www.gazprom.com PJSC Gazprom Annual Report 2017 PJSC Gazprom Annual Report 2017 Annual Gazprom PJSC Gazprom — 25 Years in Business 1993 –2018 Over the past 25 years, a unified global energy company has been successfully built out of disparate facilities run by the former Soviet Ministry of the Gas Industry and linked only through process chains. The resource base and process systems were not only retained but were also greatly enhanced through the expansion into new production regions. The use of advanced and often unique technologies took gas production and transportation to an entirely new level. Through growing its oil business, Gazprom evolved into one of Russia’s leading oil companies. In line with its strategic objective of business diversi- fication, Gazprom confidently expanded into the power market, becoming Russia’s largest generator. The Company is implementing dozens of projects in many countries across continents, continuously consolidating its position in the global energy market. Ever conscious of its corporate social responsibilities, Gazprom annually runs hundreds of initiatives to pro- mote culture and sports, and provide social support to people in Russia. Over fifteen hundred sports facili- ties and cultural sites have been built or renovated through the Gazprom for Children Programme alone. 1 PJSC Gazprom Annual Report 2017 This Annual Report has been prepared based on Resolution No. 1 of PJSC Gazprom’s Management Committee On Organising Activities Related to Holding PJSC Gazprom’s Annual General Shareholders Meeting dated 25 January 2018. The terms “PJSC Gazprom” and the “Company” used in this Annual Report refer to the parent company of Gazprom Group, i.e. to Public Joint Stock Company Gazprom (Open Joint Stock Company Gazprom, JSC Gazprom, before 17 June 2015). The terms “Gazprom Group”, the “Group” or “Gazprom” mean an aggregate of entities which includes PJSC Gazprom and its subsidiaries. For the purposes of this Annual Report, the lists of Gazprom Group’s subsidiaries, associates and joint ventures, as well as entities in which Gazprom has investments classified as joint operations, were prepared based on the principles used in the preparation of PJSC Gazprom’s IFRS consolidated financial statements. Similarly, the terms “Gazprom Neft Group” and “Gazprom Neft” refer to PAO Gazprom Neft and its subsidiaries; “Gazprom energo- holding” refers to OOO Gazprom energoholding and its subsidiaries; and “Gazprom neftekhim Salavat” refers to OOO Gazprom neftekhim Salavat and its subsidiaries. This Annual Report determines some operating and economic parameters in accordance with the IFRS principles for Gazprom Group’s entities included in the IFRS consolidated financial statements of PJSC Gazprom for the year ended 31 December 2017. Therefore, they may differ from similar parameters in reports of PJSC Gazprom prepared under Russian statutory requirements. Moreover, some operating parameters of PJSC Gazprom, its subsidiaries, associates and joint ventures are determined in accordance with the principles underlying management reporting. Parameters calculated using these methods might be not comparable between each other due to differences in the methodologies used for preparing consolidated financial statements and for management reporting. Analysis of financial results should be read in conjunction with the audited consolid- ated financial statements of PJSC Gazprom for the year ended 31 December 2017 prepared in accordance with IFRS. Among other things, the Annual Report discloses information on the future production and economic activities of Gazprom Group, based on Gazprom management’s forecasts and estimates considering the current situation. Actual results may differ from the said forecasts and estimates due to the effect of various objective factors. 48 PJSC Gazprom Annual Report 2017 PJSC Gazprom Annual Report 2017 49 PJSC Gazprom Annual Report 2017 Contents 50 PJSC Gazprom Annual Report 2017 Letter to Shareholders by the Chairman of PJSC Gazprom’s Board of Directors and the Chairman of PJSC Gazprom’s Management Committee 6 1 Company Information 8 2 Strategy 38 3 Performance Results 60 4 Environmental and Social Responsibility 114 5 Corporate Governance 136 6 Appendices 17 8 5 PJSC Gazprom Annual Report 2017 Letter to Shareholders by the Chairman of PJSC Gazprom’s Board of Directors and the Chairman of PJSC Gazprom’s Management Committee Dear Shareholders, February 2018 marked the 25th anniversary of PJSC Gazprom. These years saw us evolve from a national leader in the gas industry into strong, efficient, and diversified Gazprom Group — a major player in the global energy market. We’ve expanded into new production regions in Russia to establish and develop new gas production hubs. We have built new unique, high- tech gas pipelines and brought our underground storage deliverability to a new level. We established new export routes, and our gas exports to far abroad countries have almost doubled as a result. Gazprom was the first company in Russia to launch LNG production and supply to the global market, as well as a number of international hydrocarbon exploration and produc- tion projects across the globe, achieving a strong position in the oil and power generation markets. Gazprom’s performance in 2017 is a vivid example of its dynamic development — the Company was named a leader among the top 250 global energy companies, reached record highs in production and exports, and continued active preparations for launches of projects strategically significant to Russia. Gazprom produced 472.1 bcm of gas in 2017*, up by 12.4% year-on-year and the fastest growth in the Company’s entire history. In 2017, we continued to expand the capacity at our giant Bovanenkovskoye field in the Yamal Peninsula — production start-up is scheduled for 2018 at the field’s production site No. 3, which will be key to ramping up production from the project to a design capacity of 115 bcm per year. New pipelines are being installed to enable gas transport from the Yamal production hub. The linear section of the Ukhta — Torzhok 2 trunk pipeline was 80% finished as at the end of 2017 and scheduled for completion in 2018. A pipeline connecting Gryazovets to the future Slavyanskaya compressor station, which is to become the starting point of the Nord Stream 2 pipeline, is scheduled for commissioning in 2019. Once complete, the two projects will deliver the bulk of the infrastructure to support the fundamentally new gas flow routes within the European part of Russia and further to Europe via the Northern Gas Transmission Corridor. Consistent implementation of the Nord Stream 2 project was continued in 2017. The pipeline will double our capacity for gas supply to European consumers through the Baltic Sea, where we already successfully operated the Nord Stream 1 pipeline. Nord Stream 2 is scheduled to be launched in late 2019. By that time, we expect to have completed the construction of TurkStream, another gas trunk pipeline to Southern Europe. The pipeline’s construction was commenced in the Black Sea in May 2017, and the installation of Line 1 deep-water section was completed as early as April 2018. The need for new gas export routes is clear. Gazprom’s gas exports to far abroad coun- tries have hit all-time highs for a second consecutive year. We reached a milestone of 194.4 bcm in 2017 — a remarkable achievement, although not the limit. The long-term trends in the Euro- pean gas market include growing consumption and falling domestic production, which implies that Europe’s demand for gas imports will continue to grow. * Including the Group’s share in production volumes of entities in which Gazprom has investments classified as joint operations. 6 PJSC Gazprom Annual Report 2017 Letter to Shareholders by the Chairman of PJSC Gazprom’s Board of Directors and the Chairman of PJSC Gazprom’s Management Committee At the same time, Gazprom is preparing to enter China’s market, the largest market in Asia Pacifi c, with 20 December 2019 confi rmed as the date for Russia’s gas pipeline crossing the border with China for the fi rst time in history. To support these gas supplies, Gazprom is building large-scale gas production, transpor- tation, and processing infrastructure. The construction effort is well underway, with two thirds of the Power of Siberia pipeline’s fi rst section completed as at the end of 2017. The remaining section will be completed by the end of 2018. Construction at the Chayandinskoye fi eld, the core resource base for the Power of Siberia pipeline, is progressing on schedule. The main construction phase for the Amur Gas Processing Plant project was launched in 2017 — the plant will become the world’s No. 2 gas processing facility by capacity. In addition to executing its long-term strategic plans, Gazprom is committed to delivering on its day-to-day tasks of ensuring reliable gas supplies to consumers, which is especially critical during the autumn/winter period. As in previous years, Gazprom confi dently met the challenge of supplying peak demand both domestically and in its external markets during the 2017/2018 winter season. During the extremely cold weather in February and March, the unprecedented supply requests from European buyers were satisfi ed, registering a run of ten consecutive record highs in daily export supplies. Gazprom’s generating fl eet experiences substantially higher loads in winter, but always meets the challenge. Gazprom is the market leader by electricity output among heat generators and the largest heat generating company globally. With the launch of 360 MW Grozny TPP construction in 2017, Gazprom Group entered the fi nal stage of the Capacity Supply Agreements (CSAs) programme. Gazprom’s oil business delivered strong performance in 2017, with oil production up by 3% year-on-year to 48.6 mm tonnes*. Most importantly, this production growth was achieved primarily through projects in the newly tapped oil production areas in the Yamal Peninsula and on the Arctic shelf.