Oil

1
Oil Gas Opportunities for Private Equity
Investments

• ABZ Petroleum Investments
• CIS PEF 2006
• Moscow
• June 2006

2
Commitment to the industry

• Focus ?n the Upstream Oil Business in Russia
• ABZ Petroleum Investments is focused ?n the
  upstream oil business in Russia . The ??m??n? and
  its principals have successfully invested and
  operated in Russia and the CIS for over 10 years.
  ABZ Petroleum Investments is majority-owned b? US
  and Russian entrepreneurs with estabIished
  business reputations and excellent pubIic and
  private relationships
• Unique Combination ?f Expertise
• ABZ Petroleum Investments represents ? r?r?
  combination of experience, relationships and past
  success, and is poised to take advantage of the
  opportunity now unfolding in Russia
• The principals and management team of ABZ
  Petroleum Investments have ? collective
  experience of successfully managing the entire
  range of business probIems that ?r? encountered
  in Russia. These probIems ?r? often complicated
  government-business probIems that include
  taxation disputes, licensing, permit approvals,
  ??? permission, acquisition and divestiture
  negotiations, and crisis management

3
OVERVIEW - OIL GAS REGIONS IN RUSSIA
4
OVERVIEW - GLOBAL LEADERSHIP

• Russia proves leadership
• 1 b? hydrocarbon (incl. gas) proved reserves 378
  bn b??
• 1 b? hydrocarbon production 18.4 bn b?? ??r day
• 2 worldwide crude producer after Saudi ?r?bi?
  (7.7 mln bbl ??r day)
• Political and social stability and steadily
  improving investment climate but oil reserves ?r?
  still undervalued compared to other markets
• Russia rating
• Standard Poors BBB
• Moodys Baa2
• Fitch - BBB

5
OVERVIEW - RUSSIAN OIL GAS INDUSTRY

• Russia is globally important in the oil gas
  sector and represents ?n? of the major investment
  opportunities today
• Industry structure shaped b? dramatic history...
• Historical cost advantage due to depreciation of
  asset base after roubIe devaluation
• Focus b? acquirers of vertically integrated oil
  companies in post-privatization period on
  developing scale and ?n consolidation and control
  rather than capital efficiency
• - low and volatile domestic oil price has
  limited the ability of independent oil companies
  to compete with integrated oil companies
• ... is undergoing change and leading to new
  opportunities
• Dilution of cost position as roubIe strengthens
• The owners of vertically integrated oil companies
  ?r? now focused increasing the market
  capitalization of their companies b? increasing
  capital efficiency
• - Stability in domestic prices and the increase
  in export capacity has increased the ability of
  independents to profitabIy acquire and manage
  upstream oil assets

6
OVERVIEW - Independent oil companies

• Small independent oils account for 7 of oil
  production in Russia (175 mln. barrels per year).
  
• Number of companies 150
• Oil independents operate new, undeveloped or
  exhausted oil fields and are exposed to higher
  geological risks.
• Ratio on CAPEX to production volume is much
  higher that Russian majors (5,5)

7
Russian Market Trends MA and IPO scenes
- M A - IPO
8
Strategy

• Step 1 Acquire interests in two ?r m?r? Russian
• upstream oil companies
• Step 2 Implement ? comprehensive reservoir
  management, financial and operational
  restructuring program
• Step 3 Exit investment within two to five years

9
Oil company in Komi region

• Oil production company in European part of
  Russia in the Komi Republic
• Excellent quality reservoirs with highly
  productive wells. Current oil production is 10
  kpd. Oil is produced from 8 wells. Average
  production rate per well is 1400 bopd. Zero water
  cut.
• Reserves are 70 MMbrl.
• The company had growing production and reserves
  every year for the 5 years of its existence
• Efficient operations low OpEx

10
Komi project deal upside

• Acquisition cost US 110 MM for 49,99 of
  equity shares
• Total CAPEX US 92,2 MM in 2006-2009 period
• Exit in 2-3 years with the sale of the stake for
  US 300-350 MM

The asset can be purchased for up to 220 mil (at
18 300 per bbl/day of production). In 2 years
(with 109 mil. bbl reserves and 21 thous. BOPD
production) this company will costs 700 - 800
mil.
11
Oil company at Orenburg region

• Location Orenburg region
• Reserves ABC1 40 mln. Brl (7 mln. tn)
• Production at 2005 2 200 bpd (110 th. tn. per
  year)
• Maximum level of oil production in 2009 is 13
  kpd.
• Level of oil export is 99
• 1 developed oil field
• The company is managed by professional with more
  than 15 years of oil industry

12
Orenburg project deal upside

• Acquisition cost US 120 MM for 100 of equity
  shares
• Total CAPEX US 135 MM in 2006-2009 period
• Exit in 2-3 years for US 400-500 MM

This company can be purchased for up to 120 mil
(or 1,4 per bbl of reserves). In 2 years (with
86 mil. Bbl of reserves and 13 KBOPD production)
this company will costs 400-500 mil.
13
IMPLEMENT?TION

• ??? aims ?f restructuring
• The experience of the ABZ Petroleum Investments
  team has shown that ?n active and experienced
  management team ??n achieve ? significant
  increase in asset valuation b? implementing
  reforms that achieve three overarching goals
• Increase reserve base and move reserves into the
  proved developed category
• Increase production
• Reduce operating costs and increase effective
  price ??r barrel
• These metrics have ? direct impact ?n the value
  of the assets

14
IMPLEMENTATION (CONT'D)

• Focus ?n profitability and cash flow
• It is an environment of intense crisis management
  that requires quick decisions for important
  problems, often with imperfect information
• Successful Russian oil ??m??n? management teams
  focus ?n bottom line results, to the exclusion of
  almost all other concerns
• - impose control
• - increase production
• - increase netbacks (revenues)
• - reduce operating costs
• - shrink the workforce
• - optimize capital expenditures
• - eliminate inefficiencies

15
IMPLEMENTATION (CONT'D)

• Reservoir management
• Almost without exception, Soviet-era oilfields
  were not managed to achieve the highest economic
  value. Standard Russian practices ?r? limited b?
  the failure to link activity with value creation
• Although certain advances have b??n made over the
  past 10 years, notabIy the introduction of
  Western service contractors and equipment, most
  fields ?r? operated according to Soviet-era
  practices that often result in value-destruction
• The result of applying standard Western oilfield
  practices has b??n ?n increase in well
  productivity (2-5), lower operating costs and
  greater and m?r? efficient reserve recovery
• Measures to achieve this include
• - well pump optimization
• - use of dual completions and co-mingling
• - improved drilling and completion practices -
  mud, cement, logging and perforating, production
  measurement and monitoring
• - data integration and reservoir modeling.

16
IMPLEMENT?TION (CONT'D)

• Financial restructuring
• With the establishment of control and information
  at hand, ? program to aggressively reduce costs
  ??n begin
• Areas to address will include
• personnel reductions (often the largest operating
  cost component)
• electricity consumption
• excessive vehicle usage
• uncontrolled GA expenses
• unnecessary building and infrastructure costs
• tax optimization
• Successful cost reduction programs often include
• - the sale or spin-off of non-related or
  n?n-?r?fit?bI? subsidiaries providing
  inter??m??n? services
• - the redesign of production infrastructure to
  minimize consumables
• - the streamlining of the personnel organization
  to eliminate layers of unnecessary management and
  related overhead

17
Market Capitalization

• Future Market Cap of the two acquired oil assets
  prognoses based only on increase in proved
  reserves and production.
• The valuation does not include values of the cash
  flows.

18
EXIT

• ABZ Petroleum Investments team is targeting to
  exit the investments in 2-3 years. Key drivers of
  increased valuation
• Improvement in key operating and financial
  performance
• Improvements in managerial practices result in
  further narrowing of valuation spread
• Establishment of critical mass to attract higher
  quality strategic buyers and/or increase
  attractiveness of company to international
  capital markets

19
CONTACTS

• Gleb N. Zamyatin
• Executive director
• ABZ PETROLEUM INVESTMENTS
• 1st Volkonskiy per. 15, office 4
• 127437, Moscow, Russia
• Tel. [phone]
• Tel/fax [phone]
• z_at_abzpetroinvest.com
• www.abzpetroinvest.com