Board of Directors of JSOC Bashneft

ART OF CREATING 2013 ANNUAL REPORT VALUE CONTENTS About the company 10 Operating results 38 Information for 80 shareholders and investors Corporate 100 governance Appendices 144 Annual report JSOC Bashneft 2013 2 3 Annual report JSOC Bashneft 2013 Contents Address by the Chairman of the Board of Directors and the President 4 Corporate governance Some definitions and information on forward-looking statements 7 Our success in 2013 8 Improving the corporate governance system 101 Competitive advantages that ensure we achieve our potential 9 Corporate Governance quality audit 103 Corporate Control Element Structure 104 About the company General Meeting of Shareholders of JSOC Bashneft 106 Board of Directors of JSOC Bashneft 108 Our history 11 Committees of the Board of Directors of JSOC Bashneft 122 2013 highlights 12 Corporate Secretary of JSOC Bashneft 128 Business model and geography 14 President and Management Board of JSOC Bashneft 129 Industry position and macroeconomic factors 18 Resolving possible conflicts of interest among members of JSOC Bashneft management bodies 139 Strategy and KPIs 23 Internal control and audit 141 Our risks 30 External audit 142 Health, Safety and Environment 34 Plans to develop the corporate governance system 143 Personnel and social programmes 36 Appendices Operating results Consolidated IFRS financial accounts of Bashneft Group for 2013 145 Licensing, geological exploration and reserves 39 Energy efficiency 215 Launch of production at Trebs and Titov 46 Key risk factors 216 Other areas in Nenets Autonomous District 49 Information on the observance of the Code of Corporate Conduct 222 Foreign projects 50 List of major and related-party transactions 230 Production 52 Glossary of terms abbreviation 238 Refining 57 Other 239 Marketing 68 Financial results 75 Information for shareholders and investors Changes to the Group’s structure 81 Shareholders equity 90 Equity market and market capitalisation 92 Dividend policy and distribution 95 Information disclosure and investor relations 97 Address by the Chairman of the Board of Directors and the President Address by the Chairman of the Board of Directors and the President Annual report JSOC Bashneft 2013 4 5 Annual report JSOC Bashneft 2013 Bashneft shareholders amounted to RUB 46.2 billion. Address by the Chairman Thanks to these impressive financial results, the Company was able to pay sizable dividends of RUB 233 per share to shareholders in 2013. of the Board of Directors For the first time in Russian business history, Bashneft was listed as one of the world’s top 10 companies for total shareholder return and the President (TSR), and also took first place in the industry ranking by Boston Con- sulting Group. Dear shareholders, Improvement of corporate governance remains a top priority area for It is a pleasure to present you with the 2013 Annual Report. 2013 was us. In 2013, we took new important steps toward increasing inves- one of the most successful years in Bashneft’s history in both produc- tor attractiveness and transparency of Bashneft’s shareholder capi- tion and financial terms. Last year the Company once again demon- tal – we divested a number of non-core assets and launched the final strated the ability to implement its development strategy in a commit- stage of the Company’s reorganisation through initiating the merger of ted and efficient way – focusing on adding value through increasing Bashneft-Invest into the Group. The aim of this reorganisation stage, output, growing reserves, modernising oil refineries, developing our which was completed in Q2 2014 – was to eliminate the cross-owner- retail network, and adhering to the highest corporate governance ship in Bashneft shares and and to complete the divesting of non-core standards. business activities. We are grateful to all our shareholders for their support throughout this crucial endeavour. In 2013 Bashneft once again demonstrated the best production growth rates in the Russian oil sector, increasing oil production by 4.1% year The Company’s key achievements in 2013 include improvements on year. The achievement of a reserve replacement ratio of 133.7% in in workplace health and safety, and environmental protection. Ab- 2013 under PRMS standards was important as well. sence of accidents on the production side, due care for the environment through the adoption of the very latest technology, modernisation Over half of the additions in oil production in 2013 came from our tradi- of machinery and reduction of waste and emissions as well as creating tional regions, including the Republic of Bashkortorstan. We achieved a safe working environment remain our key priorities. this by utilising our highly qualified employees, introducing effective geological and engineering measures, and implementing the very lat- As a socially responsible company, Bashneft works jointly with its est technologies. main shareholder, JSFC Sistema, to continue to implement a range of charity programmes in all regions of presence, which improve social Launching production, in record time, at the Trebs and Titov oilfields infrastructure and support the development of culture, education and in the Nenets Autonomous Region made a considerable contribution sport. In 2013, we invested in social projects a total of RUB 1.1 billion to Bashneft’s increased production, and was one of the Company’s main in the regions where we operate. achievements last year. Bashneft also expanded the geographical reach of its projects by winning a licence for Block EP-4 in Myanmar. As part of implementing our development strategy, covering the ex- pansion of our resource base and the acquisition of attractive assets In line with our strategic goals, we continued to implement wide-scale with significant growth potential, in March 2014 we concluded a $1 bil- oil processing plant modernisation plans as well as the retail chain lion deal to acquire Burneftegaz, which is involved in oil production rebranding. and exploration work in the Tyumen Region. Burneftegaz will make an important contribution to Bashneft’s rising production figures Bashneft’s Ufa refinery complex processed 21.4 million tonnes of oil as soon as this year. in 2013, 3% more than in 2012. Average refining depth at the company’s refineries stood at 84.7% in 2013. Average light oil product output We are confident that the work done by all our employees in 2013 has rose to 60.4%. We retain our leading position among Russian com- made a significant contribution to Bashneft’s future growth. We are panies in terms of the technological processing capacity: the Nelson proud that Bashneft has, once again, confirmed its leadership position index complexity rating for Bashneft’s Ufa refinery increased last year among the most efficient companies in the Russian oil sector. from 8.55 to 8.83. Quality, professionalism, safety, efficiency and team spirit are the key This production success had a direct impact on our financial results. values at Bashneft. It is these values that guide us in our day to day Under IFRS accounting standards, Bashneft Group companies’ rev- work to achieve new successes for our shareholders, for the regions enue increased 5.3% on 2012, rising to RUB 563.3 billion. Adjusted in which we work, and for the country as a whole. EBITDA rose by 3.6% to RUB 104 billion. Net profit attributable to JSOC FELIX EVTUSHENKOV ALEXANDER KORSIK Chairman of the Board of Directors President Address by the Chairman of the Board of Directors and the President Some definitions and information on forward-looking statements Annual report JSOC Bashneft 2013 6 7 Annual report JSOC Bashneft 2013 Some definitions and information on forward-looking statements In this Annual Report the terms “Bashneft”, “we”, “Bashneft Group”, and “the Group” in various forms refer to JSOC Bashneft, its branches, subsidiaries and structured enterprises. The terms “JSOC Bashneft” and “the Company” refer to JSOC Bashneft. “Ufa Refinery”, “Novoil”, “Ufaneftekhim”, “Bashkirnefteprodukt” and “Orenburgnefteprodukt”, when referring to the period before the reorganisation in 2012, mean JSOC Bashneft’s subsidiaries consolidated with the Compa- ny, namely OJSC Ufa Refinery, OJSC Novoil (OJSC Novo-Ufimsky Refinery), OJSC Ufaneftekhim, OJSC Bashkirneft- eprodukt and OJSC Orenburgnefteprodukt respectively; after the reorganisation, these are respective branches of JSOC Bashneft. Unless otherwise stated, financial indicators covered in the Annual Report are presented and calculated on the ba- sis of consolidated financial statements under IFRS and correspond to the results disclosed in the Management’s Analysis of the Financial Position and Operating Results of Bashneft Group. Information regarding operating results presented in this document is consolidated data on Bashneft Group. Certain statements in this Annual Report may contain assumptions or forecasts concerning future events within Bashneft Group. These statements may contain the words “is expected”, “is estimated”, “intends”, “will”, “could”, negations of these expressions or other similar expressions. These statements are only assumptions. Actual events and results can differ substantially from those stated. The actual performance of Bashneft Group may differ materially from what is declared in our assumptions and forecasts as a result of a large number of factors. Such factors may include general economic conditions, Bashneft’s competitive environment, risks related to operating in Russia, rapid technological and market changes in the Group’s areas

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