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Transneft Non-Deal Roadshow. 3 Table of Contents I.Transneft today II.Business and operating profile III.Financial profile IV.Credit summary.

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Presentation on theme: "Transneft Non-Deal Roadshow. 3 Table of Contents I.Transneft today II.Business and operating profile III.Financial profile IV.Credit summary."— Presentation transcript:

1 Transneft Non-Deal Roadshow

2 3 Table of Contents I.Transneft today II.Business and operating profile III.Financial profile IV.Credit summary

3 I.Transneft today

4 5 Transneft today Transneft is an owner and monopoly operator of Russias crude oil pipeline infrastructure Russia is the worlds largest producer and second largest exporter of crude Transneft transports over 90% of all Russian crude production to internal and export destinations Transnefts pipelines and sea terminals are Russias principal oil export channels, handling approx. 80% 1 of Russian crude oil export Key facts Financial highlights Support/Services Subsidiaries Main pipeline subsidiaries 2003 1 Note: non-CIS crude exports (excluding transit) US$m Sales6,2335,2233,721 EBITDA3,1882,6781,977 EBITDA Margin51.2%51.3%53.1% Net Income1,7231,429996 CFO2,4802,1051,025 CAPEX(1,825)(1,978) (1,014) Total Debt/Equity4.9%6.6%8.0% Total Debt/EBITDA0.2x0.2x0.3x EBITDA/Gross Int. Exp.51.1x31.5x16.8x 100% 64% 100% 75.5% 100% Upper Volga Main Pipelines Nizhny Novgorod Druzhba Main Pipelines Bryansk Volga Main Pipelines Samara Northern Main Pipelines Ukhta North Western Main Pipelines Kazan Sibnefteprovod Tyumen Trans-Siberian Main Pipelines Omsk Ural-Siberian Main Pipelines Ufa Central Siberian Main Pipelines Tomsk Black Sea Main Pipelines Novorossiysk 100% Baltic Main Pipelines Saint Petersburg Notes: 1) IFRS accounts 2) Exchange rate calculation: Average $/RUR rate used for cash flow and income statement numbers; End of period $/RUR rate used for balance sheet itemsSource: Transneft 2004LTM 3Q05 100% 99.5% 100% Svyaztransneft Moscow Volzhysky Podvodnik Nizhy Novgorod Centre for Technical Diagnostics Moscow Stroyneft Moscow Giprotruboprovod Moscow Transneft (UK) Ltd. London Transneft Insurance Company Moscow Centre for Metrological Support Moscow Primorsk Specialised Sea Port Leningrad area Transpress Moscow Diagnostics/ repair of underwater pipelines Main pipeline construction management Feasibility studies and research Financing for import procurement Insurance services Metrology support Freight loading/ unloading, oil transport Publishing Communication and network support 100% Supplementary pension plans Transneft Pension Fund Moscow Transneftleasing Moscow 100% Diagnostics of main pipelines Leasing services Subsidiary companies

5 6 Transneft is the worlds largest crude pipeline network operator Transnefts pipelines link Russias main oil producing provinces to domestic refineries, export sea terminals and connection points with oil pipeline networks of neighboring countries Only 52% 2 of Russian export oil transported by Transneft have to transit through Ukraine, Belarus or the Baltic countries Oil provinces with the highest production growth prospects, such as West Siberia and Timan-Pechora, are already connected with Transnefts main pipeline system Good geographic coverage and the size of Transnefts pipeline network allow for substantial economies of scale 2 Note: as of July 2005; Source: Transneft Transnefts pipeline network Highlights 48,075 km 1 of trunk pipelines with diameters ranging from 420 to 1,220 mm 336 pumping stations 861 surface storage tanks with total capacity of 14.2 million m 3 Three oil loading sea terminals in Novorossiysk, Tuapse (Black Sea) and Primorsk (Baltic Sea) Comprehensive Environmental Management System Conformity to ISO 14001 standards Key facts and figures Russias proven reserves by region 1 Note: as of 30-Jun-05 Source: International Energy Agency: World Energy Outlook 2004

6 7 Russian government owns and runs Transneft Source: Transneft Government stake - 75% capital and 100% control Consideration towards companys interests Control over investment and dividend policy Implicit government support in negotiations with off- takers, suppliers and transit countries Unique status of exclusive agent for Russian oil exports It is the Government policy that all new major pipeline projects be led by Transneft Considers key financial and financing parameters of Transneft History of reinvesting earnings into business development and modest dividends Management structure Stockholders Meeting (Government maintains 100% of voting rights) Board of Directors (7 government appointed members and 2 Transneft executives) President (Mr. Vainstock) Administrative Board (9 Transneft managers) Auditing Committee (3 members from various government ministries) Direct government controlSupportive regulatory environmentPrudent shareholder with long-term strategic vision Shareholder structure Domestic & International Investors Russian Government Transneft 25% of Equity (Preferred shares) 0% Control 75% of Equity (Common Shares) 100% Control Russian Federation Support for Transneft

7 8 Transneft is a government tool and a source of income Transnefts crude oil load Non-CIS crude exports (excluding transit) Critical role in Russian economy The oil sector is key to the Russian economy as it provides: A quarter of national GDP and government income Two thirds of countrys export revenues Transneft is the Russias primary crude oil export channel Economics of oil pumping via a pipeline are superior to any alternative mean of transportation Alternatives often are complimentary, not competing Transneft is one of the tools the Russian government uses to exercise control over oil companies by means of determining tariffs and new pipeline projects Source: Ministry of Industry and Energy; Renaissance Capital 2005 Russia Oil & Gas Yearbook; TransneftSource: BPs Statistical Review of World Energy; Transneft 133 143 159 186 216

8 9 European pipeline network 2004 European oil consumption by source Transneft is deeply integrated into the European oil supply chain Source: Transneft, BPs Statistical Review of World Energy Transnefts network is fully interconnected with the European pipeline system Transneft is the principal channel for European crude oil imports Directly: via pipeline connection points Indirectly: via alternative transportation methods Transnefts integration into the global economy is set to increase with construction of new pipelines connecting Russian oil producers with new markets Comments Former Soviet Union 34.1% North Africa 12.3% Asia-Pacific and Other 5.1% West Africa 3.5% East & Southern Africa 0.2% Domestic 20.0% USA 1.5% Canada 0.1% Mexico 1.2% South & Central America 1.5% Middle East 20.5% Other 25.9% Transneft 74.1%

9 10 Russian crude oil production and export in comparison with forecasts of Russias Energy Strategy to 2020 Unique position to benefit from increasing global oil demand ActualForecast 2002-2020 Production growth rate: Best case: 37% Base case: 18% 2002-2020 Export growth rate: Best case: 40% Base case: 21% Source: Ministry of Industry and Energy; Energy Strategy of Russia for the Period to 2020, Transneft World 2002-2020 growth: 39% Global annual oil demand 27% 12% 58% 51% 67% 38% 17% Source: International Energy Agency: World Energy Outlook 2004

10 11 Sales, EBITDA and EBITDA margin evolution Debt financial ratios evolution Strong financial performance Source: Transneft

11 II.Business and operating profile

12 13 Year Average annual tariff (RUR/t)123.2165.2224.5250.3296.2 Number of revisions61232 Average annual increase34.1%35.9%11.5%18.3% Russian PPI33.1%9.7%17.5%13.0%28.4% Clarity and supportive nature of tariff regulation Introduced in 2002, the new tariff methodology provides a clear and transparent framework for tariff-setting and tariff-changing processes The current tariff structure is flexible and takes into account costs of running different pipelines individually The tariff-setting mechanism is essentially a cost-plus system, allowing for recovery of operating costs and costs of funding of new projects In addition to the tariffs set by the government, there is a possibility for Transneft to set long-term, negotiated and bilateral tariffs with some of its customers Tariff changes are proposed by Transneft and either approved or modified by the regulator The Company has been able to successfully justify its requests for the tariff increases 20042002200020012003 Superior economics of oil transportation via pipelines allow Transneft to keep its tariffs significantly below those charged by railways while still fully recovering costs and maintaining healthy profit margins Route Western Siberia-Western border15.6944.59 Western Siberia-Novorossiysk20.1332.24 Western Siberia-Primorsk20.7526.90 Western Siberia-Meget (Irkutsk)15.2855.90 Bashkiria-Primorsk15.3521.03 Bashkiria-Novorossiysk12.7921.03 Timano-Pechora-Primorsk 2 27.3316.71 Timano-Pechora-Western border22.3034.65 Samara-Tuapse6.4317.42 Transnefts tariff (US$/ton) Railway tariff 1 (US$/ton) Source: Transneft History of average annual tariff increases Transnefts vs. railway tariffs Comments Superior economics of transportation via pipeline Source: Russian Railways 1) 1)Using railway cars with capacity of 125 tonnes 2) 2)Transneft tariff to the the railway point

13 14 Route Belarus (to southern border)1.142450.53 Transneft's average 1 10.2824400.42 Belarus (to western border)2.65210.41 Ukraine (to Odessa)6.311120.57 Ukraine (to western border)5.66340.78 Lithuania (to Butinge)2.122260.94 Kazakhstan (to Russian border)22.9213791.66 CPC (Tengiz-Novorossiysk)30.8316001.93 Haulage Tariff US$/ 100 t-km) Tariffs still have room to grow Despite a consistent trend of tariff growth, they still remain low in comparison to tariffs in other countries Given the expected levels of international and domestic Russian oil prices, the share of Transnefts tariffs in oil producers costs is modest. Transnefts tariff currently stands at 3.5% of the oil price As a result, Transneft is well positioned to apply for further tariff increases to meet costs of maintaining and upgrading the existing pipeline infrastructure as well as developing new pipelines Transit tariff (US$/tonne) 1 Note: excluding foreign transits. Source: Average annual tariff data - Transneft; Crude oil price - Bloomberg Russia (Transneft) 1 10.2848,70024400.42 Enbridge Energy LP5.635,6357060.80 Average Haul Tariff US$/ 100 t-km) Revenues (US$/tonne) Network (km) Transnefts tariffs in perspectiveTransnefts vs. international tariffs Transnefts average annual tariffs as % of oil price Source: Transneft, Enbridge Energy LP

14 15 Transnefts customer base is solid and well diversified For 2005 Transneft has 146 contracts for oil transportation services with oil producing companies and other market participants None of the customers, including foreign transit shippers, accounted for more than 20% of the oil volume pumped by Transneft in the 1st half of 2005 Comments Share (%) in volumes transported in 1H05 Evolution of revenues2004 Revenues composition Domestic tariffs 37% Export tariffs 52% Other revenues 11% LUKoil 17.1% TNK-BP 15.3% Rosneft 14.2% Surgutneftegaz 13.8% Sibneft 6.5% Tatneft 5.5% Slavneft 5.2% Tomskneft 3.1% Bashneft 2.4% Samaraneftegaz 2.3% Russneft 2.2% Others 12.4% Source: Transneft

15 16 Transnefts pipeline network is relatively young, compared to the US inter- state liquid pipeline network At the same time, with appropriate maintenance, repair and replacement programs in place, the physical life of a pipeline is virtually unlimited Since 1999, Transneft has been implementing a massive asset modernization program, spending approximately $1 billion annually on asset repairs and upgrades. As a result, today: Fewer defects have to be repaired annually Proportion of replaced or repaired pipeline is on a downward trend Transnefts pipelines are modern and well maintained Transneft has a strong track record in asset management Pipelines by time of construction CapEx per pipeline kilometer (US$) Transnefts maintenance record Source: Company data, excluding new constructions Pipeline replaced, km775674629645430797 Coating replaced, km863 81849437426787 Replacement & rehabilitation, % of network3. Pumping stations upgraded10571037341 7 Underwater crossings repaired--579373-41 Underwater crossings replaced--19664237 Diagnostics,000 km13.312.918.822.524.727.7 Defects repaired, thousands86.1108.8754958.941 200420022000200120031999 Source: Transneft, Media reports, Renaissance Capital Source: AOPL, media reports, Transneft, Renaissance Capital

16 17 Accident Rate, per 1,000km Safety and environment protection are paramount concerns for Transnefts management Transnefts accident rate is enviable Accidents at Transnefts pipelines happen due to the same reasons as those at other pipeline companies, but less frequently There have been no terrorist attacks on the pipeline system Commentary Spill accident rate is an ultimate indicator of Transneft pipelines condition Causes of incidents, US Causes of incidents, Transneft Source: US Department of Transports Office of Pipeline Safety, Transneft, FERC, CONCAWE Causes of incidents, Europe Corrosion 25% Equipment failure or personnel mistake 20% Third-party 19% Pipe defects 17% Other 19% Construction 22% Third-party 49% Corrosion 12% Pipe defects 17% Mechanical Failure 10% Third Party 90%

17 18 Growing Russian oil export is the driving force behind Transnefts capacity extension Factors behind Transnefts capacity extension needs are market driven: As European demand for Russian oil is growing slower than its production, Russian oil producers are trying to enter new markets in North America and Far East China and India have emerged as large importers of crude oil and their needs are growing at a faster rate than anywhere else in the World Throughput capacity of Bosporus, and Danish passages is limited and close to saturation …technologically driven: The optimal capacity utilization for oil pipelines is around 60- 80% …and geopolitically driven: By construction a Baltic Pipeline System Transneft has created a new Baltic route, eliminating dependence on pipelines and sea terminals of Baltic States The US government wants to reduce dependence of the US economy on oil from the Middle East Japan and China are interested in diversification of their sources of oil supply Route Western Siberia-Primorsk98.9% Western Siberia-Eastern Siberia87.7% Western Siberia-Samara96.4% Samara-Novorossiysk82.0% Samara-Western Border85.2% T-Pechora-Yaroslavl95.0% New pipelines are needed Current capacity utilization by route Average network capacity utilization (2004, %) Source: Transneft, annual reports Capacity Utilization

18 19 Completed investment projects Potential projects under construction/consideration All new projects are well considered before being undertaken Transneft has significant experience in successfully completing large-scale projects and is well positioned to do the same in the future Extensive economic and technical feasibility studies are conducted before the implementation stage of the project is reached Large projects are typically broken into stages allowing for spreading CapEx over the period and using cash flows generated by the first stages to fund subsequent phases The priorities in terms of route directions and the general features of a project are approved by the government and outlined in a special government program Russias Energy Strategy to 2020 For the next few years the Company has identified a number of projects, with ESPO being a principal one, that would allow its clients to enter new markets Project Chechnya bypass$165m7m tpa2000 Sukhodolnaya – Rodionovskaya extension (Ukrainian bypass)$240m26m tpa2001 Baltic Pipeline System$2.5bnCurrent 50m2004 up to 60m tpa3 rd stage: by 20062006 Total Capacity Timing of Completion Total Investment Source: Transneft, Factiva Note: 1) Estimated in 2004 prices 2) Estimated in 2005 prices Project Eastern Siberia – Pacific Ocean$11.5bn 1 80m tons pa1 st section: 2008 Kharyaga-Indiga$2.2bn 2 24m tons pa- Total Capacity Timing of Completion Total Investment Comments

19 20 Baltic Pipeline System overview Rationale Transit of Russian oil to the sea terminals of Latvia (Ventspils) and Lithuania (Butinge) cost Russian oil producers US$ 140 million per year Construction of the Baltic Pipeline System and the sea terminal of Primorsk considerably reduced that amount Implementation phases The first phase of the project with throughput capacity of 12m tpa was completed in 2001. It leveraged existing infrastructure and required 457 km of new pipelines, two pumping stations, 700 thousand cubic meters of storage and a new specialized sea port at Primorsk to be built The second phase was completed in several stages during 2003- 04, eventually expanding throughput capacity of the system to 50m tpa. The project included construction of 945 km of new pipelines and three pumping stations Expansion to throughput of 60/m tpa is to be completed during the 1st half of 2006 Project highlights BPS added significant new export capacity for Russian oil Gradual capacity build-up proved to be efficient and boosted Transnefts return on investment Comments BPS route BPS commissioning stages Phase I120.24Dec-2001 Phase II180.36Jul-2003 300.60Nov-2003 420.84Feb-2004 47.50.95Aug-2004 501.00Sep-2004 Phase III601.202006 Million barrels/day Completion Date Million tons/year Export Capacity

20 21 Eastern Siberia - Pacific Ocean project overview Rationale The reference direction for the pipeline is the Asia-Pacific region, a rapidly growing segment of the worlds crude oil and oil products market Limited potential for incremental demand for the Russian oil in Europe, its major market Implementation phases The first phase of construction would involve building the 2355 km pipeline with diameter of 1220/1067 mm from Taishet to Skovorodino, 6 pumping stations, a tanker sea terminal in the Perevoznaya Bay with 3 loading berths, and oil storage facilities with total capacity of 1,36 mln cubic meters Further development will involve extension of the Taishet- Skovorodino route and Perevoznaya Bay terminal and building a Skovorodino-Perevoznaya route Project highlights Planned throughput capacity of up to 80 million tons per year (at completion) Will open up a new Pacific port, from which Russian oil exports could be shipped by tanker to other Asian markets and possibly North America Comments ESPO route ESPO gradual commissioning Phase I302,3556.620042008 Completion 804,36811.52008 Projected Cost (US$bn) Export Capacity (MMT) Pipeline Length (km) Completion year Year of Decision

21 22 Northern Route overview Project and its rationale Connect Timan-Pechora region, with the Barents Sea coastline Allow for increased oil production at the largely untapped Timan- Pechora oil fields (in-place reserves are estimated to total 4.9 bn tons of oil equivalent) Construct a more efficient method of oil transportation than currently available alternatives Diversifying export routes by facilitating oil transportation to North America and Europe Project highlights Construction would involve building the 467 km pipeline with diameter of 820 mm, 2 pumping stations, and oil storage facilities with total capacity of 770 thousand cubic meters A sea port with 2 loading berths would be built at the final point of the pipe on the Barents Sea coast Implementation phases Construction is scheduled to take 2 years Government approval is needed to design and carry out the construction of the project Guarantees of the pipeline being fully used need to be provided by oil producers Comments Northern route Northern route planned commissioning Kharyaga-Indiga 244672.220062008 Projected Cost (US$bn) Export Capacity (MMT) Pipeline Length (km) Completion year Year of Decision

22 III.Financial profile

23 24 Financial highlights Established track-record of profitable, strongly cash generative operations and prudent financial management: Robust and sustainable profitability with EBITDA margin over 50% and EBIT margin over 40% over the past 5 years Strong cash generation allowing for full coverage of maintenance CapEX Significant degree of financial headroom and flexibility in our business plan Excellent credit fundamentals Strong balance sheet Sound credit ratios Utility business model with a near-monopoly, predictable and diversified revenue stream deriving from a financially very strong group of corporate clients Sound financial policy Policy of maintaining significant cash balances allows for financial flexibility Low dividend pay-out ratio, determined by the Russian government Transneft was one of the first Russian companies to prepare consolidated IFRS accounts (1998) Transnefts corporate credit ratings are the highest in Russia. Moodys senior unsecured rating would pierce Russias sovereign rating, when assigned to future unsecured debt issues: Moodys: Corporate Rating – Baa2 / Stable Senior Unsecured Rating – A2 / Stable S&P: Corporate Rating – BB+/Stable Senior Unsecured Rating – BB+/Stable Note: According to Moodys GRI (Government Related Issuers) methodology, Transnefts future unsecured debt issues would be rated A2, currently 3 notches above Russias sovereign ceiling of Baa2.

24 25 Sales growth Vs. crude oil price Transnefts profitability Transneft is able to grow revenues and maintain profitability regardless of oil price dynamics Sales growth Vs. crude volumes

25 26 Controllable cash* expenses comparison Transneft operating costs breakdown Other 20% Strong profitability is supported by a continuously competitive cost structure Note: data as of LTM3Q05 Controllable Cash Expenses = Total Expenses less Depreciation and Taxes (other than income taxes) Source: Transenft, companies, FERC, all data for FY2003 Depreciation 18% Salaries 15% Electricity 15% Maintenance and Repairs 10% COGS 6% Materials 9% Insurance 7% Source: Transneft Operating expenses

26 27 Comments Cash Flow and CapEx Cash flows and CapEx Strong cash generating capability allows to fully cover maintenance CapEx, estimated at approximately $1 bn annually Future tariffs for new pipelines will be set to fully recover construction costs, including costs of financing We expect free cash flow to increase significantly after 2011, once the principal network buildout phase is completed

27 28 Comments Evolution of income and dividends High profitability and conservative dividend policy rapidly increase Companys equity base The existing tariff structure, based on costs plus system and set by the government, calls for a low dividend payout ratios Conservative capital structure characterized by low leverage At its projected most leveraged in 2008, Transnefts leverage remains manageable: Total Debt/EBITDA < 1.6x EBITDA/Interest Expense > 16.9x Capital structure Evolution of Leverage and Coverage

28 IV.Credit summary

29 30 Credit summary Oil pipeline transportation monopoly in the Worlds largest crude oil producing and second largest oil exporting country Strong relationship with the Government, which has no foreseeable intention to privatize Transneft Deep and increasing integration into the global oil supply chain Favorable tariff environment which guarantees Transneft profitable growth Experienced management team with proven expertise Established track–record of profitable, cash generative operations and prudent financial management Transneft has one of Russias strongest corporate financial profiles and is the highest-rated Russian corporate borrower Key credit investment highlights

30 31 Additional information: WWW.TRANSNEFT.RU WWW.TRANSNEFT.RU

31 32 Disclaimer This communication and this document do not constitute an offer of sale of any securities. The following presentation may not be forwarded or distributed to any other person and may not be reproduced in any manner whatsoever. All information contained in this document is public and may be obtained via publicly available sources of information (e.g. press articles, internet, Transnefts international financing department, Transneft website, etc) Some of the information in this presentation may contain forward-looking statements regarding future events or the future performance of Transneft, as defined in the safe harbour provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements can be identified by the use of forward-looking terminology such as believes, expects, may, are expected to, intends, will will continue, should, would be seeks, approximately, anticipates or similar expressions or the negative thereof or other variations thereof or comparable terminology. These forward-looking statements include all matters that are not historical facts. Transneft undertakes no obligation to publicly update or publicly revise any forward-looking statement, whether as a result of new information, future events or otherwise.

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