Estimating Reserves and Resources Estimating Reserves and Resources in Russiain Russia

New York Energy Forum

May 15, 2008

Presented by

Miller and Lents, Ltd.

International Oil and Gas Consultants

James C. Pearson, Chairman

Hydrocarbon Finding, Hydrocarbon Finding, Developing and ProducingDeveloping and Producing

E&P Life Cycle

Prospect Generation

WildcatDrilling

Discovery,Appraisal,Development

FieldOptimization

EnhancedRecovery

Decline,Abandonment

Reserves and Resource Reserves and Resource ClassificationsClassifications

Within the petroleum industry, there are Within the petroleum industry, there are three basic classification systems being three basic classification systems being used by oil and gas companies and used by oil and gas companies and financial institutions.financial institutions.

– Hydrocarbon ReservesHydrocarbon Reserves– Contingent ResourcesContingent Resources– Prospective ResourcesProspective Resources

Reserves and Resources Classification Framework

Key Reserve DefinitionsKey Reserve Definitions

SECSEC U.S. Stock ExchangesU.S. Stock ExchangesGAAP ReportingGAAP Reporting

SPESPE Other Stock Exchanges Other Stock Exchanges (Modified Versions) (Modified Versions)

Financial InstitutionsFinancial InstitutionsWPC, AAPG, SPEEWPC, AAPG, SPEEOPECOPEC

RussianRussian State Committee of ReservesState Committee of Reserves

History of Reserve DefinitionsHistory of Reserve Definitions

SECSEC 19781978 Definitions IssuedDefinitions Issued20002000 GuidelinesGuidelines

SPESPE 19641964 Definitions IssuedDefinitions Issued19811981 Revised DefinitionsRevised Definitions19871987 Revised DefinitionsRevised Definitions19971997 Adopted by SPE and WPCAdopted by SPE and WPC20002000 Resource DefinitionsResource Definitions20072007 Combined Reserve and Combined Reserve and

Resource Definitions Resource Definitions

RussianRussian Pre 1/1/09Pre 1/1/09 Soviet Era DefinitionsSoviet Era DefinitionsAs of 1/1/09As of 1/1/09 New DefinitionsNew Definitions

Scope of DefinitionsScope of Definitions

SECSEC ProvedProved

SPESPE Proved, Probable, Possible, Proved, Probable, Possible, ResourcesResources

RussianRussian A, B, C1, C2, D1, D2, D3A, B, C1, C2, D1, D2, D3

Limitations of SEC Definition that Limitations of SEC Definition that Affect RussiaAffect Russia

License expiration dateLicense expiration date

Only offset locations provedOnly offset locations proved

TNKTNKProved Reserves EstimatesProved Reserves Estimates

January 1, 2003January 1, 2003

Russian A + B + C1 15, 082 Million Barrels of Oil

SPE Definition Proved 8,374 Million Barrels of Oil

SEC Definition 3,048 Million Barrels of Oil

TNKTNKProved Reserve Categories EstimatesProved Reserve Categories Estimates

January 1, 2003 January 1, 2003 Million Barrels of OilMillion Barrels of Oil

Reserve CategoryReserve Category SPE DefinitionSPE Definition SEC DefinitionSEC Definition

Proved Developed ProducingProved Developed Producing 3,4043,404 2,0472,047

Proved Developed NonproducingProved Developed Nonproducing 2,0222,022 588588

Proved UndevelopedProved Undeveloped 2,9482,948 413413

WESTERN SIBERIA - EXAM PLE FIELDESTIMATED SPE RESERVES FORECAST

100,000

1,000,000

10,000,000

100,000,000

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23

DATE

GR

OS

S Y

EA

RL

Y O

IL P

RO

DU

CT

ION

(Bar

rels

)

Proved Producing plus Proved Nonproducing plus Proved Undeveloped

ACTUAL

FORECAST

Total Proved Reserves 188,453 Mbbl

WESTERN SIBERIA - EXAMPLE FIELDESTIMATED SEC RESERVES FORECAST

100,000

1,000,000

10,000,000

100,000,000

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23

DATE

GR

OS

S Y

EA

RL

Y O

IL P

RO

DU

CT

ION

(Bar

rels

)

Proved Producing plus Proved Nonproducing plus Proved Undeveloped

ACTUAL

FORECAST

Total Proved Reserves78,817 Mbbl

400 Meter Spacing (16 Hectares/Well)PD Reserves = 2 mm bbl (SPE)

PUD Reserves = 62 mm bbl (SPE)Total Proved = 64 mm bbl (SPE)

Case A – Discovery and Delineation of an Oil Field

PD Reserves = 2 mm bbl (SPE)PUD Reserves = 16 mm bbl (SPE)Total Proved = 18 mm bbl (SPE)

Case B – SEC Proved Undeveloped Locations

Russian UpsidesRussian Upsides

Infill drillingInfill drilling

Improved waterfloods – Miscible floodImproved waterfloods – Miscible flood

Horizontal drillingHorizontal drilling

Gas cyclingGas cycling

Reservoir surveillanceReservoir surveillance

Dedicated work forceDedicated work force

Means San Andres UnitMeans San Andres UnitExxon Operated WaterfloodExxon Operated Waterflood

Production HistoryProduction History

Waterflood PatternsWaterflood PatternsOil Recoveries and Life of Oil Recoveries and Life of

ProductionProduction20 to 1 Water-Oil Ratio20 to 1 Water-Oil Ratio

PatternPattern Oil Recovery, Oil Recovery, MBOMBO

Recovery Factor, Recovery Factor, PercentPercent

Life of Life of Production, Production,

YearsYears

RussianRussian 11,509.511,509.5 46.046.0 23.023.0

WesternWestern 11,190.911,190.9 44.844.8 10.410.4

Model Original Oil in Place = 25 million barrelsModel Original Oil in Place = 25 million barrels

0

0.1

0.2

0.3

0.4

0.5

0.6

0 0.1 0.2 0.3 0.4 0.5 0.6

API Recovery Factor

Per

form

ance

Der

ived

Rec

ove

ry F

acto

r

Comparison of API Recovery Factors to Performance Derived Recovery Factors

Cretaceous Reservoirs – Western Siberia, Russia

Russian DownsidesRussian Downsides

Reserve uncertaintyReserve uncertainty

Political riskPolitical risk

NationalismNationalism

High taxesHigh taxes12/31/07 contract export price = 12/31/07 contract export price = $88.16/BBL$88.16/BBLNet oil price, before profit tax = $30.58/BBLNet oil price, before profit tax = $30.58/BBL