Geological exploration & production of crude oil & gas

In September 2009, the Board of Directors of Gazprom Neft approved a development strategy for the Company’s exploration and production business, which is targeting an increase of annual hydrocarbons production to 100 mn TOE by 2020. The Company’s reserves-to‑production ratio should remain at this level for at least 20 years. Projects in initial stages of development should represent at least 50% of all production by 2020. This target will be achieved on the basis of existing assets, projects in which Gazprom Neft has a share, and oil fields transferred to Gazprom N eft by Gazprom. The Company also plans to expand its asset portfolio by acquisition of as yet unallocated rights to sub-soil areas, held by the Russian Government, as well as by asset purchases on the R ussian market and projects outside Russia.

Reserves

For more than 11 years, the Company’s stock of reserves has been audited to the standards of PRMS-SPE and to the even more conservative standards of the US SEC (US Securities and Exchange Commission). Audits have covered all Gazprom Neft fields and evaluated 95 to 98% of reserves at Company fields in the Russian ÀÂÑ1 category.

The current indicator for coverage of Company production by proven hydrocarbon reserves to PRMS-SPE standards is in excess of 20 years.

Growth of Gazprom Neft’s proven PRMS‑SPE hydrocarbon reserves in 2011 was 122 mn TOE, not including newly purchased assets.

Growth of Gazprom Neft’s proven hydrocarbon reserves by SPE standards in 2011, based on review of existing reserves and new acquisitions (the Orenburg cluster), totaled 164 mn TOE.

Geological exploration

During the reporting period, 25 prospecting and exploration wells were completed in license areas owned by Gazprom Neft and its fully controlled subsidiaries, of which 18 gave industrial hydrocarbon flows. Total exploration drilling in 2011 was 59,136 mn m (not including drilling for CJSC Science-Intensive Technologies Center), which is close to the level in 2010.

The success rate of exploration drilling was 58%, with output of 343 t of hydrocarbons per meter drilled, and a cost ratio of RUB 140/t.

Exploration drilling in 2011 discovered the Myginskoye oil field with 2 mn t of Ñ12 oil reserves, and the Ignialinskoye oil and gas condensate field with Ñ12 oil reserves of 40 mn t and 20 bn m3 of gas. There were 25 discoveries of new oil and gas deposits at the Yety-Purovskoye, Vyngapurskoye, Priobskoye, Urmanskoye, Vakunayskoye and Tympuchikanskoye fields, with recoverable Ñ1 oil reserves of 9.4 mn t, and 17.2 mn t of Ñ2 reserves.

Overall growth of the Company’s oil reserves in industrial categories (Russian classification) during 2011 was 62.7 mn t. Most of the increment (42.4 mn t) was from additional exploration at fields already in development, and reappraisal following clarification of geological models and recovery rates, particularly at the Priobskoye, Vingayakhinskoye, Yety-Pur, Vingapurskoye, Zimneye, Nizhne-Luginetskoye and Urmanskoye fields.

3D seismic survey work in Gazprom Neft’s license areas, and those areas of its subsidiaries, during the reporting period totaled 3,303 km2. A further 1,273 linear km of 2D seismic survey work was carried out.

Gazprom Neft closed a series of purchases of holdings in oil producers in 2011, as follows:

  • 61.8% of CJSC Gazprom Neft Orenburg, bought from JSC Gazprom. ÀÂC1 + C2 reserves are 53 bn m3 of gas, 95.4 mn t of crude oil, and 2.0 mn t of condensate;
  • 86.38% of JSC Yuzhuralneftegaz. ÀÂC1 + C2 reserves are 5.2 mn t of crude oil;
  • 100% of CJSC Science-Intensive Technologies Center. ÀÂC1 + C2 reserves are 11.3 mn t of petroleum.

Licensing

As of end December, 2011, Gazprom Neft and its subsidiaries had sub-soil usage rights at 75 license areas in 11 administrative regions of the Russian Federation. Outside Russia, the Company’s subsidiary NIS holds 66 permits (analogous to licenses) in Serbia and in Bosnia-Herzegovina.

These licenses give various rights: 16 licenses are for geological study of mineral areas during a period of five years, while 59 licenses allow exploration and production of hydrocarbons for periods between 20 and 50 years.

The sub-soil usage rights are held by 13 subsidiaries, but license management is carried by the following operators: JSC Gazprom Neft-Noyabrskneftegaz; LLC Gazprom Neft-Khantos; LLC Gazprom Neft- Vostok; JSC Magma; LLC Gazprom Neft-Angara; and CJSC Gazprom Neft Orenburg. JSC Gazprom Neft-Noyabrskneftegaz performs a full cycle of operations with hydrocarbons at 45 license areas belonging to four license holders.

In 2011, the Licensing Panel of the Federal Sub-soil Agency (Rosnedra) considered and approved amendments to 13 sub-soil licenses held by the Company: terms of the licenses were extended for 10 areas, and updated for 3 areas.

JSC Slavneft and its subsidiaries hold licenses for prospecting, exploration and extraction of oil and gas at 31 license areas in Western Siberia and Krasnoyarsk Territory.

JSC Tomskneft holds 33 licenses for development of more than 40 oil and gas fields in Tomsk Region and Khanty-Mansiysk Autonomous District (KhMAD). The licenses were reassigned to JSC Tomskneft in 2009.

Medium-term goals & objectives for exploration drilling 2012 to 2014

Oil & gas exploration & production block

Resource base Current assets Gas business New projects
  • Raise efficiency of geological studies;
  • Implement geological study projects (Chonsky and Kuyumbinsky projects, Equatorial Guinea, Cuba);
  • New prospective license areas in strategic regions (Yamal, Gydan).
  • Stabilising production levels at current assets;
  • Efficiency of secondary and tertiary production;
  • Optimizing systems for increase of strata pressure to slow down output declines;
  • Ensuring that oil production FCF is at least zero in 2012 for 100% of all subsidiaries and associates;
  • Optimize operating costs to achieve average/best industry performance;
  • Implement a portfolio of projects that ensure achievement of 95% gas utilization at all assets;
  • Expand FCF in gas business;
  • Lobby for legislative changes related to associated gas;
  • Optimize the investment portfolio for associated gas projects, subject to changes in legislation.
  • Begin development of large fields in Russia: Messoyakha cluster, Novoportovskoye, SeverEnergii fields, and fields outside Russia (Badra and Junin);
  • Integrate the Orenburg assets;
  • Access to other Gazprom oil assets.

JSC Yuzhuralneftegaz holds a license at the Kapitonovskoye field.

CJSC Science-Intensive Technologies Center holds a license for exploration and production of hydrocarbons at the Tsarichanskoye field, and a geological study license at the Tsarichanskoye prospecting area.

PRODUCTION OF HYDROCARBONS

Gazprom Neft is engaged in exploration, development and production of oil and gas in Russia and in non-CIS countries.

Field Development and Crude Oil Production

Most of the Company’s crude oil in Russia is produced by three subsidiaries: JSC Gazprom Neft-Noyabrskneftegaz, LLC Gazprom Neft— Khantos, and LLC Gazprom Neft-Vostok. The companies are developing fields in Yamal-Nenets Autonomous District (YaNAD) and Khanty-Mansiysk Autonomous District (KhMAD), and in Omsk, Tomsk, Tyumen, Orenburg, and Irkutsk Regions.

The Company’s foreign subsidiary, NIS, explores and produces oil and gas in Serbia, Angola, Bosnia- Herzegovina and Hungary.

Gazprom Neft is also a party to a number of production sharing agreements and hydrocarbon exploration and production projects in Iraq, Venezuela and Equatorial Guinea.

In addition to its own production, Gazprom Neft includes production by three associates (in which the Company has 50% interest) proportionately to its equity share: JSC Slavneft, JSC Tomskneft and Salym Petroleum Development (SPD).

Company fields in YaNAD with the largest reserves of hydrocarbons are: Sugmutskoye, Sutorminskoye, Vyngapurovskoye, Sporyshevskoye and Muravlenkovskoye. The Company’s share of production at these fields in 2011 represented 33.4% of its total crude oil production (not including output by consolidated entities). These fields are operated by the oil and gas production units JSC Gazprom Neft-Noyabrskneftegaz, its subsidiary LLC Zapoliarneft (holder of the development license at the Vingapursoye, Yaraynerskoye, and Novogodneye fields), and the Muravlenkovsky branch of JSC Gazprom Neft-Noyabrskneftegaz.

As regards the Company’s current core projects, it is important to note that Gazprom Neft has entered Orenburg Region, where a new production center is taking shape. We expect that output of 5 mn TOE can be achieved within five years of the initial asset purchase.

Vadim Yakovlev
First Deputy CEO

Gazprom Neft’s largest field as defined by hydrocarbon reserves in KhMAD is Priobskoye, where the development license is held by the subsidiary LLC Sibneft-Yugra and the field operator is LLC Gazprom Neft-Khantos.

The north-eastern section of the Palyanovskaya area of the Krasnoleninskoye field is also located in KhMAD, as are a cluster of license areas that the Company bought in early 2005 (Salym-2, Salym-3 and Salym-5), and the Zimneye field in Tyumen Region. LLC Gazprom Neft-Khantos was the winner of an auction in 2008 which gave rights to the section of the Zimneye field located in KhMAD .

Since the Company operates in more complicated geological and geographical conditions than the average for the industry, Gazprom Neft’s main operational focus in mature fields is cost management and operating efficiency. Factors such as producer price inflation, ruble‑to-dollar exchange rates and natural monopoly tariffs are beyond our control. But these factors can be largely mitigated by a three-pronged approach: implementing energy efficiency; optimizing spending on workovers, repairs and maintenance; and optimizing transportation costs.

Vadim Yakovlev
First Deputy CEO

Total output by LLC Gazprom Neft- Khantos in 2011 was 10,849,000 t, which is 10.6% more than in 2010, and 3.2% more than was targeted in the 2011 business plan.

One of the Company’s largest and most promising oil fields is Priobskoye (LLC Gazprom Neft-Khantos), where production growth rates are higher than at any other Company field. Development of Priobskoye began in 2004 and the field produced more than 23% of Gazprom Neft’s total output by 2008, rising to 33.3% of total crude oil production from the Company’s own fields by 2011. Priobskoye is a key asset and will play a strategic role in the Company’s future growth.

A total of 513 secondary and tertiary recovery measures were carried out by LLC Gazprom Neft-Khantos in 2011, resulting in 2,118,000 t of additional crude oil production. LLC Gazprom Neft-Khantos achieved this strong performance because it exceeded its target for new well commissioning by 5% (392 new wells were brought into operation) and as a result of efficient organization of the formation pressure system.

A cluster of fields in Omsk and Tomsk Region represent another new production center. Oil production operations at the Krapivinskoye field in Omsk Region, and at the Archinskoye, Shinginskoye and Urmanskoye fields in Tomsk Region are carried out by LLC Gazprom Neft-Vostok.

The Luginetskiye field cluster, purchased in 2010, has created a new production node, which gives year-on-year increments of oil production. Most of these reserves are at an early stage of development, offering much potential for future production growth.

In 2011, Gazprom Neft concluded transactions to buy assets in Orenburg Region as follows: CJSC Gazprom Neft Orenburg, which is developing the eastern section of the Orenburg oil and gas condensate field; CJSC Science-Intensive Technologies Center, holder of the license for the Tsarichanskoye field; and JSC Yuzhuralneftegaz, which operates the Kapitonovskoye field.

The share of Gazprom Neft in the region’s total output during 2011 was 0.196 mn t. The potential growth of annual output by 2018 is 4 mn t. Estimated recoverable reserves (Ñ12) are: 113 mn t of oil, and 53 bn m3 of free gas.

Since late 2007, Gazprom Neft and JSC Rosneft have had been equal joint venture partners with alternating management of JSC Tomskneft VNK (in accordance with their shareholder agreement). From January 2011, operating control of Tomskneft VNK was transferred to Gazprom Neft for the next three years.

Tomskneft VNK produced 10.349 mn t of oil in 2011, exactly as targeted by the business plan and 0.5% more than in 2010; Gazprom Neft’s share was 5.174 mn t of oil.

JSC Slavneft Oil and Gas Company is a joint venture between Gazprom Neft and TNK-BP. The company is developing reserves in Khanty-Mansiysk Autonomous Districts and carries out exploration in Krasnoyarsk Territory. The unit produced 18.086 mn t of oil in 2011, exactly meeting its target, but 1.5% below the figure in 2010; Gazprom Neft’s share was 9.042 mn t of oil and 0.422 bn m3 of gas.

Since June 2009, Gazprom Neft has held a 50% interest in Salym Petroleum Development, which is a joint venture with Royal Dutch Shell. Salym outperformed its production target by 1.9% in 2011, producing 8.460 mn t of oil, of which 4.230 mn t was naturally attributable to Gazprom Neft.

Gazprom Neft’s overseas business NIS, based in Serbia, increased oil output by 16.7% in 2011 to 1,133,000 t from 971,000 t in 2010.

Gazprom Neft maintained its position among Russian leaders as measured by levels of oil and gas output in 2011.

Gazprom Neft’s consolidated crude oil production in 2011 was 49,968 mn t of oil, which is 0.7% more than in 2010 and also 0.7% ahead of the business plan for 2011.

Gaz field development & production

Gazprom Neft is rapidly developing its gas business by targeting commercialization of natural gas reserves at oil fields and achieving maximum value in this business segment.

Gasprom Neft’s gas production program envisages rapid growth of gas production in Russia. The target is to raise production/use of gas from 9.1 bn m3 in 2011 to 13 bn m3 by 2014.

In 2011, total production/use of gas by Gazprom Neft (including the share in production by joint ventures) was 9,067 mn m3 (0.88 mn feet3/day). Supplies of marketable gas (minus consumption for own needs, injection into strata, and transportation losses) were 8,544.5 mn m3 (0.663 mn feet3/day).

Production of natural gas amounted to 4,917.4 mn m3, including 4,849.1 mn m3 of marketable gas (21% more than in 2010). Supplies of marketable natural gas rose by 4.8 times, reflecting the launch of natural gas production at the Muravlenkovskoye and Novogodneye fields in Q4 2010.

These growth rates were mainly due to natural gas production projects implemented at the Muravlenkovskoye and Novogodneye fields, and to projects for utilization of associated gas.

In 2011, JSC Gazprom Neft- Noyabrskneftegaz and its branch, Muravlenkovskneft, began implementation of the Noyabrsk Integrated Project (NIP) in their respective territories to boost the use of associated oil gas; the product envisages synchronised expansion of existing gas transportation capacity at Company subsidiaries, and expansion of adjacent gas refining capacity owned by CJSC SIBUR Holding. Project implementation will enable utilization of additional 1.0-1.2 bn m3 of gas per year.

A gas pipeline connecting the Severo- Yangtinskoye field and Muravlenkovsky gas refinery has been built and is ready for operation. As a result, gas utilization will increase by 20 mn m3 in 2012.

In December 2011, LLC Gazprom Neft- Vostok completed construction of a 35 km gas pipeline with a diameter of 300 mm to carry associated gas from the Shinginskoye field to the Luginetskaya Compressor Station. The pipeline is capable of supplying up to 55 mn m3 of gas per year.

In 2010, a project was approved for utilization of associated gas at the southern license area of the Priobskoye field (operated by LLC Gazprom Neft-Khantos). The parity project with CJSC SIBUR Holding envisages supply of associated gas to the Yuzhno-Baliksky Gas Treatment Plant. Work carried out in 2011 includes construction of 83 km of a planned 100 km of gas pipelines for the associated gas collection system; completion of a project survey; procurement of compressor equipment for the Vacuum Compressor Station (2 MW total capacity), and the start of installation. Project documents were prepared, and permits obtained to build the Yuzhno-Priobskoye Compressor Station (500-600 mn m3/year, 80 atmospheres) and a gas pipeline to transport associated gas (62 km, 300 mm diameter). Construction work on the Compressor Station is in progress, and construction of the gas pipeline began last December. The launch of the entire complex (four units) is scheduled in 4Q 2012.

JSC Tomskneft VNK produced 1.456 bn m3, with Gazprom Neft’s share amounting to 0.728 bn m3 of gas.

JSC Slavneft produced 0.844 bn m3, with Gazprom Neft’s share amounting to 0.422 bn m3 of gas.

The total utilization rate for associated oil gas1 (joint venture operations included) in 2011 was 64.7%, compared with 60.4% in 2010. This improvement reflects investment projects for transportation and utilization of associated oil gas (progress in the Noyabrsk and Tomsk integrated projects) as well as expansion of processing capacity by Company partners.

Development of small gas deposits in fields where Gazprom Neft has production operations will contribute to higher economic efficiency of reserve use by the Company, helping to raise annual hydrocarbon output to 100 mn TOE, in line with the Company’s Development Strategy up to 2020.

The Company has a program for associated oil gas utilization in 2012-2014, which it approved in 2011; the program includes a project portfolio that will ensure achievement of the target utilization rate of 95% at all of the Company’s key assets, except remote fields with inherently negative economics, where the issue of associated gas utilization will be resolved through Government regulation.

Total production of hydrocarbons

Total production by Gazprom Neft rose by 8.4% in 2011 to 57.3 mn TOE. Oil-equivalent production growth was achieved thanks to newly purchased production assets (CJSC Gazprom Neft Orenburg, LLC Center of Science Intensive Technologies, JSC Yuzhuralneftegaz), and production of free gas deposits at the Muravlenkovskoye and Novogodneye fields. Total production growth due to newly purchased assets was 0.4 mn TOE.

In 2011, Gazprom Neft became the leader in hydrocarbon production among Russian oil producers.

Outperformance compared with targets was due to commissioning of new wells and use of EOR techniques to boost production.

Company subsidiaries carried out a total of 1,331 secondary and tertiary recovery actions in 2011, which is 8.3% more than envisaged by the 2011 business plan; additional crude oil production due to these actions was 4,852 mn t.

Without including activities of associate companies in 2011, Gazprom Neft commissioned 735 wells. This increase in new well numbers reflects expansion of the production drilling program to 2,254,000 m (476,500 m more than envisaged in the business plan), and is also due to an 8% increase (in speed and drilling distance) achieved by drilling brigades. By the end of 2011, the number of Company production wells (not including associates) had risen by 234 to a total of 7,099 wells.

Gazprom Neft’s approved business plan for 2012 calls for a 4.1% increase in hydrocarbon production to 59.6 mn TOE.

The planned steps to slow down production declines and achieve targets are as follows: drilling of new wells, use of new technologies to maximize yield from strata, reopening currently idle wells, improving the water injection system at ageing fields, and measures to maintain formation pressure at new production zones.

The drilling plan in 2012 is for 642 new wells with a target yield of 29.3 t/day. Most of the drilling is to be carried out at the Priobskoye, Vyngapurskoye, Vyngayakhskoye, Sugmutskoye, Zimneye, Shinginskoye, Nizhne-Luginetskoye, Umseyskoye and Yety-Purskoye fields.

Rates of growth of hydrocarbon output in coming years should remain at 4% to 5%.

This performance is to be achieved by phased commissioning of explored oil fields belonging to Gazprom Neft, JSC Slavneft and JSC Tomskneft VNK, as well as commissioning of fields in Yamal and Orenburg, and expansion of the resource base through commissioning of oil fields on the balance sheets of other Group companies.

The main task for the next two or three years will be updating of the Group‘s hydrocarbon production strategy by boosting operations with a depleted resource base.

Plans for 2013 to 2015 include further projects to bring 60 mn t of hard-to-recover reserves into production. More than 250 mn t of hard-to-recover deposits will be included in a program for production in test mode.

According to preliminary conservative estimates, Gazprom Neft will raise production of hydrocarbons by 4.1% to 59.6 mn TOE in 2012.

The target production profile for 2012 includes:

  • development of existing Gazprom Neft assets: JSC Gazprom Neft-Khantos; JSC Gazprom Neft-Noyabrskneftegaz; and JSC Gazprom Neft-Vostok; with acquisition of licenses that have not yet been allocated by the Russian Government;
  • shares of production in joint ventures with JSC Slavneft (50% JV with ÒNK-ÂÐ) and JSC Tomskneft VNK (50% JV with JSC NK Rosneft);
  • obtaining fields from JSC Gazprom for further development: Novoportovskoye, Orenburgskoye, Prirazlomnoye, Dolginskoye;
  • production of Cenomanian natural gas at fields of JSC Gazprom Neft-Noyabrskneftegaz: Novogodneye and Muravlenkovskoye;
  • shares of production by units of Sibir Energy: Salym Petroleum Development (50%) and Magma (100%);
  • development of Slavneft’s Messoyakha fields jointly with ÒNÊ-ÂÐ (50%);
  • development of Slavneft’s Kuyumbinskoye field jointly with ÒNÊ-ÂÐ (50%), an intensive geological survey program and further development of the Tympuchikanskaya license group (the Tympuchikansky, Vakunaysky and Ignialinsky license areas);
  • entering foreign projects and acquiring areas and assets of unallocated funds of the Russian Federation.

Gazprom Neft is steadily building a portfolio of international assets, which should account for not more than 10% of consolidated hydrocarbon production by 2020.

INTERNATIONAL PROJECTS

Iraq

At the beginning of 2010, the Company became the operator in a project to develop the Badra field in Iraq. Gazprom Neft signed a contract with the Iraqi government to develop the Badra field as a member of a consortium with government-owned oil companies from other countries — Kogas (Korea), Petronas (Malaysia), and ÒÐÀÎ (Turkey). Gazprom Neft’s share in the project as operator is 30%, while Kogas has 22.5%, Petronas 15%, and ÒÐÀÎ 7.5%. The Iraqi government is represented by the Oil Exploration Company (OEC) with a 25% interest. The consortium will provide 100% of all financing.

The Badra field lies in the province of Wassit, in eastern Iraq, bordering Iran’s Azar field. Initial estimates suggest that recoverable reserves at Badra may exceed 3 bn barrels of crude oil.

This Middle East project in the first largescale foreign endeavour for Gazprom Neft. Development of the Badra field is expected to last 20 years, and may be extended for a further five years. It is expected that peak production of about 170,000 bbl per day will be reached in 2017.

Results from the drilling of pilot wells will give us a better understanding of the field’s geological structure, allow preparation of the final development plan and enable commercial production of at least 15,000 barrels of petroleum per day to begin from August 2013.

Vadim Yakovlev
First Deputy CEO

Under the contract, Gazprom Neft will receive USD 5.5 for each extracted barrel of crude oil (or quantity of crude that is equivalent to the price) after the project achieves an initial production level of 15,000 bbl per day. This is expected to occur in 2013, and peak production rates should be achieved in 2017.

The following key steps were taken in 2011 to further the Badra project:

  • The preliminary plan for field development was prepared and approved;
  • Landmines were cleared from an area of 14,878,173 m2 (16,209 mines and munitions were detected and removed).
  • HSE and fire safety measures included participation in sessions of HAZID, HAZOP, SIL, ENVID at the FEED stage; environmental monitoring has been organized at the fields;
  • Geology activities included 3D seismic exploration in an area of 164.5 km2 (all data processing and interpretation was completed by October 31, 2011);
  • Schlumberger Middle East S.A. won the drilling tender on June 9, 2011; the drilling contract was signed on July 11, 2011; the drilling contractor was mobilized on September 10, 2011; and drilling of the first well (Bd-5) began on November 24, 2011;
  • Work started on September 10, 2011 to prepare a site for construction of the central oil collection point; 27 km of service roads and seven drilling platforms were built during the reporting year; and the first stage of a field base camp was completed in September 2011;
  • 104 field workers had been hired by the end of 2011.
Objectives and expected results in 2012:
  • Drilling of 7 wells and confirmation of their estimated yield rates;
  • Completion of a geological survey as per contract;
  • Obtaining information on the potential of lower horizons;
  • Detailed design of the first phase of the central oil collection point (80%), of an export oil pipeline (80%), and of the first phase of a crude oil collection system (90%);
  • Design and start of construction work on phase 2 of the field base camp;;
  • Rapid construction of infrastructure.

Cuba

At the end of 2010, Gazprom Neft and the Malaysian oil company, Petronas, signed an agreement of reassignment of an interest and key provisions for joint work relative to geological exploration and subsequent development of four offshore blocks on the continental shelf near Cuba.

The agreement stipulates that Gazprom Neft is to receive 30% of the project, while reimbursing Petronas for part of the costs incurred and participating in financing of current activities on a pro rata basis.

Gazprom Neft’s Board of Directors discussed possible involvement in Cuban offshore development in early October 2010. The Board took a favorable view of development prospects in the region. The agreement will come into effect after approval by relevant authorities in the Republic of Cuba.

Petronas and the Cuban government signed a production sharing agreement for blocks nos. 44, 45, 50, and 51 in the Gulf of Mexico in 2007. Petronas remained the sole participant until it was joined by Gazprom Neft. Under the agreement, exploration will be carried out at four sites, and subsequent production could last until 2037 for crude oil and 2042 for gas. Recoverable reserves at the blocks are estimated at 450 mn t.

Initial 2D seismic survey work has been carried out under the current agreement and drilling of the first exploration well is planned for 2012. The partners will decide on further actions based on results of the exploration drilling.

Implementation of the project will help Gazprom Neft to expand its operating geography and strengthen its position in the international market. Gaining experience in offshore projects will assist the Company’s further growth, helping it to establish business in new regions and carry out strategic plans for increasing production abroad.

Equatorial Guinea

In June 2011, in the presence of the President of Russia Dmitry Medvedev and the President of Equatorial Guinea N. Mbasogo, Gazprom Neft and the National Oil Company, Guinea Equatorial de Petroleos (GEPetrol) signed an agreement to jointly explore oil reserves at two prospective offshore blocks on the continental shelf of Equatorial Guinea.

According to the signed documents, the shares of the participants during the survey phase will be: 80% for Gazprom Neft, and 20% for GEPetrol. Gazprom Neft is the project operator and assumes financial obligations to pay bonuses to the national government, obtain geological and engineering information, and implement the necessary exploration program in its entirety.

In early 2011, Gazprom Neft carried out 3D seismic work at Block T and began interpreting geological information from both blocks (T and U). The Company believes that recoverable resources of crude oil at the two blocks may total 110 mn t. Drilling of the first exploration well at each block should go ahead two years after the agreement takes effect. The production period is 30 years for oil, and 35 years for gas.

The Equatorial Guinea project will significantly enhance the Company’s experience of offshore production, improve its offshore project management skills, and establish a future production centre in West Africa.

Venezuela

In June 2009, Gazprom Neft purchased 20% of the National Oil Consortium (NOC), an entity created by five large Russian oil companies for the purpose of oil production projects in Latin America. The companies are: Gazprom Neft, JSC Rosneft, JSC LUKOIL, JSC TNK-BP Holding, and JSC Surgutneftegaz. In September 2009, the Government of the Russian Federation along with the government of the Bolivarian Republic of Venezuela signed an intergovernmental treaty on cooperation for implementation of mutual strategic projects.

Under the treaty, in spring of 2010, NOC and Corporation Venezolana del Petroleo (CVP), a subsidiary of the Venezuelan government-owned oil company (PDVSA), established a joint venture, Petróleos de Venezuela S.A. (PetroMiranda), for additional exploration and development of the Junin-6 heavy-oil field in the basin of the River Orinoco in Venezuela.

Recoverable resources at Junin-6 are estimated at 10.96 bn bbl over an area of 447.85 km2. 14 wells have been drilled at the Junin-6 territory in the past.

As required by Venezuelan law, 60% of PetroMiranda is held by CVP, and 40% by NOC. NOC has paid the first part of a USD 600 mn bonus to the Bolivarian Republic of Venezuela for the right to become a member of the joint venture.

The Board of Directors of NOC has designated JSC Gazprom Neft as the consortium leader, with responsibility for coordinating operations and managing the Junin-6 project.

As the project leader, Gazprom Neft holds coordinating role on behalf of the Russian party in the Russian-Venezuelan joint venture, PetroMiranda.

The project leader functions as technical expert on the project and issues directives to the Directors of the joint venture (on the Russian side) regarding implementation of the project. The leader’s responsibilities include preparation of a final investment decision regarding further development of the Junin-6 field (based on results obtained from the additional exploration). This decision must be made in 2013.

The following steps were taken in 2011 to progress the Junin-6 project:

Production

  • A social and environmental audit of the block was completed;
  • 30 permits for well construction were obtained from Venezuelan government agencies;
  • Access roads and bridges were built to connect the sites of stratigraphic wells;
  • Two cluster sites were built: J6-12 and J6-04;
  • Well SDZ-271 was reactivated.

Design and field work:

  • Design of an upgrader was completed;
  • Work continued on design of surface facilities at the field;
  • A project was prepared to enable a rapid early-oil stage before completion of phase I;
  • Work continued on land surveying and mapping to build cluster sites and access roads;
  • Orders for equipment are being placed and contracts signed as part of the geological survey program for the block and design of surface facilities.

Objectives and deliverables expected in 2012:

  • Drilling of stratigraphical and test wells; acquisition of information to update the geological and hydrodynamic models; selecting optimal development regimes.
  • Launching the early-oil project and producing the first crude oil;
  • Preparing the development project;
  • Design of block construction and design of the upgrader (Pre-FEED).