Hydrocarbon Exploration and Production

Rosneft is the largest oil and gas company in Russia, and among public oil and gas companies, it is the world’s largest holder of hydrocarbon reserves and producer of liquid hydrocarbons maintaining a steady growth of economically recoverable hydrocarbon reserves. This is achieved through consistent efforts to increase production from brown fields and launch new fields and prospects, as well as through successful implementation of the exploration program. Rosneft places a special focus on exploration and steady reserves growth at existing license areas, as well as resource base integration and expansion across new assets and license areas. Proved hydrocarbon reserves of Rosneft under SEC standards amounted to 41,431 mmboe (5,597 mmtoe) as of 31 December 2018. Hydrocarbon reserves grew by 1,524 mmboe (202 mmtoe), or 4%, year-on-year. DeGolyer & MacNaughton conducted an audit with the assessment of reserves till the end of the field producing life.

At the year-end, SEC-proved reserve life of Rosneft amounted to over 20 years. SEC-proven hydrocarbon reserve replacement ratio stood at 173%Reserve replacement ratio is calculated in tonnes of oil equivalent (toe). Reserve replacement ratio in barrels of oil equivalent (boe) was 175%. in 2018.

For several years, Rosneft has been a prominent leader among the major public international oil companies in SEC-proven reserve life and SEC-proven reserve replacement ratio (average value over three years), demonstrating the lowest hydrocarbon reserves exploration and development costs against the other international competitor companies.

As of 31 December 2018, the hydrocarbon reserves under the PRMS (Petroleum Resources Management System) classification comprised 47,045 mmboe (6,368 mmtoe) of 1P reserves, 84,094 mmboe (11,388 mmtoe) of 2P reserves, and 121,165 mmboe (16,426 mmtoe) of 3P reserves.

Rosneft is the leader among major Russian and international public oil and gas companies in both volume and cost of organic reserve additions due to its traditionally high efficiency in exploration.

For years, Rosneft has steadily maintained high levels of its reserve replacement ratio (reserve replacement cost in 2016–2018 was USD 0.2 per boe). The Company intends to replace at least 100% of its hydrocarbon production in 2019–2022. The Company also plans to fast-track development of new reserves with shorter project preparation timelines, accelerate resource transfers to reserves based on profitability, and improve exploration drilling success rates within the Russian Federation. The Company’s share in the total oil production of Russia is 41%, and approximately 6% in global oil production.

In 2018, the Company produced 230.2 mmt of liquid hydrocarbons (4.67 mmb per day), an average daily production increase of 2.1% year-on-year. The key growth factors are the record-high production volume at the Company’s largest asset, RN-Yuganskneftegaz; the launch of large green fields and agile manoeuvring in development of brownfields in the context of the Company’s obligations on production cuts under OPEC+ Agreement.

The average daily liquid hydrocarbons production in Q4 2018 was 4.79 mmb, +1.4% from indicators of Q3 2018. Unlike many competitor companies in Russia, Rosneft managed to quickly increase the production right after the elimination of above-mentioned restrictions using the prepared additional production potential. The Company entirely restored the production rates to the initial level of the OPEC+ Agreement (October 2016) and ramp up the production under new projects through flexible optimization of production conditions at high watercut and marginal wells in mature fields (RN-Nyaganneftegaz, Varyoganneftegaz, RN-Purneftegaz, Orenburgneft, Tomskneft) accompanied by the improved market conditions.

Year-on-year growth of oil and gas condensate daily average production in Russia in 2018 was 182 thsd barrel, more than a half provided by Rosneft. Meanwhile, the Company’s daily average production in Russia in December 2018 went up by 4.7% year-on-year.

Rosneft is the leader among its competitors in current hydrocarbon production and average hydrocarbon production growth rate over a 10-year period.

Long-term production growth is ensured by the Company’s optimal portfolio of new major upstream projects and the use of advanced production technologies at its existing fields. The annual output of the Company's largest oil and gas producing asset, RN-Yuganskneftegaz, exceeded 70 mmt of oil (a year-on-year increase of 5.5%) for the first time in the modern history of Russia. At the end of 2018, the company set a record for daily output over the entire history of its operations since 1964 — 197.5 thousand tonnes of oil per day (1.46 mmb per day). RN-Yuganskneftegaz attained these high outputs due to the improved development methods for hard-to-recover reserves of the Middle Priobye, application of advanced well drilling and completion technologies, systematic work on the expansion of resource base, the introduction of new production facilities, and contribution of the company’s personnel. In 2018, with the commissioning of the Sorovskoye field, RN-Yuganskneftegaz began the commercial development of the East-Salym license area. RN-Uvatneftegaz continues to successfully maintain the production plateau at more than 10.5 mmt (> 213 thsd barrels per day) through implementation of a set of measures. The key measure is to involve new fields in the development of reserves. In 2018, the Taltsikoye new field was commissioned. Today it produces over 2.8 thousand tonnes of oil per day (~21 thsd barrel per day). A pool of new projects has still been developed according to the stated plans. Total production of liquid hydrocarbons in 2018 at the Suzunskoye, East Messoyakhsky, Yurubcheno-Tokhomskoye, and Kondinskoye fields, which had been launched since 2016, exceeded 75 mmb. According to the approved plans, in Q4 2018, the company provided for phased commissioning of the Tagulskoye, Russkoye, and Kuyumbinskoye fields and the second phase of the Srednebotuobinskoye field.

In the medium term, the Сompany’s higher production volumes through organic growth will be ensured by enhancing production from mature fields and developing new high-potential oil and gas projects, including the Vankor cluster, the Erginsky cluster, the Russkoye, Srednebotuobinskoye, Kharampur, North Komsomolskoye, Yurubcheno-Tokhomskoye fields, and Rospan.

An important milestone in the diversification of the producing assets portfolio and the development of the Company's exploration and production projects abroad was the discovery of the Iraqi Salman field in Block 12 in H1 2018 based on the results of drilling the first exploration well. Rosneft continues to foster cooperation with Iraq’s autonomous Kurdistan Region. In May 2018, the Company and the Iraqi Kurdistan Regional Government signed an agreement on the development of the gas business in the region, including the elaboration of a comprehensive development plan and the front-end engineering of the construction and operation of a gas pipeline in Iraqi Kurdistan. Earlier, on 18 October 2017, production sharing agreements (PSA) related to five production blocks located in Iraqi Kurdistan entered into force. The parties also announced the start of joint implementation of the infrastructure project for the operation of the oil pipeline in Iraq’s autonomous Kurdistan Region.

Through participating in the development of the Zohr field, a unique production asset, together with world majors and its strategic partners – Eni (50%) and BP (10%), Rosneft significantly increased its gas production abroad in a short time and enter the Egyptian gas market, thereby providing opportunities for the Company to further expand its presence in the country and region. In June 2018, Mubadala Petroleum also joined the project. In 2018, Rosneft, together with its partners and Egyptian oil and gas companies, commissioned seven production wells, four lines of the integrated gas treatment unit (GTU), and the second transport gas pipeline from the field to the GTU. Given the achieved commissioning rate of new facilities, the level of daily production of 76 mmcmIn 100% of gas could be reached as early as 2019.