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Rosneft Board of Directors approves “ROSNEFT-2022” strategy

18 December 2017

Rosneft Board of Directors  approved the “Rosneft-2022” Strategy aimed to qualitatively change the Company's business by introducing the advanced management approaches and new technologies, increasing the returns of existing assets of the Company.

“Rosneft-2022” meets the modern challenges of the energy industry in full. The strategy provides for increasing the business profitability and the returns on key assets by intensifying the development, focusing on the implementation of key projects and changing the management model that will allow to replicate new technologies at a growing rate and to bring the company to a whole new level   taking into account the challenges of the digital era.

The new Strategy basis will be the development of a business that meets the highest ecological, environmental and industrial safety standards. Rosneft undertakes to enter the first quarter of the of the world's oil and gas companies’ list by 2022 by approving the “Rosneft-2022” Strategy in 2017 announced as the “Year of Environment” by President of Russia Vladimir Putin.

In order to achieve the set of goals the Company needs to implement a number of strategic initiatives as follows:

1. To keep the leadership by unit costs in production with a decrease in unit operating costs by 2-3 percent per year under comparable conditions.

2. To create a stable technological advantage and intensify the production. The company intends to replace at least 100 percent of the produced liquid hydrocarbons. At that, the goal will be to accelerate the involvement of reserves in development with a reduction of the project preparation terms, to transfer the resources to inventories taking into account the profitability, and to enhance the success of onshore exploratory drilling in the Russian Federation. In the coming years it is planned to actively develop a number of new promising projects (including the Vankor cluster, the Erginsky cluster, the Russkoye and the Severo-Komsomolskoye fields) and to increase the output to 250 Mmt by 2022 through natural growth (production stimulation). It is planned to achieve a 5-percent increase in the average flow rate of new wells, to reduce the cost of well construction by 10 percent and significantly increase the share of horizontal wells due to the optimization of the capital costs and development process of the RF onshore fields in the next 5 years.

3. To develop gas business. The implementation of the key gas production projects on time and within the budget will increase the positive free cash flow in 2018-2022 and will allow Rosneft to occupy 20 percent on the Russian Federation gas market with production growth to over 100 bcm. New promising projects including Rospan, Harampur and Kynsko-Chaselskaya group of fields are planned to be put into operation within this period. An important condition for the gas business development is an increase of producibility and creation of a favorable regulatory environment, in particular to get access to gas export. This will effectively monetize the Company's gas resources through the export of pipeline gas to new European consumers.

4. To strengthen the technological effectiveness of the service business. The Company will continue to improve the production performance of the service business including reduction of nonproductive time and well drilling time by 5 percent, increase of well workover teams' efficiency by 20 percent and drilling rigs use efficiency by 20-30 percent.

5. To develop petrochemical business by allocating an existing portfolio of assets into a separate business with separate financial records. Strategic tasks are a change in the basket of products, long-term contracts, optimization of capacity utilization and improvement of the level of integration with the Company's refineries. The availability of raw materials in close proximity to existing and prospective assets will boost the profitability of this business to the level of leading rivals. New projects will be implemented with the involvement of partners and project financing.

6. To improve the quality of investment and project management. The priority in project management is completion of development projects at the Company’s refineries in Russia, which will drive up their profitability. Rosneft is also planning to implement highly effective projects on de-bottlenecking (overcoming operating and technical constraints). Among other tasks is fulfilment of the program of operational efficiency increase based on the benchmarking using the Solomon data (refineries efficiency index), reduction of operating costs, fuel consumption and losses, as well as increasing mean time before failure at refineries with the help of massive digitalization among other measures.

The work on increasing investment discipline and optimizing investment project portfolio throughout the value chain will be continued.

7. To provide technological development and digitalization. An important element of the strategy is digitalization and accelerated technological development in all spheres of operation of the Company, mainly by way of accelerated replication of approved digital solutions. The programs Digital Oilfield, Digital Plant, Digital Supply Chain and Digital Filling Station, which are being implemented, will allow the Company to progress to a new quality level of modern information business, to boost reliability and economic feasibility of production and to reduce losses. The focus on digitalization will allow to increase the transparency, controllability and speed of decision-making throughout the Company’s production chain, as well as to strengthen the basis of the developing digital economy in Russia.

8. To adopt the holding management structure, to implement a pilot project in retail. In order to step up the efficiency of retail marketing and increase return on capital, the Company plans to boost the share of non-fuel retail by expanding the variety of goods and services offered, to develop the retail network in the regions, to improve customer service package at filling stations, to develop small wholesale operations, to optimize costs and reduce losses. The retail business will be a pilot project in Rosneft initiative to adopt the holding management structure. The expectation is that branching the retail off into a separate subholding and attracting a strategic investor will significantly increase its financial results.

During the development of the “Rosneft-2022” Strategy detailed diagnostics of condition, environment and challenges in every business segment of the Company were conducted. For every business line, strategic  initiatives were studied in detail, which will allow to develop and implement strategic priorities, defined earlier by Rosneft Chief Executive Officer  Igor Sechin at the Annual general meeting of shareholders.

Commenting on the “Rosneft-2022” Strategy, Rosneft Chief Executive Officer  Igor Sechin said: “Today the Board of Directors approved the strategy of   change of the Company’s business, which provides for getting to the new quality level of its development. Increasing the Company’s valuation in every business line involves effective use of internal resources with consideration to the constraints of the environment. The “Rosneft-2022” Strategy will have a significant positive influence on the Company’s shareholder value of 15-20 percent of current market capitalization. Also, the shareholders will get additional revenue in particular due to changes in dividend policy as part of “Rosneft-2022” Strategy – the minimal level of dividend payments, made by the Company, is increased to 50 percent of net IFRS profit.”

Commenting on the results of the Board meeting, Chairman of the commission for strategic planning of the Board of Directors of Rosneft, BP Chief Executive Officer Robert Dudley pointed out: “I am glad for the opportunity to take part in the development of the “Rosneft-2022” Strategy. I should note that all key issues were studied in detail.”

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December 18, 2017