Sustainable Development Report

2016 SUSTAINABLE DEVELOPMENT REPORT

2 Introduction

12 About the Transneft Group

32 Stakeholder Engagement

Ensuring Sustainable Economic 44 Development

Ensuring Sustainable Development in the 58 Sphere of Environmental Protection

76 Ensuring Sustainable Development in the HR Area

88 Ensuring Sustainable Development in the Social Area

104 Appendix Introduction

2 TRANSNEFT Transneft pays special attention to About the Report 4 environmental and social issues, Aspects of Disclosure 6 economic efficiency and business Statement by the Chairman development of the Group. of the Board of Directors and the President 8 The Company aims to comply with the most advanced information disclosure practices and is ready to report on all areas of sustain able development of the Transneft Group in this Sustainable Develop ment Report

3 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

G4-28 G4-29 ABOUT THE REPORT G4-30 G4-32 G4-33

This is the first Sustainable Development Report pub lished by Transneft. This document is important be cause Transneft pays great attention to environmental and social issues, economic efficiency and business development of the Group

Current information disclosure prac This Report includes the information pages are given in Appendix 2 “GRI tices are developed taking into ac on the reporting period from January Content Index”. count the demand from various groups 1 through December 31, 2016. of potential users of the Sustainable This Sustainable Development Report Development Report for publishing de This Report includes information on was not assured by third-party pro tailed information on issues related to legal entities forming part of the fessional auditors. However, Transneft companies’ sustainable development. Transneft Group. recognizes the importance of external We are striving to conform to the most professional assurance procedures for advanced information disclosure prac The list of essential Transneft sub improving confidence in non-financial tices and are ready to report on all ar sidiaries is approved annually by the reporting and plans to seek external eas of sustainable development of the President of the Company on the basis assurance in the future. Transneft Group in this Sustainable of criteria established by the Board of Development Report. Directors. Some values in the tables, graphs and diagrams herein may differ from their Terms “the Company” and “Transneft” When preparing this Report, we respective totals due to the difference used herein mean Public Joint Stock used the fourth version of the caused by rounding. Company Transneft. Terms “the Sustainability Reporting Guidelines Transneft Group”, “we”, and “the of the Global Reporting Initiative (GRI Group” refer to the following: 4.0) supplemented with a set of in • Transneft and legal entities which dustry-specific non-financial reporting are Transneft subsidiaries accord indicators recommended for oil and ing to the Articles of Association of gas companies (Oil and Gas Sector Transneft, when business and oper Disclosures). ating results are described. • Transneft and its subsidiaries de When preparing this Report, we used fined in accordance with the Interna the “Core” option for information dis tional Financial Reporting Standards closure. The table containing the com (IFRS), when financial results are plete list of indicators covered by the described. Report and indication of the respective

4 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

This Report includes information on the legal entities within the Transneft Group: G4-17

ESSENTIAL TRANSNEFT SUBSIDIARIES OTHER TRANSNEFT SUBSIDIARIES

Mostransnefteproduсt, JSC Sredne-Volzhsky Transnefteproduct, JSC Transneft Upper Volga, JSC Transneft Western Siberia, JSC Transneft Druzhba, JSC Transnefteproduct, JSC Transneft Volga Region, JSC Transnefteproduct-Samara, JSC Transneft Kama Region, JSC Transneft North, JSC Transneft Siberia, JSC Transneft Central Siberia, JSC Transneft Urals, JSC LatRosTrans, LLC Chernomortransneft, JSC Transneft Primorsk Port, LLC Transneft Baltic, LLC Transneft Kozmino Port, LLC Transneft East, LLC Transneft Ust-Luga Port, LLC Transneft Far East, LLC Unitary Production Enterprise “Transnefteproduct West” OIL AND PETROLEUM PRODUCT TRANSPORTATION

Svyaztransneft, JSC (securing engineer Giprotruboprovod, JSC ing communication of the facilities of oil NPF Transneft, JSC trunk pipelines) OMEGA, JSC Telecomnefteproduct, JSC Transneft Security Services, LLC (in-house Transneft Oil Pumps, JSC security service) TOMZEL, JSC Transneft Diascan, JSC Transneft Finance, LLC (accounting, tax Transneft UW Service, JSC and management accounting services) Transneft Metrology, JSC Transneft Service, JSC Transneft Terminal, JSC Transneft Energy Terminal, JSC The Pipeline Transport Institute, LLC Transneft Logistics, LLC Transneft Media, LLC Transneft Supervision, LLC Transneft Service, LLC Transneft Telecom, LLC Transneft PCD, LLC Transneftstroy, LLC Transneft Energy, LLC TES, LLC “Transneft Invest” Management Company, LLC PMC ESPO, LLC and others SERVICES AND SUPPORT ACTIVITIES

Sustainable Development Report for 2016 5 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

ASPECTS OF DISCLOSURE

G4-18 PROCEDURE FOR IDENTIFYING Analysis of performance indicators The exact list of material aspects is MATERIAL ASPECTS AND ASPECT and key events in the reporting period determined by the top management BOUNDARIES was an additional source of informa of Transneft taking into account the tion: we assessed the impact of vari vision of the current situation and the The content of the 2016 Sustainable ous changes in the Company related strategic development course. Development Report is determined to corporate governance and strate based on the opinions expressed by gy implementation on the composi The detailed list of material as top management of the Company dur tion, content and boundaries of the pects identified when defining the ing intra-company consultations. The aspects that may be recognized as contents of the Report is present opinions of managers at the level of material. ed in Appendix 1 “Material Aspects of subdivisions and subsidiaries who have Business”. Information on the man precise information on the situation We reviewed the best practice of agement approaches related to mate in particular areas bearing in mind Russian and foreign oil and gas com rial aspects of the Company’s business possible aspect boundaries within the panies to define the content of the is disclosed throughout the Report in Company are also taken into account. Report. the relevant sections.

Besides, we communicated with the A preliminary list of aspects was key stakeholders throughout the re formed based on the collected in porting period. When collecting, clas formation. The task group discussed sifying and analyzing the issues raised the preliminary list with heads of the and the topics discussed across the Company’s divisions and business ar entire range of communication chan eas in order to devise a set of aspects nels, we obtained information about with a high level of materiality and a the areas that are of the utmost in considerable impact on stakeholders’ terest to the stakeholders and are top opinions and decisions, and to deter priorities for them. mine the boundaries of these aspects.

6 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

G4-19 Aspects of Disclosure G4-20 G4-21

Aspect boundaries

Within the organiza- Outside the organization tion

Category Subcategory Aspects of Companies Group Essential subsidiaries of the Group Other entities of the Group Investment community Government authorities Local communities Suppliers Capital providers organizations Environmental Buyers Economic – Economic Performance

Indirect Economic Impact

Procurement Practices

Environmental – Energy

Water

Ecosystem Services and Biodiversity

Emissions

Effluents and Waste

Compliance

Transport

General Information

Social Labor Practices Employment and Decent Work ing Conditions Employee/Management Relations

Labor Practices Grievance Mechanisms

Human Rights Indigenous Rights

Society Local Communities

Anti-corruption Measures

Anti-competitive Behavior

Compliance

Emergency Preparedness

Product Fossil Fuel Substitutes Responsibility

Sustainable Development Report for 2016 7 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

G4-1 STATEMENT BY THE CHAIRMAN OF THE BOARD OF DIRECTORS AND THE PRESIDENT

A.V. Novak N.P. Tokarev

Chairman of the Board of Directors Chairman of the Management Board, of Transneft the President of Transneft

8 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

DEAR COLLEAGUES, OPERATIONAL AND ECONOMIC We would like to present the Transneft PERFORMANCE Sustainable Development Report for 2016. In 2016, 483.4 million tons of oil Transneft provides pipeline transportation and 33.1 million tons of petrole services in the oil and petroleum industry um products were pumped via the within Russia and supports exports to var Transneft system. ious countries. It also develops and imple ments pipeline projects, accompanying in Implementation of the Long-Term frastructure, technologies and methods. Development Program of Transneft enabled the company to improve its As a socially responsible public state- economic stability. Active policy of owned company, we strictly adhere to the import substitution and localization principle of openness and transparen of core industry operations pursued cy in conducting business and regularly by Transneft was the most impor publish the most important information tant factor of this stability. In 2016, about our business. The ever-increasing the share of Russian equipment and scope and diversity of these operations products used in the Transneft sys encourage us not only to provide time tem amounted to 92 % and is still ly information about current Company steadily growing by 1 % per year on news, but also to publish comprehensive average. reports summarizing and reviewing key results, areas and trends in our opera In 2016, we achieved the growth of tions over a substantial period of time. total revenue by 4 % (as compared This Sustainable Development Report is to 2015), which allowed us to pay one of such periodic reviews. а record amount of dividends in 2017 – RUB 58.2 billion1. Tax pay The Report outlines the key aspects of ments in 2016 amounted to more Transneft sustainable development in than RUB 78 billion and almost dou 2016: bled as compared to 2014.

1 Dividends at the end of 2016 and at the end of the first half of 2017.

Sustainable Development Report for 2016 9 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

INVESTMENT PROGRAM PERSONNEL POLICY

Transneft is implementing a substan Development and advanced training tial investment program, constructing of employees to ensure effective op and commissioning new industrial facil erations is one of the priorities in the ities, diversifying delivery routes, man personnel policy of Transneft. This aging capital expenditures flexibly and policy outlines the development of efficiently. talent pool, improvement of training systems, nurturing and strengthening In 2016, the amount of investment was corporate culture, social responsibili RUB 154.4 billion. ty, and high team motivation including young professionals. Implementation The Company commissioned of these initiatives allowed us to re the Zapоlyarye – Purpe and the duce staff turnover to 3.8 % in the re Kuyumba – Tayshet trunk oil pipelines. porting year, which is 0.5 % lower than Work is ongoing on projects aimed at in 2015. the expansion of ESPO PS throughput, the construction of the Yug (South) and On average, 80‑85 % of staff employed Sever (North) petroleum product pipe by Transneft subsidiaries are local peo lines, the reconstruction of the system ple, which also helps tackle unemploy of petroleum product pipelines in the ment in regions of operation. Moscow Region, etc. SAFETY AND ENVIRONMENT ENSURING RELIABILITY, SAFETY AND EFFICIENCY The main objectives of Transneft sub sidiaries in the field of safety and en Transneft subsidiaries regularly main vironment are the following: reduc tain, repair and upgrade pipelines and ing accident rate on trunk pipelines, other industrial facilities, adopt energy completely eliminating the discharge and resource saving technologies, de of insufficiently treated effluents, velop and use innovative methods and minimizing adverse effects of op technologies of in-line inspection and erations on staff and local popula pipeline condition monitoring. tion. To this end, Transneft subsidiar ies have implemented and are using A broad range of measures aimed at relevant management systems, such ensuring counter-terrorist protection as the safety management system of industrial facilities, including the based on the requirements set forth in use of technical equipment, is being the international standard BS OHSAS implemented. 18001:2007, the Energy Management

10 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

System (in accordance with ISO For many years, Transneft has support 50001:2011) and the Environmental ed the Moscow Kremlin Museums, the Management System (according to State Tretyakov Gallery, the Russian ISO 14001:2004). Arts and Crafts Association, spon sored events such as the International The Company is taking measures Military Music Festival “Spasskaya aimed at preservation and replen Tower” and many others. ishment of biological systems in op erating regions, protection of spe Business and social projects and events cies included in the IUCN Red List of of Transneft complement each other Threatened Species, biomonitoring of and ensure comprehensive and sustain water resources, etc. able development of the system, allow ing us to achieve objectives dictated by Over the reporting period, specific at strategic interests of the country. mospheric emissions were reduced by 1 %, with current expenditure on en We hope that this Report will help you vironmental measures amounting to to form a clear and full picture of our RUB 1.9 billion. operations and will be a convenient and useful reference material in your com SOCIAL AND CHARITY PROJECTS munication with Transneft and in ana lyzing the capabilities and prospects of In addition to business objectives, the Russian fuel and energy sector in Transneft subsidiaries are imple general. menting a wide range of social and charity projects and initiatives to improve quality of life and develop social infrastructure in the operat ing regions, support science, educa tion, culture and sports. As of today, Transneft subsidiaries have valid agreements on cooperation and so cial partnership with a number of constituent entities of the Russian Federation, which stipulate targeted charity donations and measures for ensuring economic development, im provement of the investment climate and tackling the key social issues in the regions.

Sustainable Development Report for 2016 11 About the Transneft Group

12 TRANSNEFT Oil transportation Business Map 14 volume, million 483.4 tons Scale of Business 19 Corporate Strategy and Sustainable Development Priorities 20

Membership in Organizations 24

Supply Chain 26 Length of trunk pipelines, thousand km 69 Corporate Governance regarding Sustainable Development Issues 28

Significant Changes in the Group’s Companies during the Reporting Period 30

Number of employees, thou- 114.2 sand people

Revenue, 848.1 RUB billion

13 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

G4-6 G4-8 BUSINESS MAP

Transneft operates 53,000 km of trunk oil pipelines and 16,000 km of trunk petroleum product pipelines. The Com- pany transports 85% of oil and 26% of petroleum products produced in Russia, as well as considerable volumes of raw hydrocarbons and petroleum products from the CIS countries. The Company’s oil pipelines connect the largest Rus- sian oilfields with refinaries and external markets in Europe and Asia, both directly and via seaports

Primorsk Sever Project Reconstruction of the trunk petroleum product pipeline system in the Moscow Region

Ust-Luga Primorsk Ust-Luga Construction of the Zapolyarye – Purpe trunk oil pipeline

Usa Andreapol Zapolyarye Druzhba Yaroslavl Moscow Unecha Construction of Nizhny Novgorod the Kuyumba – Lazarevo Tayshet trunk Perm Purpe oil pipeline Kazan Nikolskoye Surgut Novorossiysk Konda Kuyumba Aldan Klin Lensk Ufa Samotlor Novorossiysk Samara Tyumen Volgograd Parabel Salavat Skovorodino Tikhoretsk Khabarovsk Tuapse Yurgamysh Bratsk Tomsk Omsk Anzhero- Tayshet Sudzhensk Omsk – Pavlodar

Kozmino

Yug Project

14 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA

Export destinations

Name Transportation in 2016, million tons Primorsk Port 50.6 Ust-Luga Port 30.1 thousand Druzhba Oil Pipeline 69.0 km Novorossiysk Port 30.4 53 Kozmino Port 31.8 of trunk oil pipelines Skovorodino – Mohe Oil Pipeline 16.5 are operated by the Omsk – Pavlodar Oil Pipeline 7.6 Transneft Group

Major investment projects

Throughput, million Project tons per year completion Development of trunk oil pipelines Construction of the Zapolyarye – Purpe 32 (an increase 2016 thousand trunk oil pipeline to 45 is possible) km Construction of the Kuyumba – Tayshet 8,6 (Stage 1) 2016 16 trunk oil pipeline 15 (Stage 2) 2023 of trunk petroleum prod- Increase in throughput of the Skovorodi- 30 2017 uct pipelines are operated no – Mohe oil pipeline by the Transneft Group Expansion of the ESPO at the section 80 2020 from Tayshet IPS to Skovorodino PS Expansion of the ESPO at the section 50 2019 from Skovorodino PS to the specialized sea oil-loading port of Kozmino Development of trunk petroleum product pipelines Yug (South) project 6 (Stage 1) 2017 6 (Stage 2) 2018 % Primorsk Sever (North) project 15 (Stage 1) 2016 85 Ust-Luga 25 (Stage 2) 2018 of oil produced in Russia is Reconstruction of the trunk pipeline – 2018 transported via the Transneft system to increase the volume of pe- Group system Usa troleum products transportation to the Andreapol Moscow Region Zapolyarye Yaroslavl Moscow Unecha Expansion of the ESPO-I Expansion of the ESPO-II Nizhny Novgorod to 80 million tons/year to 50 million tons/year Lazarevo Perm Purpe Kazan % Nikolskoye Surgut 26 Konda Kuyumba Aldan Klin Lensk of petroleum products pro- Ufa Samotlor duced in Russia is transport- Novorossiysk Samara Tyumen ed by the Transneft Group Volgograd Parabel Salavat Skovorodino Tikhoretsk Khabarovsk Tuapse Yurgamysh Bratsk Tomsk Skovorodino – Kozmino Omsk Anzhero- Tayshet Mohe Sudzhensk

Expansion of the Skovo Kozmino rodino – Mohe to 30 million tons/year

Sustainable Development Report for 2016 15 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

• render oil storage, oil compound- The Transneﬅ Group share in oil ing and oil sale services; transportation segment on the • ensure planning and management territory of the Russian Federation in 2014–2016, % of oil transportation in foreign countries and oil transfer at for- 2016 eign custody transfer points; 15% • perform the functions of an agent of Russian shippers for oil transportation across the territory of the Republic of Belarus, Ukraine and the Republic of Kazakhstan; • organize collection and consol- OIL TRANSPORTATION idation of information about oil transportation, storage and Oil transportation via the trunk pipeline delivery. 85% system in the Russian Federation and abroad, including transportation un- PETROLEUM PRODUCT TRANSPOR- 2015 der interstate and intergovernmental TATION 13% agreements, is the main business segment of Transneft and its subsidiaries. The second key business segment of G4-4 the Transneft Group are services related to petroleum product trans- The Transneft Group has a dominant portation to the Russian market and position in the Russian oil transpor- for export via the trunk petroleum tation segment: oil transported via product pipelines both in the Russian the Group’s oil pipelines accounts for Federation and abroad. The main 1 84.9% of the total oil volume pro- customers of such services include: 87% duced in the Russian Federation • vertically integrated oil companies; (547.3 million tons in 2016). • companies participating in stock 2014 trading of petroleum products; 13% Apart from the trunk oil pipeline sys- • companies storing petroleum pro tem of the Transneft Group, there ducts at loading depots of Trans- are also other systems in the Russian neft. Federation, such as the pipelines of the Caspian Pipeline Consortium (CPC) Railway transport is the main compet (oil transportation in 2016 amount- itor of Transneft in petroleum pro ed to 44.3 million tons) and systems duct transportation for export and to and supply pipelines owned by oil Russian regional markets. Currently, producers. it accounts for about 60% of trans- 87% portation of light petroleum prod- The main competitor of the Transneft ucts produced at oil refineries of the The Transneﬅ Group Group in the oil transportation seg- Russian Federation, while the share of Other companies ment is Caspian Pipeline Consortium Transneft is approximately 26%. JSC in the region of the Novorossiysk Port (Sea Terminal – settlement As for petroleum product transporta- Yuzhnaya Ozereyevka). Transportation tion to the domestic market, railway services rendered by CPC-R JSC are transport has a range of advantages focused on oil for consumers in the compared to trunk petroleum product Republic of Kazakhstan and on oil of pipeline system, due to which it ac- Russian shippers. counts for a significant share in transportation of light petroleum prod- In addition to oil transportation, ucts (especially, motor gasoline) on Transneft and Transneft subsidiaries the domestic market of the Russian provide a range of related services: Federation:

1 Excluding transportation volumes of other countries’ oil via the Russian Federation.

16 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

Dominant position in the market

The share of oil transported via the oil pipelines of the Group’s companies is 85% of the total amount of oil produced in the Russian Federation

483.4 million tons

Changes in amounts of oil intake into the trunk pipeline system and oil delivery to destinations in 2014–2016.

2016 vs 2014 2015 2016 2015, % Intake into Transneft's system – total, million tons 479.00 480.50 483.49 100.6% Russian oil 460.36 461.07 464.53 100.8% Counter deliveries – Kazakhstan's oil 0.76 2.20 – – Kazakhstan's oil 16.55 15.28 17.22 112.7% Azerbaijan's oil 1.02 1.19 1.30 109.2% Turkmenistan's oil 0.31 0.76 0.44 57.9% Oil delivery – total, million tons 477.53 481.40 483.40 100.4% To Russian oil refineries 262.11 250.18 245.22 98.0% • Russian oil 261.84 249.46 245.22 98.3% • counter deliveries – Kazakhstan's oil 0.27 0.72 – – Transshipment to the CPC-R system 1.66 1.63 0.39 23.9% • Russian oil 1.66 1.63 0.39 23.9% To the CIS countries 21.50 22.05 18.65 84.6% • Russian oil 21.23 21.04 18.00 85.6% • counter deliveries – Kazakhstan's oil 0.27 0.96 – – Outside the CIS 192.26 207.56 219.14 105.6% • Russian oil 174.60 189.93 200.82 105.8% • counter deliveries – Kazakhstan's oil 0.22 0.51 – – • Kazakhstan's oil 16.16 15.12 16.63 110.0% • Azerbaijan's oil 0.93 1.27 1.22 96.1% • Turkmenistan's oil 0.35 0.73 0.47 64.4%

Oil freight turnover via routing cables executed, billion tkm 1,147.2 1,185.0 1,219.1 2.9%

Sustainable Development Report for 2016 17 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

Специальный представитель руководства по СЭМ Вице-президент

Председатель Координационного совета 2,766.7 Директор департамента охраны труда, промышленно, пожарной, экологической безопасности 2,659.1 865.0 848.1 114.9 115.5 114.2 815.7 77.2 774.4 Заместитель предстедателя Координационного совета 759.2 Начальник отдела экологической безопасности и рационального использования ДОТППиЭБ 2015 701.6 2,474.3 60.2

Секции и члены Координационного совета по направлениям деятельности ПАО «Транснефть» 39.5

Секция управления эксплуа- Секция управления охраной Секция управления подготов- тацией и обеспечением окружающей среды, кой и повышением квалифи- промышленной и пожарной рационального природо- кации специалистов и взаимо- Payments to the state , Total debt, RUB billion Revenue, Number of employees, Total assets, безопасности объектов ПАО пользования и экологиче- действием с общественно- RUB billion RUB billion thousand people RUB billion «Транснефть» ской безопасностью стью и средствами мессовой 2014 (включаязащиту от ЧС информацией 2015 2016 The Transneﬅ Group's share in the light petroleumприродного product и техногенного transportation segment in 2016, % характера)

Share in transportation of the total production Share in exports of the total export volume at Share in transportation to the domestic market Transportation volume, million tons Freight turnover, billion tkm Length of pipelines, thousand km volume at Russian oil refineries Russian oil refineries in total supplies to the domestic market from 1,263.4 Russian oil refineries 508.7 513.6 517.5 519.9 1,225.9 1,256.9 Строительство и страте- Организация рационально- Организация профессиональ- 1,188.9 72.2 70.2 31.2 32.2 33.1 33.58 44.3 46.3 69.0 гическое развитие го природопользования и ного отбора и повышения 12.0% 41.7 40.9

26.3% охраны окружающей среды квалификации кадров 18.9 17.9 16.2 Диспетчерское управле- ние Организация деятельности Организация взаимодей- по предупреждению и ствия со средствами массо- 47.0% 1,185.0 1,219.1 Эксплуатация маги- ликвидации ЧС вой информации, обществен- 477.5 481.4 483.4 483.3 1,147.2 1,210.6 стральных нефтепрово- 53.0% ными организациями 53.3 52.3 52.8 дов и нефтебаз Организация правового регулирования природоох- 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 (target) (target) 73.7%Обеспечение промыш- ранной деятельности ленной и пожарной petroleum products oil petroleum product pipelines oil pipelines 88.0% the Transneﬅбезопасности Group Other companies Организация научно-техни- ческого обеспечения и обмена информацией

Деятельность по актуализации и повышению эффективности СЭМ • an extensive railway network; within a limited navigation period: • possibility of transporting small 5–6 months. batches ofЧлены petroleum Координационного products while совета по направлениям деятельности ПАО «Транснефть» fully preserving the quality; Automotive transport is a competitor • possibility of Секретальrelatively quicker КОординационного of Transneft совета –at специалист short distances, отдела most ЭБ- и РП ДОТППиЭБ delivery; ly in intraregional transportation, since • almost unlimited mix of transport- it allows door-to-door transportation of ed petroleum products taking into petroleum products, in particular from account the character of processing oil refineries and oil depots to local at oil refineries. consumers.

Water transport is another competitor of Transneft in long-distance transportation of petroleum products. However, this type of transport can compete with petroleum product pipelines only

18 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

Специальный представитель руководства по СЭМ G4-9 Вице-президент SCALE OF BUSINESS

Секции и члены Координационного совета по направлениям деятельности ПАО «Транснефть» 39.5

Секция управления эксплуа- Секция управления охраной Секция управления подготов- тацией и обеспечением окружающей среды, кой и повышением квалифи- промышленной и пожарной рационального природо- кации специалистов и взаимо- Payments to the state , Total debt, RUB billion Revenue, Number of employees, Total assets, безопасности объектов ПАО пользования и экологиче- действием с общественно- RUB billion RUB billion thousand people RUB billion «Транснефть» ской безопасностью стью и средствами мессовой 2014 (включаязащиту от ЧС информацией 2015 природного и техногенного 2016 характера)

Transportation volume, million tons Freight turnover, billion tkm Length of pipelines, thousand km

1,263.4 508.7 513.6 517.5 519.9 1,225.9 1,256.9 Строительство и страте- Организация рационально- Организация профессиональ- 1,188.9 72.2 70.2 31.2 32.2 33.1 33.58 44.3 46.3 69.0 гическое развитие го природопользования и ного отбора и повышения 41.7 40.9

охраны окружающей среды квалификации кадров 18.9 17.9 16.2 Диспетчерское управле- ние Организация деятельности Организация взаимодей- по предупреждению и ствия со средствами массо- 1,185.0 1,219.1 Эксплуатация маги- ликвидации ЧС вой информации, обществен- 477.5 481.4 483.4 483.3 1,147.2 1,210.6 стральных нефтепрово- ными организациями 53.3 52.3 52.8 дов и нефтебаз Организация правового регулирования природоох- 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 (target) (target) Обеспечение промыш- ранной деятельности ленной и пожарной petroleum products oil petroleum product pipelines oil pipelines безопасности Организация научно-техни- ческого обеспечения и обмена информацией Capital structure as of 2016 (according to IFRS)

Total assets: RUB 2,766,745 MILLION

Деятельность по актуализации и повышению эффективности СЭМ Total capital: Total liabilities: 1,050,390 RUB MILLION RUB 1,716,355 MILLION Члены Координационного совета по направлениям деятельности ПАО «Транснефть»

Long-term liabilities Short-term liabilities Секреталь КОординационного совета – специалист отдела ЭБ и РП ДОТППиЭБ Including share capital: RUB 756,541 MILLION, RUB 293,849 MILLION, RUB 308 MILLION including loans including loans RUB 592,505 MILLION RUB 109,047 MILLION

Share capital structure Authorized, issued and fully paid shares with the par value of 1 ruble each, number of shares Ordinary 5,546,847 Preferred 1,554,875 Total 7,101,722

Sustainable Development Report for 2016 19 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

CORPORATE STRATEGY AND SUSTAINABLE DEVELOPMENT PRIORITIES

STRATEGY OF TRANSNEFT UNTIL million tons and of ESPO-II PS up to LONG-TERM DEVELOPMENT 2020 50 million tons; PROGRAM OF TRANSNEFT • construction of oil pipelines to en- The strategy of Transneft until 2020 sure oil intake from the greenfields The Long-Term Development Program (hereinafter, “the Strategy”) encom- in the Yamalo-Nenets Autonomous of Transneft (hereinafter also -re passes all operations of the Company, District and the Krasnoyarsk Territo- ferred to as “LTDP”) was author- including economic, environmen- ry into the system; ized by the resolution of the Board of tal and social sustainability of its • increase in the throughput of the Directors of Transneft on November development. Sever petroleum product pipeline 19, 2014 (Minutes No. 23) and amend- up to 25 million tons/year in order ed in 2016. The adjusted LTDP was The goal of the Strategy is to develop to redirect petroleum products from approved by the Russian Ministry and upgrade the trunk pipeline system foreign ports; of Energy, the Russian Ministry of of the Russian Federation to fully meet • diversification of petroleum product Economic Development and the the demand for oil and petroleum supplies with the launch of a new Federal Agency for State Property product transportation on the domes- route in the south of Russia with Management and authorized by the tic market and for export based on: construction of a trunk petroleum resolution of the Board of Directors • use of equipment manufactured product pipeline at the Volgograd– of Transneft on December 30, 2016 on the territory of the Russian Novorossiysk section; (Minutes No. 27). Federation; • decrease in the use of imported • deployment of advanced indus- products to 3%; The LTDP was amended as follows: try-specific technologies ensuring • ensuring petroleum product trans- 1. Extending the LTDP until 2021 in high reliability and industrial and portation from newly connected compliance with the requirement environmental safety; refineries; of the Guidelines for devising • ensuring income from oil and • reduction of the trunk pipeline leak long-term development programs petroleum product transporta- rate to 0.072 leaks/year per 1,000 of strategically important joint- tion in the amount necessary and km of operated pipelines; stock companies and federal state sufficient for implementation of the • complete elimination of discharge of unitary enterprises, as well as open development program, technical insufficiently treated wastewater; joint-stock companies if the overall re-equipment and upgrade, and • maintaining sulfur content in oil share of the Russian Federation in reconstruction of trunk pipeline pumped through the Transneft sys- their authorized capital exceeds fifty facilities. tem within the limits established by percent. the scheme of normal freight traffic; 2. Inclusion of a section on develop- The strategy of Transneft until 2020 • cost reduction when building and ment of the Far Eastern Federal provides for the following: operating pipelines, maintaining an District pursuant to subclause “b” • increase in the throughput of ES- optimal cost level for consumers of of Clause 6 of Instruction of the Gov- PO-I pipeline system (PS) up to 80 services. ernment of the Russian Federation

20 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

Complete elimination of discharge of insufficiently treated wastewater is a strategic priority until 2020

In 2016, discharge of insufficiently treated wastewater to water bodies decreased by

37%

Implementation of the Strategy of Transneft until 2020

Business area in which the Strat- Current stage of implementation / result as Targets for 2020 egy of Transneft is implemented of the end of 2016 Ensuring sustainable development in the economic area Increase in the throughput of the The project is being implemented according to • ESPO-I PS: increase up to 80 million ESPO pipeline system (PS) the approved schedule: engineering, construc- tons/year; tion and installation are under way. • ESPO-II PS: increase up to 50 million Throughput achieved: tons/year. • ESPO-I PS: 58 million tons/year; • ESPO-II PS: 30 million tons/year; Construction of the Zapolyarye – The Zapolyarye – Purpe and the Kuyumba – The project ensuring oil intake from the Purpe and the Kuyumba – Tayshet Tayshet oil pipelines were put into operation. greenfields in the Yamalo-Nenets Autono- oil pipelines mous District and the Krasnoyarsk Territory into the system was accomplished in 2016. Increase in the throughput of the The first stage of the throughput increase at Increase in the throughput of the Sever Sever petroleum product pipeline the Sever petroleum product pipeline up to 15 petroleum product pipeline up to 25 million million tons/year was completed. tons/year in order to redirect petroleum products from foreign ports. Construction of the Yug petroleum The project is being fulfilled according to the Launching a new route in the south of Rus- product pipeline approved schedule: construction and installa- sia by building a trunk petroleum product tion are under way. pipeline at the Volgograd – Novorossiysk section. Decrease in the use of imported Share of foreign equipment: 8%. Share of foreign equipment: 3%. products Ensuring sustainable development in the social area Trunk pipeline leak rate The actual trunk pipeline leak rate was 0.072 Reduction of the rate to 0.072 leaks/year leaks/year in 2016 per 1,000 km of operated per 1,000 km of operated pipelines. pipelines. Cost reduction when building and Reduction in operating costs: RUB 9,167 Cost reduction when building and operating operating pipelines million; pipelines, maintaining an optimal cost level Capital expenditure reduction: RUB 8,921 for the consumers of services. million. Ensuring sustainable development in the sphere of environmental protection Reduction in discharge of insuffi- In 2016, discharge of insufficiently treated Elimination of discharge of insufficiently ciently treated wastewater wastewater decreased by 37%. treated wastewater.

Sustainable Development Report for 2016 21 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

No. DM-P16-6658 dated September • increase in energy efficiency KEY PERFORMANCE INDICATORS 30, 2016 (Directive of the Govern- through measures aimed at ener- (KPI) ment of the Russian Federation No. gy-saving; 4531p-P13 dated June 28, 2016) in • execution of the program for cost The Company’s KPI System was first the LTDP. reduction in pipeline construction authorized by the Board of Directors 3. Amendment of the Trunk Pipeline and operation; of Transneft in 2011 and became a key Facilities Development, Technical • achieving labor productivity level of tool for annual control and driving of Re-equipment and Reconstruction the best foreign pipeline companies; the Strategy implementation. Program forming part of the LTDP. • operational innovations; 4. Adjustment of the air pollutant emis- • ensuring reliability of operated The existing KPI System has been stable sion reduction rate and the contami- oil and petroleum product trunk for several years and it ensures consist- nated wastewater discharge rate. pipelines by conducting moderniza- ent control of the Company’s perfor- 5. Adjustment of the leak rate. tion of fixed assets as well as their mance on a year-on-year basis. At the 6. Amendment of the Program for the reconstruction based on the results same time, the existing KPI system is Localization of Manufacturing of Do- of diagnostics; updated and improved if necessary, tak- mestic Equivalents to Imported Prod- • improvement in environmental and ing into account changing external and ucts in the Russian Federation for oil industrial safety of the Company’s internal factors. Many indicators within and petroleum product trunk pipeline industrial facilities; the current KPI System are related to transport, forming part of the LTDP. • betterment of social guarantees sustainable development. provided by the Company to its The following measures are planned employees; At the end of each calendar year, the within the LTDP: • development of the Company’s Board of Directors of Transneft ap- • increase in the capacity of the oil and corporate identity and promotion of proves planned KPI values for the next petroleum product trunk pipeline the Company’s single brand; calendar year; at the same time, the system to ensure oil transportation • provision of advertising for the planned values for the current calen- in accordance with the planned oil Company’s operation in external dar year established earlier may not be production volumes at oil companies’ environment; adjusted. Thus, when appraising the re- fields in operation and greenfields and • design and development of the sults of its business for 2016, Transneft petroleum product processing vol- internal corporate communications used the KPI targets authorized by the umes at existing and new refineries; system. Board of Directors in December 2015.

22 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

Unit of 2016 2017 No. KPI System for 2016 measurement Target Target 1. Integrated indicator of reliability, environmental and industrial % 100 100 safety of the trunk pipeline system 1.1. Leak rate at trunk pipelines leak/thousand 0.087 0.086 km 1.2. Reduction in the air pollutant emission rate during oil and petroleum % 1 1 product transportation via trunk pipelines 2. Integrated indicator of operational efficiency growth % 100 100

2.1. Operating costs reduction rate % 2 2 2.2. Decrease in power intensity of oil transportation via trunk pipelines in % 1 0.5 comparable conditions 2.3. Increase in labor productivity of oil and petroleum product transpor- % 1.7 0.88 tation 3. Integrated indicator of investments efficiency under the Trunk Pipe- % 100 100 line Facilities Development, Technical Re-equipment and Recon- struction Program (hereinafter – the Development Program) 3.1. Total funding of the Development Program RUB billion 326 328 3.2. Total funding of capital investment projects of the Development Pro- RUB billion 318 279 gram 3.3. Total savings due to capital expenditure efficiency projects of the RUB billion 8.6 4.9 Development Program 3.4. Compliance with the schedule for Investment Projects implementation units 4 7 3.5. Integrated indicator of the percentage of completion of physical % 100 100 voulmes of work as part of implementing the Technical Re-equipment and Renovation Program 3.5.1. Pipe replacement at the line section km 1,482 1,006 3.5.2. Tank construction and reconstruction units 63 63 4. Integrated indicator of investment activity efficiency % 100 100

4.1. Investment in innovative and R&D projects as a percentage of Trans- % 1.40 1.41 neft's revenue from oil transportation services (under RAS) 4.2. Number of titles of intellectual property received over the accounting pcs. 90 91 period and the previous two years 4.3. Integrated effect of internal commercialization of innovative and R&D % 1.45 1.46 projects over the accounting period and the previous two years as a percentage of corresponding revenue of Transneft from oil transportation services (under RAS) 4.4. Quality indicator of the updated IDP (in the year of its update) / quality % 70 70 indicator of the IDP implementation (in subsequent years) 5. Total debt/EBITDA ratio – max. 2.5 max. 2.5

6. Integrated indicator of achievement of additional KPIs established % 100 100 by directives and instructions of the shareholder, President and Government of the Russian Federation 6.1. Return on invested capital (ROIC) % 7 7

6.2. Dividend amount RUB billion 12.8 30.1

6.3. Share of direct purchasing from small and medium enterprises % 10 18

Sustainable Development Report for 2016 23 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

G4-16 MEMBERSHIPS IN ORGANIZATIONS

24 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

Transneft’s role, functions and Name and date of the or- Key goals and objectives of Business areas of the or- Members of the organiza- period of mem- ganization establishment the organization ganization tion bership in the organization Non-Profit Partnership “Rus- Promoting the develop- Analyzes short- and long- PJSOC Bashneft, VNIPIneft Founder, mem- sian National Committee of ment of Russian oil and gas, term interests of the Russian JSC, Transneft, GrozNII bership since the World Petroleum Council oil-refining and petrochem- industrial sectors in the (Grozny Oil Research Insti- 1998. for Organizing and Holding ical science, assistance in development and application tute) CJSC, Zarubezhneft International Petroleum Con- increasing R&D intensity of of scientific achievements for JSC, A. V. Topchiev Institute gresses” (NP RNC WPC). the Russian manufacturing sustainable use of Russian of Petrochemical Synthesis Established in 1958. industry. oil resources. Takes part in of the Russian Academy preparations for and organ- of Sciences, Rosneft, PJSC ization of World Petroleum “RussNeft”, OJSC “Surgut- Congresses, carries out neftegas”, Gubkin Russian international and Russian State University of Oil and thematic scientific and tech- Gas, Stroytransgaz, PJSC nical events. TATNEFT, the Chemistry Department of Moscow State University, the 25th State Sci- entific Research Institute of chemmotology of the Russian Ministry of Defense. Russian Employers’ Asso- Consolidation of Russian Represents the interests of Comprises over one hundred Member of the ciation “Russian Union of industrialists and entrepre- business groups both in Rus- sectoral and regional asso- Union, member- Industrialists and Entrepre- neurs' efforts for improve- sia and at the international ciations representing key ship since 2014. neurs”. ment of business environ- level, holds conferences on sectors of the economy: fuel Established in 1991. ment; enhancing the status current economic issues with and energy sector, machin- of Russian business in Russia engagement of representa- ery industry, investment and and abroad; maintaining the tives of Russian and foreign banking, military-industrial balance of interests of the business groups, as well as complex, construction, society, government and executives of federal author- chemical production, light business. ities. As a result of these industry and food industry, forums, decisions in the and the service sector. It sphere of entrepreneurship comprises thousands of ma- and business in Russia are jor Russian companies repre- made at the state level. senting industrial, scientific, financial and commercial organizations in all regions of Russia. NPP Technology platform Information support and dis- Provides consulting and Comprises over 300 leading Member of the “Technologies for Sustaina- cussion of current environ- expert support for projects business, scientific and edu- partnership, ble Ecological Development”. mental issues by all stake- and research, carries out cational organizations in the membership The Technology platform is holders, drafting and making foresight studies and holds area of sustainable natural since 2013. included in the List of Tech- amendments to legislative scientific and technological resources management and nology Platforms pursuant and regulatory documents, expert events to forecast environmental safety. to Minutes No. 3 dated July development of interac- market and technology 5, 2011 of the meeting of tion between the expert development, ensures inter- the Government Commission community, representatives national communication with on High Technology and of business and government representatives of European Innovation. The non-profit authorities in the area of scientific organizations, partnership Technology environmental protection organizations of the BRICS Platform “Technologies for and natural resources man- and EurAsEC (EEU) countries, Sustainable Ecological Devel- agement, implementation of provides information support opment” is the legal entity of innovative projects. for conferences, meetings, Technology Platform “Tech- workshops, trainings and nologies for Sustainable other events, implements Ecological Development”. additional education Its activities are coordinated programs in the area of by the Russian NGO Russian environmental protection Geographical Society. and natural resources management.

Sustainable Development Report for 2016 25 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

G4-12 G4-EC8 SUPPLY CHAIN G4-EC9

A diagram of supply chain of Transneft and Transneft subsidiaries shows the most important groups of purchased goods, works and services, as well as their respective shares in annual expenditures and procurement expenditures of the Group’s companies as of the end of 2016

Diagram of the supply chain based on information about procurement of Transneft and Transneft subsidiaries in 2016

Air patrol RUB 696,593 thousand / 0.2%

TRANSNEFT AND TRANSNEFT RUB 91,058,538 thousand / Local procurement of purchasers in operating regions Components of SUBSIDIARIES 21.0% pipelines RUB 8,496,663 thousand / 2.0%

Diagnostic tests RUB 3,697,008 thousand / 0.9%

Tank metal structures RUB 2,554,914 thousand / 0.6%

Local procurement in operating regions — 21.0%

Design and survey RUB 1,039,115 thousand / 0.2%

Soﬅware RUB 13,460,497 thousand / 3.1%

Other inventories RUB 119,029,054 thousand / 27.5%

Construction and installation RUB 168,510,080 thousand / 38.9%

Pipes for trunk oil pipelines RUB 24,914,109 thousand / 5.7%

Centralized procurement — 79.0%

26 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

Air patrol RUB 696,593 thousand / 0.2%

TRANSNEFT AND TRANSNEFT RUB 91,058,538 thousand / Local procurement of purchasers in operating regions Components of SUBSIDIARIES 21.0% pipelines RUB 8,496,663 thousand / 2.0%

Diagnostic tests RUB 3,697,008 thousand / 0.9%

Tank metal structures RUB 2,554,914 thousand / 0.6%

Local procurement in operating regions — 21.0%

Design and survey RUB 1,039,115 thousand / 0.2%

Soﬅware RUB 13,460,497 thousand / 3.1%

Other inventories RUB 119,029,054 thousand / 27.5% In 2016, Transneft conducted about Construction and 3,000 cases of centralized procure- installation RUB 168,510,080 thousand / 38.9% ment for the needs of Transneft subsidiaries for the total amount of RUB

Pipes for trunk oil 342 billion. Over 40 thousand instan pipelines RUB 24,914,109 thousand / 5.7% ces of local procurement at Transneft subsidiaries totaled 21% of the overall cost of procurement in 2016.

Centralized procurement — 79.0%

Sustainable Development Report for 2016 27 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

CORPORATE GOVERNANCE IN SUSTAINABLE DEVELOPMENT ISSUES

Governing bodies of Transneft include development and exercise control over Within the corporate structure of the General Meeting of Shareholders, its financial and business operations. Transneft subsidiaries, functions are the Board of Directors, the The Company’s Board of Directors in- partially delegated and the responsibil- Management Board and the President, cludes independent directors. The ity is redistributed regarding issues re- and the Revision Commission is the Company has special committees of lated to solving current economic, envi- control body. As all voting shares of the Board of Directors. ronmental and social problems. the Company are held by the Russian Federation, representatives of the For more information on Transneft’s state in the Company’s management governing bodies, see the Annual bodies set strategic directions for its Report of Transneft for 2016.

G4-34 Structure of Governing and Control Bodies

GOVERNING BODIES CONTROL BODIES

Russian Federation (78.1% of the authorized capital, Minority shareholders (21.87% of au- 100% of ordinary shares) thorized capital, 99.9% of preferred External shares) independent auditor

Shares held by Transneft subsidiaries GENERAL MEETING OF (0.02% of authorized capital, 0.1% of SHAREHOLDERS preferred shares)

Revision Commission

* Estimates

Strategy, Investment and Innovation CHAIRMAN OF THE BOARD Committee OF DIRECTORS Audit Committee HR and Remuneration Committee BOARD OF DIRECTORS

PRESIDENT Department of Internal Audit and Analysis of Core MANAGEMENT BOARD Business Activities

Dotted lines represent functional connections, while solid lines represent administrative subordination.

28 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

General Meeting of Shareholders is the supreme management body of Transneft. The Board of Directors, the Management Board, the President and the Revision Commission report to the General Meeting of Share- holders. The competence of the General Meeting of Shareholders, the timing, procedure for preparing and holding it are stipulated by laws of the Russian Federation1, the Articles of Association2 and the Regulations on the General Meeting of Shareholders of Transneft3. All decisions on the issues within the competence of the General Meeting of Shareholders are formalized by orders of the Federal Agency for State Property Management. Board of Directors provides strategic management of Transneft’s business, ensures that the shareholders’ rights are protected and exercised, controls the development and approval of the Strategy, long- term plans and the Company’s key programs, and evaluates the reports on their implemen- tation4. According to Transneft’s Articles of Association, the Board of Directors comprises eight persons. As of December 31, 2016, the Board of Directors included three independent directors (37.5% of the total number of members of the Board of Directors)5. The Company considers the composition of the Board of Directors to be balanced and adequate for the scale of the Company’s business and meeting applicable requirements of the legislation of the Russian Federation and the Listing Rules of the Moscow Exchange. The main shareholder of the Company elects candidates to the Board of Directors taking into account their personal and business qualities, as well as compliance with the independence criteria stipulated in the Listing Rules of the Moscow Exchange. Committees of the Board of Directors are consultative and advisory bodies. The key task of each Committee is to conduct a preliminary study of the most important issues within the Board of Directors’ competence and develop recommendations for the Board of Directors. There are three committees of Transneft’s Board of Directors: The Strategy, Investments and Innovations Committee deals with the issues related to devising a long-term strategy, development of the investment, innovation and dividend policy, improvement of performance of Transneft. In 2016, it included one independent director who headed that Committee. The Audit Committee is responsible for control over the Company’s financial and business operations. In 2016, the Audit Committee included only independent directors. The HR and Remuneration Committee deals with the issues related to the HR, social and remuneration policies. In 2016, the Committee mostly included independent directors (two independent directors out of three, including the Chairman of the Committee). President The sole executive body manages day-to-day operations of the Company and reports to the Board of Directors and the General Meeting of Shareholders6. The President is appointed by the General Meeting of Shareholders for 5 years and serves as the Chairman of the Man- agement Board. N.P. Tokarev has been the President of Transneft since 2007.

Management Board The collective executive body is responsible for day-to-day management of Transneft and exercises control over Transneft subsidiaries in terms of the key issues related to their operations7. The Management Board holds its meetings as needed, but at least once a month, both face-to-face and by absentee voting according to the approved schedule. Revision Commission The Revision Commission is a permanent elective body controlling financial and business operations of Transneft. The Revision Commission’s work is regulated by the Articles of Association and the Regulation on the Revision Commission of Transneft8.

1 The Federal Law No. 208–FZ dated December 26, 1995 “On Joint-Stock Companies”. 2 The new edition of the Articles of Association of Transneft was authorized by the order of the Federal Agency for State Property Management No. 520–R dated June 30, 2016 and was registered on July 21, 2016 The changes are introduced on the basis of orders of the Federal Agency for State Property Management No. 91–R dated March 22, 2017, No. 816–R dated October 18, 2016, the Report on the results of issuing securities of Transneft (state registration number 1–01–00206–А–002D dated November 17, 2016) and are registered on April 6, 2017. 3 The Regulations on the General Meeting of Shareholders of Transneft were approved by the decisions of the General Meeting of Shareholders, minutes No. 1 dated June 28, 2002, minutes No. 1 dated 2004 (new edition – by the order of the Federal Agency for State Property Management No. 392–R dated June 30, 2017). 4 The Regulations on the Board of Directors were approved by the annual General Meeting of Shareholders of Transneft, minutes No. 1 dated June 28, 2002, minutes No. 1, 2004 (new edition – by the order of the Federal Agency for State Property Management No. 392–R dated June 30, 2017). 5 Among the members elected at the annual General Meeting of Shareholders in 2017, the number of independent members of the Board of Directors has not changed. 6 The Regulations on the Sole Executive Body (the President) of Transneft were first authorized by the order of the Federal Agency for State Property Management No. 392–R dated June 30, 2017. 7 The Regulation on the Collective Executive Body (Management Board) of Transneft was approved by the annual General Meeting of Shareholders of Transneft, minutes No. 1 dated June 28, 2002 (new edition – the order of the Federal Agency for State Property Management No. 392–R dated June 30, 2017). 8 The Regulation on the Revision Commission of Transneft was approved by the decision of an extraordinary General Meeting of Shareholders of Transneft in accordance with the order of the Federal Agency for State Property Management No. 734–R dated October 6, 2015.

Sustainable Development Report for 2016 29 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

G4-13 SIGNIFICANT CHANGES IN THE GROUP’S COMPANIES DURING THE REPORTING PERIOD

CHANGES IN THE CORPORATE GOV- Federation, and the corporate gov- BUSINESS EXPANSION ERNANCE AND ORGANIZATIONAL ernance practice established in the STRUCTURE Company. In 2016, as part of implementing the Long-Term Development Program of In June 2016, the legal form of the In order to enable special control of Transneft, the Company accomplished parent company of the Transneft the Company’s Board of Directors the following investment projects that Group was made compliant with the over Transneft subsidiaries (herein- enabled intake of additional volumes legal requirements and its corpo- after, TS) which have or may have a of oil and petroleum products into the rate name was changed from OJSC considerable impact on financial and trunk pipeline system: Transneft to Public Joint Stock economic performance and other in- • Construction of the Zapolyarye – Company Transneft. The change in dicators of the Company, and/or on Purpe trunk oil pipeline (this ena- the corporate name was recorded the implementation of its develop- bled oil intake from the greenfields in the new version of the Company’s ment strategy, the term “essential TS” in the Yamalo-Nenets Autonomous Articles of Association (Order of the was introduced. In 2016, 14 organi- District and the northern part of Federal Agency for State Property zations were classified as essential TS. the Krasnoyarsk Territory into the Management No. 520-r dated June system); 30, 2016). In addition, the Company’s In 2016, TS articles of association • Construction of the Kuyumba – Tay- Articles of Association were amend- were aligned with the Company’s shet trunk oil pipeline (this enabled ed as their provisions were made Articles of Association and their up- oil intake from the greenfields in compliant with the requirements dated versions were approved, due the Krasnoyarsk Territory into the of the Corporate Governance to which it was possible to synchro- system); Code, orders of the President of nize key TS business processes with • The Eastern Siberia – Pacific Ocean the Russian Federation, directives the Company’s planning and business pipeline system, the section from of the Government of the Russian plan execution cycles and the budget. Skovorodino PS to the specialized

30 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

Major suppliers which are shippers and parties to new con- Locations of new major suppliers which are shippers and tracts concluded in 2016 parties to new contracts concluded in 2016 Gazpromneft Omsk Refinery JSC Omsk LUKOIL-Nizhegorodnefteorgsintez LLC Nizhny Novgorod Region, Kstovo Ufa oil refineries (affiliates of PJOSC Bashneft) Republic of Bashkortostan, Ufa Gazprom Neftekhim Salavat JSC Republic of Bashkortostan, Salavat LUKOIL – Permnefteorgsintez LLC Perm Samara oil refineries (Kuibyshev Refinery JSC and Novokuibyshev Samara Refinery JSC) Syzran Refinery JSC Samara region, Syzran Ryazan Oil Refining Company CJSC Ryazan Gazpromneft Moscow Refinery JSC Moscow Kirishinefteorgsintez Production Association LLC Leningrad Region, Kirishi TAIF-NK JSC Republic of Tatarstan, Nizhnekamsk TANECO JSC Republic of Tatarstan, Nizhnekamsk Antipinsky Refinery JSC Tyumen Slavneft-YaNOS JSC Yaroslavl Novopolotsk Refinery (NAFTAN OJSC) Republic of Belarus, Vitebsk Region, Novopolotsk

sea oil-loading port of Kozmino • Development of the trunk pipe- (ESPO-II). Construction of ancillary line system to increase petroleum infrastructure facilities (ensuring product supply to the port of Pri- reliable operation of the ESPO-II morsk to 15 million tons per year facilities); (this enabled an increase in export potential of Russian refineries and improvement of fuel supply to several Russian regions).

CHANGES IN THE SUPPLY CHAIN STRUCTURE, LOCATION OF MAJOR SUPPLIERS AND PERIODS OF VALIDITY OF CONTRACTS WITH SUPPLIERS

In 2016, Transneft concluded new contracts for petroleum product transportation services with a number of major suppliers which are shippers. All contracts were signed in accordance with the Order of the Government of the Russian Federation No. 218 dated March 29, 2011. The contracts are valid for one year.

Sustainable Development Report for 2016 31 Stakeholder Engagement

32 TRANSNEFT

Key Groups of Stakeholders and Interaction with Them 34

Approach to Managing the Risks Significant for the Stakeholders and Sustainable Development of the 8 Eight groups of stakeholders Group’s Companies 40

Two general meetings of share- 2 holders were held in 2016

Twelve groups of risks which are significant for the stake- 12 holders and the Company

33 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

KEY GROUPS OF STAKEHOLDERS AND INTERACTION WITH THEM

Sustainable development of the dialogue with all stakeholders and to • nature of their impact on achieve- Transneft Group companies directly de- take into account their interests in the ment of strategic objectives by the pends on relations with stakeholders. course of decision-making. Group’s companies; Management of the Group’s Companies G4-25 • channels of communication with is aware that not only they have a sig- stakeholders used by the Group. nificant impact on stakeholders in their The key principles for defining the G4-24 operating regions, but also the stake- stakeholder groups are: holders influence them. Thus, the com- • common interests and expec- panies of the Transneft Group strive tations regarding the Group’s to establish a responsible and open companies;

We classify stakeholder groups as follows:

INVESTMENT COMMUNITY DEBT CAPITAL PROVIDERS LOCAL COMMUNITIES shareholders, investors and analysts creditors and rating agencies local population, organizations of the civil society and local authorities

GOVERNMENT AUTHORITIES CONSUMERS ENVIRONMENTAL ORGANIZATIONS

Government of the Russian Federation, vertically integrated oil companies, industry regulatory bodies and organi- companies participating in stock trad- zations, ministries and agencies, region- ing of petroleum products, companies al executive authorities storing petroleum products at loading depots

SUPPLIERS OF GOODS AND SERVICES EMPLOYEES AND TRADE UNIONS

34 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

G4-26 G4-27 STAKEHOLDER ENGAGEMENT G4-EC8

Stakeholders and topics of Forms of engagement Frequency of engagement their interest Investment community General Meetings of Shareholders of Transneft. Annual General Meetings of Transneft Share- (shareholders and investors) holders are held once a year. Extraordinary General Meetings of Shareholders are held as Topics of interest: needed. • financial and operational In 2016, Transneft held one Annual General performance; Meeting of Shareholders and one Extraordi- • investment programs; nary General Meeting of Shareholders. • dividend policy; The Board of Directors and the committees of the On a regular basis, according to the estab- • shareholder value increase; Board of Directors of Transneft as platforms for lished corporate procedures. • improvement of operational continuous communication with one large share- efficiency and cost reduction; holder within them: advice, search for compromise • business development strat- and achieving agreements on the most sensitive egy; issues. • mergers and acquisitions. Regular IR events including meetings of Trans- Annually, as part of disclosure of financial neft’s management with representatives of the statements for a year. shareholders, investors and analysts. Disclosure of full information required pursu- Information is disclosed on the above-men- ant to the Russian federal laws and regulatory tioned websites when information subject to documents of the Bank of Russia on the official mandatory disclosure in accordance with the website of Transneft (http://www.transneft.ru/), Russian legislation becomes available. as well as on http://www.e-disclosure.ru/portal/ company.aspx?id=636 . Debt capital providers Holding meetings of Transneft’s management Annually, when ratings of Standard & Poor’s (creditors and rating agencies) with representatives of rating agencies and pro- and Moody’s agencies are changed or con- viding all information requested by them. firmed. Topics of interest: Holding negotiations when placing bond issues Held on a one-time basis. • financial and operational indi- and raising bank loans. cators; • investment programs; Regular publication of RAS and IFRS reporting Reporting documents published by Transneft • amount of debt and debt port- on the Group’s business. (concerning Transneft and Transneft subsidiar- folio structure; ies) based on results of every year and every • credit policy; quarter contain information about financial • business development strate- standing, liabilities and potential risks. gy; • mergers and acquisitions. Local communities Participation in expert consultations, meetings On a regular basis. (local population, civil society and regional development task forces under organizations and local author- municipal authorities. ities) Holding regular information meetings with ad- On a regular basis. Topics of interest: ministration of the Group’s operating regions. • development of the pipeline Holding public consultations. Every time when starting construction of new system of the Group’s com- industrial facilities. panies and of the territories involved; Regular publication of reports on operations of Reporting documents published by Transneft • compliance with environmen- the Group's companies. based on results of every year and every tal regulations and standards; quarter contain information about investment • compliance with safety stand- and social projects which are implemented, ards and rules; including those aimed at development of • job creation and salary level; operating regions. • taxes; Publication of information related to the inter- Information materials, including press • charity; ests of the population, other enterprises, as well releases, are published in relation to all • holding joint events with as local authorities in the operating regions of decisions and all events that, in our opinion, non-governmental organiza- the Group's companies, on the official website can be interesting for representatives of local tions and local authorities; of Transneft and its distribution through mass communities in the operating regions of the • participation in local infra- media channels. Group’s companies. structure development.

Sustainable Development Report for 2016 35 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

Stakeholders and topics of Forms of engagement Frequency of engagement their interest Consumers (vertically inte- The key principles for interaction with consumers On a regular basis within the effective con- grated oil companies, com- and the rules for concluding contracts are stipu- tracts. panies participating in stock lated by Order of the Government of the Russian In 2016, two meetings of the Consumer trading of petroleum products, Federation No. 218 dated March 29, 2011 “On Council on the matters of Transneft activities companies storing petroleum Ensuring Non-discriminatory Access to Services were held. products at loading depots) of Natural Monopoly Entities in Oil (Petroleum Products) Transportation via Trunk Pipelines of Topics of interest: the Russian Federation”. • terms of connection; The Company considers the following forms of • plans for developing the pipe- interaction with consumers as the main ones: line network, including further • regular customer satisfaction surveys. enhancement of service quali- • services and support to consumers, settlement ty through further upgrade of of claims and disputes. the pipeline network; • informing customers by publishing information • data protection and confiden- on the website and by means of direct commu- tiality. nications. • interaction within the Consumer Council on Operations of Natural Monopoly Entities in Oil and Petroleum Product Transportation via Trunk Pipelines1. Participation of representatives of Transneft in meetings of the Transneft Services Consum- er Council. The Transneft Services Consumer Council was established by the resolution of the Government Commission on the Fuel and Energy Complex, the Reserve Replacement and Improving the Economy’s Energy Efficiency in October 2014. The Council’s work is aimed at informing the Government Commission on the Fuel and Energy Complex about the attitude of service consumers to investment projects and programs, and tariffs of Transneft. Government authorities (the The Economics Department of Transneft inter- In December 2016, the Ministry of Natural Re- Government of the Russian acts with the federal bodies regulating natural sources and Environment of the Russian Fed- Federation, industry regulatory monopolies (the Federal Antimonopoly Service eration, the Federal Service for Supervision of bodies and organizations, min- of Russia) pursuant to the requirements of the Natural Resources and Transneft concluded istries and agencies, regional Federal Law No. 147-FZ dated August 17, 1995 the Cooperation Agreement. The Agreement executive authorities) “On Natural Monopolies”2, the Order of the is related to taking a number of measures Government of the Russian Federation No. 980 within the Year of Ecology announced in 2017 Topics of interest: dated December 29, 2007 “On State Regulation in the Russian Federation. • continuous and accident-free of Tariffs for Natural Monopoly Entities’ Oil and In December 2016, Transneft and the Ministry operation of the oil and Petroleum Product Transportation Services”, as of Foreign Affairs of the Russian Federation petroleum product pipeline well as other effective regulatory documents. signed the Mutual Cooperation Agreement. network; The Corporate Governance Department interacts The Agreement was signed in order to sup- • operational and financial per- with the members of the Government Expert port the Company’s international business. formance; Council3 (their representatives) regarding issues • investment programs; related to adoption of the Corporate Governance • increase in efficiency; Code (CGC) in the Company, as well as amending • business development strat- the Company’s Long-Term Development Pro- egy, gram and consideration of reports on its execu- • compliance with regulatory tion in terms of improving corporate governance. requirements.

1 It is a permanent consultative body reporting to the Government Commission on the Fuel and Energy Complex, the Reserve Replacement and Improving the Economy’s Energy Efficiency, formed to execute the instructions of the President of the Russian Federation V. V. Putin No. Pr-1293 dated June 11, 2013, and in accordance with the Order of the Government No. 1689–r dated September 19, 2013 for the purposes of creating mechanisms of social control over the operations of natural monopoly entities, providing for the customers’ participation in control over formation and implementation of investment programs, taking into account the consumers’ opinions while making decisions on setting the tariffs on the goods and services of natural monopoly entities ensuring maximum openness of decision-making, consideration of disagreements between natural monopoly entities and the consumers of their services, as well as the federal executive bodies involved. The Council comprises 16 persons representing all–Russian business, public and non-profit organizations, associations of consumers of natural monopoly entities’ services, investment structures, as well as individual VIOCs and oil refineries. 2 Transneft is a natural monopoly entity in the sphere of oil and petroleum products transportation via trunk pipelines and is subject to the Federal Law of the Russian Federation No. 147-FZ dated August 17, 1995 “On Natural Monopolies” that also regulates (Article 7) the issues of state control (supervision) of natural monopolies by the authorized federal executive bodies. 3 The Government Expert Council is a consultative body which was created for the purpose of conducting expert reviews of economic and socially important decisions of the Government of the Russian Federation, federal executive bodies, government and interdepartmental commissions and councils, as well as for forming the issues on the part of civil society institutions for discussion with the Chairman of the Government of the Russian Federation and with the federal executive bodies according to his instructions.

36 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

Stakeholders and topics of Forms of engagement Frequency of engagement their interest Interaction with other federal executive author- In March 2016, Transneft signed the Coop- ities is also based on the effective regulatory eration Agreement with the Ministry of Civil documents. Defense, Emergencies and Disaster Relief Cooperation Agreements are the main govern- of the Russian Federation. The Agreement ment relations mechanism. provides for cooperation between the parties in organizing and taking measures related to civil defense, oil and petroleum product spill prevention and response. It also involves interaction in implementing the tasks asso- ciated with forecasting and elimination of consequences of man-made disasters and fires at Transneft’s facilities. In September 2016, the Memorandum on Co- operation was signed by the Federal Antimo- nopoly Service of Russia, the Saint Petersburg International Mercantile Exchange (SPIMEX) and Transneft. The Memorandum provides for cooperation in developing exchange trade technologies and introducing modern innovative solutions for creating a transpar- ent mechanism to set fair prices for the main commodities produced in Russia and the CIS countries. Transneft signed Cooperation Agreements with the Republic of Tatarstan (February 2016) and the Government of the Nizhny Novgorod Region (November 2016). Both documents provide the basis for cooperation between the parties aimed at developing the economy, improving the investment climate and creating favorable conditions for solving the main social issues in the regions. In 2016, the companies of the Transneft Group concluded Cooperation Agreements with the Administration of the Volgograd Region, the Government of the Khabarovsk Territory and the Governor of the Bryansk Re- gion. The Agreement on Social and Economic Cooperation between the Administration of the Volgograd Region and Transneft Volga Region JSC was concluded as part of the Yug project (construction of the Volgograd – Tik- horetsk trunk pipeline section). The Agree- ments between Transneft Far East LLC and the Government of the Khabarovsk Territory, as well as between Transneft Druzhba JSC and the Government of the Bryansk Region are intended to develop long-term and stable mutually beneficial cooperation. The Government Expert Council assesses the progress in adoption of the Corporate Govern- ance Code (CGC) in the Company on an annual basis (http://open.gov.ru/events/5516467/).

Sustainable Development Report for 2016 37 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

Stakeholders and topics of Forms of engagement Frequency of engagement their interest Environmental organizations Certification of all divisions of the Group's com- All divisions of the Transneft Group's indus- panies in accordance with the Environmental trial companies are certified for compliance Topics of interest: Management System (EMS). with the ISO 14001:2004 standard. Regular • compliance with environmen- surveillance audits confirming the validity of tal regulations and standards; the certificate and recertification audits are • decrease / increase in all types conducted. of environmental impact of Holding public consultations involving environ- Every time we launch a new construction business; mental organizations. project, we hold public consultations involving • environmental protection environmental organizations' representatives. programs and measures implemented; Environmental audit and publication of environ- Information is published on the Company's • investment programs; mental reports. website. • energy efficiency improvement; • business development strategy. Suppliers of goods and ser- Full information disclosure about procurement Every time when competitive bidding is con- vices and the procedure for selecting suppliers at the ducted, the relevant information is published same time and to the same extent for all poten- on the official website of Transneft (https:// Topics of interest: tial suppliers. www.transneft.ru/tenders/all). • creditworthiness; Application of universal requirements and Procurement in Transneft and Transneft • procurement rules and trans- criteria when selecting suppliers in accordance subsidiaries is based on the Regulation “On parency; with the international standard, which guaran- the procurement of goods, works and servic- • environmental, technical and tees fair selection and equal opportunities for all es by Transneft” developed pursuant to the other regulations and stand- potential suppliers. requirements of the Federal Law No.223-FZ ards in selecting suppliers. “On Procurement of Goods, Works and Services by Certain Types of Legal Entities” and other federal laws and regulatory documents of the Russian Federation, generally accepted rules established in the world procurement practice, and other regulations mandatory for our companies, including local ones. Based on the relevant contracts, Transneft may act as the organizer of procurement of goods, works and services for Transneft subsidiaries. In 2016, Transneft accomplished 3,043 cases of centralized procurement for Transneft subsidiaries for the total amount of RUB 342 billion. 40,391 cases of local procurement of Transneft subsidiaries totaled RUB 91 billion.

38 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

Stakeholders and topics of Forms of engagement Frequency of engagement their interest Pursuing the Company’s policy in quality control It is continuously implemented in building, enhancement, development and adoption of technical re-equipment, reconstruction and standards and mechanisms for performing work overhaul of trunk pipeline facilities at all and its control. stages from design and survey works to commissioning. In terms of documentation and methodo- logical support of the construction quality management system (CQMS), the Company did the following: • approved the Construction Quality Policy of Transneft (Order of the Company No. 219 dated November 23, 2016); • approved the CQMS Development and Imple- mentation Roadmap in Transneft and TS; • signed the agreements on construction work quality between Transneft and TS participating in the CQMS; • signed the contract for developing the CQMS, its introduction and preparation for its certification between Transneft and the Pipeline Transport Institute LLC; • developed and is implementing the Program for improving the quality of construction and repair of vertical steel tanks for oil and petroleum product storage at TS facilities (5 regulatory documents were amended; 15 new standard design solutions and standard work plans for tank construction and repair were prepared and approved, etc.); • made the certificates of construction quality parameters for 2016–2017 effective; • established the Transneft Coordination Board for the CQMS.

Employees and trade unions • collective agreements; The companies of the Group continuously • employee incentive system; interact with trade union organizations, im- Topics of interest: • professional education and advanced training plement programs for employees’ education • job creation and salary level; for personnel; and advanced training and use all instruments • social and medical support; • mandatory medical inspections; for social support of the personnel. • professional development • sports and cultural events; The Transneft Group regularly organizes opportunities. • social benefits for employees: voluntary health sports and cultural events aimed at strength- insurance, accident insurance, organization ening the corporate culture. of recreation for employees and their family members, non-state pension schemes.

Sustainable Development Report for 2016 39 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

G4-2 APPROACH TO MANAGING THE RISKS SIGNIFICANT FOR THE STAKEHOLDERS AND SUSTAINABLE DEVELOPMENT OF THE GROUP’S COMPANIES

Detailed information on functioning and development of the corporate risk management system in the Transneft Group companies, as well as on the risks that occurred in 2016 and on the risk mitigation measures taken by the Group is disclosed in the Annual Re- port of Transneft for 2016

Measures taken to reduce the probability of risk occurrence Risks Affected stakeholders and to mitigate occurred risks Risks of unlawful • Shareholders, investors and analysts; • Engaging the in-house security service (Transneft Security Servic- acts • Creditors and rating agencies; es LLC), private security companies and divisions of the Federal • Local communities; National Guard Service of the Russian Federation to ensure safety • Consumers; of the assets, industrial and processing complexes, as well as • Government authorities; anti-terrorist security of facilities. In 2016, 1,132 facilities of the • Environmental organizations; Company out of 1,681 were guarded. • Employees and trade unions • Classification of the facilities and preparing safety certificates. In 2016, the Company developed 3 and updated 162 safety certificates for its facilities. All the facilities are included in the register of the fuel and energy sector kept by the Russian Ministry of Energy. • Maintaining the access and internal security procedures, detect- ing and foiling third parties’ attempts of trespassing, taking in firearms, explosives and blasting assemblies. • Enhanced protection of the Company’s facilities during public holidays. • Carrying out counter-terrorism exercises and trainings (in 2016, there were over 3 000 such exercises, including 714 trainings involving officers of the Russian Federal Security Service and the Russian Ministry of Internal Affairs). • Construction of technical and engineering security facilities (in 2016, their cost totaled RUB 1.355 billion). • Protection of the line section of the trunk oil and petroleum product pipelines against illegal taps. • Optimization of headcount of security divisions and improvement of their material and technical resources. • Participation in crime prevention measures in the regions where trunk oil and petroleum product pipelines are located (in 2016, 3,835 special steps were taken together with law enforcement officers, 995 facilities were checked).

40 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

Measures taken to reduce the probability of risk occurrence Risks Affected stakeholders and to mitigate occurred risks Risk of changes in • Shareholders, investors and analysts; • This risk is beyond the Company’s control. To mitigate its poten- the freight turn- • Creditors and rating agencies; tial negative consequences, the Company is continuously interact- over • Government authorities; ing with major customers and regulatory government authorities, • Consumers; and is developing an long-term system of tariffs . • Suppliers of goods and services; • Employees and trade unions Foreign exchange • Shareholders, investors and analysts; • The Company conducts its core business in the Russian Feder- and interest rate • Creditors and rating agencies; ation and has no significant investments in foreign companies risks • Government authorities; whose net assets value is exposed to the exchange rate risk. • Consumers; • Development and/or update of the Company’s internal regula- • Suppliers of goods and services. tions on management of foreign exchange and interest rate risks in 2016: –– Foreign Exchange and Interest Rate Risk Management Policy of Transneft; –– Foreign Exchange and Interest Rate Risk Management Proce- dure of Transneft; –– Foreign Exchange and Interest Rate Risk Management Strategy of Transneft. • When needed, foreign currency risk hedging is used to mitigate a potential negative impact of exchange rate fluctuations on the Company’s results. • Diversification of the currencies used for placement of the Com- pany’s temporarily disposable funds given the currency structure of the debt; in 2016, foreign currency loans accounted for over 75% of it. • Systematic replacement of the USD-denominated loan granted by the China Development Bank with long-term ruble bonds with a fixed coupon rate throughout 2016 (in 2016, bonds were placed for a total amount of RUB 77 billion that were used for early repayment of the China Development Bank’s loan in the amount of USD 1,160 million). Tax and legal risks • Shareholders, investors and analysts; • With imperfect and frequently changing laws, Transneft, as a • Creditors and rating agencies; law-abiding business entity and taxpayer, makes every effort • Consumers; to ensure compliance with the legislation and, if needed, seeks • Suppliers of goods and services protection of its positions in courts. • Internal control and auditing. • Thorough analysis of possible sources and consequences of legal and tax risks. • Expert review of complicated issues involving professional advi- sors. • Independent market appraisal of assets.

The influence of these risks on the Company’s business is generally assessed as limited. Credit risks • Shareholders, investors and analysts; • Preliminary analysis and monitoring of counterparties’ financial • Creditors and rating agencies; and economic standing. • Consumers; • Use of the mechanisms of guarantees and penalties in contracts. • Suppliers of goods and services; • Conclusion of contracts related to the core business based on • Employees and trade unions advance payment. • Updating the Regulation on establishing and observing the limits for transactions with counterparty banks of Transneft subsidiaries: –– setting the criteria for selecting counterparty banks for placing temporarily disposable funds and accepting bank guarantees; –– establishing the procedure for approving the limits for transactions with counterparty banks.

Sustainable Development Report for 2016 41 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

Measures taken to reduce the probability of risk occurrence Risks Affected stakeholders and to mitigate occurred risks Risk of mutual • Shareholders, investors and analysts; • Implementation of centralized policy of external borrowings, international sec- • Creditors and rating agencies; which allows ensuring the minimum possible cost of debt for toral restrictions • Government authorities; Transneft. Raising funds by the parent company with subsequent • Consumers; transfer of funds to subsidiaries as part of intragroup loans. • Suppliers of goods and services; • Development of the plan for refinancing the current debt and • Employees and trade unions raising new loans with the smoothest possible repayment profile and elimination of peak loads on cash flows. • Taking into account the existing parameters of the debt portfolio during 2016 in the Company’s financial and economic model. Risk of goods and • Shareholders, investors and analysts; • Taking measures for localizing production of certain categories of services import/ • Creditors and rating agencies; imported products. In 2016, the Company launched manufacture export ban • Government authorities; of 15 types of products in the Russian Federation: • Consumers; –– Fans for cooling systems on main line pumps • Suppliers of goods and services; –– Axisymmetric-type pressure and flow rate controllers • Employees and trade unions –– Disk-type pressure and flow rate controllers –– Four-way valve –– Fluid density transducers –– Fluid viscosity transducers –– Turbine-type flow transducers –– Mechanical displacement meter provers –– Programmable controllers for pump stations –– Measuring systems for OQQMS –– Radar-type level gauges –– Systems for measuring oil (petroleum products) level and tem- perature in tank batteries (TB) –– Anticorrosive coatings for outer surface of tanks and metal structures –– Anticorrosive coatings for inner surface of oil and petroleum product storage tanks –– Heavy floating booms Decisions of reg- • Shareholders, investors and analysts; • Continuous work with regulatory bodies and major customers to ulatory bodies (in • Creditors and rating agencies; reduce uncertainty and potential negative impact of these risks relation to tariffs, • Consumers; on the Company’s performance. In 2016, the interaction was customs, divi- • Suppliers of goods and services related to the issues regarding application of the effective regula- dends): tions and contracts. • The Company conducts its core business in the Russian Federa- tion. It does not export goods and is actively implementing the policy for substitution of imported equipment. Risks of chang- • Shareholders, investors and analysts; • Development and execution of the Action Plan for operating costs es in prices for • Creditors and rating agencies; and capital expenditure reduction involves a decrease in operat- purchased goods, • Local communities; ing costs (expenditure) by at least 2-3% annually, due to which works and services • Consumers; the above-mentioned risk may be significantly offset. • Suppliers of goods and services Environmental and • Local communities; • Mitigation of adverse consequences of natural phenomena climate risks • Government authorities; through regular monitoring of the technical condition of the • Environmental organizations; Company’s industrial facilities and introduction of innovative • Employees and trade unions solutions. • Taking preparatory measures before the beginning of the autumn and winter period. • Creation of emergency reserves of materials and equipment. • Training of emergency response and repair teams. • Insurance of industrial facilities. Risks of accidents • Shareholders, investors and analysts; • Internal pipeline diagnostics at a high technical level. and incidents • Creditors and rating agencies; • Continuous monitoring of technical condition of pipelines. • Local communities; • Efficient system for repairing pipelines and maintaining their safe • Government authorities; operation. • Environmental organizations; • Insurance of the property and liability of Transneft subsidiaries, • Consumers; including the line section facilities, oil pump stations, oil depots, • Employees and trade unions buildings and structures, vehicles and specialized machinery, as well as equipment and line fill oil / petroleum product in trunk pipelines and tank batteries.

42 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

Measures taken to reduce the probability of risk occurrence Risks Affected stakeholders and to mitigate occurred risks HR and social risks • Local communities; • Ensuring staffing of Transneft subsidiaries with highly qualified • Government authorities; employees and maintaining their stability. • Employees and trade unions • Improving the quality of training, retraining and advanced training of the staff in accordance with the Company’s innovation and development priorities. • Increasing flexibility of financial and non-financial incentive systems taking into account regional factors and situation on the labor market, ensuring competitive salaries. • Enhancing the labor productivity management system, through application of innovations, modern equipment and new labor-saving technologies.

Sustainable Development Report for 2016 43 Ensuring Sustainable Economic Development

44 TRANSNEFT billion rubles of dividends were paid to the state Management Approach in 2016 to Ensuring Economic 11.5 Stability of the Group 46

Financial and Economic Performance 49

Ongoing Infrastructure Investment Projects, Increase in Demand from billion rubles: a decrease in the Existing Consumers, Entry into operating costs in 2016 New Markets 52

9.6 Innovations and R&D 54

Procurement Practices 56

billion rubles: total tax 78.3 payment in 2016

billion rubles: amount of the investment program 154.4 in 2016

45 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

MANAGEMENT APPROACH TO ENSURING ECONOMIC STABILITY OF THE GROUP

The companies of the Transneft Group account for a large share in oil and petroleum product transportation both within the Russian Federation and abroad. Therefore, their economic stability is critical not only for the shareholders, investors, creditors, suppliers and employees. Economic stability of our companies is essential for sustainable development of the national economy.

FINANCIAL STRATEGY of funds, control over their use and credit rating at a level no lower reduction in borrowing costs; than the sovereign rating of the To ensure long-term financial stabili- • controls the proper level of guaran- Russian Federation; ty, the Group has developed and is im- tees (in the form of bank guarantees • performs regular monitoring of plementing the financial strategy of or otherwise) under the contracts financial standing of the counter- Transneft. It encompasses issues relat- with external counterparties; party banks of Transneft. ed to financial planning, forming funds • ensures dividend payments to and providing required and sufficient shareholders while providing the financial resources for the Group’s operations with the required funds; companies when the initiatives stipu- • refinances the debt on more favora- lated by the Long-Term Development ble terms and ensures a smooth Program are executed. As part of its repayment profile in case of a financial strategy, Transneft does the favorable market environment; following: • diversifies the currencies used for • maintains liquidity at a level suffi- placement of temporarily dispos- cient for ensuring financial stability able funds considering the currency regardless of adverse events and for structure of liabilities and the pay- unconditional financing of opera- ment schedule; tions and investments; • manages foreign currency and inter- • ensures concentration of cash flows est rate risks; in the parent company of the Group • maintains the main debt ratios with- for the most efficient management in the limits required for keeping the

46 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

Area Packages of measures Reduction of the cost of • Optimization of trunk pipelines operation; energy resources • optimization of capacity of industrial facilities at the trunk pipelines; • increase in energy-intensive equipment efficiency.

Procurement optimiza- • Substitution of imported equipment by Russian products, provided that the quality and reliability of tion supplied equipment and components are at the same level as of imported ones; • specifying a bid price of an item, given that the prior year prices should not be exceeded.

Fuel consumption reduc- • Introduction of GLONASS system and control of transport and specialized machinery movement tion along established routes; • installation of up-to-date automated and highly efficient equipment in boiler houses, reduction of thermal energy loss in heating networks due to use of modern thermal insulation materials. Reduction of expenditure Optimization of maintenance companies’ operations, installation of modern equipment in divisions of on maintenance organi- maintenance TS, adoption of efficient technologies zations' services

EBITDA effect from cost reduction and financial performance improvement programs

EBITDA growth in 2016, RUB Action plans / programs which ensured the main effect billion Action Plan for Capital Expenditure Reduction 0.2 Action Plan for Operating Costs Reduction 6.6 Energy Conservation and Energy Efficiency Improvement Program of Transneft 0.01

COST REDUCTION • Energy Conservation and Energy PROGRAMS Efficiency Improvement Program of Transneft for 2016–20213 In order to ensure economic stability of the Group’s companies, in addition RESULTS AND PLANS to strict compliance with the financial strategy, in 2016, special pro- Capital expenditure reduction grams for cost reduction and financial performance improvement were Due to fulfillment of the Action Plan implemented: for Capital Expenditure Reduction of • Action Plan for Capital Expenditure Transneft, the actual decrease in cap- Reduction1; ital expenditure amounted to RUB • Action Plan for Operating Costs 8.9 billion in 2016 versus the tar- Reduction2; get of RUB 8.6 billion. Over the entire

1 Devised by Transneft to execute the Action Plan to limit the final cost of goods and services of infrastructure companies while preserving their financial stability and investment attractiveness; the plan was authorized by the Chairman of the Government of the Russian Federation D.A. Medvedev, Resolution No. 6732p-P9 dated November 11, 2013. 2 Authorized by the decision of the Board of Directors of Transneft dated April 10, 2014 (minutes No. 5) starting from 2017. 3 Forms part of Transneft’s Long-Term Development Program authorized by the decision of the Board of Directors of Transneft dated November 19, 2014 (minutes No. 23) to execute the Decree of the President of the Russian Federation No. Pr-3086 dated December 27, 2013 and the Directive of the Government of the Russian Federation No. 4955p-P13 dated July 17, 2014, the letter of the Federal Agency for State Property Management No. PF- 11/35222 dated August 15, 2014.

Sustainable Development Report for 2016 47 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

The total decrease in operating costs from 2016 through 2021 will amount to ≈33.0 billion rubles

Actual power consumption rates achieved in 2016 and targets for 2017, %

Unit of 2016 2017 No. Target indicator measurement Target Actual Target 1. Power consumption rate for oil transportation via trunk pipelines thousand kWh/ 11.04 11.03 10.99 million tkm 2. Power consumption rate for petroleum product transportation via thousand kWh/ 15.65 15.17 14.28 trunk pipelines million tkm 3. Decrease in the power consumption rate for oil transportation via % 1.0 1.73 0.5 trunk pipelines in comparable conditions 4. Decrease in the power consumption rate for petroleum product % 1.0 2.3 0.5 transportation via trunk pipelines in comparable conditions

Note: the planned consumption rate for 2017 is indicated for comparable conditions versus 2016

period of execution of the Action Plan Improvement and Cost Reduction preserving the continuity of technolog- for Capital Expenditure Reduction of Program of Transneft. The overall de- ical processes and reliable equipment Transneft for 2016–2021, the overall crease in operating costs over 2016– operation, and complying with the ex- capital expenditure is expected to de- 2021 is expected to total about RUB isting sanitary standards. These targets crease by RUB 26.9 billion. 33.0 billion. include the following: • decrease in the power consumption Operating costs reduction Energy conservation and energy ef- rate for oil and petroleum product ficiency improvement transportation, transshipment, In 2016, the actual decrease in oper- intake, discharge, loading and ating costs amounted to RUB 9.2 bil- As part of the Energy Conservation delivery; lion, which exceeds the target of RUB and Energy Efficiency Improvement • reduction in consumption of energy 4.6 billion planned as part of exe- Program of Transneft for 2016–2021, resources (boiler and furnace fuels, cuting the Action Plan for Operating the Group developed cost reduction thermal and electrical energy, fuels Costs Reduction of Transneft. targets for fuel and energy resources in and lubricants) used for internal con- the Group’s budget for the Company’s sumption and process needs when In 2017, the Action Plan for Operating divisions which carry out oil and pe- providing services related to oil and Costs Reduction of Transneft was re- troleum product transportation. These petroleum product transportation via placed by the Operating Efficiency targets should be achieved while fully trunk pipelines.

48 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

FINANCIAL AND ECONOMIC G4-EC1 PERFORMANCE

All financial results presented in this Report are based on the audited consolidated financial statements of the Transneft Group prepared in accordance with the International Financial Reporting Standards (IFRS).

Information on financial perfor- ECONOMIC VALUE DISTRIBUTED Direct economic value generated, mance of Transneft and its subsidi- RUB billion aries is disclosed in the Sustainable According to the GRI 4.0 methodology, Development Report according to the economic value distributed includes Net sales the GRI 4.0 methodology. the following components: 848.1 • operating costs: cash payments 774.4 815.7 More detailed information on the fi- made to counterparties for materials, nancial and accounting statements product components, equipment and is disclosed on the official website services, rental payments, etc. of Transneft https://www.transneft. • employee salaries and other payments ru/investors/year_reports/. and benefits for employees: employee salaries, amounts paid to government 2014 2015 2016 DIRECT ECONOMIC VALUE institutions on behalf of employees GENERATED (taxes, levies, and payments to the Revenue from ﬁnancial investments unemployment insurance fund), as 36.8 According to the GRI 4.0 meth- well as pensions, insurance payments, odology, direct economic value expenditure on medical services to 19.9 21.5 generated includes the following employees, and other forms of support components: for employees; • net sales: gross sales minus re- • payments to capital providers: divi- turns, discounts, and write-off; dends to all categories of shareholders • revenue from financial invest- and interest payments to creditors; 2014 2015 2016 ments – cash received as interest • payments to the government: all or- on financial loans, as dividends ganization’s taxes, except for deferred Revenue from sale of assets 4.0 from shareholdings, as royalties, taxes; 3.3 and as direct income generated • community investments: voluntary 2.5 from the organization’s assets donations to charities, NGOs and (such as property rental); research institutes, funds to support • revenue from sale of assets: cash community infrastructure and direct generated from sale of tangible financing of social programs, including and intangible assets. cultural and educational events. 2014 2015 2016

Sustainable Development Report for 2016 49 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

direct economic value generated amounted to 873.3 billion rubles

Economic value retained, RUB billion

2014 2015 2016

284.5 298.2 Economic value retained, RUB billion 312.5

796.8 855.8 873.7 Economic value retained, RUB billion 2014 2015 2016

543.3 2014 2015512.3 284.5 2016 575.5 298.2 312.5

284.5 298.2 Economic value retained 796.8 312.5 855.8 873.7 Economic value distributed

873.7 Direct economic value generated 796.8 855.8 543.3 873.7 512.3 575.5

543.3 Economic value distributed, RUB 512.3 575.5 billionEconomic value retained Economic value distributed 575.5 543.3 14.9 Economic value retained 873.7 Direct512.3 economic value generated 8.2 78.3 Economic value distributed 1.5 39.8 60.4 873.7 Direct economic value generated Economic42.6 value46.0 distributed,59.7 RUB billion 122.6 138.3 144.9 575.5 ECONOMIC VALUE RETAINED Economic value distributed, RUB 543.3 14.9 billion 512.3 575.5 1.5 8.2 78.3 60.4 In accordance with the GRI 4.0 meth- 543.3 14.9 39.8 512.3 46.0 59.7 odology, the retained economic value 8.2 42.6 1.5 78.3 305.8 290.4 277.7 is calculated as the difference between 39.8 60.4 122.6 138.3 144.9 the direct economic value generated 42.6 46.0 59.7 and the economic value distributed. 122.6 138.3 144.9 2014 2015 2016

305.8 Community investments290.4 277.7 Payments to the government 305.8 290.4 277.7 Payments to capital providers

Employee2014 salaries and other2015 2016 payments and benefits for employees Operating costs Community investments 2014 2015 2016 Payments to the government Community investments Payments to capital providers Payments to the government Employee salaries and other payments and benefits for employees Payments to capital providers Operating costs Employee salaries and other payments and benefits for employees 50 TRANSNEFT Operating costs ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

FINANCIAL RELATIONS WITH THE Financial relations with the state, RUB billion 2014 2015 2016 STATE Tax exemptions – – 2.6

Subsidies – – 0.012 Tax exemptions in the amount of RUB 2.6 billion were received, as the compa- Investment grants – – – nies of the Transneft Group applied re- R&D grants – – – duced rates of income tax (RUB 1.3 bil- Financial rewards – – – lion) and property tax (RUB 1.3 billion) established by the local authorities. Royalty holiday – – –

Other types of state support – – – Subsidies granted to the Company by the Overall tax payments 39.8 60.4 78.3 state are not significant on the Group’s scale. Overall dividend amount paid to the state 6.8 1.8 11.5 G4-EC4

Economic value retained, RUB billion

2014 2015 2016

284.5 298.2 312.5

796.8 855.8 873.7 % 543.3 78.1 512.3 575.5 share of the state in the share capital of Transneft as of December 31, 2016 Economic value retained Economic value distributed

873.7 Direct economic value generated

Economic value distributed, RUB billion 575.5 543.3 14.9 512.3 1.5 8.2 78.3 39.8 60.4 42.6 46.0 59.7

122.6 138.3 144.9

305.8 290.4 277.7

2014 2015 2016

Community investments Payments to the government Payments to capital providers Employee salaries and other payments and beneﬁts for employees Operating costs

Sustainable Development Report for 2016 51 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

ONGOING INFRASTRUCTURE INVESTMENT PROJECTS, INCREASE IN DEMAND FROM THE EXISTING CONSUMERS, ENTRY INTO NEW MARKETS

In 2016, financing of the invest- development of the trunk petrole- ment program amounted to RUB um product pipeline system in the 154.4 billion, including invest- amount of RUB 49.0 billion. ments in the development of the trunk oil pipeline system totaling In 2016, Transneft implemented the RUB 105.4 billion and those in the following main investment projects:

52 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

Commissioning Projects Project implementation benefits period Development of the trunk oil pipeline system Construction of the Zapolyarye – Purpe Project execution enabled oil intake from the greenfields in the Commissioned in trunk oil pipeline Yamalo-Nenets Autonomous District and the northern part of Kras- 2016 noyarsk Territory into the trunk oil pipeline system. Construction of the Kuyumba – Tayshet Project fulfillment enabled oil intake from the greenfields in the Commissioned in trunk oil pipeline Krasnoyarsk Territory into the trunk oil pipeline system. 2016 Expansion of the ESPO PS at the section Implementation of the ESPO PS expansion projects will enable di- To be commissioned from Tayshet IPS to Skovorodino PS to versification of Russian oil exports in the Eastern direction to supply in 2020 80 million tons/year oil to countries of the Asia-Pacific Region, as well as the possibility to supply oil to Russian refineries. Expansion of the ESPO PS at the section To be commissioned from Skovorodino PS to the Port of Koz- in 2019 mino up to 50 million tons/year Construction of the branch pipe from Project realization will enable pipeline transportation of oil to the To be commissioned the ESPO to the Komsomolsk Refinery Komsomolsk Refinery. in 2018 Development of the trunk petroleum product pipeline system Yug project: Implementation of the Yug project will enable pipeline transporta- To be commissioned • 1st stage: reconstruction of the Tikho- tion of diesel fuel to the domestic market of the Russian Federation, in 2017–2018 retsk – Novorossiysk trunk pipelines; as well as for export through the Port of Novorossiysk, which will • 2nd stage: construction of the Volg- also ensure redirection of transshipment of petroleum products ograd – Tikhoretsk trunk petroleum made in Russia from foreign ports to ports of the Russian Federa- product pipeline tion. Sever project: development of the trunk Project fulfillment will make it possible to increase diesel fuel To be commissioned pipeline system to increase petroleum transshipment to 25 million tons/year in the Port of Primorsk, in 2018 product supply to the Port of Primorsk including redirection of transshipment of petroleum products to 25 million tons/year manufactured in Russia from foreign ports to ports of the Russian Federation. Reconstruction of the trunk pipeline Project realization will allow increasing light petroleum product To be commissioned system to increase petroleum product transportation for the needs of the Moscow Region and expanding in 2018 transportation to the Moscow Region the motor gasoline mix.

Sustainable Development Report for 2016 53 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

INNOVATIONS AND R&D

Innovative development is a priority area for Transneft

54 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

key performance indicators (KPI) in Program was highly rated by the in- operations. The Program was aimed teragency group of independent ex- at considerable enhancement of key perts: 98.7% out of 100%, which performance indicators of processes, is one of the best results for state- including substantial energy resources owned companies. The Program conservation, improved reliability and was approved by the Interagency longer operation of the main equip- Commission for Technological ment, higher labor productivity and Development under the Presidium of development of other aspects. The the Presidential Council for Economic projects stipulated by that Program Modernization and Innovative were implemented by 2017. Development.

Adoption of new technological solu- INNOVATION DEVELOPMENT PRO- The up-to-date Certificate of the tions enables the Company to main- GRAM FOR 2017–2021 Innovation Development Program of tain reliability and safety of trunk oil Transneft for 2017–2021 is available and petroleum product pipelines, en- In 2016, Transneft developed its on Transneft’s official website: http:// suring continuous oil and petroleum Innovation Development Program for www.transneft.ru/development/ product transportation to consumers 2017–2021 based on the findings of innovations/. in Russia and abroad, improving eco- the independent technological audit.2 nomic performance, reducing costs and considerably enhancing process To ensure continuity the new Program efficiency. includes all main measures and projects of the previous Program. The INNOVATION DEVELOPMENT PRO- new Innovation Development Program GRAM UNTIL 2017 was expanded and includes initiatives for developing the system of in- During 2016, the Group was imple- tellectual property management and menting projects under the Innovation cooperation with higher educational Development Program of Transneft institutions, scientific organizations, until 2017.1 The Program was based institutes of the Russian Academy of on the projects for developing break- Sciences (RAS), technology platforms, through technologies in oil and petro- development institutes, innovative ter- leum product pipeline transportation, ritorial clusters, etc. improving equipment and technologies, providing for the launch of in- Among the companies of the Russian novative R&D solutions, as well as on fuel and energy sector, Transneft’s

1 The Innovation Development Program of Transneft until 2017 was authorized by the resolution of the Board of Directors of the Company dated April 1, 2011 (Minutes No. 7), endorsed by the Russian Ministry of Energy, the Russian Ministry of Education and Science, the Russian Ministry of Economic Development, and the task force for the development of the public-private partnership in the innovation sector under the Government Commission on High Technology and Innovation (Minutes No. 15-AK dated April 13, 2011). 2 Developed pursuant to the Order of the Government of the Russian Federation No. DM-P36-7563 dated November 7, 2015, and to the Directive of the Government of the Russian Federation No. 1471p-P13 dated March 3, 2016, agreed with the Russian Ministry of Energy, the Russian Ministry of Education and Science, the Russian Ministry of Economic Development, established by the decision of the Board of Directors of Transneft dated November 11, 2016 (Minutes No. 21).

Sustainable Development Report for 2016 55 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

PROCUREMENT PRACTICES

THE LEGAL BASIS FOR procurement processes (including the THE PRINCIPLES OF PROCURE- PROCUREMENT OF GOODS, WORKS ways of procurement) and when they MENT OF GOODS, WORKS AND AND SERVICES should be applied, the procedure for SERVICES concluding and executing agreements, Procurement in Transneft and as well as other requirements related Purchasers comply with the following Transneft subsidiaries (hereinafter, to procurement. principles when they acquire goods, purchasers) is conducted on the ba- works and services: sis of the Regulation “On the procure- The Regulation on procurement de- • information transparency of pro- ment of goods, works and services termines procurement methods to be curement; by Transneft” developed in compli- applied by Transneft and Transneft • equality, fairness, no discrimina- ance with the requirements of the subsidiaries in the course of procure- tion or unreasonable restrictions Federal Law dated July 18, 2011 ment of all goods, works and ser- of competition in relation to pro- No. 223-FZ “On Purchase of Goods, vices, except for the cases specified curement parties; Works and Services by Certain Types by Part 4 of Article 1 of the Law on • earmarked economically efficient of Legal Entities” (hereinafter, the Law Procurement. purchasing of goods, works and on Procurement) and other federal services (if necessary, the cost laws and regulatory documents of the Transneft arranges and conducts pro- of the life cycle of the products Russian Federation. curement of goods, works and servic- purchased is taken into account) es as the organizer of procurement for and initiatives aimed at reduction The Regulation on procurement stipu- Transneft subsidiaries and other en- of purchaser’s expenditures; lates procurement procedures for pur- tities on the basis of the Regulations • absence of immeasurable supplier chasers and contain requirements for on procurement of goods, works requirements that can be used to procurement, including those for the and services of the corresponding restrict participation in competi- procedure of preparing and conducting organizations. tive bidding.

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PLANNING OF PROCUREMENT OF and documentation, explanation conducting procurement) was 21% of GOODS, WORKS AND SERVICES of the documentation provisions, the total cost of procurement in 2016. protocols prepared in the course G4-EC9 The main objectives of Transneft’s of procurement, as well as other procurement planning are the follow- information whose placement ONLINE PROCUREMENT ing: setting the order of priority for in the Management Information procurement, as well as increasing System is stipulated by the Law on On the basis of Article 3 of the participation of legal entities, individu- Procurement and the Regulation Law on Procurement, the Order als and individual entrepreneurs in it. on procurement. of the Government of the Russian Federation No. 616 dated June 21, To comply with the Law on CENTRALIZATION OF PROCURE- 2012 stipulates the list of goods, Procurement and the requirements MENT OF TRANSNEFT SUBSIDIAR- works and services to be purchased of the Order of the Government of IES, CONDUCTING CONSOLIDATED online. the Russian Federation No. 932 dat- (JOINT) PROCUREMENT ed September 17, 2012 On adopt- Transneft also conducts online pro- ing the Rules for setting the plan of In order to increase the efficiency of curement of goods, works and servic- procurement of goods (works, ser- procurement by Transneft subsidiar- es which are not included in this list, vices) and requirements for the form ies and to reduce the costs of staffing thus the share of Transneft’s online of such a plan, the Company ensures and conducting procurement process- purchases is even greater. the following at the planning stage of es, Transneft arranges and carries out procurement: procurement of goods, works and ser- Confidentiality of the information pro- • timely preparation of the plan of vices as the organizer of procurement vided by procurement participants procurement of goods, works and on the basis of agency agreements is one of the principles of online services; with purchasers. procurement. • comprehensive description of the subject matter of a contract during For the purposes of centralizing pro- In practice, online procurement is or- the preparation of the plan of curement, special units have been ganized by operators of online plat- procurement of goods, works and created in Transneft which have the forms who transfer documents and services. authority to procure goods, works and information between procurement services for the needs of Transneft participants and the purchaser in a ENSURING OPENNESS AND TRANS- subsidiaries (actual receivers of timely manner, in full and ensuring PARENCY OF PROCUREMENT goods, works and services). confidentiality of submitted bids.

In order to ensure transparency, the Consolidated (joint) procurement in Taking into account functions of an information on the procurement of Transneft is conducted for the pur- online platform operator, Transneft customers is to be placed not only poses of reducing the cost of procure- selects operators that are independ- in the procurement module of the ment, reducing the initial (maximum) ent of purchasers to ensure an unbi- Management Infomation System, but contract (item) price and relying on ased procurement process. also on the purchasers’ websites, the expertise of professional buy- as well as in other freely available ers when simultaneously purchasing Compliance with the principle of con- sources. uniform goods, works and services fidentiality enables the Company to required by several Transneft sub- achieve the goal of online procure- Information on procurement includes: sidiaries. When a consolidated pro- ment, enhancing the opportunities • the Regulation on procurement, curement deal is reached, individual of participation of legal entities and amendments to this Regulation; purchasers conclude their own con- individuals in procurement of goods, • the plan for procurement of goods, tracts based on volumes specified by works and services, encouraging such works, services; the consolidated deal and at a price participation, stimulating fair compe- • the plan for procurement of inno- reflecting the reduction of the final tition, ensuring openness and trans- vative and high-tech products, and price from the initial contract price. parency of procurement and prevent- pharmaceuticals; ing corruption and other malpractice. • in the course of procurement, infor- In 2016, Transneft conducted about mation on procurement, including 3,000 centralized purchases for a notification and documentation Transneft subsidiaries totalling RUB about it, a draft agreement, which 342 billion. Over 40 thousand local- is an indispensable part of the noti- ized purchases were conducted by the fication about procurement and the purchasers in their operating regions documentation on procurement, totalling RUB 91 billion. The share of amendments to such a notification the mentioned expenditures (while

Sustainable Development Report for 2016 57 Ensuring Sustainable Development in the Sphere of Environmental Protection

58 TRANSNEFT Ensuring Sustainable Development in the Sphere of Environmental

Protection Management Approach to Environmental Aspects of Business 60

Use of Energy Resources and billion rubles: investments in Energy Conservation 64 environmental protection 3,4 Pollutant and Greenhouse Gas Emissions 67

Environmental Impact of Transportation 69

Water Use 70

decrease in harmful atmos- Waste Generation and Protection 1% pheric emissions in 2016 of Land Resources 72 Conservation of Ecosystems and Biodiversity 73

billion rubles: economic impact of ≈1 energy conservation measures

59 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

MANAGEMENT APPROACH TO ENVIRONMENTAL ASPECTS OF BUSINESS

Transneft considers environmental protection and ensuring a high level of environmental safety of its industrial facilities as its highest and unswerving priority

INNOVATIONS IN THE FIELD OF ENVIRONMENTAL PROTECTION

In accordance with the Resolution of work “Development of reclamation the Governmental Commission on technology for lands contaminat- High Technologies and Innovations ed with oil and petroleum products dated July 5, 2011 and the rec- in the summer and winter period in ommendations of the Ministry of inaccessible places with the use of Economic Development of Russia, biosorbents”. Transneft decided to join the Technology Platform “Technologies Besides, in 2016, the research work for Sustainable Ecological “Investigation of the existing tech- Development” coordinated by the nologies for flow analysis of petro- All-Russian Public Organization leum products content in water. “Russian Geographical Society”. As Development of recommendations for part of the research program for introducing flow analyzers at the fa- this project, in 2016, Transneft em- cilities of Transneft subsidiaries” was ployees performed the technological completed.

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ENVIRONMENTAL POLICY facilities, reducing industrial waste, Development of the Russian Federation specific emissions and pollutant dis- for the period until 2030. In 2016, the Environmental Policy of charge into the environment where Transneft was updated and made ef- feasible; MANAGEMENT AND CONTROL OF fective by the order No.198 dated • allocation of sufficient inventory, ENVIRONMENTAL MEASURES October 6, 2016. According to it, the financial and human resources for main principles of the Company’s op- environmental protection activities; The EMS was developed, implemented erations in the environmental field are • contractors’ compliance with the and certified in Transneft subsidiaries. the following: requirements of international agree- Transneft subsidiaries obtained inter- • prevention and reduction of the ments of the Russian Federation, national DQS and IQNet certificates of negative environmental impact by the legislation of the Russian Fed- conformity to the ISO 14001 standard means of innovative technologies eration and its constituent entities, as early as in 2004. and improvements in environmental laws enacted by local authorities, safety of pipeline transport facilities standards and rules of environmen- The EMS was developed taking into ac- and reduction of specific emissions, tal safety and rational use of natural count the structure of the Company’s pollutant and industrial waste dis- resources, the Environmental Man- administrative management. Transneft charge into the environment; agement System (hereinafter, the adopted 19 EMS regulations that de- • rational use of natural resources at EMS) of Transneft during design, termine responsibility, authority, and all stages of operations, consider- construction, technical re-equip- interaction of personnel in the EMS. ing the requirements of regulatory ment, renovation, major repairs and documents, improving the energy operation of facilities at Transneft efficiency of operational processes subsidiaries; at all stages; • reduction of greenhouse gas emis- • disclosure of important information sions; related to environmental protection. • restoring and recovering disrupted areas; In accordance with the Decree of the • efficient funding and constant President of the Russian Federation improvement of the Environmental No. 176 dated April 19, 2017 and the Management System of Transneft Environmental Strategy of Transneft in accordance with the ISO 14001 until 2025, to minimize the negative international standard; environmental impact of operations, • increasing environmental aware- the objectives and priority areas of ness, education and professional- environmental protection for all op- ism of the staff of Transneft and erational facilities were determined, Transneft subsidiaries in the field of including: rational use of natural resources, • planning and conducting busi- environmental protection and safety. ness with the focus on prevention and reduction of the negative Transneft considers adherence to environmental impact by means these objectives as the key to ensur- of innovative technologies and ing environmental safety of its opera- improvements of the environmen- tions and implementation of the State tal safety of pipeline transport Policy in the Sphere of Environmental

Sustainable Development Report for 2016 61 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

Structure of the Coordination Board for Environmental Management System of Transneft

Special management representative for EMS Vice-President

Chairman of the Coordination Board Director of the Occupational, Industrial, Fire and Environmental Safety Department of Transneft

Deputy Chairman of the Coordination Board Head of the environmental safety and nature conservation division of the Occupational, Industrial, Fire and Environmental Safety Department of Transneft

Sections and members of the Coordination Board of Transneft’s business areas

Section for managing operation Section for environmental pro- Section for managing training and and ensuring industrial and fire tection, nature conservation and advanced training of specialists safety of Transneft facilities environmental safety (including and public relations • Construction and strategic protection against natural and • Professional selection and development man-caused emergencies) advanced training • Dispatch control • Nature conservation and envi- • Public and NGO relations • Operation of trunk oil pipelines ronmental protection and oil depots • Emergency prevention and • Ensuring industrial and fire response safety • Statutory regulation of environmental protection • R&D support and information exchange

Updating the EMS and increasing its efficiency

Members of the Coordination Board of Transneft’s business areas

Secretary of the Coordination Board, specialist of the environmental safety and nature conservation division of the Occupational, Industrial, Fire and Environmental Safety Department of Transneft

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In accordance with the audit plan for 2016, Transneft and TS conducted re-certification audits that confirmed complete conformity of the Company’s EMS to the ISO 14001:2004 international environmental standard.

Transneft developed the Responsibility ENVIRONMENTAL PROTECTION Current expenditure on environmental Assignment Matrix to meet environ- EXPENDITURE AND protection, RUB million mental law requirements in accord- INVESTMENTS ance with the ISO 14001:2004 inter- 1,937 national standard. The Transneft Group finances envi- 1,769 1,438 1,552 ronmental protection measures. In 1,312 An effective industrial air, water and 2016, current expenditure related to soil quality monitoring system was environmental protection amounted implemented at all Transnefts’ in- to RUB 1,936.6 million and invest- dustrial facilities. It is supported ments in fixed assets related to en- by 56 environmental testing labo- vironmental protection totaled RUB 2012 2013 2014 2015 2016 ratories accredited by the Russian 3,400.2 million. Federal Service for Accreditation G4-EN31 (RusAccreditation). In 2016, three additional laboratories were put into The sufficient financing of programs operation. for environmental protection, con- Investments in environmental struction and renovation of environ- protection, RUB million Environmental analytical control is mental facilities, and acquisition of carried out in accordance with the environmental equipment ensures 3,400 schedules approved by regulato- compliance of Transneft’s industri- ry authorities. In 2016, more than al facilities with requirements of the 2,066 1,969 290 thousand analyses of environ- Russian laws, international treaties 1,417 mental condition were performed. of the Russian Federation, stand- The results of the analyses conduct- ards and regulations in the field of ed in 2016 showed that no established environmental management, envi- standards were exceeded. ronmental protection and safety. 2013 2014 2015 2016

Sustainable Development Report for 2016 63 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

G4-EN3 G4-EN5 USE OF ENERGY RESOURCES G4-EN6 G4-EN7 AND ENERGY CONSERVATION

THE TRANSNEFT GROUP’S POLICY a system of incentives to reward IN THE FIELD OF ENERGY USE energy conservation proposals; • organization of legal and informa- As the Transneft Group is the key ele- tional support of efficient use of ment of the fuel and energy sector of energy resources; the Russian Federation, constant im- • organization of energy audits, provement of energy efficiency of the preparation of energy performance Group’s companies is its top priority. certificates of facilities and subsequent collection, analysis and To achieve high energy efficiency, the systematic use of this information; Transneft Group companies are work- • inclusion of the goals related to ing in the following areas: energy efficiency enhancements in • implementation of measures under the Strategic Development Program the approved Energy Conservation of Transneft until 2020. Program to reduce specific electrici- ty consumption; • introduction and continuous improvement of the Environmental Management System in accordance with the ISO 50001:2011 international standard; • business planning with attention to energy conservation and energy efficiency; • design and construction of pipeline transport facilities with the use of the best energy-efficient technologies; • augmentation of Transneft’s repu- tation as an energy-efficient company whose credibility is based on the trust of international organizations, partners, customers and local communities in Transneft’s regions of operation; • increasing accountability of the staff for rational and efficient use of energy resources, establishing

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RUB RUB thousand 40,645,052 excl.) (VAT 231,344 3,946,307 883,323 250,294 268,161 79,211 4,529 2,045 2,405,576 Including oil and Including oil and products petroleum transportation nat. value 14,388,834 162,066 315,670 75,205 21,752 56,640 2,658 139 250 74,288

RUB RUB thousand 41,049,169 excl.) (VAT 266,434 4,812,989 1,044,500 281,070 321,907 82,563 4,529 156,614 2,822,974 2016 Total nat. value 14,446,987 179,594 392,827 88,719 24,427 69,813 2,789 139 16,017 86,695

RUB RUB thousand 36,584,245 excl.) (VAT 208,763 3,979,304 825,787 146,989 256,913 147,166 3,714 4,272 2,596,462 Including oil and Including oil and products petroleum transportation nat. value 13,840,843 159,276 290,723 72,736 12,627 59,444 4,524 95 391 64,910

RUB RUB thousand 35,924,245 excl.) (VAT 247,862 4,781,937 959,711 147,666 293,984 147,579 3,714 121,355 3,107,929 2015 Total nat. value 13,896,309 182,624 364,469 82,945 12,627 65,059 4,650 112 10,297 92,106

RUB RUB thousand 32,485,148 excl.) (VAT 353,507 2,375,623 855,275 202,548 260,933 109,724 6,245 24,478 2,336,136 Including oil and Including oil and products petroleum transportation nat. value 12,640,627 243,303 644,403 76,005 16,947 57,576 3,740 193 2,158 69,251

RUB RUB thousand 32,983,492 excl.) (VAT 384,097 2,746,305 969,179 202,548 132,005 6,602 126,967 2,748,956 290,523 2014 Total nat. value 12,686,839 260,701 685,020 85,995 16,947 63,974 4,457 204 10,794 81,406 3 including oil for heat genera including oil for tion, t power including oil for genera tion, t heat including natural gas for generation, thousand m heat including diesel fuel for generation, t power including diesel fuel for generation (at emergency t DPPs), including furnace oil, t including motor fuel for motor transport and special equipment, t Electric energy (purchased) (purchased) Electric energy (including the cost of capacity), thousand kWh (purchased), Thermal energy Gcal needs, the Company’s Fuel for tons of oil equivalent, total • • • • • • • ENERGY USE resources Use of energy

Sustainable Development Report for 2016 65 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

ENERGY CONSERVATION

In accordance with the Order of the Russian Ministry of Energy No. 398 dated June 30, 2014, Transneft developed the Energy Conservation and Energy Efficiency Improvement Program until 2021.1

The Company achieved significant economy of energy resources and funds as a result of increased energy efficiency.

Savings achieved 2016 Energy conservation measures tons of oil thousand RUB Gcal equivalent kWh thousand 1. Optimization of oil pumping process – 135,800 – 420,894

2. Energy conservation in electrical equipment – 109,333 – 452,193

3. Energy conservation during heat generation 6,128 – – 49,051 4. Energy conservation in heat supply system – – 4,319 7,129 5. Energy conservation during motor transport operation 1,780 – – 40,443 Cumulative effect of energy conservation measures 38,637.57 – – 969,709.52

1 Approved by the Board of Directors of Transneft as of October 28, 2015 (Minutes No. 26), agreed with the Russian Ministry of Energy on May 5, 2015 (the letter No. IA-4923/15).

Energy efficiency of operations – use of energy resources (nat. value) per unit of freight turnover (billion tkm)

2014 2015 2016 Electric energy (purchased) (taking into account the cost of capacity), Oil: 11.37 Oil: 11.16 Oil: 11.03 million kWh Petroleum product: Petroleum product: Petroleum product: 14.68 14.42 14.35 Thermal energy (purchased), Gcal 152.536 134.667 130.177 Fuel for the Company’s needs, tons of fuel oil equivalent, total 0.547 0.258 0.264 • including oil for heat generation, t 0.064 0.060 0.060 • including oil for power generation, t 0.014 0.010 0.017 • including natural gas for heat generation, thousand m3 0.049 0.054 0.048 • including diesel fuel for heat generation, t 0.004 0.007 0.004 • including diesel fuel for power generation (at emergency DPPs), t 0.0002 0.0001 0.0001 • including furnace oil, t 0.0018 0.0006 0.0004 • including motor fuel for motor transport and special equipment, t 0.059 0.059 0.064

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POLLUTANT AND GREENHOUSE GAS EMISSIONS TO THE ATMOSPHERE

In accordance with the Federal Laws emissions of pollutants into the at- “On Environmental Protection”, “On mosphere in 2016 was 1% (100% Protection of Atmospheric Air”, the achieved). UN Framework Convention on Climate Change the Long-Term Development In the reporting year, gross pollut- Program of Transneft until 2021 stipu- ant emissions to the atmosphere de- lates reduction of specific air pollutant creased by 0.295 thousand tons as emissions to decrease the negative compared to 2015. Gross emissions of impact of industrial processes on the pollutants to the atmosphere amount- atmospheric air. ed to 80.75 thousand tons. G4-EN21 In 2016, specific emissions of air pollutants decreased by 0.002 kg/t (by Overall, during the reporting year, 1%) as compared to the previous 11.39 thousand tons of pollutant emis- year and amounted to 0.156 kg/t. sions were caught and neutralized The planned reduction of specific throughout the Company.

Sustainable Development Report for 2016 67 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

Current expenditure on atmospheric air protection in 2016 amounted to 178.2 million rubles

In the future, the following measures • introducing of satellite navigation • installing units for catching and for reducing air pollutant emissions are systems for controlling motor regeneration of pollutants from planned throughout the Company: fuel consumption; off-gas at industrial facilities. • continuing technical re-equipment • overhaul of heating networks of boiler houses, with installation with replacement of thermal in- It is planned to continue reducing of modern energy-efficient boilers sulation materials to reduce the specific pollutant emissions to the and switching from petroleum to loss of heat; atmosphere by 1% every year from gas; • fitting tanks with floating roofs 2017 through 2020 and by 0.7% in • upgrading the car and truck fleet; and pontoons; 2021.

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ENVIRONMENTAL IMPACT G4-EN30 OF TRANSPORTATION

Transportation does not have a significant negative environmental impact.

The car and truck fleet of Transneft comprises 18.7 thousand vehicles con- suming fuel, 5.7 thousand (30%) of which have engines of the Euro 4 environmental class and higher.

5,700

18,700

Vehicles with engines of the Euro 4 environmental class and higher

Sustainable Development Report for 2016 69 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

G4-EN8 G4-EN10 WATER USE G4-EN22

5 Five wastewater treatment plants (of the total number of wastewater treatment facilities to be built and renovated in 2016) were made, installed and put into operation at their design capacity by the Tyumen Machinery and Repair Plant of Transneft Siberia

Water use in 2016 amounted to • renovation, technical re-equipment Amount and sources of water intake 9,231.5 thousand m3, of which and overhaul of 6 treatment facili- in 2016, thousand m3 2,886.2 thousand m3 were taken from ties with a total capacity of 505 m3 surface sources, while the amount of per day were carried out (4 facilities water from underground sources and for domestic wastewater and 2 ones 2,887.9 2,886.2 from other sources totaled 3,457.4 thou- for industrial and rain wastewater); sand m3 and 2,887.9 thousand m3 re- • manufacture of wastewater treat- spectively. The volume of recycled water ment plants at the Tyumen Machin- 9,231.5 amounted to 6,279.7 thousand m3. ery and Repair Plant of Transneft Siberia with the approved typical Water disposal in 2016 totaled patterns for domestic, industrial 9,549.4 thousand m3. and rain wastewater treatment was organized. 3,457.4 With a view to avoid the discharge from surface sources of polluted wastewater, the following Implementation of water protection from underground sources measures were taken in 2016: measures will ensure full compliance from other sources • 10 wastewater treatment facilities of wastewater treatment facilities with for industrial and rain wastewater the requirements of environmental leg- with a total capacity of 1,520 m3 islation and will completely eliminate per day and 5 domestic wastewater the discharge of polluted wastewater to treatment facilities with the capacity surface water bodies and maintain the of 225 m3 per day were built and put required level of wastewater treatment into operation; by 2020.

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The cost of commissioning the wastewater treatment facilities amounted to 2.6 billion rubles

Water use in the Transneft Group

2016 actual Water intake, total, thousand m3 9,231.5 Water disposal, total, thousand m3 9,549.4

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WASTE GENERATION AND PROTECTION OF LAND RESOURCES

In accordance with the Federal Law No.89-FZ “On Production and Consumer Waste”, the Company is taking comprehensive measures for reducing generation and accumulation of industrial and consumer waste

In 2016, current expenditure on protection against industrial and post-consumer waste amounted to 268.03 million rubles

In 2016, 124.647 thousand tons of indus- • gradual replacement of mercury Transneft subsidiaries created a reg- trial and consumer waste of hazard class- vapor lamps with LED ones with ister of facilities which have a neg- es I-V were generated, which is 7.59 thou- longer service life; ative impact on the environment: sand tons less than in 2015. • decrease in oil sludge generation 1,742 facilities were categorized. during the clean-up of tanks. In accordance with the Order of Waste generation is reduced due to com- the Government of the Russian prehensive measures for decreasing the In 2016, 0.273 tonnes of waste were Federation No. 1062, all TS received generation and accumulation of industri- utilized, 1.208 thousand tonnes were licenses for collection, transporta- al and consumer waste: neutralized, and 115.035 thousand tion, processing, disposal, neutral- • implementation of electronic docu- tonnes were transferred to third-party ization and placement of wastes of ment management system; licensed organizations. classes I-IV. G4-EN23

Waste generation, thousand tons

2015 2016 Total 132.24 124.647

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CONSERVATION OF G4-EN13 ECOSYSTEMS AND BIODIVERSITY

PROTECTION OF PLANTS INCLUDED IN THE RED LIST AND FOREST REGENERATION

When plants included in the Red List forest legislation: trunk pipelines are are found on pipeline routes of the constructed under the close supervi- Transneft Group companies, a spe- sion of environmental specialists, all cial design solution should be devel- construction and installation is carried oped, and if the pipeline route cannot out together with remedial work. As 171 be changed, some plants are replanted part of these measures, 171 thousand thousand trees and shrubs were planted in another area. All work is performed trees and shrubs were planted in 2015 in 2015 and 2016. in accordance with environmental and and 2016.

Sustainable Development Report for 2016 73 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

PRESERVATION OF BIOMONITORING AND MAINTAINING REINDEER MIGRATION BIODIVERSITY OF WATER RESOURCES ROUTES

As part of additional biomonitoring The cost of restoring aquatic biological of the service area for hydrobiotech- resources in 2016 totaled nical facilities of Transneft Kozmino Port LLC organized by environmental specialists, a two-hectare testing field for growing marine aquatic organisms 156.3 (Japanese scallop, bay mussel, kelp, trepang) has been operated for more million rubles than six years in the Kozmino bay of Companies of the Transneft Group the Sea of Japan with a view to im- adopted a special technology for oil prove the habitat in the area around Grown and released to sea in the Выращено и выпущено особей pipeline construction: combining the port. Kozmino bay in six years, thousand в морскую акваторию в бухте aboveground and underground lay- specimens Козьмино за шесть лет ing. Due to this innovative design and The main objective is obtaining accurate 2 700 8 2,7 technical solution, 18 passages for information on the state of the water 8 000 reindeer were organized along the body. In case of possible changes occur- 48 Zapolyarye – Purpe oil pipeline route. ring in natural processes, their man- 48 000 In some of them the pipes are laid made component is identified, and pre- above ground, and on flood plains, by ventative measures are implemented to the water, the pipes are laid under- avoid and reduce the negative impact ground. All the organized reindeer of operations. According to the results passages are situated on reindeer mi- of the comprehensive monitoring of gration routes and between their graz- the environmental condition of aquat- 250 ing lands and are agreed with the local ic organisms, operations of Transneft reindeer herders. Kozmino Port LLC do not have any scallops 250 000 trepangs sea urchins red king crabs

scallops trepangs sea urchins king crabs

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negative human impact on the adja- Primorye Territory (the fish spawn of Fish stocking of water bodies in the cent waters. the chum salmon), in the waters of Company's operating regions, thousand specimens the Irkutsk Region, the Republic of 5.5 In accordance with the Federal Sakha (Yakutia) and the Krasnoyarsk 5.5 Law No. 166-FZ “On Fishing and Territory, including the Belaya River, Preservation of Water Biological the Angara River and the Bratsk 10 Resources”, every year Transneft takes Reservoir (juveniles of peled, thymal- measures for artificial reproduction of lus, Arctic cisco, Siberian sturgeon), aquatic biological resources. in the Vilyuysk Reservoir of the Mirninsky District of the Republic of Apart from monitoring the condition Sakha (Yakutia) (the fish spawn of pe- of waters of the Kozmino bay, the led), in the waters of Volga, the Oka, testing field contributes to maintain- Shatura and Senezh Lake (juvenile ing the species diversity of the bay sterlet, common carp and silver carp) and the reproduction of precious ani- and in many other water bodies. mal species. During the last six years, 250 thousand scallops, 2.7 thousand Reproduction of aquatic biological 12,000 young red king crabs, 8 thousand sea resources is the most important part 11,000 urchins and 48 thousand trepangs of Transneft’s environmental policy. have been grown on the testing field In 2016 we released: and released in the Kozmino Bay. • more than 12 million juvenile fish; • over 5.5 thousand kelp sprouts; Similar measures for fish stocking • 5.5 thousand Japanese scallop of water bodies are implemented by juveniles. the Transneft Group companies under the supervision of specialists The expenditure amounted to RUB from regional ministries of agricul- 156.3 million. ture and local offices of the Federal Agency for Fishery (Rosrybolovstvo), In 2017, it is planned to release ichthyologists and environmen- about 10 thousand Japanese scal- 2016 2017 tal specialists on the Ryazanovka lops and more than 11 million juve- (target) River in the Khasansky District of the nile fish. juvenile ﬁsh Japanese scallop juveniles kelp sprouts

Sustainable Development Report for 2016 75 Ensuring Sustainable Development in the HR Area

76 TRANSNEFT Management Approach to the HR Policy, Health and Safety of the Employees, Improvement of Workforce Quality, Anti-Corruption Measures 78 thousand: average number of Transneft’s Staff 79 114.2 employees Protection of Employees’ Interests and Rights 80

Occupational Safety 81

Improvement of Workforce Quality 82

Anti-Corruption Measures 85 3.8% staff turnover Labor Practices Grievance Mechanisms 87

Labor productivity:

million tkm 17.5 per person

77 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

MANAGEMENT APPROACH TO THE HR POLICY, HEALTH AND SAFETY OF THE EMPLOYEES, IMPROVEMENT OF WORKFORCE QUALITY, ANTI-CORRUPTION MEASURES

The primary goals of the Transneft Group’s HR policy are the following: • staffing of Transneft subsidiaries with highly qualified personnel and maintaining their high stability; • increasing flexibility of financial and non-financial incentive systems taking into account regional factors and the situation of certain professional and skill groups on the labor market, ensuring a competitive remuneration system; • improving the quality of training, retraining and advanced training of personnel based on areas of the Group’s innovative development.

The main strategic initiatives related to development of the personnel management system are established in the Transneft’s HR policy is aimed at Long-Term Development Program of achieving the Company’s strategic de- Transneft. velopment goals, taking into account the implementation of projects to develop the trunk pipeline transport system of the Russian Federation. The main objective of the HR policy is to ensure staffing of Transneft subsidiaries with sufficient number of highly qualified personnel focusing on long- term employment.

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G4-10 STAFF G4-LA1

In 2016, the average staff number of Staﬀ breakdown by area, Average staﬀ number of Transneﬅ Transneft subsidiaries amounted to thousand persons subsidiaries, thousand persons 114.2 thousand persons, which is 1% 1.6 less than in 2015. The decrease in the 1.1 8.5 headcount is due to the reorganization 8.4 of Transneft subsidiaries, outsourcing 14.2 14.2 of certain operations and selling as- 64.9 62.7 sets in Ukraine.

19.5 The average age of the Transneft 19.1 Group employees is 40.7 years; 59% of the staff have worked in Transneft 50.6 51.5 system for more than five years.

The staff turnover does not exceed 30.4 30.2 the targets set in the Long-Term 2015 2016 Development Program, and in 2016 Workers it amounted to 3.8% throughout the 1.5 1.4 Transneft Group, which is 0.5% lower Managers, specialists, clerks 10.4 10.4 than in 2015.

9.4 9.5 The average percentage of employees recruited from the local population of TS regions of operation is 80–85% of 20.2 20.0 the total staff number.

2015 2016

Other countries North Caucasian FD Far Eastern FD Southern FD Siberian FD Northwestern FD Ural FD Central FD Volga FD *FD — Federal District

Sustainable Development Report for 2016 79 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

G4-LA4 PROTECTION OF EMPLOYEES’ INTERESTS AND RIGHTS

Health protection, personal volun- Non-state pension schemes tary health and accident insurance

Health resorts and recreation for NON-FINANCIAL Support of retirees children INCENTIVES

Promotion of mass sports and Housing healthy lifestyle

Social policy aimed at attracting, re- the laws of the Russian Federation taining and motivating employees and Collective Agreements of the forms an important part of Transneft’s Transneft subsidiaries. HR policy. Each of Transneft subsidiaries As part of the social policy, a range makes independent decisions on of measures is being implemented whether it is necessary to include to improve the standard of living and the minimum period for notifica- staff efficiency, support employees and tion of employees and/or their rep- their families, retirees, create condi- resentatives about considerable tions for treatment, health and recrea- changes in the organization’s oper- tion of staff, and promotion of healthy ations in the Collective Agreement lifestyle. or any other regulatory document, meeting deadlines provided for Benefits and payments for employ- in the Labor Code of the Russian ees are provided in accordance with Federation.

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OCCUPATIONAL SAFETY

Protection of employees’ life and • equipping employees with personal The Transneft Group has implemented health and ensuring safe working con- protective equipment which meets the occupational safety management ditions are the main priorities of the the best standards of occupational system conforming to the BS OHSAS Transneft Group. safety; 18001:2007 international standard. • carrying out special assessment of Compliance with the standard has been The key principles of the Transneft working conditions and assessment confirmed by the DQS international Group in the sphere of occupational of occupational risk levels; audit and certification company, and safety are the following: • mandatory sanitary services and the certificate of conformity has been • priority of employees’ life and health health care for the employees to issued. over operational performance; meet the occupational safety re- • personal responsibility of each quirements, conducting mandatory employee for his/her own safety, the preliminary and periodic medical right of each employee to suspend checks of the employees; the work and the duty to refuse to • providing information on occupa- carry out the work which does not tional safety and working conditions meet safety requirements; in the workplace, on existing health • involvement of all employees in the risks and on measures of protec- reduction of workplace injuries and tion against harmful and hazardous occupational diseases; workplace factors; • leading role of managers at all • continuous training in safe methods levels in ensuring safe working and techniques of ensuring occupa- conditions; tional safety and regular examination • openness of significant information of knowledge of occupational safety on occupational safety and health requirements; measures. • allocation of organizational, material and financial resources to ensure To comply with the above-mentioned functioning of the occupational principles, Transneft sets the following safety management system and objectives and tasks: execution of occupational safety • ensuring occupational safety and measures; safe working conditions of the • ensuring personal responsibility of employees when they use buildings, managers and employees for com- structures, equipment and conduct- pliance with the occupational safety ing technological processes; requirements.

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IMPROVING THE WORKFORCE QUALITY

students and employees during the Staff is trained mostly in corpo- entire period of employment by the rate and state educational organiza- Company. tions that have agreements with the Company and provide training for Training of personnel for the pipe- more than 50% of the total number of line transportation system is conduct- employees under professional training ed in all areas stipulated by laws of and development programs. the Russian Federation and meets the objectives and tasks of the Education The accreditation procedure was es- Development Government Program tablished to ensure the quality of ed- RECRUITMENT AND ОNBOARDING for 2013-2020 and Other Activities in ucational services when selecting OF NEW EMPLOYEES Education.1 counterparties and developing the relations with the providers of such Procedures for recruitment of employ- Specialized higher education institu- services: this means selection of ed- ees with the required qualification, in- tions provide specialized industry-re- ucational institutions which meet the cluding young specialists, onboarding lated training of specialists in accord- Company’s requirements in terms of of new employees, on-the-job training ance with higher education programs material and technical equipment and with day release, assessment of perfor- under the agreements with Transneft educational programs in the best way. mance and career development are set and its subsidiaries. out in the following documents: • Transneft’s regulation on young The Company established 115 corpo- specialists with higher or secondary rate scholarships to support talented professional education; students. Monthly social allowances • “Trunk pipeline transportation for oil are given to teachers of specialized ed- and petroleum products. Regulation ucational organizations: 45 instructors on work with students of higher edu- receive such allowances. cational institutions”. The Company introduced occupation- Ukhta TRAINING AND ADVANCED TRAINING al standards in accordance with the Moscow OF EMPLOYEES Professional Standards Introduction Plan of Transneft Group for 2016–20202; it in- Kanash The required qualification of employees cludes training and retraining of the em- Samara is maintained through development ployees taking into account the estab- Ufa Tyumen of necessary skills of both targeted lished professional standards. Belogorsk Tomsk

Vladivostok

1 The Order of the Government of the Russian Federation No. 295 dated April 15, 2014. State higher educational 2 In accordance with the requirements of the Decree of the Government of the Russian Federation No. 584 dated June 27, 2016 “On the peculiarities of ap- institutions plying professional standards in terms of requirements, obligatory for state extrabudgetary foundations of the Russian Federation, state or local institu- Corporate educational tions, state or municipal unitary enterprises, as well as state corporations, state-owned companies and business entities, more than fifty per cent of stocks institutions (shares) in the share capital of which are in state or municipal ownership”.

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Corporate training geography

MANAGERS AND SPECIALISTS WORKERS

• Advanced training • Higher education • Targeted training (targeted train- • Secondary professional education • Professional retraining ing programs, pre-certification • Professional training • Workshops, trainings training)

Ukhta

Moscow

Kanash

Samara Ufa Tyumen Belogorsk Tomsk

Vladivostok

State higher educational institutions

Corporate educational institutions

Sustainable Development Report for 2016 83 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

INCREASE IN LABOR PRODUCTIVITY fields of the Company’s business. The In-kind labor productivity, million presented works are assessed accord- tkm/person A steady growth of labor productivi- ing to the following criteria: ty in key business areas is an impor- • novelty of the project taking into tant indicator of improved quality of account the degree of the author’s Transneﬅ 16.4 the Company’s personnel. In 2016, la- participation in its design; 16.9 bor productivity in oil and petroleum • scientific elaboration of the subject, 17.5 product transportation amounted to including the quality of materials ExxconMobil Pipeline 17.5 million tkm per person, which is prepared; 17.2 3.5% higher compared to 2015. • applicability of the work considering 17.2 the feasibility of implementation, Marathon Pipeline PROFESSIONAL AND TECHNICAL relevance and economic impact of 11.5 CONTESTS deployment of the project; 11.9 • presentation of the project. Portland Pipeline Every year Transneft and its subsidi- 15.4 aries organize industrial and techni- The winners of the contest (first, sec- 10.7 cal contests that serve as an effective ond and third places) receive financial BP Pipeline tool of encouraging the employees rewards and are given certificates and 4.7 to increase their professionalism. valuable prizes. 8.6

Examination, dissemination and intro- KazTransOil duction of the best practice allows the 5.4 Group to improve labor productivity 5.6 and occupational safety. Shell Pipeline 7.5 The industrial and technical contests 4.1 form a significant part of the corpo- Chevron Pipeline rate culture of Transneft. They pro- 2.4 mote creativity in the workplace 2.4 8.6 and foster professional pride of the Company’s employees. 2014 2015 Industrial and technical contests of 2016 Transneft include professional skills Median 2015 competitions and the Youth competition for the best R&D project.

The winners of contests (first, second and third places) receive financial rewards, the winner is given the Best Employee title and a special bonus for great professional skills.

The Company’s young specialists, students of oil and gas higher educational institutions studying under the agreements with Transneft and young professionals of organizations which are members of the International Association of Oil Transporters take part in the youth contest for the best scientific and technological development. Young scientists and specialists, as well as creative teams of up to three members under 30 years are permitted to participate in the contest. The contest is held in the form of a science and technology conference in seven areas (sections) covering all

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ANTI-CORRUPTION MEASURES

ANTI-CORRUPTION POLICY with counterparties, and in corporate Company’s employees perform their offi- relations. cial duties. Since October 2014, Transneft has been a member of the Anti- Internal documents of Transneft de- Transneft’s Policy in the Field of Anti- Corruption Charter of Russian lineate a system for preventing and Corruption Measures and Prevention of Business. The members of the countering corruption, responsibili- Conflicts of Interest is the key document Charter declare nonacceptance of all ties, prohibitions and rules of conduct determining the Group’s anti-corruption forms of corruption in business and for employees at all levels and in all policy1. Employees familiarize themselves intend to promote the principles of divisions of the Company with a view with organizational level documents estab- preventing and countering corruption to prevent possible cases of corrup- lishing the procedures for preventing and in government relations, interaction tion and conflict of interest when the countering corruption when they are hired.

1 In 2017 the document was updated and titled Anti-Corruption Policy of Transneft.

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The operational level documents con- owners and beneficiaries submitted by tain rules and processes for pre- counterparties. venting and combating corruption in charity and sponsorship, exchange of The company annually assesses the business gifts, in relation to travel and need to update internal documents entertainment expenses, etc. that establish anti-corruption measures. The deadlines for updating the Transneft regulates the process of documents are set and included in concluding contracts and conducting the Annual Plan of measures for pre- procurement, ensuring verification of venting and countering corruption in information about the entire chain of Transneft.

ANTI-CORRUPTION MEASURES TAKEN IN 2016 AS OF DECEMBER 31, 2016, INFOR- MATION ON TENS OF THOUSANDS OF AGREEMENTS, COUNTERPARTIES Anti-corruption measures are carried To improve the efficiency of -an AND THEIR BENEFICIARIES WAS out in the Company on a regular ba- ti-corruption procedures and to en- COLLECTED AND SYSTEMATIZED: sis. In 2016, in accordance with the sure prompt response to reports instructions of the Government of the on corruption in Transneft, the Russian Federation on execution of Company established an accessible the National Anti-Corruption Plan for and safe communication channel for 1,710 2016–2017, Transneft took measures whistleblowing. thousand agreements to increase the efficiency of the system for preventing and countering corrup- Every month Transneft provided infor- tion in the Transneft Group. mation on efficiency and transparency of operations of the Company and 248 In 2016, the Company trained person- its subsidiaries and affiliates, including nel on the topic “Improving the effi- the results of inspection of the agree- thousand owners and ultimate ciency of anti-corruption measures in ments concluded during the current beneficiaries federal foundations, state-owned com- period and related counterparties, panies and corporations”. owners and ultimate beneficiaries. >83.7 thousand counterparties

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LABOR PRACTICES GRIEVANCE G4-LA16 MECHANISMS

Labor grievances from employees are analyzed, and the necessary of the Group’s companies are exam- documents are requested. If need- ined under the procedures and with- ed, the representatives of Transneft in the time frame established by the visit the subsidiaries and affiliates law and the Records management in- to examine the issues raised by ap- structions in Transneft. plicants. Replies to the grievances are sent in accordance with the All the received grievances are thor- legislation. oughly and objectively checked to ensure their compliance with labor legislation, the arguments of applicants

Sustainable Development Report for 2016 87 G4-EC7 Ensuring Sustainable Development in the Social Area

88 TRANSNEFT Social development outside the or- Management Approach to the Projects of the Group’s Companies ganization is aimed at improving the Affecting the Interests of the quality of life in the operating re- Society and Local Communities 90 gions, financing social infrastructure Interaction with the Local Agencies institutions, supporting science, ed- and Divisions of EMERCOM of Russia in Emergencies 92 ucation and culture, and sponsoring sports programs. Interaction with the Public in the Sphere of Environmental Protection 94 The Transneft Group companies conclude agreements with the subjects Non-Profit Infrastructure Projects 97 of the Russian Federation on coop- Interaction with the Public in the eration and social partnership which Area of Culture and Sports 98 provide for earmarked charitable do- Resolution of Conflicts and nations for development of the econ- Disputes with Local Communities in the Operating Regions 101 omy, improvement of the investment climate and tackling the key social Statutory Compliance 102 issues in regions.

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MANAGEMENT APPROACH TO THE PROJECTS OF THE GROUP’S COMPANIES AFFECTING THE INTERESTS OF THE SOCIETY AND LOCAL COMMUNITIES

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Transneft is one of the largest infra- of the local communities (including the costs (losses) related to the con- structure companies in Russia. The those of indigenous peoples) in the ar- struction of pipeline transportation Group operates in most regions of the eas where they traditionally live with facilities. country. This is why a high level of so- conclusion of mutual agreements on cial responsibility to the society and paying financial compensation, supply- In the operating regions of the citizens is a traditional priority for the ing special machinery or equipment to Transneft Group companies, opinion Company. provide essential services in remote surveys are carried out every year to regions of the country. estimate the attitude of local com- The Company has the following priori- munities to the Group’s business and ties in the social sphere: The companies of the Transneft Group whether the actual corporate conduct • funding social infrastructure insti- conclude agreements with the constit- of the Group’s companies matches the tutions in operating regions; uent entities of the Russian Federation business ethics (adhering to agree- • participation in the development of on cooperation and social partnership ments, submission of claims, etc.). The children’s, teenage, youth and mass that stipulate targeted charitable do- surveys show that the Transneft Group sports; nations to municipalities of these en- has great social importance for its in- • cooperation with local communities tities aimed at developing the econo- dividual regions of operation and for in implementation of ecological my, improving the investment climate the entire country. programs on protecting the envi- and tackling the main social issues ronment and wildlife; in regions. Under these agreements, • promoting science and higher pro- charitable support is provided for the fessional education; foundations and public organizations • funding cultural events that pre- that render assistance to indigenous serve and foster spiritual values peoples of the North, Siberia, and the of peoples living in multiethnic Far East, including the northern part Russia; of the Amur Region. • cooperation with the Russian Or- thodox Church and other religious Besides, the companies of the organizations; Transneft Group pay compensation for • supporting socially important possible harm from their operations events. in the areas where indigenous peoples live. The payments are made on When constructing and renovating the the basis of civil law as part of ensur- facilities of oil and petroleum prod- ing and exercising the land ownership uct pipeline transport, the Company right and the right to other natural re- searches for and implements optimal sources, the indigenous peoples’ rights solutions for the facilities’ design and for traditional use of natural resourc- location, taking into account the inter- es and protection of the places where ests of the land owners and obtain- they live, and traditional self-governing the land use rights necessary for ment. In 2016, RUB 400 thousand construction, as well as the interests were allocated to compensate for

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INTERACTION WITH THE LOCAL AGENCIES AND DIVISIONS OF EMERCOM OF RUSSIA IN EMER- GENCIES

In 2016, Transneft and EMERCOM of The Emergency System of Transneft has • improving the efficiency of the Russia concluded an Agreement reg- been introduced at the facility level and Emergency System of Transneft ulating the procedure and forms of forms part of the functional subsystem coordinating bodies; their interaction in certain areas, in- of the unified state system for prevention • improving the interaction with day- cluding organization and maintaining and elimination of emergency situations to-day management bodies of func- of civil defense, prevention and re- (hereinafter also referred to as the Unified tional and regional subsystems of sponse to oil and petroleum product Emergency System) of the Ministry of the Unified Emergency System and spills, while completing tasks related Energy of the Russian Federation in or- the permanent-readiness forces to forecasting of and recovery after ganizations (at facilities) of the fuel and of the Unified Emergency System, man-caused emergencies and fires at energy sector. It is designed to solve when they perform their tasks in the fuel and energy sector facilities of problems in the field of emergency pre- the field of emergency response Transneft. vention and response and ensuring fire and tackle issues related to coordi- safety at the Transneft Group facilities. nation of forces of the Emergency In accordance with the Federal Law System of Transneft in case of vari- No.68-FZ “On Protection of Population All the Transneft Group enterprises take ous emergencies (accidents); and Territories against Natural and measures to organize the most effective • ensuring the preparedness of Man-Caused Emergencies” dated actions in case of emergency: management bodies, forces and December 21, 1994, and the Decree of • pursuing uniform policy in the field of facilities of Transneft subsidiaries the Government “On the Unified State emergency prevention and response, designed for emergency prevention System of Prevention and Liquidation life, health and environmental pro- and response; of Emergency Situations” No.794 dat- tection, salvage and fire safety in the • collection, processing, exchange ed December 30, 2003, the Transneft interests of Transneft; and release of information about Group has established the Transneft • organizing protection of employees emergencies and emergency Emergency Prevention and Response against emergencies and ensuring threats; System (the Emergency System of fire safety at facilities of Transneft • organizing and conducting exer- Transneft). subsidiaries; cises and trainings in protection of

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68 In 2016, emergency response teams of the Transneft Group took part in 68 command- and-staff exercises and trainings, 16 comprehensive exercises, 18,021 drills, including 11 offshore.

population and territories against In order to comply with the federal emergencies at the Transneft laws on protection of population and Group facilities; territories against man-caused emer- • training of the Transneft Group gencies and ensure preparedness for employees and the staff of oil spill response, Transneft subsid- emergency response teams in TS iaries have established and certi- in emergency response and in re- fied 40 emergency response teams sponse to accidents and incidents on the basis of central maintenance at trunk oil and petroleum product services, line emergency and mainte- pipelines; nance services and emergency repair • informing employees about emer- services, and specialized divisions gencies and emergency threats in for emergency prevention and re- a timely manner; sponse at trunk oil pipelines, includ- • providing financial and material ing 16 professional and 24 non-pro- reserves for emergency response; fessional emergency response teams. • organizing emergency response These teams form the key forces of measures; the Emergency System of Transneft • developing and improving TS em- and comprise a total of 2,963 rescue ployees’ safety culture in day-to- workers, including 687 professionals. day operations and during various emergencies; In 2016, emergency response teams • improving the legal framework of the Transneft Group took part with regard to protection of ter- in 68 command-and-staff exercis- ritories and the Transneft Group es and trainings, 16 comprehensive employees against natural and exercises, 18,021 drills, including man-caused emergencies. 11 offshore.

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G4-EN1 INTERACTION WITH THE PUBLIC IN THE SPHERE OF ENVIRONMENTAL PROTECTION

Companies of the Transneft Group closely interact with relevant ministries and public environmental organizations as part of implementing projects and programs to preserve the environment and biological diversity in various Russian regions

CLEAN-UP OF THE ARCTIC

There are still depots of fuels and lubri- The Transneft Group provides assis- 2012 through 2016, 52 hectares of the cants and accumulation of construction tance in cleaning the protected area of territory were cleaned, and 800 tonnes and household waste, remains of vehi- the Bely Island in the Kara Sea. This is of scrap metal were collected. cles and aircraft, storage batteries and the territory of the state conservation other scrap metal at the facilities left area in the northern part of the Yamal In the summer of 2016, Transneft also after the drawdown of military and busi- Peninsula which is not covered by the arranged the trip of a volunteer group ness operations in the Arctic. The clean- Federal program. During the Soviet era as part of a special expedition to the up of part of such territories is carried the Popov Hydrometeorological Station Vilkitskiy Island (named after a Russian out under the Federal Arctic clean-up was located there. After the clean-up, a marine officer, explorer of the Arctic, program which includes, among oth- trading post for representatives of in- discoverer of the Severnaya Zemlya ers, elimination of long-standing landfill digenous peoples of the North will be archipelago) for deploying environ- sites on the islands of Franz Josef Land. built on the Bely Island. Overall, from mental task forces.

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PRESERVATION OF THE AMUR TIGER POPULATION

Companies of the Transneft Group well as supporting nature reserves. make regular charitable donations Among other things, due to these to finance projects and programs on measures once unstable popula- protection of Amur tigers and their tion of the tiger has stabilized by habitats. They include equipment now and comprises a little over >500 of hunting control groups, keep- 500 animals, and there are now The number of Siberian tigers ing tigers in rehabilitation and re- even premises for an increase in introduction (breeding) centers, as the population.

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PRESERVATION OF THE EUROPEAN BISON POPULATION Increase in the number of bisons in the Meshchyora National Park and the Companies of the Transneft Group List, in the Meshchyora National Murom reserve have been cooperating with the Park and the Murom reserve. Due 56 Meshchyora National Park since to the project implementation, the 36 2011. During the entire period of population of the bisons in the re- cooperation charitable support has serve increased from 36 animals been provided for the project on re- in 2012 to 56 animals in 2016. storing the European bison population, a species registered in the Red 2012 2016

BIRDS OF THE NORTHERN EURASIAN MOUNTAINS

The companies of the Transneft Himalayas, Central Verkhoyane, Group sponsor the largest modern to the ridges of Chersky, Suntar- Russian environmental project. It is Hayat and Sette-Daban, and to the carried out by the Russian Menzbir Kolyma Highlands were organ- Bird Protection and Study Society in ized. Scientists reached once unat- coordination with the MSU Faculty of tainable places for the first time, Geography. Due to the Group’s assis- watched nesting and migrations of tance, expeditions to the Putoransky 103 bird species and made several State Nature Reserve, the Eastern scientific discoveries.

YEAR OF ECOLOGY

In December 2016, the Ministry of Natural Resources and Environment of the Russian Federation, the Federal Service for Supervision of Natural Resources and Transneft concluded the Cooperation Agreement on implementation of a number of projects and measures as part of the Year of Ecology in the Russian Federation in 2017.

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NON-PROFIT INFRASTRUCTURE PROJECTS

Transneft Central Siberia JSC is ac- center of such level for children af- tively assisting medical institutions. fected by cancer. The patients will In June 2015, the construction of the be able to undergo psychological and first modern rehabilitation center for social rehabilitation, receive exer- children with cancer in the Tomsk cise therapy and play on a special- Region began with its support. The ized playground. It is also planned center is constructed as an initiative to form the first mobile palliative of the Charitable Foundation named care team for children in the Tomsk after Alena Petrova, while the funds Region on the basis of the center. are provided mainly by Transneft Completion of the construction and Central Siberia JSC. This organization opening of the center are planned will become the first rehabilitation for 2017.

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INTERACTION WITH THE PUBLIC IN THE AREA OF CULTURE AND SPORTS

SUPPORT FOR CHILDREN’S AND TEENAGE SPORTS AND SPORTS FOR DISABLED PEOPLE in 2016, Transneft has been a partner of the Charitable support is also given a stage of the All-Russian football Russian Cycling Federation for many to children’s and teenage sports tournament among amputees took place years. The Federation received support schools and Olympic reserve in Nizhny Novgorod with the use of for sporting events aimed at preparing schools in Transneft’s operating funds allocated to the non-commercial Russian national teams and their par- regions. partnership Nizhny Novgorod Football Academy ticipation in bicycle races. As a part of this partnership, the Company spon- sors cycling sports schools.

In a partnership with Transneft Upper Volga JSC, the non-commercial partnership Nizhny Novgorod Football Academy supports football teams of amputees and players with cerebral palsy. In 2016, Transneft Upper Volga JSC provided charitable support ex- ceeding RUB 9 million.

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PRESERVATION OF CULTURAL AND HISTORICAL HERITAGE

Support of cultural and historical her- In a partnership with Transneft, in 2016, the State Tretyakov Gallery Tatyana itage in Russia and abroad is an impor- the Tretyakov Gallery started to imple- Mrdulyash. “Last year the compa- tant area of the Company’s business. ment its brand developement concept, ny purchased the equipment for The Transneft Group has provided assis- renovating its corporate identity and ar- restorers which will allow studying tance to the Moscow Kremlin Museums, chitecture of the brand. The upgrade of our collection at a very high level the State Tretyakov Gallery, the Jewish the brand included a change in the logo to understand the history of cre- Museum and Tolerance Center, and has and the official name of the Tretyakov ating works of art, verify the dates been a partner of Fort Ross Conservancy. Gallery on Krymsky Val, which became and the authenticity of paintings. the New Tretyakov Gallery; a new web- This year we hope for Transneft’s In 2015–2016, with the support from site was developed, too. support in the new project on ren- Transneft, the 17th century mural paint- ovation of the building on Krymsky ing on the east front of the Cathedral of “Transneft is a genuine partner Val with the Dutch architect Rem the Dormition was renovated. In 2017, who understands the importance of Koolhaas.” it is planned to start the comprehen- strategic changes in the life of the sive renovation of the Cathedral of the Tretyakov Gallery, and supports our Dormition under the patronage of the ambitious ideas,” says the Deputy Transneft Group. General Director for Development of

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SUPPORT FOR SIGNIFICANT CULTURAL EVENTS

Since 2011, Transneft has been the Folk art is an indispensable part of general partner of the Military Music Russian culture. For several years, overall, Festival “Spasskaya Tower”. Every year Transneft has been the general sponsor in early September military music bands of the events arranged by the Russian from various countries perform on Red Arts and Crafts Association. The Square. The total audience of the festival Association currently comprises about 100 including people watching broadcast on 250 folk art organizations located in 64 million people attended the Spasskaya TV and on the Internet amounts to about regions of the Russian Federation. Tower Festival 100 million people. The Spasskaya Tower Festival is the world’s largest international military music show attracting spectators in Russia and worldwide.

SUPPORT FOR THEATRES FOR YOUNG AUDIENCES

Every year since 2012, agreements on charitable donations have been concluded between Transneft Upper Volga JSC and the Nizhny Novgorod Theater for Young Spectators.

Transneft Volga Region JSC supports construction and renovation of socially important facilities. These include the children’s puppet theater in Samara, the theater for young spectators in Saratov, and sports grounds in the Rostov Region.

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G4-HR8 RESOLUTION OF CONFLICTS G4-OG10 AND DISPUTES WITH LOCAL COMMUNITIES IN THE OPERATING REGIONS

Companies of the Transneft Group implement investment projects and operate in various regions of the Russian Federation, including remote regions of the North, Siberia and the Far East.

Some projects inevitably affect the interests of the public and local communities. The Transneft Group shapes its policy in accordance with the best practices in social development of operating regions and business cooperation with municipalities, public associations and local communities. Legal divisions of Transneft subsidiaries provide legal support for Transneft subsidiaries with a view to minimize the risk of possible disputes with representatives of the public and local communities. However, in case of such disputes, the management of the Transneft Group companies arranges business meetings and consultations seeking to resolve them, offers options for improvement of the social and economic situation of the local communities. In 2016, there were no disputes related to violation of rights of local communities and indigenous peoples.

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STATUTORY COMPLIANCE

G4-EN29 PENALTIES AND NON-FINANCIAL Penalties and non-financial sanc- PENALTIES AND NON-FINANCIAL G4-SO7 SANCTIONS IMPOSED ON THE tions imposed for anti-competitive SANCTIONS IMPOSED ON G4-SO8 COMPANIES OF THE TRANSNEFT behavior TRANSNEFT SUBSIDIARIES GROUP FOR VIOLATION OF THE FOR NON-COMPLIANCE WITH LAW AND ANTI-COMPETITIVE In 2016, legal sanctions for anti-com- ENVIRONMENTAL LAWS BEHAVIOR petitive behavior were used against the Transneft Group companies in two cases: The cases of imposing financial and Penalties and non-financial sanctions • in the first case an order for non-financial sanctions on Transneft imposed for violation of the law eliminating the violations in the subsidiaries were related mainly to course of bidding was issued and violation of water protection laws, In 2016, non-financial penal sanctions the violations were eliminated fire safety rules in forests, and inad- for violating the law were imposed on voluntarily; thus, no penalties were equate land reclamation. the Transneft Group companies. imposed; • in the second case an order was No penalties and non-financial sanc- issued and a fine of RUB 50 thou- tions for infringing the rights of local sand was imposed for a failure to communities were imposed on the provide technical specifications for Transneft Group companies, and no installing heat meters in apart- complaints were filed. ment buildings; the fine was paid.

Non-financial sanctions Total amount of penalties Groups of violations imposed imposed, RUB thousand Non-compliance with environmental laws 9 2,565 Violations in the field of occupational safety 1 310 Transport (violations of requirements for transportation) 3 251.1 Violations in the field of construction (including industrial 39 2,860 safety) Fire safety, protection of the fuel and energy sector facilities, 5 20 phytosanitary and veterinary surveillance, sanitary and epide- miological requirements Violations of labor and pension laws 4 31 Violations related to the use of land and water bodies 1 520 Information disclosure, anti-corruption laws, tax reporting 3 3,969.3

2014 2015 2016 Non-financial sanctions imposed 67 16 9 Penaties imposed, pcs. 28 38 44 Total amount of penalties imposed, RUB thousand 960 3,285 2,515

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Sustainable Development Report for 2016 103 Appendix

104 TRANSNEFT The G4 Sustainability Reporting Guidelines (the GRI Sustainability Material Aspects of Business 106 Reporting Guidelines) were used G4 for preparing the Report GRI Content Index 109 Contact Details 118

The Report was prepared in accordance with the Core Core option (the GRI Guidelines)

21 material aspect of business

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APPENDIX 1. MATERIAL ASPECTS OF BUSINESS

CATEGORY: ECONOMIC

The Economic Category illustrates the flow of capital among various stakeholders and the main economic impacts of the organization throughout society.

Aspects Materiality for stakeholders Estimated impact of the aspect on the Company’s sustainable development Investment Investment community Government authorities Local communities Suppliers Capital providers Environmental organizations Buyers Employees

Economic Performance ++ ++ – + ++ – + + High Indirect Economic Impact – ++ ++ – – – – + Medium Procurement Practices – ++ – ++ – – – – Medium

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CATEGORY: ENVIRONMENTAL

The Environmental Category covers addition, it covers biodiversity, product impact related to consumed resources and service-related impact, as well and generated waste (such as as environmental compliance and emissions, effluents and waste). In expenditure.

Energy ++ + – – – ++ – – High Water ++ + + – – ++ – – Medium Ecosystem Services and Biodiversity ++ ++ ++ – – ++ – – Medium Emissions ++ ++ ++ – – ++ – – Medium Effluents and Waste ++ ++ ++ – – ++ – – High Compliance ++ ++ + – – ++ – – High Transport – – – – – ++ – – Medium Overall – – – – – ++ – – High Supplier Environmental Assessment – – – – – ++ – – Medium

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CATEGORY: SOCIAL

The social dimension of sustainability • human rights; concerns the impacts the organization • society; has on the social systems within • product responsibility. which it operates. The Social Category includes the following subcategories: • labor practices and decent work;

Subcategory: Labor Practices and Decent Work Employment – ++ ++ – – – – ++ High Labor/Management Relations – – – – – – – ++ Medium – – – – – – – ++ High Labor Practices Grievance Mechanisms – ++ – – – – – + Medium

Subcategory: Human Rights Indigenous Rights – ++ ++ – – – – – Medium

Subcategory: Society Local communities – – ++ – – – – – Medium Anti-corruption measures ++ ++ – ++ – – ++ – High Anti-competitive behavior – ++ – – – – ++ – Medium Compliance – ++ – – – – – – Medium Emergency Preparedness – ++ ++ – – – – – High

Subcategory: Product Responsibility Fossil Fuel Substitutes ++ ++ – – – ++ – – Medium

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APPENDIX 2. G4-32 GRI CONTENT INDEX

General Standard Disclosures

External Indicator Section (or disclosure made in the table) Page assurance

G4–1 Statement by the Chairman of the Board of Yes Statement by the Chairman of the 8 No Directors and the President Board of Directors and the President G4-2 Description of key impacts, risks, and opportunities Yes Stakeholder Engagement – Approach 40 No to Managing the Risks Significant for the Stakeholders and Sustainable Development of the Group’s Companies G4-3 The name of the organization Yes Contact Details 118 No G4-4 The primary brands, products, and services Yes About the Transneft Group – Business 16 No Map G4-5 The location of the organization’s headquarters Yes Contact Details 118 No G4-6 The number of countries where the organization Yes About the Transneft Group – Business 14 No operates, and names of countries where either Map the organization has significant operations or that are specifically relevant to the sustainability topics covered in the report G4-7 The nature of ownership and legal form Yes The nature of ownership: shared. Legal 118 No form: public joint stock company. G4-8 The markets served Yes About the Transneft Group – Business 14 No Map G4-9 The scale of the organization Yes About the Transneft Group – Scale of 19 No Business G4-10 Total number of employees (broken down by Yes Ensuring Sustainable Development in 79 No various aspects) the HR Area G4-11 The percentage of total employees covered by Yes All employees of Transneft subsidiaries No collective bargaining agreements are provided with social benefits, guarantees and compensations stipulated in Collective agreements or relevant Regulations in accordance with the same procedure. The share of employees of Transneft subsidiaries with which Collective agreements were concluded is 87% G4-12 Supply chain Yes About the Transneft Group – Supply 26 No Chain G4-13 Significant changes in the organization during the Yes About the Transneft Group – Significant 30 No reporting period Changes in the Group's Companies during the Reporting Period G4-14 Use of precautionary approach (Principle 15 of the Yes Transneft subscribes to principal No Rio Declaration on Environment and Development provisions of the precautionary of the UN, 1992) principle (Principle 15 of the Rio Declaration on Environment and Development of the UN, 1992).

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External Indicator Section (or disclosure made in the table) Page assurance

G4-15 Externally developed economic, environmental Yes The Company does not participate in No and social charters, principles, or other initiatives such initiatives to which the organization subscribes or which it endorses G4-16 Memberships in associations Yes About the Transneft Group – 24 No Memberships in Organizations G4-17 List of all the entities included in the organization’s Yes About the Report 5 No consolidated financial statements or equivalent documents. Report whether any entity included in the organization’s consolidated financial statements or equivalent documents is not covered by the Sustainability Report. G4-18 Principles for defining report content Yes Aspects of Disclosure 6 No G4-19 List of all the material Aspects identified in the Yes Aspects of Disclosure, 7 No process of defining report content Appendix – Material Aspects of Business G4-20 Aspect Boundary within the organization for each Yes Aspects of Disclosure 7 No material Aspect G4-21 Aspect Boundary outside the organization for each Yes Aspects of Disclosure 7 No material Aspect G4-22 The effect of any restatements of information Yes This is the first Sustainable No provided in previous reports, and the reasons for Development Report published by such restatements Transneft G4-23 Significant changes from previous reporting Yes This is the first Sustainable No periods in the Scope and Aspect Boundaries Development Report published by Transneft G4-24 A list of stakeholder groups engaged by the Yes Stakeholder Engagement – Key Groups 34 No organization of Stakeholders and Interaction with Them G4-25 The basis for identification and selection of Yes Stakeholder Engagement – Key Groups 34 No stakeholders with whom to engage of Stakeholders and Interaction with Them G4-26 The organization’s approach to stakeholder Yes Stakeholder Engagement – Key Groups 35 No engagement, including frequency of engagement of Stakeholders and Interaction with by type and by stakeholder group. An indication of Them whether any of the engagement was undertaken specifically as part of the report preparation process. G4-27 Key topics and concerns that have been raised Yes Stakeholder Engagement – Key Groups 35 No through stakeholder engagement, and how the of Stakeholders and Interaction with organization has responded to those key topics and Them concerns G4-28 Reporting period for information provided Yes About the Report 4 No G4-29 Date of most recent previous report Yes About the Report 4 No G4-30 Reporting cycle (such as annual or biennial) Yes About the Report 4 No G4-31 Contact person for questions regarding the report Yes Contact Details 118 No or its contents G4-32 Option of report preparation ‘In accordance’ with Yes About the Report, the GRI Content 4 No the GRI Guidelines chosen by the organization Index. No external assurance of the The GRI Content Index for the chosen option of Report was conducted. report preparation. The reference to the External Assurance Report, if the report has been externally assured G4-33 The organization’s policy and current practice with Yes About the Report 4 No regard to seeking external assurance for the report

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External Indicator Section (or disclosure made in the table) Page assurance

G4-34 The corporate governance structure of the Yes About the Transneft Group – 28 No organization, including committees of the Corporate Governance in Sustainable highest governance body, as well as committees Development Issues responsible for decision-making with regard to economic, environmental and social impacts of the organization G4-35 The process for delegating authority for economic, No No environmental and social topics from the highest governance body to senior executives and other employees G4-36 Report whether the organization has appointed No No an executive-level position or positions with responsibility for economic, environmental and social topics, and whether post holders report directly to the highest governance body G4-37 Processes for consultation between stakeholders No No and the highest governance body on economic, environmental and social topics G4-38 The composition of the highest governance body No No and its committees G4-39 Report whether the Chair of the highest No No governance body is also an executive officer G4-40 The nomination and selection processes for the No No highest governance body and its committees G4-41 Processes for the highest governance body No No to ensure conflicts of interest are avoided and managed G4-42 The highest governance body’s and senior No No executives’ roles in the development, approval, and updating of the organization’s purpose, value or mission statements, strategies, policies, and goals related to economic, environmental and social impacts G4-43 The measures taken to develop and enhance the No No highest governance body’s collective knowledge of economic, environmental and social topics G4-44 The processes for evaluation of the highest No No governance body’s performance with respect to governance of economic, environmental and social topics and actions taken in response G4-45 The highest governance body’s role in the No No identification and management of economic, environmental and social impacts, risks, and opportunities G4-46 The highest governance body’s role in reviewing No No the effectiveness of the organization’s risk management processes for economic, environmental and social topics G4-47 The frequency of the highest governance body’s No No review of economic, environmental and social impacts, risks, and opportunities G4-48 The highest committee or position that formally No No reviews and approves the organization’s sustainability report G4-49 The process for communicating critical concerns to No No the highest governance body

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External Indicator Section (or disclosure made in the table) Page assurance

G4-50 The nature and total number of critical concerns No No that were communicated to the highest governance body and the mechanisms used to address and resolve them G4-51 The remuneration policies for the highest No No governance body and senior executives and performance criteria G4-52 The process for determining remuneration No No G4-53 Report how stakeholders’ views are sought and No No taken into account regarding remuneration G4-54 The ratio of the annual total compensation for the No No organization’s highest-paid officer to the median annual total compensation for all employees G4-55 The ratio of percentage increase in annual total No No compensation for the organization’s highest-paid officer to the median percentage increase in annual total compensation for all employees G4-56 The organization’s values, principles, standards and Yes The Company does not have such No norms of behavior such as codes of conduct and internal documents codes of ethics G4-57 The internal and external mechanisms for seeking No No advice on ethical and lawful behavior, and matters related to organizational integrity G4-58 The internal and external mechanisms for No No reporting concerns about unethical or unlawful behavior, and matters related to organizational integrity

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Specific Standard Disclosures

Section (or disclosure made in the External Indicator Page table) assurance

CATEGORY: ECONOMIC

Aspect: Economic performance G4-EC1 Direct economic value generated and distributed Yes Ensuring Sustainable Economic 49 No Development – Financial and Economic Performance G4-EC2 Financial implications and other risks and No No opportunities for the organization's activities due to climate change G4-EC3 Coverage of the organization's defined benefit No No plan obligations G4-EC4 Financial assistance received from government Yes Ensuring Sustainable Economic 51 No Development – Financial and Economic Performance Aspect: Indirect Economic Impacts G4-EC7 Development and impact of infrastructure Yes Disclosed in Ensuring Sustainable 88 No investments and services supported Development in the Social Area G4-EC8 Significant indirect economic impacts, including the Yes About the Transneft Group – Supply 26, 35 No extent of impacts Chain Stakeholder Engagement – Key Groups of Stakeholders and Interaction with Them Aspect: Procurement practices G4-EC9 Proportion of spending on local suppliers at Yes About the Transneft Group – Supply 26, 57 No significant locations of operation Chain Ensuring Sustainable Economic Development – Procurement Practices CATEGORY: ENVIRONMENTAL

Aspect: Energy G4-EN3 Energy consumption within the organization Yes Ensuring Sustainable Development 64 No in the Sphere of Environmental Protection – Use of Energy Resources and Energy Conservation G4-EN4 Energy consumption outside of the organization No No G4-EN5 Energy intensity Yes Ensuring Sustainable Development 64 No in the Sphere of Environmental Protection – Use of Energy Resources and Energy Conservation G4-EN6 Reduction of energy consumption Yes Ensuring Sustainable Development 64 No in the Sphere of Environmental Protection – Use of Energy Resources and Energy Conservation G4-EN7 Reductions in energy requirements of products and Yes Ensuring Sustainable Development 64 No services in the Sphere of Environmental Protection – Use of Energy Resources and Energy Conservation G4-OG2 Total investment in renewable energy Yes The Company does not invest in No renewable energy sources G4-OG3 Total amount of renewable energy generated by Yes The Company does not generate No source energy from renewable sources Aspect: Water

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Section (or disclosure made in the External Indicator Page table) assurance

G4-EN8 Total water withdrawal by source Yes Ensuring Sustainable Development 70 No in the Sphere of Environmental Protection – Water Use G4-EN9 Water sources significantly affected by withdrawal No No of water G4-EN10 Percentage and total volume of water recycled and Yes Ensuring Sustainable Development 70 No reused in the Sphere of Environmental Protection – Water Use Aspect: Ecosystem Services and Biodiversity G4-EN11 Operational sites owned, leased, managed in, or No No adjacent to, protected areas and areas of high biodiversity value outside protected areas G4-EN12 Description of significant impacts of activities, No No products, and services on biodiversity in protected areas and areas of high biodiversity value outside protected areas G4-EN13 Habitats protected or restored Yes Ensuring Sustainable Development 73 No in the Sphere of Environmental Protection – Conservation of Ecosystems and Biodiversity Ensuring Sustainable Development 94 in the Social Area – Interaction with the Public in the Sphere of Environmental Protection G4-EN14 Total number of IUCN Red List species and national No No conservation list species with habitats in areas affected by operations, by level of extinction risk G4-OG4 Number and percentage of significant operating No No sites in which biodiversity risk has been assessed and monitored Aspect: Emissions G4-EN15 Direct greenhouse gas (GHG) emissions (Scope 1) No No G4-EN16 Energy indirect greenhouse gas (GHG) emissions No No (Scope 2) G4-EN17 Other indirect greenhouse gas (GHG) emissions No No (Scope 3) G4-EN18 Greenhouse gas (GHG) emissions intensity No No G4-EN19 Reduction of greenhouse gas (GHG) emissions No No G4-EN20 Emissions of ozone-depleting substances (ODS) Yes Due to the nature of industry No processes, we do not generate ozone-depleting emissions.

G4-EN21 NOx, SOx, and other significant air emissions Yes Ensuring Sustainable Development 68 No in the Sphere of Environmental Protection – Pollutant and Greenhouse Gas Emissions to the Atmosphere Aspect: Effluents and Waste G4-EN22 Total water discharge by quality and destination Yes Ensuring Sustainable Development 70 No in the Sphere of Environmental Protection – Water Use G4-EN23 Total weight of waste by type and disposal method Yes Ensuring Sustainable Development 72 No in the Sphere of Environmental Protection – Waste Generation and Protection of Land Resources G4-EN24 Total number and volume of significant spills No No

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Section (or disclosure made in the External Indicator Page table) assurance

G4-EN25 Weight of transported, imported, exported, or Yes We do not conduct international No treated waste deemed hazardous under the terms transportation of waste, do not of the Basel Convention (2) Annex I, II, III, and VIII, import and do not export waste and percentage of transported waste shipped deemed hazardous under the internationally terms of the Basel Convention G4-EN26 Identity, size, protected status, and biodiversity No No value of water bodies and related habitats significantly affected by the organization’s discharges of water and runoff G4-OG5 Volume and disposal of formation or produced No No water G4-OG6 Volume of flared and vented hydrocarbons No No G4-OG7 Amount of drilling waste (drill mud and cuttings) No No and strategies for treatment and disposal Aspect: Compliance G4-EN29 Monetary value of significant fines and total Yes Ensuring Sustainable Development 102 No number of non-monetary sanctions for non- in the Social Area – Statutory compliance with environmental laws and Compliance regulations Aspect: Transport G4-EN30 Significant environmental impacts of transporting Yes Ensuring Sustainable Development 69 No products and other goods and materials for in the Sphere of Environmental the organization’s operations, and transporting Protection – Environmental Impact members of the workforce of Transportation Aspect: Overall G4-EN31 Total environmental protection expenditures and Yes Ensuring Sustainable Development 63 No investments by type in the Sphere of Environmental Protection – Management Approach to the Environmental Aspects of Business CATEGORY: SOCIAL

Subcategory: Labor Practices and Decent Work

Aspect: Employment G4-LA1 Total number and rates of new employee hires Yes Ensuring Sustainable Development 79 No and employee turnover by age group, gender and in the HR Area – Staff region G4-LA2 Benefits provided to full-time employees that are No No not provided to temporary or part-time employees, by significant locations of operation G4-LA3 Return to work and retention rates after parental No No leave, by gender Aspect: Labor/Management Relations G4-LA4 Minimum notice periods regarding operational Yes Ensuring Sustainable Development 80 No changes, including whether these are specified in in the HR Area – Protection of collective agreements Employees’ Interests and Rights Aspect: Labor Practices Grievance Mechanisms G4-LA16 Number of grievances about labor practices filed, Yes Ensuring Sustainable Development 87 No addressed, and resolved through formal grievance in the HR Area – Labor Practices mechanisms Grievance Mechanisms

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Section (or disclosure made in the External Indicator Page table) assurance

Subcategory: Human Rights

Aspect: Indigenous Rights G4-HR8 Total number of incidents of violations involving Yes Ensuring Sustainable Development 101 No rights of indigenous peoples and actions taken in the Social Area – Resolution of Conflicts and Disputes with Local Communities in the Operating Regions G4-OG9 Operations where indigenous communities are No No present and affected by activities and where specific engagement strategies are in place

Subcategory: Society

Aspect: Local Communities G4-SO1 Percentage of operations with implemented local No No community engagement, impact assessments, and development programs G4-SO2 Operations with significant actual or potential No No negative impacts on local communities G4-OG10 Number and description of significant disputes with Yes Ensuring Sustainable Development 101 No local communities and indigenous peoples in the Social Area – Resolution of Conflicts and Disputes with Local Communities in the Operating Regions G4-OG11 Number of sites that have been decommissioned No No and sites that are in the process of being decommissioned Aspect: Anti-corruption G4-SO3 Total number and percentage of operations No No assessed for risks related to corruption and the significant risks identified G4-SO4 Communication and training on anti-corruption Yes All the Company’s employees have No policies and procedures been trained on anti-corruption policies and procedures. We conduct regular training of employees in anti-corruption policies and procedures. Each new employee undergoes mandatory training in anti-corruption policies and procedures. G4-SO5 Confirmed incidents of corruption and actions Yes No incidents of corruption detected No taken during the reporting period. G4-SO6 Total value of political contributions by country and Yes We do not participate in projects No recipient/beneficiary that can affect the decision-making process of government and local authorities with regard to the Company’s operation and do not make political contributions. Aspect: Anti-competitive Behavior G4-SO7 Total number of legal actions for anti-competitive Yes Ensuring Sustainable Development 102 No behavior, anti-trust, and monopoly practices and in the Social Area – Statutory their outcomes Compliance Aspect: Compliance G4-SO8 Monetary value of significant fines and total Yes Ensuring Sustainable Development 102 No number of non-monetary sanctions for non- in the Social Area – Statutory compliance with laws and regulations Compliance

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Section (or disclosure made in the External Indicator Page table) assurance

Aspect: Emergency Preparedness Yes Ensuring Sustainable Development 92 No in the Social Area – Interaction with the Local Agencies and Divisions of EMERCOM of Russia in Emergencies

Subcategory: Product Responsibility

Aspect: Fossil Fuel Substitutes G4-OG14 Volume of biofuels produced and purchased Yes The Company does not produce No meeting sustainability criteria and/or purchase the considerable volumes of biofuels meeting sustainability criteria.

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G4-3 G4-5 CONTACT DETAILS G4-7 G4-31

Full legal name in the English Registered in the Russian Federation Contact person for questions language: Public Joint Stock in the federal city of Moscow. regarding the Sustainable Company Transneft. Location: Russia, Moscow Development Report: Andrey Gusenkov (telephone: Abbreviated legal name in the Address: 57 Bolshaya Polyanka Street, +7 (499) 799-88-11; email: English language: Transneft. Moscow, 119180. [email protected])

The previous name in the English Telephone: +7 (495) 950-81-78. language: Oil Transporting Joint- Stock Company Transneft (OJSC Fax: +7 (495) 950-89-00. Transneft). The decision to change the name of the Company was Website: http://www.transneft.ru. made on June 30, 2016 when approving the new version of the Email: [email protected]. Articles of Association (Order of the Federal Agency for State Property Management No. 520-r), the entry into the Unified State Register of Legal Entities was made on July 21, 2016.

Transneft was registered by the Moscow Registration Chamber on August 26, 1993 under No. 026.800 (Certificate of state registration series LA No. 009851). Information on the state registration of Transneft was entered into the Unified State Register of Legal Entities by the Department of the Ministry for Taxes and Levies of the Russian Federation for Moscow on July 24, 2002 under primary state registration number (OGRN) 1027700049486 (certificate of making an entry in the Unified State Register of Legal Entities on the legal entity registered before July 1, 2002, Series 77 No. 007893052).

118 TRANSNEFT ENSURING SUSTAINABLE DEVELOPMENT IN ENSURING SUSTAINABLE ENSURING SUSTAINABLE DEVELOPMENT THE SPHERE OF ENVIRONMENTAL PROTECTION DEVELOPMENT IN THE HR AREA IN THE SOCIAL AREA APPENDIX

NOTES

Sustainable Development Report for 2016 119 ENSURING SUSTAINABLE ECONOMIC INTRODUCTION ABOUT THE TRANSNEFT GROUP STAKEHOLDER ENGAGEMENT DEVELOPMENT

NOTES

120 TRANSNEFT www.transneft.ru