Focusing on the business

Eurasia Drilling Company Limited Annual Report 2014 How to use this report

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Eurasia Drilling Company 01 Annual Report 2014 Strategic report Focusing on the business

Eurasia Drilling Company is the largest Contents provider of onshore drilling services Strategic report Corporate governance 03 Business at a glance 36 Board of Directors in Russia and the CIS, and the only 03 Activity overview 39 Corporate governance report independent Russian offshore drilling 04 Russian market overview – 45 Statement of Directors’ contractor. Activity overview – 03 onshore responsibilities in respect 05 Onshore rig fleet of the Annual Report and 06 Offshore prospects the financial statements Our clear vision and strong focus on what 08 Management philosophy 46 Directors’ report 09 Company history 49 Remuneration report we do best have consistently resulted in 10 2014 operational highlights superior returns for our shareholders and 11 2014 financial highlights Financials maximum value for our customers. 12 Chairman’s statement 52 Auditors’ report Management philosophy – 07 13 CEO’s strategic review 53 Consolidated balance sheets 14 Key strategic focus 54 Consolidated statements With industry-leading growth since our 15 A proven business model of comprehensive income inception, we have unrivalled market 16 Chief Executive’s strategic 55 Consolidated statements review of stockholders’ equity penetration in Russia and growth 17 Management’s discussion and 56 Consolidated statements ambitions on a global scale. analysis of EDC’s financial of cash flows condition and results of operations 57 Notes to the consolidated Key strategic focus – 13 34 Corporate responsibility financial statements

Information 70 Corporate information

A proven business model – 14

Eurasia Drilling Company 02 Annual Report 2014 Strategic report Business at a glance Activity overview

Our total fleet of 684 rigs including onshore Where we operate Our assets drilling, workover and sidetracking rigs and offshore jack-up rigs enabled our highly The core area of our land operations is Russia. However, we have EDC provides onshore integrated well construction services, professional, results-oriented 21,850 personnel made our first international investment, establishing a presence in workover and sidetracking services. The Company also provides Kurdistan, northern Iraq. Our offshore business is concentrated in offshore drilling services in the Caspian Sea and is the largest to deliver over to 1,800 wells to our customers the Russian, Kazakh and Turkmen waters of the Caspian Sea, where provider of such services in Russia. in 2014. we have a dominant position in the jack-up market operating three of the four active jack-up rigs. Operational headquarters In Russia, the world’s second-largest oil Regional/branch office producer, every third well is drilled by EDC. Support base

Operational headquarters Russia Regional/branch office Support base Onshore assets Offshore assets Usinsk Our total onshore land drilling EDC operates three jack-up rigs rig count is 261 – the largest fleet in the Caspian Sea and a fourth in the eastern hemisphere. Our jack-up was commissioned at Russia Kogalym Land drilling and sidetracking rigs 261 rigs are located in virtually every the end of 2014. The Company Nizhnevartovsk significant oil and gas basin of is a leader in the Caspian jack-up Usinsk Urai Polazna Russia. Our rigs are capable of market where we operate under Nefteyugansk drilling a wide range of oil and ‘zero discharge’ to protect the Workover rigs 419 Kogalym gas wells. environment. Nizhnevartovsk Moscow Urai Kaliningrad Polazna Samara Nefteyugansk Offshore rigs Zhirnovsk 4 Moscow Kaliningrad Samara Astrakhan Kazakhstan

Zhirnovsk Operational headquarters Aktau 1 Kazakhstan Uzbekistan Astrakhan Workover assets Sidetracking Aktau Turkmenistan These rigs are designed primarily We also own and operate the Uzbekistan Regional branches 12 to maintain, repair or enhance largest fleet of mobile drilling Ashgabat Turkmenistan production from an existing well rigs in Russia, with chassis/ Iraq through various means. truck-mounted rigs suitable Ashgabat for sidetracking and off-pad Support bases Iraq 14 in-fill drilling.

Eurasia Drilling Company Strategic report 03 Annual Report 2014 Business at a glance Russian market overview – onshore

The Russian economy is highly dependent Russian oil industry dynamics Russian drilling market on the oil and gas industry, with more than • According to Russian Federation Statistics Service, Russia’s • Russian drilling volumes, based on metres drilled, increased 48% of state revenues delivered directly oil production amounted to approximately 10.5 billion bpd in at a compound annual growth rate (CAGR) of approximately from hydrocarbon production (according 2014, an increase of 0.6% over 2013, making Russia the 5% between 2007 and 2014, and a similar CAGR is world’s third-largest oil producer. estimated by commentators in the coming years. Horizontal to Renergyco). metres drilled grew by a CAGR of 21% over the same period. • Drilling volumes in Western Siberia will dominate the drilling Provision of onshore drilling services to oil and market for many years to come, but the growth rate in drilling gas companies in Russia is our primary business will be even higher in greenfield areas. focus. The Russian oilfield services market, • As drilling depths rise, the marginal cost of drilling increases among the largest in the world, has proven non-linearly (everything else being equal), pushing up the resilient throughout the economic cycle. overall cost faster than the increase in metres. In addition exploration and horizontal drilling, which are inherently more expensive than development drilling in brownfield areas, are forecasted to increase over the next few years. • The volume of horizontal metres drilled in Russia grew +12% in 2014 (YoY). It is possible growth could be faster in later years if recent initiatives to drill pilot horizontal shale wells in Russia yield expected results.

Russia’s crude oil production and development drilling Russian onshore market by metres drilled (millions metres)

mbd Metres (millions) 2020F 2019F 11.0 40 2018F 10.0 35 2017F 2016F 9.0 30 2015F 8.0 25 2014 7.0 20 2013 2012 6.0 15 2011 5.0 10 2010 2009 4.0 5 2008 3.0 0 2007 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 1990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014 ■ Crude oil production (million barrels per day (mbd), left) ■ Western Siberia ■ Volga-Urals ■ Eastern Siberia ■ Development drilling (million metres, right) ■ Timan-Pechoras ■ Others

Source: Russian Upstream and Oilfield Services Industry 2015 by REnergyCo

Eurasia Drilling Company Strategic report 04 Annual Report 2014 Business at a glance Onshore rig fleet EDC owns a market-leading onshore drilling fleet in Russia

We continuously invest in our rig fleet, expanding EDC land drilling rig fleet EDC rigs by age YOUNGEST and upgrading in order to deliver efficient, LARGEST high‑quality services to our customers and • EDC’s rig fleet is one of the most modern in Russia. It has an FLEET IN 44% RUSSIA provide them with advanced solutions to lower average life of approximately 14 years, relative to an average 26% ■ <5y their total cost per barrel produced. life of 16 years for the Russian fleet in total. ■ 5-10y ■ • We also own and operate the largest fleet of mobile drilling 10-15y EDC ■ 15-20y rigs in Russia with 49 chassis/truck-mounted rigs suitable ■ >20y for sidetracking and off-pad in-fill drilling. 16% • Over two-thirds of our drilling and sidetrack rigs are powered by electricity and more than half our rigs are configured for 7% 7% pad drilling. • Around a quarter of our rigs are heavy (>320 tonnes); Source: Company data suitable for drilling complex, deep and horizontal wells.

EDC rig fleet by type

EDC rig fleet by type Type Draw works Total % of total

Mobile Mechanical 35 14% Electric 14 5% All types 49 19%

Stationary Mechanical 46 17% 0 – Electric 2 1%

1,000 – All types 48 18%

2,000 – Pad/Cluster Mechanical – – 2,000m 2,500m Electric 151 63% 3,000 – 3,000m 8% 15% All types 164 63% 100t-125t 160t-175t 48% 4,000m 4,000 – 5,000m 200t-225t 3% 6,000m 250t-270t 22% Total Mechanical 81 31% 5,000 – 320t-400t 4% Electric 180 69%

Maximum depth in metres 450t All types 261 100.0% 6,000 –

Eurasia Drilling Company Strategic report 05 Annual Report 2014 Business at a glance Offshore prospects Quality assets in a tight market

We are the largest independent Russian EDC assets offshore drilling contractor. We operate the largest jack-up drilling rig fleet in the Caspian ASTRA (BMC-H jack-up rig) ASTRA Sea. We own four out of five jack-ups MERCURY • 46 new wells and one workover to date operating in the market. • Operates in Russian and Kazakh sectors of the Caspian Sea 1 • Capable of drilling in waters with depth of up to 45m (150ft) 2 Our rigs have been specifically designed LSP-1 3 SATURN (Keppel Fells CS Mod V jack-up rig) • 38 new wells and 18 workovers to date to meet strict ‘zero discharge’ environmental 4 protection requirements. • Operates in Turkmen waters of the Caspian Sea 5 • Capable of drilling in waters with depth of up to 107m (350ft) 1 STATOIL Exploration Kazakhstan NEPTUNE (LeTourneau Super E jack-up rig) • 2 new wells drilled to date (inaugural well in February 2014) 2 NCOC (Exxon) Russia • Operates in Turkmen and Russian waters of the Caspian Sea Exploration 6 • Capable of drilling in waters with depth of up to 107m (350ft) 3 CMOC (Shell) Exploration & Appraisal MERCURY (LeTourneau Super E jack-up rig) (+ future development) 7 • Second newbuild, commissioned the end of 2014 4 CNPC • Mobilised to Turkmen waters in 2015 Exploration • Capable of drilling in waters with depth of up to 107m (350ft) 5 LUKOIL Exploration, Appraisal & Development with jack-ups SATURN EDC is also a drilling contractor on LSP-1 platform: Azerbaijan • Since 2009, EDC has provided drilling on the LSP-1 platform 6 CONOCO/MUBADALA 8 Turkmenistan at LUKOIL’s Yuri Korchagin field platform Exploration 9 7 TOTAL 10 • 22 wells drilled to date on this platform mostly extended Exploration NEPTUNE reach wells 8 PETRONAS Production Caspian Sea jack-up market

9 DRAGON The Caspian Sea accounts for approximately % of the world’s Production Iran 3 (15-year multi-rig development) oil reserves. Forecasts are that, assuming sufficient rigs are available, the number of wells will increase by at least 39%, to 10 TURKMEN EXPLORATION (Chevron, Conoco, Total) 214 or more, by 2020.* In the medium term, the Caspian Sea will See page 06 for further information see significant further exploration development and production.

Source: The Economist, Company, BP Statistical Review of World Energy June 2012, Information Please® Database, © 2007 Pearson Education, Inc. *Source: Wood Mackenzie, September 2012 http://www.infoplease.com/ipa/A0779169.html

Eurasia Drilling Company Strategic report 06 Annual Report 2014 Business at a glance Offshore prospects continued

EDC’s jack-up rigs EDC’s platform drilling services

ASTRA SATURN LUKOIL’s LSP-1 Platform on Yuri Korchagin field

• EDC entered offshore business • Most discoveries in the Russia • SATURN jack-up rig was acquired • The rig achieved a major • Since spudding the first well we • EDC has been responsible as by acquiring ASTRA jack-up rig sector of the Caspian Sea were from Transocean in 2011 and milestone of working during drilled a total of 22 wells on this Drilling Contractor for the well in 2006 drilled by the ASTRA was the second jack-up rig in five years without the LTI platform, many of which are long construction and Completion EDC’s fleet reach, horizontal wells process • The longest reach well drilled to NEPTUNE MERCURY date is 8.4km.

• NEPTUNE is our first new-build • It was built on time and on budget • MERCURY is our second • The rig was commissioned on jack-up rig for our offshore and the rig is contracted on a new-build jack-up rig for our schedule and has a long-term operations in the Caspian Sea long-term basis offshore operations in the contract Caspian Sea

Eurasia Drilling Company 07 Annual Report 2014 Strategic report Business at a glance Management philosophy Extensive operational expertise and insightful strategic vision

Our management team has both extensive With approximately 21,850 staff, people are key to our business. operational experience and significant strategic We have long recognised that they are our most important asset. Our field crews and support teams are led by managers and vision. This combination of skillsets enabled us experts who collaborate with our customers to push the boundaries People of value-added technology and find drilling solutions that deliver to deliver strong operational and financial results. With approximately 21,850 staff, people are key increased returns for our customers. As a result we are able to deliver to our business. We have long recognised that The fundamental prospects for our business continue to expand. the highest standards of innovation and service, as our customers they are our most important asset. We are well placed to leverage our core strengths to benefit from expect. Every day, we use our corporate know-how in procurement, growth opportunities: in Russian domestic markets, as every effort logistics, rig moving, repair and maintenance, geology, drilling is made to preserve and increase production levels; in Iraq where technology and techniques to construct and complete wells for our Exploration & Production (E&P) companies are keen to develop a customers. We are also deploying industry-leading horizontal drilling large portfolio of oilfields; and in the Caspian Sea where there is a technology and delivering the most modern and efficient jack-up rigs large backlog of exploration and development drilling plans. operating in the Caspian Sea. Talent To be ready for growth, we continue to Our leadership team is committed to supporting this growth, through We measure leadership success against the five objectives we set concentrate on the processes and systems our organisational strength, our superior operational rig crews and in 2007: organic growth and efficiency improvement, selective needed to ensure we attract the best talent. support teams, and the development of talented, trained and expansion into closely related services, secure access to land rig motivated people across all levels of our business. manufacturing capacity, further growth of our customer base in Russia and Iraq, and developing our offshore drilling business. Our ability to attract and retain the most talented individuals in the The leadership team has made good progress against all of industry is one of our key competitive advantages and a necessary these objectives. Since our IPO in 2007 our market share has Safety condition for our plans to develop the business over the longer term. increased from 20% to 29% in 2013, while EBITDA has grown from The health, safety and security of everyone We are committed to further strengthening our team by working US $314 million to US $940 million in 2013. Revenues increased from who works for us are essential to the success to recruit, retain and motivate the best people in the industry. US $1.5 billion to US $3.5 billion in 2013. In 2014, due to a more of our business. This includes embedding innovative incentive and training challenging market due to sanctions, client mix change, depreciating programmes across our operations. Ruble & lower oil price, while our revenue (-14.5%) and market share (-7%) declined we increased EDITDA to 28% (+1%). Our commitment to high levels of safety is embedded into all elements of our operations. Lost time incidents have historically been below the International Association of Drilling Contractors average. This safety culture is a core principle for us, and clear leadership in this area will enable us to make further progress towards our goal of being an incident-free business.

Eurasia Drilling Company Strategic report 08 Annual Report 2014 Business at a glance Company history

Through our history, EDC’s May 1995 November 2009 April 2012 impressive growth has been Formation of OAO LUKOIL-Burenie, LUKOIL’s Operations began on LUKOIL’s Yuri Korchagin Contracted Lamprell to build fourth jack-up drilling achieved primarily by organic in-house drilling division platform in the Caspian Sea rig, the MERCURY, for the Caspian Sea means; more recently it has been supported by strategic acquisitions. March 1996 July 2012 Development of LUKOIL-Burenie as a drilling Started operations in Iraq subsidiary of LUKOIL

EDC September 2012 December 2004 FORMED Signed a multi-year contract extension with EDC entered the onshore drilling December 2009 PETRONAS for drilling offshore in Turkmenistan services market by acquiring LUKOIL-Burenie Further expanded workover; acquired two Western Siberia businesses from LUKOIL including 163 rigs April 2013 December 2006 Secured new three-year framework agreement for Entered the offshore drilling services market by March 2010 onshore drilling and completion of wells for LUKOIL acquiring the jack-up rig ASTRA located in the Commissioned self-built high-spec rig Caspian Sea from LUKOIL in Kaliningrad; 450 mt YERMAK October 2013 Awarded three-year contract with Dragon Oil for July 2007 June 2010 offshore drilling in the Turkmen waters of the Start-up of onshore operations in Kazakhstan Workover expanded to Komi Republic; Caspian Sea acquired Meridian (21 rigs) November 2013 November 2010 Commissioned a new-build jack-up rig NEPTUNE Contracted Lamprell to construct LeTourneau Super 116E jack-up rig (early 2013 delivery) 2014 January 2011 Acquired Kaliningrad drilling business from LUKOIL, May 2014 November 2007 including four rigs Signed inaugural three-year framework EDC became a public company; IPO on agreement with GAZPROMNEFT London Stock Exchange February 2011 SATURN (formerly Trident 20) jack-up rig acquired June 2014 December 2007 from Transocean Signed framework agreement with BENTEC for construction of proprietary rigs Expanded workover business, acquiring 28 rigs from Schlumberger April 2011 December 2014 Exchanged assets with Schlumberger (SLB) and Commissioned new-build jackup MERCURY entered into a strategic alliance in Russia and CIS

Eurasia Drilling Company Strategic report 09 Annual Report 2014 Business at a glance 2014 operational highlights EDC generated record results in 2014

“We’ve had another successful year at EDC and Operational highlights I’m very pleased to report that we’ve managed to deliver again on our financial and operational • 5.669 million metres drilled onshore in 2014; 9.5% below • During 2014 the ASTRA jack-up rig operated for LUKOIL and targets. The year 2014 was our tenth anniversary 2013 (6.264 million metres) N Operating Company in the Russian and Kazakh waters as an independent drilling company and was • 1.285 million Horizontal metres drilled in 2014; flat with2013 of the Caspian Sea. , SATURN continued operations for marked by significant changes in the market, but up 1% as a share of total metres drilled Petronas Carigali and Neptune started drilling for Dragon oil, while our team performed strongly by consistently both in the Turkmen sector • Our market share was 27% based on metres drilled onshore focusing on our operational capabilities and in Russia during 2014, according to CDU-TEK data • Five wells were drilled and completed on LUKOIL’s improvements in efficiency.” Yuri Korchagin field platform in the Caspian Sea • The share of total drilling volumes of our largest customer, Dr Alexander Djaparidze LUKOIL, increased to 63% (57% in 2013); Gazpromneft • MERCURY was commissioned on time and budget in Chief Executive Officer significantly increased to22 % (12%) while Rosneft’s share December 2014 and will operate in Turkmenistan in the Caspian Sea Operational KPIs dropped as predicted to 7% (24% in 2013)

Lost Time Incident Rate EDC metres drilled (millions)/market share (%) Metres per crew per day Rigs per crew

0.6 7 35 115 1.8 0.5 6 30 105 1.6 0.4 5 25 4 20 95 0.3 1.4 3 15 85 0.2 2 10 1.2 0.1 1 5 75 0 0 0 65 1.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

EDC IADC (global) EDC metres drilled (left) EDC market share (right) Metres/drill crew/day Rigs/rig crew

Source: EDC HSE statistics Source: EDC operational statistics data Source: EDC operations data (BoD) Safety Operations Metres per crew per day Rigs per crew Lost Time Incident Rate (LTIR): This is an industry- Market share: Since official statistics began on We use this as an internal metric to monitor We use this metric to monitor the utilisation of our wide measure of personnel accidents. Every time metres drilled per month and by operator, we crew efficiency and process improvement trends. asset base. All rigs need to be active and returning an employee is involved in an incident or accident monitor our market share on the basis of metres The metric is also a function of the activity mix, revenue to the Company; similarly a rig crew needs that results in medical attention that prevents him or drilled versus total market. The industry captures such as volumes of development, exploration to be working. Due to the difficult logistics of her from returning to work for one day or more is exploration, development and horizontal metres and increasing slower horizontal drilling. In 2014 moving rigs when winter ice roads are available thus logged as an LTI. We report under International drilled each month. We monitor our exploration, efficiency continued to decline from the peak it is common for rigs not to have full-time crews Association of Drilling Contractors (IADC) so we can development, sidetracking and horizontal metres of 2012 as we saw a decrease in total metres assigned and working. More crews than rigs in benchmark ourselves against peers worldwide. drilled and can thus track our share of Russian drilled and a continuing growth in horizontal 2014 was due to weather shut down and significant Under the IADC rules our LTIR per 200,000 drilling activity as a whole and our share of each metres (22% YoY). rig moving activity. man-hours worked was 0.18 versus worldwide of our customers’ drilling activity. average of 0.23 in 2014.

Eurasia Drilling Company Strategic report 10 Annual Report 2014 Business at a glance 2014 financial highlights EDC generated strong results in a challenging environment during 2014

“We’ve reported another strong set of results Financial highlights KPIs despite the challenging market environment, high geopolitical tensions, declining oil prices • Top-line revenue down 14.5% to US $2,975 million and the weakening Ruble. Our revenues, (2013: US $3,488 million) Revenue and EBITDA adjusted EBITDA and net income in US Dollar • Adjusted EBITDA down 11% to US $940 million US $ million % terms declined mostly because of Ruble (2012: US $790 million) 4,000 30 devaluation.” • Adjusted EBITDA margin up to 28.0% (2013: 26.9%) 3,500 25 3,000 Richard Anderson • Net income down 2.8% to US $420 million 2,500 20 Chief Financial Officer (2013: US $432 million) 2,000 15 1,500 10 • Net income margin up to 14.1% (2013: 12.4%) 1,000 500 5 • Capital expenditure US $530 million (2013: US $508 million) 0 0 Revenues • Net debt as of 31 December 2014 US $792 million 2006 2007 2008 2009 2010 2011 2012 2013 2014 (31 December 2013: US $337 million) Revenue (US $ million, left) EBITDA (%, right) • Cash flow from operations a record US $641 million -14.5% (2013: US $751 million) US $2,975 million (2013: US $3,488 million) • In April 2013 the Company placed its debut Eurobond, EPS (US $) due in , for US $ million with a coupon of 2020 600 US $ . % per annum 4 875 3.00 EBITDA margin • Dividends declared for the year ended 31 December 2014 2.50 were US $1.00 per share (2013: US $0.92 per share) 2.00 +1% • Earnings per share of $2.89 versus $2.94 in prior year (2013) 1.50 1.00 28% (2013: 27%) 0.50 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 Net income margin +1.7% 14.1% (2013: 12.4%)

Eurasia Drilling Company Strategic report 11 Annual Report 2014 Strategic report Chairman’s statement

• Our EBITDA decreased by 11% to US $835 million while EBITDA return of Bashneft shares to government, the devaluation of the Ruble margin strengthened to 28%, a new record for the Company. and the 50% reduction in oil price. We believe that the underlying • Our net income decreased by 2.8% to US $420 million. fundamentals driving the drilling & workover business remain robust • Our dividend increased by 8.7% to US $1.00 per share and the Board and the management team remained focused on maintaining the strong base of prudence, governance and responsibility We invested US $530 million in our onshore and offshore drilling that is at the heart of EDC. This was confirmed by our delivery of strong assets, further strengthening EDC’s market-leading drilling fleet and consistent revenue growth in Rubles, EBITDA margin expansion by onshore in Russia and offshore in the Caspian Sea. Our fleet has an 1% and robust returns on capital employed in 2014. average life of approximately 14 years and can drill to an average depth of 3,500 metres, relative to an industry average life of 16 years On the safety front we are delighted to report that the Company’s and average depth of 3,100 metres for the Russian fleet in total. Total Reported Incident Rate for 2014 was once again lower than that All this was done while keeping our balance sheet conservatively of the industry as a whole. geared (with a net debt to EBITDA of 0.95x at year-end driven mainly by weakening Ruble considerations) and maintaining a high credit We announced in January 2015, a proposed Plan of Merger, whereby rating from our credit rating agencies (BB+ with stable outlook from Schlumberger will take a 45.65% equity position in EDC and we will S&P and BB with positive outlook from Fitch). delist the GDRs from the London Stock Exchange for a consideration of US $22 per share. This Plan of Merger was subject to extensive Lord Clanwilliam Key achievements in the past 12 months have been the inaugural due diligence in December 2014 and January 2015, including a Chairman long-term framework agreements with GAZPROMNEFT, and the comprehensive review by a Special Committee of non-executive signing of an agreement with BENTEC for rig construction at our directors which I chaired. The Special Committee’s analysis “In 2014 EDC demonstrated JV facility in Kaliningrad. unanimously supported the Plan of Merger and it was approved by its leadership position in majority vote at an extraordinary general meeting on 15 February Our success in increasing profitability on a sustainable basis owes 2015. In February 2015, Schlumberger fully complied with a request the Russian drilling market.” as much to improved productivity & personnel training as it does to by the Russian Federal Anti-monopolies Services (FAS) for detailed delivering new technology and revenue growth. We commissioned two information on the Plan of Merger. EDC and Schlumberger continue to In 2014 we demonstrated our leadership position in the Russian state-of-the-art drilling simulators in two of our training centres in 2014. cooperate with FAS and the Government Commission on Monitoring drilling industry. Despite a year challenged by a significant client We continue our rig upgrade plan with the delivery of 11 new rigs Foreign Investment, and we are currently waiting for a final written mix change, we achieved a market share of 27% in the onshore equipped with the latest technology needed to address the growing confirmation in regard to the transaction before closing the deal. metres drilled, just 2% below 2013. We sustained our dominant share of horizontal and complex wells. Although our crew productivity position in the Caspian Sea offshore, and strengthened this by the KPI declined by 5.5% in terms of metres per crew per day, when As in prior years I wish to thank our Board for its guidance and commissioning of a fourth jack-up rig in December 2014. We were adjusted for the 10% decrease in total metres drilled, the 22% increase considerable input and their valued contributions over the year. I wish able to leverage the prior year’s centralisation of our repair and of the much slower horizontal metres, and the 25% increase in rig to also thank our management for its dedication and long hours, our maintenance and rig-move / rig-up teams into focused divisions, moves, we calculate our net overall productivity to be up about 5%. employees for their hard work and attention to detail in successful when we demobilised and redeployed 24 rigs between our second service delivery, and our vendors, clients and shareholders for their and third largest customers during 2014. Clearly our share price (EDCL.IL) had a very volatile year. The high was support. As ever, I remain proud to be associated with such a fine US $45 per Global Depositary Receipt (GDR) in January 2014 and the Company as EDC. Against the backdrop of high geopolitical tensions, declining oil price low was US $11 on 16 December 2014. The stock price was under and a weakening Ruble (by an average of -17% YOY), we delivered pressure all year, starting with investor’s concerns over the reduction of Lord Clanwilliam strong results: our activity with the largest oil company over pricing, then by concerns Chairman • Our revenue decreased by 14.5% to US $2.9 billion. over the ongoing crisis in Ukraine, the oil & gas sector sanctions, the 1 July 2015

Eurasia Drilling Company Strategic report 12 Annual Report 2014 CEO’s strategic review Our strategy and business model

We implement our business model and For our operations in the Caspian Sea, our services are provided strategy through targeted investment in on a dayrate basis, which is the global standard for offshore contract drilling and workover. As the Caspian Sea is land-locked, drilling people, equipment and processes to maximise units (jack-ups and semi-submersibles) have been built/assembled our customers’ production through delivery in situ as it is not possible to ship an already constructed mobile of fully constructed or repaired wells. drilling unit to the Caspian Sea through the narrow canal/river system. We purchased two of the three jack-ups active in the Caspian from Our core business activity is well established in all mature basins LUKOIL (ASTRA) and Transocean (SATURN) to enter this market. across Russia, where we project-manage the drilling and sidetracking We then ordered two new jack-ups speculatively, and both were of development wells, the majority on a turnkey basis. We also provide awarded long-term contracts in the Caspian Sea. The NEPTUNE workover rig services for the repair and maintenance of wells. Drilling has been commissioned and is drilling for Dragon Oil in Turkmen and completion of exploration or more complex wells are provided waters, while the MERCURY was delivered on schedule in November on a dayrate basis, as are our workover and offshore services. 2014 and was commissioned by year end. We will operate four of the five available jackup rigs in the Caspian Sea starting in2015 . For turnkey activity we calculate the total well construction cost We also provide ‘life of development drilling’ services on LUKOIL’s based on knowledge and experience and convert to a Ruble per Yuri Korchagin platform in the Russian waters. Dr Alexander Djaparidze metre rate in order to invoice the customer for metres drilled per Chief Executive Officer month. Under this commercial model, improvements in rig utilisation (shorter rig moves, reduction of non-productive time and increases in drilling efficiency) result in faster well delivery and revenue and “At EDC, we provide our EBITDA growth.

customers with cost-effective Our onshore dayrate contracts protect us against longer than planned drilling, sidetracking and drilling or completion due to unknown geology (exploration wells), complex wells and completions (such as shale oil development) workover services executed by sharing the risk with our customers. Working closely with our by motivated and well-trained customers and applying the knowledge and experience we have gained for turnkey operations enables us to deliver such unknown personnel using applicable and complex wells at a market-leading pace. This provides us technologies with due with a significant advantage when competing for business in our consideration for personnel targeted markets. and environmental safety.” $2 billion We have invested over US $2 billion in rigs, equipment and personnel training since our IPO in 2007.

Eurasia Drilling Company Strategic report 13 Annual Report 2014 CEO’s strategic review Key strategic focus Update on achievements, risks and actions

Achievements/Changes 2014 Risks Actions for 2015

• Market share (metres) 27% (market declined -5%) • Oil price remains low for longer ✓✓ Accelerate retirement of older rigs • Drilling rigs 261 (+2%), crews -6% YoY • Ukraine crisis – new energy sector ✓✓ Reduce Capex in line with activity • Drilled 5.6 million metres -10% YoY sanctions ✓✓ Target new customers Growth (organic • Drilled 1.3 million horizontal metres flat YoY • Low oil price & security impacts in Iraq 1 & inorganic)

• Grew GPN metres +28% YoY to 12% of total • Customer demand for large discount ✓✓ Monitor Rosneft opportunities • Lukoil share 63% (+10% YoY) • Market share decline (due to Rosneft) ✓✓ Mobilise six rigs for Bashneft • Rosneft share 7% (24% in 2013) • Lukoil share of activity to grow ✓✓ Grow share of smaller E&P companies 2 Diversify client base • Others share 8% flat YoY

• Commissioned Mercury new build jackup • 2 jackups to enter Caspian market ✓✓ Neptune to continue with Dragon • Low oil price impacts on activity ✓✓ Mercury to start mid year 3 Expand offshore drilling

• Workover activity grew 10% YoY • Lukoil sidetracking declining ✓✓ Start workover for Bashneft • Sidetracking activity declined -9% YoY Develop and improve workover and 4 sidetracking

• Rig upgrade: 11 new land rigs, upgraded eight rigs • Ruble depreciation impacts ✓✓ Delivery of 14 new rigs • Signed rig building JV w’Bentec in Kaliningrad • Technology sanction escalation risks Broaden technology • Commissioned two drilling simulators for training 5 platform

Eurasia Drilling Company Strategic report 14 Annual Report 2014 CEO’s strategic review A proven business model

COMPETITIVE COMPETITIVE ADVANTAGE ADVANTAGE Our competitive Invest in our assets and Constantly strive to improve Anticipate structural changes in the industry our people efficiency and safety Sustaining our leadership position owes as much advantage We believe that the key to our differentiation is the EDC has long experience of driving operational to the ability of our management team to anticipate Having established a leadership quality of our assets and the quality of our people. efficiencies, which has contributed to doubling changes in market dynamics as it does to the position in the Russian drilling We have invested heavily in our rig fleet (nearly 50% EBITDA margins since our incorporation. We have execution of our stated strategy. We anticipated that our fleet is now less than10 years old) and in our rig increased metres drilled by crew per day by 15% demand for horizontal drilling would grow strongly market over the past ten years, crews (in 2014 we installed two drilling simulators for since our IPO in 2007 (when slower horizontal and so we have strengthened our ability to deliver our priority is to sustain and training) and we believe we have the most competitive metres drilled grew by 460% over the same period). complex well solutions by investing in our rig fleet, extend this leadership position remuneration structure, ensuring our people are We have one of the best health and safety records training our crews and forging a strategic alliance in the future. incentivised to deliver best performance. in the industry (benchmarked against IADC). with Schlumberger. Focus on our core strengths Become our customers’ partner Our differentiated proposition We seek to be the market leader in our core One of the unique characteristics of the Russian oil is built around our scale, our competences of drilling and workover. In 2011, industry, and essentially the biggest barrier to entry, Commitment to efficient execution and our we sold the bulk of our drilling service assets to is that oil companies often have virtual monopolies strong shareholder Schlumberger as part of a larger transaction in which in certain brownfield producing regions. There partnership with our we bought 19 existing drilling rigs with 17 drilling are legacy relationships between oil and service returns customers, and we will crews, 34 workover rigs with 25 related crews, and companies in these regions and retaining these Our leadership position, seek to maintain this 23 sidetracking rigs with 20 related crews. requires a partnership approach. Our focus on substantial growth prospects, differentiation as we developing longer-term framework agreements with all our customers will give us greater certainty and focus on improving efficiency pursue the following: visibility of cash flows, allowing us to make the and prudent financial investments that our critical to our long-term growth. management will allow us to continue to deliver strong returns to shareholders. Key strengths Leadership • Greenfield – declining prospectivity in Russia’s Higher value for our customers We have built a market-leading position in one of the mature brownfield regions is spurring exploration The key to our success has been our focus on EDC (LSE: EDCL) is the largest world’s leading oilfield service markets. We have and development in the more remote, more delivering the best solutions to our customers. We are committed to retaining a independent oilfield service achieved this by focusing on process and service challenging greenfield regions and these require strong balance sheet, allowing company in Russia, with a drilling innovation, by investing in our rig fleet and our people more advanced equipment and more complex We operate in an increasingly competitive market and us to safely navigate volatile and by concentrating on what we do best. solutions, for which our younger, heavier rig fleet we believe that investment in our rigs and our crews financial markets while giving us market share of 27% (end 2014). and expert rig crews are ideally suited. and development of partnerships with best-in-class We have quadrupled metres Secure fundamentals • Offshore – we have built a leadership position in the service providers has significantly enhanced the the flexibility to take advantage drilled and quintupled US dollar Our core market environment is less volatile Caspian Sea jack-up market, owning four of the five customer proposition. of opportunities that may arise revenues since 2005 and have than other major drilling markets globally, as the available jack-up rigs (at the end of 2014). We built to grow our business in a contractual model in Russia favours longer-term two new jack-ups; NEPTUNE was delivered in Efficiency value-accretive way. more than doubled EBITDA agreements with our key customers. 2013 and MERCURY delivered at the end of 2014. EDC has long experience of driving operational margins over the same period, We believe demand will continue for our high efficiencies, doubling EBITDA margins since our allowing us to grow US dollar net Growth specification rigs for the foreseeable future. formation. We have increased metres drilled per income by a factor of over 13 EDC currently enjoys multiple growth opportunities: • International – we see excellent opportunities to crew per day by over 40% since 2005 and have one • Core market – the maturity of Russia’s producing expand in the CIS and MENA regions, a market of the best health and safety records in the industry. times. This has been impacted provinces and the Russian government’s desire to with many parallels to Russia, chiefly via acquisition. We constantly strive for greater efficiency, seeking to by the weakening Ruble in 2014 at least maintain current oil production will require We have four rigs in northern Iraq, where potential improve rig utilisation, minimise downtime and lost as 90% of our revenue was ever more aggressive drilling and we believe this market is high but activity is currently curtailed due time injuries and we believe there is more to come. Ruble denominated. provides underlying market volume growth of to security & low oil price. up to 5% p.a. in our core onshore drilling market in Russia. With horizontal drilling growing by an Our investment case average of 15% per year. is predicated on the following six key factors:

Eurasia Drilling Company Strategic report 15 Annual Report 2014 CEO’s strategic review Chief Executive’s strategic review

Our financial and operational performance We believe that the long term outlook for our core onshore and partnership with Schlumberger over the last decade and cements surmounted new challenges in 2014, sustaining offshore drilling businesses remains robust. While onshore total drilling this relationship for the benefit of our customers for years to come. volume growth declined by 4% in 2014 as compared to 2013, there The dialog between companies started early December 2014 as our leadership in the drilling industry. was a significant growth of over 33% in the underlying horizontal Schlumberger & EDC recognised the opportunity to build on this metres drilled in Russia. While the oil price saw a significant drop relationship in one of the world’s most important oil & gas producing In 2014 we maintained our lead as the premier oil and gas drilling by year end, when coupled with the depreciating Ruble, Russia countries at a time when the equity market was no longer sustaining company in the eastern hemisphere. Our financial and operational continues to be one of the lowest cost producers of oil, beaten only EDC’s development though investment in our GDRs (EDCL.IL). On performance was strong in a market impacted by a significant change by Middle East countries. Furthermore, as the Russian economy has 15 February 2015, at an Extraordinary General Meeting, a majority in our client mix, high geopolitical tensions, technological and financial a high reliance on hydrocarbons for both for tax revenues and hard vote of shareholders approved the plan of merger which will pay a sanctions on Russia, declining oil price and a weakening Ruble. currency from exports, we expect the oil and gas sector will continue consideration of US $22 for each outstanding GDR, representing a to be supported by Government through tax adjustment and direct premium of 69% to EDCL.IL’s stock value at market close on the day Our management team performed well in 2014 and I am immensely financing from the National Funds. prior to announcement. Schlumberger and EDC have fully complied impressed by the way they responded to the challenging market with requests from the Russian Federal Anti-monopolies Services changes throughout the year. They focused on the fundamentals of The competitive landscape saw some changes in 2014, with a net (FAS) and the Government Commission on Monitoring Foreign the business, taking up the activity changes while continuing to deliver decline in the number of independent drillers. Rosneft purchased Investment in relation to the Plan of Merger and we will wait for a quality services to all customers in a safe and efficient manner. Orenberg Bureniye Company and Weatherford’s drilling rigs to final written confirmation from the authorities before closing the deal. increase their in-house drilling capacity to cover 50% to 60% of their To facilitate this delay we have extended the Long Stop Date for the Key achievements in the past 12 months have been the delivery drilling needs, while Bashneft spun off their in-house drilling division Plan or Merger until 30 September 2015. on time and on budget of the second new build jackup MERCURY, (now renamed Targin). As part of our strategy, we continue to increase the award of the first long-term framework agreements with our client base and will start drilling for Bashneft in 2015. I wish to thank our investors for their confidence in EDC over the last Gazpromneft and an agreement with BENTEC for the construction seven years and it is with regret that we plan to take the company of rigs in Kaliningrad. It looks like 2015 will be another challenging year due to low oil private under the Plan of Merger but I and the Board believe that it is price, continuing sanctions and weak Ruble, but the underlying necessary for our continued development and it is in the best interests In 2014 we achieved the following: fundamentals remain robust which in turn supports the drilling of our customers and shareholders. • increased our EBITDA margin to 28% despite drilling activity and our business. 10% less metres and with a 21% depreciation of the Ruble; Dr Alexander Djaparidze • signed the first ever three-year framework agreement with On 20 January 2015, after extensive due diligence, we announced Chief Executive Officer GAZPROMNEFT for drilling and sidetracking started in 2014; a plan of merger whereby Schlumberger, the largest oilfield services 1 July 2015 • increased by 60% our drilling activity for Gazpromneft to 22% company in the world, will take a 45.65% equity ownership in EDC of our total drilling; with an option to purchase the balance in three to five years after • commenced drilling operations with our new offshore jack-up closure. This was based on our successful strategic business drilling rig, NEPTUNE for Dragon Oil • commissioned the new MERCURY jack-up on time and on budget in December 2014; • signed a contract with BENTEC for the construction of drilling Further progress rigs in Kaliningrad. In 2013 we consolidated our lead as the premier oil and gas drilling company in the eastern hemisphere – our financial and operational performance grew further on the strong fundamentals of the markets where we operate.

Eurasia Drilling Company Strategic report 16 Annual Report 2014 Strategic report Management’s discussion and analysis of EDC’s financial condition and results of operations

The following report represents management’s For the year ended 31 December 2014, we had total revenue of Our business is currently organised into two discussion and analysis of EDC’s financial US $2,975 million, adjusted EBITDA of US $834 million and net main divisions and we had total revenue of: income of US $421 million, compared to total revenue of US $3,478 condition and results of operations for the million, adjusted EBITDA of US $940 million and net income of twelve month period ending 31 December 2014 US $432 million for the year ended 31 December 2013. and is intended to help our shareholders and other users of our financial statements better Our business is currently organised into two main divisions: onshore $2,754 million and offshore drilling services. For the year ended 31 December 2014, Total revenue from our onshore division. understand our operations and attendant we had total revenue of US $2,754 million from our onshore division financial results and current financial condition. and total revenue of US $221 million from our offshore division.

This information is provided as a supplement to, and should be read in For the year ended 31 December 2014, we had an estimated market conjunction with, our audited 2014 Consolidated Financial Statements share of approximately 27% of the onshore drilling services market in $221 million and the accompanying notes, prepared in accordance with US GAAP. Russia, as measured by the number of metres drilled, according to This discussion should not be considered all inclusive as it does not CDU-TEK. Our onshore fleet of257 land drilling and sidetracking rigs Total revenue from our offshore division. necessarily include all changes regarding general economic, political, is located in all major Russian oil and gas producing regions, including governmental and environmental events. As used in this report, Western Siberia, Volga-Urals and Timan-Pechora. In all these regions ‘Company’, ‘we,’ ‘us,’ ‘our,’ and ‘EDC’ means Eurasia Drilling Company we have well-established land support bases. We have expanded our Limited and, where the context requires, includes our subsidiaries. Russian onshore drilling business primarily organically since acquiring substantially all of LUKOIL’s onshore drilling assets in 2004. Since our This report contains forward-looking statements that involve known entry into the onshore drilling services market, we have transformed and unknown risks, uncertainties, and other factors which may cause the business from an in-house cost centre to a major independent our actual results, performance, or achievements to be materially oilfield service provider with sound finances and materially improved different from any future results, performance, or achievements operating efficiency. Our onshore drilling services include the expressed or implied by such forward-looking statements. construction of production, exploration and appraisal oil and gas and certain other types of wells, including vertical, deviated and horizontal Nature of operations wells, ranging from a depth of approximately 1,200 to more than We are the largest provider of onshore drilling services in Russia, as 6,400 metres. In addition, we provide a wide range of onshore measured by the number of metres drilled, according to REnergyCo. workover services. As of 31 December 2014 our total workover We also provide offshore drilling services in the Caspian Sea and are fleet consisted of419 workover rigs. the largest provider of such services in the sectors where we operate, based on the number of jack-up drilling rigs, according to Wood In April 2011, we entered into a strategic alliance in Russia and the Mackenzie. We offer our onshore integrated well construction CIS with Schlumberger, pursuant to which Schlumberger became services and workover services to local and international oil and gas our preferred supplier for certain drilling services for a five-year period. companies primarily in Russia and our offshore drilling services to The transaction also involved an asset swap where we acquired Russian and international oil and gas companies in the Russian, Schlumberger’s drilling, sidetracking and workover assets in Russia Kazakh and Turkmen sectors of the Caspian Sea. In addition, we and sold them certain of our non-core drilling services businesses provide onshore drilling services in Iraq. Our total land fleet consists of and assets to our services portfolio. The transaction positively 680 rigs consisting of 261 onshore drilling and sidetracking rigs and contributed to our operational and financial results. 419 workover rigs. Our offshore fleet consists of four jack-up rigs.

Eurasia Drilling Company Strategic report 17 Annual Report 2014 Strategic report Management’s discussion and analysis of EDC’s financial condition and results of operations continued

Our customers as of 31 December 2014 include a number of General overview Approximately 80% of Russia’s oil production is coming from mature major Russian and international oil and gas companies operating in Demand for drilling services depends on a variety of factors, including fields where the decline rates are significant. Compensating for output Russia, such as LUKOIL, GAZPROMNEFT, ROSNEFT, REPSOL, worldwide demand for oil and gas, the ability of OPEC to set and declines absorbs more than 80% of upstream oil and gas spending RUSVIETPETRO, TOMSKNEFT, TOMSKGAZPROM and others. maintain production levels and impact pricing, the level of production based on IEA estimates . More investments are required every year of non-OPEC countries, and the policies of various governments to combat natural decline rates in these fields to maintain production We entered the international drilling market outside the CIS for regarding exploration and development of their oil and gas reserves. levels. The shift towards more complex and higher cost drilling the first time in the second half of2012 . We acquired three land Our results of operations depend on the levels of activity in Russia techniques such as horizontal drilling is among these investments. drilling rigs from an existing drilling contractor in Iraq and late in 2012 and the countries of the Caspian Sea, and the prices of crude oil and added a fourth rig. Our customers have included international oil natural gas in Russia. To date most of our drilling activities have been Russia’s oil production continued to grow by approximately 1% and gas companies Afren, Gulf Keystone, HKN, Repsol, Marathon Oil in oil provinces rather than gas provinces (where far fewer wells are during 2014 as compared to the corresponding period of 2013. The and others. drilled). This business mix may slowly change over time if we obtain increase, as has been the case for the past several years, is driven by new clients whose activities are more heavily weighted to drilling the contribution from greenfields coming on stream in Eastern Siberia, For the year ended 31 December 2014, we were the largest offshore natural gas wells. Timan-Pechora, the Caspian, and Sakhalin. The output from mature drilling contractor operating in the jack-up market of the Russian, fields continues to decline but is significantly mitigated by infill Kazakh and Turkmen sectors of the Caspian Sea according to The oilfield services market in Russia is robust and it is arguably the horizontal drilling. Wood Mackenzie. By the end of 2014, in these sectors there were most stable land market of any size in the world. Back in 2009, four jack-up rigs operating and we owned three of them, namely the onshore drilling activity (as measured by wells or metres drilled) fell During the first half of 2014 the oil prices have been supportive, ASTRA, SATURN and NEPTUNE. We entered the offshore drilling only around 6%, as compared to 2008, which was substantially less remaining robust at more than US $100 per barrel, but declined business in 2006 by acquiring the ASTRA jack-up rig from LUKOIL. than the reductions in drilling activity experienced in the world’s other significantly later in the year. This coupled to sanctions on Russia Since 2009, we have also provided drilling services on LUKOIL’s large markets. Following the global recession, oil prices stabilised in causing material ruble devaluation. A weaker ruble negatively affects marine ice-resistant fixed platform LSP-1 on the Yuri Korchagin field 2010 and remained stable at historically high levels in 2011-2013, our reported results of operations. In addition, E&P companies in the Russian sector of the Caspian Sea. In 2011, we acquired our giving oil and gas companies confidence to increase their CAPEX continue to re-evaluate their spending so as to target higher drilling second jack-up rig, the SATURN, from Transocean. Our offshore budgets. Since 2009 up to 2013, the Russian drilling market has been efficiencies and caused one to increase their in-house drilling drilling services division constructs oil and gas exploration and steadily growing by 10% on average allowing the country to meet its capabilities. production wells in waters with depths of up to 107 metres. Our third oil production targets. jack-up rig, new-build NEPTUNE, was commissioned in November 2013 and commenced drilling at the beginning of 2014. In addition, During 2014 the total drilling volumes in Russia have been lower than our fourth new-build jack-up rig, MERCURY, was commissioned in the in 2013. This last occurred at the beginning of 2010 as a result of end of 2014. the economic crisis. The total drilling volumes were down 4.1% or 0.9 million metres. This decline in total metres drilled was mitigated by Our offshore customers in the Caspian Sea have included LUKOIL, a significant increase in horizontal drilling volumes which were up by Petronas Carigali, Dragon Oil, CMOC (a joint venture between Shell, 33% during 2014 compared to the corresponding period of 2013. KazMunayTeniz and the Oman Pearls Company Ltd), KNK and the Among E&P companies, GAZPROMNEFT, ROSNEFT, SLAVNEFT, N Operating Company (a joint venture between KazMunayGas, LUKOIL, and BASHNEFT accounted for the major increase in ConocoPhillips and Mubadala). horizontal drilling.

Eurasia Drilling Company Strategic report 18 Annual Report 2014 Strategic report Management’s discussion and analysis of EDC’s financial condition and results of operations continued

Operations review Our Russian onshore drilling volumes decreased by 9.5% compared The year ending 31 December 2014 was both challenging and to the volumes achieved during 2013 while the share of horizontal exciting for the business as we faced a number of issues including drilling increased to 23% in 2014 from 21% in 2013. The decrease lower oil prices, weaker ruble, political instability and changing mix in metres drilled is attributable to a number of factors including an 27% increased number of rig moves between customers with some over of services. Our market share onshore in Russia, very long-distances; higher contribution of horizontal and exploration based on metres drilled in 2014. Onshore business drilling which are inherently more time consuming; increase in average Our 2014 onshore operating results include: depth of the wells drilled, and unfavourable weather conditions. • Drilled 5.669 million total metres, 9.5% below metres drilled during All these factors led to lower metres drilled year-over-year and the corresponding period of 2013 (6.264 million metres); which was also in line with total Russian drilling market dynamics. • The share of horizontal metres drilled (of total) increased to 23% $2,975 million during 2014 compared to 21% during the same period of 2013; Lower total metres drilled were mitigated by the continued increase in • Exploration drilling volumes increased by 6.2% during 2014 the share of horizontal drilling volumes in our portfolio to 23% during Revenues decreased by 14.5% in 2014 compared to the corresponding period of 2013; 2014 from 21% during the corresponding period of 2013. On average versus US $3,300 million in 2013. • The share of our largest customer, LUKOIL, increased to 63% a horizontal well takes twice as long to drill than drilling a deviated of our total metres drilled during 2014, as compared to 57% well. We accounted for approximately 32% of the horizontal metres during 2013; drilled for LUKOIL, ROSNEFT and GAZPROMNEFT, estimated on the • The share of our second largest customer, GAZPROMNEFT, basis of CDU TEK data. increased to 22% of our total metres drilled during 2014, as compared to 12% during 2013; The Russian E&P market is fairly concentrated where 78% of all • The share of ROSNEFT decreased to 7% of our total metres the volumes are drilled by four large E&P companies, ROSNEFT, drilled during 2014, as compared to 24% during 2013; SURGUTNEFTEGAS, LUKOIL and GAZPROMNEFT. The leaders • Our market share was approximately 27% based on metres of decreased drilling activity among these E&P companies were drilled onshore in Russia during 2014; SURGUTNEFTEGAS (-17%) and ROSNEFT (-8%). We are not • Signed a long-term agreement with GAZPROMNEFT for well providing well construction to SURGUTNEFTEGAS, as the company construction and sidetracking services for a three year period; has its own drilling rig fleet that covers its drilling needs. Early in2014 • Signed a Framework Agreement with BENTEC for rig ROSNEFT, which used to be our second largest customer, decided manufacturing at the Company’s minority owned drilling rig to expand its own in-house fleet. To date, ROSNEFT acquired two production facility located in Kaliningrad; independent drilling companies, namely OOO Orenburg Drilling • Our rig moving crew count increased by 13.3% year-over-year; Company and eight companies involved in drilling operations in • Sidetracking activity decreased by 8.6% compared to the Russia and Venezuela from Weatherford International plc (transaction corresponding period of 2013 with 233 well sidetracks performed closed 1 August 2014). These transactions shrank the size of the during 2014. market available to independent competition. In recent years, LUKOIL, GAZPROM, GAZPROMNEFT, BASHNEFT, and TNK-BP (before the acquisition by ROSNEFT) sold their in-house drilling fleets.

Eurasia Drilling Company Strategic report 19 Annual Report 2014 Strategic report Management’s discussion and analysis of EDC’s financial condition and results of operations continued

Our customer mix continues to evolve given the changes described Our cooperation with GAZPROMNEFT continues to evolve as we The availability of rigs is one of the keys to being a successful drilling above. The share of ROSNEFT in our portfolio decreased to 7% of our were awarded our inaugural long-term Framework Agreement for well company. Our rig fleet as of31 December 2014 totalled 261 onshore total metres drilled during 2014, as compared to 24% during the construction and sidetracking operations. The Agreement covers a drilling and sidetracking rigs. The rig count was higher than that corresponding period of 2013. In EDC’s portfolio ROSNEFT’s drilling three-year period, beginning January 2014, and includes a pricing as of 31 December 2013 in the amount of 255 rigs as we put into volumes were down 72% as we relocated 25 rigs mostly to LUKOIL formula and minimum guaranteed number of active rigs for onshore operation more rigs than we have yet to retire. During 2014 we put and GAZPROMNEFT during 2014. Horizontal drilling volumes for drilling and sidetracking services in Russia. It’s our strategic priority into operation 11 onshore drilling rigs with capacity ranging from 200 this customer also decreased by 73.5% year-over-year. Most of the to diversify our customer base in Russia while building long-term to 450 tonnes and retired five stationary drilling rigs. We are expecting volumes that we drilled were in Western Siberia, which accounts for relationships with our clients. During 2014, metres drilled for the delivery of a total of 14 new modern rigs and retirement of up to the bulk of ROSNEFT’s total oil production. We expect to reallocate GAZPROMNEFT in our portfolio increased by 59% to 1.230 million 20 rigs in 2015. the remaining five drilling rigs from ROSNEFT’s fields to our other metres drilled compared to the corresponding period of 2013. customers during early 2015. As a consequence of this progress GAZPROMNEFT has become Our rigs are located in most major oil and gas provinces of Russia and our second largest customer. In addition, there was an increase in we continue to invest in modernisation of our rig fleet. Management Our cooperation with our main customer, LUKOIL, continues to be horizontal drilling activity of 97.9% year-over-year. Most of the growth believes that the effective age of our rig fleet is less than Russia’s average. strong as we operate under long-term Framework Agreements that comes from intensified drilling activity in Western Siberia and the As per management estimations, the average age of our rig fleet as govern minimum volume commitments and indicative pricing ranges. Volga-Urals regions. In 2012 we were awarded a drilling contract of 31 December 2014 was 14 years old with 57% of our rigs being less The current and third sequential three year Agreement (2013 to 2015) on the Novoportskoye field in the Yamalo-Nenetsk Region, one of than 10 years old. Besides new rig additions, our rig modernisation includes greater flexibility regarding fleet deployment and contract GAZPROMNEFT’s greenfield projects, where we continued to drill programme involves upgrade of the existing rigs that improves the structures. Pursuant to the new Agreement, depending on the during 2014 and moved two additional rigs to this field. Overall the average age of our fleet. During2014 we performed eight rig upgrades. complexity of the drilling, our services are provided either on a general share of GAZPROMNEFT in our drilling volumes increased to 22% contractor ‘turn-key’ basis or on a day rate basis. Completion services during 2014, compared to just 12% during 2013. In 2014 EDC Our land rigs are capable of drilling a wide range of oil and gas wells, which are a part of the well construction service that we provide, provided a sizable 44% of GAZPROMNEFT’s total drilling volumes in including vertical, deviated, horizontal, and extended-reach wellbores pursuant to the new framework agreement, are contracted separately, Russia, according to CDU TEK data. We are expanding collaboration up to 6,400 metres (21,000 feet) in total length. More than half of our given the increased complexity of such services. We drilled 3.563 in geographies of strategic importance to this customer. rigs are configured for pad drilling, the method that we believe will million metres for LUKOIL during 2014, a moderate 0.7% increase over continue to dominate future developments due to Russia’s geography. 2013. The majority of our drilling activity for LUKOIL, approximately During the 2014 our largest customers (LUKOIL, GAZPROMNEFT and 80% of total metres drilled, was done in Western Siberia, while there ROSNEFT) accounted for approximately 58% of Russia’s total drilling In Russia, as in the rest of the world, unexploited oil and gas was a slight decrease in metres drilled in this area compared to the volumes, based on CDU TEK. We also continue to work for smaller oil reserves increasingly occur in more challenging environments, both corresponding period of 2013. In 2014 we were awarded two new and gas companies such as Pechoraneft, Samaranafta, Rusvietpetro, geographically and geologically. The services market in Russia is drilling contracts on the Vinogradova and Imilorskoye fields in the Russneft and others. evolving toward higher technological content and advanced Khanty – Mansiysk Region, which are LUKOIL’s most prospective techniques. As technology applications advance, so do the costs fields in this area. The decrease in drilling activity in Western Siberia The 2014 was characterised by abnormally high rig moving activity. of bringing a barrel of hydrocarbons to market. To justify the higher during 2014 was offset by the significant growth in drilling volumes in It was driven by rig relocation from ROSNEFT’s fields and the start of costs, technologies must deliver greater efficiency and production Volga-Urals and Timan-Pechora. The moderate increase in total the new drilling projects such as LUKOIL’s Imilorskoye, Vinogradovo potential to the oil and gas producers. To satisfy this requirement, drilling volumes with LUKOIL was augmented by an 11.6% increase in and Paykihinskoe fields. The longest rig move we performed to date and to ensure the stability and further growth of oil production in horizontal drilling year-over-year. LUKOIL’s share in total metres drilled was a move of 2,200 km from Vankor field to Novoportovskoe field. Russia, we forecast an increasing requirement for new modern increased by six percentage points to 63% during 2014 compared During the first quarter of2014 our rig moving crew count increased rigs. We continue to deliver on our five year rig fleet upgrade and to the corresponding period of 2013. by 26% period-over-period and since most of rig relocations were modernisation plan, developed in 2010 and add new drilling rigs and finalised by May2014 , the rig moving crew then count decreased. Rig modernise some of the existing ones. The drilling rigs that we are moving crew count increased further in the fourth quarter of 2014 as ordering are produced by Russian and Chinese manufacturers at we started to move the rigs for 2015 drilling program’s locations. prices significantly lower than the peak prices experienced in 2008, and with considerably shorter lead times.

Eurasia Drilling Company Strategic report 20 Annual Report 2014 Strategic report Management’s discussion and analysis of EDC’s financial condition and results of operations continued

Our onshore workover and sidetracking operations continue to be an Our offshore operations remained strong during 2014. Our crews important part of our business. Our workover fleet as of31 December remained active on LUKOIL’s Yuri Korchagin field platform, drilling 2014 totalled 419 workover rigs, as compared to 427 rigs the previous three wells including one challenging extended reach development 5,668,979m year. The decrease is due to the retirements of older rigs. Growth (ERD) well and commencing drilling of another extended-reach 5,668,979 total metres drilled in 2014. in our total workover jobs performed during 2014 has been quite horizontal development well. ERD on Yuri Korchagin is expected steady with workover job count increasing 9.6%. Sidetracking job to continue. To date the longest ERD well drilled by us offshore on count decreased 8.6% due to increased mobile rig movement this field was8 .3 km. between projects. Our ASTRA jack-up, after a paid stand-by, was deployed in the 1,285,200m We commenced drilling operations in Iraq in June 2012 by acquiring Russian waters of the Caspian Sea drilling and testing an exploration three land drilling rigs from an existing drilling contractor and added a well for LUKOIL. During the middle of the year the rig moved to 1,285,200 horizontal metres drilled fourth rig in Iraq later in 2012. We manage our operations through two Kazakh waters of the Caspian Sea where an exploration well was or 23% of total. offices and a rig yard in Iraq. We operate four single well drilling rigs drilled for KNK. After which the rig retuned to the Russian waters of capable of drilling wells of up to 5,000 metres in depth. During 2014 the Caspian Sea and drilled another exploration well for LUKOIL. two rigs were employed by international oil and gas companies while the other two were undergoing planned refurbishment and Our SATURN jack-up continues operations for Petronas in recertification. Rig utilisation was also lower than planned in 2014 due Turkmenistan. Effective from 9 January 2013, SATURN is contracted 1,792 wells to issues with security (Islamic State invading Iraq) and KRG funding for a three-year period. The award marks a continuation of several Drilled 1,792 wells in 2014. to our customers. previous multi-year contracts starting in 2003, working almost entirely throughout this period in Turkmenistan. In June 2012 the SATURN Offshore business achieved a major milestone of working continuously for five years Our 2014 offshore operating results include: without a Lost Time Incident (LTI). During 2014 the SATURN continued to operate without any LTIs. During 2014 the SATURN • Our ASTRA jack-up rig was on paid stand-by for most of the first completed four geological sidetrack wells. quarter 2014, drilled and tested two exploration wells for LUKOIL and one exploration well for KNK in the Russian and Kazakh Our NEPTUNE jack-up started drilling its first ever well in the Cheleken sectors of the Caspian Sea, respectively; Contract Area, Turkmenistan in the Caspian Sea for Dragon Oil in • Our SATURN jack-up rig continued its operations for PETRONAS February 2014. This new build LeTourneau designed Super 116E Carigali (Turkmenistan) Sdn Bhd (Petronas) in the Turkmen waters jack-up is designed to operate in water depths of up to 350 feet (107 of the Caspian Sea; four geological sidetracks were performed; metres), and has a rated drilling depth of 30,000 feet (9,150 metres). • We drilled and completed three wells on LUKOIL’s Yuri Korchagin At the end of 2013 Dragon Oil plc awarded us a three year contract field platform in the Caspian Sea, all of which were extended-reach for drilling services in the Turkmen sector of the Caspian Sea. Under horizontal development wells; this contract NEPTUNE drilled and completed four wells in 2014. • The new-build NEPTUNE jack-up rig drilled four wells for Dragon Oil in Turkmen waters of the Caspian Sea; In April 2012 we ordered a fourth jack-up rig MERCURY for our • Our fourth new-build jack-up, MERCURY, was completed Caspian Sea operations from Lamprell; this rig will be another with all required equipment and was being commissioned LeTourneau Super 116E like NEPTUNE. Assembly of MERCURY’s at year end 2014. new-build jack-up first blocks commenced in a shipyard in the

Eurasia Drilling Company Strategic report 21 Annual Report 2014 Strategic report Management’s discussion and analysis of EDC’s financial condition and results of operations continued

Caspian Sea during 2013 and MERCURY was completed late 2014 Outlook The smallest of these ASTRA will have paid stand-by in Q1 until ice and was being commissioned at year end. MERCURY is planned to The fundamentals of the Russian OFS markets remains unchanged, clears at its next drilling location in the Russian sector. SATURN & provide well drilling services to Dragon Oil plc in the Cheleken with more than 80% of production coming from declining mature NEPTUNE will continue to drill in the Kazakh waters for Petronas & Contract Area, Turkmenistan in the Caspian Sea replacing NEPTUNE fields, so the drilling intensity needs to be maintained to sustain Dragon oil. Our fourth jack-up MERCURY was commissioned & for the remainder of the three year contract mentioned above. Russian oil production levels. Despite the drop in total metres drilled moved to Turkmen waters of the Caspian Sea at the beginning of the onshore Russia in 2014, the total oil production increased 1% YoY in year. It was due to replace NEPTUNE so it could be released to drill Non-US GAAP measure part due to the 33% increase in the more productive horizontal metres in Russian waters, but due to changes in customers’ activity plans, Reconciliation of net income to adjusted EBITDA drilled. We therefore expect that total metres drilled in Russia will be NEPTUNE continues to drill and MERCURY’s start date has been Adjusted Earnings Before Interest, Taxes, Depreciation and flat or slightly lower in2015 , but the amount of horizontal metres is delayed until after mid-year. Amortisation (EBITDA), a non-GAAP financial measure, is computed expected to increase. with reference to the Company’s net income for year ending We have negotiated minor price increases in rubles for our land 31 December 2014 and the year ending 31 December 2013 as However, due to the recent oil price of around $50 per barrel, coupled operations in 2015. However, our absolute revenue in US $ will be follows (in thousands of US dollars, unaudited): to the increased cost of financing due to sanctions, we believe oil & lower based on the expected weaker ruble versus 2014. Our capital 2014* 2013* gas companies could be economical in their capital expenditures in expenditures in US $ are also expected to decrease due to weaker Net income 420,788 432,082 2015 despite the mitigating support provided by the weaker ruble. ruble and prudent investment decisions. This will be mitigated by our US $ based revenues from our offshore activities in the Caspian Sea. Income tax expense 114,929 150,381 The E&P companies will concentrate on projects & developments Loss (gain) on disposal of PP&E 218 (1,608) that have higher rates of return and new, higher infrastructure cost, greenfield developments will be delayed. Certain factors affecting our results of operations Foreign currency exchange rate loss 12,700 705 Macroeconomic factors affecting oil companies’ capital Litigation settlement 2,607 50,996 For EDC we expect another challenging year due to the impact of low expenditure programs Other (income) expense (1,113) 929 oil price, the financial sanctions on our customers (both direct & Our results of operations are subject to the business cycles of our Interest income ( 27,110 ) ( , ) 17189 indirect-soft sanctions) and the weaker ruble (approximately 90% of customers in the oil and gas sector and, more specifically, on their Interest expense 33,266 58,254 our revenue is ruble based). We expect this to impact rig utilisation planned capital expenditure programs and their ability to execute Depreciation 278,126 265,929 for both our onshore & offshore operations as customers have to them. Oil and gas companies rely on their cash flows from operating Adjusted EBITDA 834,411 940,479 update plans which will affect drilling schedules. Activity in Iraq is activities to finance significant portions of their capital expenditures. * 2014 & 2013 EBITDA is adjusted for litigation settlement in the amount of also impacted by low oil price, which limits customer’s funding and Such cash flows depend heavily on the global prices for crude oil and US $2.6 million and US $51.0 million respectively. the security risks continue. natural gas, which affect the prices that our customers receive for sales of their products. Accordingly, oil and gas companies’ budgets Our adjusted EBITDA in dollar terms decreased by US $ 106.1 million We continue to invest in our rig fleet so we can retire old land rigs are normally based on assumptions of expected crude oil and natural during 2014 as compared to 2013 due to a depreciation of the Russian with efficient new rigs. We will receive up to 14 new rigs in 2015. gas prices for the relevant periods. Lower prices may reduce the ruble against the US dollar. At the same time the adjusted EBITDA amount of oil and gas that our customers can produce economically margin increased to 28.0% from 27.0% achieved during 2013 due to a We expect another soft year for onshore drilling activity in Russia for or reduce the economic viability of projects, both planned and in number of factors including contribution to EBITDA from new-build the reasons noted above. EDC’s total metres drilled and the number development. A substantial or extended decline in crude oil and jack-up NEPTUNE (commenced drilling early in 2014), lower amount of sidetracks are expected to be lower YoY but horizontal metres will natural gas prices could result in lower capital expenditures by our of pass-through costs, increased higher-value horizontal drilling and increase. Our customer mix will continue with GAZPROMNEFT customers, and, consequently, lead to a reduction in the number of sustained cost controls by our management team. Our workover and displacing ROSNEFT as our #2 client and we have been awarded wells they commission to be drilled. Fluctuations in our customers’ sidetracking operation also positively contributed to 2014 adjusted work with new clients, the largest of which is BASHNEFT. capital expenditures have caused the results of our drilling operations EBITDA by lower non-productive time compared to 2013. Among the to vary from year to year. factors that constrained the adjusted EBITDA margin expansion was Our Offshore business now has four jack-ups in the Caspian Sea. significant one off rig redeployment costs resulting from changes in the customer mix and unfavourable weather conditions.

Eurasia Drilling Company Strategic report 22 Annual Report 2014 Strategic report Management’s discussion and analysis of EDC’s financial condition and results of operations continued

World prices for crude oil are characterised by significant fluctuations as our customers report higher flow rates from wells drilled determined by the global balance of supply and demand, horizontally. In many instances vertical wells are not economically expectations regarding future supply and demand, the condition of feasible due to low flow rates. The horizontal drilling technique is 28% the world economy and geopolitical events, prices of, demand for especially beneficial when used to drill reservoirs with a greater EBITDA margin 28% in 2014 versus and availability of alternative fuels and many other factors beyond our horizontal dimension than vertical thickness. Douglas-Westwood 26% in 2013. control. Natural gas prices in Russia are regulated by the Russian estimates that horizontal drilling could improve initial well flow rates government. While Russian natural gas prices have increased in by two to seven times in some reservoirs. recent years, and are expected to continue to rise to a level closer to parity with export netbacks, they are still significantly below Our margins are also affected by the level of pass-through third party world levels. services in our expenses and revenue. Under most of our onshore 14.1% drilling contracts, we act as a general contractor and are contractually Change in mix of services responsible for managing all aspects of the drilling process, including Net income margin of 14.1% in 2014 versus Because margins can vary significantly amongst the services we certain services we do not perform ourselves. Therefore, historically, 12.4% in 2013. provide, our results of operations are affected by changes in the mix some of the revenue has related to pass-through third party services of onshore and offshore drilling and workover services we provide and products sold to our customers with little or no related mark-up to our customers. The services we provide in our onshore division (such as, for example, telemetry and technology services for have expanded from offering primarily conventional production and horizontal drilling). The corresponding payments we make to exploration drilling services in January 2005 to offering a wider range third party service providers are recorded under services of of drilling and workover services, including sidetracking, horizontal, subcontractors. In 2012 and during 1H 2013, we experienced a and underbalanced drilling. decrease in pass-through services with our largest customer, LUKOIL-West Siberia, as they began to contract for telemetry services For example, in 2014 we drilled 1,285,200 metres utilising horizontal directly with third party providers starting in May 2012 as well as due drilling techniques, representing 23% of our total drilling volumes, to certain other non-recurring factors. During 2014, we experienced a while in 2013 our horizontal drilling operations were 1,296,143 metres, further decrease in pass-through services as we decreased amount or approximately 21% of total drilling volumes. Unexploited oil and of work for ROSNEFT in their Western Siberian fields. gas reserves in Russia increasingly occur in more challenging environments, both geographically and geologically, and drilling is Productivity getting increasingly complex. ‘Easy to access’ reservoirs that were Our results of operations are affected by the productivity of our crews, intensively developed during past decades are no longer capable which in turn depends on a number of factors. These factors include of delivering appropriate flow rates using conventional drilling crew training and incentives, operating procedures, fleet upgrades techniques. As existing brownfield resources deplete, particularly in and modernisation, logistics flow and mix of services. such mature oil production provinces as Western Siberia and Volga Urals, the period of sustainable production growth from conventional Over the medium-term to long-term we expect our productivity to oil is ending and oil companies are being pushed to develop less continue to improve due to the ongoing implementation and utilisation explored regions where the complexity of drilling and, accordingly, of more advanced drilling technologies and the application of new its costs, are usually higher. Additionally, Russia’s strategic goal to standards to our drilling operations. Advanced crew training and maintain oil production at least at current levels is driving higher application of innovative technologies have allowed us to both improve drilling complexity as oil becomes harder to extract from maturing rates of penetration and reduce non-productive time. Examples of brownfields. Looking forward we see an increase in horizontal drilling technological advancements include wider usage of polycrystalline

Eurasia Drilling Company Strategic report 23 Annual Report 2014 Strategic report Management’s discussion and analysis of EDC’s financial condition and results of operations continued diamond compact drill bits, introduction of new generation drilling services are most affected by adverse weather conditions, as our At the end of 2014 we believed we had sufficient operating capacity motors, optimisation of bottom-hole assembly and mud programs/ drilling rigs, equipment, material and crews that are required for such with the addition of the new rigs to our drilling fleet and our increased properties, and real-time drilling navigation. The use of top-drives and services are mobilised to remote locations accessible only by winter drilling productivity to drill approximately 7.3 million metres on an four-step drilling mud cleaning systems on our high specification rigs roads or helicopters. On the other hand, onshore production drilling annual basis. further improves penetration rates and efficiency in the increasingly services tend to be less affected by adverse weather conditions due challenging wells we are drilling. to the cluster drilling method we utilise, which involves drilling multiple Additionally, our results of operations can be affected by the amount of wells from a single drilling pad. However, also when using this drilling capital expenditures we are required to undertake in order to modernise During the last several years we have witnessed a number of factors method, our operations may be temporarily disrupted by adverse and renovate our drilling rig fleet periodically and to satisfy applicable that could moderate the rate of productivity improvement when weather conditions such that we are unable to operate our rigs or equipment certification requirements. As of 31 December 2014, measured on a per metre basis. All these factors can be broadly mobilise required supplies to rig sites. With respect to our offshore approximately 44% of our drilling rigs were more than 20 years old. described as changing the mix of services that we provide to our division, we are generally unable to perform drilling services in the customers. Horizontal wells are inherently more time consuming to Russian sector of the Caspian Sea during winter months due to the Foreign currency fluctuations drill than comparable deviated wells. Our productivity as measured in presence of ice. However, the Yuri Korchagin platform is ice-resistant, Our audited consolidated financial statements are presented in metres drilled per crew per day decreased by 6% during 2014 as which allows us to drill there year-round. US dollars, which is the Group’s reporting currency. The functional compared to the corresponding period 2013 on the back of higher currency of most of our operating entities is the Russian ruble as this share of horizontal drilling and higher rig moving activity. Another Operating capacity is the currency of the primary economic environment in which they factor that affects our crew productivity is seasonality described in Our revenue growth can be negatively affected by the number of operate and in which cash is generated and expended. Foreign more detail below. drilling rigs and drilling crews available to us. Our ability to increase exchange gains and losses result from converting monetary assets our onshore business or maintain its current level depends on our and liabilities denominated in Russian rubles into US dollar occurs at Seasonality and extreme weather conditions ability to procure a sufficient number of new drilling rigs and each balance sheet date. Our results of operations in both our onshore and offshore segments modernise our existing ones. Importantly, since the wells we drill are have, and will continue to experience, seasonal fluctuations in revenue getting deeper we anticipate increased demand for heavier rigs. In The Group has currency exposure on the carrying amount of the rig and expenses as a result of weather conditions. Our revenue from 2010, we developed a five-year plan for the delivery of new rigs and fleet, which is reflected as a Russian ruble asset in the accounting onshore and offshore drilling services can be negatively affected by since then we have ordered 49 new rigs and taken delivery of 33 up records of the Group’s Russian subsidiaries and then translated into particularly severe winter weather in certain regions of Russia that may to the end of 2014. These new purchases were either for heavy rigs, US dollars in the Group’s audited consolidated financial statements. make oil and gas operations difficult and occasionally non-operational i.e., 320 ton hook load, equivalent to 1,500 horsepower or greater, A strengthening of the Russian ruble against the US dollar means a during that season. Our revenue from onshore drilling services may or medium rigs with 250 ton hook load. These new rigs are in the higher US dollar carrying amount of the Group’s rig fleet and vice also be negatively affected by spring thawing because drilling rigs, order of 30% more efficient than the older rigs they replaced. As of versa. At the same time, as of 31 December 2014, 91% of our long equipment, and materials situated in certain regions can only be 31 December 2014, approximately 24% of our drilling rigs were in and short-term debt was denominated in US dollars. Accordingly, the transported during winter when the ground is sufficiently frozen to the heavy class. translation effect of the assets is not balanced by a similar translation create access roads. As a result, a portion of our business activity in effect of the liabilities. However, our projected dollar based cash flows, the fourth and first quarters of each year is devoted to transportation of principally from our offshore operations, are expected to reduce our drilling rigs, equipment, and materials and we experience a decrease dollar denominated debt as it matures. in revenue while continuing to incur costs. If we fail to complete a drilling contract on time or are unable to move our equipment due to adverse weather conditions our ability to commence drilling on a timely basis at another site may be impeded. However, the effect of severe weather conditions on our operations depends on the specific type of service being provided. For instance, our onshore exploration drilling

Eurasia Drilling Company Strategic report 24 Annual Report 2014 Strategic report Management’s discussion and analysis of EDC’s financial condition and results of operations continued

Revenues Depending on the complexity of the drilling, our services are provided Cost of services We generate our revenues primarily from the sale of onshore drilling either on a general contractor ‘turn-key’ basis or on a day rate basis. Our cost of services, excluding depreciation and taxes, comprises services, as well as from offshore drilling services and certain other Completion services which are a part of the well construction service five primary cost categories: services of subcontractors, staff cost services. that we provide are contracted separately, given the increased (including social contribution), materials, depreciation and other. complexity of such services. The following table sets forth a breakdown of our revenues by type of The table below sets forth the costs associated with each category services provided and as a percentage of total revenues for the period In addition, in 2010 we entered into a five-year workover framework in dollars and as a percentage of the cost of services for the periods indicated. agreement with LUKOIL. This workover framework agreement indicated. includes a guaranteed volume of workover services to be provided Year ended 31 December during the five-year term. LUKOIL also represents a significant part of Year ended 31 December our offshore drilling business, as we have a multi-year agreement for 2014 2013 2014 2013 our services on the LSP-1 platform in the Yuri Korchagin field in the (in thousands of US $, except percentages) (in thousands of US $, except percentages) Caspian Sea. Drilling and Cost of services 2,251,860 100% 2,621,945 100% related services 2,972,336 99.9% 3,473,555 99.9% In 2014 we signed an inaugural long-term three-year onshore Services of Other sales drilling and sidetracking services framework agreement with subcontractors 905,194 40.2% 1,017,119 38.8% and services 2,875 0.1% 4,569 0.1% GAZPROMNEFT, which includes a pricing formula and minimum Staff cost, , , % including social Total revenue 2,975,211 100% 3 478 124 100 guaranteed number of active rigs. contributions 603,861 26.8% 669,598 25.5% Our revenues from drilling and related services represented Materials 394,126 17.5% 577,331 22.0% With respect to our other customers and the companies of the approximately 99.9% of our total revenues for the years ended LUKOIL group with which we enter into contracts outside of the scope Depreciation 278,126 12.4% 265,929 10.1% 31 December 2014 and 2013. Related services include our of the Framework Agreement, contracts are typically for a period Other 70,553 3.1% 91,968 3.5% workover and sidetracking operations. of one year. We generally contract to provide our onshore drilling services on the basis of agreed procedures and prices, as a general Cost of services (2014) A significant portion of our revenues from drilling and related services contractor and, to a limited extent, on a day rate basis. is derived from LUKOIL, which, for the 12-month period ended 12% 31 December 2014, accounted for approximately 74.6% of our 3% ■ Current contracting practices in the Russian drilling market contribute Other total revenues. We provide our onshore drilling services to LUKOIL ■ to fluctuations in revenue. We obtain a significant part of our business 3rd party subcontractors on the basis of long-term three-year onshore drilling services ■ Manpower through open tenders. Most tenders are conducted annually through 17% framework agreement (the ‘Framework Agreement’), under which ■ a process that begins with requests for proposals in September EDC 40% Materials we are required to provide a guaranteed scope of drilling and well ■ and ends with signed contractual commitments generally between Depreciation construction services to LUKOIL. Pursuant to the Framework December and March. As a result, a portion of our business activity Agreement, EDC enters into annual contracts with companies in the winter months is generally devoted to rig up and rig down in the LUKOIL group which contain detailed information on the operations and transportation of equipment and personnel required 27% numbers and locations of the wells to be drilled during the relevant for our onshore drilling services. year, as well as the basis on which our services are provided.

Eurasia Drilling Company Strategic report 25 Annual Report 2014 Strategic report Management’s discussion and analysis of EDC’s financial condition and results of operations continued

Services of subcontractors Other Revenues Under most of our onshore drilling contracts, we act as a general The remaining portion of our cost of services which we categorise Revenues decreased by US $502.9 million, or 14.5%, to US $2,975.2 contractor and are contractually responsible for managing all as ‘other’ includes license fees, insurance expenses, safety and million for 2014 from US $3,478.1 million for 2013 due to 17.1% aspects of the drilling process, including certain services we do not environmental expenses, leasing and rent, and various local taxes, depreciation of the Russian ruble against the US dollar in 2014. perform ourselves. In our onshore division, services contracted from such as property, road, and other small regional taxes. Increase in revenues from workover & sidetracking operations and third parties include subcontracting for technological services, higher revenues from our offshore business as our new-build jack-up transportation services, preparatory services, well facility services, Results of operations NEPTUNE commenced operations in March 2014 were partially petrophysical services, well services, drilling motor and drilling The table below sets forth a summary of our operating results in netted off by changes in our client mix and related increase in rig navigation services, cementing services, drilling bit services, dollars and as a percentage of total revenues for the periods redeployment. and current repair & maintenance expenses for fixed assets. indicated. In absolute terms, all of our 2014 operating results set forth Subcontractor services were the largest component of our cost of below were affected by the 17.1% depreciation of the Russian ruble Cost of services services for the years ended 31 December 2014 and 2013. Services against the US dollar during the year ended 31 December 2014 as Cost of services decreased by US $370.1 million, or 14.1%, to of subcontractors include certain reimbursable services the cost of compared to 2013. US $2,251.9 million for 2014 from US $2,621.9 million for 2013. Cost which is passed through to our customers at little or no mark-up. The of services as a percentage of total revenues slightly increased from reimbursements for such services that we receive from our customers Year ended 31 December 75.4% for 2013 to 75.7% for 2014. The decrease in absolute terms are recorded as revenue. 2014 2013 was due to depreciation of the Russian ruble. Despite higher transportation costs due to increase in rigs redeployment and higher (in thousands of US $, except percentages) Staff cost, including social contributions depreciation due to arrival of new rigs and change in drilling pipe Total revenues 2,975,211 100.0% 3,478,124 100% Staff cost, including social contributions, include costs of our life estimation, as a percentage of total revenues cost of services personnel directly engaged in providing onshore and offshore drilling Cost of services (2,251,860) (75.7%) (2,621,945) (75.4%) remained almost on the same level which was primarily attributable and other services. Staff cost include amounts we pay in support of Selling, general and to efforts by the Group’s management to control costs. administrative our private employee insurance and medical funds, contributions to expenses (168,122) (5.7%) (186,608) (5.4%) pension funds or social taxes, other employee benefits. For 2014, services of subcontractors were US $905.2 million, or (Loss) gain on 40.2% of total cost of services as compared to US $1,017.1 million, disposal of property, Materials plant and equipment (218) (0.0%) 1,608 0.0% or 38.8% of total cost of services for 2013. The decrease in absolute Expenditures for materials have been driven primarily by our terms was due to depreciation of the Russian ruble. The increase Gain on disposal of customers’ particular drilling programs and projects. Materials for our materials 1,056 0.0% 4,979 0.1% as a percentage of total cost of services was due to increased onshore and offshore drilling divisions primarily include spare parts, transportation costs related to rigs redeployment caused by changes Litigation settlement (2,607) (0.1%) (50,996) (1.5%) tubular goods, mud chemicals, cement, and drilling tools. Materials in the client mix and due to a significant decrease in the share of Other income also include fuel and energy costs consisting primarily of oil, materials in total cost of services as to be described further below, (expense) 1,113 0.0% (929) (0.0%) lubricants, and electricity. causing the relative share of other constituents of our cost of services Income from operating activities 554,573 18.6% 624,233 17.9% to increase. Depreciation Interest expense (33,266) (1.1%) (58,254) (1.7%) Depreciation is calculated using the straight-line method over the Interest income 27,110 0.9% 17,189 0.5% useful lives of assets which are estimated to the best knowledge Foreign currency and experience of our management team. exchange rate loss (12,700) (0.4%) (705) (0.0%) Income before income taxes 535,717 18.0% 582,463 16.7% Income tax expense (114,929) (3.9%) (150,381) (4.3%) Net income 420,788 14.1% 432,082 12.4%

Eurasia Drilling Company Strategic report 26 Annual Report 2014 Strategic report Management’s discussion and analysis of EDC’s financial condition and results of operations continued

Staff cost, including social contributions for 2014 were US $603.9 For 2014, other expenses were US $70.6 million, or 3.1% of total cost million, or 26.8% of total cost of services as compared to US $669.6 of services compared to US $92.0 million, or 3.5% of total cost of million, or 25.5% of total cost of services for 2013. The decrease in services for 2013. The decrease in both absolute terms and as a 0.9 absolute terms was driven by depreciation of the Russian ruble which percentage of total cost of services was due to the discontinuance Our net debt to EBITDA ratio was 0.9 at was partially netted off by annual salary indexation, formation of of certain leases and rent in respect of drilling equipment and a the end of 2014. additional drilling crew for our offshore operations on NEPTUNE and decrease in insurance. Change in absolute figures was also affected increase in workover and rig-moving crew count. The increase in by depreciation of the Russian ruble. wages and salaries as a percentage of total cost of services resulted from a decrease in the share of reimbursable materials in total Selling, general and administrative expenses cost of services, as described above, causing the relative share Selling, general and administrative expenses decreased by 75.7% of other constituents of our cost of services to increase as well US $18.5 million, or 9.9%, to US $168.1 million for 2014, as compared as increase in workover and rig-moving activities where staff cost, to US $186.6 million for 2013. The decrease in absolute terms was Cost of services as a percentage of revenues. including social contribution, are a comparatively larger component driven by depreciation of the Russian ruble. As a percentage of total of cost of services. revenues, selling, general and administrative expenses increased from 5.4% for 2013 to 5.7% for 2014. For 2014, cost of materials was US $394.1 million, or 17.5% of total cost of services as compared to US $577.3 million, or 22.0% of total (Loss) gain on disposal of property, plant and equipment cost of services for 2013. The decrease in both absolute terms and a Loss on the disposal of property, plant and equipment amounted to percentage of total cost of services despite higher prices for the fuel US $0.2 million for 2014, as compared to a gain of US $1.6 million for and energy was caused by decrease in reimbursable pass-through 2013. This difference was primarily due to the timing of opportunistic materials (casing pipe) as a result of declining activity with ROSNEFT. sales of unneeded or obsolete equipment. Change in absolute figures was also affected by depreciation of the Russian ruble. Gain on disposal of materials Gain on the disposal of materials amounted to US $1.1 million for Depreciation for 2014 was US $278.1 million, or 12.4% of total cost of 2014, as compared to US $5.0 million for 2013. This difference was services as compared to US $265.9 million, or 10.1% of total cost of primarily due to the timing of opportunistic sales of unneeded or services for 2013. In absolute terms, the increase due to change in obsolete materials. estimate of the useful life of the drilling pipe from two to three years to two years and depreciation of NEPTUNE after commencing Litigation settlement operations in 2014 was partially netted of by ruble devaluation. Litigation settlement amounted to US $2.6 million for 2014, as Change in the drilling pipe useful life estimation increased our compared to US $ 51.0 million for 2013. In 2013 financial statements depreciation in 2014 by US $20.8 million. In addition to these factors, we recognised a claim provision as a result of a decision rendered the increase in a percentage of total cost of services was also on 7 March 2014 by the arbitration tribunal before the Stockholm caused by a decrease in the share of reimbursable materials. Chamber of Commerce between China Petrochemical International Company Limited (CPIC) and a Group company. During the reporting period an amount of US $ 53.6 was paid to CPIC as a final settlement of the arbitration award. For more details please refer to the commitments disclosure in the notes to our 2014 consolidated financial statements.

Eurasia Drilling Company Strategic report 27 Annual Report 2014 Strategic report Management’s discussion and analysis of EDC’s financial condition and results of operations continued

Other income (expense) Foreign currency exchange rate loss Cash flows Amounts in this category represent unusual income or expense not Foreign currency exchange rate loss amounted to US $12.7 million for The table below shows our net cash flows from operating, investing resulting from our ordinary course of business activities. In 2014 we 2014, as compared to US $0.7 million in 2013 due to the fluctuations and financing activities for the years ended 31 December 2014 recognised income in the amount of US $1.1 million as compared to in the ruble/US $ exchange rates and significant depreciation of the and 2013. a loss of US $0.9 million during 2013. Russian ruble in Q4 2014. Year ended 31 December Income from operating activities Income before income taxes 2014 2013 Income from operating activities decreased by US $69.7 million, or Income before income taxes decreased by US $46.7 million, or 8.0%, (in thousands of US $) 11.2%, to US $554.6 million for 2014, as compared to US $624.2 to US $535.7 million for 2014, compared to US $582.5 million for Net cash provided by operating activities 641,117 751,053 million for 2013. The decrease in absolute terms was due to the ruble 2013. The decrease in income before income taxes was attributable depreciation. As a percentage of total revenue, income from operating to the ruble depreciation and factors described in more detail above. Net cash used in investing activities (533,859) (496,236) activities increased from 17.9% for 2013 to 18.6% in 2014. Positive Net cash provided by (used in) financing activities (361,262) , impacts from our offshore business, workover & sidetracking Income tax expense 248 667 operations, continued increase in share of higher-value horizontal Income tax expense decreased by US $35.5 million, or 23.6%, to Operating activities drilling, sustained cost controls by our management team as well as US $114.9 million for 2014, compared to US $150.4 million for 2013. Net cash provided by operating activities amounted to Net cash decrease in litigation settlement were partially netted off by change The decrease was partially due to a lower tax base. Our effective provided by operating activities amounted to US $641.1 million for in the client mix, rig redeployment and increase in depreciation. tax rate decreased to 21.5% in 2014 from 25.8% in 2013. This 2014, as compared to US $751.1 million for 2013. This decrease decrease in effective tax rate is attributable to higher non-deductible is attributable to the Russian ruble devaluation as well as the Interest expense expenses in 2013 (mainly due to a litigation settlement claim provision) US $ 53.6 claim paid to CPIC in 2014 as a final settlement of the Interest expense decreased by US $25.0 million, or 42.9%, to and a higher withholding tax accrued in 2013 due to a change of arbitration award. US $33.3 million for 2014, compared to US $58.3 million for 2013. intercompany dividend policy. The decrease in interest expense was attributable to significant Investing activities one-off fees recognised in 2013 (Raiffeisenbank commissions for Net Income Net cash used in investing activities amounted to US $533.9 million early repayment of the US $220 million facility and UniCredit Bank As a result of the foregoing factors, despite the ruble devaluation for 2014, as compared to US $496.2 million for 2013. Investing commissions for opening the US $227 million facility), the lower net income decreased only by US $11.3 million, or 2.6%, to activities in 2013 were positively impacted by the return of restricted weighted average interest rate on our debt and higher amount of US $420.8 million for 2014, compared to US $432.1 million for 2013. cash in the amount of US $45.4 million which was posted as collateral capitalised interest (including adjustment of prior year). for the issuance of a commercial letter of credit to Lamprell; no such Liquidity and capital resources transaction took place in 2014. Capital expenditures during 2014 Interest income The Company’s primary sources of liquidity are cash generated from amounted to US $530.5 million (including US $138 million offshore Interest income increased by US $9.9 million, or 57.7%, to US $27.1 operating activities and debt financing. The Company’s plan going capital expenditures out of which US $19 million is capitalised interest) million for 2014 from US $17.2 million for 2013. The increase was forward is to finance its capital expenditures, interest payments and as compared to capital expenditures, excluding changes in restricted primarily due to improvements in our cash management practices dividends primarily out of operating cash flows, as well as to finance cash, of US $553.1 million (including US $120 million offshore capital and better terms of overnight deposits. a portion of its capital expenditures through existing and prospective expenditures out of which US $15 million is capitalised interest) in credit facilities. 2013. There were no strategic acquisitions during 2014 and 2013.

Eurasia Drilling Company Strategic report 28 Annual Report 2014 Strategic report Management’s discussion and analysis of EDC’s financial condition and results of operations continued

Financing activities Capital expenditure Net cash used by financing activities amounted to US $361.3 million Our business is capital intensive and expenditures are primarily for 2014, compared to US $248.7 million provided by financing required to (i) purchase new drilling rigs and other equipment and (ii) $641 million activities for 2013. During both periods, certain debt was redeemed in upgrade and modernise the technical characteristics of our existing Net cash flow from operations for 2014 accordance with its terms. In 2013 we raised US $600 million through drilling rigs and equipment. versus US $751 million for 2013. a Eurobond offering and US $210.8 million through a new credit line facility with UniCredit Bank and made an early repayment of our For the years ended 31 December 2014 and 2013 advances given for Raiffeisenbank facility in the amount of US $220 million and OAO property, plant and equipment amounted to the following: Sberbank of Russia facility for our workover division in the amount of US $25 million. In 2014 there were no early repayments and only At 31 December At 31 December $534 million US $36.2 million was raised (US $ 16.2 million through existing 2014 2013 UniCredit Bank facility and US $ 20.0 million through a new facility (in thousands of US $) Capital expenditure was US $534 million in 2014 with BNP Paribas). Also, in 2014 the Group paid dividends to its Advances given for property, plant versus US $501 million in 2013. shareholders for both FY 2013 (in January 2014) and for FY 2014 and equipment 36,820 90,493 (in December 2014) while in 2013 there was only one dividend payment for FY 2012. The amounts represent cash advances for property, plant and equipment purchased but for which we have not yet taken delivery. Liquidity The decrease in advances given for property, plant, and equipment As of 31 December 2014 we had cash and cash equivalents of US in 2014 was attributable to the arrival of onshore drilling rigs and $327.1 million compared to US $777.8 million at 31 December 2013. equipment and devaluation of the Russian ruble.

At 31 December At 31 December The table below presents the amounts invested in construction still in 2014 2013 progress for the periods indicate: (in thousands of US $) Cash held in banks – Russian rubles 119,440 231,178 At 31 December At 31 December Cash held in banks – US dollars 107,080 249,630 2014 2013 Short term deposit – Russian rubles 98,761 285,770 (in thousands of US $) Short term deposit – US dollars 1,699 11,113 Construction in progress 405,591 494,735 Other 45 101 The decrease in construction in progress in 2014 is mostly due to our Total cash and cash equivalents 327,055 777,792 new-build jack-up NEPTUNE being put in service and commencing Our cash flow in the short term can be negatively affected by the operations in March 2014. During the reporting period we made level of expenditures we are required to make in the fourth and first two final instalment payments to Lamprell in the amount of quarters of each year to mobilise our rigs, crews and equipment to US $90.8 million for the construction of our second new-build drilling sites. jack-up rig, MERCURY.

Eurasia Drilling Company Strategic report 29 Annual Report 2014 Strategic report Management’s discussion and analysis of EDC’s financial condition and results of operations continued

Capital resources We believe we have sufficient working capital to meet our requirements Overview of other matters For the year ended 31 December 2014 and for the year ended for at least the next 12 months. We also expect to meet our Dividend Policy and Year-End Dividend Declaration 31 December 2013 our short-term and long-term debt amounted contractual payment obligation requirements for at least the next 12 Our ability to pay dividends depends primarily on the amount of cash to the following: months with cash flows from our operations, other financing we have on-hand and on the receipt of dividends and distributions arrangements and our available working capital. from our subsidiaries. The payment of dividends by our subsidiaries At 31 December At 31 December is contingent upon the sufficiency of their earnings, cash flows, and 2014 2013 The following table summarises the principal maturities of our distributable reserves and the ability of our subsidiaries to make, in (in thousands of US $) long-term debt and long term liabilities for PP&E, including their current accordance with relevant legislation, Company law, exchange controls Current portion of long-term debt 69,219 70,369 portion, as of 31 December 2014. We expect to meet our debt and and contractual restrictions, dividend payments and other types of Non-current long-term debt 906,640 963,569 long term liabilities payment requirements with cash flows from our distributions to us. operations and other financing arrangements. As of 31 December 2014, our long term debt comprised of the In August 2007, we adopted a dividend policy according to which following: Payments due by period we expect to declare and pay dividends each year based on the 2020 and Company’s earnings and the cash needs of the business. Outstanding Total 2015 2016 2017 2018 2019 thereafter Final debt (in thousands of US $) Our results of operations and cash generating capacity continue to be maturity Interest (in thousands strong, which allows us both to invest in our growing business and to Long-term debt date Currency rate of US $) Security Contractual obligations increase dividend payments to our shareholders. The decision of the Debt of the Company Long-term Board of Directors on the amount of dividends to pay depends on Property, debt 975,859 69,219 193,762 104,884 3,997 3,997 600,000 many factors, including, but not limited to, the financial situation and LIBOR + plant and Long-term results of the Company, its capital needs for the support of business ZAO UniCredit Bank 2017 US $ 3.3% 227,000 equipment liabilities for growth, the overall macroeconomic and market environment, and tax Loans from PP&E 143,544 57,232 53,849 32,463 and legislative issues. stockholders 2015 US $ 5.8% 40,000 None Debt of our subsidiaries Our long-term debt and first two overdraft lines from ZAO UniCredit For the year ended 31 December 2014 a dividend was declared by Bank loans LIBOR are secured by certain property, plant and equipment with a carrying the Board of Directors on 31 October 2014 in the amount of US $1 BNP PARIBAS SA 2019 US $ +4% 19,983 None amount of US $76.9 million as of 31 December 2014. At the same per share, or US $145 million which was paid in December 2014. Eurobonds 2020 US $ 4.875% 600,000 None time, our secured debt represented approximately 23% of our total For 2013 a dividend of 92 cents per share, or US $135 million, was Russian ruble bonds 2018 RUB 8.4% 88,876 None long and short-term debt. declared in December 2013 and paid early in 2014. Total long-term debt 975,859 Total non-current Off-balance sheet arrangements long-term debt 906,640 The Company does not have off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material EDC also has long-term liability for property, plant and equipment effect on its financial condition, revenue, expenses, results of (PP&E) which represents accounts payable to OOO Rushong-Hua operations, liquidity, capital expenditures or capital resources. for onshore drilling rigs purchased by instalments in three years. As of 31 December 2014 long-term liability for PP&E amounted to US $ 143.5 million compared to US $ 80.5 million as of 31 December 2013.

Eurasia Drilling Company Strategic report 30 Annual Report 2014 Strategic report Management’s discussion and analysis of EDC’s financial condition and results of operations continued

Treasury shares Basic and diluted earnings per share were US $2.89 for 2014, In February 2014, we announced that we may buy back up to US compared to US $2.94 for 2013. This decrease in earnings per share $200 million of our GDRs commencing 2 April 2014 for a period was attributable to the decrease in net income by 2.6%. $1.00 of six months. In September 2014, the Share Repurchase Program Dividend per share declared by EDC for 2014 was extended for an additional six month period starting 2 October Related party transactions ($0.92 for 2013). 2014, once the prior Share Repurchase Program expired. The Shareholder loans amount authorised for the extended share repurchase was up to In the period from November 2006 through March 2007 the Company US $200 million in addition to the amount spent for the existing entered into loan agreements with its shareholders to partially fund the Share Repurchase Program. The second Share Repurchased investment programme of our onshore drilling services division and Programs expired 2 April 2015. In total 2,026,145 GDRs were the purchase of our offshore drilling services business. The aggregate $2.89 repurchased at a total cost of US 57,046 thousand dollars. The principal amount of such loans was US $40 million and US $50 million GDRs repurchased under the Share Repurchase Programs are held as of 31 December 2014 and 31 December 2013 respectively. These by EDC Incentive Plan Limited, a subsidiary of the Company. Also loans are denominated in US dollars and bear interest at 5.8% per Earnings during 2014, 15,983 shares were transferred to Directors in lieu of annum with the maturity date on 31 December 2015. cash for their services. As of 31 December 2014 there were 2,064,037 shares held in treasury. US $2.5 million interest and US $2.9 million was recognised and paid per share on these loans during the years ended on 31 December 2014 and Earnings per share 2013. Management believes the terms of these loans are no more Versus $2.94 in 2013 while Ruble depreciated Basic earnings per share is computed by dividing net income available onerous than those that would have been negotiated in an arms- 21% YoY. to common stockholders by the weighted average number of shares length negotiation. of common stock outstanding during the reporting periods. Legal services The calculation of earnings per share for the periods indicated was The Company’s General Counsel, Douglas Stinemetz, is a partner as follows: with The Stinemetz Law Firm (the Firm). During the years ended 31 December 2014 and 2013 the Firm billed EDC for costs and Year ended 31 December expenses of US $2.2 million and US $3.9 million, respectively. All 2014 2013 services were billed at a discount to the Firm’s normal billing rates, while expenses were billed at their actual cost. In addition the Net income available for common stockholders 420,788 432,082 amounts paid to The Stinemetz Law Firm include considerable Weighted average number of outstanding third party expenses and charges for the services of other lawyers. shares 145,665,352 146,778,795 Mr Stinemetz is not otherwise paid for his services as the Company’s Basic and diluted earnings per share General Counsel. Management believes the amounts paid for these of common stock (US dollars) 2.89 2.94 legal services are no more onerous than those that would have been negotiated in an arms-length negotiation for a similar level of service and expertise.

Eurasia Drilling Company Strategic report 31 Annual Report 2014 Strategic report Management’s discussion and analysis of EDC’s financial condition and results of operations continued

Transactions with the associate company Credit risks The LUKOIL Group made up approximately 74.6% and 65.9% of our In 2014 the Company issued a short-term loan of US $0.6 million Financial assets which potentially subject our entities to credit risk sales for the years ended 31 December 2014 and 2013, respectively. to an associate company OOO Kliver. The loan was denominated in consist principally of trade receivables. We have policies in place to The ROSNEFT Group made up approximately 5.7% and 18.7% of our Russian rubles, bore interest at 10% and was fully paid back as of ensure that sales of products and services are made to customers sales for the years ended 31 December 2014 and 2013, respectively. 31 December 2014. Additionally in 2014 EDC acquired equipment with an appropriate credit history. Credit risks related to accounts In order to reduce exposure to this credit risk we have been increasing from OOO Kliver in the total amount of US $23.3 million compared to receivable are systematically monitored and are considered when our business with other, unrelated customers and continue to monitor US $6.3 million in 2013. As of 31 December 2014 and 2013 advances impairment provisions are created. The carrying amount of accounts our account receivable balances closely. We perform periodic credit paid to OOO Kliver amounted to US $1.7 million and US $2 million, receivable, net of provision for impairment of receivables, represents checks on our customers and, as a result, did not have any material respectively. the maximum amount exposed to credit risk. bad debt expense from our operations during the six-month periods ended 30 June 2014 and 2013. Our allowance for doubtful accounts Quantitative and qualitative disclosures about A significant proportion of our operations are with LUKOIL Group stood at US $7.0 million on 31 December 2014, which amount was market risk companies and ROSNEFT Group companies and as such considered adequate. Our cash and cash equivalents are placed with We are exposed to market risk from adverse movements in foreign the Company has significant concentrations of credit risk with major banks of Russia, Switzerland, Austria and the United Kingdom. currency exchange rates and changes in interest rates on our these clients. obligations. Our overall risk management objective is to reduce the potential adverse effects of these risks on our financial performance; Included in our sales and accounts receivables are the following however, we do not maintain any formal hedging programs beyond transactions and balances with these major customers: management of credit risk. 2014 2013 (in thousands of US $) Revenues from LUKOIL Group for the year ended December 31 2,220,821 2,291,461 Revenues from ROSNEFT Group for the year ended December 31 170,126 649,673 Accounts receivable from LUKOIL Group as of December 31 229,170 221,354 Accounts receivable from ROSNEFT Group as of December 31 17,040 74,426

Eurasia Drilling Company Strategic report 32 Annual Report 2014 Strategic report Management’s discussion and analysis of EDC’s financial condition and results of operations continued

Interest rate risk Long term debt denomination Our exposure to market risk for changes in interest rates relates to exposure to market risk for changes in interest rates relates primarily to our long-term 9% and short-term debt. The table below presents scheduled long-term debt ■ US$ maturities in US dollars and related weighted-average interest rates as of ■ RUB 31 December 2014: Total US$ 975.9 million Scheduled maturity (in millions of US $, except percentages) Fair value 2020 and 31 December 2015 2016 2017 2018 2019 thereafter Total 2014 91% Total long-term 69.2 193.8 104.9 4.0 4.0 600.0 975.9 716.5 Fixed rate 39.0 88.9 600.0 728.9 511.4 Interest rates Average interest rate 5.4% 5.3% 4.9% 4.9% 4.9% 4.9% Variable rate* 29.2 104.9 104.9 4.0 4.0 247.0 205.1 25% Average interest rate 3.6% 3.6% 3.6% 4.4% ■ Variable ■ Fixed * Based on the LIBOR rate at the end of 2014 which rate may fluctuate in later periods.

Currency risk We are exposed to foreign currency exchange rate risks. The currency giving rise to these risks is primarily the Russian ruble. We use the Russian ruble for the majority of our operations, while the US dollar is our reporting 75% currency. Foreign exchange gains and losses result from converting monetary and certain non-monetary assets and liabilities denominated in the Russian ruble into US dollar amounts at each balance sheet date. This includes any borrowings in a foreign currency. As of 31 December 2014 we had US $88.9 million of a total of US $975.9 million of our long and short- term debt denominated in the Russian ruble. As of 31 December 2013 we had US $173.1 million of a total of US $1,033.9 million of our long and short-term debt denominated in the Russian ruble. In addition, the results of our operations are impacted by transactions entered into in currencies other than the Russian ruble, and a fluctuation in the Russian ruble versus US dollar exchange rates will result in a change in the recognised revenue and expenses associated with such transactions. Furthermore, while the majority of our revenue is denominated in the Russian ruble, some of our costs, including some of those associated with purchases of foreign manufactured land and offshore drilling rigs, are denominated in the US dollar and other currencies. Any further significant foreign currency exchange rate fluctuations (both short- and long-term) could have a material adverse effect on our business, financial condition and results of operations.

Eurasia Drilling Company 33 Annual Report 2014 Strategic report Strategic report Corporate responsibility

At EDC we believe that ethical, sustainable and developments. We have also initiated an annual employee survey to socially responsible operations are fundamental identify the degree of satisfaction of our employees and to define areas for improvement. The results were published internally and we to our business and to our long-term growth. continue to improve communication channels with our employees. It is the way we work. We place special emphasis on developing young specialists. We hold Acting responsibly annual competitions to recognise and reward innovation & excellence • We observe and promote ethical business practices and advocate in our workforce. As an example On 28 May, our Kogalym branch respect and tolerance by and for all people. office hosted the XV Competition for development of young • Our business decisions are made to ensure long-term growth for employees. The competition was attended by 17 young employees the benefit of our employees, customers and investors. from all department. After review by a committee chaired by MF • We care about where we work and together with our employees, Abdrakhmanov first deputy director of production the follow awards local people and government bodies, we develop constructive were made: solutions to shared problems and promote suitable projects and initiatives that are of long-term benefit to our local communities. First place to Sergei Sokolov for his work on the development of • We are committed to high standards in occupational health and corporate training for electricians using a drawworks simulator. Congratulation to winners of youth competition in Kogalym. safety and to protecting the environment. Second place to Dmitry Buglak for his the work on software ‘Portal.’ Third place was awarded Ramil Auhadievu for his work on work Commitment to our people ‘Automatic Drilling.’ Commitment to HSE With approximately 21,850 employees we are focused on providing Our 200-strong HSE Group promotes our health, safety and them with a safe and high-quality working environment backed up by Olesya Sagitova an economist in the Department of Planning and environmental protection policies and procedures to all our employees a first-class compensation and benefits package. Economic Analysis was the winner for work on Inventory Management and works to ensure that we comply with all government laws and of Kuzbass ‘BKE’. regulations. We are a member of the International Association of In addition, we have a ‘Collective Bargaining Agreement’ that governs Drilling Contractors (IADC) to which we regularly report our HSE social and labour relations for more than 80% of our workforce. We have established Youth Boards to help improve our young statistics. Historically, since 2005, our lost time incident rate (LTIR) has employees’ social life and communicate their concerns to the been lower than the worldwide industry indicator reported by the One of the key components of employees’ social protection is the management of the Company. We have also introduced a counsellor- IADC. We are happy to report that this trend continued in 2014, when supplementary pension plan provided by LUKOIL-GARANT, a counsellee system where our young specialists are mentored by our LTIR was 0.18 compared to 0.23 for the industry as reported by non-state pension fund to which we contribute on behalf of our senior employees to help them achieve their potential. the IADC. employees. Every year our Western Siberia branch organises a contest for the In September 2008, BKE, our Russian onshore operating subsidiary, For a company like ours, with a significant number of employees Best Drilling Crew of the year. The competition covers both theoretical received compliance certificates for ISO14001 :2004 (Environmental spread over the vast territories of Russia and the CIS, it is important to and practical testing and lasts for one day. The top operational staff Protection Management System) and OHSAS 18001:2007 (Health keep open channels of communication. We continuously seek ways to at the branch determine the winners and award them with monetary and Safety Management System). Subject to the certification engage with our employees regarding matters occurring across the prizes, certificates and souvenirs. procedure the second surveillance audit as to compliance of the business. Our news directory contains news from our subsidiaries Health and Safety Management System as well as the Environmental and is available to each employee to keep them informed of ongoing Protection Management System with the requirements of the international standards ISO 14001:2004, QHSAS 18001:2007 was carried out in BKE in 2013. The audit company recommended that BKE recertified as compliant with the requirements of the standards.

Eurasia Drilling Company Strategic report 34 Annual Report 2014 Strategic report Corporate responsibility continued

In June 2007, BKE Shelf, our offshore operating subsidiary, was Commitment to the community Commitment to our investors and customers audited and recognised as complying with the quality standard ISO We are involved in several projects in various communities where we We do all this while never losing sight of the fact that, fundamentally, 9001:2000 (Russian Register Certification System) under the IQNET operate, aimed at improving the wellbeing of the local population. Our we are here to run a successful business that makes a profit and programme. Early in 2013 BKE Shelf was audited and recertified in support includes financial assistance for the disabled, low-income invests for continued long-term growth. compliance with the quality standard ISO 9001:2008. families, disabled and elderly war veterans, and disadvantaged, disabled and orphaned children. We plan to continue reporting our financial results on a six-monthly The minimisation of any negative effects of our operations on the basis to support investors in our Eurobonds. These will be posted on environment is critical to us. Our offshore operations in the Caspian EDC supports the development of youth sport in the regions of our website at www.eurasiadrilling.com. Sea are in strict compliance with the zero discharge principle. This our operations, and we strive to enrich the cultural life of local principle means that no waste is discharged into the sea; rather it is communities. As an example, we sponsor local national holidays for We will also continue to report our drilling volumes on our website collected in closed containers and transported onshore for disposal. the Khanty-Mansiysk and Yamalo-Nenetz Autonomous Regions’ on a monthly basis. The zero discharge principle is applied for all of our exploration and population. production drilling. We have long-standing cooperation agreements with many Training is a key part of HSE and we installed drilling simulators in educational institutions to provide internships for students at our two of our training centres in 2014. These enable our employees to facilities. In 2014 we provided over 400 places for university and experience and manage drilling hazards in a controlled environment. college students. Educational institutions involved include: Ufa State Oil and Technical University, Tyumen State Oil and Gas University, Saratov State University of N.G. Chernyshevsky, Zhirnovsk Oil College, Samara State Technical University, Perm Oil College, Russian State University of Gubkin, Irkutsk State Technical University, Uchta State Technical University, Astrakhan State University, Almetyevsk State Oil Institute, Oktyabrsky Oil Industry College of S. Kuvykin, Perm National Research Polytechnic University, Saratov State Technical University, National Mineral Resources University, National Research Tomsk Polytechnic University, Platov South-Russian State Polytechnic Remembrance parade in Kogalym Remembrance Parade in Usinsk University, Northern (Arctic) Federal University and Nefteyugansk Industrial College.

2015 was a special year of remembrance of 70 years since the world war that had a significant impact on Russia. Our employees participated in remembrance events in all regions where EDC is located in order to remember relatives and ancestors who lost their lives in the World Wars.

New training simulator commissioned in 2014 SGC Eurasia participates in Commemorating with veterans being demonstrated by Head of HSE Osama Saudi remembrance parade in Perm

Eurasia Drilling Company Strategic report 35 Annual Report 2014 Corporate governance Board of Directors

The Earl of Clanwilliam Dr Alexander Djaparidze Richard Anderson Chairman of the Board of Directors of EDC Chief Executive Officer of EDC Chief Financial Officer of EDC

The Earl of Clanwilliam has been the Chairman of the Board Dr Djaparidze has been the Chief Executive Officer of the Company Mr Anderson was the Chief Financial Officer of the Company from of Directors of the Company since October 2007. Until recently, he since August 2007 and was one of the Company’s founders in 2002. July 2008 to March 2015 and has been a member of the Board of has also been a member of the board of directors of OJSC Polyus He has also been the Chairman of BKE since 2005. From June 1995 Directors since October 2011. Mr Anderson has 32 years of Gold (since March 2006); he now sits on the board of directors of to February 2007, Dr Djaparidze served as President of PetroAlliance. experience in the oil and gas industry in various finance and the parent company Polyus Gold International Limited. The Earl of Prior to joining PetroAlliance, he held various executive positions at management roles. Mr Anderson was the President and Chief Clanwilliam founded and is currently a director of Meade Hall & CGE, and served as Managing Director of MD SEIS. Dr Djaparidze Executive Officer of Prime Natural Resources, Inc. from May 2002 Associates (formerly Gardant Communications). Since 1997, The Earl holds a degree in mining engineering and geophysics from the to March 2007. Mr Anderson also served as a director of Transocean of Clanwilliam has served as a member of the board of directors of Gubkin Russian State University of Oil and Gas. Dr Djaparidze from September 2007 to June 2011 and as a director of Boots & the Benevolent Society of St Patrick, and since 2005, has served on also holds a PhD in technical science from the Gubkin Moscow Coots, Inc. from April 1998 to September 2010. He also currently the Advisory Council of the Ukrainian British City Club, and from Institute of Oil and Gas and is a member of the Eurasia Geophysical serves as a director of Vanguard Natural Resources Ltd. Mr Anderson 2000 to 2004 was non-executive chairman of Cleveland Bridge UK Society. Dr Djaparidze was awarded the Russian Federation is a non-executive independent director of Gulf Marine Services Plc Ltd. The Earl of Clanwilliam is a Director of NMC Healthcare, a FTSE Government prize for special achievements in science since February 2014 and a non-executive director of Soma Oil & Gas 350 company with operations in the UAE, and a Chairman of the and technology in 2006. He is a member of the Eurasia Holdings since December 2013. Mr Anderson is a certified public Charitable Foundation of Oracle Capital, the London-based multi- Geophysical Federation (EGS). accountant and holds a BSc magna cum laude in business from the family wealth office. He is also a senior advisor to the Board of University of Colorado and a Master’s degree in taxation from the Milio International Limited, a British-owned and -operated University of Denver. commodities and logistics company. In December 2013, the Earl of Clanwilliam joined the board of directors of Soma Oil & Gas Holdings. The Earl of Clanwilliam is a graduate of Eton College and The Royal Military Academy, Sandhurst.

Eurasia Drilling Company 36 Annual Report 2014 Governance Corporate governance Board of Directors continued

Maurice Dijols Martin Hansen Dr Alexander Shokhin

Mr Dijols has been a member of the Board of Directors since October Mr Hansen has been a member of the Board of Directors since 2005. Dr Shokhin has been a member of the Board of Directors since 2011. Mr Dijols was the President of Schlumberger Russia from 2003 He served as the Chief Financial Officer of the Company from May October 2007. He has served on the board of directors of LUKOIL to 2011. Mr Dijols joined Schlumberger in the Middle East in May 2004 to November 2007. He was formerly a member of the board of from 2005 to 2013 and TNK-BP from 2009 to 2013. Dr Shokhin 1977 and has held a variety of executive positions during his 35-year directors of BKE from 2005 to 2007. From 1999 to 2002, Mr Hansen also serves on the board of directors of OAO Russian Railways career with Schlumberger. Mr Dijols has been a non-executive was Chief Financial Officer of PetroAlliance. Mr Hansen holds a BA and OAO Baltika Breweries since 2008, and OAO Alrosa since 2013. director of Ruspetro PLC since 2013. He also serves as an in business administration from the University of Iowa. Dr Shokhin has been the President of the State University-Higher independent director of IG Seismic Services Limited. Mr Dijols is School of Economics since 1995. He has been President of the a Member of the Society of Petroleum Engineers, Member of the Russian Union of Industrialists and Entrepreneurs since 2005. Presiding Committee of the European Business Congress and Dr Shokhin was Chairman of the Supervisory Council of Member of the Conseil du Commerce Extérieur de la France. Renaissance Capital Investment Group from 2002 until 2005. From Mr Dijols holds a degree from the Ecole d’Ingénieurs de Marseille 1994 until 2002, he was a Deputy of the State Duma, where his last and the Ecole Supérieure d’Electricité. position was Head of the Duma Committee on Credit Institutions and Capital Markets. Dr Shokhin holds a degree in economics from Moscow State University. He is a Doctor of Economic Science and Professor and Member of the Russian Academy of Natural Sciences. He was awarded the Order of Honour (1997) and the State Order ‘For Merits before the Fatherland’ of 4th degree (2008).

Eurasia Drilling Company 37 Annual Report 2014 Governance Corporate governance Board of Directors continued

Anatoliy Kozyrev Edward J. DiPaolo Igor Belikov

Mr Kozyrev has been a member of the Board of Directors since Mr DiPaolo has been a member of the Board of Directors since Mr Belikov has been a member of the Board of Directors since September 2012. He served as a member of the board of directors September 2013. He is the founder, partner and president of JNDI September 2013. Since 2002 he has been the CEO of the NGO the of BKE and BKE Shelf from 2008 to 2012. From 1998 to 2007, Corporation, a worldwide oil and gas consulting company formed Russian Institute of Directors, a leading Russian thinktank, research Mr Kozyrev served as Vice President and Director of the Chief in 2002. He also serves as a senior advisor with Duff & Phelps and expertise provider on corporate governance. From 1997 to 2002, Administration for Corporate Budget and Economy Planning and Corporation. Mr DiPaolo built a 26-year career with Halliburton Mr Belikov was the General Director of the Institute for Stock Market Investments of LUKOIL. From 1993 to 1998, he served as Deputy Company, culminating in the role of Group Senior Vice President and Management. He served as President of the Institute of Minister of Fuel and Energy of the Russian Federation, and sat on of Global Business Development. Prior to that, he worked in various Privatization and Management from 1996 to 1997. Mr Belikov the board of directors of LUKOIL. Mr Kozyrev holds a degree in management and engineering positions in the United States, Europe currently serves on the boards of directors for OAO Acron (chairman engineering and economics from the Moscow Institute of Engineering and the Far East and has worked for both Halliburton Energy of the audit committee), OAO Mortgage Credit Agency (chairman of and Economy and a degree in international economic relations from Services and KBR. He retired from Halliburton in May 2002. Mr the nomination and remuneration committees, OAO Vnukovo Airport the USSR Federal Academy of Foreign Trade. DiPaolo was an Energy Partner at Growth Capital Partners, L.P. until (chairman of the board), and OAO VNIPINeft. He also chairs the 2011. He currently serves on the boards of directors for: Edgen Financial Inspection Commission of OAO Aeroflot. Mr Belikov has Group, lnc., Evolution Petroleum and Willbros Group, lnc. He also also served on the boards of LUKOIL, Siberian Telecom, North West works with several private equity groups and sits on several private Telecom and Astrakhanenergo. Mr Belikov obtained his diplomas company boards. Mr DiPaolo also served on the board of directors from Voronezh State University (History and English) and the Finance of Boots & Coots, lnc., Superior Well Services, lnc. and lnnicor Academy (Banking and Insurance) and academic degree (Candidate Subsurface Technologies, lnc. Mr DiPaolo received his BSc in of Science) from the Institute of African Studies of the Academy of agricultural engineering from West Virginia University in 1976. Sciences of the USSR. Mr Belikov is a co-author of the Russian Corporate Governance Code and has had extensive consulting experience on corporate governance.

Eurasia Drilling Company 38 Annual Report 2014 Governance Corporate governance Corporate governance report

The Company is committed to observing high Board composition Staggered Board standards of corporate governance. This report As of the date if this report, the Board of Directors of the Company In accordance with the Articles of Association, the Company’s Board comprised nine directors: of Directors is divided into three classes. Each Director holds office for describes how the Company has applied the a term of three years, such terms being staggered in accordance with principles of good governance as set out in Chairman resolutions adopted at the Company’s Annual General Meeting held the UK Corporate Governance Code issued Lord Clanwilliam 9 September 2009. by the UK Financial Reporting Council in Executive Directors Our Board of Directors is divided into three classes as described September 2012 (the Code), except where Dr Alexander Djaparidze (Chief Executive Officer) below: indicated otherwise within this report. and Mr Richard Anderson (Chief Financial Officer). Term to expire While the Company as a legal entity incorporated in the Cayman Non-Executive Directors at the Annual Islands is not subject to UK corporate governance requirements per Mr Dijols, Mr Hansen, Mr Kozyrev, Dr Shokhin, Mr DiPaolo General se, the Company nevertheless intends to comply with established Meeting to and Mr Belikov. Classes No. of Directors be held in practices under the Code, wherever reasonably possible. Class I 3 2015 The Board considers all seven Non-Executive Directors to be Class II 3 2016 The Board independent for purposes of the Code. Members of the Company’s Board of Directors are collectively Class III 3 2017 responsible to the Company’s shareholders for the direction The Board considers and will continue to consider its composition At each Annual General Meeting of the shareholders of the Company, and oversight of the Company to ensure its long-term success. from time to time. The Remuneration and Nomination Committee of one class of Directors will be elected for a full term of three years The Board met regularly throughout the year to approve the the Board on 1 March 2009 adopted a policy as to how best to to succeed that class of Directors whose terms shall be expiring. Company’s strategic objectives, to lead the Company within a consider and nominate members of the Board. The Board may The three-year cycle relating to the appointment and tenure of each framework of effective controls, which enable risk to be assessed choose to deviate from the strict requirements of the Code in relation class of Directors referred to above is a continuous rolling cycle, and managed, and to ensure that sufficient resources are available to Board composition on a case-by-case basis if it is considered in commencing for the second time in the year following the third year to meet the objectives set. the best interests of the Company, consistent with industry practice of the cycle. Shareholders may only appoint or remove Directors at generally or required by applicable Cayman Islands law. such time in the cycle as they are due for re-election. Brief biographies of the Executive and Non-Executive Directors are set out on pages 36 to 38. The biographies illustrate that the Directors have a range of business and financial experience that is important and relevant to the management of the Company. The roles of Chairman of the Board and Chief Executive Officer are clearly defined and separate. Except as otherwise noted, each member of the Board of Directors was appointed to the Board on 15 October 2007.

Eurasia Drilling Company 39 Annual Report 2014 Governance Corporate governance Corporate governance report continued

The following persons were elected to the Board of Directors Board business Corporate • renaming Safety Committee as Health, Safety and in accordance with the class designated against their names: During 2014 the key activities of the Board included: responsibility Ecology Committee and its appointment as permanent committee of the Board; • receipt of regular management reports on health, Class Strategy • review and discussion of various potential Name of Director Age Position designation safety and environment issues; acquisitions and financings; Martin E. Hansen 74 Director Class I • approval of the Company’s Sanctions Compliance • establishment of a Special Committee, comprising Policy; Maurice Dijols 63 Director Class I of three independent Directors of the Board, to • completion of an annual self-evaluation of the Anatoliy Kozyrev 72 Director Class I provide an independent review of a potential Board’s work; Director and merger, acquisition, going private or investment People • nomination of Class III Directors for re-election; Richard Anderson Chief Financial Officer Class II transaction; 61 • review and approval of the adjustment to the target Governance • approval of the Company’s full-year and interim Igor Belikov 58 Director Class II achieved under the 2013 Long-Term Incentive and risk results; Edward J. DiPaolo 61 Director Class II Compensation Plan in 2013 to 11%, as well as • approval of the 2014 dividend; Chairman of the approval of the revised 2015 award schedule to the • reviews of the material financial and non-financial Lord Clanwilliam 54 Board of Directors Class III Plan. risks facing the Group’s businesses; Alexander Yu. Director and • receipt of regular safety updates; Djaparidze 59 Chief Executive Officer Class III • approval of share conversion into GDRs by some Alexander Shokhin 63 Director Class III shareholders; Performance • receipt of regular reports to the Board from the Lord Clanwilliam, Alexander Yu. Djaparidze and Alexander monitoring Chief Executive and the Company’s management; Shokhin were appointed to the Board on 22 September 2014. • approval of the Group plan and budget for the 2014 Martin E. Hansen, Maurice Dijols and Anatoliy Kozyrev were financial year; appointed to the Board on 28 September 2012. Richard Anderson, • undertaking of capital expenditure reviews, and Igor Belikov and Edward J. DiPaolo were appointed to the Board reviews of potential acquisitions, as well as receipt on 23 September 2013. of reports on the Company’s GDRs’ market performance; • receipt, on a rolling basis, of management presentations; • receipt of feedback on meetings held with institutional investors; • review and approval of a Guarantee to secure BKE payment obligations under US $19,983,371.12 Credit Facility Agreement; • approval of a $200 million share buyback program for a period of six months beginning on April 2, 2014;

Eurasia Drilling Company 40 Annual Report 2014 Governance Corporate governance Corporate governance report continued

Board meeting attendance Board appointment process Information and professional development During 2014 the Company’s Board of Directors held three meetings, To ensure a rigorous and transparent procedure, any new candidate As required by the Code, all Directors have access to the advice on 18 February 2014, 13 June 2014 and 23 September 2014. All the for nomination as a Director is considered by the Board as a whole, and services of the Company Secretary, and any Director wishing to Board members attended the meetings in person. on the recommendation of the Remuneration and Nomination do so in furtherance of his duties may take independent professional Committee. The nomination process involves considering the existing advice at the Company’s expense. In the year ended 31 December Senior executives are invited, when appropriate, to attend Board balance of skills and experience on the Board, and a continuous 2014, members of the Special Committee hired legal counsel and meetings and to make presentations on the results and strategies of process of assessing the needs of the Company. Non-Executive an investment bank to review the fairness of a potential merger the Company and their business units. Papers and information for Directors are required to devote sufficient time to the Company’s transaction to shareholders. In order to discharge their duties, Board and committee meetings are generally provided to Directors in affairs. Successful candidates are subject to election at the Annual Directors are provided with access to papers prior to Board meetings advance to enable adequate preparation for thorough discussion at General Meeting. and Directors are free to seek any further information they consider these meetings. This allows any Director who is unable to attend a necessary. In addition, between Board meetings, Directors have meeting to provide comments to the Chairman, the Chairman of the Role and authority of the Board access to the Company’s officers and employees in order to progress relevant committee or the Company Secretary, who will then relay The Company is controlled through its Board. The Board’s main the Company’s business. these comments to the relevant meeting. roles are to manage the Company with the objective of maximising shareholder value, set the general business strategy of the Company In order to facilitate the Directors’ fulfilment of their responsibilities Some decisions are taken between Board meetings by written and oversee decision-making and risk management processes within regarding continuing education and to enhance each Director’s resolution or consent in accordance with the Company’s Articles of the Company. The Board is governed by its Charter, which is posted knowledge of the Company, the Company’s business operations and Association. When Directors are not able to attend in person, video on the Company’s website. the latest developments in corporate governance, the management and teleconferencing facilities allow them to participate fully. provides Directors with the following: The Board reserves to itself certain key matters to approve or monitor, • access to, or notice of, continuing educational programmes that are such as the Company’s business plans, annual budget, significant designed to keep Directors abreast of the latest developments in capital expenditure, as well as the Company’s operating and financial corporate governance matters and critical issues relating to the performance. The Directors are provided with regular information on operation of public company boards; the Company’s performance and activities and meet on a regular • material that contains information pertaining to (i) the Company’s basis. Meetings include a formal schedule of matters specifically industry and (ii) comparisons of the Company with its major reserved for the Board’s decision. Additional special meetings of the competitors; and Board may be called as necessary • reports and presentations from various advisors of the Company on its business.

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Chairman and Chief Executive Company Secretary Our Audit and Finance Committee comprises four members, three There is a clear division of responsibilities between the Chairman The Company Secretary is Mr Douglas Stinemetz, who is also a of whom are independent Directors for the purposes of the Code: and the Chief Executive Officer. The Board is chaired by the General Counsel of the Company and a partner with The Stinemetz Dr Alexander Shokhin (the Chairman), Mr Martin Hansen and Lord Clanwilliam. The Chairman is responsible for leadership of Law Firm. Mr Stinemetz supports the Chairman in the delivery of the Mr Anatoly Kozyrev, who are all independent for the purposes of the Board, ensuring its effectiveness in all aspects of its role, setting corporate governance agenda, in particular in the planning of agendas the Code; and Mr Richard Anderson, an Executive Director and its agenda and implementing the Board’s resolutions, as well as for for Board and Committee meetings, and in ensuring that information EDC’s Chief Financial Officer. coordination of operational activities with the Chief Executive Officer is made available to Board members on a timely basis. He advises with an objective of delivering value to the shareholders. the Directors on Board procedures and corporate governance Our Remuneration and Nomination Committee is comprised of matters. During 2014, Mr Stinemetz responded to various three members, the majority of whom are independent Directors Dr Alexander Djaparidze is the Company’s Chief Executive Officer. consultations on the evolving global governance and reporting for the purposes of the Code: Mr Dijols (the Chairman) and Lord The Chief Executive Officer is responsible for formulating strategy agenda on behalf of the Group. He also engaged with shareholders Clanwilliam, who are independent for the purposes of the Code; and for ensuring its delivery once agreed upon by the Board. The to ensure they fully understood the Company’s governance and and Dr Djaparidze, our Chief Executive Officer. Chief Executive Officer is appointed by the Board to manage the remuneration arrangements. Company and to supervise and hold accountable all EDC operational Our Corporate Governance Committee comprises three members: personnel. The Chief Executive Officer has authority on all matters of Board evaluation Lord Clanwilliam (the Chairman), Mr Belikov and Mr Kozyrev, who management and is accountable for all duties and responsibilities The Board of Directors undertakes an annual evaluation to assess the are all Non-Executive Directors and are independent for purposes delegated by the Board to ensure the performance of the Company. performance of the Board as a whole, its committees and individual of the Code. The Chief Executive Officer is primarily responsible for new business Directors, with the aim of improving the effectiveness of the Board and development, communicating with shareholders and analysts and all its members and the performance of the Company. Our Safety Committee comprises three members: Mr DiPaolo (the areas of day-to-day management of operations of the Company. In Chairman), Lord Clanwilliam and Mr Dijols, who are Non-Executive doing so, he works with the executive management team, which Insurance Directors and are independent for purposes of the Code. Each of the comprises vice presidents and certain other senior executives In accordance with the Code, the Company maintains Directors’ and committees has terms of reference under which authority is delegated officers’ insurance in respect of the Directors’ duties as directors, by the Board. The terms of reference for each committee can be which is renewed on an annual basis. found at: www.eurasiadrilling.com/investor-relations/corporate- governance/board-committees/. The Board delegates specific Board committees responsibilities to committees as described below. Specific responsibilities have been delegated to Board Committees and each has its own terms of reference, which are available on In addition to the principal Board committees, the Special Committee, www.eurasiadrilling.com/investor-relations/corporate- which was formed in late 2014, focuses on providing an independent governance/board-committees/. The principal committees of the review of a potential merger, acquisition, going private or investment Board are the Audit and Finance, Remuneration and Nomination, transaction. Corporate Governance and Health, Safety and Ecology Committees. We believe that our Audit and Finance Committee serves the same function as the audit committee recommended by the Code and that our Remuneration and Nomination Committee serves the same function as the remuneration committee and the nomination committee recommended by the Code. Currently we are able to comply with the requirements of the Code in relation to the composition of the audit committee and the remuneration committee.

Eurasia Drilling Company 42 Annual Report 2014 Governance Corporate governance Corporate governance report continued

Audit and Finance Committee Corporate Governance Committee Based on Health, Safety and Ecology Committee recommendations, The Company’s Audit and Finance Committee consists of four Our Corporate Governance Committee consists of three members: the Company has taken several new initiatives to promote health and members: Dr Shokhin, Mr Hansen, Mr Kozyrev and Mr Anderson. Lord Clanwilliam, Mr Kozyrev and Mr Belikov. safety internally: it has (1) developed and implemented a new QHSE The Committee is chaired by Dr Shokhin. The Audit and Finance system (2) hired an experienced specialist in drilling health and safety Committee convenes as often as necessary. The Committee is The Committee is chaired by Lord Clanwilliam. The Corporate management to head the Company’s HSE Department in Moscow authorised to carry out the following functions relating to the control Governance Committee is responsible for assisting and advising the and (3) introduced a new reporting system for accidents of the Company’s financial and business operations: Board of Directors with respect to matters relating to the general • coordinate with the Company’s independent auditors and prepare operation of the Board of Directors, corporate governance and the Special Committee recommendations for its Board of Directors in connection with the performance of the Board of Directors and individual Directors. The Special Committee was formed by the Board in December, 2014, election and removal of the independent auditors and on the fee To ensure compliance with the Company’s obligations under the following receipt by the Company of certain expressions of interests paid to, and scope of services to be provided by, the independent Listing Rules (including the obligations under the Disclosure and involving potential merger, acquisition, going private or investment auditors; Transparency Rules) of the United Kingdom Listing Authority (UKLA), transaction (the “Transactions”). The Committee is comprised of • assess the independent auditors’ reports; to preserve the Company’s reputation for integrity and ethical conduct three independent Directors: Earl Clanwilliam, Mr Igor Belikov and • review the Company’s standards and internal control procedures and to avoid improper conduct by anyone associated with the Dr Alexander Shokhin. and make appropriate reports and recommendations to the Company, the Company has introduced a Corporate Disclosure Company’s Board of Directors; Policy, a Share Dealing Policy, and an Anti-Bribery Compliance Policy, The Committee’s objective is to review and oversee any and all • assess the Company’s financial reports; as well as the Enforcement Policy and Procedures. The Company has Transactions and make recommendations to the Board. The • review and approve budgets and business plans, as well as also established a Disclosure Committee. More detailed information Committee is authorized to approve any Transaction on behalf the process for developing budgets and business plans; about the above corporate policies is given in the Directors’ report on of the Board. • review and approve intercompany financings; and pages 46 to 48. • review and approve any financing transactions with a value In January 2015, the Committee evaluated the proposed Transaction, in excess of US $50 million. Health, Safety and Ecology Committee as described in “Significant agreements” section on page47 below, Our Health, Safety and Ecology Committee is comprised of three and the Company’s preparedness for any Transaction, hired counsel Remuneration and Nomination Committee members: Mr DiPaolo, Lord Clanwilliam and Mr Dijols. The Committee and an investment bank to review the fairness of the Transaction to The Company’s Remuneration and Nomination Committee consists is chaired by Mr DiPaolo. shareholders, approved the Transaction on behalf of the Board and of three members: Mr Dijols, Lord Clanwilliam and Dr Djaparidze. recommended it for the Company’s shareholders’ approval. The Committee is chaired by Mr Dijols. The Committee is responsible The Health, Safety and Ecology Committee is responsible for for establishing and implementing a policy for the compensation evaluating the effectiveness of the Company’s policies and systems Relationship with shareholders of Directors, consultants and members of senior management, for identifying and managing health, safety and environmental risks The Company is a strong proponent of transparency, best practice which may take the form of cash, stock options granted pursuant within its operations, as well as for ensuring compliance with health, disclosure, consistent communication and equal and timely to stock option plans and other benefits. More detailed information safety and environmental regulatory requirements. It receives, on dissemination of information to shareholders. about the Remuneration and Nomination Committee is given in the behalf of the Board, reports from management concerning any Remuneration report on pages 49 to 51. fatalities and/or serious accidents within the Company and any The Company continues to increase its communication with resulting action. The Committee also reviews any strategies and shareholders, investors and brokers. Presentations are made to action plans developed by management in response to issues raised analysts, the press and institutional investors at the time of the and, where appropriate, makes recommendations to the Board announcement of the full-year and half-year results. The Company, concerning the same. principally through the Chief Executive Officer, Chief Financial Officer and Vice President Marketing and Investor Relations, maintains a regular dialogue with institutional shareholders and financial analysts, particularly following the interim and preliminary results announcements.

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The Company has a website, www.eurasiadrilling.com, on which In addition, the Company’s policies contain a statement on business Results of 2014 Annual General Meeting of it publishes its press releases, stock exchange announcements, conduct which emphasises the legal, ethical and moral standards that shareholders announcements of conference calls with shareholders and other have to be employed in all of the Company’s business dealings. The On 22 September 2014, the Company held its annual shareholders’ information concerning the Company’s business, and upon which it Company expects the highest standards from all employees and key meeting in Rottach-Egern, Germany. The primary business brought also publishes its annual and interim results. The Annual General suppliers. before the meeting consisted of two proposals. The first proposal Meeting is the principal forum for dialogue with private shareholders. sought re-election and appointment of Class III Directors. The second Shareholders may obtain copies of annual and interim reports upon Statement of compliance with the Code proposal sought shareholder approval of the appointment of KPMG request. A business presentation is made by the Chief Executive The Directors believe the Company has complied with the provisions as the Company’s independent auditor. Officer and there is an opportunity for shareholders to put questions set out in the Code, except as set out above in this report. The to the Directors. Directors are of the opinion that these areas of non-compliance do not The first proposal (election of Class III Directors: Lord Clanwilliam, prejudice shareholders’ interests and are justifiable given the specific Dr. Alexander Djaparidze and Dr. Alexander Shokhin) was approved Internal controls circumstances of the Company. by about 91.4%, 81.9% and 80% of the shares voting, respectively, The Board has overall responsibility for the Company’s system of while the second proposal was passed by about 91.9% of the shares internal controls and for reviewing its effectiveness, while the Going concern voting. Approximately 92.1% of the total issued and outstanding implementation of internal control systems is the responsibility of the The Directors are satisfied that the Group has adequate resources to shares of the Company were present at the meeting either in person Company’s management. However, such a system can only manage continue to operate for the foreseeable future and have adopted the or by proxy and voted. rather than eliminate the risk of failure to achieve business objectives going concern basis in preparing the financial statements. and can only provide reasonable, not absolute, assurance against Auditors’ fees for 2014 material misstatement or loss. The Board maintains full control over Greater than 10% shareholdings The Company’s independent auditing firm is ZAO KPMG, a company strategic, financial, operational and compliance issues. Within the As of 31 December 2014, the following are shareholders who, to the incorporated under the laws of the Russian Federation and a member overall objectives set by the Board, the management of the Company Company’s knowledge, own, directly or indirectly, over ten per cent firm of the KPMG network of independent member firms affiliated with is delegated to the Chief Executive Officer, who is assisted by the (10%) of the Company’s issued and outstanding shares: KPMG International, a Swiss cooperative. During 2013 the Company Company’s management. The responsibilities of the Company’s paid ZAO KPMG US $1,288,336 (net of VAT) for auditing services. management include: Alexander Djaparidze 30.2%1 The firm provided no material non-audit services to EDC during2013 . • the development and recommendation of strategic plans for Alexander Putilov 22.4%2 consideration and approval by the Board that reflect the longer-term 1 objectives and priorities established by the Board; Dr Djaparidze is Chief Executive Officer as well as a member of the Board of Directors of the Company. His shareholding includes shares owned by the • implementation of the strategies and policies of the Company as Patrimony 2012 Trust, by Dr Djaparidze directly, Cloudburst Orange Limited determined by the Board; and by Margin Finance Company Limited. • monitoring of operating and financial results against the plans and 2 Mr Alexander Putilov is the beneficial owner of the shares held by Burned Sun Limited, through his ownership of Burned Sun Limited. budgets; • prioritisation of the allocation of technical and human resources; • development and implementation of risk management systems; and • management and monitoring of health, safety and environmental matters.

Eurasia Drilling Company 44 Annual Report 2014 Governance Corporate governance Statement of Directors’ responsibilities in respect of the Annual Report and the financial statements

The Directors are responsible for preparing the Annual Report and the The Directors are responsible for keeping proper accounting records Company financial statements in accordance with applicable law and that disclose with reasonable accuracy at any time the financial regulations. Our corporate affairs are governed by our amended and position of the Company and enable them to ensure that its financial restated memorandum of association (the ‘Memorandum of statements comply with US GAAP. They have general responsibility Association’), the amended and restated articles of association (the for taking such steps as are reasonably open to them to safeguard ‘Articles of Association’) and by the Companies Law (2013 Revision) the assets of the Group and to prevent and detect fraud and other (the ‘Companies Law’) and the common law of the Cayman Islands. irregularities. As noted in the Corporate Governance report, because the Company is incorporated in the Cayman Islands, it is not subject to UK The Directors are responsible for the maintenance and integrity of corporate governance requirements. However, because the Company the corporate and financial information included on the Company’s intends to comply with established best practice, wherever possible website. Legislation in the UK governing the preparation and and where it is in the Company’s interests, the Company has applied dissemination of financial statements may differ from legislation the principles of good governance set out in the Corporate Code, in other applicable or controlling jurisdictions. To the best of the except where indicated within this report. The Company’s audited Directors’ knowledge: consolidated financial statements and the accompanying notes have (a) the financial statements prepared in accordance with US GAAP been prepared in accordance with US GAAP. give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and its consolidated In preparing the Company’s financial statements, the Directors are undertakings; and required to: (b) the Annual Report includes a fair review of the development and • select suitable accounting policies and then apply them performance of the Company’s business and the position of the consistently; Company and its consolidated undertakings as a whole, together • make judgments and estimates that are reasonable and prudent; with a description of the principal risks and uncertainties it faces. • state whether they have been prepared in accordance with US GAAP; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

Eurasia Drilling Company 45 Annual Report 2014 Governance Corporate governance Directors’ report

This report is submitted for the year ended Retirement and re-election of Directors The Corporate Disclosure Policy provides examples of what may 31 December 2014. In accordance with the Articles of Association, the Company’s Board constitute confidential information, which depending upon the of Directors is divided into three classes. Each Director holds his office circumstances may include, but are not limited to the following: (i) Activities, profits and dividends for a term of three years, such terms being staggered in accordance changes in corporate structure; (ii) changes in capital structure; (iii) changes in financial results; (iv) changes in business operations; (v) The principal activities of the Company continue to be onshore and with resolutions adopted at the Company’s Annual General Meeting acquisitions and dispositions; and (vi) changes in credit arrangements. offshore drilling services in Russia and in the Caspian Sea, as well held on 9 September 2009. Pursuant to the Articles of Association, as onshore integrated well construction and workover services. one third of the Directors of the Company are required to retire by rotation at each Annual General Meeting. The retiring Directors are Share Dealing Policy summary The Company’s profit for the year amounted to US $420 million eligible to stand for re-election. The Company has adopted a Share Dealing Policy, a copy of which (2013: US $432 million). is available on the Company’s website. The Share Dealing Policy At the Annual General Meeting, Lord Clanwilliam, forbids dealing in the Company’s shares based on material non-public For the year ended 31 December 2014 the Board of Directors 2014 Dr. Djaparidze and Dr. Shokhin were elected as Class III information, i.e. insider trading and similar offences. The purpose of declared an ordinary dividend effective 31 October 2014 in the Directors on September . the Share Dealing Policy is to ensure compliance with the law, to amount of US $1.00 per share or US $144 million, which was included 22 2014 preserve the Company’s reputation for integrity and ethical conduct in ‘Accounts payable and accrued liabilities’ and payable on and to avoid improper conduct by anyone associated with the 19 December 2014. In 2013 a dividend of 92 cents per share Company policies The Directors have adopted several policies applicable to Company. The Share Dealing Policy makes the Company’s Directors, or US $135 million was declared and paid early in 2014. the Directors, officers and employees of the Company as officers and employees aware that they are all personally responsible for ensuring the Company’s strict compliance with this Policy and Further descriptions of the Company’s development and performance summarised below. that any breach of it will be treated as a disciplinary offence with the during the year, position at the year-end and likely future prospects severest consequences. The Policy establishes certain procedures are reviewed in the Chairman’s statement, the Chief Executive Corporate Disclosure Policy summary and requires all persons to consult with the General Counsel of the Officer’s strategic review, in Management’s discussion and analysis The Company has adopted a Corporate Disclosure Policy, a copy of which is available on the Company’s website. The Corporate Company before taking any action that may be covered by the Policy. of financial condition and operational results on pages17 to 33, Disclosure Policy regulates the disclosure of information about the Corporate governance report on pages 39 to 44, and the the Company to the public. The purpose of the Policy is to raise Policy and practice on payment of suppliers Remuneration report on pages 49 to 51 which are incorporated As a result of the nature of the Company’s business, its contractual into this Directors’ report as if set forth herein. awareness of the Company’s approach to disclosure among the Board of Directors, senior management and employees of the relationships with suppliers of goods and services and with Share capital and major shareholders Company. This Corporate Disclosure Policy does not derogate subcontractors vary according to circumstances. It is the Company’s policy to enter into an appropriate form of contractual agreement on The Company’s share capital and major shareholders are set forth from the Company’s existing policies and practices regarding payment terms and to pay according to those terms. The Company in the Notes to the consolidated financial statements on pages confidential information. does not follow any particular code or practice for the payment 57 to 69, the Corporate governance report on pages 39 to 44 and A disclosure committee (the ‘Disclosure Committee’) has been of creditors. In practice, the Company makes every effort to the Remuneration report on pages 49 to 51. established with responsibility for overseeing the Company’s pay accordingly when it can be confirmed that the supplier has disclosure practices and consists of the Chief Executive Officer, provided the goods or services in accordance with the relevant Chief Financial Officer and General Counsel of EDC. Confidential terms of the contract. information about or related to the Company must not be disclosed to third parties except in accordance with the Corporate Disclosure Policy.

Eurasia Drilling Company 46 Annual Report 2014 Governance Corporate governance Directors’ report continued

Anti-bribery Compliance Policy summary Company, before doing business directly or indirectly with a country Friday 6 March 2015. A separate notification of such termination It is the policy of EDC to comply with applicable laws against bribery, that is the target of country-based sanctions, must: (i) review the and a notification that the Extraordinary General Meeting has been including the UK Bribery Act 2010, which came into force on 1 July relevant Instruction under this Policy; (ii) inform the sanctions working convened and setting out the procedure for GDR holders to exercise 2011, the Foreign Corrupt Practices Act and other relevant legislation, group of any transaction which may violate sanctions in place; and their voting rights will be issued by the Depositary to GDR holders. and prohibit the taking of bribes. The Anti-bribery Compliance Policy (iii) provide such additional information as may be requested by the is intended to serve as a preventive and teaching tool, to assist in Company’s General Counsel and/or Outside Legal Counsel in order As a result of the resolution to approve the Merger, passed at the recognising and avoiding potential conflicts with and violations of to confirm compliance with applicable law. Extraordinary General Meeting by the requisite percentage of the anti-bribery laws. The Anti-bribery Compliance Policy applies to all Shareholders and consummation of the Merger: levels of the Company’s business across all the jurisdictions in which Significant agreements • each of the Shares in issue and outstanding at the Merger the Company does business. The Company requires all the The Company agreed with certain members of the Company's Consideration Record Date (as defined below), other than the Company’s Directors, officers, managers, employees, agents, sales management team and certain significant shareholders (the Excluded Shares (as defined below), will be cancelled in exchange representatives, contractors, joint venture partners and all other ‘Participants’) the terms of a merger (the ‘Merger’) between the for payment of cash consideration of US $22.00 per Share (the parties carrying out services and acting on behalf of and with the Company and EDC Acquisition Company Limited (‘EACL’), a company ‘Merger Consideration’) following completion of the Merger or, in authority of the Company to comply with the Anti-bribery Compliance formed by one of the Participants solely for the purposes of the the case of Dissenting Shares (as defined below), the fair value of Policy, including: (i) not to offer, promise, pay and/or request and Merger, under the provisions of the Companies Law (2013 Revision) the Shares as determined in accordance with section 238 of the accept bribes or anything designed to create an undue advantage or of the Cayman Islands, as amended (the ‘Cayman Companies Law’). Cayman Companies Law; improper influence, and (ii) to report any incidents of bribery as • Dissenting Shares shall cease to confer upon any Dissenting required by the Anti‑bribery Compliance Policy and by law to the The Company convened an Extraordinary General Meeting of the Shareholder (as defined below) any of the rights of a member Company’s compliance officer and/or outside legal counsel. shareholders of the Company (the ‘Shareholders’) on Monday 16 except the right to payment of the fair value of such Dissenting February 2015, on which the Shareholders approved the plan of Shares held by them, the right to participate in proceedings until the Enforcement Policy and Procedures merger (the ‘Plan of Merger’) between the Company and EACL and determination of fair value is reached and the right to institute The Enforcement Policy and Procedures (‘EPP’) of the Company set the transactions contemplated by the Plan of Merger. Under the terms proceedings to obtain relief on the ground that the Merger is void out EDC’s policy and procedures for processing allegations of of the Plan of Merger, the Company will be merged with EACL, with and unlawful subject to and in accordance with the provisions of corruption in relation to activities of the Company, including the Company continuing as the surviving company after the Merger. section 238 of the Cayman Companies Law, unless any holders procurement of contracts, and dealings with the administrative The Plan of Merger is made pursuant to a merger implementation of Dissenting Shares fail to perfect or effectively withdraw or lose authorities of the territories in which EDC operates. agreement dated 20 January 2015 between the Company and EACL their dissenter rights, in which event they shall receive the Merger (the ‘Merger Implementation Agreement’). Consideration; Sanctions Compliance Policy • each share of EACL issued and outstanding as at the Effective Date The Company is committed to observing high standards of corporate Subject to the approval of the Plan of Merger and the Merger shall be converted into and exchanged for one Share; governance and ethical conduct and aims to ensure compliance with becoming effective (the date on which the Merger becomes effective • each Share held by EACL in issue and outstanding as at the Merger applicable laws and regulations with respect lo sanctions in being the date that the Plan of Merger is registered by the Cayman Consideration Record Date shall be cancelled by operation of law international business transactions. The Company’s management has Islands Registrar of Companies (the ‘Effective Date’)), the Company at the Effective Date; and decided to establish a working group, consisting of the Company’s intends to cancel the listing of the global depositary receipts (‘GDRs’) • each Share held by the Participants in issue and outstanding as at Chief Operating Officer, Chief Financial Officer and General Counsel representing its issued and outstanding shares with a nominal or par the Merger Consideration Record Date shall remain issued and and Secretary, to develop and deploy appropriate oversight, value of US $0.01 each (the ‘Shares’) on the Official List of the UK outstanding as at and following the Effective Date. monitoring and controls to ensure compliance with applicable Financial Conduct Authority and the admission of the GDRs to sanctions regimes and the Sanctions Compliance Policy. The working trading on the London Stock Exchange. Subject to the Merger The ‘Dissenting Shares’ are any Shares owned by ‘Dissenting group is to screen potential transactions and counterparties becoming effective, the Company has also provided written notice to Shareholders’ who have validly exercised and have not effectively (customers, vendors, suppliers, etc.) of the Company against The Bank of New York Mellon as depositary for the GDR programme withdrawn or lost their rights to dissent from the Merger in accordance applicable sanctions regimes and issue appropriate instructions (the ‘Depositary’) terminating the deposit agreement in respect with section 238 of the Cayman Companies Law and who have the regarding applicable sanctions. Any business segment of the of the GDRs (the ‘Deposit Agreement’) with effect from or around right to seek payment of the fair value of their Shares.

Eurasia Drilling Company 47 Annual Report 2014 Governance Corporate governance Directors’ report continued

The ‘Excluded Shares’ are the Shares that will be held by EACL and The Company anticipates that on the Effective Date, following In addition, the Merger cannot be implemented unless the Russian the Participants at the Effective Date representing approximately conversion of the convertible loan facility into Shares pursuant to Federal Anti-Monopoly Service (‘FAS’) confirms that SLB and the 69.33% of the Company's total outstanding Shares. the Convertible Loan Agreement and acquisition of approximately Company have responded to all information requests to FAS's 14.98% of the Shares from the Participants in accordance with the satisfaction and that no further notification to, or review by, FAS is ‘Merger Consideration Record Date’ means 5 p.m. (EST) on the Share Purchase Agreement, approximately 54.35% of the Shares will required, as well as a written confirmation from the Government business day immediately prior to the day on which the Plan of be held directly or indirectly by the Participants and approximately Commission on Monitoring Foreign Investment is issued. As a result, Merger is filed with the Cayman Islands Registrar of Companies. 45.65% of the Shares will be held directly or indirectly by SLB through the filing of the plan of merger with the Cayman Islands Registrar of its group companies. Companies, payment of the Merger consideration to the Company's The Merger Consideration represents a premium of 81.1% over the shareholders and by The Bank of New York Mellon (as depositary) to GDR price on 19 January 2015. Conditional on the implementation of the Merger, SLB Subsidiary holders of the Company's GDRs, and the delisting of the GDRs from has agreed to pay certain of the Participants an aggregate of the London Stock Exchange, will not occur on the expected dates It is proposed that the Merger Consideration will be financed by US $44 million under non-competition agreements between previously announced by the Company. a loan of approximately US $991 million provided by a subsidiary of SLB Subsidiary and certain of the Participants. Schlumberger Limited (‘SLB’) to EACL in accordance with the terms Annual General Meeting of a convertible loan agreement entered into between such subsidiary The holders of the Shares currently owned directly or indirectly by the The Directors have not scheduled an Annual General Meeting of the of SLB (‘SLB Subsidiary’) and EACL on 20 January 2015 (the Participants and which comprise approximately 69.33% of the issued Members of the Company in 2015 yet. Date of the Annual General ‘Convertible Loan Agreement’). The Merger will not be completed Shares voted in favour of the resolution voted on at the Extraordinary Meeting, as well as details of the resolutions to be proposed at the unless all of the conditions precedent in the Convertible Loan General Meeting. Annual General Meeting are given in the Notice of Annual General Agreement have been satisfied or waived (where applicable) by the Meeting, which is published separately and sent to shareholders. relevant time. Pursuant to the terms of the Merger Implementation Agreement, in The Directors consider that all of the resolutions set out in the Notice addition to approval by Shareholders and the shareholder of EACL, of Annual General Meeting are in the best interests of the Company On or around the Effective Date, SLB Subsidiary and EACL have the filing of the Plan of Merger with the Cayman Islands Registrar of and its shareholders as a whole and recommend that shareholders agreed that the convertible loan facility will be converted into new Companies is subject to certain conditions, including: (i) no material vote in favour of each of them. Shares in an amount equal to the number of Shares (other than the adverse change having arisen in relation to the Company; (ii) the Excluded Shares) cancelled by operation of law as part of the Special Committee not having withdrawn its recommendation of Auditors Merger at a conversion price of US $22.00 per Share. Following such the Merger; (iii) none of EACL, the Company, any subsidiary of the During the year KPMG Limited continued as the Company’s conversion under the Convertible Loan Agreement, SLB Subsidiary Company nor any of the Participants becoming subject to European independent auditors. KPMG Limited have expressed their willingness and another affiliate has agreed to acquire approximately a further Union or United States sanctions or sanctions extended by an Order to continue in office. Accordingly, a resolution to reappoint KPMG 14.98% of the Shares from the Participants in accordance with and of Her Majesty in Council to the Cayman Islands or the British Virgin Limited as the Company’s independent auditor will be proposed the subject to the terms of a share purchase agreement between SLB Islands; and (iv) no order or judgment having been made by any forthcoming Annual General Meeting. Subsidiary and such affiliate and the Participants dated 20 January governmental authority which renders unlawful, restrains or prohibits 2015 (the ‘Share Purchase Agreement’). SLB Subsidiary has agreed the Merger or any of the related transactions and no written notice of to pay US $176 million to the Participants for an option (the ‘Call an intention to make such an order or judgment having been received. Option’) to acquire the balance of the Participants' Shares subject to Unless the conditions precedent to the Merger have been satisfied and in accordance with the terms of a call option agreement dated or waived (where applicable) by 31 March 2015 (or such other date 20 January 2015 (the ‘Call Option Agreement’). The Call Option is as is agreed between the Company and EACL), the Merger will exercisable in whole (but not in part only) by SLB Subsidiary during not proceed and the Merger Implementation Agreement will be a two year period commencing three years from completion of the terminated. acquisition of approximately 14.98% of the Shares.

Eurasia Drilling Company 48 Annual Report 2014 Governance Corporate governance Remuneration report

This Remuneration report for the year ending of benefit. The Board may grant extra remuneration to any Director The Committee’s policy is for a significant proportion of executive 31 December 2014 sets out how the principles of who performs special services at the request of the Company. reward to be variable and dependent upon the Company’s No such extra remuneration was granted in 2014. performance. Variable reward components provide an opportunity for the UK Corporate Governance Code (the ‘Code’) higher levels of remuneration where this remuneration is supported by relating to Directors’ and senior management Remuneration Committee exceptional performance, whether at an individual level or in relation to remuneration are applied. The Board believes The Board has delegated to the Remuneration and Nomination the Company’s short-term and longer-term business priorities. that the Company was generally compliant Committee, through its terms of reference, consideration of executive Variable rewards will continue to be provided through a balanced mix remuneration issues generally, including the use of share incentive of performance-related elements. The annual bonus scheme supports with the provisions of the Code relating to plans. The Remuneration and Nomination Committee comprises operational objectives over the financial year, whilst the Company’s management remuneration throughout the three members: schedule of awards under its 2013 Long-Term Incentive period, except where indicated within this report. • Maurice Dijols, Chairman of the Committee, an independent Compensation Plan will reward superior performance over a longer Director for purposes of the Code; period. Remuneration of the Board of Directors • Lord Clanwilliam, Chairman of the Board and a Non‑Executive Board member remuneration for the Company consists of a stipend Director whom the Company deems independent; and In 2014, the remuneration of senior management consisted of: plus reimbursement for each Director’s actual expenses incurred in • Alexander Djaparidze, a Director who is also the Company’s • Basic salary – which forms the major element of remuneration and attending the Company’s Board meetings. The stipend paid to each Chief Executive Officer. Dr Djaparidze does not vote on his own is based on comparable positions in leading businesses of similar Board member for 2013 was as follows: compensation. size and complexity. • Annual discretionary bonus – which is based on achievement of Name Amount1 The terms of reference permit the Remuneration Committee to obtain Company profit targets, as well as other financial and non-financial its own external advice on any matter at the Company’s expense. measures and personal targets. The maximum bonus payout is fifty Lord Clanwilliam US $187,5002 The Committee terms of reference are publicly available on the per cent (50%) of salary. Anatoliy Kozyrev US $150,0002 Company’s website. • 2013 Long-Term Incentive Compensation Plan – under which each Maurice Dijols US $150,0002 year within the validity of the Plan the named senior officers of the 3 Martin Hansen US $112,500 Remuneration policy for Executive Directors Company are eligible to receive Cash Awards and/or Share Awards Alexander Djaparidze US $112,500 and senior management if the Company achieves a target increase in its earnings per share Alexander Shokhin US $112,500 The objective of the Company’s remuneration policy is to ensure that (EPS). Igor Belikov US $112,500 Executive Directors and members of the senior management of the Edward DiPaolo US $112,500 Company are provided with appropriate incentives to encourage Further details of each element of the senior management’s Richard Anderson3 US $112,500 enhanced performance and are, in a fair and responsible manner, remuneration package, together with details of interests in shares, Note 1: Directors awarded 1500 EDCL GDRs each in 2014 rewarded for their individual contributions to the success of the are set out below in this report. Note 2: includes Director fees in the amount of US$ 37,500 Company. Dr Djaparidze, the Company’s Chief Executive Officer, and Note 3: Martin Hansen Q4 fee and Richard Anderson entire fee were paid in 2015. Mr Anderson are the only Executive Directors. The Committee aims to provide a competitive remuneration package to attract, retain and At its December 2008 meeting the Board adopted a policy by which motivate senior management with the experience needed to shape Board members could elect to receive the value of their yearly stipend and execute the Company’s strategy and deliver shareholder value. in either cash or shares of the Company’s stock, valued at the The Committee takes account of external market data supplied by previous year-end closing price. Certain of the Directors chose the independent professional advisors and is sensitive to the wider scene, share option for 2014. Non-Executive Directors do not receive any including pay and employment conditions elsewhere in the Company, performance-related bonuses, pensions, share options or other forms especially when determining annual salary increases.

Eurasia Drilling Company 49 Annual Report 2014 Governance Corporate governance Remuneration report continued

Information on compensation of the Company’s dependent upon performance conditions being met. The bonus is As of 31 December 2014 no other Directors, to the Company’s best top five officers payable in cash. Senior management discretionary bonuses for the knowledge, had interests in shares in the Company. As of 31 The following table sets forth compensation for the Company’s five period 1 January 2014 to 31 December 2014 in aggregate were December 2014, there were no options or other commitments to most highly compensated officers employed on a full-time basis approximately US $2,432,138. issue additional shares in the Company apart from any disclosed during 2014. In addition to the amounts set forth below, the Company above. reimburses its officers for their actual out-of-pocket expenses incurred (c) Share incentive plan while conducting the Company’s business. This table does not It is the Remuneration and Nomination Committee’s policy that 2013 Long-Term Incentive Compensation Plan include benefits under the Company’s incentive compensation plans, senior management should participate in the Company’s incentive The 2013 Plan was adopted by the Board to provide incentives and if any. compensation plan as this scheme aligns their interests with those of reward certain eligible officers of the Company whose present and our shareholders by linking the reward available to participants with potential contributions are important to the success of the Company, Total target increases in the Company’s earnings per share. Details of the by offering them an opportunity to participate in the Company’s future compensation share incentive awards are set out below. performance through the grant of Cash Awards and/or Share Awards paid in 2014 as the Committee deems appropriate. Name Title US $ Interests of Directors and senior management Alexander Djaparidze Chief Executive Officer 2.285,000 in the Company Pursuant to the 2013 Plan, each Award Year (a calendar year Murat Sampiev Chief Operating Officer 1, 511,050 As of 31 December 2014, the Directors and certain senior commencing 1 January and ending 31 December each year within Senior Vice President – management of the Company, to the Company’s best knowledge, the validity of the Plan), the Company’s named executive officers (the Edward Redd Offshore Operations 750,000 had the following interests in shares of the Company: ‘Participants’) are eligible to receive Cash Awards and/or Share Richard Anderson Chief Financial Officer 685,760 Awards if the Company achieves a target increase in its earnings per Taleh Aleskerov Senior Vice President, Shares Percentage share (EPS). The target EPS is set annually by the Board of Directors Finance 820,010 Directors and senior management (including GDRs) of shares of the Company based on recommendations from the Company’s Alexander Djaparidze1 44,980,235 30.6% management. Awards are payable to the Participants based on a Management remuneration Alexander Bogachev 179,004 0.12% percentage of their respective annual salary and bonus, calculated for (a) Basic salary and benefits Taleh Aleskerov 135,684 0.09% each Award Year based on the Participants’ current salary and bonus The Company structures remuneration packages which are Martin Hansen 53,451 0.04% at the beginning of such Award Year (the ‘Annual Compensation’) and appropriate to the particular function and level of responsibility of Edward Redd 31,400 0,04% such officer’s position (as set forth in the chart below). each individual member of senior management and which are Douglas Stinemetz2 27,000 0.02% designed to attract, retain and motivate such persons. It takes into Lord Clanwilliam 1,500 0.001% The chart on the next page states four (4) target EPS increases account the remuneration structures and levels at other companies, Maurice Dijols 4000 0.0003% for each Award Year and the Annual Award Percentage upon in particular in the Russian oilfield services sector. Eligible members Alexander Shokhin 1,500 0.001% achievement of the applicable target EPS increase for such Award of senior management are also provided with insurance and other Igor Belikov 1,500 0.001% Year. The Award is then based on the range of EPS performance health benefits in accordance with market standards. Edward J.DiPaolo 1,500 0.001% actually achieved between the target levels. At Grade A level, the Richard Anderson 1,500 0.001% Award opportunities under the Plan range from 100% to 250% of Senior management compensation for the period 1 January 2014 to Anatoliy Kozyrev 1,500 0.001% Annual Compensation. At Grade B level, Award opportunities range 31 December 2014 in aggregate was approximately US $6,051,820. from 85% to 225% of Annual Compensation and from 75% to 200% 1 Alexander Djaparidize is a Director, as well as our Chief Executive Officer. for Grade C. (b) Annual discretionary bonus scheme Alexander Djaparidize was the beneficial owner of an aggregate of44 ,980,235 shares. Alexander Djaparidize was a beneficial owner of 26,140,091 shares through The Company operates an annual discretionary bonus scheme his beneficial ownership of Cloudburst Orange Limited. A familial trust of Alexander under which eligible members of management are able to earn a Djaparidze was a beneficial owner of 14,835,479 shares, plus 4,004,665 shares discretionary bonus up to a maximum of fifty per cent (50%) of salary, through its ownership of Margin Finance Company Limited. 2 S. Douglas Stinemetz, our General Counsel and Secretary, was a beneficial owner of 27,000 shares through his ownership of Eagle Eye Holdings, Inc.

Eurasia Drilling Company 50 Annual Report 2014 Governance Corporate governance Remuneration report continued

If EPS target is 0%15% If Cash Awards are granted, the Company shall pay the Participant COO and other such Award within thirty (30) days of the date it vests (the ‘Payment persons, as Date’). At the election of the Company, each Participant may receive designated in the Award in Shares/GDRs rather than cash. In the case of such an Schedule 1, election, the Participant shall receive the Award in GDRs from the as revised from Company valued at the average closing price per GDR, quoted by the time to time by London Stock Exchange, for the twenty (20) trading days preceding Grade A the Committee 100% 150% 200% 250% the Payment Date. The Company shall issue or otherwise cause such Various, as GDRs to be transferred to the Participant within thirty (30) days of the designated in Payment Date. Schedule 1, as revised from In accordance with the Company’s Long-Term Incentive time to time by 2013 Grade B the Committee 85% 125% 175% 225% Compensation Plan participants of the Plan were awarded Various, as US $14,550,991. designated in Schedule 1, On June 13, 2014, the Board reviewed and adopted the following as revised from revised award schedule to the 2013 Long-Term Incentive time to time by Compensation Plan. Grade C the Committee 75% 115% 150% 200% If EPS target is 0%

Eurasia Drilling Company 51 Annual Report 2014 Governance Financials Auditors’ report To the Board of Directors Eurasia Drilling Company Limited

Audited entity: Eurasia Drilling Company Limited Eurasia Drilling Company Limited, an Exempted Company incorporated in the Cayman Islands with Limited Liability with effect from the 25th day of November Two Thousand Two. Certificate of Incorporation CR-121302. The registered office is situated at the offices of Paget-Brown Trust Company Ltd., Boundary Hall, Cricket Square, PO Box 1111, Grand Cayman KY-1102, Cayman Islands. Independent auditor: ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. Registered by the Moscow Registration Chamber on 25 May 1992, Registration No. 011.585. Entered in the Unified State Register of Legal Entities on 13 August 2002 by the Moscow Inter-Regional Tax Inspectorate No.39 of the Ministry for Taxes and Duties of the Russian Federation, Registration No. 1027700125628, Certificate series 77 No. 005721432. Member of the Non-commercial Partnership ‘Chamber of Auditors of Russia’. Principal Registration Number of the Entry in the State Register of Auditors and Audit Organisations: No.10301000804.

Eurasia Drilling Company 52 Annual Report 2014 Financials Financials Consolidated balance sheets As of 31 December 2014 and 2013 (All amounts in thousands of US $, unless otherwise noted)

Note 2014 2013 Note 2014 2013 Assets Liabilities and stockholders’ equity Current assets Current liabilities Cash and cash equivalents 3 327,055 777,792 Accounts payable and accrued liabilities 241,352 539,298 Accounts receivable, net 4 359,263 530,353 Advances received 2,746 1,269 Inventories 140,025 212,859 Current portion of long-term liabilities for property, plant and Taxes receivable 9 11,337 45,867 equipment 8 57,232 34,025 Deferred income tax assets 9 10,958 11,815 Current portion of long-term debt 7 69,219 70,369 Other current assets 9,483 12,514 Taxes payable 9 38,986 113,622 Total current assets 858,121 1,591,200 Deferred income tax liabilities 9 4,241 11,849 Property, plant and equipment 5 1,687,285 1,918,263 Total current liabilities 413,776 770,432 Advances given for property, plant and equipment 36,820 90,493 Long-term debt 7 906,640 963,569 Goodwill 6 86,865 104,695 Long-term liabilities for property, plant and equipment 8 86,312 46,518 Deferred income tax assets 9 2,226 1,784 Accrued pension liability 10 8,369 12,494 Other non-current assets 14,596 15,298 Deferred income tax liabilities 9 71,106 107,564 Total assets 2,685,913 3,721,733 Other non-current liabilities 13,385 4,669 Total liabilities 1,499,588 1,905,246 Stockholder's equity 13 Common stock 1,469 1,469 Treasury stock (58,573) (1,977) Additional paid-in capital 653,379 653,379 Retained earnings 1,645,372 1,369,335 Accumulated other comprehensive loss (1,055,322) (205,719) Total Stockholder’s equity 1,186,325 1,816,487 Total liabilities and Stockholder’s equity 2,685,913 3,721,733

Taleh Aleskerov CFO of Eurasia Drilling Company Limited 8 April 2014

The accompanying notes are an integral part of these consolidated financial statements.

Eurasia Drilling Company 53 Annual Report 2014 Financials Financials Consolidated statements of comprehensive income For the years ended 31 December 2014 and 2013 (All amounts in thousands of US $, unless otherwise noted)

Note 2014 2013 Revenues Drilling and related services 2,972,336 3,473,555 Other sales and services 2,875 4,569 Total revenues 2,975,211 3,478,124 Cost of services 12 (2,251,860) (2,621,945) Selling, general and administrative expenses (168,122) (186,608) (Loss) gain on disposal of property, plant and equipment (218) 1,608 Gain on disposal of materials 1,056 4,979 Litigation settlement 14 (2,607) (50,996) Other income (expense) 1,113 (929) Income from operating activities 554,573 624,233 Interest expense (33,266) (58,254) Interest income 27,110 17,189 Foreign currency exchange rate loss (12,700) (705) Income before income taxes 535,717 582,463 Income tax expense 9 (114,929) (150,381) Net income 420,788 432,082

Basic and diluted earnings per share of common stock (US dollars) 13 2.89 2.94 Other comprehensive loss: Foreign currency translation loss (850,013) (113,912) Pension benefits: Prior service benefit 218 695 Actuarial gain 192 1,456 Other comprehensive loss (849,603) (111,761) Comprehensive (loss) income (428,815) 320,321

The accompanying notes are an integral part of these consolidated financial statements.

Eurasia Drilling Company 54 Annual Report 2014 Financials Financials Consolidated statements of stockholders’ equity For the years ended 31 December 2014 and 2013 (All amounts in thousands of US $, unless otherwise noted)

Accumulated other Treasury Additional comprehensive Total Common stock, paid-in Retained income/(loss), stockholders’ stock at cost capital earnings net of tax equity Balances as of 31 December 2012 1,469 (1,652) 684,398 1,072,369 (93,958) 1,662,626 Net income – – – 432,082 – 432,082 Other comprehensive income – – – – (111,761) (111,761) Comprehensive income 320,321 Purchase of treasury stock – (32,264) – – – (32,264) Disposal of treasury stock – 920 – – – 920 Exercise of incentive compensation plan – 31,019 (31,019) – – - Dividends declared – – – (135,116) – (135,116) Balances as of 31 December 2013 1,469 (1,977) 653,379 1,369,335 (205,719) 1,816,487 Net income – – – 420,788 – 420,788 Other comprehensive loss – – – – (849,603) (849,603) Comprehensive loss (428,815) Purchase of treasury stock – (57,046) – – – ( 57,046 ) Disposal of treasury stock – 450 – – – 450 Dividends declared – – – (144,751) – (144,751) Balances as of 31 December 2014 1,469 (58,573) 653,379 1,645,372 (1,055,322) 1,186,325

The accompanying notes are an integral part of these consolidated financial statements.

Eurasia Drilling Company 55 Annual Report 2014 Financials Financials Consolidated statements of cash flows For the years ended 31 December 2014 and 2013 (All amounts in thousands of US $, unless otherwise noted)

Note 2014 2013 Note 2014 2013 Cash flows from operating activities Cash flows from financing activities Net income 420,788 432,082 Proceeds from issuance of long-term debt 36,183 810,800 Adjustments for non-cash items: Principal repayments of long-term debt ( 27,351) (402,135) Depreciation 278,126 265,929 Payments for property, plant and equipment by installments (33,181) (24,983) Deferred income tax 7,984 26,804 Dividends paid (279,867) (102,751) Loss (gain) on disposal of property, plant and equipment 218 (1,608) Purchase of treasury stock ( 57,046 ) (32,264) Increase in allowance for doubtful accounts receivable 204 111 Net cash (used in) provided by financing activities (361,262) 248,667 Foreign currency exchange rate loss 12,700 1,372 Effect of exchange rate changes on cash (196,733) (31,025) All other items – net 4,983 5,514 Net (decrease) increase in cash and cash equivalents (450,737) 472,459 Changes in operating assets and liabilities: Cash and cash equivalents at beginning of period 777,792 305,333 Accounts receivable (52,896) (39,484) Cash and cash equivalents at end of period 3 327,055 777,792 Inventories (12,446) (12,991) Supplemental disclosures of cash flow information Taxes receivable and payable (6,994) (2,328) Interest paid (net of amount capitalised) 35,530 51,824 Other current assets and liabilities 7,364 11,862 Income tax paid 108,744 126,393 Accounts payable and accrued liabilities 31,370 13,570 Advances received 3,319 (776) Litigation settlement payable (53,603) 50,996 Net cash provided by operating activities 641,117 751,053 Cash flows from investing activities Purchases of property, plant and equipment (530,485) (553,096) Change in restricted cash – 45,400 Proceeds from sale of property, plant and equipment 1,340 7,871 Loans issued (8,956) – Loan principal collections 4,242 3,589 Net cash used in investing activities (533,859) (496,236)

The accompanying notes are an integral part of these consolidated financial statements.

Eurasia Drilling Company 56 Annual Report 2014 Financials Financials Notes to the consolidated financial statements (All amounts in thousands of US $, unless otherwise noted)

Note 1. Organisation and environment The majority of the Group’s revenues are currently derived from services provided to OAO LUKOIL and The primary activities of Eurasia Drilling Company Limited (the ‘Company’) and its subsidiaries (together, its affiliated entities (the ‘LUKOIL Group’) and as such, the Group is economically dependent upon its the ‘Group’) include providing exploratory and developmental drilling and oil and gas field services to contractual agreements with the LUKOIL Group (refer to Note 17). companies operating within the Russian Federation, Iraq and the Caspian Sea region. Business and economic environment Eurasia Drilling Company Limited was registered on 25 November 2002 under the Law of the Cayman The accompanying financial statements reflect management’s assessment of the impact of the business Islands. The Company was established for the purpose of acquiring OOO LUKOIL Burenie and its environment in the countries in which the Group operates on the operations and financial position of the subsidiaries. Group. The future business environment may differ from management’s assessment.

In November 2004 Eurasia Drilling Company Limited entered into a purchase agreement with OAO LUKOIL Basis of preparation to acquire OOO LUKOIL Burenie and its subsidiaries. The acquisition was completed on 30 December The consolidated financial statements have been prepared by the Group in accordance with accounting 2004. Prior to the acquisition, the Company had no operating activity. principles generally accepted in the United States of America (‘US GAAP’).

OOO LUKOIL Burenie, now OOO Burovaya Kompaniya Eurasia, was established in accordance with the decision of the Board of Directors of OAO LUKOIL on February 13, 1995 and registered by the resolution Note 2. Summary of significant accounting policies of the Head of Kogalym Administration No. 216 on May 17, 1995. It was formed from the West Siberian The following significant accounting policies have been applied in the preparation of the consolidated drilling subdivisions of OAO LUKOIL. financial statements.

As of 31 December 2014 and 2013 OOO Burovaya Kompaniya Eurasia had on-shore operating branches Principles of consolidation in Kogalym, Perm, Usinsk and Samara in the Russian Federation. These consolidated financial statements include the financial position and results of the Company and controlled subsidiaries of which the Company directly or indirectly owns more than 50% of the voting In December 2006, the Group acquired a 100% interest in LUKOIL Shelf Limited and LUKOIL Overseas interest, unless minority interest shareholders have substantive participating rights. All significant Orient which provide off-shore drilling services in the Caspian Sea to various oil and gas companies in the intercompany balances and transactions have been eliminated in consolidation. Other significant Russian Federation, Kazakhstan and Turkmenistan. In 2007 these companies were renamed EDC Shelf investments in companies of which the Company directly or indirectly owns between 20% and 50% Limited and AstraOrient Limited, respectively. In 2007, the Company established a Russian subsidiary, of the voting interest and over which it exercises significant influence but not control, are accounted for OOO BKE Shelf, to operate its off-shore drilling services segment. All operations from EDC Shelf Limited using the equity method of accounting. Investments in other companies are recorded at cost. Equity were transferred to OOO BKE Shelf. investments and investments in other companies are included in ‘Other non-current assets’ in the consolidated balance sheet. In December 2009, the Group acquired a 100% interest in OOO Kogalym Well Workover Division (OOO KWWD) and OOO Urai Well Workover Division (OOO UWWD) which provide well workover, well Use of estimates reconditioning and well servicing operations in West Siberia. In December 2011 these two companies were The preparation of the consolidated financial statements requires management of the Group to make a merged into one legal entity OOO KRS Eurasia. number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the In June 2010, the Group acquired a 100% interest in OOO Meridian which performs workover services reported amounts of revenues and expenses during the reporting period. Significant items subject to in the Komi region. In April 2013 this company was merged into OOO KRS Eurasia. such estimates and assumptions include the carrying amount of property, plant and equipment, goodwill impairment assessment, accounts receivable, inventories, deferred income taxes, long-term debt, accrued In February 2011 the Group acquired a 100% interest in Caspian Sea Ventures International Limited (CSVI). pension liability and stock-based compensation liability. Actual results could differ from those estimates. The acquired company is the owner of a jack-up drilling rig operating in the Turkmen waters of the Caspian Sea. Acquisitions In April 2011 the Group acquired a 100% interest in OOO Sibirskaya Geophisicheskaya Company Assets acquired and liabilities assumed in business combinations are recorded on the Company’s (OOO SGC) and 100% in ZAO Samatlorsky KRS (ZAO SKRS). The acquired companies perform drilling consolidated balance sheet as of the respective acquisition dates based upon their fair values at such and workover services in West Siberia. In April 2013 ZAO SKRS was merged into OOO KRS Eurasia. dates. The results of operations of the businesses acquired by the Company begin to be included in the Company’s consolidated statement of income upon the respective acquisition dates. In July 2012 the Group acquired rigs in Iraq and established a new company EDC Romfor to perform drilling and workover services in Kurdistan region.

Eurasia Drilling Company 57 Annual Report 2014 Financials Financials Notes to the consolidated financial statements continued (All amounts in thousands of US $, unless otherwise noted)

Note 2. Summary of significant accounting policies continued Inventories Functional and reporting currency Inventories, consisting primarily of materials and tools used for drilling are stated at the lower of cost or The functional currency of the Company and its subsidiaries, except for OOO Burovaya Kompaniya market value. The cost of inventories is determined using the ‘average cost’ method. Eurasia, OOO KRS Eurasia and OOO SGC is the US dollar. The functional currency of OOO Burovaya Kompaniya Eurasia, OOO KRS Eurasia and OOO SGC is the Russian ruble because this the currency of Property, plant and equipment the primary economic environment in which they operate and in which cash is generated and expended. Property, plant, and equipment are stated at cost, net of depreciation. Depreciation is calculated using The Group’s reporting currency is the US dollar. the straight-line method over the useful lives of the assets, estimated to be in the following ranges:

Translation from the functional currency to the US dollar was conducted as follows: Buildings 15–20 years Machinery and equipment 2–20 years • All assets and liabilities were translated from the functional to the reporting currency at the exchange rate Vehicles 5–20 years effective at the reporting date; • Equity items were translated from the functional to the reporting currency at the historical exchange rate; The cost of maintenance, repairs and replacement of minor items of property, plant and equipment is expensed as incurred. Major refurbishments and improvements of assets are capitalised. • Items in the statement of comprehensive income and cash flows were translated from the functional currency to the reporting currency at rates that approximate rates at the date of transaction. Goodwill Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to Translation differences resulting from the use of these exchange rates are included as a separate assets acquired and liabilities assumed. It is assigned to reporting units as of the acquisition date. Goodwill component of accumulated other comprehensive income/loss. is not amortised, but is tested for impairment at least on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting The closing exchange rate as of December and was . and . Russian rubles to 31 2014 2013 56 2584 32 7292 unit below its carrying amount. The impairment test requires estimating the fair value of a reporting unit and one US dollar, respectively. comparing it with its carrying amount, including goodwill assigned to the reporting unit. If the estimated fair value of the reporting unit is less than its net carrying amount, including goodwill, then the goodwill is The Russian ruble and other currencies of republics of the former Soviet Union are not readily convertible written down to its implied fair value. outside of their countries. Accordingly, the translation of amounts recorded in these currencies into US dollars should not be construed as a representation that such currency amounts have been, could be or will in the future be converted into US dollars at the exchange rate shown or at any other exchange rate. Impairment of long-lived assets Long-lived assets and certain intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Cash and cash equivalents Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an Cash and cash equivalents include all highly liquid investments with an original maturity of three months asset group to the estimated undiscounted future net cash flows expected to be generated by that group. or less. If the carrying amount of an asset group exceeds its estimated undiscounted future net cash flows, an impairment charge is recognised by writing down the carrying value to the estimated fair value of the asset Cash with restrictions on immediate use group. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to Cash funds for which restrictions on immediate use exist are accounted for within other current or dispose and are no longer depreciated. non-current assets. The group classifies restricted cash in other current assets if the cash is to be used within a year for payment of existing or maturing obligations. If the cash is to be held for a longer period of Leased assets time, the restricted cash is shown in other non-current assets. Cash classification in the noncurrent section Leases under which the Group assumes substantially all the risks and rewards of ownership are classified is also set aside for plant expansion, retirement of long-term debt or purchase of long-term investments. as capital leases. Leased property, plant and equipment meeting certain capital lease criteria are capitalised and the present value of the related lease payments is recorded as a liability. Amortisation Accounts receivable of capitalised lease assets is computed using the straight-line method over the estimated useful life. Accounts receivable are recorded at their transaction amounts less allowance for doubtful accounts. Allowance for doubtful accounts receivable is recorded to the extent that there is a likelihood that any of Payments for operating leases, under which the Group does not assume all the risks and rewards of the amounts due will not be obtained. Non-current receivables are discounted to the present value of ownership are expensed in the period they are incurred. expected cash flows in future periods using the original discount rate.

Eurasia Drilling Company 58 Annual Report 2014 Financials Financials Notes to the consolidated financial statements continued (All amounts in thousands of US $, unless otherwise noted)

Note 2. Summary of significant accounting policies continued Revenue recognition Income taxes Drilling and related services Deferred income tax assets and liabilities are recognised for the future tax consequences attributable to Drilling and related services are generally sold based upon contracts with customers that do not include temporary differences between the carrying amounts of existing assets and liabilities for the purpose of the significant post-delivery obligations. Service revenue is recognised when the services are rendered and consolidated financial statements and their respective tax bases and operating loss and tax credit carry collectability is reasonably assured. Rates for services are typically priced on a per day, per meter, per forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to man-hour, or similar basis. Claims and change orders that are in the process of being negotiated with apply to taxable income in the years in which those temporary differences are expected to be recovered or customers for extra work or changes in the scope of work are included in revenue when collection is settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognised in deemed probable to the extent that the work has been performed. earnings in the reporting period which includes the enactment date. The Group uses the percentage-of-completion method. The percentage-of-completion method recognises The ultimate realisation of deferred income tax assets is dependent upon the generation of future taxable income as work on a contract progresses. For unit-price contracts (based on meters drilled or day-rates) income in the reporting periods in which the originating expenditures become deductible. In assessing the the percentage-of-completion equals 100% of work performed each month. Revenue is recognised based realisability of deferred income tax assets, management considers whether it is more likely than not that on meters drilled or day-rates. For fixed-price contracts the percentage-of-completion is defined based on the deferred income tax assets will be realised. In making this assessment, management considers the surveys of work performed or completion of physical proportion. Contract costs are accumulated in the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning same manner as inventory costs and are charged to operations as the related revenue from contracts is strategies. recognised. Claims and change orders that are in the process of being negotiated with customers for extra work or changes in the scope of work are included in revenue when collection is deemed probable. An income tax position is recognised only if the uncertain position is more likely than not of being sustained upon examination, based on its technical merits. A recognised income tax position is measured at the Revenue is recognised only when it is probable that the economic benefits associated with the transaction largest amount that is greater than 50% likely of being realised. Changes in recognition or measurement will flow to the Group. are reflected in the period in which the change in judgment occurs. The Company records interest and penalties relating to unrecognised tax benefits in income tax expense in earnings. Other sales and services Revenues for other sales and services are recognised when the significant risks and rewards of ownership Interest-bearing borrowings have passed to the buyer, when it is probable that economic benefits will flow to the Group and when Interest-bearing borrowings are recognised initially at cost. Subsequent to initial recognition, long-term these economic benefits can be reliably measured. borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in earnings over the period of the borrowings. All sales are shown net of value added tax.

If borrowings are repurchased or settled before maturity, any difference between the amount paid and the Treasury stock carrying amount is recognised in earnings in the period in which the repurchase or settlement occurs. Purchases by Group companies of the Company’s outstanding stock are recorded at cost and classified as treasury stock within Stockholders’ equity. Authorised and Issued stock includes treasury stock. Pension benefits Outstanding stock does not include treasury stock. The expected costs in respect of pension obligations of the Group are determined by an independent actuary. The net periodic costs are recognised as employees render the services necessary to earn the Earnings per share postretirement benefits. Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the reporting period. Environmental expenditures A calculation is carried out to establish if there is potential dilution in earnings per share if convertible Group companies accrue for losses associated with environmental remediation obligations, when such securities were to be converted into shares of common stock or contracts to issue shares of common losses are probable and reasonably estimable. Such accruals are adjusted as further information becomes stock were to be exercised. If there is such dilution, diluted earnings per share are presented. available or circumstances change. Share-based payments The Group accounts for liability classified share-based payment awards to employees at fair value on the date of grant and as of each reporting date. Expenses are recognised over the vesting period. Equity classified share-based payment awards to employees are valued at fair value on the date of grant and expensed over the vesting period.

Eurasia Drilling Company 59 Annual Report 2014 Financials Financials Notes to the consolidated financial statements continued (All amounts in thousands of US $, unless otherwise noted)

Note 2. Summary of significant accounting policies continued Additionally, the amendments in this ASU clarify that the sale of an investment in a foreign entity includes Commitments and contingencies both events that result in the loss of a controlling financial interest in a foreign entity and events that result Certain conditions may exist as of the balance sheet date, which may result in losses to the Group but the in an acquirer obtaining control of an acquire in which it held an equity interest immediately before the impact of which will only be resolved when one or more future events occur or fail to occur. acquisition date (sometimes also referred to as a step acquisition). Accordingly, the cumulative translation adjustment should be released into net income upon occurrence of those events. ASU No. 2013-05 is If the Group’s assessment of contingencies indicates that it is probable that a material loss has been effective for annual reporting periods beginning after 15 December 2013, and interim periods within those incurred and the amount of the liability can be estimated, then the estimated liability is accrued and annual periods. The Group adopted the requirements of ASU No. 2013-05 starting from the beginning of charged to earnings. If a probable material loss is within a range and there is no amount within the range 2014. This adoption did not have a material impact on the Group’s results of operations, financial position which is a better estimate than any other amount, the minimum amount in the range is accrued. If the or cash flows. assessment indicates that a potential material loss is not probable, but is reasonably possible, or is probable but cannot be estimated, than the nature of the contingent liability, together with an estimate Recent accounting pronouncements of the range of possible loss, is disclosed in the notes to the consolidated financial statements. Loss In June 2014, the FASB issued ASU No. 2014-12, ‘Compensation – Stock Compensation (Topic 718),’ contingencies considered remote are generally not disclosed unless they involve guarantees, in which that clarifies issues regarding accounting for share-based payments when the terms of an award provide case the nature of the guarantee is disclosed. that a performance target could be achieved after the requisite service period. This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period Changes in accounting policy be treated as a performance condition. Entities should apply Topic 718 to awards with performance In April 2014, the FASB issued ASU No. 2014-08, ‘Presentation of Financial Statements (Topic 205) and conditions that affect vesting. ASU No. 2014-12 is effective for annual reporting periods beginning after Property, Plant, and Equipment (Topic 360). Reporting Discontinued Operations and Disclosures of 15 December 2015, and interim periods within those annual periods and can be applied prospectively or Disposals of Components of an Entity,’ which changes the requirements for reporting discontinued retrospectively. The Group is evaluating the effect of the adoption of ASU No. 2014-12 on its results of operations in Subtopic 205-20. This ASU defines that only those disposals of components of an entity that operations, financial position and cash flows. represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results will be reported as discontinued operations in the financial statements. ASU No.2014 -08 is effective for In May 2014, the FASB issued ASU No. 2014-09, ‘Revenue from Contracts with Customers,’ that annual reporting periods beginning after 15 December 2014, and interim periods within those annual introduces new principles of revenue recognition and will replace the existing guidance. ASU No. 2014-09 periods but early adoption is permitted. The Group adopted the requirements of ASU No. 2014-08 starting is effective for annual reporting periods beginning after 15 December 2016, and interim periods within from the beginning of 2014. This adoption did not have a material impact on the Group’s results of those annual periods. Early application is not permitted. The standard permits the use of either the operations, financial position or cash flows and did not require additional disclosures. retrospective or cumulative effect transition method. The Group is evaluating the effect of the adoption of ASU No. 2014-09 and has not yet selected a transition method. In July 2013, the FASB issued ASU No. 2013-11, ‘Presentation of an Unrecognised Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,’ which Change in accounting estimate clarifies Topic740 of the Codification. This ASU states that an unrecognised tax benefit, or a portion of an In 2014 the Company assessed its estimates of the useful life of drilling pipe. Management revised its unrecognised tax benefit, should be presented in the financial statements as a reduction to a deferred previous estimates which were two to three years and currently estimates that its drilling pipe’s useful tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. ASU No. life is two years. The effect of reflecting this change in accounting estimate on the2014 financial 2013-11 is effective for fiscal years, and interim periods within those years, beginning after15 December statements is a decrease in net income by US $ 16.6 million. 2013. The Group adopted the requirements of ASU No. 2013-11 starting from the beginning of 2014. This adoption did not have a material impact on the Group’s results of operations, financial position or cash Comparative amounts flows and did not require additional disclosures. Certain prior period amounts have been reclassified to conform with the current period presentation.

In March 2013, the FASB issued ASU No. 2013-05, ‘Foreign Currency Matters (Topic 830),’ that requires entities to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income when a reporting entity ceases to have financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided.

Eurasia Drilling Company 60 Annual Report 2014 Financials Financials Notes to the consolidated financial statements continued (All amounts in thousands of US $, unless otherwise noted)

Note 3. Cash and cash equivalents Note 5. Property, plant and equipment Cash and cash equivalents include the following: Property, plant and equipment include the following:

As of As of As of As of 31 December 31 December 31 December 31 December 2014 2013 2014 2013 Cash held in banks – Russian rubles 119,440 231,178 Machinery and equipment 1,911,925 2,261,584 Cash held in banks – US dollars 107,080 249,630 Buildings 25,821 31,890 Short-term deposit – Russian rubles 98,791 285,770 Vehicles 44,293 50,337 Short-term deposit – US dollars 1,699 11,113 1,982,039 2,343,811 Other 45 101 Less: accumulated depreciation (700,345) (920,283) Total cash and cash equivalents 327,055 777,792 Construction in progress 405,591 494,735 Total property, plant and equipment 1,687,285 1,918,263

Note 4. Accounts receivable, net During the year ended 31 December 2014 and 2013 the Group capitalised interest in the amount of Accounts receivable include the following: US $ 19.1 million and US $ 14.7 million, respectively. These amounts were included in Construction in progress as of 31 December 2014 and 2013, respectively. As of As of 31 December 31 December 2014 2013 Note 6. Goodwill Trade accounts receivable 249,895 389,393 The movement in goodwill was as following: Unbilled revenue 100,725 126,187 Other accounts receivable 4,834 7,039 Goodwill as of 31 December 2012 107,998 Advances given 10,800 19,513 Cumulative translation adjustment (3,303) 366,254 542,132 Goodwill as of 31 December 2013 104,695 Allowance for doubtful accounts (6,991) (11,779) Cumulative translation adjustment (17,830) Total accounts receivable, net 359,263 530,353 Goodwill as of 31 December 2014 86,865

Eurasia Drilling Company 61 Annual Report 2014 Financials Financials Notes to the consolidated financial statements continued (All amounts in thousands of US $, unless otherwise noted)

Note 7. Long-term debt OAO Sberbank of Russia Long-term debt includes the following: Long-term debt with OAO Sberbank of Russia with an outstanding balance of US $20.4 million as of 31 December 2013 was denominated in Russian rubles and bore interest at 7.7% per annum. Final As of As of maturity 31 December 31 December Unused credit lines Lender date 2014 2013 Long-term debt with Raiffeisen Bank was denominated in US dollars, bore interest at 5.65% per annum Debt of the Company and was paid before the maturity during the reporting period. ZAO UniCredit Bank 227,000 , 2017 210 800 Alfa Bank Loans from stockholders 2015 40,000 50,000 Long-term debt with Alfa-Bank with an outstanding balance of US $122.5 million as of 31 December 2012 Debt of the Company’s subsidiaries was denominated in Russian rubles and bore interest at 8.4% per annum. 4.875% Eurobonds, maturing 2020 2020 600,000 600,000 8.4% Russian ruble bonds, maturing 2018 2018 88,876 152,769 Unused credit lines As of December the Group had a revolving credit facility of US $ million with an interest rate BNP PARIBAS SA 2019 19,983 – 31 2014 100 of LIBOR plus mandatory cost rate plus 1.75% per annum arranged by Raiffeisen Bank International AG. OAO Sberbank of Russia 2014 – 20,369 The facility is short term in nature with duration of each drawn advance being 90 days. There is no defined Total long-term debt 975,859 1,033,938 availability period for this facility with both parties having the right to terminate the agreement by giving Current portion of long-term debt (69,219) (70,369) 90 days written notice. This facility can be used for any general corporate purposes of the Group. Total non-current long-term debt 906,640 963,569 As of 31 December 2014 the facility was undrawn.

ZAO UniCredit Bank As of 31 December 2014 and 31 December 2013 the Group had two unused lines with ZAO UniCredit Long-term debt with ZAO UniCredit Bank with an outstanding balance of US $227.0 million as of Bank. The first one is a line of credit denominated in Russian rubles the remaining amount of which at the 31 December 2014 is denominated in US $ and bears interest at LIBOR+3.25% per annum. currency exchange rate as of 31 December 2014 equals to US $3.0 million. This line of credit is short-term in nature with a duration of 90 days and availability period until August 2015. The second one is an Stockholders overdraft line denominated in Russian rubles the remaining amount of which at the currency exchange rate Long-term loans from stockholders as of 31 December 2014 represent loans denominated in US dollars as of 31 December 2014 equals to US $1.4 million and is available until September 2015. In 2014 the which bear interest at 5.8% and mature on 31 December 2015. Group signed two additional overdraft lines denominated in US $ available until the second quarter of 2018. The remaining amount at the currency exchange rate as of 31 December 2014 equals to US $23.5 Debt of the Company’s subsidiaries million. All lines are solely intended for issuing or extending unsecured commercial letters of credit for the Eurobonds purpose of acquiring new drilling rigs (used as security for these lines). As of 31 December 2014 the In April 2013, the Group issued non-convertible bonds totalling US $600 million. The bonds were placed remaining amounts of the lines were undrawn. at face value with a maturity of seven years. The bonds have a half year coupon period with a coupon yield of 4.875% per annum. As of 31 December 2014 and 31 December 2013 the Group also had two revolving multi-currency overdraft lines with OAO Sberbank of Russia denominated in Russian rubles. Total undrawn amount of the Russian ruble bonds lines at the currency exchange rate as of 31 December 2014 equaled to US $80.0 million and is available In June 2011, the Group issued five million non-convertible bonds with a face value of 1,000 Russian rubles until June 2019. The lines are solely intended for issuing or extending unsecured commercial letters of each. The bonds were placed at face value with a maturity of 2,548 days. The bonds have a 182 days’ credit for the purpose of acquiring new drilling rigs. coupon period and bear interest at 8.4% per annum for the first 10 coupon periods. The interest rate for the remaining four coupon periods shall be determined at the end of the 10th coupon period. Bond holders First two above-mentioned unused lines from ZAO UniCredit Bank along with the long-term loan have an option to call the redemption of the bonds in June of 2016. with ZAO UniCredit Bank are secured by property, plant and equipment with a carrying amount of US $76.9 million and US $165.9 million as of 31 December 2014 and 31 December 2013, respectively. BNP Paribas SA Long-term debt with BNP Paribas SA with an outstanding balance of US $20.0 million as of 31 December 2014 is denominated in US $ and bears interest at LIBOR + 4% per annum.

Eurasia Drilling Company 62 Annual Report 2014 Financials Financials Notes to the consolidated financial statements continued (All amounts in thousands of US $, unless otherwise noted)

Note 7. Long-term debt continued Year ended Year ended Unused credit lines continued 31 December 31 December Maturities of long-term debt outstanding at 31 December 2014 are as follows: 2014 2013 Current income tax expense 106,945 123,577 2020 and Deferred income tax expense 7,984 26,804 2015 2016 2017 2018 2019 thereafter Total Total income tax expense 114,929 150,381 69,219 193,762 104,884 3,997 3,997 600,000 975,859 Deferred income taxes are included in the consolidated balance sheets as follows:

Note 8. Long-term liabilities for property, plant and equipment As of As of Long-term liability for Property, plant and equipment represents accounts payable to OOO Rushong-Hua 31 December 31 December per different contracts for drilling rigs purchased by installments in three years. The majority of the total 2014 2013 outstanding balance of US $143.5 million as of 31 December 2014 is denominated in US $ and bears Deferred income tax assets – current 10,958 11,815 interest at 5.0%-6.3% per annum. Deferred income tax assets – non-current 2,226 1,784

Deferred income tax liabilities – current (4,241) (11,849) Maturities of long-term liability for Property, plant and equipment at 31 December 2014 are as follows: Deferred income tax liabilities – non-current (71,106) (107,564) Net deferred income tax liability (62,163) (105,814) 2020 and 2015 2016 2017 2018 2019 thereafter Total The following table sets out the tax effects of each type of temporary differences which give rise to 57,232 53,849 32,463 – – – 143,544 deferred income tax assets and liabilities:

Note 9. Taxes As of As of 31 December 31 December Income taxes 2014 2013 The Group is taxable in a number of jurisdictions within and outside of the Russian Federation and, as a Inventories 17,423 , result, is subject to a variety of taxes as established under the statutory provisions of each jurisdiction. 25177 Tax loss carrying forward 9,879 5,505 Operations in the Russian Federation are subject to a Federal income tax rate of 2.0% and a regional Long-term liabilities for property, plant and equipment 7,202 – income tax rate that varies from 13.5% to 18.0% at the discretion of the individual regional administration. Accrued pension liability 2,252 2,499 The Group’s foreign operations are subject to taxes at the tax rates applicable to the jurisdictions in which Property, plant and equipment 1,909 1,784 they operate. Accounts payable and accrued liabilities 1,606 2,278 The majority of the Group’s earnings in 2014 and 2013 were taxed in the Russian Federation. Other non-current assets 1,673 513 Long-term accounts receivable – 43 As of 31 December 2014 and 2013, and during 2014 and 2013 the Group did not have any unrecognised Deferred income tax assets 41,944 tax benefits and thus, no interest and penalties related to unrecognised tax benefits were accrued. The Property, plant and equipment (81,772) (110,619) Group’s policy is to record interest and penalties related to unrecognised tax benefits as components of Accounts receivable (19,268) (21,962) income tax expense. In addition, the Group does not expect that the amount of unrecognised tax benefits Investments (2,856) (10,234) will change significantly within the next twelve months. Other non-current liabilities (144) – The Company and its subsidiaries file standalone income tax returns in each country in which they operate. Inventories (35) (798) Income tax returns are open for inspection by the tax authorities in Russia for tax years 2011-2014, in Other current liabilities (32) – Turkmenistan for 2014, in Kazakhstan for 2013-2014 and Cyprus for 2011-2014. Deferred income tax liabilities (104,107) (143,613) Net deferred income tax liabilities (62,163) (105,814)

Eurasia Drilling Company 63 Annual Report 2014 Financials Financials Notes to the consolidated financial statements continued (All amounts in thousands of US $, unless otherwise noted)

Note 9. Taxes continued Taxes receivable include the following: Income taxes continued Based upon the level of historical taxable income and expectations for future taxable income over future As of As of periods, in which the deferred income tax assets are deductible, management believes it is more likely than 31 December 31 December not the Group will realise the benefits of these deductible temporary differences as of31 December 2014 2014 2013 and 2013. Prepaid income tax 10,243 24,506 Prepaid value-added tax 290 20,126 The Company has not recognised deferred income taxes on US $886 million of undistributed earnings of Value-added tax recoverable 314 631 its Russian subsidiaries, since such earnings are considered to be reinvested indefinitely. If the earnings were distributed in the form of dividends, the Company would be subject to foreign withholding taxes. The Other taxes 490 604 amount of unrecognised deferred income tax liability is US $44 million. Total taxes receivable 11,337 45,867

Based on the former Company’s intercompany dividend policy the Company recognised in 2013 deferred Taxes payable include the following: income tax on 20% of the undistributed earnings of its Russian subsidiaries from its on-shore segment earned during the reporting period and on 30% of the undistributed earnings of its Russian subsidiaries As of As of from its off-shore segment earned during 2013. Additionally the Company recognised deferred income tax 31 December 31 December on 10% of the undistributed earnings of its subsidiary OOO Burovaya Kompaniya Eurasia that remain after 2014 2013 applying the former intercompany dividend policy. Effective 1 January 2014 OOO Burovaya Kompaniya Value-added tax 14,705 76,872 Eurasia will distribute 30% of its net income earned since 1 January 2014 and the Russian off-shore Social taxes and contributions 10,133 17,026 segment will distribute 65% of its net income earned since 1 January 2014. The percentage of the Personal income tax 6,770 10,535 distribution of the earnings of the other Russian subsidiaries of the Company remains unchanged (20%). Income tax payable 5,233 5,899 The remaining balances of retained earnings of these companies are considered to be reinvested indefinitely. Management of the Company has the intention and the ability not to distribute these retained Property tax 528 2,124 earnings. Other taxes 1,617 1,166 Total taxes payable 38,986 113,622 The following table is a reconciliation of the amount of income tax expense that would result from applying the Russian combined statutory income tax rate to income before income taxes to total income taxes:

Year ended Year ended 31 December 31 December 2014 2013 Income before income tax 537,717 582,463 Notional income tax at Russian statutory rate of 20% 107,143 116,493 Increase in income tax due to: Non-deductible items, net 4,704 20,611 Regional rate differences (2,427) (3,032) Withholding tax 6,148 11,726 Foreign rate differences (639) 4,583 Total income tax expense 114,929 150,381

Eurasia Drilling Company 64 Annual Report 2014 Financials Financials Notes to the consolidated financial statements continued (All amounts in thousands of US $, unless otherwise noted)

Note 10. Pension benefits 2014 2013 The Company sponsors a post employment and post retirement benefits program. The primary component Benefit obligations of the post employment and post retirement benefits programme is a defined benefit pension plan that Benefit obligations as of1 January 16,153 19,804 covers the majority of the Company’s employees. This plan is administered by a non-state pension fund, LUKOIL-GARANT, and provides pension benefits. The Company also provides several long-term employee Plan amendments – (353) benefits such as death-in-service benefits, lump sum at jubilee ages and lump-sum payments upon Service cost 1,268 1,718 retirement of a defined benefit nature. Interest cost 998 1,261 Effect of exchange rate changes (7,318 ) (1,364) Additionally the Company provides financial support, of a defined benefit nature, to its old age and disabled Actuarial (gain) loss (401) (1,944) pensioners, who did not acquire any pension under the occupational pension programme and provides payments in case of death of a pensioner. Curtailment – (721) Benefits paid (1,594) (2,248) The Company’s pension plan primarily consists of a defined benefit plan enabling employees to contribute Inclusion of new subsidiaries into valuation 1,502 – a portion of their salary to the plan and at retirement to receive a lump sum amount from the Company Benefit obligations as of 31 December 10,608 16,153 equal to all past contributions made by the employee up to 3.5% of their annual salary. Plan assets Fair value of plan assets as of 1 January 3,659 4,206 Employees also have the right to receive upon retirement the benefits accumulated under the previous pension plan when OOO Burovaya Kompaniya Eurasia was a subsidiary of the LUKOIL Group. This plan Employer contributions 1,299 1,764 was replaced in December 2003. These benefits have been fixed and included in the benefit obligation as Return on plan assets 197 233 of 31 December 2014 and 2013. The amount was determined primarily based on a formula including past Effect of exchange rate changes (1,582) (296) pensionable service and relative salaries as of 31 December 2003. Benefits paid (1,594) (2,248) Inclusion of new subsidiaries into valuation 260 – The following table provides information about the benefit obligations and plan assets as of31 December Fair value of plan assets as of 31 December 2,239 3,659 2014 and 2013. The benefit obligations below represent the projected benefit obligation of the pension plan. Funded status (8,369) (12,494) Amounts recognised in the consolidated balance sheet as of 31 December Accrued pension liability (8,369) (12,494)

Eurasia Drilling Company 65 Annual Report 2014 Financials Financials Notes to the consolidated financial statements continued (All amounts in thousands of US $, unless otherwise noted)

Note 10. Pension benefits continued Note 12. Cost of services Included in accumulated other comprehensive loss as of 31 December 2014 and 2013, are the following Cost of services includes the following: pre-tax amounts that have not yet been recognised in net periodic benefit cost: Year ended Year ended 2014 2013 31 December 31 December 2014 2013 Unamortised prior service cost (295) (976) Services of subcontractors 905,194 1,017,119 Unrecognised actuarial gain (loss) 561 552 Staff cost, including social contributions 603,861 669,598 Total loss 266 (424) Materials 394,126 577,331 Amounts recognised in other comprehensive loss before tax during the years ended 31 December 2014 Depreciation 278,126 265,929 and 2013: Other 70,553 91,968 Total cost of services 2,251,860 2,621,945 2014 2013 Additional prior service benefit from plan amendment (272) (525) Note 13. Stockholders’ equity Re-classified prior service cost amortisation – (343) Common and treasury stock Additional gain arising during the period (240) (1,820) Re-classified gain amortisation – – Year ended Year ended 31 December 31 December Net amount recognised in other comprehensive (gain) loss for the period (512) (2,688) Number of shares 2014 2013 Authorised and issued common stock, par value 0.01 US $ each 146,865,243 146,865,243 Treasury stock (2,064,037) ( , ) Note 11. Fair value of financial instruments 53 875 The fair values of cash and cash equivalents (Level 1), current and long-term accounts receivable (Level 3) Issued and outstanding common stock, par value 0.01 US $ each 144,801,206 146,811,368 are approximately equal to their value as disclosed in the consolidated financial statements. The fair value of long-term receivables was determined by discounting with estimated market interest rates for similar The movement of treasury stock was as following: financing arrangements. Number of shares held in treasury as of 31 December 2012 77,857 The fair value of long-term debt and long-term liabilities for property, plant and equipment (Level 3) differ Number of shares purchased 876,370 from the amount disclosed in the consolidated interim financial statements as of31 December 2014. Exercise of incentive compensation plan (875,260) The estimated fair value of long-term debt as of 31 December 2014 and 2013 was US $716 million and Directors fees (25,092) US $1,017 million, respectively, as a result of discounting using estimated market interest rates for similar financing arrangements. The estimated fair value of long-term liabilities for property, plant and equipment Number of shares held in treasury as of 31 December 2013 53,875 as of 31 December 2014 and 2013 was US $129 million and US $81 million, respectively, as a result of Number of shares purchased 2,026,145 discounting using estimated market interest rates for similar financing arrangements. These amounts Directors fees (15,983) include all future cash outflows associated with the long-term debt repayments, including the current Number of shares held in treasury as of 31 December 2014 2,064,037 portion and interest. Market interest rates mean the rates of raising long-term debt by companies with a similar credit rating for similar tenors, repayment schedules and similar other main terms. During the year ended 31 December 2014, the Group did not have significant transactions or events that would result in nonfinancial assets and liabilities measured at fair value on a nonrecurring basis.

Eurasia Drilling Company 66 Annual Report 2014 Financials Financials Notes to the consolidated financial statements continued (All amounts in thousands of US $, unless otherwise noted)

Note 13. Stockholders’ equity continued Note 14. Commitments and contingencies Dividends and dividend limitations Commitments Profits available for distribution from the Company’s Russian subsidiaries to the Company in respect of Capital expenditure any reporting period are primarily determined by reference to the statutory financial statements of these The Group has signed a number of contracts for land rigs constructions with OOO Rushong-Hua subsidiaries prepared in accordance with the laws of the Russian Federation and denominated in Russian (refer to Note 8). The total commitment for capital expenditure per these contracts is US $262 million. rubles. Under Russian Law, dividends are limited to the retained earnings as set out in the statutory financial statements of the Company’s Russian subsidiaries. These laws and other legislative acts Insurance governing the rights of stockholders to receive dividends are subject to various interpretations. The insurance industry in the Russian Federation and certain other areas where the Group has operations is in the course of development. Management believes that the Group has adequate property damage Retained earnings of the Company’s Russian subsidiaries were RUB 53.1 billion and RUB 47.3 billion, coverage for its main production assets. In respect of third party liability for property and environmental respectively as of 31 December 2014 and 2013, pursuant to the statutory financial statements, which damage arising from accidents on Group property or relating to Group operations, the Group has at the US dollar exchange rates as of 31 December 2014 and 2013 amount to US $943 million and insurance coverage that is generally higher than insurance limits set by the local legal requirements. US $1,444 million, respectively. Management believes that the Group has adequate insurance coverage of the risks, which could have a material effect on the Group’s operations and financial position. At the Board of Directors meeting on 31 October 2014, dividends were declared for 2014, in the amount of US $1 per share of common stock. Dividends in the amount of US $145 million were Litigation and claims paid in December of 2014. On 9 April 2012 China Petrochemical International Company Limited (CPIC) filed a demand for arbitration with the Arbitration Institute of the Stockholm Chamber of Commerce against Cyprus Oilfield Holdings At the Board of Directors meeting on 10 December 2013, dividends were declared for 2013, in the Limited (COHL), a Group company. The arbitration involved a contract for the purchase of five drilling amount of US $0.92 per share of common stock. Dividends payable by the Company of US $135 million rigs from CPIC which COHL terminated for failure to deliver the rigs on time and in accordance with were included in ‘Accounts payable and accrued liabilities’ in the consolidated balance sheet as of specifications. On 7 March 2014 the arbitration tribunal found against COHL and awarded CPIC US $ 31 December 2013. During the year ended 31 December 2014 this dividend was fully paid. 29.7 million in damages, US $1.3 million for additional work, US $0.1 million in lost profits, US $0.9 million as penalty and reimbursement of a US $6.2 million performance bond from CPIC which COHL had Earnings per share exercised, with accrued interest (at a commercial rate determined by the tribunal) and certain other costs. The calculation of earnings per share for these years was as follows: The Group accrued a liability for the total amount of US $50.9 million in the consolidated financial statements as of 31 December 2013 included in ‘Accounts payable and accrued liabilities’. During the reporting period an amount of US $ . million was paid to CPIC as a final settlement of the arbitration award. Year ended Year ended 53 6 31 December 31 December 2014 2013 The Group is involved in other various claims and legal actions arising in the normal course of business. Net income available for common stockholders 420,988 432,082 It is the opinion of management that the ultimate disposition of these matters will not have a material adverse effect on the Group’s consolidated financial position, results of operations, or liquidity. Weighted average number of outstanding shares 145,665,352 146,778,795 Basic earnings per share of common stock (US $) 2.89 2.94 Environmental obligations Group companies have operated in the Russian Federation, Kazakhstan and Turkmenistan for several years. Environmental regulations are currently under consideration in these countries. Group companies routinely assess and evaluate their obligations in response to new and changing legislation.

As liabilities in respect of the Group’s environmental obligations are able to be determined, they are charged against income over the estimated remaining lives of the related assets or recognised immediately depending on their nature. The likelihood and amount of liabilities relating to environmental obligations under proposed or any future legislation cannot be reasonably estimated at present and could become material. Under existing legislation, however, management believes that there are no significant unrecorded liabilities or contingencies, which could have a materially adverse effect on the operating results or financial position of the Group.

Eurasia Drilling Company 67 Annual Report 2014 Financials Financials Notes to the consolidated financial statements continued (All amounts in thousands of US $, unless otherwise noted)

Note 14. Commitments and contingencies continued Note 16. Segment information Commitments continued Presented below is information about the Group’s operating and geographical segments for the years Taxation ended 31 December 2014 and 2013, in accordance with ASC 280, ‘Disclosures about Segments of an The taxation systems in the Russian Federation, Kazakhstan and Turkmenistan are relatively new and are Enterprise and Related Information’. characterised by frequent changes in legislation, official pronouncements and court decisions, which are often unclear, contradictory and subject to varying interpretation by different tax authorities. Taxes are The Group has two operating and geographical segments: on-shore drilling conducted in the CIS subject to review and investigation by a number of authorities, which have the authority to impose severe and off-shore drilling conducted in the Caspian Sea. These segments are based upon the Group’s fines, penalties and interest charges. A tax year remains open in Russia for review by the tax authorities organisational structure, the way in which these operations are managed, the availability of separate during the three subsequent calendar years; however, under certain circumstances a tax year may remain financial results, and materiality considerations. Management, on a regular basis, assesses the open longer. Recent events within the Russian Federation suggest that the tax authorities are taking a performance of these operating segments. more assertive position in their interpretation and enforcement of tax legislation. Geographical segments have been determined based on the area of operations and include two The tax authorities in each region may have a different interpretation of similar taxation issues which segments. They are the Caspian Sea and the CIS other than the Caspian Sea. may result in taxation issues successfully defended by the Group in one region being unsuccessful in another region. There is some direction provided from the central authority based in Moscow on particular The transactions between the segments are immaterial. Segment information is summarised as follows: taxation issues. As of and for the year ended 31 December 2014 These circumstances may create tax risks that are substantially more significant than in other countries. Onshore Management believes that it has provided adequately for tax liabilities based on its interpretations of drilling services applicable tax legislation, official pronouncements and court decisions. However, the interpretations (CIS other Offshore of the relevant authorities could differ and the effect on these consolidated financial statements, if the than the drilling services authorities were successful in enforcing their interpretations, could be significant. Caspian Sea) (Caspian Sea) Consolidated Total revenues 2,754,013 221,198 2,975,211 Net income 333,994 86,794 420,788 Note 15. Related party transactions Total assets 1,828,945 856,968 2,685,913 In the rapidly developing business environment in the Russian Federation, companies and individuals Goodwill 24,765 62,100 86,865 have frequently used nominees and other forms of intermediary companies in transactions. The senior management of the Company believes that the Group has appropriate procedures in place to identify As of and for the year ended 31 December 2013 and properly disclose transactions with related parties in this environment and has disclosed all of the relationships identified which it deemed to be significant. Onshore drilling services The Company’s General Counsel, Douglas Stinemetz, is a partner with The Stinemetz Law Firm. (CIS other Offshore than the drilling services During year ended 31 December 2014 and 2013 the firm billed the Company for costs and expenses Caspian Sea) (Caspian Sea) Consolidated of US $2.2 million and US $3.9 million, respectively. Mr Stinemetz is not otherwise paid for his services as the Company’s General Counsel. Total revenues 3,290,587 187,537 3,478,124 Net income 363,856 68,226 432,082 Long-term loans from stockholders were US $40 million and US $50 million as of 31 December 2014 and Total assets 2,955,624 753,918 3,709,542 31 December 2013, respectively (refer to Note 7). Interest expense of US $2.5 million and US $2.9 million Goodwill 42,595 62,100 104,695 was recognised and paid on these loans during the years ended 31 December 2014 and 2013, respectively.

During the reporting period the Group acquired equipment from OOO Kliver. The total amount of purchased equipment during the reporting period was US $23.3 million (2013: US $6.3 million). As of 31 December 2014 advances paid to OOO Kliver amounted to US $1.7 million (as of 31 December 2013: US $2 million).

Eurasia Drilling Company 68 Annual Report 2014 Financials Financials Notes to the consolidated financial statements continued (All amounts in thousands of US $, unless otherwise noted)

Note 17. Concentration of credit risk and sales Note 18. Incentive Compensation Plan A significant proportions of the Group’s operations which exceeded10 percent of the Group’s revenue are In 2013 the Company introduced a new compensation plan to certain members of management effective with LUKOIL Group companies and with Rosneft Group companies. As such the Group has significant 1 January 2013. The period of validity of the award is indefinite. The participants are eligible to receive cash concentrations of credit risk with these Groups. awards and/or share awards (at the election of the Company) if the Company achieves a target increase in its earnings per share (EPS). The target EPS is set annually by the Board of Directors of the Company. Included in the Group’s revenues and accounts receivables are the following transactions and balances Awards are payable to the Participants based on a percentage of their respective annual salary. The with the major Customers: percentage ranges from 75% to 250% based on the grade level of management and on the range of EPS performance actually achieved between the target levels. 2014 2013 If the performance conditions are satisfied and provided that the Participant is still employed up to and Revenues from LUKOIL Group for the year ended December 2,220,821 , , 31 2 291 461 through the vesting date, Awards are exercisable in three years from the date of grant, with the first 20% Revenues from Rosneft Group for the year ended December 31 170,126 649,673 of such awards vesting immediately, next 30% and the remaining 50% vesting annually on each of the Accounts receivable from LUKOIL Group as of December 31 229,170 221,354 following two anniversaries thereafter. Accounts receivable from Rosneft Group as of December 31 17,040 74,426 The rights to compensation under this plan vest at 31 December of each award year if the participants are still employed or otherwise in good standing with the Company.

Related to this plan the Company recorded US $13.5 million and US $6.4 million as compensation expense during the year ended 31 December 2014 and 2013, respectively. As of 31 December 2014 US $7.4 million and US $8.2 million related to this plan are included in ‘Accounts payable and accrued liabilities’ and ‘Other non-current liabilities’ of the consolidated balance sheets, respectively (2013: US $3.0 million and US $4.7 million, respectively). The Company has approximately US $13.7 million of unrecognised compensation expense as of 31 December 2014 that will be recognised up to 31 December 2016.

Note 19. Subsequent events The Company has evaluated subsequent events from the balance sheet date through 8 April 2015, the date at which the financial statements were available to be issued, and determined there are no items to disclose.

Eurasia Drilling Company 69 Annual Report 2014 Financials Information Corporate information

Directors Officers Registered address Bankers Earl of Clanwilliam Alexander Yu. Djaparidze Boundary Hall Barclays Bank PLC Chairman of the Board of Directors, Chief Executive Officer Cricket Square OAO Sberbank (Zapadno-Uralskiy branch) Eurasia Drilling Company Ltd. PO Box 1111 ZAO Unicredit Bank Principal, Policy Partnership Ltd. Murat Sampiev Grand Cayman KY1-1102 OAO Alfa-Bank Chief Operating Officer Cayman Islands ZAO Raiffeisenbank Alexander Yu. Djaparidze ZAO VTB Capital Chief Executive Officer, Taleh M. Aleskerov Eurasia Drilling Company Ltd. Chief Financial Officer Principal administrative offices No. 53, Mykonos Court Auditors Richard Anderson Edward Redd Aristide Charalambous 2 ZAO KPMG Former Chief Financial Officer, Senior Vice President Offshore Operations 1077 Nicosia Eurasia Drilling Company Ltd. Cyprus Atle Loge Investor Relations contact Maurice Dijols Vice President Business Development Tom O’Gallagher Chairman of the Russian Schlumberger companies Financial advisors Vice President Investor Relations and Senior Advisor to the Schlumberger CEO Tom O’Gallagher Goldman Sachs International T: +44 (0) 207 717 9707 Vice President Investor Relations CJSC ‘Sberbank CIB’ E: [email protected] Martin E. Hansen or through our website at: Former Chief Financial Officer, S. Douglas Stinemetz www.eurasiadrilling.com Eurasia Drilling Company Ltd. General Counsel and Secretary Transfer agent Bank of New York Mellon Anatoliy Kozyrev Former Vice President and Director of the Subsidiary officers Chief Administration for Corporate Budget and Alexander N. Bogachev Legal advisors Economy Planning and Investments of LUKOIL President, Skadden, Arps, Slate, Meagher & Flom LLP OOO Burovaya Kompaniya Eurasia & Affiliates Alexander Shokhin President of the Russian Union of Industrialists Taleh M. Aleskerov and Entrepreneurs Senior VP Finance and CFO, OOO Burovaya Kompaniya Eurasia Edward J. DiPaolo Founder, partner and president of JNDI Corporation Yury K. Gagaev General Director, Igor Belikov BKE Shelf Ltd. CEO of NGO Russian Institute of Directors Yury V. Vetluzhskih General Director, OOO ‘SGC’ (subsidiary from April 2011)

Eurasia Drilling Company Information 70 Annual Report 2014 www.eurasiadrilling.com

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