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april 2004


CEO Robert Dudley Presents 2004 Business Plan (p. 1) New Appointments to the Board of Directors (p. 4) Deputy COO Larry McVay on Priorities in 2004 (p. 4)

EVP James Dupree on Delivering Technology (p. 6) Accounting Transformation Project Launched (p. 9) Making Sense of PPM (p. 9)

TNK BP Business Plan

Robert Dudley President and CEO

TNK BP's five year strategy sets forth the Company's key overall objectives over the next half decade. These objectives include aggressive growth in crude production com bined with an active reserve replace ment/addition strategy, a new focus on gas, increased investment in tech nology across the business, an empha sis on enhancing margins in the mid and downstream businesses and a plan to improve the quality of oilfield services. In addition, management committed to reviewing the Company's overall asset portfolio with the aim of consolidat ing and upgrading opportunities where possible. With these overall goals in mind, a more specific business plan for 2004 was developed by management and approved by the Board of Directors in February of this year. In this regard, I would like to outline a number of the key targets that have been set in the context of three critical drivers, namely: That the Company remains within the financial framework set out in the Shareholder Agreement establishing TNK BP (net debt to equity to be in the range of 25% to 35% with a minimum dividend payout of 40% of net income). That the Company continues to enhance its competitive position by improving its operating and financial metrics faster than its peers. That the Company consistently improves its year on year performance, while also increasing its focus on longer term planning. Within this context then, the key goals in the 2004 business plan are: Crude oil production growth of at least 12%, from 1.276 mil lion barrels per day (bpd) to 1.429 million bpd, with the potential to exceed this growth if the commercial environ ment permits. Broader use of new technology will play a vital role in achieving this target. Export sales to be maintained at a level in excess of 50% of production (52% achieved in 2003) in order to maximize the netbacks achieved from crude oil sales. Revenue and EBITDA to grow in line with production, assuming normalized oil prices and exchange rates. Cost efficiency to improve, with a specific focus on reducing lifting costs by approximately 5%.

Gas sales and condensate production to increase on average by more than 100%, as the Company focuses on maximizing the value of its full hydrocarbon base. Reserve replacement of production to be in excess of 75%, with an ultimate goal of 100% replacement annually. Achievement of this goal will involve an exploration budget in excess of $100 million. Organic capital expenditure is planned to be in excess of $1 billion, and will be combined with a focus on capital efficien cy to ensure that the Company's financial returns are not undermined by increased expenditures. Focus on internal controls, corporate governance, and on health, safety and the environment to increase. TNK BP intends to enhance its valuation by becoming a leader in these fields. Full integration of the Company's management structure using the business unit model (asset based organization) will also be a key goal for the year. The aim will be to increase the overall transparency of the business in order to encour age idea transfer across the organization and to increase the opportunities generated by business synergies. One concrete step that will help to catalyze this process will be the consol idation of all the head office functions into the new head quarters office (the Arbat Center) by the end of the year. Related to this, we will also aim to continue developing of a distinctive corporate culture, focused, among other things, on performance management, with an incentive program contingent upon both personal and corporate performance.

Oil Production, 2001 2004*

All the operational and financial targets have been developed on a normalized basis, meaning that performance monitoring will not be affected by exchange rate fluctuations or oil price movements. Business streams will deliver the key contribution to achieving corporate goals. Business stream objectives are the building blocks for the achievement of the Company's overall goals, and it is important to outline some specific plans here. These objec tives are highly interlinked in terms of delivering the overall business plan and are best considered together. For example, Upstream objectives overlap with those for Technology and Oil Field Services (OFS).

Development and implementation of a reserve management process that will enable us to fully understand and track the impact of our work programs on the Company's reserves. In addition, Technology is accountable for implementing an exploration program designed to add reserves from acreages adjacent to producing fields as well as to evaluate the potential for developing new core areas for TNK BP. This will make a major contribution toward taking the Company's reserve replacement up from its minimum goal of replacing 75% of annual production toward its ultimate goal of 100% annual replacement.

OFS Objectives Upstream Objectives

The Upstream business faces the challenging task of increasing oil production by at least 12% in 2004 as well as replacing at least 75% of the reserves produced through exploration and improved reservoir management. It will be facing these chal lenges in tandem with the Technology and OFS business streams, and I will outline the objectives of all three streams together. Production: Upstream, Technology and OFS are working closely together to deliver the production challenge of grow ing oil output by at least 12% this year. In particular, the Upstream business will be working with Technology to ensure the appropriate deployment of technology and investments to areas that will deliver the greatest benefit. In addition, Oil Field Services will be working to reduce the cost of services while continuing to improve the overall qual ity of service delivery, which will translate into improved production rates. Asset Based Organization: The Upstream business stream will complete its move to the business unit model during 2004 with the delivery of the Asset Based Organization project. This delivery will increase transparency and accountability, which will both improve decision making and ultimately enhance performance. Investment Efficiency: Upstream, in conjunction with Technology and Oil Field Services, is targeting overall improvement of investment efficiency by 3% along with the delivery of production growth. This will ensure that new production will be accretive to TNK BP earnings. TNK BP's Oil Field Services business has a substantial cap ital budget in 2004. This year will see the first significant capital spend on improving the quality of Oil Field Services in recent years. OFS will work jointly with Technology and Upstream to identify opportunities that will add value to the Company as well as enhance operational safety. Align capital expenditure with OFS strategy. A key to achieving the targeted improvements in quality and service will be to ensure that the stream's capital expenditure is aligned with OFS strategy, with a particular focus on capital efficiency.

Downstream Objectives

The key goal of the Downstream business is to enhance the value of our oil production by maximizing the value of the Company's crude oil sales as well as producing oil products appropriate to the domestic and export markets that we aim to supply. Within that framework: Downstream will continue to improve the netback received from our crude oil sales by investing to increase logistical efficiency and to open new, more profitable export routes to international markets. Increase market share in the Russian and Ukrainian retail markets. Following one of the most detailed surveys of cus tomer opinion ever conducted in Russia and Ukraine, mar keting will implement its strategy to increase the Company's market share in both countries. This will include the build ing and acquisition of new retail sites while continuing to develop strong TNK and BP brands in the appropriate mar ketplace to target the most profitable customer segments. Downstream will continue to invest in upgrading the Company's major refineries: Ryazan, Saratov (Russia) and the LINOS refinery (Ukraine). This will increase the Company's ability to efficiently produce light products for the growing Russian market and reduce the need to export less profitable heavy fuel oil. All the goals that have been set for the operational business streams will present significant challenges during the year ahead. Nevertheless, as the TNK BP organization begins to work as an integrated team, I am confident that these chal lenges will be met. The non operational goals set by manage ment focus on building a distinctive corporate culture and pro viding incentives to all of our staff to achieve the highest lev els of individual and team performance, increasing the levels of transparency throughout the Company, and improving HSE performance. This combination of stretch operational goals and integrated teamwork will enable TNK BP to begin making immediate and tangible progress toward building a world class Russian company -- an industry leader valued on a par with our global peers.

Technology Objectives

Technology and Upstream are jointly responsible for deliver ing the challenging production and reserve targets with a par ticular focus on capital efficiency. Key elements of the 2004 plan to support these targets include: Implementation of seven technical expert networks, jointly with Upstream, to develop common standards and work processes, provide enabling technologies, share best prac tices and provide for the development of regional expertise. Overall, the groups will span a variety of production tech nology disciplines. Re organization of the technical centers. As part of the evo lution of the Technology Stream, the technical centers will be rationalized and integrated into the stream. In the future, they will focus on reservoir development and exploration. Development of an infrastructure and projects organization focused on implementation of project appraisal, project man agement control systems and processes, group engineering support, and development of project management as a disci pline. Development and implementation of standards related to pipeline and facilities conditions and maintenance, opera tions excellence and optimum production capacities.


TNK BP Executives Viktor Vekselberg Participate in 2004 Takes Part in the World CERA Week in Houston Economic Forum's Davos Meeting

In February 2004, TNK BP CEO Bob Dudley and COO Viktor Vekselberg took part in CERA Week, Cambridge Energy Research Associates' annual conference in Houston. Each year, CERA Week brings together a diverse and high level audience of international energy industry executives, experts and analysts for a discussion of trends, risks and oppor tunities in the global energy industry. With Russia's continued oil boom high on the agenda of this year's conference, senior TNK BP executives delivered two major presentations. At the industry breakfast, TNK BP executives teamed up with CERA senior director Thane Gustafson to provide an update on TNK BP's first presenta tion to the analysts, which took place on October 16 17, 2003. CERA's Gustafson provided an overview of the changes in Russia's business environment, concluding that the nation's environment remains challenging, yet rich in opportunity. Speaking at the industry break fast, Bob Dudley noted that, six months after the Company's intro duction to the analyst communi ty, TNK BP has delivered a robust performance. Based on 2003 results, TNK BP attained 14% production growth during the year, while exports reached 52% of total production. The Company paid down more than $750 million in debt, and had its credit rat ings increased by the three major international rating agencies. "These results have been achieved in spite of the intense inte gration effort, which had become a second full time job for most of the headquarters staff," said Dudley. In his remarks, COO Viktor Vekselberg discussed two strategic growth proj ects: the acquisition of Slavneft, and the Kovykta project. Bob Dudley also addressed CERA Week's plenary session. The date of that speech coincided with the first anniversary of the announcement of the BP AAR transaction establishing TNK BP. Dudley presented a progress report on engineering a world class Russian company -- including the introduction of new technology and business processes to TNK BP. "We have a real responsibility to make change occur," Dudley said. "Our priorities focus on good governance -- introduction of policies and procedures consistent with global standards. Building a new corporate culture while retaining the best of our heritages is essential to the success of any complex merg er." Other key priorities include reducing inefficiencies, fur ther developing social responsibility, and embedding a new approach to health, safety and the environment. "We realize TNK BP is a bellwether indicator for the viability of strategic Russian/international commercial partnerships," Dudley con cluded. "We have a responsibility to succeed in building TNK BP into a world class Russian company. We have had an excellent start but there is still much to be done as we go for ward."

TNK BP continues participation in international anti corruption initiative

Member of the Board of Directors and Chief Operating Officer of TNK BP Viktor Vekselberg participated in the annual meeting of the World Economic Forum in Davos, Switzerland. The Davos meeting, which takes place in January, has emerged as the most authoritative informal global summit of the world's most influential political and business leaders, prominent academics and social activists. The theme of the 2004 Davos meeting was "Partnership for Prosperity and Security." Viktor Vekselberg took part in a series of meetings of Governors of the Energy Industry, and participated in the work of the session on combating corruption and bribery. The working group, established by the World Economic Forum in coop eration with Transparency International, is dedicated to developing a voluntary "code of conduct" for inter national and national energy companies. The working group's goal is to develop a set of self regulatory guidelines that will reduce corrupt behavior in both the public and private sector, affecting the energy business worldwide. Participating in the group's work are most major international oil companies, including ExxonMobil, Shell and ChevronTexaco, as well as a number of national and state owned oil companies. TNK BP is the only Russian oil company taking part in the initiative to develop anti corruption guidelines. "Corruption is a function of poor governance," commented Viktor Vekselberg. "As part of our work to build a world class Russian company, we are committed to imposing high levels of corporate governance on all aspects of our operations. Our par ticipation in this important international industry initiative reflects our commitment on that issue." The January 2004 meeting of the Energy Industry Governors took place jointly with that of the Governors of Metals, Mining and Construction Industries, which is also developing a set of industry specific self regulatory principles. All partici pants agreed on the need for an inclusive, multi industry approach. Within that framework, the group will continue working to develop a set of generic multi industry Business Principles on Combating Bribery, aiming to expand the num ber of participants, and identifying synergies with other exist ing anti corruption initiatives (such as those existing within the framework of the United Nations and the Organization for Economic Cooperation and Development). The group is plan ning to present the principles for approval and endorsement of the Governors in 2005.

april 2004


New Appointments to the TNK BP Board of Directors

Two new directors representing BP were appointed to the TNK BP Board of Directors, replacing outgoing BP representatives.

Richard Olver replaces Rodney Chase as Deputy Chairman of the TNK BP Board of Directors. Richard Olver, currently Deputy Group Chief Executive of BP plc, was appointed to the number two position at BP on January 9, 2003. On July 1, 2004, Mr. Olver will retire from the Board of BP plc in order to become Chairman of BAE Systems plc. Mr. Olver is a chartered engineer with a First Class Honors degree in Civil Engineering and is also a member of the Institution of Civil Engineers. He is a non executive director of Reuters Group plc, Chairman of the Reuters Audit Committee, a member of the Nomination Committee, and a Governor and Senior Independent Director (as of April 2004) of New Hall School. Following a brief period designing and building highways and bridges, Mr. Olver joined BP in 1973. His early career involved a wide range of oil, gas and refining projects in Britain, Canada, Scotland, the Middle East and Norway. He was appointed Vice President, BP Pipelines Inc., BP North America, in 1979. In 1983, Mr. Olver became Divisional Manager for New Technology with responsibility for offshore, Arctic and enhanced oil recovery technology development. In 1985, he became Divisional Manager of Corporate Planning for British Petroleum, and led the strategic team on BP's acquisition of Standard Oil in the United States. In 1988, Mr. Olver took on the role of General Manager, Gas, BP Exploration Europe, responsible for the operation, new business development and asset management of BP and Britoil's European gas portfolio. He was named Chief of Staff to the Chairman of BP and Head of Corporate Strategy for the BP Group in May 1990. In April 1992, Mr. Olver became Chief Executive, BP Exploration, USA, where he led BP's growth in deepwater exploration in the Gulf of Mexico. In 1995, he became Deputy Chief Executive of BP Exploration. Mr. Olver was appointed to the Board of BP and became CEO of Exploration and Production on January 1, 1998. He led the Upstream E&P business of BP for five years, taking the business from 1.5 million barrels of oil per day to 3.6 million barrels of oil per day through the merger with Amoco and the acquisition of ARCO, thereby more than doubling the size of the business. Lamar McKay replaces Andy Inglis as a member of the TNK BP Board of Directors representing BP. Lamar McKay currently serves as the leader of the Russia/Kazakhstan Strategic Performance Unit at BP plc. He previously served as President and General Representative for Russia and Kazakhstan. Prior to that, Mr. McKay served as the Head of Office of the Deputy Group Chief Executive. Mr. McKay started his career in 1980 as a Reservoir Engineer at the Amoco Production Company, and played an array of roles across the Upstream business. In the 1980s, he served in

a variety of commercial and operating positions in the US. In 1993, Mr. McKay was named General Manager of Arkoma Basin and, in 1997, moved into the role of Business Unit Leader for the Gulf of Mexico Shelf. During the BP Amoco merger, in 1999 2000, he served as General Manager for Worldwide Upstream Strategy and Planning, including worldwide exploration and production, in Chicago. In 2000, Mr. McKay moved to work with BP in the UK, first as Business Unit Leader for Central North Sea in Aberdeen, and subsequently as Chief of Staff for Worldwide Upstream in London. Mr. McKay received a degree in Petroleum Engineering (summa cum laude) from Mississippi State University and an Executive MBA from Indiana University.


Part of the print run of the December 2003 issue of Insight TNK BP contained an error in the biography of the member of the Board of Directors Len Blavatnik. The correct version of Mr. Blavatnik's bio is below. Len Blavatnik (Chairman, Access Industries): Member of the Compensation Committee. Mr. Blavatnik holds a Master's degree from Columbia University and an MBA from Harvard Business School. He is the founder and principal shareholder of Access Industries Inc., a global private equity investment firm with a diversified portfolio in energy, min erals and mining, telecommunica tions and financial services. Mr. Blavatnik also serves as a director of the Siberian Urals Aluminum Company (SUAL), and Svenska Bredbandsbolaget AB. He is a member of the Global Advisory Board of the Center for Inter national Business and Mana gement at Cambridge University and a member of the board of Dean's Advisors at the Harvard Business School. Mr. Blavatnik also serves on the Board of Directors of the Eurasia Group in New York, and is Vice Chairman of the Kennan Council at the Woodrow Wilson Center in Washington, DC.

Larry McVay: Pursuing Operational Excellence

Deputy Chief Operating Officer Larry McVay talks to Insight TNK BP about priorities for 2004. Q: TNK BP is now in its third quarter of operations as a new vertically integrated oil company. With the immediate post merger transition period behind us, what are management's current priorities? A: TNK BP's five year strategy sets out a clear path to sus tainable long term growth, with the ultimate goal being to enhance the Company's value. As we implement this plan, we intend to transform TNK BP into Russia's top oil and gas com pany. Q: How do you define "Russia's Top Oil and Gas Company"? A: I see it as combining a number of different financial, opera tional and management metrics. Superior profitability is clear ly a major overall goal, but the means of achieving that goal are also important. In addition, to be a top company, HSE culture


and performance must adhere to the highest standards. We plan to accomplish this with senior leadership involvement, a strong focus on safe behavior, good but simple environmental safety systems and valuing every person who works at our facilities. On the production side, we will focus on upstream growth, and a critical part of achieving this target will be improving the performance and quality of contractor services. On the cost front, achieving best in class operating efficiency will involve reducing finding and development costs, as well as achieving top quartile lifting costs per barrel. Equally, we will need to ensure that our capital expenditure is used efficiently, and I believe that improved project management skills will have a key role to play here. Throughout the business, Technology will have a significant impact on adding reserves, improving productivity and reduc ing unit costs. These will become vital to our drive to become the top oil and gas company. Our ability to transfer best prac tices internally will be helped by the introduction of the "Asset Based Organization." Indeed, there is probably no other place in the global oil and gas industry where the `integrated oil con cept' has the potential to create so much value as here in Russia. In the Downstream, we will be working to improve our oper ating efficiency and utilization rates, but our main focus will be on maximizing our netbacks. We will accomplish this by exporting as much crude oil and product as possible and opti mizing our transportation channels to minimize transportation costs. If we can achieve all these goals, then I believe that we will not only be able to describe ourselves as the top oil and gas company in Russia, but that we will also bear favorable com parison with any energy company in the world. Q: This is clearly a long term goal. What will be done this year to achieve this? What are this year's priorities? A: The operating priorities for the next 12 months have been set within the framework of the 2004 business plan. It is per haps no surprise that one of this year's major targets is to increase our production cost effectively. To achieve this goal, we must improve the quality of services to both the upstream and downstream businesses, particularly through the estab lishment of our Contractor Performance Management system. Our goal will be to develop a service market involving both company owned and independent contractors that will see competitive pressures leading to an overall improvement in quality, provided this is done cost effectively. Related to this goal is our drive to apply technology across the organization, which I see as one of the main opportunities to add value in the short to medium term. We aim to ensure that we select the right projects and execute them in the right way to optimize our resource base. We have already started to benchmark our performance against our domestic and interna tional competitors, and are planning to move toward the levels of proficiency achieved by "best in class" performers. As one example, we are analyzing the performance of our well workovers as well as the run life of the ESPs [electric sub mersible pumps] that we use. It is already clear that there is plenty of scope to improve both the efficiency of the workovers themselves and to increase the time needed between pump replacements. Q: You mentioned optimization of the resource base. As pro duction continues to grow, does management plan to main tain TNK BP's reserve base? A: Improved reserve replacement and management are among our key priorities this year. Historically, reserve replacement for the combined TNK BP heritage companies has been in the range of 30%. Clearly this is not a sustainable approach over the long term. This year, we are aiming to maintain the level of

Larry McVay

Larry McVay is Deputy Chief Operating Officer of TNK BP, and will be transitioning to COO in the near future. He joined TNK BP at the Company's inception in September 2003. He is currently the chair of the Company's Operations Committee; the Up stream, Downstream, Technology and Oilfield Services streams report to him. Mr. McVay has 35 years of oil industry experience across the full range of upstream and down stream activities. After graduating from Texas Tech University with an engineering degree, he joined Amoco's E&P division, where he worked for 10 years in engineer ing, supervision and manage ment roles. In 1980, he moved to a line management position when he became District Manager for Amoco's largest E&P District located in West Texas. During this time, Mr. McVay's responsibilities included design ing, constructing and operating the first field scale Enhanced Oil Recovery project in the US. He then moved into the downstream business, where he managed the Amoco Pipeline Co., as well as two refineries in the US.

After working for the chairman of Amoco implementing a new busi ness led performance review process, he moved to Egypt to operate the Gulf of Suez Petroleum Company (GUPCO), an Amoco subsidiary. After the BP Amoco merger, he stayed as Managing Director of GUPCO until he was appointed Technology Vice President for Operations in the E&P business in London. Prior to joining TNK BP, in addition to serving as Technology Vice President (Operations), he also served as Vice President of HSE for BP's upstream business.

our existing organic reserve base by achieving at least 75% reserve replacement -- both through the drill bit and through depletion plans and reserve studies of existing fields. This means an increased commitment to exploration drilling, but also a greater focus on improved reservoir and reserve manage ment. With the upside I can already see from our existing assets and our new commitment to sustain the company for the long term, I am very confident that we will achieve our reserve replacement targets and, in fact, grow our reserves despite the rapid increase in production. Q: Beyond the replacement of reserves and the application of new technology, do you see further opportunities for maximizing the value of our resource base? A: The monetization of TNK BP's reserves and the maximiza tion of their value will require the development of a number of major projects over the next few years. It is in this sphere that BP's international experience and knowledge base will have a particular impact -- in prioritizing the timing of projects, establishing appropriate budgets and then keeping the devel opments on schedule. We need to ensure that we optimize the efficient use of capital within TNK BP, and the broader use of the "Capital Value Process" will help us to achieve this. Bringing fields such as Rospan and Kovykta into production on time and within budget will be a vital part of our mission to enhance the value of TNK BP. Q: Are there any areas where you can already identify imbalances in the Company's portfolio? A: One area in which the portfolio has been unbalanced in the past has been gas, but we plan to change that as we look to

april 2004


maximize the value of our full hydrocarbon base. This will include both associated gas and natural gas liquids at our exist ing fields as well as our dry gas reserves at Rospan, Kovykta and in the Orenburg region. Over the longer term, full devel opment of our gas resource base will depend both upon the lib eralization of the domestic market and the ability of independ ent gas producers to export. However, in the short term, our plans are robust even within the current regulatory environ ment. As a result, I see significant value in TNK BP's gas port folio, which can lead to a more balanced revenue generation from oil and gas sales over the next decade. Q: Governance issues and HSE are two of your particular areas of responsibility. How do they feature in 2004 priori ties? A: I see as one of my major tasks encouraging the use of the highest governance standards to minimize risks and so add value for the Company's shareholders. At the present time, the well documented risks of doing business in Russia mean that the Company's reserves and production are not fully valued. Therefore, in all our relationships, whether with employees, partners, contractors or the government, we must make clear the rules by which we intend to operate and then not deviate from those rules in any of our business dealings. In this way, we can help foster an environment in which business risk is reduced, thus lowering the discount placed on the valuation of Russian assets. As an example of steps being taken in this direction, I would highlight the work being done to establish TNK BP as an industry leader in the area of Health, Safety and Environment (HSE). Although the achievement of top industry standards will take time, systematic plans are already being put in place. For instance, we have set a clear target to reduce the number of fatalities and safety related incidents across the organiza tion. By introducing mandatory standards for wearing seat belts, vehicle inspection and driving tests for employees, we aim to ensure that the number of incidents involving TNK BP vehicles and drivers is below the high incidence of traffic acci dents and fatalities observed in Russia generally. The involve ment of senior management as role models in this area is par ticularly important, especially given the fact that Russian driv ers commonly forego wearing seat belts. Q: In conclusion, as an executive with a wide range of glob al oil experience, what are your views on this Russian opportunity? Are you still excited about your latest chal lenge? A: I see the TNK BP venture as an enormous opportunity to create a major Russian oil company to bear comparison with the best of its global peers. Opportunities like this do not come about very often, so when I was offered a senior management role as the company was being formed, I agreed without hesi tation. At this stage, I see so many opportunities for growth and value enhancement that prioritization and focus are likely to be key success factors as we develop the business in the short term. It is also clear that achieving all these goals will depend on the skills and enthusiasm of the people working throughout TNK BP. Because of this, we are committed to making TNK BP the best place in the industry to work. We will aim to achieve this through continued development of all our people, using specif ic training programs, sharing experience, ideas and knowledge across the organization. A few months into this new company, I am absolutely con vinced that our model, based on the integration of Russian knowledge and assets with international technology and gov ernance skills, will allow us to build a unique, distinctive enti ty, fully capable of becoming the top Russian oil and gas com pany. I personally am very excited by this opportunity and fully committed to making it a reality.

German Khan Presents Five year Strategy at London's IP Week

In February 2004, TNK BP Executive Director German Khan presented TNK BP's strategy at IP Week, an annual industry conference organized by the Institute of Petroleum in London. Addressing the forum, Khan noted that the recently adopted five year strategy represents the best long term plan for the assets that comprise TNK BP. This reflects a new and more stable environment in Russia, which allows long term plan ning, as well as a new approach to managing the Company for long term value, said Khan. The strategy foresees annual organic capital expenditure of roughly $1billion per year, which does not include any acquisi tion costs. In 2004, Capex is likely to exceed $1billion, with Upstream accounting for 70% to 80% of that expenditure. Khan also highlighted the Company's downstream plans, including the work to bring to completion the Ryazan refinery modern ization project, increase netbacks from export and domestic sales, and the Company's support for the expansion of Russia's export infrastructure. Concluding the speech, Khan confirmed the intention of management and shareholders of TNK BP to transform it into a world class Russian company.

Technology Delivery Models

TNK BP's strategy assigns a key role to new technology in delivering high performance and sustainable growth. To facilitate the introduction of new technology throughout the Company, TNK BP established an in house Technology stream (see Insight TNK BP, December 2003). James Dupree, Executive Vice President and head of the Technology stream, shared his views with Insight TNK BP, explaining the Company's model for delivering technology and ensur ing the long term sustainability of TNK BP's business. By James Dupree Executive Vice President, Technology The primary objective of TNK BP's Technology organization is to implement and steward technology in the Company. Technology relies on three basic organizational models to ful fill this function and to meet the "customer needs" of the busi ness streams as well as TNK BP's corporate requirements. The purpose of this article is to explain how these three organiza tional systems work within the Technology stream, and how they enable Technology's productive interaction with other elements of the TNK BP organization.


The three simple delivery models include: Focused projects; Network support, or expert working groups; Corporate functions. The high level organizational diagram illustrates the connec tion between the different segments within the Technology organization to one or more of the three interaction models mentioned above. This article will also provide some concrete examples of focused projects, expert working groups and cor porate functions.

Focus Project: Orenburg Hydraulic Fracturing

Focused Projects

The technology organization has limited available human resources. Thus, to be effective, it must focus on projects that create the greatest value for TNK BP. Candidates for focused projects can be identified in a number of ways, including but not limited to peer assistance, business unit requests, financial memoranda reviews, asset reviews, and requests by senior man agement. Focused projects vary in size and scope. For example, the Rospan gas production project is a technology focused project that includes all aspects of technology, such as drilling, construction, fracturing and production. In contrast, the focused projects in Orenburg, Nyagan and Udmurtia concen trate on improving our hydraulic fracturing practices in these performance units. To better describe how focused projects work, below are three examples that the technology organization has either complet ed or is currently working on. The three projects are the Orenburg hydraulic fracturing program, Business Unit East VKY water flood program and the Udmurtia optimizations. Orenburg hydraulic fracturing: The production opportunity to increase the size of the Orenburg fracturing programs from 20 tons of propant to 40 tons propant was identified in the August 2003 production enhancement peer assist. The "prize" was identified to be between 20 tons/day to 140 tons/day of incremental oil production with the larger hydraulic fracs. The Technology stream designed and implemented in eight wells a

fracture design utilizing 40 tons of propant. The program delivered 500 tons/day of incremental production above what a 20 ton propant fracture design would deliver, and proved that larger hydraulic fracs in Orenburg should be utilized in the future. The technology Stream helped the business unit identify an additional 30 wells for stimulation with propant treatments using 40 tons or more of propant. Business Unit East VKY Water Flood: This opportunity was identified through the financial memorandum process and from requests to review rapidly declining production from wells in the VKY field. The Technology Stream organized a two day technical session to review the VKY reservoir devel opment plan. As a result of that technical session, recommen dations were made to immediately convert 12 wells to water injection. The business unit converted the wells agreed to, and the field responded. The decline was arrested, and the result was a more than 300 ton/day production increase within two months. The Technology Stream has an agreed upon work pro gram for the business unit to continue the rehabilitation of the VKY field.

Technology Delivery Models

april 2004


Udmurtia optimizations: The opportunity to optimize wells in the Mishkinshoye field in Udmurtia was identified during a production technical limit session that the Technology Stream held at the field. Previously, the top optimizations in the field averaged eight tons/day of incremental production. The opti mizations identified by the Technology Sream delivered an average 23 tons/day of production. This was achieved by opti mizing the ESP size and location to operate below 0.6 of the bubble point pressure. The three examples above illustrate some of the focused proj ects being implemented, but do not constitute an exhaustive list of all projects under way. At any time, the Technology Stream is working jointly with Upstream on multiple focused projects. A few of the many other focused projects currently in progress are the Nyagan five spot water flood, the Nyagan idle well reactivation, the Ryabchek horizon fracs at Samotlor, the Business Unit East propant flow back problem and the Kolin Yegausvoye fracs. This delivery model enables Technology to provide project specific support, design pilots or specific rec ommendations, following which Technology experts can move on to the next opportunity.

Well workover in Udmurtia

Each expert working group is led by an expert from Technology and includes representatives from each of the Company's performance units. The groups serve as a link that provides ongoing two way connectivity between the Technology and Upstream organizations, ultimately facilitat ing implementation of new technology at the oilfield. This is different from focused projects, where the technology group concentrates on just one particular "ring fenced" oppor tunity in the upstream area. Nevertheless, expert groups can identify projects that could become focused projects if the reward is deemed to be sufficient.

Expert Working Groups

Over the past six months, the Technology organization has worked to identify the key gaps in performance that have the greatest impact on the forward value of the Company. Inclusive of Technology and Upstream representatives, seven expert working groups were launched on February 17, 2004, to work in close cooperation with Upstream to close those per formance gaps. Expert groups concentrate on providing expert assistance with regard to problem solving, sharing best practices across per formance units, developing common standards, rolling out enabling computing technologies, and coordinating work activities aligned with achieving overall company goals.

Corporate Functions

As in any large corporation, Technology also performs a num ber of corporate functions on the Company's behalf. Some examples of corporate functions include reserve management, exploration, group engineering and long term reservoir man agement. For example, every year TNK BP must undergo an external reserves audit to validate its oil and gas reserves for Western markets. The external reserve audits are used with banks and creditors to raise money on the capital markets and to establish the Company's debt credit rating. As with any oil company, part of TNK BP's value is related to the results of the external reserve audit. Given the audit's critically impor tant nature, the Technology organization dedicates a signifi cant number of its staff to the audit for four to five months every year. When the audit is completed, these same individu als begin to prepare for the next year's audit and assist the Upstream business in moving the reserves from the "possible" category to the "proved" category.

Technology Expert Groups

Water Flood Excellence Electric Submersible Pumps Workover Evaluation and Tracking System (WETS) Operations Efficiency Corrosion Failure Prevention Drilling Operations Drilling Performance

Planning for the Future

Although "the brain" of the Technology organization is located in Moscow, the bulk of its work actually occurs in the regions, across the performance units throughout the Company's entire asset base. Technology experts spend much of their time in per formance units, working closely with local experts "on the ground," tailoring approaches and processes specific to the needs of each particular field and project. In this role, they also foster horizontal ties across the organization, spreading best practices accross the Company's performance units. As we continue to build TNK BP into a distinctive Russian company that aspires to attain industry leadership, Technology will play a key role in ensuring a sustainable and long term future for the Company. Proper long term reserve and deple tion planning, and a sustained exploration program will help to ensure that TNK BP continues to successfully deliver on its performance obligations to shareholders, employees and the Russian economy consistently and over the long term. This way, in line with its strategic objectives, TNK BP will contin ue to thrive as the leading Russian oil major even after the cur rent phase of Russia's "brownfield renaissance" runs out of steam.

Expert groups represent a model for delivery of new technolo gy to Upstream different than that provided by focused proj ects. Through the use of expert working groups, the Technology stream aims to work similar issues across the entire upstream through their representation. This allows the rela tively small number of technology experts to affect and influ ence a larger portion of our business. For example, the electric submersible pumps (ESP) group focuses on applying the "expert working group" methodology to the large number of pumps within every performance unit across our Company. At a February kick off meeting, the tech nology leader along with the most qualified ESP experts from the regions agreed on key areas of focus, enabling technology, and the continued sharing of ideas. Performance milestones for the year were set, ensuring a more uniform campaign in the implementation of standards and processes to field more effec tive optimizations and longer ESP runtime.


Accounting Transformation Project: Improving Transparency

As part of its effort to improve corporate governance and increase transparency, TNK BP launched a large scale project to modernize the Company's accounting. The Accounting Transformation Project (ATP), the first major project of its kind in the Russian oil industry, is designed to redefine the Company's accounting processes to deliver faster, more accu rate and comprehensive financial information for both inter nal and external reporting needs. The project began in early 2004 and will continue well into 2005. ATP is at the core of TNK BP's corporate objectives, which include preparation of financial statements in accordance with International Accounting Standards (IAS) and manage ment of critical information in a timely and efficient manner. To date, multiple reporting methods and systems across the organization and its subsidiaries have delayed the generation and reporting of accurate and comprehensive financial and operating results. The goals of ATP are to: Facilitate swifter reconciliation between Russian Accounting Standards (RAS) and IAS by harmonizing and redesigning existing processes; Establish common policies and procedures to support a faster close and facilitate IAS reporting; Strengthen management reporting by capturing and making available relevant data for all users. Beginning in 2005, ATP will enable the Company to close its books within 10 business days of the end of each quarter, in conformance with IAS. Designed to respond to recent changes in Russian legislation with regard to reporting requirements, ATP will help TNK BP deliver on its performance promise and ensure better governance, risk and opportunity manage ment. In addition, the implementation of ATP will drive greater transparency and increase investor and creditor confi dence in the fundamentals underpinning the Company's oper ations. Starting in 2004, Russian banks, financial institutions and trading companies are required to utilize International Accounting Standards. Other organizations are required to adopt IAS between 2005 and 2010. By moving to IAS in 2005, TNK BP is taking a market leading position. Transforming the Company's accounting requires substantial change in the accounting organizations at the head office and the streams, as well as in the way the Company's businesses provide financial information. Financial reporting procedures at subsidiaries and affiliates will be optimized and based upon international accrual accounting principles. The organiza tional structure and processes of the Company's accounting centers will be simplified, in part through the creation of eight Regional Accounting Centers. These centers will be responsi ble for preparing financial reports for their regions using processes common to the entire organization. An integrated IT software system will support consolidation and group reporting. ATP will provide managers with a uniform format for the presentation of consolidated accounts by stream or business unit.

Accounting Transformation Project

With the adoption of ATP, TNK BP's corporate accounting standards will meet the highest international corporate gover nance norms. The Company will publish a Group Accounting Manual outlining TNK BP's corporate accounting policies and procedures. TNK BP will also develop and implement a standard Chart of Accounts across the organization to meet a single set of accounting and management reporting require ments. This standardization should allow TNK BP to estab lish industry best practices for efficient processes and ulti mately set the highest accounting standards within the Russian oil and gas industry while furthering its ability to compete at a global industry level. ATP's implementation will signify a step toward transferring more power to the Company's managers, reducing red tape and providing more transparent financial information. ATP is the first program of its kind in the Russian oil industry, pro viding TNK BP with the opportunity to lead the industry in this area.

Planning and Performance Management: Building a Unique Competitive Advantage

TNK BP's strategy emphasizes the importance of transparency and good corporate governance in building a world class Russian company and attaining valuations comparable to those of inter national peers. Accurate and timely management information is the cornerstone of good corporate governance and is vital if the Company is to establish a competitive advantage over its domes tic rivals. Transparency created by the timely flow of accurate information from businesses to management and back facilitates effective forecasting and planning, informed decision making and efficient resource allocation. It is with that goal in mind that TNK BP established the Planning & Performance Management function (PPM).

april 2004


Planning and Performance Management as a corporate func tion is new to the Russian oil industry and does not have an analogue in other Russian oil companies. The PPM team at TNK BP has been charged with the task of working with the Company's businesses to provide management with timely access to crucial information and the analysis required for rapid and flexible decision making. The group is also respon sible for helping the businesses and corporate services (referred to as "streams and functions") develop their plans and for monitoring performance against targets, with a par ticular focus on identifying new opportunities to enhance performance and mitigate risks to the organization as a whole.

PPM at a Glance

place, and that the planning and performance analysis is carried out as efficiently as pos sible. The long term target is to make PPM as integral a part of TNK BP's business as it is at BP. "Our goal is to continuously build the trust of senior man agement, the Board of Directors, the shareholders and all the businesses with regard to the information we provide, and to demonstrate that the analysis is fully objective and serves to optimize the decision They are responsible for gather making process throughout the ing data from their businesses Company," says CEO Robert and using it to produce analy Dudley. ses helpful to the business itself and to senior manage "We want the business streams ment who assess all TNK BP to see PPM as a resource that units. PPM actually operates in helps them address the chal seven areas: Upstream, lenges that they will inevitably Downstream, Oilfield Services, face in striving to meet their Technology, Functional Units, stretch targets," says Dave Investment Governance and Cook. "We are also there for senior management to high Corporate. light key performance vari Just like any other function of ances, both good and bad, TNK BP, PPM itself has a per across the Company. But above formance contract. It focuses all, we aim to provide the com on building an efficient plan petitive advantage of transpar ning process and making it ent and instantaneous access work, as well as on ensuring to management information that the GFO is as accurate and and analysis that will allow timely as possible and that all rapid and flexible interventions performance contracts are in to capture opportunities and limit risks. I am convinced that place at the appropriate time. this will be an advantage that PPM's short term goal is to TNK BP's domestic and many ensure that the processes that international rivals will find very make this all happen are in difficult to replicate." The PPM group's experience is as broad as the organization itself, incorporating experts from technical upstream and downstream areas with finan cial analysts and experts from functions such as Human Resources. Most members of the 150 strong PPM team, in addition to being accountable to the PPM EVP and CFO, work closely with the business units and report, as part of a matrix system, to their stream EVP.

Introducing the New Culture

Introducing the new function to the Company and making it an integral part of operations and planning meant a cultural adjustment for TNK BP -- not unlike the adjustment under gone by BP a few years earlier, says Dave Cook, TNK BP's Executive Vice President for Planning and Performance Management. "PPM today is very much part of the BP culture. Acceptance of PPM's critical importance to management's decision making has evolved within the BP culture over time. An understanding that transparency of information at all levels is vital to informed and timely management decisions took a number of years to develop fully, as did the appreciation that the business could thrive on a combination of very challenging targets. However, today BP has a very advanced information gathering and analysis system that allows PPM to help the business units and senior management identify potential risks to business performance before they become serious problems and capture new opportunities to maximize the returns from individual businesses and the group as a whole." Since PPM was established at TNK BP, one of its roles has been to facilitate understanding by both employees and sen ior management of the concept of setting stretch targets -- targets that realistically have perhaps only a 30% chance of

PPM Matrix Reporting Structure

being achieved -- as well as setting threshold levels as mini mum requirements. Within that context, PPM operates as an objective corporate think tank that helps streams and func tions achieve as many of their targets as possible, while pro viding transparent management information to corporate executives, enabling optimal resource allocation to maximize the success of the organization as a whole.

Managing Information

On a monthly basis, streams and corporate PPM teams receive data from the business streams and functions, analyze it and feed it back to the businesses. The same data is also used to keep senior management informed of progress toward the plan targets. The key role, though, is to help identify potential risks or opportunities in the businesses and the interventions that may be needed to mitigate or exploit them. Because PPM is looking at these issues across the whole Company, it can also help to identify the potential for the transfer of expertise or new techniques throughout the organ


ization, as well as to assist in the optimization of investment opportunities. In this role, the team's objectivity is of para mount importance, because it must provide members of senior management with a dispassionate view of the relative value of different opportunities so that they can make informed deci sions about allocating resources among projects. The information collected by PPM is merged into a compre hensive monthly document called the Group Financial Outlook (GFO). The accuracy and timeliness of this infor mation is undoubtedly the foundation and most important element of PPM's work," says Cook. "Without trustworthy information, any management analysis is devalued." In only seven months, TNK BP has seen dramatic improvements in the quality of data being collected, with new systems being developed and a broader spectrum of employees understand ing the need for timely and accurate reporting. Although there is much more work to be done before TNK BP reaches the levels achieved by BP, the Company is already establish ing a culture of forecasting and adjusting performance. An example comes from the downstream business in late 2003. Due to a rare combination of market conditions at the time, netbacks obtained in the domestic market were actually bet ter than those in the export market. The rapid availability of this information enabled management to decide quickly to ignore the export target in the interests of maximizing returns. Volumes were placed on the domestic market -- at the expense of export targets, but resulting in higher returns to the Group. This again emphasized the flexibility to alter tac tics where appropriate to optimize TNK BP's performance as a whole. PPM also uses the information to help streams and functions develop their own performance plans. While businesses retain full responsibility for their plans and the fulfillment of targets within them, PPM's role is to assist in the analysis used to develop each business's overall goals, and then to review the plans relative to past performance and the exter nal competitive environment. Consolidating plans from all the streams and functions, PPM provides corporate manage ment with a "bottom up view" of where the combined Corporation is heading. Through an iterative process, an overall Company plan acceptable to corporate management, shareholders and the Board of Directors is then developed, with the contributions from each stream or function clearly combining to achieve the higher level targets of the entire organization. Once the plan as a whole has been agreed upon, PPM must ensure that each stream and function is in agreement with individual performance contracts, which then "cascade" into contracts at the business unit, performance unit and ulti mately individual levels.

making plan" is an anathema. Nevertheless, identifying such risks in advance is key to performance and, in the new system, TNK BP businesses have been learning to be transparent and ask for help upon realizing that they are at risk of not meeting a performance target. "Admitting the possibility of missing planned targets is something that has been alien to Russian culture Dave Cook is TNK BP's over many decades," Cook says. Executive Vice President "However, recognition of a potential in charge of PPM risk and the need for assistance in mitigating it should not be seen in a negative light, but rather as a positive search for improvement and collaborative out comes. Encouragingly, we are witnessing a growing under standing of that." For example, three workover rigs recently were sent from TNK Nizhnevartovsk to Varyoganneftegaz (VNG). Their transfer was driven by the declining workload at TNK Nizhnevartovsk. The business unit flagged the slowdown early -- a demonstration of transparency. As a result, the rigs were made available earlier than planned to help VNG deliv er more production. "This efficiency is good for all, and will help not only VNG, but the Company as a whole, deliver the production and financial targets," Cook comments. "This particular case highlights the fact that all employees will be rewarded not just on the basis of their own business unit's performance, but equally on the basis of performance of the Company as a whole. As a consequence, early acknowledgment of a business risk or opportunity can actually enhance rather than reduce the remuneration of employees in a particular business stream, even though their unit has missed a plan target."

Long term Planning

While PPM plays a key role in ensuring that the Company attains annual performance targets, it also plays a role in longer term planning. "Another part of PPM's monitoring role is to highlight the impact of performance in the current year on the Company's longer term goals," Cook says. "That means we monitor ongoing trends in operational and finan cial metrics to ensure that any risks to the achievement of the five year plan are recognized early, so that interventions can be made where necessary." The team is also involved in reviewing the five year plan throughout the cycle to keep any targets within realistic boundaries or to make adjustments in case of dramatic changes in the external environment. All of this takes place in close collaboration with the businesses as well as other key corporate functions -- especially Strategy and New Business Development as well as Finance. All TNK BP planning is done on a normalized basis, i.e., uti lizing fixed price and exchange rate assumptions. Performance data and financial results are analyzed using real prices but are also normalized to allow for comparison with the plan targets. As a consequence, performance meas urement is not distorted by, for example, a jump in oil prices or a collapse in the exchange rate. The organization may decide to react to the new environment, but the original per formance contracts set under fixed assumptions will remain valid.

When Things Don't Go According to Plan

The most important aspect of addressing risks relevant to a plan's achievement is knowing about them as soon as possi ble. This is why the transparency and timeliness of PPM's internal data as well as its ongoing monitoring role to high light potential problems and to help the businesses address them quickly are vital -- a "no surprises" philosophy. Again it is important to emphasize that the targets set by the plans are often "stretch" targets, and require effort, innovation and creativity to achieve. Recognizing the risk of not achieving a planned target is psy chologically difficult -- particularly so in Russia, where "not

april 2004


Russian Oil And Gas Industry News

Russian Production and Export Data

Oil and gas condensate production in the Russian Federation totaled 421.377 million tons (8.4 million bpd) in 2003, up 11% (by 41.474 million tons) from 2002. Gas production in Russia totaled 616.45 billion cubic meters (59.6 bcfd) in 2003, a 3.6% (21.15 bn cu m) increase on 2002. Export shipments of Russian oil to non FSU countries totaled 154.978 million tons (3.1 million bpd), up 12.4% on 2002.

pipeline transportation tariffs. Prior to this appointment, Novikov served as Deputy Representative of the RF President in the Volga Federal District.

Ministry of Natural Resources to Propose New Subsoil Use Amendments

Yuri Trutnev, the newly appointed Minister of Natural Resources, said that his ministry is planning to propose draft legislation that would abolish tenders for subsoil licenses in favor of license auctions. Trutnev said the ministry plans to propose legislation that would make it mandatory for regional authorities holding tenders or auctions to announce them in the media. Speaking about sector taxation, Trutnev noted that he favored a differentiated tax on minerals production, based on the vol ume of production as the criterion for differentiation. The new minister also expressed his negative view on Production Sharing Agreements, stating that PSAs were "a corruption mechanism. In my view, the development of the shelf can be based on instruments other than PSA," said Trutnev, although he qualified the statement as his "personal view."

Russian Oil and Gas Production and Exports, 2003

Baltic Pipeline System Phase Two Completed

In February 2004, Transneft completed phase two of the upgrade of the Baltic Pipeline System, further enhancing Russia's oil export capacity. The upgade increased the capacity of BPS to 42 million tons per year, making it equal to that of Novorossiysk, Russia's largest oil terminal. According to Transneft President Semyon Vainshtok, weather conditions in Primorsk, the terminal point of the BPS, will not disrupt the port's operations. "While downtime in the port of Novorossiysk averages 80 90 days a year because of storms, Primorsk operates 364 days a year," said Vainshtok.

Energy Sector Regulator Restructured

Following the restructuring of the Russian Federation Government, announced by President Vladimir Putin in March 2004, the functions of the former Energy Ministry have been assumed by the newly created Ministry of Industry and Energy. The ministry, headed by Viktor Khristenko, will over see Russia's entire industrial sector, including defense, energy and nuclear power industries. Primary responsibility for regulating the oil and gas industry will rest with the Federal Energy Agency. The agency's man date is to provide government services and manage state prop erty in the energy sector. Rosneft's Sergei Oganesyan has been appointed head of the agency. Prior to this appointment, he served as vice president of state owned Rosneft, and headed Rosneft's offshore subsidiary, Rosneft Sakhalinmorneftegaz. The Federal Energy Commission has been reorganized into the Federal Tariff Service of the Ministry of Economy and Development. Headed by Sergei Novikov, the service will be tasked with tariff regulation, including oil and product

Changes to Angarsk Nakhodka Pipeline Route

In March 2004, Transneft tabled a new proposal regarding the route of the oil pipeline from East Siberia to Russia's Pacific coast. Transneft wants the initial point of the pipeline to be built in Taishet, a city located considerably further west of Angarsk. In addition, citing environmental concerns, Transneft proposed moving the pipeline route further away from Lake Baikal. Transneft's new proposal envisions the pipeline going around the lake in the north. The pipeline com pany says the route bypassing Lake Baikal from the south is no longer under consideration. The new route would entail a pipeline that is 4,130 km long, compared to the length of 3,765 km stipulated by the Angarsk Nakhodka plan. Capacity is planned at 56 million tons per year. According to Transneft's boss Semyon Vainshtok, the develop ment of a feasibility study will take up all of 2004. Design works will span one year, while construction will be completed within approximately four years.

"Insight TNK-BP" is published by the Communications and Public Affairs Division

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