Presentation of the CEO of the Petroleum Industry of Serbia Kirill KRAVCHENKO

KEY FACTORS IN OIL AND GAS STRATEGY DEVELOPMENT

PART ONE

ECOS 2011 Novi Sad 4 July 2011

BASIC MACROECONOMIC TRENDS INFLUENCING ENERGY SECTOR DEVELOPMENT

Shifts in economic activities Demand concentration 600 largest megalopolises shall bear more than 60% of economy growth by 2025 Conclusions for the industry Analysis if geographical limitations in strategy

Aiming at local growth areas Government relations

Shifts in demand for resources

Resource utilization efficiency Deficit of basic global resources (energy, water) Necessary to increase efficiency of resource utilization 2-8 times in order to achieve economic development

Converting risks to opportunities

Business growth in the areas of most

deficit resources

Programs aiming at increase of energy

efficiency

Capital availability

Farewell to cheep capital era Restoration of global demand / mainly GDP due to developing markets growth Savings are not sufficient to finance investments

Growth of capital utilization efficiency value

Investment portfolio optimization Providing long term financing Improving investment projects
execution

2 Sourse: McKinsey

APPROXIMATELY 60% OF GLOBAL GROWTH IN OIL AND GAS DEMAND ARE GOING TO COME FROM 7 DIRECTIONS
Demand 2010, mboe/d
Deepwater Unconventio nal gas Unconventio nal oil LNG Arctic EOR New approach 133.6 7.3 2.4 2.0 2.5 0.5 1.3

Growth2010-20, CAGR, %
8 6 6

|Main countries [growth 2010-20, MMboe/day]

USA[0.7], Nigeria [0.6], Brazil; [1.7], Angola[0.6] USA [1.5], Canada [0.5], China [0.2], Australia [0.02] Canada [1.8], USA [0.2]

5
1 4 5 15.4 168.2

Qatar [0.5], Australia [0.9], Iran [0.4], Nigeria [0.3]

Norway [0.1], USA [-0.2], Canada [0.2], Russia [0.6] USA [0.7], China [0.5] Iraq [2.3], Libya [0.9]

3.2

2020, mboe/d
3 Source: McKinsey

SURPLUS OF WORLD REFINING CAPACITIES LEAD TO LOW MARGIN IN OIL REFINING BUSINESS
Capacity surplus and refining margin in Europe 000 bbl per day, USD per bbl Capacity surplus1 000 bbl / day 1995-2015 (forecast) 3 000 2 000 1 000 0 -1 000 1995 96 97 98 99 2000 01 02 Refinery of basic complexity 03 04 05 06 -2 -4 07 08 9 10 11 12 13 14 15 Refinery of medium complexity Refinery of maximum complexity Refining margin USD / bbl 10 8 6 4 2

Capacity surplus and refining margin in Asia 000 bbl per day, USD per bbl Capacity surplus1 1 000 bbl / day 1995-2015 (forecast) 2 500 2 000 1 500 1 000 500 0 -500 95 96 97 98 99 00 Refinery of basic complexity 01 02 03 04 05 06 07 08 9 10 11 12 13 14 15 Refinery of medium complexity Refining margin USD / bbl

Refinery of maximum complexity

10 8

6 4 2
-2 -4

4 Source: McKinsey

1 Refinery complexity excl. total oil demand

PRODUCTION SCOPE GROWTH WAS AND WILL BE THE KEY FACTOR OF SUCCESS IN OIL BUSINESS
Production scope growth for Period 1990 2005 1 Bbl of oil equivalent, %

Median value of TRS

15 14
Above average

13 12 11 10 9

Average

8 7 6 5 4 3 2 1 0 -1 -2
0 8 9 10 11 12 13 14 15 16 17 18 19 Total shareholders income Average annuals growth ration 19902005

Below average

1 including mergers 5 SOURCE: Datastream; Wood Mackenzie; Corporate Performance Center; McKinsey

MAJOR COMPANIES HAVE RECENTLY REDUCED TOTAL ACTUAL REFINING CAPACITIES TO ~220 MLN TONS PER YEAR OR BY 20% OF TOTAL CAPACITY
Actual capacities of refining mln tons per year 340 Capacity reduction , % Refining and production ratio , % 1994 2008
1994 2008

312

-8%

267

259

245 184 -25% 224 208

143 134 -6%* 152 112

176 120 -32% 842 149

170 107

-37%

189

128

* Including acquisition of share in refining assets of TNK. Without this acquisition reduction totals in 15%. 6 Source: McKinsey Source: Oil & Gas Journal; JS Herold, corporate web sites

UNCOMPREHENSIVE DATA

MAJOR COMPANIES REDUCE PRESENCE AND ACTIVITIES IN DEVELOPED MARKETS, MAKING SELECT ENTRANCE INTO November 2010: Chevron sells its Investments and expansion THE EMERGING MARKETS marketing business (including 174
petrol stations) in the Caribean Divestment and streamlining

Quotes

May 2010 : Exxon sells 190 petrol stations in three US states

May 2010: Exxon sells retail business in Australia (including 295 petrol stations) March 2010 : Shell sells its downstream business in New Zealand (including 229 petrol stations)

In the last decade we divested downstream on average by $ 1bln annually (objective: reduction of company-owned petrol stations to 13001), simultaneously investing into assets, which ensure strong positioning and good prospects for demand growth. Therefore, currently our assets are clustered in Asia and Pacific Region Chevron analysts assembly

October 2010: Shell sells 565 petrol stations in Finland and Sweden February 2010: BP announces the sales of its retail business in France January 2010: Exxon sells its downstream business in Austria (including 135 petrol stations)

We abandon retail markets, in which we owned small petrol station networks posting small sales volume Limited number of markets coupled with strong brands result in streamlined business and increased profitability Shell analysts assembly

November 2010: BP sells its marketing business (including 190 petrol stations) spanning 5 African countries September 2010: Chevron sells its downstream business in African countries

Our pivotal markets streamlined, growth in emerging markets Total analysts assembly

1 In 2009, the company owned 3200 petrol stations; fixed target 1900 SOURCE: companies strategic presentations, IHS Herold, working group analysis, McKinsey

Presentation of the CEO of the Petroleum Industry of Serbia Kirill KRAVCHENKO

STRATEGIC DEVELOPMENT OF THE NIS AS A EUROPEAN OIL AND GAS COMPANY

PART TWO

ECOS 2011 Novi Sad 4 July 2011

NIS IN 2009: BEFORE PRIVATISATION

Until privatisation, NIS had been seriously fallen behind its competitors in economy, labor productivity and technology

ECONOMY
Company Margin EBIT, % Margin EBITDA, %

LABOUR PRODUCTIVITY
ROACE, %
Company

Revenue/FTE, EUR mln. (2008)

EBITDA/FTE, EUR thsd. (2008)

Refinery throughput/FTE, thsd. tons (2008)

Average

Average

TECHNOLOGY
.. [US$/bbl]

Operational costs (US$/bbl) Maintenance (Hours/MAC)

Shell

0.70

3.24

6.56

.[Hours/MUc ]

9.3

46.4

88.5

Personnel Index

68

513

513

Energy Index

91.8

314.4

564.0

Losses Index

2.3

309.4

309.4

. [%]

Exploitation readiness

98.3

87.9

85.8

Controlled extraordinary standstills [%]

0.00

8.05

22.70

Accidental Frequency

0.00

58.80

58.80

NIS PRIVATISATION
The take-over of the NIS by the Gazprom neft was part of the Agreement between the Governments of the Russian Federation and the Republic of Serbia

Government of the Russian Federation

Government of the Republic of Serbia

Agreement on cooperation in oil and gas field between the Government of RF and the Government of RS from 25.01.2008 includes: Construction of the Serbian section of the gas pipeline South stream; Construction of UGS Banatski Dvor; Purchase of 51 % of NIS shares

JSC Gasprom neft

Government of the Republic of Serbia

Protocol of the basic purchase conditions for shares of Naftna Industrija Srbije a.d. by JSC Gazprom neft that comprises 51 % of the equity capital, dated 25.01.2008.

Naftna Industrija Srbije a.d. Novi Sad Share Purchase Agreement, dated 24.12.2008.

Completion of NIS shares acquisition on 02.02.2009

NIS transformation into open joint stock company in August 2010: 51 % - JSC Gazprom neft; 29,88 % - the Republic of Serbia; 19,12 % - minority shareholders

Redemption of 5,15 % of NIS shares by JSC Gazprom neft in March 2011: 56,15 % - JSC Gazprom neft; 29,88 % - the Republic of Serbia; 13,97 % - minority shareholders

NIS TODAY: TRANSITION, INVESTMENTS AND MODERNIZATION

NIS today is oriented to business and regional development
For 2,5 years, NIS has been managed by Gazprom neft team, and following results have been achieved: The strategy of Company is developed, as well as investment program

Increase of oil and gas production (18-year lasting production decrease

stopped). Replacement of oil and gas reserves exceeded production (first in 18 years)

Profit OCF. EBITDA at the end of 2010, In million EURO

Operating costs decreased Bank debts decreased A large-scale investment program has been started: reconstruction and Refining of Euro-standard oil-products has begun Production
modernization of refineries, oilfields, patrol stations

and strategic cooperation with Serbian companies is intensified (Petrohemija)

profit

OCF

EBITDA

Activities aimed at development of sales channels in SEE region

At the end of 2010, the Company achieved first profit 160 million EURO. Substantial growth of OCF up to 173 million EURO and EBITDA up to 315 million EURO took place

NIS CORPORATE CULTURE

Vision, mission and values of the Company correspond to the European Union standards and trends VISION Vertically-integrated oil company NIS will be a distinguished branch leader of the Balkan region in terms of sustainable growth dynamics and efficiency improvement while demonstrating high level of social and environmental responsibility as well as modern standards of customer services MISSION By using natural resources and modern technologies in a responsible manner to provide people in the Balkan region with energy for movement to the better. VALUES Professionalism

Initiative and responsibility

Observation of rules and discipline culture but without bureaucracy Positive view and readiness for cooperation

NIS TODAY: KEY FACTS AND FIGURES

The biggest in the SEE and sole in Serbia vertically-integrated oil and gas company, the largest taxpayer, 11 % stake in Serbia's GDP, number of employees c.11 000.

UPSTREAM
Exploration and production of oil and natural gas 53 oil & gas fields in Serbia 0,9 mln. tons of crude oil (2010) 0,5 bln. m - average annual gas production (2010) 45 mln. tons of crude oil produced since company was established 30 bln. m of natural gas produced since company was established 2 mln. m of gas condensate produced since company was established Research and development centre JV Jadran-Naftagas in BiH ff-shore blocks in Angola

REFINING
Production gasoline, diesel, jet fuel, heating oil, bitumens, LPG, lubricants and raw materials for petrochemical industry 2 refineries in Pancevo and Novi Sad 7,3 mln. tons of oil estimated annual refining capacity Gas processing plant in Elemir

OILFIELD SERVICES
In-house oilfield services drilling, workovers, specialized transport, geophysical exploration civil construction services, hydroprobing,etc Extensive overseas operations and potential areas (under development): Russia and CIS (drilling, workovers, other services) Hungary (workover, measuring) Romania (workover, maintaining, oil field services) BiH (drilling, maintaining) Middle East and North Africa - Egypt, Lybia, Angola, Iran, Iraq, etc (drilling, workovers, etc)

SALES
Sales gasoline, diesel, jet fuel, heating oil, bitumens, LPG, lubricants and raw materials for petrochemical industry 2,6 mln. tons of refined products average annual sales volume in RS 472 retail stations 34 % market share of fuel retail market 66 % of Serbian wholesale fuel market petroleum and gas storage capacity fleet of trucks and railway carriages

NIS TOMORROW: TRANSFORMATION INTO A MODERN EUROPEAN COMPANY

Strategic goal of NIS transformation from a national company to a regional leader
In the long-term perspective

up to 2020
In the medium-term perspective up to

2013
Current situation Expanding player in the Balkan market with the growing performance and low production cost in RS and overseas; refinement targeted to the increase of light petroleum products and lowering of operating costs; leading retail net in the Republic of Serbia; product sales through the premium distribution channels at the Balkan and European markets.

Production leader at the Balkans Growth of production volume and hydrocarbons reserves (due to HF) in Serbia, Montenegro, Bosnia and Herzegovina, Romania and other countries;

Vertically integrated company with:

localized production region;

processing on the territory of RS; product sales in the domestic market; Own sales network in RS without unified brand.

Production of motor fuel in accordance with EU standards;

RS retail market leader, stable growth in sales to direct clients in RS and at the Balkans.

Realization of the Transformation and Modernization Program that provides breakeven and stable position in the medium-term perspective

To become the most fast-growing VIOG company at the Balkans in the field of oil and gas exploitation, production and sales of petroleum products

To be able to appropriately compete at the SEE market. To become the most fast-growing player at the Balkans in respect of exploitation, processing and retail sales volume

Goal: ensure basis for the qualitative growth of scale, ensure vertical integration of the Company

Goal: realization of megaprojects that ensure long-term development and growth of the business regional scale

Goal: new scale of the business, active international activities

INVESTMENT PROGRAM 2010 2013

In 2010 investment in NIS amounted to approximately 200 million EURO, In period from 2011 to 2013 they should approach 900 milion EURO
Investment in upstream means the development of projects which will increase the resource potential and growth of oil and gas extraction volume, including implementation of new technologies for oil and gas extraction and foreign extraction (concessions) in countries of the SEE region Investment in refinery upgrading by commissioning of MHC/DHT technological complex at Panchevo Refinery and production of the refinery products which will meet the requirements of Euro-Standards
Loan Gazprom Nefts

Allocation of investments in accordance with areas of activities and years until 2013, million euro

Investment in sales assumes the reconstruction of old and construction of new NIS fuel filling stations in Serbia as well as retail network development in SEE region The main emphasis of the investment programme (548 million Euro) is the upgrade of the refinery capacity (MHC/DHT project) and environmental projects Investment in refinery modernization project (/DHT project) and environmental projects will be mostly financed by Gazprom Neft, JSC, (approximately 500 million Euro), the rest will be financed from the NIS own resources

Loan Gazprom Nefts

refinery (/DHT project) ecological projects

production, including foreign extraction (concessions) sales

maintenance program (MCF) others

TECHNOLOGICAL DEVELOPMENT DIRECTION

Lubricants Project

Advanced processing according to European standards

Synergy with petrochemicals

Premium Econom

UPSTREAM DEVELOPMENT: EXTENT OF PRODUCTION INCREASE

New technologies in oil production more possibilities in oil recovery factor increase

In 2009 longstanding decrease of oil and gas production had

been stopped

Oil production dynamics In period 2001 2010, thousand tones

In 2010 increase of production continued Increase

of hydrocarbon production took place due to implementation of new production technology and use of different workover programs, specifically: implementation of ESP pumps

implementation of hydraulic fracturing;

drilling of new wells; idle wells re-activation Starting from the end of 2010, concession activities have been developed in SEE countries: NIS affiliated company established in Bosnia and Herzegovina, agreements on hydrocarbon prospecting works have been concluded with Romania and Hungary
Gas production dynamics In period 2001 2010, milion cubic metres

HYDRAULIC FRACTURING AND ESP PUMPS

Hydraulic fracturing gives 72% average increase on well production, ESP gives 234% average increase on well production

Hydraulic fracturing. Scheme of fracture growth in reservoir

Scheme of ESP pump

Casing ESP

packer

oil reservoir

impermeable top of the layer

Reservoir

Hydraulic fracturing is a stimulation method which target is creation of fractures in the oil or gas reservoir near the well bore due to pumping a viscous fluid at a high pressure in the reservoir rocks. It is used to increase oil or gas well productivity. It appears to be one of the most efficient stimulation methods.

ESP pumps are used to pump reservoir fluids (oil, water, gas) out of the wellbore with productivity higher than 1000 bbl/day. Usually ESP put in a well with high water cut. Standard ESP design assumes putting the pump with the engine into the wellbore.

UPSTREAM INNOVATIONS
Projects on 2 injection, exploring unconventional resources in Serbia as well as new energy development projects

2 Injection

2 Injection
2

Pilot Project for 2 injection into gas cap of Rusanda has been approved for 2011 in order to maintain reservoir pressure, slowing down the fall of oil production, enhancement of oil recovery

Oil

UNCONVENTIONAL RESOURCES
Pilot Project for exploratory well drilling has been approved for realization in 2011 in order to determine the presence of unconventional gas zones.

Schematic geology of natural gas resources

Unconventional resources of hydrocarbons are accumulation of oil and gas (shale gas, coal bed methane, tight gas reservoir shale, gas hydrates, high viscosity oil, combustible shale), which cannot be extracted using conventional technologies of hydrocarbon production with positive economically profitable results.

ALTERNATIVE ENERGY SOURCES

NIS is considering of implementation of the Pilot Project for the use of solar energy and air energy in order to satisfy energy demand of the oil and gas production system in the nearest future.

SALES DEVELOPMENT: RECONSTRUCTION AND CONSTRUCTION OF STATIONS

NIS implements an ambitious program on reconstruction and construction of petrol filling stations

Program objectives increase of sales at NIS stations by increasing the quality level of retail sites park : Construction of new stations, Reconstruction of the existing stations, Equipment of stations with LPG filling machines, Rebranding of stations. From the end of 2009 to 2013 (including) 230 petrol filling stations located all over Serbia will be reconstructed or constructed.

All new petrol stations are designed for liquid motor fuel and car gas filling, equipped with modern multi dispensers and shops, a coffee bars and car wash. A new fully automated retail site has been opened on the territory of Serbia at the end of 2010. Expected economic effect increase of average daily sales volume per one station minimum for 6,0 tons per day in 2013.

SALES DEVELOPMENT: NEW PRODUCT TRENDS

As of 2010 NIS develops new business-lines: production and sale of lubricants and jet fuels; development of bunker fuel and bitumen businesses

GOALS increase of quantity and efficiency of sales due to maximum sinergic effect with Gazprom neft group

Wide-range of lube oils production under the trademark NISOTEC and sales in Serbia and SEE
Development of export channels for deliveries of jet fuel to the airports of SEE Production of marine fuel in accordance with all international standarts and construction of the own terminals on the Danube river Production of the European quality bitumen and development of export sale channels in SEE

GLOBAL MARKET TRENDS AND CHALLENGES

By 2014 a surplus of refinery capacity of 44 % in the SEE Region is expected

Export opportunities for excess amounts of diesel and gasoline produced by NIS refineries, thousand tons

By 2012 (when the Reconstruction and Modernization

of NIS Refinery will be implemented), NIS refineries capacity will be 74% higher than the potential demand on the domestic market

1715

Ability to produce diesel at the NIS refineries

By 2014 production surplus of 44% in the SEE region is

expected

By 2025 a significant quantity of products for export is

anticipated

NIS

will ensure additional supply channels for its products thanks to the production surplus and available capacities in the region
750

Ability to produce gasoline at NIS refineries

NIS DEVELOPMENT ON FOREIGN MARKETS

The company develops its business abroad in both upstream and downstream

In 2011 NIS subsidiary Jadran Naftagas started its work on prospecting and exploration of hydrocarbons in Bosnia and Herzegovina
In 2011 NIS and the Canadian company East-West Petroleum Corporation signed an agreement on joint development of hydrocarbon deposits in Romania
Croatia

Hungary Romania

In 2011 NIS and an international company Falcon Oil &Gas Ltd. Concluded an agreement on joint development of hydrocarbon deposits in Hungary
We plan to create a petroleum stations network in Romania, Bulgaria and Bosnia and Herzegovina The issue of developing marginal export channels in Romania, Bulgaria and Kosovo is under consideration The possibilities of hydrocarbon exploration and production in Montenegro, Croatia, Albania and Macedonia are being studied We explore the opportunities of developing gas business in Hungary, Croatia and Montenegro We explore the possibilities of NIS oilfield services engagement in Romania, Hungary and Bosnia and Herzegovina

Bosnia and Herzegovina

Serbia

Montenegro

Bulgaria

Macedonia
Albania Kosovo

Exploration&Production Study of possibilities for exploration&production Oilfield services

Petrol Stations Networks Export Destinations Development of gas business

BASIC PROVISIONS OF NIS STRATEGY

NIS is a vertically-integrated company, which means paying attention to all business segments development from production to sales

UPSTREAM
5,0 ....

REFINING
5,0 .

SALES
5,0 .

1,9 ....

4,0 .

3,6 .

1,5 ....

2,4 .

2,5 .

2011

2013

2020

2011

2013

2020

2011

2013

2020

Increase of production volume and hydrocarbons reserves by developming of new fields in Serbia and SEE countries, and also implementation of new technologies for oil and gas extraction

Increase of refining capacity with the increase of share of oil products that meet European requirements EuroDiesel by finishing reconstruction and modernization of Panchevo Refinery and re-profiling the Novi Sad Refinery

Increase of oil products sales volume in wholesale market and in retail sale market by retail network development through reconstruction of old and construction of new NIS fuel filling stations and entering new markets in SEE countries

GROWTH BASED ON SUSTAINABLE FOUNDATION

10 thous. Publications about NIS
( 0,73% of them are negative) Top position in the influence and reputation ranking

NIS brand management

New corporate brand rebranding

Company of the Year in nomination Corporate Social Responsibility

5 target sponsored programs

Internet communications: integration into social networking

8 agreements on social and economic partnership

2 of the ranking of web sites in Serbia

Report on sustainable development of NIS for 2010 according to GRI standards for the first time in Serbia

Internal Communication Channels System

Gazprom neft Brand Promotion Program in Serbia

52%
of the employees know about long-term aims of the company
Day of the Company, portal, cascade Direct Dialogue, magazine, museum, feedback

Transformation of Corporate Culture Plan is in the process of implementation

A SHORT SUMMARY
When Gazprom neft obtained shares of NIS, the latter was a loss-making company with declining production and market share. Today, NIS is one of the biggest vertically-integrated oil and gas companies in SEE, oriented on regional business development, which proved its ability to increase production volumes and market share while reducing its debts and achieving positive operational and financial results. In the future NIS will become a modern European company. Fuel market of the SEE is a highly competitive environment with the trend of excess refining capacity. Given that, NIS has been actively developing sales channels to the neighboring countries. In order to improve market position NIS management has developed comprehensive strategy 2011-20132020. Strategic goal of NIS transformation from a national company to a regional leader. Realization of strategy will allow NIS to develop as a European oil and gas company and to be competitive on the SEE market.