Annual Report 2010

ANNUAL REPORT 2010

Annual Creportontent 2010 s 1

2 Key performance indicators 92 Board of Directors and Management Board 4 Message to shareholders 92 Governing bodies structure of JSC Gazprom Neft 9 Highlights 93 Membership of the Board of Directors 100 Membership of the Management Board 12 Development strategy 105 Total compensation for members of Board 18 Company history of Directors and Management Board 20 Company structure 22 Geography of operations 106 Environment and innovations 26 Competitive state of the company 106 Environmental protection and safety 114 Innovation activity 31 Company key performance indicators by type of operation 119 Energy and energy saving in 2010 31 Oil and gas exploration and production 122 Social responsibility 41 Oil refining and regional policy 45 Production of petroleum products 122 Personnel, occupational safety, and health 46 sales of petroleum products management 48 Premium business segments 127 social responsibility in areas of operations 52 Export of crude oil and petroleum products 129 To shareholders and investors 54 Analysis of the company’s 129 Authorised capital shareholder capital financial results of activity structure by the management 130 share market and capitalisation 54 Definitions and recalculation methodology 132 Participation in the Depositary Receipt 54 Forecast statements Program 55 Key performance indicators for 2008–2010 134 Dividend history 56 Key financial and performance indicators 135 Observing the Corporate Code of Conduct 57 Result of activities for 2010 compared to 2009 138 Asset management and 57 Production segments corporate structure 58 Changes in structure of the group 60 Performance indicators and analysis 140 Credit ratings and debt portfolio 66 Results of activities management 76 Financial appendices 140 Credit rating 77 Financial indicators 141 Debt obligations 78 Additional information 142 Glossary of key terms 84 Investment program and definitions

86 Key risk factors 145 Appendix. Major deals and deals of interest

Addresses and contacts 2 Key performance JSC GAZPROM NEFT indicators

Key financial indicators 2010 2009 2008 2007 2006 2010/2009 Sales revenue, mn USD 32 772 24 166 33 870 22 768 20 176 36 % EBITDA, mn USD 7 226 5 977 8 610 6 601 6 091 21 % Operating income, mn USD 4 658 3 429 6 249 4 899 4 366 36 % Income before tax, mn USD 4 277 3 897 6 161 5 458 4 854 10 % Net income*, mn USD 3 346 2 685 4 658 4 143 3 661 25 % Net cash from operating activities, mn USD 5 392 3 475 5 483 5 316 3 320 55 % Investments, mn USD 4 925 4 889 3 399 5 959 1 649 1 % Dividends paid mn USD 728 937 792 2 071 602 –22 % Net financial debt, mn USD 5 246 5 014 1 312 2 641 336 5 % Average capital employed, mn USD 24 858 19 542 14 245 11 672 9 541 27 % Average shareholders’ equity, mn USD 19 728 16 379 12 268 10 183 8 793 20 % Price per share at year-end, USD RTS 4.19 5.55 2.05 6.35 4.56 –25 % Price per share at year-end, RUB. MICEX 128.27 163.46 62.67 151.74 119.9 –22 %

Key financial ratios 2010 2009 2008 2007 2006 2010/2009 Base and diluted earnings per common share, USD per 0.67 0.64 0.98 0.87 0.77 4 % share Dividend per share**, RUB – 3.57 5.40 5.40 8.08 – Return on average capital employed, % 15.96 % 15.53 % 36.30 % 35.36 % 39.83 % 0.43 p.p. EBITDA margin, % 22.05 % 24.72 % 25.42 % 28.99 % 30.32 % –2.67 p.p. EBITDA per barrel, USD per barrel 18,55 16.25 23.85 19.96 18.00 14 % Net income margin*, % 10.21 % 11.11 % 13.75 % 18.20 % 18.15 % –0.90 p.p. Net income* per barrel, USD per barrel 13.48 11.32 19.42 16.44 14.43 19 % Return on equity, % 18.41 % 16.81 % 38.29 % 40.69 % 41.64 % 1.60 p.p. Gearing, % 20.88 % 22.58 % 10.29 % 20.56 % 3.27 % –1.70 p.p. Current liquidity ratio 1.46 1.33 1.48 1.31 1.99 10 %

Sales revenue, mn USD EBITDA, mn USD Net income, mn USD

40 000 10 000 5 000 4 658 35 000 36 % 4 % 33 870 8 610 32 772 4 000 [25 %]* 8 000 21 % 4 153 30 000 3 346* 7 226 3 661 3 013 25 000 6 601 6 000 3 000 24 166 6 091 5 977 3 148 22 768 20 000 20 176 2 685* 4 000 2 000 15 000

10 000 2 000 1 000 5 000

0 0 0 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

* Corrected for non-recurring income and expenses: losses of 142 mn USD due to the sale of Sibneft-Chukotka in the fourth quarter of 2009. Income of 470 mn USD due to acquiring Sibir Energy in the second quarter of 2009. Reserve of 198 mn USD to pay a penalty to the Federal Antimonopoly Service in the fourth quarter of 2010. ** Not announced as at the date of signing the Dividends Report for 2010.

Content Next chapter Annual report 2010 3

Key production indicators 2010 2009 2008 2007 2006 2010/2009 Proven reserves of oil, mn bbl 6 441 6 924 6 303 6 709 5 845 –7 % of gas, bn ft3 6 511 3 231 3 033 1 232 1 263 102 % Hydrocarbons, mn BOE 7 526 7 462 6 808 6 914 6 056 1 % Crude oil production by consolidated subsidiaries, mln bbl 230 225 229 243 243 2 % Crude production including share in equity investees, mln bbl 366 349 343 321 329 5 % Marketable gas production by consolidated subsidiaries, bn m³ 3.1 2.1 1.9 1.5 1.8 47 % Marketable gas production including share in equity investees 4.0 3.2 3.1 1.9 2.2 26 % (Slavneft and Tomskneft), bn m³ Marketable hydrocarbon production, thousand BOE per day 1 067 1 008 987 909 938 6 % Oil refining at own refineries, mln t 30.8 26.6 18.4 16.5 16.3 16 % at equity oil refineries, mln t 7.2 6.8 10.0 9.7 8.0 5 % Crude exports, mln t Non-CIS countries 15.9 15.6 16.3 15.1 18.2 2 % CIS countries 3.0 3.3 3.3 2.5 2.6 –9 % Sales of crude oil in Russian Federation, mln t 0.01 0.5 0.9 1.6 0.1 –97 % Gas, bn m³ 5.2 3.7 3.7 2.2 3.0 41 % Petroleum product exports to international market, mln t Non-CIS countries 14.9 13.7 11.4 11.4 12.2 9 % CIS countries 1.7 1.9 1.8 1.9 1.3 –11 % Petroleum product sales in Russian Federation, mln t 20.5 17.4 15.6 13.4 11.9 18 % Number of active filling stations (own, leased and franchise) 1 596 1 546 865 783 776 3 %

Net cash from operating activities, Net income per barrel, mn USD USD per barrel Gearing, %

6 000 20,00 25,00 22,58 55 % 5 483 19,42 5 316 5 392 20,56 5 000 18,00 20,00 20,88 1,70 p.p.

4 000 16,00 16,44 15,00 3 320 3 475 3 000 14,43 10,00 14,00 19 % 10,29 2 000 13,48

12,00 5,00 1 000 11,32 3,27 0 0 10,00 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

Content Next chapter 4 JSC GAZPROM NEFT Message to shareholders

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Dear Shareholders and Investors,

Characterising the results of activities of JSC Moreover, Gazprom Neft continues to employ Gazprom Neft in 2010, the Board of Directors notes a systematic approach in forming its strategic with satisfaction stable growth in the company's development concept. To improve managerial key financial and performance indicators. Gazprom control efficiency at all levels, the company is Neft has repeatedly confirmed its status as an adopting an integrated system for long-term effective company. This is a guarantee of realising strategy development and medium-term business its future plans and projects. plans.

Current activities focused on improving efficiency In the near-term, the company has defined the in the producing fields. Integrating new acquired following strategic objectives for key business assets has also allowed the company to increase directions: performance indicators significantly. zz successfully implementing major projects and We note 2010 as a year of quality achievements for building up the resource base Gazprom Neft, not only in operational activities but also in its corporative and financial management. zz effective activity on existing assets The Board of Directors approved the company’s dividend policy, the debt portfolio of Gazprom zz improving the quality and extent of oil-refining Neft was optimised, and activity for further cost reduction is continuing. zz developing sales in premium segments.

Last year, Gazprom Neft expanded its geography To conclude, I would like to remind you that of operations significantly and continued to every company measure to optimise production strengthen its vertical integration. This allowed activities, financial policy and corporative the company to maintain its leading industry management focuses on creating additional position, in such indicators as operating efficiency revenue for Gazprom Neft. and profitability.

Alexey Miller

Chairman of the Management Board, JSC Gazprom Chairman of the Board of Directors, JSC Gazprom Neft

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Dear Shareholders,

Pre-crisis oil prices and the global economic North-West region of Russia, pilot sales of new situation recovered during 2010. This allowed premium-class high-octane fuel of the G-Drive our company to advance significantly toward brand began. our strategic targets. In 2010, Gazprom Neft demonstrated stable growth in all business Financial indicators of activities of the Gazprom directions. Neft Group also demonstrate stable growth. In 2010, EBITDA was more than 7 bn USD, and the Based on the results of reserves audit conducted internal rate of return was 16 %. The same year also by DeGolyer and MacNaughton, the company's saw the company’s net income (not considering the proven reserves as per PRMS were 1 bn BOE as of influence of non-recurring incomes and expenses) the end of 2010 – and the reserves recovery rate increase by 25 %, totaling 3.346 mn USD. has exceeded 110 %. Resource base recovery is an essential foundation for further stable production In the area of corporate management and growth. financial policy, we have optimised the structure and conditions for the company’s credit portfolio Systematic work for optimising production field and approved a new dividend policy. The effective development, as well as new assets, allowed the interest rate for the debt portfolio has decreased company to increase hydrocarbon production to from 5.11 % to 3.96 %, and the average credit 52.8 mn t, compared to 50.2 mn t in 2009. Gas payment period increased to 2.1 years. production increased by 26 %. This was mainly due to the start up of the Cenomanian gas project at 2010 was successful for the company, not only Muravlenko and Novogodny fields. It was also due in terms of its current activities, but in its many to the company's systematic work in the associated highlights for further business development. gas utilisation program. Last year, the geography of the Gazprom Neft In 2010, refinery quantities increased by 13 %. The exploration and production segment expanded increase was due to actively realising the refining significantly. The company became an operator facilities modernisation program, combined with for developing the eastern section of the Gazprom increasing the company share in authorised capital Orenburg field and soon became its owner. In of the Moscow refinery. November 2010, Gazprom Neft, in partnership with NOVATEK company, acquired 51 % of Sever Gazprom Neft continues to increase premium sales, Energy shares. Acquiring this asset is another step in focusing on growing activity in the retail market developing a strategically important region for the segment. For example, in 2010, the company's company: the north of Yamal-Nenets Autonomous retail sales increased faster than market growth, District. Two major projects are being undertaken by 16 % while the Russian market demonstrated in this region: developing the Messoyakha group growth of 9 %. These figures have been achieved of deposits (in partnership with TNK-BP) and due to modernising the company’s retail network Novoport deposit of Gazprom. and uniting filling stations under the 'Gazprom Neft' brand. The figures are also a result of the In 2010, international projects of Gazprom company expanding its own network through Neft Group also developed rapidly. The work to acquiring and constructing new filling stations. increase operating efficiency of NIS has continued, resulting in a significant improvement in financial In 2010, the new G-Family brand for engine oils indicators for our Serbian subsidiary. Additionally, was marketed on the Russian and foreign markets. we have entered new regions in the Middle East. It includes more than 40 types of modern engine In January 2010, Gazprom Neft signed a contract oil for the consumer and commercial markets. with the government of Iraq to develop the Badra Furthermore, at the end of last year in the deposit.

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The company continues to accumulate offshore gasoline and diesel fuel in compliance with classes practical experience. We were involved in a 4 and 5 of technical regulations. production-sharing project in the offshore exploration phase in Equatorial Guinea. At the The company maintains a balanced financial end of the year, the company also concluded policy. The cash flow from key operation activity an agreement to acquire a share in an offshore is directed toward further business development. exploration project in Cuba. Moreover, Gazprom Furthermore, the dividend payout level is among Neft became a leader in the Venezuelan project's the highest in the industry. Russian consortium to develop the Junin-6 deposit. We are looking to 2011 with certainty. Gazprom The most important event in the refining segment Neft Group management will continue to focus its was commissioning the Izomalk-2 light naphtha efforts on maintaining stable production at existing isomerisation complex at the Omsk refinery; the fields, developing new projects, integrating largest complex in Russia and Europe. Also at the new assets, modernizing refining facilities, and Omsk refinery in 2010, construction of a complex developing the retail network. This should, in turn, for hydroforming cat-cracked gasoline and diesel result in a further increase in company revenue for fuel began. The complex will ensure production of shareholders.

Alexander Dyukov

Chairman of the Management Board, JSC Gazprom Neft

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January Gazprom Neft started crude oil deliveries from The company signed a contract for developing Kozmino port. Badra deposit in Iraq.

February Russian President Dmitry Medvedev made a Gazprom Neft and Malka Oil closed a deal on working visit to the Omsk Refinery. acquiring STS-Servis.

March At Omsk Refinery, construction of the complex for Gazprom Neft and Yamal-Nenets Autonomous hydroforming of cat-cracked gasoline and diesel District local authorities signed socio-economic fuel began. agreements for 2010.

Gazprom Neft won the tender for Severo- Romanovsky oil and gas site.

April Gazprom Neft and Nippon Oil started a common The company introduced the new G-Energy brand project implementing blending of motor oils. of motor oils to the market.

IR Global Rankings recognised the company Gazprom Neft and the government of Omsk region as the best in financial disclosure among global concluded a cooperation agreement for 2010. companies in the oil and gas industry.

May Gazprom Neft-Aero started aircraft fueling in Gazprom Neft expanded its share in Sibir Energy Turkish Airports. by 25 %.

Gazprom Neft has begun considering strategic alternatives for developing the oil and gas business.

June Gazprom Neft-Aero started fueling Russian aircraft Gazprom Neft was recognised as the Best Taxpayer in China and Jordan. of St. Petersburg for the fourth time.

The company started constructing a complex for Gazprom Neft and Equatorial Guinea signed a light hydrocracking and hydrofinishing at the oil production sharing agreement for two offshore refinery in Pančevo (Serbia). blocks.

The Annual Meeting of Shareholders of JSC Gazprom Neft was held.

July The company implemented a filling station loyalty Consolidated hydrocarbon production of Gazprom program for private individuals entitled 'We’re Neft has increased by 8% to 25 814 000 TOE. going your way'.

Construction of a plant for light naphtha Gazprom Neft became a sponsor for Serbian isomerisation has begun at the Moscow Refinery. FC Crvena Zvezda.

August Gazprom Neft acquired a chain of 20 filling stations Gazprom Neft became a sponsor for the World in Kazakhstan. Chess Olympiad.

Gazprom Neft, Mitsubishi Corporation and Nippon Oil Corporation received approval for a joint project within the framework of the Kyoto Protocol.

September Dealings with NIS shares began on the Belgrade The advertising campaign for G-Energy oil brand Stock Exchange. began, starring Jason Statham.

Gazprom Neft closed the bid book within the At Ety-Purov deposit, verification of the project for framework of a 5-year syndicated pre-export common implementation within the framework of agreement to a total sum of 1.5 bn USD. the Kyoto Protocol was implemented.

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October At Omsk lubricants plant, construction of a complex A plant for polymer-asphalt and asphaltic emulsion for blending, canning, storage and offloading oils production was commissioned at Omsk Refinery. began.

Gazprom Neft received the status of leader of the Gazprom Neft brought Ravninny deposit into Russian consortium in the Venezuelan project to production. develop Junin-6 deposit.

November Gazprom Neft Cup became the official Child Gazprom Neft-Lubricants and Sibur Holding Tournament of the Kontinental Hockey League. signed a long-term cooperation agreement.

Gazprom Neft has started the winter phase of its Gazprom Neft has summarised the first tenders major advertising campaign for the filling stations in Iraq. chain.

Gazprom Neft was a winner in the category 'Best The joint venture between Gazprom Neft and Corporate Site' in the Annual Reports competition, NOVATEK Yamal Razvitie closed a deal on acquiring conducted by RTS. 51% shares of Sever Energy from Gazprom.

Gazprom Neft-Aero started fueling Russian aircraft in Cyprus.

December The Board of Directors approved the investment Gazprom Neft held the first Corporate Forum. program and budget for Gazprom Neft for 2011.

Gazprom Neft and SIBUR selected a contractor for constructing a compressor station in the south licensed territory of Priobskoye deposit.

2011

January Gazprom Neft and TNK-BP reached an The company closed a deal on selling the first agreement on acquiring 50 % shares of CJSC enterprise of the oil service block within the Messoyakhaneftegaz, which held the licenses for framework of leaving the oil service business. developing the Messoyakha group of deposits in the north of Yamal.

The Moscow Refinery started production of Euro 4 Gazprom Neft sent mandatory cash offers to NIS standard diesel fuel. minority shareholders.

February Gazprom Neft successfully placed bonds for Gazprom Neft has become the only shareholder 30 bn RUB. of Sibir Energy.

The company and the government of Khanty- Mansiysk Autonomous District, Yugra, concluded a cooperation agreement.

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Gazprom Neft to 2020:

• Projects from exploration to production, refin- EXTENT mn ing and sales implemented across the world. OF PRODUCTION TOE • Own technologies as well as scientific, engi- TO 2020 100 neering and technical centers in production and refining activities. RAW MATERIAL mn t • Balanced business structure including Produc- PROCESSING per tion-Refining-Sales chain. 70 year • High extent of refining, products according to the highest international standards, full range of fuels and lubricants of the brand. SALES FOR mn t END CONSUMERS per • Powerful sales network with a powerful brand. 40 year 12 JSC GAZPROM NEFT Development strategy

Currently, Gazprom Neft is an important player in the energy market. The development strategy of JSC Gazprom Neft was The company manufactures and supplies a wide range of goods for adopted at the beginning of 2010. It establishes the various industries in many worldwide regions. basic principles, targets, development directions and expected results of the company’s activities, including subsidiary and dependent companies. Within the framework of creating an integrated Our mission is to supply customers with high-quality system for developing long-term and medium- energy resources, conduct business honestly and term plans, this document is key when identifying responsibly, take care of employees, and to be a targets for periods in the nearest future. leader in efficiency, assuring the company's long- term and balanced growth. In 2010, the company took a big step towards achieving targets established by the development Gazprom Neft’s strategic aims are to become a strategy. Compared to last year, Gazprom Neft large international market player of Russian origin, production indicators have grown in almost all holding a regionally diversified portfolio of assets in directions. Production growth was 5 %, refining the whole revenue chain. The company also aims growth – 13 %, and premium sales growth – 18 %. to actively participat in developing regions, and act with high social and environmental sustainability. This has been achieved due to the stability of the macroeconomic situation, characterised by the The expectations of all interested parties economy recovering after the crisis. Brent oil prices (shareholders, customers, partners, state, society have increased from 62 USD/barrel to 79 USD/ and employees) establish the company's mission. barrel, the demand for oil products in the domestic This mission has two directions of development: market has increased from 7 % to 15 %, and the growth and efficiency. price rise totaled 18 %.

Vision of business targets:

Production Refining

mn t raw materials 100 mn TOE 70per year zz Reserves-to-production ratio – 20 years. zz Including Russian Federation – up to zz Production ratio in fields in initial stages of 40 mn t per year, and foreign countries – developments – minimum 50 %. up to 30 mn t per year. zz Production rate of foreign projects – 10 %. zz Increase of extent of refining in Russia to 90 %. zz Increase in light oil products in Russia to 77 %.

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The key financial indicators have also increased – Due to implementing a modernisation program EBITDA by 21 %, and net income by 25 %. These for refineries, the volume of diesel fuel production figures are the results of growth in production and has increased by 15.4 %. The growth of kerosene refining, improved structures for production and production by 15.2 % allowed the company to sales of oil products, and measures implemented gain a leading position in the Russian aviation fuel for improving efficiency and cost savings. market. Connected with optimising the product range, market demand and rising demand for In 2010, growth of proven hydrocarbons reserves premium gasoline by 12.7 %, the production in the PRMS category for Gazprom Neft was 5.1 mn volume of high-octane gasoline has increased. TOE, and the exploration works expansion was twofold. Additionally, another new field and 44 Maintaining a high refining margin during 2010 hydrocarbon deposits were discovered at deposits defined the main directions for the company's sales of associated companies and affiliates. Intensifying policy. Sales of oil products in the domestic market, exploration works at existing fields, the start of which is more profitable than the foreign market, the Cenomanian gas project on Muravlenko and has increased by 17%. Development of business Novogodny deposits, and new assets have allowed units for retail segments continued. This included the company to increase its production to 52.8 mn into-plane fueling, bunkering, production and sales TOE. This is more than 5 % of the 2009 level. of engine oils and lubricants. Compared to 2009, the company grew premium oil products sales via In 2010, Gazprom Neft achieved record indicators separate business units: jet fuel (by 19 %), bunker for refining volumes: 37.9 mn t is the absolute fuel by 17 % and motor oils by 29 %. maximum for the company. Furthermore, refining growth was noted in all refineries of the group.

By 2020, large-scale Sales for development of the business end consumers should ensure the highest total income for shareholders, mn t in Russia and abroad, compared to other Russian oil 40including: companies, while maintaining a top-three leadership position zz 12 mn t – retail sales via filling stations (including 8.2 mn t in Russia and countries by efficiency among Russian of the CIS). vertically integrated oil zz 18 mn t – jet fuel, bunkering, lubricants, companies. etc. zz 10 mn t – individual wholesale retail to large end consumers.

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In 2010, the company achieved great success, not In 2010, the new G-Family brand for engine oils was only in current activities, but in many highlights marketed in Russia and abroad. It includes more defining further business development. Gazprom than 40 types of international level modern engine Neft took management of the East Orenburg field oil for the consumer and commercial markets. of Gazprom and will soon become the owner of this asset. Gazprom Neft, in partnership with NOVATEK, Foreign projects have been growing rapidly. acquired a 51% stake of Sever Energy. Acquiring this Optimizing NIS management schemes has improved asset is another step in developing a strategically business efficiency of the Serbian company. In important region – the north of Yamalo-Nenets 2010, NIS received a net income of 218.9 mn Autonomous District – where the company plans EUR compared with a loss of 58.4 mn EUR in to start implementing large projects for Messoyakha 2009. 2010 was a key year for NIS development group of deposits (in cooperation with TNK-BP) and due to starting the active phase for investment Gazprom Neft's Novoport deposit. project implementation. Within the modernisation framework for refining facilities at the refinery in The most important event in the refining segment Pančevo (Serbia), construction of a complex for was commissioning the Izomalk-2 light naphtha hydrocracking and hydrofinishing has begun. isomerisation complex at the Omsk refinery: the largest complex in Russia and Europe and one of the By the end of 2010, the first Iraq tenders were three largest complexes in the world. The complex's summarised. This demonstrated the start of capacity is 800,000 t per year. The complex Gazprom Neft's practical activity in the Middle produces a high-octane component for motor East. The company continues to accumulate fuel – isomerisate – which is used in automobile offshore practical experience. Gazprom Neft gasoline production. In addition to improving the entered a production sharing project in the offshore performance properties of engines, isomerisate in exploration phase in Equatorial Guinea, and at the gasoline allows the company to lower significantly end of the year, the company acquired a share in an the content of harmful substances in automobile offshore exploration project in Cuba. Gazprom Neft emissions. This is because the component does became a company leader in the consortium within not contain sulfurous, olefinic and aromatic the large foreign project to develop the Junin-6 hydrocarbons. deposit. All this could be considered elements of implementing long-term company strategy. Also at the Omsk refinery in 2010, construction of a complex for hydroforming cat-cracked gasoline and Successful activity has ensured a solid financial base diesel fuel began. The complex will ensure gasoline for implementing the company’s strategic tasks at and diesel fuel production complies with classes 4 a favorable time in the foreign economic situation and 5 of technical regulations. during 2010. In 2010, the company continued to implement a systematic approach in forming In 2010, the total number of filling stations increased its strategic development concept. To coordinate by 3.2 %. This was a result of expanding the retail management activity for the company at all levels network in Russia and countries of the CIS due to and in all directions, Gazprom Neft planned a acquiring a filling station chain in Kazakhstan and gradual transition to an integrated scheme for retail network development in Russia. developing a long-term strategy and defending medium-term plans. The filling station chain re-branding project entered the final phase. Re-branding has been completed for 950 filling stations in Russia, Tajikistan, Kyrgyzstan, and Belarus, including all filling stations in the Sibneft chain.

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In the near-term, the company has defined the following strategic objectives for key business types.

Successful implementation of large projects and increasing the resource base:

zz Creating a new production center in the north zz Start of foreign projects in Iraq, Venezuela, of Yamal-Nenets Autonomous District due to Equatorial Guinea and Cuba. developing the Sever Energy deposits as well as the Novoport deposit and Messoyakha group zz Improving business processes and the of deposits. Implementing these projects, management mechanism for large projects. along with the production increase of crude hydrocarbons, will allow JSC Gazprom Neft to zz Lobbying for tax relief and infrastructural enter a strategically important and prospective solutions. oil and gas region of Yamal Peninsula; gain experience of deposit development in zz Increasing the resource base, including acquiring conditions of the far north and Arctic Circle; new assets. gain experience in oil marine transportation; and create an effective infrastructure for oil and gas transportation which can be connected to the undivided fund.

Plans for 2011: Active work implementing large projects is continuing.

• Messoyakha project • Exploration work Novoport project program • Test production start • Export • Closing the deal

Sever Energy project • Concept design for asset • development

Orenburg project • Closing the deal • Concept design for asset Cuba project development • Exploration well drilling

Badra project • Seismic operations and mine clearance • Contract signing for drilling • Building of a company town Junin-6 project • Drilling operation start Equator project • Decision-making on the • Seismic 3D operations Early Production project

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Effective activity on existing assets

zz Optimizing deposit development. zz Implementing new techniques and technologies. zz Project supporting with geological and hydrodynamic analog simulations. zz Cost optimisation.

zz Implementing complex plans for deposit zz Increasing the use level of associated petroleum development. gas.

zz Creating mechanisms for portfolio analysis, zz Improving infrastructure management. portfolio management and portfolio optimisation. zz Lobbying for tax relief.

Improving oil refinery efficiency

zz Implementing the motor fuels quality zz Implementing the operational improvements improvement program: production of Euro 4 program and cost reduction for refineries. and Euro 5, increasing high-octane gasoline production. zz Revenue increase for the oil products range.

zz Implementing the increase in extent of refining program.

Increasing supply efficiency for crude oil and refined products

zz Optimizing export logistics. zz Obtaining access to refining facilities outside Russia. zz Increase in trading operations efficiency. zz Providing logistics for new production projects.

Developing and improving efficiency in premium segments

zz Sales increase via small wholesale and retail. zz Introducing and developing for highly effective retail brands. zz Increasing operating efficiency for retailers and petroleum facilities. zz Business development for product areas: jet fuel, lubricating oils, bitumen, petrochemistry products and bunkering.

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Work on the company’s strategy is based on external and internal factors potentially affecting detailed analysis of the industry and understanding the achievement of set plans are monitored the company’s possibilities. A number of key continuously. They include:

External factors: Internal factors:

zz World economic forecast. zz Resource-base condition. zz Energy-use pattern. zz Asset quality. zz Supply and demand balance. zz Financial capacity. zz Market specifics. zz Organisational capacity. zz Government regulation. zz Human resources. zz Characteristics of competitors.

Gazprom Neft in 2020: zz Projects from exploration to production, refining zz Balanced business structure including and sales implemented all over the world. Production-Refining-Sales chain.

zz Human resources, which are capable of working zz High extent of refining, products according to with any assets both in complexity and in the the highest international standards, full range 'vertical' business, and accounting for regional of fuels and lubricants of the brand. specifics, from traditional Russian markets to European, American and Asian Markets. zz Powerful sales network with a powerful brand.

zz Own technologies as well as scientific, engineering and technical centers in production and refining activities.

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In this report, such terms as ‘Gazprom Neft’, ‘the company’, and ‘group’ in their different variants refer to JSC Company history Gazprom Neft, its consolidated subsidiaries and affiliates.

1995 2005

Open joint stock company siberian oil Gazprom Group bought a controlling interest in Company was established by Decree of the JSC Sibneft (75.68 %) and subsequently, on May President of the Russian Federation. Acting as 13, 2006 the company’s name was changed to the company’s founder, the state passed on Joint Stock Company Gazprom Neft. The strategic the government stake in the largest oil industry objectives of the company were to ensure the enterprises of Russia: OJSC Noyabrskneftegaz, position of a global company that had regionally OJSC Noyabrskneftegazgeophysica, OJSC Omsk diversified assets along the entire revenue chain. Refinery and OJSC Omsknefteproduct.

2006 1996-1997 Gazprom Neft entered the retail market of Central The Russian Government implemented the Sibneft Asia by setting up an affiliate – Gazprom Neft privatisation plan with the aim of developing the Asia – to sell petroleum products of the company market economy. At auctions in 1996, private in Kyrgyzstan, Tajikistan and Kazakhstan. In the investors bought some 49 % of Sibneft’s shares. same year, the company joined, for the first In 1997, under the government 'Shares for Loans' time as a shareholder, international pipeline program, the Financial Oil Company won the projects of state significance. Specifically, auction to purchase the state-owned share in this was the construction of the Burgas- Sibneft. Alexandroupolis Transbalkan Oil Pipeline, jointly with JSC OC Rosneft and JSC Transneft.

1998-2004 2007 Good resource potential, effective raw-material processing capacity and professional management Business units were set up within the company ensured a high rate of company development. for separate areas of operations: Gazprom Neft- The Sibneft management did much to modernise Nefteservice, Gazprom Neft-Marine Bunker, production, introduce the latest technology Gazprom Neft-Lubricants and Gazprom Neft- and optimise business processes. Thanks to Aero. Looking to further expand its resource implementing a proactive policy aimed at base, in December 2007, Gazprom Neft acquired increasing assets, the geography of production a 50% stake in Tomskneft, a company producing expanded significantly (Tomsk region, Omsk region oil and gas in Tomsk region and Khanty-Mansiysk and Chukotka Autonomous District) and the sales Autonomous District. network in Russia’s regions was also expanded (Sverdlovsk region, Tyumen region, Krasnoyarsk territory, St. Petersburg and Moscow). One of the company's major purchases during this period was purchasing 49.9 % of shares of JSC NGK Slavneft, which produced oil and gas in Western Siberia and Krasnoyarsk territory.

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2008 2010

Gazprom neft, Rosneft, Lukoil, TNK-BP Gazprom Neft is expanding its presence in the and Surgutneftegas signed a Memorandum global oil and gas market. The year’s milestones of Understanding for cooperation and joint include: participation in projects in Venezuela and Cuba, as part of the National Oil Consortium. zz Gazprom Neft and Sweden’s Malka Oil closed a deal for purchasing STS Service, Malka Oil’s production unit. 2009 zz Gazprom Neft signed a contract to develop the Gazprom Neft acquired new assets for its resource Badra field in Iraq, which contains more than portfolio: NIS and a controlling stake in Sibir Energy. 2 billion barrels of oil reserves. This resulted in an increased ownership ratio of the Moscow refinery and access to the Salym oil fields. zz Acquiring a retail network in Kazakhstan. In April 2009, the company closed a deal with Chevron Global Energy to purchase the Chevron zz JSC Gazprom Neft became a participant for Italia S.p.A. oils and lubricants production plant the project on deposit development, and Sever in the city of Bari (Italy). In an effort to enhance Energy holds a development license for those international partnership, Gazprom Neft and the deposits via associated companies. National Iranian Oil Company (NIOC) signed a Memorandum of Understanding for developing zz JSC Gazprom Neft became a leader in the the Azar and Shangule fields. Another major event framework of the consortium of Russian for the company was launching a large-scale vertically integrated oil companies for the rebranding program for the Gazprom Neft chain Venezuelan project for developing the Junin-6 of filling stations. oil deposit block.

zz Acquiring a share in the offshore exploration project in Cuba.

zz The company entered a production sharing project in the offshore exploration phase in Equatorial Guinea.

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Company structure

Gazprom Neft

Production Oil Service Marketing and Exploration OJSC Gazprom Neft-Noyabrskneftegas OJSC Gazprom Neft-Omsk Gazprom Neft-Nefteservice LLC Gazprom Neft-Khantos LLC CJSC Gazprom Neft-Kuzbass OJSC Gazprom Neft NNGF Gazprom Neft-Vostok LLC OJSC Gazprom Neft-Altai Kapitalny Remont Skvazhin – Archinskoye LLC Gazprom Neft-Tsentr LLC Service LLC OJSC Meretoyakhaneftegaz CJSC Munai-Myrza Spetstransservice LLC Sibneft-Yugra LLC Gazprom Neft Marine Bunker LLC Noyabrskneftegazsvyaz LLC Zapolyarneft LLC Gazprom Neft Asia LLC Noyabrskteploneft LLC Gazprom Neft-Angara LLC OJSC Gazprom Neft-Tyumen RMZ Gazprom Neft – Gazprom Neft-Sakhalin LLC Omsk Refinery LLC Gazprom Neft-Logistika LLC OJSC NK-Magma Noyabrskneftespetsstroy LLC Gazprom Neft-Chelyabinsk LLC Noyabrskenergoneft LLC Gazprom Neft-Krasnoyarsk LLC Foreign Holding NoyabrskEPUService LLC OJSC Gazprom Neft-Ural Gazprom Neft North Africa B.V. CJSC Gazprom Neft-Aero Service Drilling Company LLC Gazprom Neft Equatorial B.V. CJSC Gazprom Neft-Aero Novosibirsk Neftekhimremont LLC Gazprom Neft Cuba B.V. CJSC Gazprom Neft-Severo-Zapad YamalServiceTsentr (LLC) Gazprom Neft Badra B.V. OJSC Gazprom Neft-Yaroslavl Noyabrskneftegazproekt LLC OJSC Gazprom Neft-Ivanovo Noyabrskneftegazavtomatika LLC OJSC Gazprom Neft-Novosibirsk Avtomatika Service LLC Gazprom Neft-Belnefteprodukt LLC Servisnaya Transportnaya Kompaniya LLC Gazprom Neft-Aero Murmansk LLC Noyabrskaya Tsentralnaya Trubnaya Gazprom Neft-Tajikistan LLC Baza LLC Gazprom Neft-Kazakhstan LLP Alliance Oil Asia LLC Gazprom Neft-Shipping LLC Gazprom Neft-Resurs LLC Gazprom Neft-Nizhniy Novgorod LLC CJSC Gazprom Neft-Mobilnaya Karta Gazprom Neft Lubricants Ukraine LLC

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Refining Crude Exports Other Operations OJSC Gazprom Neft-Omsk Refinery Gazprom Neft Trading Gmbh Gazprom Neftfinance LLC Gazprom Neft-Lubricants LLC Gazprom Neftenergo LLC Gazprom Neft Lubricants Italia S.p.A. Gazprom Neft – ZS LLC OJSC Moscow Refinery Gazprom Neft – NTTS LLC Gazprom Neft – Invest LLC Gazprom Neft Business Service LLC CJSC Social and Business Centre Okhta Complex Galernaya 5 LLC Gazprom Neft-Razvitie LLC

Multi-Business Companies Joint Ventures

Naftna Industrija Srbije (NIS) JSC NGK Slavneft Sibir Energy JSC Tomskneft-VNK Salym Petroleum Development (SPD) OOO SeverEnergiya

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Geography of operations by Gazprom Neft Group

Production and refining

Italy

Serbia Angola Belarus

GEOGRAPHY OF PRODUCTION 24 Krasnoyarsk territory 55 Omsk region 56 Orenburg region 70 Tomsk region 72 Tyumen region 86 Khanty-Mansiysk Autonomous District – Yugra 89 yamalo-Nenets Autonomous District 83 serbia Angola

GEOGRAPHY OF SUBSOIL USE 76 38 Irkutsk region 77, 50 23 Krasnodar territory 24 Krasnoyarsk territory 89 24 83 Nenets Autonomous District 55 Omsk region 70 Tomsk region 72 Tyumen region 86 Khanty-Mansiysk Autonomous District – Yugra 86 89 yamalo-Nenets Autonomous District

OIL REFINING 72 77,50 Moscow and Moscow region 70 55 Omsk region 23 55 76 yaroslavl region serbia 38 Belarus

LUBRICANTS 55 Omsk region 76 yaroslavl region serbia Italy 56

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76 77, 50 89 24

72 70 23 55

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Company`s sales activity

RETAIL SALES 6 Republic of Ingushetia 22 Altai territory 9 Republic of Karachayevo- Belarus 74 Chelyabinsk region Cherkessia 37 Ivanovo region 10 Republic of Karelia 40 Kaluga region 19 Republic of Khakassia 42 Kemerovo region 13 Republic of Mordovia 86 Khanty-Mansiysk Autonomous 15 Republic of North Ossetia – District – Yugra Alania 24 Krasnoyarsk territory 14 Republic of Sakha (Yakutia) 77, 50 Moscow and Moscow region 16 Republic of Tatarstan 52 Nizhny Novgorod region 61 Rostov region 53 Novgorod region 62 Ryazan region 54 Novosibirsk region 63 samara region 55 Omsk region 64 saratov region 47, 78 st. Petersburg and Leningrad 65 sakhalin region region 66 sverdlovsk region 66 sverdlovsk region 67 smolensk region 70 Tomsk region 26 stavropol territory 69 Tver region 68 Tambov region 72 Tyumen region 69 Tver region 89 yamalo-Nenets Autonomous 70 Tomsk region District 71 Tula region 76 yaroslavl region 72 Tyumen region 73 Ulyanovsk region LARGE WHOLESALE 33 Vladimir region 22 Altai territory 35 Vologda region 28 Amur region 36 Voronezh region 29 Arkhangelsk region 89 yamalo-Nenets Autonomous 30 Astrakhan region District 31 Belgorod region 76 yaroslavl region 32 Bryansk region 51 74 Chelyabinsk region GAZPROMNEFT 95 Chechen Republic MARINE BUNKER 75 Chita region 29 Arkhangelsk region 21 Chuvash republic 30 Astrakhan region 10 37 Ivanovo region 39 Kaliningrad region 39 38 Irkutsk region 27 Khabarovsk territory 47, 78 79 Jewish Autonomous region 23 Krasnodar territory 83 47, 78 st. Petersburg and Leningrad 51 Murmansk region 60 14 53 29 region 25 Primorsk rerritory 39 Kaliningrad region 16 Republic of Tatarstan 35 40 Kaluga region 61 Rostov region 69 42 Kemerovo region 47, 78 st. Petersburg 67 11 27 Khabarovsk territory and Leningrad region 76 77, 50 86 Khanty-Mansiysk Autonomous 34 Volgograd region 32 40 44 District – Yugra 76 yaroslavl region 37 89 24 43 Kirov region 71 33 27 57 23 Krasnodar territory GAZPROMNEFT-AERO 46 62 52 43 24 Krasnoyarsk territory 28 Amur region 48 13 11 Komi Republic 32 Bryansk region 65 31 68 86 44 Kostroma region 74 Chelyabinsk region 59 45 Kurgan region 27 Khabarovsk territory 58 73 16 66 46 Kursk region 77, 50 Moscow and Moscow region 48 Lipetsk region 51 Murmansk region 28 77, 50 Moscow and Moscow region 54 Novosibirsk region 63 64 72 51 Murmansk region 47, 78 st. Petersburg and Leningrad 61 74 70 52 Nizhny Novgorod region region 23 45 55 53 Novgorod region 64 saratov region 3 54 Novosibirsk region 69 Tver region 38 79 70 Tomsk region 75 26 54 55 Omsk region 73 Ulyanovsk region 9 42 56 Orenburg region 36 Voronezh region 30 15 25 57 Oryol region 75 Zabaykal’skiy region 6 58 Penza region Kyrgyzstan 95 19 59 Perm region Kazakhstan 22 25 Primorsk territory Tajikistan 5 60 Pskov region 3 Republic of Buryatia 56 5 Republic of Dagestan

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Kyrgyzstan Serbia Kazakhstan

Tajikistan

10 39 47, 78 83 60 14 53 29

35 69 67 11 76 77, 50 32 40 44 37 89 24 71 33 27 57 46 62 52 43 48 13 65 31 68 86 59 58 73 16 66

63 28 64 72 61 74 70 23 45 55 3 38 79 75 26 54 9 42 30 15 25 6 95 19 22

5 56

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Competitive state of the company

JSC Gazprom Neft is a subsidiary of JSC Gazprom, the activities of Among Russian vertically integrated oil companies which focus on safe supply of crude oil and oil products to domestic (VIOC), Rosneft, Gazprom Neft and TNK-BP and foreign consumers, implementing high-performance technologies demonstrated the largest growth of oil production: of production and refining, and strengthening competitive positions +6 %, +4 %, and +2 % respectively. Bashneft in both Russian and foreign markets. According to the results of 2010, increased oil production volume by 16 % at old proven reserves of hydrocarbons of the company as per SPE (PRMS) fields. The largest decline of equity production classification exceed 1 bn TOE. This ranks the company among the 20 in Russia was demonstrated by Slavneft (-3 %), largest oil companies in the world. Gazprom Neft is currently one of Tomskneft (-2 %) and LUKOIL (-2 %). the fastest-growing oil companies in Russia. In 2010, total oil production of Gazprom Neft (accounting for share in equity investees) increased by 4 % to 49.6 mn t. This was mainly due to integrating assets acquired in the middle Oil and gas production of 2009 (NIS and Sibir Energy) as well as further modernisation of the system for developing own According to the 2010 results, Gazprom Neft is fields. the fifth-largest company in terms of volume of oil production among oil companies in Russia. In 2010, the volume of gas production in Russia also increased significantly. The growth was mainly In 2010, oil production in Russia increased by 2.2 % stipulated by increasing Gazprom production by and totalled 505.1 mn t. Additionally, in the course 10 %. The growth of production volumes resulted of the year, the daily production rate increased to from starting the recovery process in the European a record figure for the post-Soviet period: 10.1 mn gas market as well as profitability of gas deliveries bbl. This allowed Russia to remain the leader in to markets of CIS countries approaching that of gas global oil production. In 2010, production growth deliveries to Europe. In Russia, total gas production was achieved due to developing new fields, and increased by 12 % to 665 bn m³. mainly through production growth at Vankor field.

Oil and gas production of oil and gas companies in Russia, thousand TOE Source: INFOTEK

Company Production Share in Production in Share in 2010/2009 in 2010 2010 2009 2009 Rosneft* 132 066 22 % 123 950 21 % 7 % LUKOIL 104 041 17 % 104 049 18 % 0 % TNK-BP** 92 225 15 % 90 681 16 % 2 % Surgut NG 70 756 12 % 70 901 12 % 0 % Gazprom Neft*** 51 548 9 % 49 295 9 % 5 % Tatneft 26 783 5 % 26 718 5 % 0% Other 123 001 20 % 109 968 19 % 1-2 % Total excluding gas production by Gazprom and NOVATEK 600 419 100 % 575 623 100 % 4 %

* 2010 production was adjusted to include Tomskneft’s share. ** Including share of Slavneft’s production. *** Including share of Slavneft’s, Tomskneft’s, Salym Petroleum’s production, excluding production abroad (NIS).

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Oil and gas production in the Russian Federation in 2010 by oil The dynamics of gas production (natural and and gas companies (excluding gas production by Gazprom and associated) by the largest Russian oil and gas NOVATEK) companies mostly grew in 2010.

In 2010 in Russia, Gazprom Neft's marketable gas production grew by 23 %, compared to the same period in the previous year, and totalled 3.6 bn m³. Rosneft* The growth was stipulated by starting natural gas LUKOIL production at Cenomanian deposits of Muravlenko TNK-BP** and Novogodny fields in quarter 4 of 2010. 2010, % Surgutneftegas Gazprom Neft*** In 2010 in Russia, Gazprom Neft's total oil Tatneft production grew by 4.6 % to 51.5 mn TOE. Others Accounting for NIS production, Gazprom Neft's total consolidated production of hydrocarbons totalled 52.8 mn TOE in 2010.

Source: INFOTEK 9 % 5 % 12 % 20 % 15 % 22 % 17 %

Refining

Refining in Russia has grown stably over recent was mainly due to fully consolidating the Moscow years. According to data from Minenergo, in Refinery after acquiring Sibir Energy. 2010 in Russia the volume of refining grew by 5.5 % compared to 2009 and totalled 249 mn t. Beyond Russia, from February 2009, the refining The growth of refining volumes was mainly due volumes of Serbian NIS began to be included in to fiscal policy in Russia, which stimulates this the Gazprom consolidation. Throughout 2010 in direction of business, making it more efficient than Russia and beyond, the company's consolidated crude oil export for Russian vertically integrated oil refining totalled 37.9 mn t. This is more than companies. 13 % of the indicator for the previous year. The production volume of high-octane petrol increased In 2010, the volume of diesel fuel production by 13 %, in connection with optimising the increased by 4.3 % and totalled 70.2 mn t, residual product range and increasing demand for high- oil – 69.9 mn t (8.6 % growth) and petrol – 35.9 octane petrol; kerosene production increased by mn t (0.5 % growth). Furthermore, utilisation of 16 % and the volume of diesel fuel production main refining facilities in Russia totalled 92.1 %, increased by 15 %. This was due to implementing and increased by 41 percentage points compared a modernisation program at the refinery. to 2009. The company ranks third as per oil refining volumes According to the results of 2010, Gazprom Neft and oil product delivery on the Russian market. The increased its own share in total volume of oil refining rate of growth of sales of light oils and retail sales in Russia from 13.2 % to 14.2 %. It also confirmed is outstripping market growth. its third position among Russian oil companies. This

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Oil refining in Russia in 2010 Oil refining in Russia, thous. t

250 Source: INFOTEK 249.95

Rosneft 240 LUKOIL Gazprom Neft* 236.30 235.73 2010, % TNK-BP** 230 Surgutneftegas 228.60 Ufa plants 220 TAIF-NK 219.57 Others 210

Source: INFOTEK 200 9 % 3 % 9 % 12 % 15 % 14 % 20 % 18 % 2006 2007 2008 2009 2010

Oil refining in Russia, mn t Source: INFOTEK

Company Oil refining Share Oil refining Share 2010/2009 in 2010 in 2010 in 2009 in 2009 Rosneft 50 763 20 % 50 222 21.3 % 1 % LUKOIL 45 214 18 % 44 147 18.7 % 2 % Gazprom Neft* 35 048 14 % 31 026 13.2 % 13 % TNK-BP** 31 160 12 % 28 303 12.0 % 10 % Surgutneftegas 21 237 8 % 20 484 8.7 % 4 % Ufa plants 21 193 8 % 20 746 8.8 % 2 % TAIF-NK 8 100 3 % 7 791 3.3 % 4 % Others 37 239 15 % 33 009 14.0 % 13 % Total 249 953 100 % 235 728 100 % 6 %

* Including share in refinery of Slavneft’s, the Moscow Refinery, excluding refining abroad (NIS). ** Including share of Slavneft’s refining.

Exports

In 2010, volumes of oil export declined by 0.5 % to In 2010, Russia reduced the volume of export to 250 mn t. This is due to the decline of raw material CIS countries by 29.8 % to 26.3 mn t. In the same export to Belarus. At the same time, export to non- year, oil export to Belarus reduced by 40 % to CIS countries grew by approximately 5 %. Last year, 12.88 mn t, compared to the same indicator for 213 mn t of Russian raw materials was exported to 2009. The volume of export to Ukraine reduced by non-CIS counties via Transneft. Without Transneft, 5.8 %, compared to 2009, and totalled 5.95 mn t. 37 mn t of oil and gas-condensate was delivered by Russian raw material export to Kazakhstan grew by rail, including 3.33 mn t from refineries. 17.19 % and totalled 7.43 mn t.

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Crude exports by Russian companies During 2010, Rosneft oil company exported via the Transneft System in 2010 54.4 mn t of crude oil to non-CIS countries via the Transneft system, LUKOIL – 27.9 mn t, Surgutneftegas – 25.5 mn t, TNK-BP – 31.5 mn t, Tatneft – 16.3 mn t and Gazprom Neft – 14.6 mn t.

Compared to 2009, in 2010, the total share of Rosneft Gazprom Neft oil export in Russian oil export to TNK-BP non-CIS countries changed slightly (a decrease Surgutneftegas of 0.2 percentage points). This was mainly due 2010, % LUKOIL to high netback of refining compared to crude oil Tatneft export netback. Gazprom Neft Other

Source: INFOTEK 8 % 7 % 13 % 20 % 12 % 25 % 15 %

Crude exports by Russian companies via the Transneft System, thous. t Source: INFOTEK

Company Oil export Share Oil export Share 2010/2009 in 2010* in 2010 in 2009* in 2009 Rosneft 54 040 25.3 % 48 375 22.9 % 12 % TNK-BP 31 459 14.7 % 33 774 16.0 % –7 % Surgutneftegas 25 554 12.0 % 27 145 12.9 % –6 % LUKOIL 27 886 13.0 % 24 862 11.8 % 12 % Tatneft 16 345 7.6 % 15 911 7.5 % 3 % Gazprom Neft 14 594 6.8 % 14 738 7.0 % –1 % Others 43 932 20.5 % 46 229 21.9 % –5 % Total 213 813 100 % 211 035 100 % 1 %

* Crude oil export via Transneft system.

Previous chapter Content Next chapter PRODUCTION STRATEGY

In 2010, Gazprom Neft became a wholly international oil and gas company. Active development of our foreign projects in Iraq, Venezuela, Equatorial Guinea and Cuba began. We are gaining new deep marine shelf competence, experience in working with heavy crude, as well as capacity as an operator and leader of an international consortium.

Boris Zilbermints Deputy Chairman of the Management Board Deputy Director General for Exploration and Production Annual Creportompan 2010 y key performance 31 indicators by type of operation in 2010

Today, JSC Gazprom Neft is an actively developing company with the following aims: zz Leading positions in developing northern areas of the Yamalo-Nenets Autonomous District. zz Sustainable mining, specialising on works with exhausted resource bases in traditional mining areas. zz Expanding exploration and production business abroad. zz Quality improvement of oil products produced and the extent of oil-refining at existing facilities. zz Developing premium sales channels for products under the powerful brand.

Oil and gas exploration and production

In September 2009, the Board of Directors of implementing a medium-term program for cost Gazprom Neft approved the development strategy cutting in the area of exploration and production, for the company’s exploration and production which proved its efficiency based on the results of block. In accordance with this, Gazprom Neft 2010. This program is a part of a general task for intends to increase oil production volumes to vertically integrated oil companies to achieve their 100 mn TOE per year by 2020. The company will aim in optimising expenses. maintain the reserves-to-production ratio at this level for no less than 20 years, and the share of projects at the initial development stage by the Status of the raw materials base stated period should ensure no less than 50% of production. The target volume of production will For more than 10 years, the audit of company be reached due to existing assets and by means reserves has been conducted according to PRMS of projects with participating interest of Gazprom (SPE) standards and more SEC standards. The audit Neft, as well as transferring Gazprom oil fields to is conducted at all fields, based on evaluating the Gazprom Neft. Also the company plans to expand representative base of JSC Gasport Neft fields, its asset portfolio through acquiring sites of the which are 95 %-98 % of Russian category undivided fund, acquiring assets on the Russian A+B+C1. market, and developing projects abroad. Based on the independent assessment from In 2010, consolidated production of Gazprom engineers of DeGolyer & MacNaughton (in 2007 Neft totalled 52.8 mn TOE. For 2011, its increase is and 2006, the assessment company for the planned to 56.8 mn TOE. The company will achieve company’s reserves was Miller & Lents) as of 31 main growth by developing the Cenomanian gas December 2010, the total reserves of categories deposits of Muravlenko and Novogodny fields. 'proven' and 'probable' for Gazprom Neft Group One of the key tasks for 2010 was reducing the (including the company share in reserves of cost of oil produced. The main base component subsidiaries, accounting for the share included in of development was optimisation projects for the equity of Slavneft, Tomskneft, Salym Petroleum company’s existing assets. Gazprom Neft defined Development and SeverEnergiya), according to its own strategy to become a leader in working PRMS international standards totalled 1 765 mn with exhausted resource bases. In 2009-2010, a TOE hydrocarbons (13 052 mln BOE). series of projects was initiated, covering almost the entire range of activity of the company’s production The current indicator of Gazprom Neft production assets, from scheduling procedure and the process reserves with proven PRMS category levels of control system to implementing projects creating hydrocarbons is approximately 19 years. the most progressive procedures for acquiring services and optimising warehouse remains. One In 2010, growth of proven hydrocarbon reserves of the largest and most important projects was for Gazprom Neft in the PRMS category was

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Proven reserves of hydrocarbons as per PRMS (SPE) classification 52.6 mn t. The growth of 23.3 mn t was due (mn TOE) to supplementary exploration of the producing field, 26.1 mn t was due to production drilling, as well as reappraising reserves resulting from 1 050 110 % recovery of resources detailing of geological models of fields and the 61 oil recoverability factor (3.2 mn t). 1 023 1 000 1 018 In the reporting period, seismic surveys in the licensed plots of JSC Gazprom Neft and its 950 subsidiaries were conducted: 3D surveys of 1 680 km² and 2D surveys of 3 817 km. –53 900 –3 In 2010, of the 67 tested objects, 24 yielded

850 commercial oil inflows, condensate and gas, 15 – non-commercial oil and gas inflows, 11 yielded no inflow, and the remaining 17 objects yielded 800 01.01.2010 Production Supplementary SeverEnergiya 01.01.2011 either reservoir water inflows or those slightly exploration and revision of precious estimations admixed with oil.

The financing of exploration by JSC Gazprom Neft 5.1 mn TOE. According to the 2010 results, and its subsidiaries in 2010 totalled 4.694 bn RUB, proven reserves of hydrocarbons for Gazprom which is 153 % of the financing provided in 2009. Neft totalled 110 %. In 2010, the Gazprom Neft and NOVATEK joint venture Yamal Razvitie LLC closed a deal Exploration on acquiring 51 % shares in SeverEnergiya LLC from Gazprom. SeverEnergiya holds In the reporting period, at licensed sites of JSC 100 % of JSC Arktikgaz, CJSC Urengoi Inc Gazprom Neft and its subsidiaries, testing of 19 and JSC Neftegaztekhnologia. Companies prospecting and appraisal wells was completed. hold licenses for implementing development This included 11 wells where commercial inflows and production at oil and gas-condensate of hydrocarbons were obtained. Exploration fields of Yamalo-Nenets Autonomous District: meters drilled in 2010 totalled 63,720 m, which is Samburgsky, Yevo-Yakhinsky, Yaro-Yakhinsky 168% compared to 2009. This increase of drilling and Severo-Chaselsky sites. According to PRMS, in 2010 compared to 2009 is connected with the reserves of sites of 'proven' and 'probable' increase in financing exploration. categories totalled 191 mn TOE.

The exploration drilling success rate was 69 %, Licensing with an efficiency of 385.3 t of hydrocarbons per meter drilled and 167 RUB/TOE. The organic As of 31 December, 2010, JSC Gazprom Neft and recovery of the resource base totalled 165.6 %. its subsidiaries held subsoil licenses for 63 licensed sites located in 10 regions of the Russian Federation. Based on the results of prospecting and Outside Russia, in Serbia, the NIS subsidiary has exploration drilling and supplementary 65 permits (similar to Russian licenses). exploration performed by enterprises of the Group, Severo-Vakunaiskoye deposit and 17 new By type of activity, 9 licenses entitle the company deposits at Vyngayakhskoye, Vyngapurovskoye, to conduct geological surveys, and 54 licenses Ety-Pur, Novogodny, and Tympuchikanskoye grant the right to hydrocarbon exploration and fields with recoverable reserves of hydrocarbons production for 20 to 50 years.

as per category C1 at 4 249 mn TOE and category

C2 at 10 451 mn TOE were discovered. Eight subsidiaries hold JSC Gazprom Neft subsoil licenses. However, three operators In 2010, total growth of oil reserves in the manage these licenses: OJSC Gazprom Neft- commercial category for the company totalled Noyabrskneftegaz, Gazprom Neft-Khantos LLC

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and Gazprom Neft-Vostok LLC. OJSC Gazprom The foreign subsidiary company, NIS, is engaged Neft-Noyabrskneftegaz performs the full cycle in oil and gas exploration and production in Serbia. of hydrocarbon operations in 44 licensed plots, including 10 plots owned by 3 subsoil users. The company also participates in several production sharing agreements and other production projects In 2010, the Licensing Commission of the Federal in Angola, Iraq, Venezuela, Equatorial Guinea and Agency for Subsoil Use reviewed and approved Cuba. additions to 16 additional subsoil licenses. For 7 sites, the geological survey period was extended, Alongside its own production, Gazprom Neft holds and for 9 sites, license agreement terms were made 50 % shares in three subsidiaries, the production current. of which is accounted on a pro rata basis of equity participation: OJSC Slavneft, OJSC Tomskneft and OJSC NGK Slavneft and its subsidiaries hold oil Salym Petroleum Development. and gas exploration and production licenses for 37 license sites on the territory of Western Siberia The largest hydrocarbon reserves in the Yamalo- and Krasnoyarsk territory. Nenets Autonomous District are found in: Sugmutskoye, Sutorminskoye, Vyngapurovskoye, OJSC Tomskneft holds 33 licenses for developing Sporyshevskoye and Muravlenko fields. hydrocarbon fields on the territory of the Tomsk region and Khanty-Mansiysk Autonomous District. In 2010, these fields accounted for 36.3 % of the company's total oil production (with no Sibir Energy’s subsidiaries – OJSC NK Magma account of production on a pro rata basis of and Siberian Geological Company LLC – hold equity participation). Production in these fields is 8 licenses for exploration surveying (to search undertaken by oil and gas producing enterprise and assess raw hydrocarbon fields) and 2 licenses OJSC Gazprom Neft-Noyabrskneftegaz, its for exploration and oil production at licensed sites subsidiary Zapolyarneft LLC holding a license for located in the territory of the Khanty-Mansiysk developing Vyngapurovskoye, Yarainerskoye and Autonomous District (Yuzhnoye, Orekhovskoye Novogodny deposits, and a Muravlenko branch of and Koltogorsk deposits). Furthermore, Sibir OJSC Gazprom Neft-Noyabrskneftegaz. Energy has a 50 % share in the Salym Petroleum Development joint venture that holds 3 licenses In Khanty-Mansiysk Autonomous District, the JSC for exploring and developing the Salym group Gazprom Neft deposit with most prospects is the of oil fields, also located in Khanty-Mansiysk Priobskoye field. Sibneft-Yugra LLC – a subsidiary Autonomous District. SeverEnergiya LLC including of the company – holds a development license for JSC Arktikgaz, CJSC Urengoi Inc, CJSC Arctic Gas this, with Gazprom Neft-Khantos LLC acting as the Company, and Neftegaztekhnologia LLC hold 2 operator. In the same region is the north-eastern licenses for search, exploration and production of part of the Palyanovskaya Area of Krasnoleninskoye raw hydrocarbons, and 2 licenses for exploring field and a group of licensed sites acquired by the and producing raw hydrocarbons. All licensed company in early 2005 (Salymsky-2, Salymsky-3, sites are located in the territory of Yamalo-Nenets Salymsky-5) and the Zimneye field in Tyumen Autonomous District. region.

Hydrocarbon production The Priobskoye field is one of the company's largest and most promising oil deposits, and is the leader Gazprom Neft is engaged in oil and gas exploration in terms of rate of production growth. Active and production in Russia as well as in non-CIS development of this field began in 2004. As early countries. In Russia, the company’s oil production as 2010, it accounted for 31 % of total oil produced is mainly performed by three of its subsidiary by the company on its own fields. Therefore, the operators: JSC Gazprom Neft - Noyabrskneftegaz, Priobskoye deposit is a key asset and strategically Gazprom Neft-Khantos LLC and Gazprom important for the company’s future development. Neft‑Vostok LLC. Key production companies are developing fields in Yamalo-Nenets and A regional group of fields in the Omsk and Tomsk Khanty‑Mansiysk Autonomous Districts, Omsk, Regions will become a second 'new' centre. Tomsk, Tyumen and Irkutsk Regions. Gazprom Neft-Vostok is the oil production

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operator of the Krapivinskoye field located in indicators of the business plan for 2010 by 5 %. Omsk region and of Archinskoye, Shinginskoye, The average daily production for the year totalled and Urmanskoye fields in Tomsk region. 26,884 t. This exceeds 2009 indicators by 15 %. 514 geological and engineering operations were Tomsk region is one of Gazprom Neft’s production performed at the enterprise. This allowed it to centres. In early 2010, Gazprom Neft's assets were produce an additional 2.08 mn t of oil. increased in this region through the Luginetskie group of fields after acquiring the STS-Service The enterprise succeeded in achieving high enterprise from Swedish company Malka Oil. indicators in production due to an increase in All these fields form a new production centre well efficiency, daily production on Zimneye field, providing annual growth of oil production. A and over-fulfilling the plan to bring in 41 % new significant part of the enterprise's reserves is in the wells (396 wells were brought into production). early development phases. This creates potential Furthermore, deepening production drilling for further production growth. totalled 1,328,200 m in rock. This exceeds planned indicators by 64 %. The enterprise also put into From the end of 2007, on a parity basis with service an industrial complex for diagnostics and Rosneft, Gazprom Neft holds and, according to repair of pump and compressor pipes, and an oil the shareholder agreement, manages Tomskneft delivery and acceptance point. on a rota basis. Serbian Gazprom Neft enterprise NIS achieved In 2010, the oil production volume of Tomskneft significant production growth. During 2010, NIS totalled 10.3 mn t (of which the share of Gazprom oil production increased by 38 % (207 300 t) to Neft totalled 5.15 mn t). This is 217,000 t more 970 000 t. This exceeds business plan indicators than the planned volume of marketable gas: by 11.4 %. 0.6 bn m³. STS-Service, acquired by Gazprom Neft at the OJSC Slavneft – another joint venture of Gazprom beginning of 2010, exceeded the planned figure Neft and TNK-BP – is engaged in producing by 23.5 %. reserves in the Ural Federal District and exploring the Siberian Federal District. For all of 2010, the Sibir Energy exceeded planned production enterprises of the company produced 18.36 indicators by 5.5 %. mn t of oil. This complies with the business plan and is 3% below the previous year’s indicator. The company’s enterprises exceeded planned The share of Gazprom Neft in Slavneft’s oil indicators of production. This was mainly production totalled 9.18 mn t, and marketable due to starting up new wells at fast rates and gas: 0.3 bn m³. implementing measures to stimulate production. In 2010, the start-up of new wells increased by Since June 2009, Gazprom Neft has held a 50 % 229 % (136 wells), as compared to the business share in a joint venture with Royal Dutch Shell: plan. The volume of added production totalled Salym Petroleum Development. In 2010, the total 4,809,790 t. volume of oil production in the Salym group of oil fields, which is developed by Salym Petroleum In 2010, the company produced 4.0 bn m3 Development, grew by 8 % compared to 2009, marketable gas (including the share in gas and totals 8.27 mn t, including the Gazprom Neft production of subsidiaries, and including share share of 4.13 mn t. in equity investees). This is 26 % more than in 2009. The growth is mainly due to starting The total production of Gazprom Neft in 2010 natural gas production at the Muravlenko and increased by 4.1 % from the same period a year Novogodny deposits in Q4 of 2010. In Q4 2010, earlier and amounted to 49.6 mn TOE. One of marketable gas production of these two fields the leaders as per production growth rate was a totalled 0.473 bn m³. In 2010, natural gas planned production subsidiary of the company: Gazprom production totalled 4.2 bn m³. Neft-Khantos LLC. In 2010, its production volume totalled 9.8 mn t. This exceeds the extent of The company continues to study the possibility of production in 2009 by 14.9 % and exceeds starting simultaneous exploitation of oil and gas

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formations on its other fields, where this will assure additional volumes of associated gas and products production synergy. from its processing. This programme will allow the company to utilise up to 500 mn m³ associated gas Within the framework of implementing the at the Yuzhno-Balyksky gas treatment plant and programme to increase the level of associated achieve 95 % of associated gas utilisation at the gas utilisation at Priobskoye field in Q4 of 2010, a Priobskoye field. turnkey contractor was selected for constructing the Yuzhno-Priobskoye gas-compressor station. At the end of Q4 2010, the Investment Committee An EPC contract was included, and contracts for of the company considered the medium-term constructing a gathering system for associated investment programme of JSC Gazprom Neft gas were also concluded: construction of to increase the level of associated gas use for pipelines and delivery of vacuum compressor 2011–2013. According to this programme, in Q1 stations. Implemented measures will improve the 2011, it is expected to approve the investment effectiveness of associated gas use, minimise risk programme to increase the level of associated gas associated with environmental protection and use in Noyabrsk region. taxation, and increase income through selling JSC Gazprom Neft expects that by 2020, the share Production drilling of gas in the production portfolio will total around 30 %. This will be due to developing combined

Pcs. Thous. m fields (including the gas component) and the growth of the percentage of associated gas use. 1 200 1 153 3 000 1 050 2 610 Developing small gas deposits as part of the 1 000 919 production activity fields of Gazprom Neft will 2 500 Commissioning of new wells promote the increase in economic efficiency of 2 259 800 Gazprom Neft the use of the company’s reserves. It will also Associated companies 2 033 help raise the hydrocarbons production volume 600 2 000 to 100 mn TOE. This is specified in the company's development strategy to 2020. Production drilling 1 623 400 Gazprom Neft In 2010, Gazprom Neft's hydrocarbon production 1 500 Associated companies 1 151 increased by 5.3 % and totalled 52.8 mn TOE. 200 1 082 Source: In 2010, Gazprom Neft maintained its position as 0 1 000 Company data 2008 2009 2010 an industry leader by level of oil and gas production among Russian oil companies.

Hydrocarbon production in 2008-2010 mn TOE In 2010, the commissioning of Gazprom Neft’s new production wells, not considering its subsidiaries, 60 totalled 746 wells (79 wells more than in 2009). 52.81 Increasing the number of commissioned wells was 50.17 50 48.72 possible due to expanding the production drilling programme. Meterage reached 2,619,000 m, which is 351,000 m more than the level of 2009. 40 Gazprom Neft Slavneft This was due to the increase of schedule speed Tomskneft and average rate per drilling crew. At the end of 30 SPD 2010, the company's production stock of oil wells Cenomanian gas (without regard to subsidiaries) increased by 20 96 wells and totalled 6,720.

10 In 2011, according to preliminary conservative Source: plans, Gazprom Neft plans to increase hydrocarbon Company data production by 7.6 % to 56.8 mn TOE. 0 2008 2009 2010

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In 2011, the planned profile of production includes: zz production share in enterprises of Sibir Energy: Salym Petroleum Development (50 %) and Magma zz developing existing assets of JSC Gazprom Neft: (100 %) Gazprom Neft-Khantos LLC; Gazprom Neft-NNG LLC; Gazprom Neft-Vostok including acquired zz developing Messoyakha fields in partnership with licenses of the undivided fund: Imilorskoye, TNK-BP (50 %) Gavrikovskoye and Erginskoye zz developing Kuyubvinskoye field of NGK Slavneft zz share of production in joint ventures OJSC NGK in partnership with TNK-BP (50 %), implementing Slavneft (50% in partnership with TNK-BP) and the active exploration work programme, OJSC Tomskneft VNK (50 % in partnership with and further developing Tympuchikanskoye OJSC NK Rosneft) group (Tympuchikanskoye, Vakunaiskoye and Ignyalinskoye sites) zz obtaining and further developing JSC Gazprom fields: Novoport, Orenburg zz entering foreign projects and acquiring sites and assets of the distributed fund in Russia. zz producing Cenomanian natural gas on fields of Gazprom Neft-Noyabrskneftegaz: Novogodny and Muravlenko

Previous chapter Content Next chapter INTERNATIONAL COOPERATION

In 2010, Gazprom Neft continued its development in world markets and entered an active phase of implementing a number of international projects. The current key tasks of Gaz- prom Neft’s international business are expanding cooperation geographically, developing contacts with international oil companies, and forming effective interactions with countries’ government authorities and markets which are of interest to the company.

Vladislav Baryshnikov Member of the Management Board Deputy Director General for International Business Development 38 JSC GAZPROM NEFT

International projects Cuba

Gazprom Neft is consistently forming the portfolio At the end of 2010, Gazprom Neft and Malaysian of international assets; a share of which should company, Petronas, signed a transfer share include around 10 % of consolidated production agreement and principal provisions on cooperation. of hydrocarbons by 2020. This covers the conditions of exploration and following the development of four blocks, located Iraq offshore of Cuba.

In early 2010, the company became an operator The signed documents stipulate a transfer to for the development project of Badra field in Iraq. Gazprom Neft of a 30 % share of the project. The Gazprom Neft, as a member of a consortium company will compensate Petronas part of the including state-owned oil companies Kogas expenditure incurred and participate in financing (Korea), Petronas (Malaysia), TPAO (Turkey), current activity on a pro rata basis. signed a contract with the Iraq government for developing the Badra field. As the operator of the Gazprom Neft's Board of Directors considered the project, Gazprom Neft holds a share interest of possibility of activity offshore Cuba at the beginning 30 %. of October 2010. The Board took a favourable view of development prospects in this region. The Badra field is located in the territory of Wasit agreement will come into operation following its Province in the east part of Iraq and borders approval by the authorities of the Republic of Cuba. the Azar Iranian field. According to preliminary assessments, forecast recoverable resources of In 2007, Malaysian Petronas and the Government Badra totalled 3 bn bbl of oil. of the Republic of Cuba signed a production sharing agreement on blocks of № 44, № 45, № 50, and This Middle East project is the first large-scale № 51 located offshore of the Gulf of Mexico . foreign project of Gazprom Neft. Badra’s Before entering the project, JSC Gazprom Neft development project is planned for 20 years, Petronas was the only participant. The agreement with a possible extension for another 5 years. The stipulates that exploration is implemented at four maximum level of oil production is expected to be sites, including subsequent oil production to 2037 around 170,000 bbl per day, and will be achieved and gas to 2042. Forecasting recoverable resources in 2016. by blocks are estimated at 450 mn t.

Under the terms of contract, a bonus of 5.5 USD Within a framework of the current agreement, a 2D per every barrel of oil produced (or corresponding seismic survey was performed in sites for Q4 2011. volume of oil) will be paid to Gazprom Neft after Drilling of the first exploration well is also planned. achieving the initial production level of 15 000 Based on the results of exploration drilling, the bbl per day. The company plans to achieve this partners will decide on the subsequent activities indicator in 2013, with the maximum level in 2016. within the framework of the project.

At this time, the company Gazprom Neft Badra Implementing this project will allow the company to B.V., the project operator, has been created and expand its geography of operations and strengthen is working. During 2010, all key organisational its position in the international market. The and legal issues were settled, and the preliminary company's experience in implementing offshore arrangements with members of the consortium projects will promote the company's development, on terms and phases of the field’s development entering new regions and applying strategic plans were achieved. for increasing production abroad.

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Equatorial Guinea the Bolivarian Republic of Venezuela signed an intergovernmental agreement on cooperation in implementing mutual strategic projects. JSC Gazprom Neft, the Ministry of Ore Mining, Industry and Energy of Equatorial Guinea, and Within the framework of this agreement, in National Oil Company Guinea Equatorial de spring 2010, NOC and Corporacion Venezolana Petroleos (GEPetrol) signed two production del Petroleo (CVP), a subsidiary of the Venezuelan sharing agreements for exploring two exploratory state-owned oil company PDVSA, set up a offshore blocks. joint venture, Petróleos de Venezuela S.A. (PetroMiranda), for supplementary exploration According to signed documents in the phase of and development of Junin-6 field. This field is exploration, the shares of participants are: 80 % located in the heavy oil basin of the Orinoco river - share of Gazprom Neft and 20 % - GEPetrol. in Venezuela. Forecast recoverable resources of Gazprom Neft is the operator of the project and the 'Junin-6' block totals 10.96 bn bbl. The area of incurs obligations for paying bonuses to the the grid block is 447.85 km2. Previously, 14 wells state, obtaining geological-technical information, were drilled in the territory of the 'Junin-6' block. and implementing the necessary exploration programme of full-scale. According to Venezuelan law, a 60 % share of PetroMiranda belongs to PDVSA-CVP, and 40% At the start of 2011, Gazprom Neft performed to NOC. For the interest in the joined venture, NOC 3D seismic survey at block 'T' and proceeded with paid the first part of the 600 mn USD bonus to the interpreting geological information for both blocks Bolivarian Republic of Venezuela. ('T' and 'U'). The company expects that forecast oil recoverable resources for the two blocks will The Board of Directors of NOC assigned JSC total 110 mn t. Drilling the first exploration well at Gazprom Neft as the company leader for each block should start two years after the date of coordinating operations and managing the the agreement comes into force. The production 'Junin‑6' project. period for oil is 30 years, and 35 years for gas. The company's status as the project leader Entering the project in Equatorial Guinea will grants power to Gazprom Neft as the operation significantly enhance the company's experience coordinator (from the Russian part) of the in offshore production. It will also improve PetroMiranda Russian-Venezuela joint venture. the company's experience of offshore project management, and in future, to form a production The project leader fulfils the function of technical centre in West Africa. expert in the project and formulates directives by members of the Board of Directors of the joint Venezuela venture (from the Russian part) on implementing the project. The leader's responsibilities include In June 2009, Gazprom Neft acquired a 20 % preparing a final investment decision following the share of authorised capital in the National Oil development of the Junin-6 field (based on results Consortium (NOC). Large Russian oil companies obtained from supplementary exploration). This formed the consortium to implement oil producing decision will be made in 2013. projects in Latin America: JSC Gazprom Neft, OJSC NK Rosneft, OJSC NK LUKOIL, OJSC TNK-BP Holding, and OJSC Surgutneftegas with equal shares. In September 2009, the Government of the Russian Federation and Government of

Previous chapter Content Next chapter REFINING STRATEGY

To assess the results of the block of logistics, refining and sales in 2010, it is sufficient to look at key performance indicators. The company ranks third in Russia as per oil refining volumes and oil product delivery to the domestic market. The rate of retail sales also significantly exceeds average market growth. Furthermore, 2010 was marked by a number of highlights: commissioning the isomerisation plant at the Omsk Refinery; the start of manufacturing new bitumen materials; launching the G-Family brand on the international market; and completely rebranding the company’s network of Anatoly Cherner filling stations. Deputy Chairman of the Management Board Deputy Director General for Logistics, Processing and Sales Annual report 2010 41

OIL REFINING

The company's strategic aims in refining are modernizing the Omsk refinery is planned at over increasing volumes of refining in Russia to 100 bn RUB over 10 years. 38‑40 mn t per year; expanding refining capacities in Europe to 25-30 mn t per year; manufacturing In October 2010 at Omsk refinery, light naphtha production; meeting requirements of technical isomerisation plant, Izomalk-2, was commissioned. regulations, for example Classes 4 and 5; increasing This unique plant is the largest capacity plant of the extent of refining to 90 %-95 % and the yield its type in Russia and Europe – and is among of light oils to 77 %. Additionally, the technological the three largest capacity plants in the world. level of refineries should meet the requirements The capacity of the plant is 800,000 t per year. of world standards, including those relating to Izomalk-2 allows the production of the high- environment and safety. octane component of commercial petrol with a zero content of sulphur, aromatics and unsaturated The company approved the programme for hydrocarbons. In the project, engineering solutions modernising and reconstructing facilities and are applied which allow the production of petrol constructing new plants. This programme with a high-octane rating, meeting Euro 4 and began in 2009. At Omsk refinery and Euro 5 Class requirements. Due to introducing Yaroslavnefteorgsintez (YANOS), the company Izomalk-2 into the technological workflow of the implemented reconstruction of new units for diesel refinery, the company will increase its oil refining fuel hydrotreatment. At the Moscow refinery, this and production levels. work started in 2010. Also in 2010 at the Omsk refinery, construction Currently a large-scale modernisation programme of the plant for hydroforming diesel fuel and cat- is being implemented at the Omsk refinery. It cracked petrol began. Similar projects will be is focusing on improving the environmental implemented at YANOS and the Moscow refinery. characteristics of manufactured fuels and The main part of the programme for improving expanding volumes and range of products. oil product quality will be implemented by 2015. These include high-octane petrol, diesel fuels, aromatics, coke, modern bitumen materials In 2010, the company maintained its status as a and petrochemicals. The total investment for leader among Russian oil companies as per growth rate of oil refinery volumes. For the reported year, Refining Volume, mn t the company succeeded in increasing refining by 13.5 %, from 33.4 to 37.9 mn t.

40 37.9 The company mainly achieved growth of refining volumes by increasing its share in Sibir Energy, 33.4 which is a shareholder of the Moscow refinery.

30 28.4 Omsk Refinery. The company's main refining asset

Omsk reﬁnery is the Omsk Refinery (share in refining is 100 %). Moscow reﬁnery The Omsk refinery is one of the most advanced 20 Slavneft-YANOS refineries in Russia – and one of the largest refineries Naftna Industrija Srbije (NIS) in the world. The refinery has an installed capacity of 19.5 mn t of crude oil per year. In 2010, the Omsk 10 refinery maintained a leading position in Russia in terms of volume of light petroleum products and Source: aromatic hydrocarbons manufactured. In 2010, in Company data 0 terms of oil refining – 18.98 mn t (7.6 % of volume 2008 2009 2010 of all Russian refineries) – Omsk refinery ranked

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second among Russian refineries. The first position Moscow refinery. OJSC Moscow Refinery is a fuel- was taken by PO Kirishneftorgsintez LLC with 21.2 producing plant with a deep oil refining scheme. mn t, belonging to OJSC Surgutneftegas. In 2010, The installed capacity is 12.15 mn t per year. the load of the Omsk refinery for primary crude oil processing was 97.4 % of the installed capacity. According to the 2010 results, at the Moscow The extent of oil refining was 83.3 % compared refinery, the volume of oil refining totalled to the industry average rate of 71.8 % in Russia. 10.147 mn t, exceeding planned production indicators by 350,000 t. The key types of products include automobile petrol, diesel fuel, fuel oil (black oil), and jet In connection with the start of a two-year repair propulsion fuel, alongside a range of aromatics, cycle at the refinery, in terms of calendar time of liquefied petroleum gases, various types processing plant operation, 2010 can be compared of lubricants, additives, catalysts and other to 2008. For May-June of the previous year, full production. The yield of light oils is 67 %. cycle repairs were performed at the refinery for large-tonnage processing plants of the 'big ring'. On 16 February 2010, at the annual meeting of the board of the Federal Agency for Technical In 2010, the yield of light oils totalled 57.17 % or Regulation and Metrology, the Omsk refinery 5.801 mn t. In the structure of production of light was awarded the honourable status 'Leader of oils, the share of high-octane petrol increased by the Quality' in the nomination 'Industrial and 2.1 % compared to 2008. According to the results technology products'. For eight years, various types of previous year, Moscow refinery produced a of production at Omsk refinery won prises and total of 2.461 mn t petrol, including 2.01 mn t of diplomas in the all-Russian competition '100 Best high-octane petrol AI-95 and AI-92. Production Products of Russia'. In 2010, unleaded petrol 'Super of kerosene and winter diesel fuel increased by Euro 98' and liquefied hydrocarbon gas type of PA 13.5 % compared to 2008. In 2010, production for automobile transport were awarded diplomas. of diesel fuel totalled 2.708 mn t, kerosene - Additionally, the competition awarded diplomas 624 000 t, bitumen – 805 000 t, and marketable for six types of production. black oil – 2.574 mn t.

In 2010, commissioning the light naphtha The volume of irrecoverable oil losses totalled isomerisation plant, Izomalk-2, allowed the 0.73 %. This is 12 % lower than in 2008. At company to increase its refining and yield the Moscow refinery, the extent of oil refining of automobile petrol, while meeting the increased by 0.2 % and totalled 72.4 %, compared requirements of Euro 4 and Euro 5. to 2008.

In 2010, the share of Gazprom Neft in total volume Crude oil refining and production of oil products of refining totalled 8.91 mn t (accounting for Sibir by Gazprom Neft Group at Omsk refinery, mn t Energy stock consolidation).

20 18.98 In July 2010, at the Moscow refinery on the 18.37 18.43 17.91 construction site of the light naphtha isomerisation 17.24 17.35 plant, a time capsule was buried. This was a

15 milestone marking the start of a large-scale Petrol modernisation programme for the Moscow Diesel fuel refinery, planned up to 2020. The programme Jet engine fuel entails reconstructing existing assets, constructing 10 Black oil new refining capacities, improving safety for Bitumen operating procedures, and implementing Other environmental projects at the refinery. In total, Oil reﬁning 5 more than 56 bn RUB will be invested in the refinery modernisation programme. The light Source: naphtha isomerisation plant will produce the Company data component of automobile petrol with an octane 0 2008 2009 2010 rating up to 90.5. It is planned that the plant will

Previous chapter Content Next chapter Annual report 2010 43

be commissioned in 2012. The installed capacity oils totalled 56.8 %. Consumers include virtually all will total 650,000 t per year. large enterprises of central and northwest Regions of Russia as well as airports, the administration of The main sales markets for the refinery’s products the North Railway, and defence industry facilities. are the city of Moscow and Moscow region. In accordance with the share in OJSC NGK Slavneft Slavneft-YANOS. OJSC Slavneft-Yaroslav authorised capital, Gazprom Neft has access to nefteorgsintez (Slavneft-YANOS) is a fuel and oil- the refining facilities of OJSC Slavneft-YANOS. In producing plant with a deep oil refining scheme 2010, at OJSC NGK Slavneft, the primary crude and an installed capacity of 15.2 mln tons a year. oil processing volume totalled 14.3 mn t, of which By oil-refining volumes, YANOS ranks fifth among Gazprom Neft's share of totalled 7.15 mn t. Russian refineries. OJSC Slavneft-YANOS produces a wide range of oil products, from high-octane Along with Gazprom Neft's other refineries, a petrol to high quality bitumen. In 2010, the extent refining facilities modernisation programme began of oil refining totalled 65.5 % and the yield of light at YANOS,. The programme aims to improve oil product quality to meet Euro 4 and Euro 5, and Crude oil refining and production of oil products increase the extent of refining. At the refinery, 21 by Gazprom Neft Group at Moscow refinery, mn t investment projects are being implemented. In March 2010, a new crude unit was commissioned. In 2011, commissioning of isomerisation of light 10 8.91 8.51 naphtha and hydrotreatment of cat-cracked petrol plants is planned. 8 In 2010, two products by Slavneft-YANOS were 5.78 Petrol 5.52 Diesel fuel pronounced winners of the '100 Best Products of 6 Jet engine fuel Russia' competition in the nomination 'Industrial Black oil and technology products'. Diesel fuel Euro, sort 3.27 Bitumen C, type III was pronounced the winner of the 4 3.11 Other competition and awarded the 'Leader of Quality' Oil reﬁning prise. Viscous construction bitumen Euro BV 2 50/70, type II was awarded a diploma and the status 'Innovation of the Year'. Source: 0 Company data 2008 2009 2010 NIS refinery. The NIS refining facility comprises two refineries in the towns of Pančevo and Novi Sad. The facility produces an entire range of Crude oil refining and production of oil products petroleum products, from motor petrol and by Gazprom Neft Group at Slavneft-YANOS, mn t diesel fuel to machine oil and raw materials for the petrochemical industry. 8 7.15 The maximum annual crude oil capacity of the 6.75 6.83 6.75 6.40 6.45 production lines of the two enterprises is 7.3 mn t 6 of crude oil per year: Pančevo – up to 4.8 mn t and Petrol Novi Sad – up to 2.5 mln t of crude oil per year. Diesel fuel The average annual refining volume is more than Jet engine fuel 4 mln t. of crude oil. 4 Black oil Bitumen NIS refinery produces a wide range of oil products Other which meet international standards of quality Oil reﬁning 2 and the specifications of the refinery. The range includes automobile fuel, liquefied hydrocarbon gas as motor fuel for automobile transport, Source: unleaded motor fuel BMB 95 'Premium', BMB 92 0 Company data 2008 2009 2010 'Regular', motor fuel MB 95 'Premium', Eurodiesel,

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diesel fuel D2, associated gas, aviation fuel, oils, investments totalled approximately 140 mn EUR. lubricants, and more. In 2010, in total, NIS refinery processed 2.85 mn t Apart from sales to the Serbian market, NIS (excluding customer-owned refining). Successfully exports motor fuels, benzene, toluene, road and implementing the oil refining and sales strategy will construction bitumen to EU countries, Ukraine, allow JSC Gazprom Neft to increase the refining Croatia, Montenegro, and Bosnia-Herzegovina. volume to 70 mn t of crude oil – and therefore maintain its existing production-processing ratio. In 2010, within the framework of modernising The target balance of oil reserve distribution will be: refining facilities at NIS in Pančevo (Serbia), 40 % – processing in Russia, 25-30 % – processing construction of a facility for hydrocracking abroad, 20-25 % – direct oil sales. and hydrofinishing has begun. This will enable increasing refining volumes to a maximum refinery The company intends to focus its resources on load of 4.8 mn t per year. This will not only meet priority areas of refining development, including: Serbian market demand, but provide conditions to ensure export of fuel supply to Balkan states. zz improving Russian refinery efficiency

Up to 2012, Gazprom Neft's investments in projects zz increasing refinery capacities in Russia and in for refinery modernisation in Pančevo will total Europe. 540 mn EUR. This mainly accounts for constructing a hydrogen plant at the refinery site, modernizing The target result of development in the areas and constructing facilities for the refinery’s mentioned should be: industrial infrastructure, and implementing various environmental projects. The company will assign zz increasing processing capacities on a pro rata 396 mn EUR of the total volume of financing to basis to planned production growth constructing the hydrocracking plant alone. In line with the modernisation programme, the plant's zz improving the extent of raw material processing commissioning is planned for Q3 2012. zz improving motor fuel quality Financing arrangements of Gazprom Neft for the NIS modernisation programme are formalised zz meeting oil product market demands in an agreement with Serbian government. The arrangements total 540 mn EUR. In 2010, zz technical and processing efficiency of facilities

zz process control system at a level that meets the highest global standards. Structure of output production of Gazprom Neft Group at the NIS refinery, mn t

3,0 2.85

2.46 2,5 2.39 2.18 Petrol Diesel fuel 2,0 Jet engine fuel Black oil Bitumen 1,5 Other Oil reﬁning

0,5

Source: Company data 0 2009 2010

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Production of petroleum products

In 2010, Gazprom Neft increased its volume of petroleum product Due to implementing the modernisation production by 13 % to 35.6 mn t. programme at the company’s refinery and optimizing the production range, according to the 2010 results, petrol production volume increased The increase is connected with the expansion by 9.4 %, high quality kerosene by 15.2 % and of the company’s retail network, reducing the diesel fuel by 15.4 %. turnaround time at the Omsk refinery, and consolidating the Moscow and NIS refineries. JSC Gazprom Neft became one of the top-three leaders in bitumen production and sales, with growth totalling 33.8 %. The company began Structure of petroleum product production large-scale modernisation of bitumen facilities at by Gazprom Neft Group, mn t its refineries.

40 37.90 In October 2010 at Omsk refinery, a plant was 35.63 commissioned for producing modern high- 35 33.43 quality components for pavements based on 31.51 paving bitumen. These included polymer-bitumen 30 28.39 26.74 Petrol binders (PBB) and bitumen emulsions (BE) with a 25 Diesel fuel capacity up to 10,000 t of PBB and up to 3,000 t Jet engine fuel of BE per year. This will allow the company 20 Black oil to make a profit through selling a new, more Bitumen advanced product, compared with conventional 15 Other paving bitumen. Oil reﬁning 10

5 Source: 0 Company data 2008 2009 2010

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Sales of petroleum products

Implementing the strategy in the share of oil product sales will allow According to the company’s strategic plans, in JSC Gazprom Neft to become one of the top-three largest vertical 2020, oil product sales for end consumers will total integrated oil companies in Russia and CIS countries by retail sales 40 mn t, both in Russia and abroad. This includes volume in 2020. 12 mn t from filling stations, 18 mn t from aviation fuel, bunkering, lubricants etc, and 10 mn t from individual wholesale retail to large end consumers.

Sales of oil products by Gazprom Neft Group In 2010, Gazprom Neft focused its resources on in the domestic market, mn t priority development areas and strengthened its positions in the oil product retail market. 25 The company sells oil products in Russia and CIS countries, mainly through 20 subsidiaries 20.54 (Gazprom Neft-Aero, Gazprom Neft Marine 20 Bunker, Gazprom Neft-Lubricants, Sibir Energy, 17.43 15.64 High-octane petrol NIS, and oil product supply companies). Of these, 15 Low-octane petrol 16 are retail companies, effecting wholesale sales Diesel fuel of oil products and retail trade via filling stations. Black oil 10 Kerosene In 2010, the volume of oil product sales in the Others domestic market grew by 17 % compared to 2009, totalling 20.54 mn t. In 2010, small wholesale grew 5 by 15 % compared to 2009 and totalled 5,275 Source: 000 t. Wholesale (transit) due to redistribution to Company data 0 the more premium small wholesale segment grew 2008 2009 2010 insignificantly by 1% and totalled 4,536,000 t.

The number of active filling stations, operated by sales subsidiaries grew by 50 units to 1,596, while Number of active filling stations the average sales volume per filling station grew by and average daily sales per filling station in Russia, t per day 11 %, totalling 10.1 t per day.

pcs. t per day During 2010, the company built 27 filling stations, 2 000 12 renovated 42 and purchased 60. 10.1 9.1 1 596 9.4 10 Within the framework of retail network 1 546 optimisation, the company decommissioned 28 1 500 Number of active filling stations filling stations and reduced the number of leased 8 Russia CIS countries filling stations by one. Eastern Europe 1 000 6 865 The filling station chain re-branding project entered Average daily sales its final phase. Re-branding has been completed for per ﬁlling station in Russia 4 950 filling stations in Russia, Tajikistan, Kyrgyzstan 500 and Belarus, including all filling stations in the

2 Sibneft chain. From 1 November 2010, Gazprom Neft began the next phase of a large-scale Source: advertising campaign, promoting a retail brand 0 0 Company data 2008 2009 2010 for the Gazprom Neft network of filling stations. Within the framework of this phase, the company

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introduced a new advertising clip entitled 'Winter The company has four foreign distribution Tale', which was broadcast on Russian federal enterprises in customs union countries: Gazprom television. Neft-Kazakhstan LLP, Gazprom Neft-Tajikistan LLC, Gazprom Neft Asia LLC in Kyrgyzstan, and Developing the retail segment for selling oil Gazprom Neft-Belnefteprodukt FLLC in Belarus. products is a priority activity for Gazprom Neft. The During 2010, they sold 1,062,000 t of petroleum appearance of a highly recognizable and trusted products. national brand will enable the company to achieve a strategic aim: to be among the top leaders in oil The motor fuel market in Kazakhstan is key for product sales in Russia. JSC Gazprom Neft's sales development in Central Asia. In 2010, Gazprom Neft acquired a network of In 2010, sales through filling stations in Russia 20 filling stations and 9 sites from ARNA Petroleum increased by 18 % and totalled 3,047,000 t of oil to construct filling stations in Kazakhstan. The products. company's attraction to this region is explained by the market capacity of the republic and the Sales of petrol grew by 10 % and totalled proximity to its Omsk refinery. 2,161,000 t. Diesel fuel sales grew by 44 % and totalled 824,000 t.

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Premium business segments

Within the framework of increasing efficiency of oil product sales, the Jordan, Norway, India and Cyprus. Novosibirsk individual lines of business involve selling the following oil products: Aircraft Fuelling Complex became the main site for jet fuel, lubricating oils, bitumen, petrochemistry products and seminars on aircraft fuelling activities for IATA. At bunkering. The company has developed separate strategic plans for Sheremetyevo, construction of an aircraft fuelling every direction, which will assure a total sales gain of more than double complex has begun. by 2020. In 2010, leading positions were maintained in Prime objectives for business units are increasing sales efficiency, retail trade of aviation fuel, compared to other widening the geographical area of business, and increasing market distribution networks. The company kept second share. position in jet fuel supply for Russia's domestic market.

Aircraft fuelling CJSC Gazprom Neft-Aero has increased its retail sales volume of aviation fuel to 19 % in 2010, CJSC Gazprom Neft-Aero performs business compared to 2009. Further plans include business activities in jet fuel sales through its associated development, both in increasing the business enterprises in Moscow, St. Petersburg, Novosibirsk, geography in Russian and foreign airports, and Murmansk, Tomsk, Bryansk, etc, as well as in growing its own aircraft fuelling network. countries of Central Asia: Kazakhstan (Astana), and Tajikistan (Dushanbe). Additionally, the aircraft fuelling activities for Russian air companies are Bunkering performed in the airports of South-East Asia, Europe, Africa, and Latin America. In 2010, Gazprom Neft Marine Bunker LLC gained a leading position in the Russian bunker market by In 2010, CJSC Gazprom Neft-Aero made great increasing its own 'on board' bunkering by 17 %. In advances in the international market. CJSC 2010, the total sales volume equalled 1,464,000 t, Gazprom Neft-Aero subsidiaries began aircraft- including 1,380,000 t sales for sea vessels and fuelling activities at airports in Turkey, China, 84,000 t for river ships.

Trend of aviation fuel retail sales Trend of marine fuel retail sales in the Russian domestic market in the Russian domestic market in 2009-2010 in 2009–2010

30 % 30 %

20 % 19 % 20 % 17 % 14 %

9 % 10 % 10 %

0 0 Russian Federation in total Gazprom Neft-Aero Russian Federation in total Gazprom Neft Marine Bunker

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Currently, Gazprom Neft Marine Bunker LLC has In 2011, a continued increase of volume in the largest business area in Russia, compared to bunkering is planned in Istanbul, alongside starting other Russian bunkering companies. It also offers activities in Constanta (Rumania) and in ports of marine fuel to ship owners in all sea and river ports the Danube River,. The first bunkering activity is within Russia: expected to be performed in ports of Baltic states.

zz Northwest region: St. Petersburg, Kaliningrad, To execute large-scaled strategic plans, Gazprom Murmansk, Arkhangelsk. Neft Marine Bunker LLC must strengthen its competitive advantages by increasing its base zz South region: Novorossiysk, Tuapse, Port of own ships and terminals. At the beginning of Caucasus. 2011, a subsidiary of Gazprom Neft Marine Bunker, Gazprom Neft Shipping, put two new ships into zz Far-east region: Nakhodka, Vladivostok, service – Gazprom Neft South and Gazprom Neft Vostochny. North – to perform bunkering activities in the ports of St. Petersburg and Murmansk. zz Inland waterways: Yaroslavl, Kazan, Volgograd, Rostov-on-Don, Astrakhan, By 2015, the company plans that sales volumes will Ust-Kut. increase to 1.9 mn t in Russia. It is planned that the significant growth of volumes in bunkering will be The main share of sales volume was in the fulfilled by increasing the share in the bunkering North-West region. The 17 % increase of own market in Russia and actively developing key on board bunkering compared to 2009, was bunkering activities in the regions of Europe and achieved by increasing market share in the ports Asia (Mediterranean, South-East Asia, and Middle of St. Petersburg, Murmansk, Kaliningrad and East). entering the prospective markets of the ports of Ust Luga and Archangel. By 2020, the company plans to gain a significant share of the world market and be among the 20 In 2010, the company increased the geographical largest international bunkering companies. The area of river ships bunkering activity, thanks to the company aims to do this by increasing marine ports of Volgograd, Astrakhan and Ust Kut. The fuel sales volume four-fold, compared to 2010. bunkering volume for Russian inland waterways The network effect will increase the client base has increased significantly, by 23 %. and ensure long-term cooperation with large international shipping companies. New objectives of the renewed strategy for further development have been established. One of these is developing international bunkering activities in Production and sales of engine oils the markets of Europe, the Middle East and Asia. Gazprom Neft-Lubricants LLC is a vertically Gazprom Neft Marine Bunker LLC meets all integrated engine-oils company with productive conditions for entering foreign markets. These assets in Western Siberia (Omsk), European Russia include having practical experience and a skilled (Yaroslavl), and Western Europe (Bari, Italy). In and effective management crew. The sales activity 2010, the company produced and sold more than in high-quality fuels produced by Gazprom Neft 434,000 t of engine-oil type production. Oil Refinery Plant allows the company to create a positive image as a reliable partner. The production range includes 200 lines of oil produced in Russia and Western Europe. In 2010, In 2010, partner agreements were signed with the new G-Family brand for engine oils was Turkish company, Petrol Ofici, for bunkering marketed in Russian and abroad. It includes more activities with our clients in the port of Istanbul. than 40 types of international-level modern engine In autumn, an agreement was signed with a large oil for the consumer and commercial markets. Oils Italian Mediterranean shipping company for of the G-Family brand are produced at Gazprom bunkering activity in Turkey. Within the framework Neft Lubricants Italia S.p.A. in the city of Bari. This of these agreements, the first bunkering was advanced complex can produce 30,000 t of oils performed in the port of Istanbul (Turkey). and 6,000 t of lubricants per year. The operating

Content Next chapter 50 JSC GAZPROM NEFT

procedures applied at the Bari plant will be buyers themselves to form market prices with open introduced into production at Russian plants step competition. by step. In 2010-2012, Gazprom Neft will invest 2 bn RUB in constructing a plant at Omsk refinery Since its launch, more than 1,100 companies for low-tonnage blending, packing and offloading have registered at the floor, and more than 250 of oils with a capacity of 120,000 t. companies have obtained trading access. Large and small traders and end consumers participate in In 2010, the company increased its market share trading. From summer 2010, products are traded of oils in Russia from 11 % to 13 %. on the ETF from three bases (free bases): Kemerovo base (Kuzbass), Turinsky base (Tyumen) and In 2010, the sales structure changed significantly. Volodarskaya Linear Operator Dispatcher System Sales of pre-packaged oils increased by 29 %, (LODS). At Volodarskaya LODS, oil-product trading and premium production, meeting international began using a resource from OJSC NK Magma. specifications, by 31 %. This is a result of the The trading algorithm has been updated, reflecting company’s strategic transformation from experience accumulated and the requirements of raw-material producer to a customer-centric the state bodies. marketing company: a producer of high-marginal commercial oils. 318,000 t of oil products costing more than 5.4 bn RUB have been sold via ETF since it began The company set itself the goal to implement a operations. long-term investment programme, expand the modern production range, increase the Russian JSC Gazprom Neft is a cofounder of CJSC Saint market share, and further expand into foreign Petersburg International Mercantile Exchange. markets. Since November 2009, it has been regularly submitting products for tender. In 2010, at the Saint Petersburg International Mercantile Electronic trading floor and stock Exchange, Gazprom Neft sold 1,033,000 t of oil exchange trade products totalling more than 17.4 bn RUB. At the end of 2010, test trading was conducted on the For Gazprom Neft, the stock exchange trade with NP Interregional Exchange of Oil and Gas Industry oil products is a form of wholesale trade allowing exchange, and the Saint Petersburg Exchange the company to form a universally recognised price (16,000 t of oil products sold). market indicator (index). Since the second half of 2010, JSC Gazprom Since 2008, the company has been actively Neft sold no less than 10 % of oil product of developing a sales mechanism for oil products the company’s volume of sales in the domestic via the electronic trading floor (ETF). This allows market on a monthly basis. For the year ended,

Trend of pre-packaged oil retail sales in Russian domestic market in 2009-2010 Share of exchange trading*

29 % 30 % 10 % 8 % 9 % 8 % 20 % 6 %

11 % 4 % 10 %

2 %

0 1 % Russia in total Gazprom Neft-Lubricants 0 2009 2010

* The share of exchange trading is indicated as a part of specific oil products sales in the domestic market.

Content Next chapter Annual report 2010 51

the percentage of stock exchange sales of JSC trading with exchange products. The company Gazprom Neft totalled 8.2 % of sales on the continues to play an active part in its discussion domestic market. and introduction.

In 2011, the company envisages starting trade In 2011, the company will consider the possibility according to the common unified exchange of participating in trading with derivative securities specification on the Saint Petersburg International (futures). Additionally, trading via the electronic Mercantile Exchange. This will allow the company trading floor of the company will be developed in to take an essential step towards fully anonymous future.

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Export of crude oil and oil products

Gazprom Neft Group is a high-volume exporter of crude oil and oil According to 2010 results, Gazprom Neft Group products. supplied 15.8 mn t of oil to the world market, in absolute terms. This is 1 mn t more than in 2010. Of The main routes of oil export shipments were the Black Sea ports of this amount, 8.95 mn t was exported by sea, and Novorossiysk and Tuapse, the Baltic Sea port of Primorsk, and the 6.85 mn t via the Druzhba trunk pipeline. Czech Republic and Germany, via the Druzhba Pipeline. 3,019 mn t of crude oil was exported to the markets of CIS countries, which is less than the level of 2009. Structure of crude oil export from Russia by transport types (including CIS countries) in 2010 In 2010, Gazprom Neft's export of oil products to non-CIS countries (accounting for NIS) increased by 9 % and totalled 14.9 mn t compared to 2009. Export to CIS countries fell by 10 % and totalled 1.7 mn t.

Pipeline transport Primorsk 2010, % Novorossiysk Tuapse

Source: 47.9 % 3.7 % 9.7 % 38.7 % Company data

Structure of oil product export from Russia Trends of export of crude oil (including CIS countries) in 2010 and oil products, mn t

Crude oil Oil products 18

16.7 Petrol 16.3 Jet engine fuel 16 15.6 15.9 2010, % Diesel fuel 15.6 Black oil Bitumen 14 Other 13.2

Source: Source: Company data 10 40 % 1 % 4 % 34 % 18 % 3 % Company data 2008 2009 2010

Previous chapter Content Next chapter FINANCIAL RESULTS OF ACTIVITY

In 2010, we achieved significant success in expanding the asset portfolio. We studied les- sons in finding optimal decisions while working on the merger and acquisition market and successfully integrating and developing new enterprises. To gain a leading position for efficiency in the industry, we proceeded with quality changes in the approach to working with existing assets. Namely, management by change will become one key priority for the company to achieve its established strategic aims.

Vadim Yakovlev Deputy Chairman of the Management Board First Deputy Director General, Financial Director 54 ANALYSIS BY THE MANAGEMENT JSC GAZPROM NEFT OF THE COMPANY’S FINANCIAL RESULTS

Definitions and recalculation methodology

The statements concern the review of the Tonnes of produced crude oil were recalculated financial condition of JSC Gazprom Neft as of into barrels, using indexes of oil density for every 31 December 2010 and shall be regarded jointly field. Acquired oil, as well as other operational with financial statements of the company. These indicators, expressed in barrels was recalculated include its annotations, prepared in line with into barrels using an index of 7.3 bbl per 1 t. Cubic generally accepted accounting principles of the metres were recalculated into cubic ft using the United States of America (US GAAP), the financial index of 35.31 ft³ per 1 m³. Oil was recalculated statements presented in a separate appendix to the into BOE based on 1 barrel per 1 BOE and gas was annual report, the 2010 Financial Report. recalculated on the basis of 6,000 ft³ per 1 BOE.

The statements concern the financial conditions and performance results of JSC Gazprom Neft on a consolidated basis.

Forecast statements

This report contains forward-looking statements concerning the ‘objectives’, ‘outlook’, ‘probably’, ‘project’, ‘will’, financial condition, results of operations and businesses of Gazprom ‘seek’, ‘target’, ‘risks’, ‘goals’, ‘should’, and similar Neft and its consolidated subsidiaries. All statements, other than terms and phrases. A number of factors could statements of historical facts are, or may be deemed to be, forward- affect the future operations of Gazprom Neft and looking statements. Forward-looking statements are statements of could cause those results to differ materially from future expectations based on management’s current expectations and those expressed in the forward-looking statements assumptions, and involve known and unknown risks and uncertainties included in this report, including (without that could cause actual results, performance indicators or events to limitation): price fluctuations in crude oil and gas; differ materially from those, expressed or implied in these statements. changes in demand for the company’s products; currency fluctuations; drilling and production results; reserve estimates; loss of market and Forward-looking statements include, among industry competition; environmental and physical other things, statements concerning the potential risks; risks associated with identifying suitable exposure of market risks on Gazprom Neft, potential acquisition properties and targets, and and statements expressing management’s successfully negotiating and completing such expectations, beliefs, estimates, forecasts, transactions; economic and financial market projections and assumptions. These forward- conditions in various countries and regions; political looking statements are identified by the presence risks, project delay or advancement, approvals and of terms and phrases such as: ‘anticipate’, ‘believe’, cost estimates; and changes in trading conditions. ‘could’, ‘estimate’, ‘expect’, ‘intend’, ‘may’, ‘plan’,

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KEY PERFORMANCE INDICATORS FOR 2008-2010

Change, % (mn USD) 2010 2009 2008 2010/2009 2009/2008 Revenues 32 772 24 166 33 870 35.6 % –28.7 % Income before tax 4 277 3 897 6 161 9.8 % –36.7 % EBITDA* 7 226 5 977 8 610 20.9 % –30.6 % USD/BOE 18,5 16.2 23.8 14.2 % –31.9 % Net income of JSC Gazprom Neft 3 148 3 013 4 658 4.5 % –35.3 % USD per common share 0.7 0,6 1.0 4.5 % –35.1 % USD/BOE 8.1 8.2 12.9 –1.3 % –36.5 % Net cash from operating activities 5 392 3 475 5 483 55.2 % –36.6 % USD/BOE 13.8 9.4 15.2 46.6 % –37.8 %

* EBITDA is an additional finance indicator not required by US GAAP. The calculation is presented in the Appendix on page 76.

Net income of JSC Gazprom Neft, Revenues, mn USD EBITDA, mn USD mn USD

40 000 10 000 5 000 4 658 35 000 36 % 8 000 8 610 4 000 33 870 32 772 21 % 30 000 7 226 5 % 25 000 6 000 3 000 3 148 24 166 5 977 3 013 20 000 4 000 2 000 15 000

10 000 2 000 1 000 5 000 0 0 0 2008 2009 2010 2008 2009 2010 2008 2009 2010

Net cash from operating activities, EBITDA per BOE, USD/BOE mn USD Net income per BOE, USD/BOE

25 6 000 20,00 55 % 23,8 19,42 5 483 5 000 5 392 20 14 % 18,00 18,5 4 000 15 16,2 16,00 3 475 3 000 10 14,00 19 % 2 000 13,48

5 12,00 1 000 11,32 0 0 10,00 2008 2009 2010 2008 2009 2010 2008 2009 2010

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KEY FINANCIAL AND PERFORMANCE INDICATORS

Change, % 2010 2009 2008 2010/2009 2009/2008 Revenues, mn USD 32 772 24 166 33 870 35.6 % –28.7 % Adjusted EBITDA*, mn USD 7 226 5 977 8 610 20.9 % –30.6 % Net income of JSC Gazprom Neft, mn USD 3 148 3 013 4 658 4.5 % –35.3 % Hydrocarbon production including share in affiliates, mn BOE 389.57 367.94 361.07 5.9 % 1.9 % Oil production including share in affiliates, mn bbl 366.13 349.35 342.97 4.8 % 1.9 % Marketable gas production including share in affiliates, mn ft³ 140.53 111.42 108.65 26.1 % 2.5 % Refining throughput at own and affiliate refineries, mn t 35.66 31.51 26.74 13.2 % 17.8 %

* EBITDA is an additional finance indicator not required by US GAAP. The calculation is presented in the Appendix on page 76.

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2010 results compared to 2009

In 2010, the price rise on oil enabled financial The net income of JSC Gazprom Neft, adjusted indicators to improve. Thus, revenues grew by for non-recurring events, totalled 3,346 mn USD 35.6 %, adjusted EBITDA by 20.9 %, and net income and increased by 24.6 % compared to 2009. Non- by 4.5 %. recurring events include:

Compared to the period a year earlier, oil production zz In 2010: reserve to pay 198 mn USD penalty volume increased by 4.8 % and marketable gas by charge for a suit of the Federal Anti-Monopoly 26 %. This resulted in hydrocarbon production Service. growth to 390 mn BOE. zz In 2009: income from investments amounting The strengthening of the ruble against the dollar to 470 mn USD, due to acquiring Sibir Energy, by 4.4 % affected the growth of the company’s and losses of 142 mn USD due to selling operating expenses. Sibneft-Chukotka.

Outstanding interest decreased in connection with The net income of JSC Gazprom Neft grew by the lowering of the effective interest rate, resulting 4.5 % and totalled 3,148 mn USD, compared to from credit portfolio optimisation. 3,013 mn USD in 2009.

Production segments

The company’s activities are divided into two main one segment forms a part of the costs of the other production segments: segment. In most cases, it is difficult to assess market prices for crude oil in the domestic market. zz Exploration and extraction, including This is due to the significant intra-group turnover exploration, development and extraction of within the vertically integrated oil companies. The crude oil and gas. prices set for intra-group acquisition of crude oil reflect a combination of market factors, such as zz Refining, marketing and distribution, which global crude pricing, transportation costs, crude- includes refining crude oil, acquisition, sales processing costs, capital investment for associated and transportation of crude oil and refined oil companies, and other factors. Accordingly, the products. results of operations in these individual segments do not necessarily reflect each segment’s underlying The company’s operating segments are financial position and results of operations. For this interdependent; a proportion of the revenues of reason, we do not analyse our segments separately.

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Changes in group structure

Severenergiya NIS

In December 2010, Yamal Razvitie LLC (a joint In February 2009, JSC Gazprom Neft completed venture between JSC Gazprom Neft and OJSC a deal on acquiring 51 % interest in the Serbian NOVATEK) acquired 51% shares in shareholder oil company, NIS. The cost of the deal totalled capital of SeverEnergiya from Gazprom Neft for 400 mn EUR. The agreement envisages a 1.9 bn USD. The corresponding acquisition value, reconstruction and modernisation programme paid by the company, totalled 898 mn USD. in the processing capacities of NIS totalling 547 SeverEnergiya, via its subsidiaries, is engaged in mn EUR by 2012. Within the framework of this developing the oil and gas fields of Samburgsky programme, the company will take measures to and Yevo-Yakhinsky, and several oil and gas fields improve the quality of produced oil products to of lesser magnitude with a total volume of proven ensure they meet European standard Euro 5. resources as per PRMS classification of more than 1.7 bn TOE. On 31 January 2011, the company sent mandatory cash offers to buy back NIS shares. These are currently in free circulation (the maximum amount Sibir Energy of interest in NIS that can be acquired is 19.12 % of authorised capital). The share price is equal to In the period from 23 April 2009 – the date of the the share price at which Gazprom Neft acquired company’s first acquisition of shares in Sibir Energy NIS shares in 2009. – until 11 February 2011, the company invested 3.2 bn USD to acquire 100 % of the ordinary shares of Sibir Energy. As a result of acquiring Sibir Malka Oil Energy, the company increased its effective interest in Moscow refinery from 38.86 % to 77.72 %. On 4 February 2010, JSC Gazprom Neft completed a deal on acquiring 100 % of the share capital of Sibir Energy’s primary upstream assets include STS-Service LLC. The cost of the deal totalled 820 JSC Magma (95 %-owned by Sibir Energy) and mn Swedish krona (approximately 114 mn USD). a 50% share of interest in the joint venture of Salym Petroleum Development with Royal Dutch STS-Service owns Block 87 in Tomsk region Shell. Sibir Energy’s total current production is over comprising Zapadno-Luginetskoye field (currently 80,000 bbl of oil per day. Sibir Energy also holds a under development), Nizhneluginetskoye and a

38.86 % stake in the Moscow oil refinery. This is part of Shinginskoye field. C1+C2 category reserves jointly managed by Sibir Energy and Gazprom Neft, total 11.5 mn t, and there are 11 prospective and a network of 134 filling stations in Moscow structures within the area. These fields are located and the Moscow region via JSC Moscow Fuelling in the immediate vicinity of Shinginskoye field, Company and JSC Mosnefteprodukt. developed by the company’s subsidiary, Gazprom Neft-Vostok LLC, which will integrate STS-Service into its own structure.

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Iraq The Board of Directors of NOC assigned JSC Gazprom Neft as the company-leader for In January 2010, Gazprom Neft, as a member of a coordinating operations and managing the consortium including state-owned oil companies 'Junin-6' project. In the first phase of the project Kogas (Korea), Petronas (Malaysia), ТРАО (Turkey), (2011–2013), it is planned to start an agreement signed a contract with the Iraq government procedure for permit documentation and to hold for developing the Badra field. According to tenders for selecting a contractor to perform the preliminary assessments, the geological reserves block's environment audit. of Badra totalled over 2 bn bbl of oil. Gazprom Neft is the operator of the project and its share is 30 %. The shares of other participants are: Equatorial Guinea Kogas - 22.5 %, Petronas - 15 %, TPAO - 7.5 %, Oil Exploration Company (OEC) representing the The Ministry of Ore Mining, Industry and Energy interests of Iraq Government - 25 %. of Equatorial Guinea, national oil company Guinea Equatorial de Petrоleos (GEPetrol), and Field development is planned to start in 2013. JSC Gazprom Neft signed a production-sharing Badra’s development project is planned for 20 agreement on exploring two exploratory offshore years with a possible 5-year extension. The blocks. JSC Gazprom Neft is an operator of this maximum level of oil production is expected to be project. According to preliminary assessments, around 8.5 mn t per year and will be achieved in the oil reserves on the two offshore blocks may 2016. amount to 110 mn t.

In 2011, it is planned to start the exploration Venezuela phase with a possible extension of 4-5 years. The company envisages performing an additional 3D In June 2009, Gazprom Neft acquired a 20 % share seismic survey on one of two offshore blocks and of authorised capital in the National Oil Consortium processing and interpreting historical data on both (NOC). Large Russian oil companies formed the blocks. Based on the results of seismic survey, a consortium to implement oil-producing projects in decision will be made on exploration-well drilling. Latin America. These companies are JSC Gazprom Neft, OJSC NK Rosneft, OJSC NK LUKOIL, OJSC TNK-BP Holding, and OJSC Surgutneftegas in equal shares. In September 2009, the Government of the Russian Federation and Government of Bolivarian Republic of Venezuela signed an inter-government agreement on cooperating in implementing mutual strategic projects.

Within the framework of this agreement, in April 2010, NOC and Corporacion Venezolana del Petroleo (CVP), a company of the state- owned oil company of Venezuela PDVSA, set up a joint venture (PetroMiranda). This was to engage in supplementary exploration and further development of Junin-6 field, which is located in the basin of the Orinoco river in Venezuela.

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Performance indicators and analysis

Exploration, production and Another new field and 44 hydrocarbon deposits development were discovered on the fields of consolidated subsidiaries and affiliates. Under the oil price increase, the company doubled its extent of exploration work by consolidated Exploration-drilling efficiency totalled 89.5 % in subsidiaries and affiliates. subsidiaries and 86.7 % in affiliates.

Exploratory drilling, thous. m Reserves 150 140 128 As of 31 December 2010, the company’s proven 120 reserves totalled 5,279 mn BOE, including proven reserves of oil totalling 4,663 mn bbl 90 Subsidiaries and proven reserves of natural gas totalling 63 3.7 trillion ft3. 60 Afﬁliates As of 31 December 2010, the company’s proven 30 reserves, including share in subsidiaries, totalled

0 7,526 BOE, including 6,441 mn bbl of oil and 2008 2009 2010 6.5 trillion ft³.

Number of drilled exploration wells Independent field development experts from DeGolyer & MacNaughton have estimated these 50 reserves based on PRMS SPE. 44

40 According to PRMS, indicators of reserves 34 shown in the table differ from those represented 30 Subsidiaries in the group’s consolidated statements in the 22 Afﬁliates section for additional information on oil and 20 gas exploration and production. The indicators, represented as additional information, were 10 prepared in accordance with SEC (Securities and Exchange Commission), which during calculation 0 2008 2009 2010 requires applying the 12-month average price as of the first of every month in the reporting Number of oil and gas deposits discovered period. According to PRMS, reserves in the table below were prepared using the most optimistic 50 management expectation of future prices for 44 crude oil and natural gas. 40 38

30 Subsidiaries

20 Afﬁliates

9 10

0 2008 2009 2010

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Oil and gas reserves

Share in affiliates Gazprom Slavneft Tomskneft Salym Sever- Total (mn BOE) Neft Petroleum Energiya Proven reserves on 31 December 2008 4 847 1 369 592 – – 6 808 Production (237) (72) (45) (14) – (368) Revision of previous estimations 362 192 154 – – 708 Obtaining licences 17 – – 297 – 314 Proven reserves on 31 December 2009 4 989 1 489 701 283 – 7 462 Production (249) (69) (42) (30) – (390) Revision of previous estimations 539 (494) (43) (3) – (1) Obtaining licences – – – – 455 455 Proven reserves on 31 December 2010 5 279 926 616 250 455 7 526 Group’s probable reserves in total 2 598 1 460 382 121 965 5 526 Group’s possible reserve in total 2 120 1 349 232 57 917 4 675

Stock turnover of hydrocarbon reserves, mn TOE

2 250

2 025 2 000 13 %

1 787 1 750

1 500

1 250 73 61 1 000 0 0,5 % 1 018 1 023 –53 –70 –6 750

500

250

ABC1 0 SPE 01.01.2010 Oil Gazprom Neft Slavneft Tomskneft SPD Acquisition 01.01.2011 production of SeverEnergiya

Production drilling

The company increased the extent of production 746 wells, connected with actively developing drilling in conditions of recovering oil prices at the Priobskoye field. end of 2009-2010. Number of new wells, drilled on fields of affiliates, The number of new wells drilled on fields of increased by 22.2 % to 407 wells. consolidated subsidiaries increased by 11.8 % to

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Production drilling

Change, % 2010 2009 2008 2010/2009 2009/2008 Consolidated subsidiaries Production drilling, thousand m 2 610 2 259 2 033 15.5 % 11.1 % Number of drilled production wells, pcs. 746 667 611 11.8 % 9.2 % Average flow rate of operating wells, t per day 15.92 16.34 16.93 –2.6 % –3.5 % Water cut, % 82.44 82.11 81.94 0.4 % 0.2 % Affiliates Production drilling, thousand m 1 623 1 151 1 082 41.0 % 6.4 % Number of drilled production wells, pcs. 407 333 308 22.2 % 8.1 %

Production

Change, % 2010 2009 2008 2010/2009 2009/2008 Crude oil (mn bbl) Noyabrskneftegaz 129.12 138.05 154.27 –6.5 % –10.5 % Yugra 69.25 60.82 54.13 13.9 % 12.4 % Gazprom Neft 11.10 12.97 15.38 –14.4 % –15.7 % NIS 7.17 5.14 – 39.5 % – Others 13.56 7.95 4.81 70.6 % 65.3 % Oil production by subsidiaries in total 230.20 224.93 228.59 2.3 % –1.6 % Share in Slavneft’s production 67.33 69.35 71.94 –2.9 % –3.6 % Share in Tomskneft’s production 38.72 40.73 42.44 –4.9 % –4.0 % Share in SPD’s production 29.88 14.34 – 108.4 % – Share in affiliates’ production in total 135.93 124.42 114.38 9.3 % 8.8 % Production in total 366.13 349.35 342.97 4.8 % 1.9 % Gas (bn ft3) Gazprom Neft Group 107.93 73.22 67.87 47.4 % 7.9 % Share in Slavneft’s production 11.91 13.25 13.10 –10.1 % 1.1 % Share in Tomskneft’s production 20.69 24.95 27.68 –17.1 % -9.9 % Gas production in total 140.53 111.42 108.65 26.1 % 2.5 % Hydrocarbons (mn BOE) Gazprom Neft Group 248.19 237.14 239.90 4.7 % –1.2 % Share in Slavneft’s production 69.32 71.56 74.12 –3.1 % –3.5 % Share in Tomskneft’s production 42.18 44.90 47.05 –6.1 % –4.6 % Share in SPD’s production 29.88 14.34 – 108.4 % – Hydrocarbon production in total 389.57 367.94 361.07 5.9 % 1.9 % Average daily hydrocarbon production 1 067 1 008 987 5.9 % 1.9 % by Gazprom Neft Group, thousand BOE per day

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Oil and gas condensate production in 2008-2010, mn TOE In 2010, the volume of oil production by the company increased by 4.8 %, due to:

zz production growth on Priobskoye field (Khanty- 60 Mansiysk Autonomous District), connected 52.81 50.17 with extending meterage drilled and increasing 50 48.72 hydrofrac operations

40 Gazprom Neft zz fully consolidating production at the Salym Slavneft Petroleum Development. Tomskneft 30 SPD In 2010, gas production increased by 26.1 %. Cenomanian gas This was connected with starting natural gas 20 production on Muravlenko and Novogodny fields in Q4 2010. 10 Source: For the 12 months of 2010 compared with the 12 Company data 0 months of 2009, the bulk volume of the group's 2008 2009 2010 hydrocarbon production increased by 5.9 %

Oil acquisition

Change, % (mn bbl) 2010 2009 2008 2010/2009 2009/2008 Oil acquisition in Russia* 38.62 24.76 11.95 56.0 % 107.2 % Oil acquisition on the international market 17.42 16.11 15.18 8.1 % 6.1 % Total 56.04 40.87 27.13 37.1 % 50.6 %

* Oil acquisition in Russia does not include acquisition from affiliates Slavneft, Tomskneft and Salym Petroleum Development, taking into account the share included in equity.

In 2010, acquisitioned oil volume grew by 37.1 % (by 50.6 % in 2009). This was driven by increasing volumes of commercial activities.

Oil balance (%) Refining

In 2010, the total volume of refining grew by 53 % 60 % 61 % 70 % 76 % 13.5 %. Growth was also observed in all the group’s refining assets.

The refining volume grew mainly at the Moscow refinery by 54.2 % for the year. This was linked to Production increasing the share in Sibir Energy after acquisition. 47 % Reﬁning and marketing 40 % 39 % The volumes of high octane petrol production 30 % 24 % increased by 12.7 %. This was due to growing Source: demand for this oil product and modernisation Company’s data measures at the refinery. 2006 2007 2008 2009 2010

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Refining

Change, % (mn t) 2010 2009 2008 2010/2009 2009/2008 Crude-oil refining Omsk refinery 18.98 18.43 18.37 3.0 % 0.3 % Moscow refinery 8.91 5.78 3.27 54.2 % 76.8 % NIS 2.85 2.39 – 19.2 % – Share in Yaroslavl refinery 7.15 6.83 6.75 4.7 % 1.2 % Refining in total 37.89 33.43 28.39 13.3 % 17.8 % Production of oil products High-octane petrol 6.40 5.68 4.33 12.7 % 31.2 % Low-octane petrol 0.86 0.95 1.14 –9.5 % –16.7 % Naphtha 1.63 2.12 1.91 –23.1 % 11.0 % Diesel fuel 11.47 9.94 9.01 15.4 % 10.3 % Black oil 7.80 6.01 5.75 29.8 % 4.5 % Kerosene 2.43 2.11 1.81 15.2 % 16.6 % Others 5.06 4.70 2.79 7.7 % 68.5 % Production of oil products in total 35.66 31.51 26.74 13.2 % 17.8 %

High-quality kerosene production increased by The volume of diesel fuel production increased 15.2 %. This strengthened the company's leading by 15.4 %. This was due to implementing the positions in the Russian aviation fuel market. modernisation programme for the refinery.

Acquisition of oil products

2010 2009 Change, % mn USD mn t mn USD mn t mn USD mn t High-octane petrol 203 0.28 217 0.44 –6.5 % –36.4 % Low-octane petrol 63 0.10 47 0.10 34.0 % 2.0 % Naphtha 109 0.16 25 0.06 336.0 % 166.7 % Diesel fuel 380 0.71 323 0.79 17.6 % –10.1 % Black oil 113 0.37 85 0.36 32.9 % 2.8 % Kerosene 115 0.20 70 0.18 64.7 % 11.1 % Others 79 0.32 35 0.13 125.7 % 146.2 % Total 1 062 2.14 802 2.06 32.4 % 4.0 %

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2009 2008 Change, % mn USD mn t mn USD mn t mn USD mn t High-octane petrol 217 0.44 239 0.30 –9.2 % 46.7 % Low-octane petrol 47 0.10 67 0.10 –29.9 % – Naphtha 25 0.06 32 0.04 –21.9 % 50.0 % Diesel fuel 323 0.79 994 1.19 –67.5 % –33.6 % Black oil 85 0.36 287 0.83 –70.4 % –56.6 % Kerosene 70 0.18 179 0.28 –61.0 % –35.7 % Others 35 0.13 67 0.09 –47.8 % 44.4 % Total 802 2.06 1 865 2.83 –57.0 % –27.2 %

Marketing and distribution

In 2010, the total amount of filling stations increased by 3.2 %. The company acquired a filling station chain in Kazakhstan and implemented a construction and reconstruction programme for filling stations in Russia.

Change, % (pcs.) 2010 2009 2008 2010/2009 2009/2008 Active filling stations Russia 947 921 763 2.8 % 20.7 % CIS countries 181 152 102 19.1 % 49.0 % Eastern Europe 468 473 – –1.1 % – Total 1 596 1 546 865 3.2 % 78.7 % Average daily sales per filling station in Russia, 10.10 9.10 9.40 11.0 % –3.2 % t per day

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RESULTS OF ACTIVITIES

Change, % (mn USD) 2010 2009 2008 2010/2009 2009/2008 Revenues Refined products and oil and gas sales 32 044 23 648 33 205 35.5 % –28.8 % Other sales 728 518 665 40.5 % –22.1 % Total 32 772 24 166 33 870 35.6 % –28.7 % Costs and other deductions Cost of purchased oil, natural gas and oil products 7 459 5 335 8 022 39.8 % –33.5 % Operating expenses 2 111 1 883 2 015 12.1 % –6.6 % Selling, general and administrative expenses 1 649 1 280 1 046 28.8 % 22.4 % Transportation expenses 2 886 2 262 2 046 27.6 % 10.6 % Depreciation, depletion and amortisation 1 619 1 475 1 309 9.8 % 12.7 % Export duties 6 631 3 948 7 328 68.0 % –46.1 % Taxes other than profit tax 5 240 3 982 5 353 31.6 % –25.6 % Exploration expenses 91 147 193 –38.1 % –23.8 % Cost of other sales 428 283 309 51.2 % –8.4 % Loss on sale of assets, net – 142 – – – Total 28 114 20 737 27 621 35.6 % –24.9 % Operating revenue 4 658 3 429 6 249 35.8 % –45.1 % Other (expense) / income Income from equity affiliates 229 212 407 8.0 % –47.9 % Investment income 9 470 – –98.1 % – Interest receivable 48 108 100 –55.6 % 8.0 % Outstanding interest (336) (369) (167) –8.9 % 121.0 % Other (expense) income, net (309) (1) 89 30 800.0 % –101.1 % Foreign exchange (loss) gain, net (22) 48 (517) –145.8 % –109.3 % Total (381) 468 (88) –181.4 % –631.8 % Income before tax 4 277 3 897 6 161 9.8 % –36.7 % Provision for profit tax 884 804 1 425 10.0 % –43.6 % Deferred profit tax expense (benefit) (40) 12 39 –433.3 % –69.2 % Total 844 816 1 464 3.4 % –44.3 % Net profit 3 433 3 081 4 697 11.4 % –34.4 % Less: Net income attributable to non-controlling interest (285) (68) (39) 319.1 % 74.4 % Net income of JSC Gazprom Neft 3 148 3 013 4 658 4.5 % –35.3 %

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Revenues

Change, % (mn USD) 2010 2009 2008 2010/2009 2009/2008 Crude oil Export and sales on international markets 8 941 6 749 11 349 32.5 % –40.5 % Export to CIS countries 1 252 990 1 410 26.5 % –29.8 % Sales on the domestic market 2 52 297 –96.2 % –82.5 % Total crude oil sales 10 195 7 791 13 056 30.9 % –40.3 % Gas Export and sales in international markets 117 68 – 72.1 % – Sales in the domestic market 190 107 148 77.6 % –27.7 % Total gas sales 307 175 148 75.4 % 18.2 % Oil products Export sales 7 115 5 149 8 381 38.2 % –38.6 % Sales in the international market 2 590 2 095 – 23.6 % – Export and CIS sales 1 147 907 1 288 26.5 % –29.6 % Sales on the domestic market 10 690 7 531 10 332 41.9 % –27.1 % Total oil product sales 21 542 15 682 20 001 37.4 % –21.6 % Other sales 728 518 665 40.5 % –22.1 % Total revenues 32 772 24 166 33 870 35.6 % –28.7 %

Structure of 2010 Revenues by Gazprom Neft Group

Oil export to international markets Oil export to CIS countries Gas sales Oil product export to international markets 2010, % Sales of oil products from NIS Oil product export to CIS countries Sales on the domestic market Other

33 % 4 % 8 % 2 % 22 % 27 % 1 % 3 %

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Sales volumes

Change, % 2010 2009 2008 2010/2009 2009/2008 Crude oil, mn t Export and sales in international markets 15.94 15.57 16.30 2.4 % –4.5 % Export to CIS countries 3.02 3.32 3.30 –9.0 % 0.6 % Sales in the domestic market 0.01 0.52 0.90 –98.1 % –42.2 % Total crude oil sales 18.97 19.41 20.50 –2.3 % –5.3 % Gas sales in the domestic market, bn m3 4.88 3.43 3.70 42.3 % –7.3 % Oil products mn t Export sales 12.31 11.36 11.40 8.4 % –0.4 % Sales in the international market 2.61 2.29 – 14.0 % – Export and CIS sales 1.74 1.90 1.79 –8.4 % 6.1 % Sales in the domestic market 20.54 17.43 15.64 17.8 % 11.4 % Total oil product sales* 37.20 32.98 28.83 12.8 % 14.4 %

* Here and hereinafter, the sales in Gazprom Neft Group are indicated (including NIS, Sibir Energy and acquisition of oil products). Average sales prices realised

In 2010, compared to 2009, the increase of revenues by 35.6 % was connected to the growth in oil prices and the increases in sales and production volumes.

Change, % (USD/t) 2010 2009 2008 2010/2009 2009/2008 Crude oil Export and sales in international markets 560.92 433.46 696.3 29.4 % –37.7 % Export to CIS countries 414.57 298.19 427.3 39.0 % –30.2 % Oil products Export sales 577.99 453.26 735.2 27.5 % –38.3 % Sales in the international market 992.34 914.85 – 8,5 % – Export to CIS countries 659.20 477.37 719.6 38.1 % –33.7 % Sales in the domestic market 520.45 432.07 660.6 20.5 % –34.6 %

Crude oil export sales Oil export to CIS countries

In 2010, compared to 2009, the 32.5 % increase In 2010, compared to 2009, the 26.5 % increase in export revenues was connected to a 29.4 % of oil export to CIS countries was mainly connected growth in oil prices and the 2.4 % increase in to the 30.9 % increase in oil prices. sales volumes. In 2009, compared to 2008, the 29.8 % decrease In 2009, compared to 2008, the 40.5 % in revenues of exports to the CIS was mainly decrease in export revenues was connected to a connected to the 30.2 % decrease in oil prices. drop in oil prices by 37.7 % along with the 4.5 % This was compensated partly by the 0.6 % growth decrease in sales volumes. in sales volumes.

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Oil products export sales

In 2010, compared to 2009, the 38.2 % increase In 2009, compared to 2008, the 38.6 % decrease in export of oil products was mainly connected in export revenues of oil products was connected to to the 8.4 % increase in sales volumes, and the the 38.3 % drop in oil prices, and 0.4 % decrease 27.5 % price rise. The increase was conditioned in sales volumes. by a 13.3 % growth in refining.

2010 2009 Change, % mn USD mn t mn USD mn t mn USD mn t High-octane petrol 65 0.09 224 0.45 –71.0 % –80.0 % Low-octane petrol 14 0.02 20 0.04 –30.0 % –50.0 % Naphtha 1 131 1.64 873 1.70 29.6 % –3.5 % Diesel fuel 3 179 4.73 2 477 4.93 28.3 % –4.1 % Black oil 2 205 5.08 1 249 3.61 76.5 % 40.7 % Kerosene 181 0.25 13 0.02 – – Others 340 0.50 293 0.61 16.0 % –8.0 % Total 7 115 12.31 5 149 11.36 38.2 % 8.4 %

Oil product sales on the international market

In 2010, compared to 2009, the total 23.6 % growth of revenues of sales of oil products on the international market was connected to the 14.0 % growth of sales volume and price rises of 8.5 %.

Oil product sales in CIS countries

2010 2009 Change, % mn USD mn t mn USD mn t mn USD mn t High-octane petrol 488 0.62 366 0.60 33.3 % 3.3 % Low-octane petrol 79 0.12 61 0.12 29.5 % 0.0 % Naphtha 15 0.03 86 0.23 –82.6 % –87.0 % Diesel fuel 264 0.42 109 0.22 142.2 % 90.9 % Black oil 1 – 5 0.02 –80.0 % –100.0 % Kerosene 114 0.22 166 0.44 –31.3 % –50.0 % Others 186 0.33 114 0.27 63.2 % 22.2 % Total 1 147 1.74 907 1.90 26.5 % –8.4 %

In 2010, compared to 2009, the total 26.5 % In 2009, compared to 2008, the total 29.6 % growth of revenues of oil product sales in CIS decrease in export revenues of oil products to countries was connected to price rises of 38.1 %. CIS countries was connected to the 33.7 % drop However, this growth was partly offset by an 8.4 % in price. This partly compensated for by a 6.1 % sales volume decrease. increase in sales volumes.

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Oil product sales on the domestic market

In 2010, compared to 2009, the total 41.9 % In 2009, compared to 2008, the total 27.1 % growth of revenues of sales of oil products on the decrease in export revenues of oil products on domestic market was connected to the 17.8 % the domestic market was connected to the drop growth of sales volume and price rises of 20.5 %. in prices by 34.6 %. This was partly compensated for by an 11.4 % increase in sales volumes..

2010 2009 Change, % mn USD mn t mn USD mn t mn USD mn t High-octane petrol 4 006 5.44 2 772 4.51 44.5 % 20.6 % Low-octane petrol 513 0.87 449 0.84 14.3 % 3.6 % Diesel fuel 3 117 6.06 2 050 4.73 52.0 % 28.1 % Black oil 1 081 3.49 750 3.26 44.1 % 7.1 % Kerosene 1 033 2.10 774 1.88 33.5 % 11.7 % Others 940 2.58 736 2.21 27.7 % 16.7 % Total 10 690 20.54 7 531 17.43 41.9 % 17.8 %

Other sales In 2009, compared to 2008, the cost price of acquired oil, gas and oil products decreased by Other revenues primarily comprise sales of services 33.5 %. This was connected to a price drop for such as processing services, transportation, crude oil and oil products. It was compensated for construction, utilities and others. by an increase in volumes due to the company’s acquisitions. In 2010, compared to 2009, the total 40.5 % growth of other sales was driven by price rises and Expenses: production and refining an increase in sales volumes. In 2010, production expenses increased In 2009, compared to 2008, the total 22.1 % insignificantly due to the strengthening of the ruble decrease of other sales was driven by a decrease against the dollar by 4.4 % and a 4.7 % increase in in price and sales volumes. hydrocarbon production volumes.

The company’s production expenses decreased Costs and other deductions from 5.13 to 4.98 USD per BOE or by 2.9 %.

Cost price of acquired crude oil, gas and The 31.4 % growth of refining expenses was driven oil roducts by routine maintenance in the middle of 2010 at Omsk and Moscow refineries, and the growth of In 2010, compared to 2009, the cost price of refining volumes at all refineries. acquired crude oil, gas and oil products increased by 39.8 %. This was connected to the price rises for In 2010, compared to 2009, the company’s refining crude oil and oil products, and the corresponding expenses per 1 barrel of oil increased from 2.71 to increase in volumes. 3.15 USD, or by 16.3 %.

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Production and refining expenses

Change, % (mn USD) 2010 2009 2008 2010/2009 2009/2008 Hydrocarbon production expenses 1 236 1 217 1 371 1.6 % –11.2 % Refining expenses at own refineries and refineries of affiliates, 875 666 644 31.4 % 3.4 % including share in equity investees Operating expenses in total 2 111 1 883 2 015 12.1 % –6.6 %

Selling, general and administrative Depreciation, depletion and amortisation expenses Depreciation, depletion and amortisation expenses Commercial, general and administrative expenses include depletion of oil and gas-producing assets include general business expenses, wages, salaries and amortisation of other fixed assets. and social benefits (except for wages and salaries at the production and refining subsidiaries), insurance, In 2010, compared to 2009, depreciation, banking commissions, legal fees, consulting and depletion and amortisation expenses increased by audit services, charity, allowances for doubtful 9.8 %. The growth was driven by the increase in accounts and other expenses. the value of amortised assets due to implementing the company’s capital-expenditure programme. In 2010, commercial, general and administrative expenses increased by 28.8 % due to the In 2010, compared to 2009, depreciation, strengthening of the ruble against the dollar, and depletion and amortisation expenses increased the growth of sales volumes and inflation. by 12.7 %. The growth was driven by the increase in the value of amortised assets. This was due to In 2009, compared to 2008, commercial, general implementing the company’s capital expenditure and administrative expenses increased by 22.4 % programme and recent acquisitions. and totalled 1,280 mn USD. The increase is connected to the company's expansion of activities Export customs duties and recent acquisitions. In 2010, compared to 2009, the amount of Transportation expenses paid export duties increased due to the growth in exporting crude oil and oil products, and the Transportation expenses include costs to crude oil price rise. This resulted in export duties transport crude oil to refineries and oil products growing by 68 %. to end customers. These costs comprise pipeline transportation, sea freight, railway, shipping, In 2009, compared to 2008, the amount of export handling and other transportation costs. duties decreased due to the price drop for crude oil and changes in the duty calculation formula. In 2010, the increase of transportation expenses occurred due to the growth of transportation In 2010, mineral extraction tax increased due to tariffs, the strengthening of the ruble against the the rise in crude oil prices used in tax calculation dollar, and the company’s acquisitions. and the growth of production volume by 2.3 %.

In 2009, as compared to 2008, the increase of In 2009, mineral extraction tax decreased due to transportation expenses reflects the growth of the price drop for crude oil and adjustment of the transportation tariffs within Russia, and the growth formula for tax calculation. of corresponding transportation volumes due to NIS and Sibir Energy acquisitions.

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Export customs duties

Change, % (mn USD) 2010 2009 2008 2010/2009 2009/2008 Export customs duties for crude oil 4 631 2 790 5 316 66.0 % –47.5 % Export customs duties for oil products 2 000 1 158 2 012 72.7 % –42.4 % Total 6 631 3 948 7 328 68.0 % –46.1 %

In 2010, excise grew due to an increase in refining In 2009, the growth of rates of excise was driven volumes at the company’s refineries and 10 % by the increase of refining volume at the company’s growth of rates of excise. refineries, and the influence of acquiring control at Moscow refinery.

Taxes excluding profit tax

Change, % (mn USD) 2010 2009 2008 2010/2009 2009/2008 Mineral-extraction taxes 3 051 2 215 4 202 37.7 % –47.3 % Excise 1 743 1 412 828 23.4 % 70.5 % Property tax 177 123 107 43.9 % 15.0 % Other taxes 269 232 216 15.9 % 7.4 % Total 5 240 3 982 5 353 31.6 % –25.6 %

Other spending

Change in revenues of participation interest in The decrease of interest to be paid was driven by affiliates is mainly driven by the change in crude the decrease of the company’s effective interest oil prices. rate.

Change in interest receivable is stipulated by the In 2010, effective profit tax rate totalled 19.7 %, change in the amount of finance on bank deposits. which corresponds to the current effective profit tax rate.

Liquidity and capital resources

Cash flows

Change, % (mn USD) 2010 2009 2008 2010/2009 2009/2008 Net cash provided by operating activities 5 392 3 475 5 483 55.2 % –36.6 % Net cash used in investing activities (4 852) (4 880) (3 502) –0.6 % 39.3 % Net cash provided by (used in) financing activities (309) 185 (566) –267.0 % –132.7 %

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Net cash from operating activities In 2009, net cash used in investing activities grew by 39.3 % or by 1,378 mn USD. Compared to In 2010, net cash received from operation activities 2008, the growth was driven by acquiring NIS and totalled 5,392 mn USD, compared to 3,475 mn Sibir Energy and was partly compensated for by a USD in 2009 (growth of 55.2 %). The growth decrease in capital expenditure. resulted from the operating income and optimising working capital control. Net cash provided by (used in) financing activities In 2009, compared to 2008, net cash provided by operating activities decreased by 2,008 mn USD, In 2010, net cash used in financing activities or by 36.6 %. The price drop for crude oil and oil totalled 309 mn USD. In 2009, it totalled 185 products and increase in working capital volume mn USD. Change was driven by a 703 mn USD drove the decrease. decrease of net cash inflow from loans. This was partly compensated for by a decrease in the Net cash used in investing activities dividend payout by 209 mn USD.

In 2010, net cash used in investment activities In 2009, net cash received from financing activities decreased by 0.6 % to 4,852 mn USD, compared totalled 185 mn USD. (566 mn USD in 2008). to 4,880 mn USD in 2009. The decrease was driven Change was driven by the 851 mn USD increase by the decrease in M&A activity (by 658 mn USD of net cash inflow from loans. This was partly less than in 2009), and was partly compensated for compensated for by an increase in the dividend by a 26.6 % growth of capital expenditure. payout by 145 mn USD.

Capital investments

Change, % (mn USD) 2010 2009 2008 2010/2009 2009/2008 Exploration and production 2 351 2 000 2 979 17.6 % –32.9 % Oil refining 414 306 189 35.3 % 61.9 % Marketing and distribution 304 180 159 69.0 % 13.1 % NIS 161 67 – 140.3 % – Others 71 54 39 30.4 % 39.6 % Capital investments in total 3 301 2 607 3 366 26.6 % –22.5 %

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Capital Investments in 2008-2010, mn USD In 2010, capital expenditure increased by 26.6 %. The increase was driven by the following factors: 3 500 3 366 26,6 % 3 301 zz The 11.8 % increase in the number of new 3 000 drilled wells and strengthening of the ruble 2 607 against the dollar by 4.4 % resulted in the 2 500 17.6 % growth of capital expenditure in Exploration and production Oil reﬁning exploration and production. 2 000 Marketing and distribution NIS zz The 35.3 % growth of capital expenditure in 1 500 Others refining by was connected to implementing the modernisation programme at the company’s 1 000 refineries.

500 z Source: z The 69 % growth of capital expenditure in 0 Company data the marketing and distribution sector was 2008 2009 2010 connected to implementing the rebranding programme for filling stations.

In 2009, compared to 2008, the 22.5 % decrease Net Debt and EBITDA in 2008-2010, mn USD in capital expenditure was driven by the following factors: 6 000 0.91 0.76 1,00 5 442 5 490 zz The weakening of the ruble against the dollar

5 000 by 21.6 % and the decrease of contract price, 0,80 which was partly compensated for by an increase in the volume of work, resulted in 4 000 0,60 the 32.9 % decrease of capital expenditure in Net debt exploration and production. 3 000 Net debt / EBITDA 0,40 zz The growth of capital expenditure in the 0.19 2 000 1 618 refining segment by 61.9 % was connected to implementing the modernisation programme 0,20 1 000 at the company’s refineries.

Source: zz The 13.1 % growth of capital expenditure in 0 0 Company data 2008 2009 2010 the marketing and distribution sector was connected to implementing the rebranding programme for filling stations.

Debt obligations

(mn USD) 2010 2009 2008 Short-term loans 1 694 2 148 2 085 Long-term loans 4 942 4 162 1 608 Cash assets and its equivalents (1 146) (868) (2 075) Net debt 5 490 5 442 1 618 Net debt / EBITDA 0.76 0.91 0.19 Short-term loans / Debt in total, % 25.5 % 34.0 % 56.5 %

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Share of short-term loans in the company’s Due to successfully refinancing short-term debt and total debt the balanced policy of participation, the weighted average maturity for credit portfolio increased by Source: 22.5 % in 2010, and the average weighted rate 60 % 56.5 % Company data for loans decreased by 1.15 points to 3.96 %, 50 % compared to 2009.

40 % 34.0 % A major part of the company’s debt is expressed 30 % 25.5 % or hedged in USD. 20 % In 2009, the debt increase is mostly connected to 10 % acquiring NIS and Sibir Energy. 0 2008 2009 2010 In 2010, the company confirmed long-term ratings assigned by Standard & Poor’s 'BBB-' and Moody’s Investors 'Baa3', forecast 'stable'. A 55.2 % increase of net cash received from operating activities was invested in capital In accordance with the company’s financial policy, expenditure and M&A projects. the net debt/EBITDA ratio must not exceed 1.5 and the minimum amount of dividend payout must The company’s credit portfolio was diversified and total 15 % of net income (US GAAP). included pre-export financing, syndicated and bilateral loans, ruble bonds and other financial instruments.

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FINANCIAL APPENDICES

EBITDA

Change, % mn USD 2010 2009 2008 2010/2009 2009/2008 Adjusted EBITDA 7 226 5 977 8 610 20.9 % –30.6 % Company share in EBITDA of affiliated companies (949) (931) (1 052) 1.9 % –11.5 % Income from investment 9 470 – –98.1 % – Income from share in affiliated companies’ business 229 212 407 8.0 % –47.9 % Foreign exchange gain/loss, net (22) 48 (517) –145.8 % –109.3 % Miscellaneous (expenses)/income, net (309) (143) 89 116.1 % –260.7 % Interest payable (336) (369) (167) –8.9 % 121.0 % Interest receivable 48 108 100 –55.6 % 8.0 % Wear, depletion and amortisation (1 619) (1 475) (1 309) 9.8 % 12.7 % Income before tax 4 277 3 897 6 161 9.7 % –36.7 %

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FINANCIAL PERFORMANCE

Profitability

Change, p.p.

2010 2009 2008 2010/2009 2009/2008 Adjusted EBITDA profitability, % 22.05 % 24.73 % 25.42 % –2.7 % –0.7 % Net profit profitability, % 10.48 % 12.75 % 13.87 % –2.3 % –1.1 % Profitability on assets, % 11.08 % 12.29 % 25.51 % –1.2 % –13.2 % Profitability on equity, % 17.40 % 18.81 % 38.29 % –1.4 % –19.5 % Income on capital employed, % 15.93 % 14.92 % 36.20 % 1.0 % –21.3 %

Efficiency

Change, %

2010 2009 2008 2010/2009 2009/2008 Trade receivables turnover, days 19 20 11 – 0.8 % Inventory turnover, days 47 47 27 – 0.7 %

Liquidity

Change, %

2010 2009 2008 2010/2009 2009/2008 Current liquidity ratio 1.46 1.17 1.42 0.2 % –0.2 % Quick assets ratio 0.81 0.68 1.02 0.2 % –0.3 % Absolute liquidity ratio 0.28 0.18 0.56 0.6 % –0.7 %

Leverage

2010 2009 2008 2010/2009 2009/2008 Change, p.p. Net debt/total assets, % 17.12 % 18.19 % 8.01 % –0.1 % 1.3 % Net debt/owner’s equity, % 26.40 % 29.17 % 11.48 % –0.1 % 1.5 % Leverage, % 20.88 % 22.58 % 10.29 % –0.1 % 1.2 % Change, % Net debt/market capitalisation 27.51 21.21 16.00 0.3 % 0.3 % Net debt/EBITDA 0.76 0.59 0.25 0.3 % 1.4 % Total debt/EBITDA 0.90 0.84 0.41 0.1 % 1.0 %

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ADDITIONAL INFORMATION

Main macroeconomic factors Changes in market prices of crude oil affecting results of operations and petroleum products

The main factors affecting the company’s results The prices for crude oil and petroleum products of operations include: in the international and Russian markets are the primary factors affecting the company’s results zz changes in market prices of crude oil and of operations. In 2010, the average Brent oil price petroleum products increased by 28.9 % to USD 79.50 per barrel, compared to 2009. Company management zz Russian Ruble (RUB) exchange rate versus the expects stable oil prices in 2011. US Dollar ('USD') and inflation Petroleum product prices on international and zz taxation Russian markets are mainly defined by the level of international oil prices, demand and supply of oil zz changes in transportation tariffs of crude oil and products, and competition level at various markets. petroleum products. Price dynamics is different for various types of petroleum products.

Change, %

2010 2009 2008 2010/2009 2009/2008 International market (USD per barrel) Brent 79.50 61.67 97.26 28.9 % –36.6 % Urals spot (average Med + NWE) 78.28 61.22 94.79 27.9 % –35.4 % (USD per tonne) Premium petrol (average NWE) 735.26 578.99 841.55 27.0 % –31.2 % Naphtha (average Med + NWE) 704.68 527.28 779.84 33.6 % –32.4 % Diesel fuel (average NEW) 689.65 536.98 948.49 28.4 % –43.4 % Gas oil 0.2 % (average Med + NWE) 672.65 512.67 903.81 31.2 % –43.3 % Fuel oil 3.5 % (average NWE) 436.17 341.66 452.55 27.7 % –24.5 % Domestic market (USD per tonne) High-octane petrol 715.05 600.06 1 023.15 19.2 % –41.4 % Low-octane petrol 569.15 494.07 803.38 15.2 % –38.5 % Fuel oil 507.28 419.88 880.67 20.8 % –52.3 % Black oil 250.73 204.38 329.05 22.7 % –37.9 %

Source: Platts (international market), Kortes (domestic market)

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Brent oil price, USD/barrel Rate of exchange, RUB/USD

100 35 97.26 4.1% 28.9% 30 31.7 80 29.4 30.4 79.50 25 60 61.67 20

40 15 10 20 5

0 0 2008 2009 2010 2008 2009 2010

Russian ruble versus US dollar or otherwise expressed in US dollars. Therefore, exchange rate and inflation the strengthening (weakening) of the exchange rate of the ruble affects company performance. Company management established that the US To mitigate the effects of the fluctuation in the dollar is the functional currency and the company ruble – US dollar exchange rate, the company reporting currency, as a major portion of uses derivative instruments as shown in 2010 income, financial and trade liabilities have been Consolidated Financial Statements. estimated, charged and are subject to payment

2010 2009 2008 Consumer Price Index, % 8.8 % 8.8 % 13.3 % Producer Price Index, % 16.7 % 13.9 % –7.0 % Ruble/US dollar exchange rate as of the end of the period 30.48 30.24 29.38 Average ruble/US dollar exchange rate for the period 30.37 31.72 24.86 Real appreciation (depreciation) of the ruble against the US dollar, % 7.9 % 5.7 % –5.3 % Nominal period average appreciation (depreciation) of the ruble against 4.4 % –21.6 % 2.9 % the US dollar, %

Consumer Price Index, % Novorossiysk Netback, RUB/t

15 % 7 500

13.3 %

5.3 % 10 % 7 000 6 969 8.8 % 8.8 % 6 740 5 % 6 500 6 597

0 6 000 2008 2009 2010 2008 2009 2010

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Taxation

Change, %

2010 2009 2008 2010/2009 2009/2008 Export customs duty (USD per tonne) Crude oil 273.61 179.93 355.08 52.1 % –49.3 % Light and medium distillates 196.66 133.54 251.53 47.3 % –46.9 % Fuel oil 105.94 71.92 135.51 47.3 % –46.9 % Excise taxes (RUB per tonne) Straight-run petrol 4 290 3 900 3 900 10.0 % – High-octane petrol 3 992 3 629 3 629 10.0 % – Low-octane petrol 2 923 2 657 2 657 10.0 % – Diesel fuel 1 188 1 080 1 080 10.0 % – Oils 3 246 2 951 2 951 10.0 % – Mineral extraction tax Oil, RUB per tonne 3 074 2 299 3 329 33.7 % –30.9 % Oil, USD per barrel 13.81 9.89 18.27 39.6 % –45.9 % Natural gas, RUB per 1 000, m³ 147 147 147 – –

Crude oil export customs duty rate. Export calendar day of the following month (monitoring customs duty rate per tonne of crude oil is period). The rate is effective on the first day of the established on a monthly basis by the Government coming month after the monitoring period. of the Russian Federation. The actual rate is based on the average Urals price in the period from The Government sets export custom duty rates the 15th calendar day in the month to the 14th according to the following formulae:

Urals Price Quotation (P), USD per tonne Maximum export customs duty rate

0 – 109.50 0 % 109.50 – 146.00 35.0 % × (P – 109.50) 146.00 – 182.50 US Dollar 12.78 + 45.0 % × (P – 146.00) >182.50 US Dollar 29.20 + 65.0 % × (P – 182.50)

Oil exported to CIS countries. The members of the Since January 2010, the reduction factor for Custom Union (Kazakhstan, Tajikistan, Kyrgyzstan) customs duty on oil export to Belarus has been - are not subject to oil customs duty. Until 2010, oil cancelled. According to provisions of the inter- export to Belarus was subject to decreased export Government agreement 'On Regulation of Trade customs duty, which was defined based on special and Economic Cooperation for Oil and Petroleum factor. The following factors were established in Products Export' as of 12 January 2007, oil 2007-2009: 2007 – 0.293, 2008 – 0.335, 2009 exported from Russia to Belarus required for – 0.356. national consumption was not subject to export duty.

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In January 2011, an inter-Governmental agreement where the price is the average monthly Urals was reached between Russia and Belarus according price at Rotterdam and Mediterranean exchange to which oil exported to Belarus is not subject to (dollar/barrel). Export customs duty rate for dark customs duty, starting from 1 January 2011. oil products is calculated according to the formula:

Export customs duty rate on petroleum products. 0.236 × (price × 7.3 – 109.5). The Government determines the export customs duty rate on oil products, based on the prices for crude on According to the Resolution of the Russian international markets, which is set separately for light Government No.1155 as of 27 December 2010, and middle distillates and for fuel oil. Oil products export customs duty rates on petroleum products exported to CIS countries - the members of the were changed. Since 1 February 2011, export Custom Union (Kazakhstan, Tajikistan, Kyrgyzstan) customs duty rates on petroleum products are - are not subject to oil customs duty. calculated according to this formula:

Export customs duty rate for light and medium R=К×Roil, distillates is calculated according to the formula:

where Roil = export customs duty rate per tonne of oil, K = design factor with respect to certain category of petroleum products defined in the 0.438 × (price × 7.3 – 109.5), following table:

2011 2012 2013 Light and medium distillates 0.67 0.64 0.60 Fuel oil 0.47 0.53 0.60

Excise tax rate on petroleum products. The tax In accordance with Federal Law No.306 as of 27 agent to pay petroleum products excise tax in the November 2010, the following petroleum products Russian Federation is petroleum product producers excise rates are established from 1 January, 2011 (except for straight-run petrol producers). In other (RUB/t): countries where the company operates, producers or sales companies pay the excises, depending on local legislation.

2011 2012 2013 Petrol: Euro-3 5 672 7 382 9 151 Euro-4, -5 5 143 6 822 8 560 Naphtha 6 089 7 824 9 617 Other 5 995 7 725 9 511 Fuel oil: Euro-3 2 485 3 814 5 199 Euro-4, -5 2 247 3 562 4 934 Other 2 753 4 098 5 500 Motor oil 4 681 6 072 7 509

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Mineral extraction tax (MET) rate on oil. rate exceed 80 % general, the MET formula is Starting from 1 January 2007, mineral extraction multiplied by coefficient C, which is calculated tax rate on crude oil (R) is calculated using the as follows: following general formula: С = – 3,5 × N / V + 3,8. R = 419 × (Р – 9) × D / 261, Thus every marginal percent of depletion exceeding where P is the average monthly Urals oil price on 80 % reduces the MET payable by 3.5 %. the Rotterdam and Mediterranean markets (USD/ bbl) and D is the actual RUB/USD average exchange Natural gas mineral extraction tax rate. The rate. Effective from 1 January 2009, the formula rate of mineral extraction tax for natural gas was amended to incorporate a higher threshold has remained stable since 1 January 2006, and oil price: equals 147.00 RUB per thousand cubic meters of natural gas. Associated gas is not subject to mineral R = 419 × (Р – 15) × D/ 261. extraction tax.

Depleted oil assets are subject to lower MET. The Company started to produce natural gas Depleted oil assets are those that have a depletion in Q4 2010. Gas production volume in 2011 is rate exceeding 80%. Depletion rate is calculated estimated at 4 bn m3. by dividing the accumulated production volume from the oil field (N) by the field’s total reserves In accordance with Federal Law No.307 as of 27

(V, where V is ABC1 + C2 reserves volume as per November 2010, the following mineral extraction Russian classification). Should the field’s depletion tax rates were established for oil and natural gas:

2011 2012 2013

Oil, RUB/t 419 446 470 Natural gas, RUB/1 000 m³ 237 251 265

Transporting crude oil and petroleum Federation ('FTS') set transportation tariffs products of natural monopolies. The tariffs depend on transport destination, delivery volume, distance of The state authorities define the transportation transportation, and several other factors. The FTS tariff policies to ensure the balance of interests of are to revise the tariffs at least annually, comprising the state and all participants in the transportation a dispatch tariff, loading, transhipment, pumping process. The Federal Tariffs Service of the Russian and other tariffs.

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Tariff rates applicable at company’s main transportation routes:

Change, %

2010 2009 2008 2010/2009 2009/2008 Oil (RUB/t) Export 273.61 179.93 355.08 52.1 % –49.3 % Pipeline 1 245.61 937.19 753.17 32.9 % 24.4 % CIS Pipeline 973.36 749.33 629.79 29.9 % 19.0 % Transportation to refineries Omsk refinery 414.14 351.51 282.39 17.8 % 24.5 % Moscow refinery 832.79 629.22 504.05 32.4 % 24.8 % Yaroslavl refinery 860.18 705.57 574.97 21.9 % 22.7 % Petroleum products Export Transportation from Omsk refinery Petrol 1 965.91 1 718.86 1 680.04 14.4 % 2.3 % Fuel oil 3 037.08 2 717.20 – 11.8 % – Diesel fuel 2 527.73 2 056.74 1 941.52 22.9 % 5.9 % Transportation from Moscow refinery Petrol 1 602.30 1 263.82 1 107.70 26.8 % 14.1 % Fuel oil 1 686.39 1 075.39 994.40 56.8 % 8.1 % Diesel fuel 1 343.00 1 347.11 1 124.56 –0.3 % 19.8 % Transportation from YANOS Petrol 1 729.82 1 574.17 1 258.19 9.9 % 25.1 % Fuel oil 1 266.42 1 130.93 1 022.82 12.0 % 10.6 % Diesel fuel 911.74 1 005.33 820.96 –9.3 % 22.5 %

In 2010, the company supplied 48.0 % of overall via Tuapse Sea port (7.8 % in 2009); 13.7 % of export oil volume (45.2 % in 2009) via the oil was transported via the recently commissioned Primorsk port on the Baltic Sea; 24.9 % of oil was East Siberia – Pacific Ocean transit pipeline via exported via Druzhba pipeline (20.4 % in 2009), Kozmino terminal. In 2009, the remaining portion mainly to Germany, the Czech Republic and of oil was transported to China via pipeline across Gdansk port (Poland); 3.7 % of oil was transported Kazakhstan territory (5.1 %) and via Yuzhny port via Novorossiysk port (18.8 % in 2009) and 9.7 % on the Black Sea (2.7 %).

Previous chapter Content Next chapter 84 JSC GAZPROM NEFT INVESTMENT PROGRAMME

JSC Gazprom Neft’s investment activity aims to maximise the Implementing the investment programme in 2010 company's value, improve business efficiency and achieve its strategic and further in 2011-2012 will solve the following goals. key tasks:

zz Increasing production at JSC Gazprom Neft assets by 5.3 % (in tonnes of oil equivalent) in The main principles of JSC Gazprom Neft’s 2010 compared to 2009, and by 7.6 % in 2011. investment activity are: zz conforming investment plans to approved zz Starting geological exploration and company strategy development of new fields – Ravninnoye, North- zz implementing the most effective projects and Romanovsky, Vorgenskoye and Messoyakha building optimum investment portfolio group of fields, Novoportov field; implementing zz collegial decision-making and delegating international projects – Venezuela, Iraq, Cuba investment decision-making according to an and Equatorial Guinea – to reach production of accountability matrix 100 mn t of oil equivalent by 2020. zz minimising risks of project implementation zz differential approach to decision-making zz Reconstructing refineries to meet technical for projects and monitoring implementation regulation requirements: transition to Euro-4 depending on project type and complexity from 2012 and to Euro-5 from 2015, as well as zz mandatory regular monitoring of project maximizing production of high-octane petrol. implementation. zz Reconstructing NIS refinery in accordance with Implementing investment plan conformance to acquisition bargain provisions: implementing approved company strategy is achieved through environmental projects, reaching Euro-5 quality a process of building a three-year Medium Term for produced motor fuel. Investment Programme (MTIP). MTIP focuses on achieving distinct and detailed medium-term zz Optimising sales network, including Sibir goals as a stage for implementing long-term Energy and NIS, and bringing filling stations to company goals. MTIP comprises investment corporate standard and closing unprofitable projects for which the scope of required financing, stations. economic and operational objectives has been pre- defined and balanced with company investment Far-reaching business development plans in all opportunities. business directions require significant investment. The total amount of funds invested by 2020, both Capital expenditure by business segment, mn USD to support current activities and for development, including assets purchased on the market, will total 4 000 3 836 up to 80 bn USD.

3 301 Total investment volume in 2010 was 4.9 bn USD. 3 000 2 607 JSC Gazprom Neft capital investment into organic Exploration and production growth and maintaining conventional assets in 2010 Reﬁning 2 000 totalled 3.3 bn USD. This is 25 % more than the capital Marketing and sales investment in 2009: NIS Other 1 000 zz Capital investment into oil production increased by 17.6 % and was 2.4 bn USD. The company increased commissioning of new wells by 12 %

0 compared to 2009, and implemented a project 2009 2010 2011 (plan) Source: Company data of bringing Cenomanian deposits of Muravlenko and Novogodny fields.

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zz 414 mn USD was invested into oil refining, 45.3 % of JSC Gazprom Neft-Novosibirsk stocks which is 35.3 % more than the amount (that will allow the company to increase its share allocated for developing this business in 2009. to 100 %, with respect to purchasing stocks from Investment growth is explained by the transition minority shareholders). The company invested of the Motor Fuel Quality Programme into the 1.5 bn USD in 2010 to implement these projects. active phase of constructing new plants and Total investment into non-organic growth was reconstructing existing ones. At Omsk refinery 1.6 bn USD. in 2010, the company completed constructing and commissioning a 500,000 t isomerisation In 2011, the company plans to increase investment plant. This will enable an increase of high-octane into 'organic growth' by up to 3.8 bn USD. This petrol production conforming to environmental growth is due to increasing investment into oil class 5 quality in 2011. Construction of a petrol refining by 67 %. This is conditioned by continuing and diesel fuel hydrofinishing complex began. At implementation of the large-scale motor fuel Moscow refinery, construction of light naphtha quality improvement programme: constructing isomerisation facility started as the first project two large petrol and diesel fuel hydrofinishing of the Plant Reconstruction and Modification plants at Omsk refinery, and an isomerisation Programme. plant at Moscow refinery. The company plans to increase investment in oil products sales by zz For the oil products sales programme, the 57 %. This is in connection with the Sibir Energy company invested 69 % more, compared to the sales network optimisation programme, which previous year. 304 mn USD Investment growth is includes bringing the external appearance of due to new projects aimed at starting fuel retail filling stations to company standards, closing in Kazakhstan, acquiring filling station chains unprofitable stations, and starting the active and land for filling stations construction; and phase of logistics and bulk plants optimisation. purchasing Lentransgaz assets. The volume of investment into NIS will grow by 244 % and total 555 mn USD. This is explained zz The volume of investment into NIS increased by by the transition of the MHC/DHT light 140 % compared to 2009 and was 161 mn USD. hydrocracking unit construction to the active This considerable growth is due to starting a phase. For exploration and production projects, large oil refinery project implementation at the the company plans to decrease investment by refinery in Pančevo: constructing a MHC/DHT 13 %. This is due to toughening investment light hydrocracking unit. project efficiency requirements and minimisation of specific investment per tonne of production. zz Other investment totalled 71 mn USD. Also of note in 2011 is the company's plan to invest in purchasing stocks of a range of assets, In 2010, the company implemented a range of large among which is purchasing 22.39 % of Sibir projects to purchase companies shares/stocks. The Energy stocks from Central Fuel Company. This most important of these were acquiring the share will allow consolidation of 100 % of stocks of in charter capital of LLC SeverEnergiya (25.5 %), this company and the purchase of Gazprom Neft consolidating Sibir Energy stocks – increasing Orenburg stocks. In total, the company plans to company share to 77.35 % – and purchasing invest 1.6 bn USD into non-organic growth.

Previous chapter Content Next chapter 86 JSC GAZPROM NEFT MAJOR RISK FACTORS

Company Risk Management Policy Industry risks

In 2008, JSC Gazprom Neft developed a Risk JSC Gazprom Neft's main areas of operations are Management Policy. This set out the risk- producing oil and gas, oil refining, and selling oil management principles and objectives for and petroleum products. This is why the company enhancing the efficiency of the company’s is exposed to risks typical for the oil and gas operations in the short and long-term. industry. The company is particularly exposed to risks caused by: The company's key risk-management objective is assuring the continuous production process and zz a potential change in purchased raw materials business stability against threats, preventing and and service prices limiting the impact of external and internal negative factors on company operations. zz potential changes in oil and petroleum products prices Risk management is an integral part of the JSC Gazprom environment, including: zz industry competition

zz introducing a risk-oriented approach into zz exploration. all aspects of production and management activities Risks associated with potential changes in purchased raw materials and service zz systematic analysis of identified risks prices

zz building a risks-control system and monitoring In the course of its business, JSC Gazprom Neft risk management efficiency uses the infrastructure of monopoly providers of oil, petroleum product transportation and energy zz understanding basic principles and approaches supply services. to risk management adopted in the company by all company employees The company has no control over the infrastructure of such monopoly providers and the amount of zz ensuring necessary normative and procedural rates they charged. It is important to note that support although the controlling bodies of the Russian Federation regulate the amount, the rates grow zz distributing risk-management authorities and annually. This leads to an increase in expenses for accountability among company divisions. the company.

The company's risk-management objective is to To reduce exposure to these risks, the company: ensure additional guarantees for the company to achieve strategic goals by preventing and zz performs long-term planning of commodity indentifying risks earlier, and to ensure maximum flows, reserves oil and petroleum product efficiency of management activities. throughput volumes, and required rolling stock

zz conducts optimal redistribution of commodity flows by transport type

zz takes measures to use alternative and own power generation sources.

These measures allow the company to reduce the risks associated with using services and goods acquired from monopoly providers to an acceptable level, and to ensure the company's continuing operation.

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Risks associated with potential changes in zz acquiring other companies that hold subsoil oil and petroleum products prices licenses for hydrocarbon production or existing assets associated with hydrocarbon production

The financial performance indicators of the zz implementing foreign projects company relate directly to the level of oil and petroleum product prices. The company cannot zz engaging leading independent service control prices for its products, which depend on companies global and domestic changes to the supply and demand balance, the volume of consumption zz purchasing high-tech equipment of these markets, and the actions of regulatory authorities. zz purchasing existing retail network enterprises and land plots for constructing new ones To reduce adverse exposure to the above risks, the company has: zz expanding sales markets and volumes.

zz developed comprehensive measures for Implementing a portfolio of strategic projects reducing the cost of mineral production aimed at developing JSC Gazprom Neft across key operations areas enables the company to zz introduced a flexible commodity-flow strengthen its competitive positions in the oil and distribution system. This allows the company gas industry step by step, and reduce industry to redistribute commodity flows in a prompt competition risks. and timely manner, should a gap in oil and petroleum product prices between foreign and Exploration risks domestic markets occur. The company's key strategic goal is to increase the zz a business-planning system based on a scenario quantity and quality of its hydrocarbon resource approach to identifying the company's key base to ensure an adequate production level. performance indicators, depending on the This, in turn, depends largely on the success of level of world oil prices. This approach enables exploration activities. the company to, among other activities, reduce costs, by scaling back or postponing its The major exploration risk is failing to confirm the investment programmes. estimated hydrocarbon reserves. An important factor is exploring in different geographical These measures allow the company to reduce risks regions, including areas with adverse climates, to an acceptable level and perform the obligations which often incurs the risk of cost growth. assumed. At the same time, JSC Gazprom Neft has extensive Industry competition risks experience in conducting exploration work, using advanced hydrocarbon prospecting and The oil-and-gas industry is known for tough exploration methods, and advanced drilling and competition between the leading Russian oil and field infrastructure development technologies. This gas companies in the main areas of production and reduces the probability of such risks. economic operations. These include:

zz obtaining subsoil licenses for hydrocarbon production at the biddings organised by Russian government authorities

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Country and regional risks Financial risks

Political risks Company employees perform financial risk management at the company in accordance with As of now, the political situation in Russia is stable. their professional fields of activity. This is characterised by the sustainability of the federal and regional branches of power. The Financial Risk Management Committee outlines a uniform approach to managing JSC Gazprom Neft is registered as a taxpayer in St. financial risk at the company and its subsidiaries. Petersburg; the second-biggest city of the Russian The work performed by company employees and Federation and the administrative centre of the the Financial Risk Management Committee is North-Western Federal District. St. Petersburg has instrumental in reducing potential financial damage considerable nature and resource potential, highly- to the company and meeting its objectives. developed industry and an extensive transport network. Credit risks

JSC Gazprom Neft is represented by subsidiaries in The management of the company pays increasing the Siberian and Central Federal Districts. attention to credit risk management. The company has implemented a range of measures providing On the whole, the company assesses the political for effective monitoring and management situation in Russia as stable and believes that, this risk. These include evaluating partners’ currently, there are no signs of probable adverse creditworthiness, setting individual limitations risks. depending on the financial state of the partner, controlling advance payments, dealing with debts Foreign asset risks receivable by line of business, and other measures.

Expanding into new regions creates the possibility These actions assure the management of the of gaining a commercial advantage and a risk of company that, currently, there are no significant misjudging the political and economic situation in risks of damage exceeding the amount of countries where the company holds assets. This accumulated reserves. may result in the loss of assets and failing to meet the target efficiency indicators. The company places funds on deposit with a number of Russian banks. The company uses a The company has implemented a number of policy to regularly evaluate the creditworthiness foreign projects aimed at expanding production of the banks holding its deposits and to rank these operations geographically. Presently, JSC Gazprom banks by reliability. Neft views the level of its foreign asset risks as acceptable. However, the company cannot rule Borrowing risk out negative changes, as such risks are beyond its control. The company effectively manages the risk associated with borrowing. In addition to bank credit, the company actively employs alternative sources of borrowing. Furthermore, the company's stable financial state, as confirmed by international rating agencies, enables it to freely attract necessary credit resources from Russian and foreign banks.

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Currency risk Legal risks

The major part of JSC Gazprom Neft’s gross JSC Gazprom Neft operates in strict compliance revenues comprises export operations for sales of with the civil, tax, customs and currency legislation. oil and petroleum products. Therefore, fluctuations in currency rates against the ruble affect the The company cannot guarantee there will be results of the company’s financial and economic no adverse changes in Russian legislation in the operations. long-term, as most risk factors are beyond the company’s control. The company reduces adverse The company's currency risk is significantly lower exposure to this category of risks by monitoring due to expenses denominated in foreign currencies. and responding in a timely way to changes to The company takes a considerable share of the different sections of legislation. It also reduces loans in US dollars from the international credit these risks by actively interacting with legislative market. Current obligations of these loans are also and executive authorities, and public organisations denominated in dollars. over interpreting and improving legislation.

The currency structure of revenues and obligations Risks associated with tax legislation function as a hedging mechanism, where changes differently directed factors compensate each other. Balanced arrangement of foreign currency claims JSC Gazprom Neft is one of the top taxpayers in and obligations minimise currency risk exposure the Russian Federation. The company bears the on the results of the company’s financial and burden of paying federal, regional and local taxes, economic operations. particularly mineral extraction tax, value-added tax, income tax, unified social tax, property tax With a share of these claims and obligations and land tax. unbalanced, the company hedges these risks. Additionally, in each specific situation, the company The process of Russian tax law amendment can be draws upon internal instruments and reserves. This considered as almost complete. The legislation has allows it to manage the currency risk effectively been codified. The general part of the Tax Code, and guarantee the company's performance of applicable as of 1999, formalised basic taxation obligations. principles and introduction of new taxes. Applying those principles and applicability to protect property Interest rate risk interests of tax-payers is now implemented in law practice. A specific part of the Tax Code establishes As a major borrower, the company is exposed to taxes that form the tax burden of the emitter and interest rate risks. The main source of borrowing is defines taxation elements. In the last 10 years, the the international financial market. The debt portfolio VAT rate has been reduced by 2 % and income mainly comprises credits and loans denominated in tax by 15 %. The regressive scale of unified social US dollars. The interest rate for a small portion of tax rates has been set, and sales tax and other these loans (the share is not fixed and may vary) is mandatory taxes were cancelled. based on interbank LIBOR rates, which, if raised, may result in higher debt-servicing costs for the company. The results of the tax reform can be assessed An increase in the company's loan costs may positively. The taxation system has been structured, adversely affect the creditworthiness and liquidity taxation mechanisms and procedures are now indicators. However, the LIBOR rate is currently at a simplified, and tax rates have been cut. relatively low historical level and has a medium-term tendency for stabilising. This, along with a relatively Regarding the experience of reviewing cases in the small share of LIBOR-based loans, gives the company constitutional court of the Russian Federation, the a low exposure to interest rate risk. statements of the basic law affect the taxation laws of economic entities and protect tax-payers from ill-founded and sudden increases of tax burden.

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The aforementioned factors enable us to conclude JSC Gazprom Neft analyses and evaluates the that Russia’s tax system is becoming more stable, legislative initiatives of the interested ministries and and the operations of economic entities in the departments concerning subsoil legislation and Russian Federation are becoming more predictable. licensing specific operations. The proposed and discussed amendments to the current legislation In the course of its business, the company performs will have an overall positive effect on the regime of online monitoring of tax-legislation changes subsoil use and on the performance of licensable and changes in applying current provisions. The operations in the Russian Federation. company also acts as an expert in the law-making process by assessing and developing draft laws, JSC Gazprom Neft does not appear to be directly including tax laws. exposed to any legal risks associated with losing the right to use subsoil plots or violating the current Risks associated with changes in customs legislation, resulting from the above changes. regulations and duties Risks from changes in court practices with JSC Gazprom Neft participates in foreign economic issues related to Company’s activity relations. Therefore, it is exposed to risks associated with changes in the legislation governing foreign JSC Gazprom Neft performs monitoring, on a economic activities. It is also exposed to risks regular basis, of decisions by supreme courts and regarding customs legislation governing relations assessment of law enforcement trends as shown with respect to establishing the procedure of by local arbitration courts. The Company uses transferring goods through the customs border its findings not just to protect its legal rights and of the Russian Federation, imposing and applying interests in court, but also to settle any legal issues customs regimes, and imposing, introducing and arising from Company’s ongoing activity. collecting customs payments. Risks from changes in court practices can therefore One can single out as a risk the possibility that the be considered as minor risks. Government of the Russian Federation will change customs duty rates (both export and import) for specific goods, in respect of which JSC Gazprom Environmental risks Neft signs foreign trade deals. The major adverse consequence of this risk, if realised, will be higher JSC Gazprom Neft’s operations involve a potential costs and lower export efficiency. risk of environmental damage or contamination. This may result in civil liability and the need to The company complies with the customs control perform works to eliminate such damage. requirements, executes all documents necessary for performing export and import operations The company is fully aware of its social responsibility in a timely way, and has sufficient financial and to create safe working conditions and preserve personnel resources to observe the customs rules the environment. JSC Gazprom Neft continuously and regulations. controls its operations to ensure it complies with Risks associated with changes in licensing the appropriate environmental standards and requirements for core business implements environmental protection programmes.

Developing modern subsoil legislation is based on JSC Gazprom Neft's environmental policy is the state's detailed regulation of the subsoil use designed to ensure the company complies with processes, on the need to enhance the rational use the requirements of the current environmental of subsoil plots, and the need for strict compliance legislation. It does this by investing considerable with environmental legislation. funds in implementing environmental protection measures, including employing technologies that JSC Gazprom Neft conducts its operations in minimise negative environmental impact. Through the license plots in compliance with the strict such activities, the company has significantly requirements of the Russian subsoil legislation. The reduced the probability of environmental company updates its license agreements subject to contamination risks. changes in the current legislation.

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In 2010, we focused on improving corporate management practices in Gazprom Neft in accordance with international standards. Our key focus was on developing procedures to ensure steadfast adherence to shareholders’ rights and to maintain a high level of company informational transparency. Activities of the Board of Directors as a centre of decision-making in strategic and investment planning have been significantly intensified.

Elena Ilyukhina Member of the Management Board Deputy Director General for Legal and Corporate Affairs 92 BOARD OF DIRECTORS JSC GAZPROM NEFT AND MANAGEMENT BOARD

JSC GAZPROM NEFT GOVERNANCE STRUCTURE

The general shareholders’ meeting is the General Shareholders’ Meeting annually approves company's supreme governing body, which is the candidate of independent auditor, based on the competent in the most critical issues of company proposal of the Board of Directors. operations. Establishing, competency and organisation of the The Board of Directors is the governing body. governing and regulating bodies’ activities are Its main functions are to ensure general guidance defined by the Charter of JSC Gazprom Neft and of the company operations and be responsible respective internal documents: for strategic management aimed at increasing company shareholder value. The Board of Directors zz Regulations for JSC Gazprom Neft General ensures and monitors effective performance of the Shareholders’ Meeting. company executive bodies. zz Regulations for JSC Gazprom Neft Board of The Management Board is the collegial executive Directors. body managing the company's day-to-day operations. zz Regulations for JSC Gazprom Neft Management Board. The Director General is the chief executive officer exercising functions of the company Management zz Regulations for JSC Gazprom Neft General Board Chairman. Director.

To monitor finances and business operations, the zz Regulations for JSC Gazprom Neft Auditing General Shareholders’ Meeting elects the Internal Commission. Audit Committee to ensure control over and analysis of the company's financial and economic activities, All interested parties can view JSC Gazprom functioning of the internal audit system and risk Neft's Charter and internal regulations management system; and to review the legality of at the company’s official website: business transactions. http://ir.gazprom-neft.сom/corporate-governance/.

For the annual audit of financial reporting in accordance with Russian Accounting Standards (RAS) and in accordance with the Generally Accepted Accounting Principles (US GAAP), JSC Gazprom Neft involves an external auditor. The

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MEMBERSHIP OF THE BOARD OF DIRECTORS

Corporate legislation requires the Board of Directors to define priorities zz gives shareholders the opportunity to nominate in the company’s development, establishing the key focuses of candidates for the company’s Board of Directors business. Accounting for the strategic importance of the tasks faced for a period of two months. This term is longer by the Board of Directors, membership of the board should be trusted than the one month required by the law. by shareholders and ensure effective execution of its functions. zz provides the Board of Directors with timely information on the current Board of Directors and candidates.

The Board of Directors of JSC Gazprom Neft zz performs ongoing communication with the comprises 10 members. The members of the Board depository bank, the issuer of depository of Directors of JSC Gazprom Neft are members receipts of the Management Board of JSC Gazprom. The Board of Directors is headed by the Chairman of zz utilises obligatory cumulative voting when the Management Board of JSC Gazprom, A.B. electing members of the Board of Directors, Miller. Membership of key managers of the parent and explains this procedure company in the Board of Directors lay witness to its complete professionalism. zz announces the results of voting on issues and specifies the quorum and parties who voted for Accounting for the structure of the company’s each voting option share capital, 95.68 % of which is owned by JSC Gazprom, top executive management membership zz publishes the minutes of the General by majority stakeholders in the company Board of Shareholders’ Meeting on the company’s Directors is completely justified. official website.

The Board of Directors of JSC Gazprom Neft is As at 31 December 2010, the Board of Directors largely independent of the company management. elected as of 29 June 2010 has been functioning The sole executive director in the Board of Directors' at the General Shareholders’ Meeting of the structure is the Chairman of the Management company. Board of JSC Gazprom Neft, A.V. Dyukov. The Chairman and members of the Board of JSC Gazprom Neft maintains transparency of Directors did not hold company shares during the the Board of Directors’ election procedure. The reporting year. Members of the Board of Directors company: did not enter into any transactions for purchasing or selling company shares in the reporting year. In 2010, no legal action was brought against the members of the Board of Directors.

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Information on changes in the membership of the Board of Directors in the reporting year

From the beginning of 2010 to the annual General Shareholders’ Meeting of JSC Gazprom Neft conducted on 29 June 2010, the Board of Directors of the company comprised:

1. Miller, Alexey Borisovich Chairman of the Board of Directors 2. Golubev, Valery Alexandrovich 3. Kruglov, Andrey Vyacheslavovich 4. Dubik, Nikolay Nikolaevich 5. Pavlova, Olga Petrovna MILLER, Alexey Borisovich 6. Podyuk, Vasily Grigorievich Chairman of the Board of Directors 7. Seleznev, Kirill Gennadievich 8. Dyukov, Alexander Valerievich 9. Mikheev, Alexander Leonidovich Born in 1962, graduated from N. A. Voznesensky 10. Alisov, Vladimir Ivanovich. Leningrad Finance and Economics Institute. Ph.D. in Economics. No other changes were made in the membership of the Board of Since 2001 – Chairman of the Management Directors prior to 29 June 2010. Board, JSC Gazprom. Since 2003 – Deputy Chairman of the Board of As at 31 December 2010, the Board of Directors has been functioning, Directors, JSC Gazprom. elected as of 29 June 2010 has been functioning at the annual General Shareholders’ Meeting of the company.

GOLUBEV, Valery Alexandrovich

Born in 1952, graduated from V. I. Ulyanov (Lenin) Leningrad Electrotechnical Institute and the Academy of National Economy under the aegis of the Government of the Russian Federation. 2003-2006 – Member of the Management Board of JSC Gazprom. 2005-2006 – Head of the Department for Investments and Construction, JSC Gazprom, General Director, Gazkomplektimpex LLC. Since 2006 – Deputy Chairman of the Management Board of JSC Gazprom.

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KRUGLOV, Andrey Vyacheslavovich PAVLOVA, Olga Petrovna

Born in 1969, graduated from the St. Petersburg Born in 1953, graduated from the Far Eastern Technological Institute of the Refrigeration State University. Candidate of legal sciences. Industry specialising in Low Temperature Since 2003 – Head of the Property Management Machinery and Physics. and Corporate Relations Department, JSC Gazprom. Ph.D. in Economics. Since 2004 – Member of the Management Since 2004 – Deputy Chairman of the Board of JSC Gazprom. Management Board of JSC Gazprom, Head of the Financial and Economic Department, JSC Gazprom.

DUBIK, Nikolay Nikolaevich KALINKIN, Alexander Vyacheslavovich

Born in 1971, graduated from the Lomonosov Born in 1957, graduated from Moscow Gubkin Moscow State University. Institute of Oil and Gas. 2005-2008 – Deputy Head of the Legal Since 2002 – Deputy Head of Gas, Gas Department, JSC Gazprom. Condensate and Oil Production Department in 2008 – First Deputy Head of Legal Department, JSC Gazprom. JSC Gazprom. Since 2008 – Head of Legal Department, JSC Gazprom, member of the Management Board of JSC Gazprom. Honoured lawyer of the Russian Federation.

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SELEZNEV, Kirill Gennadievich MIKHEEV, Alexander Leonidovich

Born in 1974, graduated from D.F. Ustinov Baltic Born in 1944, graduated from the Oil and Gas State Technical University, and St. Petersburg Department of the Gubkin State University of Oil State University. Ph.D. in Economics. and Gas. Since 2002 – Head of the Department for Since 2003 – First Deputy Head of Gas and Marketing and Processing of Gas and Liquid Liquid Hydrocarbons Processing and Marketing Hydrocarbons. Department at OJSC Gazprom. Since 2003 – Member of the Management Board of JSC Gazprom. Since 2004 - JSC Gazprom, Director General, LLC Mezhregiongaz (from 2010 LLC Gazprom Mezhregiongaz).

DYUKOV, Alexander Valerievich ALISOV, Vladimir Ivanovich

Born in 1967, graduated from the Leningrad Born in 1960, graduated from the Law Faculty Order-of-Lenin Shipbuilding Institute. In 2001, of the A.A. Zhdanov Leningrad State University. obtained an IMISP MBA degree. 2004-2007 – Head of the Legal Directorate of 2005-2006 – President of JSC SIBUR Holding. JSC Gazpromregiongaz. 2006 - Director General, Sibur LLC. 2007-2008 – Deputy Head of the Legal Since 2006 – Chairman of the Board of Directors, Department of JSC Gazprom. JSC SIBUR Holding. Since 2008 – First Deputy Head of the Legal 2006-2008 – President of JSC Gazprom Neft. Department of JSC Gazprom. Since January 2008 – Chairman of the Member of the Russian Lawyers’ Association, Management Board, Director General, Member of the Expert Committee for Corporate JSC Gazprom Neft. Governance at FFMS of Russia. In 2010, by the Order of the President of the Russian Federation, awarded with title of honour 'Honoured Lawyer of the Russian Federation'.

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JSC GAZPROM NEFT BOARD OF DIRECTORS’ zz Company budget planning and financing: ACTIVITIES IN 2010 –– Approved JSC Gazprom Neft’s budget plan for 2010 and 2011. 2010 was a year of active work for JSC Gazprom Neft’s Board of –– Approved JSC Gazprom Neft’s Costs Directors. Compared to 2009, twice as many meetings of the Board Optimisation Programme for 2010 and 2011. of Directors were held in the period under report. From 2010, meetings –– Reviewed forecasted indices of JSC Gazprom in presentia are held at least once every two months, according to best Neft’s Budget and Costs Optimisation practices of corporate guidance. This allows the Board of Directors Programme until 2013. exercise its duties most efficiently. The number of questions considered –– Approved a number of borrowing transactions. by the Board of Directors has increased in proportion to the number –– Approved transactions providing surety for of meetings. the liabilities of JSC Gazprom Neft Group companies. In the Quarter 1 of 2010, the Board of Directors approved the –– Approved the issue of JSC Gazprom Neft’s Transaction Settlements Procedure, which significantly broadened the exchange and corporate bonds. competency of the Board of Directors. This was a result of considering the company's most critical and challenging transactions.. zz Corporate sphere: –– Approved JSC Gazprom Neft’s Dividend Policy. –– Approved the Transactions Settlement The main activities of the Board of Directors Procedure and JSC Gazprom Neft’s in 2010 are: Communication Procedure with companies and organisations where JSC Gazprom Neft holds zz Strategic and investment planning: stocks and shares. –– Approved JSC Gazprom Neft’s Strategic –– Approved the Procedure on Remuneration and Development Concept until 2020. Compensation to JSC Gazprom Neft’s Board of –– Approved JSC Gazprom Neft’s Investment Directors. Programme in 2010 and 2011. –– Made a range of decisions on corporate matters. –– Reviewed forecast investment plan until 2013. –– Recommended remuneration to members of –– Reviewed the progress status of the the Board of Directors and Auditing Committee 'Associated Gas Recovery and Usage based on 2009 performance. Efficiency Improvement' medium-term investment programme for 2008-2010. zz Miscellaneous: –– Approved the concept of JSC Gazprom Neft –– Approved a range of transactions of interest. quitting the oil-related services business. –– Reviewed the question of JSC Gazprom Neft’s –– Reviewed information on JSC Gazprom Neft’s Management Board members participating in operations in the Middle East and Cuba. governing bodies of other organisations. –– Approved the proposed list of JSC Gazprom –– As part of corporate restructuring, made a Neft’s strategic targets until 2020. number of decisions concerning adding/ –– Reviewed the principles and procedure of JSC withdrawing the company's participation in Gazprom Neft’s investment decision-making. other organisations. –– Analysed the financial and economic –– As part of the sports season, approved sponsor efficiency of JSC Gazprom Neft’s participation support to sport clubs in areas of SC Gazprom in investees’ charter capital. Neft's presence : FC Zenit and HC SKA. –– Approved JSC Gazprom Neft’s Petroleum Products and Liquefied Gas Marketing The company sends MD&A management reports Strategy. (management’s discussion and analysis of financial –– Reviewed the report on preliminary results of conditions and results of operation) to members activity, current positions, future plans and of the Board of Directors every quarter. This is an JSC Gazprom Neft’s strategy to strengthen efficient additional tool that informs members markets of petroleum product sales in CIS of the Board of Directors about results of the countries in the Central Asian Region. company’s operations, envisaged by the Charter and Regulation of JSC Gazprom Neft Management.

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Committees of the Board of Directors The Audit Committee ensures constructive communication with the external auditor, bodies The Board of Directors of JSC Gazprom Neft has supervising the company's financial and economic set up two committees to ensure the Board's activities, and the company's internal audit units. effective activity: the Audit Committee and the Human Resources and Remuneration Committee. In 2010, the Audit Committee’s activities were The purpose of establishing the committees is performed in accordance with a plan. The preliminary and in-depth study of issues falling Committee's activities are directly related with the within their competence. The set-up procedure Work Plan of the Board of Directors, and include and committees’ activities are regulated by the consideration of financial activities and investment regulations on each of these committees. planning issues.

The Audit Committee of the Board of In 2010, the Audit Committee: Directors of JSC Gazprom Neft zz made decisions on attracting external financing The Audit Committee assists the Board of the for JSC Gazprom Neft Directors in monitoring the company’s financial and economic performance. It does this by evaluating zz reviewed a number of issues relating to the an internal control system, including mechanisms company's issue of borrowing, surety and of control over preparing and presenting financial guarantees under obligations of subsidiary and statements and other statements, assessing their affiliated structures completeness and fairness, and monitoring the risk management system. zz analysed conditions of a number of transactions where interest is held

zz reviewed the JSC Gazprom Neft Investment Programme and forecast for 2013 and recommended it for approval by the Board of Statistics of the Board of Directors’ members' Directors participation in meetings zz analysed the company's business plan and Member of the Board of Directors Number of meetings in budget draft (financial) for 2011. This included presentia in which the member Gazprom Neft Group's financial borrowing of the Board of Directors programme forecast for 2013. The Board of participated/total number of Directors approved the budget, based on the meetings in presentia Committee's recommendation Alexey Borisovich Miller 7/7 Chairman of the Board of Directors zz preliminarily reviewed the draft of the JSC Valery Alexandrovich Golubev 7/7 Gazprom Neft Cost Optimisation (Reduction) Programme in 2011 and forecast indices until Andrey Vyacheslavovich Kruglov 7/7 2013 Nikolay Nikolaevich Dubik 5/7 Olga Petrovna Pavlova 7/7 zz analysed execution of the financial borrowing Kirill Gennadievich Seleznev 6/7 programme and debt-portfolio management of Gazprom Neft Group in 2010 Alexander Valerievich Dyukov 7/7 Alexander Leonidovich Mikheev 7/7 zz reviewed a number of corporate issues: Vladimir Ivanovich Alisov 7/7 Vasily Grigorievich Podyuk 3/4 (total number of meetings –– preliminary review of the Annual Report Member of the Board of Directors until in presentia held until 29 June draft for 2009 29 June 2010 2010) Alexander Vyacheslavovich Kalinkin 3/3 (total number of meetings –– analysed the JSC Gazprom Neft 2009 annual Member of the Board of Directors since in presentia held since 29 June financial statements 29 June 2010 2010)

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–– assessed the external auditor’s report zz reviewed the draft of the company’s 2009 concerning JSC Gazprom Neft’s 2009 Annual Report annual financial statements zz recommended the amount of remuneration –– recommended an external auditor and made to members of the Board of Directors and the recommendations concerning his fee Audit Committee of JSC Gazprom Neft

–– reviewed the project of profit allocation zz reviewed procedures for holding the General based on the results of the activity in 2009, Shareholders’ Meeting. and recommended a part of net profit to be allocated to dividend payout. Based on the Human Resources and Remuneration Committee's recommendation, the company As of 31 December 2010, the Audit Committee adopted a procedure to define the amount of comprised: remuneration and compensation for members of the Board of Directors. 1. Kruglov, Andrey Vyacheslavovich Chairman of the Committee The most significant project implemented by the 2. Pavlova, Olga Petrovna Human Resources and Remuneration Committee in 3. Dubik, Nikolay Nikolaevich. 2010 was approving the procedure for appraising of the Board of Directors’ performance efficiency. In 2010, the Audit Committee's composition The Committee recognised that it was necessary remained the same. to annually appraise JSC Gazprom Neft’s Board of Directors’ performance. Human Resources and Remuneration Committee of JSC Gazprom Neft’s Board Over the entire period under report, the Human of Directors Resources and Remuneration Committee comprised: In accordance with the regulation on Human Resources and Remuneration Committee, the 1. Pavlova, Olga Petrovna Committee's main purpose is to perform a Chairman of the Committee preliminary in-depth study of issues referred to 2. Kruglov, Andrey Vyacheslavovich the competency of the Board of Directors. It also 3. Dubik, Nikolay Nikolaevich. prepares recommendations for decision-making by the Board of Directors, regarding the company’s Following election at the Annual General Meeting, activity in human resources management and the new Board of Directors resolved not to change remunerating members of the management body the composition of the Human Resources and and the Audit Committee. Remuneration Committee.

To prepare for the annual General Shareholders’ Meeting in 2010, the members of the Human Resources and Remuneration Committee:

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MEMBERSHIP OF THE MANAGEMENT BOARD

The Charter defines the structure of JSC Gazprom Neft’s executive bodies and is composed of the Management Board and Director General.

JSC Gazprom Neft’s Management Board is a collective executive body DYUKOV, Alexander Valerievich that manages the company's day-to-day operations. Chairman of the Management Board, Director General of JSC Gazprom Neft

In accordance with JSC Gazprom Neft’s Born in 1967, graduated from the Leningrad Charter, the Board of Directors establishes Order-of-Lenin Shipbuilding Institute. In 2001, he the Management Board, upon assignment obtained an IMISP MBA degree. of JSC Gazprom Neft’s Director General. The 2005-2006 – President of JSC SIBUR Holding company Board of Directors shall determine the 2006 – Director General of SIBUR LLC Management Board member’s term of tenure. Since 2006 – Chairman of the Board of Directors, Internal documents of JSC Gazprom Neft define JSC SIBUR Holding professional qualification requirements for 2006-2008 President of JSC Gazprom Neft members of JSC Gazprom Neft’s Management Since January 2008 – Chairman of the Board . Board of Directors, Director General of JSC Gazprom Neft The company Director General, A.V. Dyukov (elected in December 2006) is also the Chairman of the Management Board which organises his activity. In the absence of the Chairman of the Management Board, his functions are exercised by one of four elected deputies of Chairman of the Management Board (V.V. Yakovlev (First Deputy), V.V. Baranov, B.S. Zilbermints, and A.M. Cherner).

As of 31 December 2010, JSC Gazprom Neft’s Management Board comprised 10 members: the Director General and his deputies, exercising their activities in accordance with the competence the Director General allocated between them.

During the year under report, the composition of JSC Gazprom Neft’s Management Board remained unchanged. In 2010, no legal action was brought against the Director General or members of the Management Board.

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YAKOVLEV ZILBERMINTS CHERNER Vadim Vladislavovich Boris Semenovich Anatoliy Moiseevich Deputy Chairman of the Management Deputy Chairman of the Management Deputy Chairman of the Management Board, First Deputy Director General - Board, Deputy Director General for Board, Deputy Director General for Financial Director Exploration and Production Logistics, Refining and Distribution

Born in 1970, graduated from Born in 1967, graduated from the Born in 1954, graduated from Moscow Engineering Physics Geology Faculty of Gubkin Russian Groznyy Oil Institute. Institute, Higher School of Finance State University of Oil and Gas in Positions held over the past five at the International University in 1997. Was awarded a Masters years: Moscow. In 1999, he qualified as Degree in economics by Southern Since 2006 – Vice-President of a Member of the Association of Methodist University (Dallas, USA). JSC Gazprom Neft for Refining and Chartered Certified Accountants In 2007, he completed programme Distribution. (ACCA). In 2009, he obtained a for general managers in business Since January 2008 – Deputy diploma from the British Institute of school at Harvard University. Chairman of the Management Directors (ID). 2002 -2008 – Regional Director Board, JSC Gazprom Neft, Deputy 2005-2006 – Deputy Director of LUKOIL Overseas Service Ltd. Director General for Logistics, General for Economics and Finance, in Kazakhstan. Refining and Distribution. In charge LLC SIBUR-Russian Tyres. Since February 2008 – Deputy of oil refining, logistics and sales of 2006-2008 – Head of the Budget Director General for Exploration oil and petroleum products. Planning Department, JSC Gazprom and Production, JSC Gazprom Neft. Neft. In charge of reserves, geology, Since January, 2008 – Deputy exploration and production. Chairman of the Management Board, JSC Gazprom Neft, Deputy Director General for Economics and Finance. In charge of economics and finance. Since May 2010 – First Deputy Director General - Financial Director. In charge of economics and finances in the company.

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BARANOV BARYSHNIKOV DYBAL Vitaly Vitalyevich Vladislav Valerievich Alexander Mikhailovich Deputy Chairman of the Management Member of the Management Member of the Management Board, Board, Deputy Director General for Board, Deputy Director General for Deputy Director General for Corporate Administration International Business Development Communications

Born in 1966, graduated from Born in 1965, graduated from the Born in 1966, graduated from St. Petersburg University of Military Krasnoznamenny Institute. Leningrad Electrotechnical Institute. Economics and Finance with a 2002-2009 – Director of JSC 2005-2007 – Chairman of degree in Economics and Production Gazprom rep office in China, the the Board of Directors of Management. regional rep office in the Asia-Pacific OJSC Gazprom-Media. 2008 – London Business School Region. 2007-2008 – Vice-President of (London, UK), MBA, Senior Third Class Counsellor of State of the JSC Gazprom Neft. Executive Programme. Russian Federation. Since January 2008 – Member Since 2003 employed with SIBUR Since April 2009 – Deputy Director of the Management Board of Group first as Advisor to President General for International Business JSC Gazprom Neft, Deputy for General Matters, Head of the Development. Director General for Corporate President’s Administration. Since November 2009 – Member Communications. Since May 2006 – Vice-President for of the Management Board of Responsible for information and Managerial Matters at SIBUR. JSC Gazprom Neft. regional policy, interior corporate Since March 2009, employed Supervises matters related to and marketing communications. as Deputy Director General for international business development Managerial Matters at JSC Gazprom and relations with international Neft. partners. In June 2009, he was elected Member of the Management Board of JSC Gazprom Neft.

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ILYUKHINA KRAVCHENKO ANTONOV Elena Anatolievna Kirill Albertovich Igor Konstantinovich Member of the Management Board, Member of the Management Board, Member of the Management Board Deputy Director General for Corporate Deputy Director General for Foreign Deputy Director General for Security and Legal Matters Assets Management

Born in 1969, graduated from Born in 1976, graduated from Born in 1951, graduated from the Ulyanov (Lenin) Saint Petersburg the Lomonosov Moscow State Leningrad Aeronautic Engineering State Electrotechnical University University, the Open British Institute. and from Saint Petersburg State University, IMD Business School. 2000-2005 – Director General of University. Doctor of Science in Economics, the St. Petersburg State Unitary In 2001 was awarded a Ph.D. in Professor. Enterprise Informatika. economics. 2004-2007 – Administrative 2005-2007 – Vice-President for 2001-2007 – Deputy Director Director, OJSC MCC Eurochem. Security at JSC Sibneft. General, FGUP Rublevo-Uspensky Elected many times as member of Since 2007 – Deputy Director LOK (medical and recreational the boards of directors of major General for Security at complex) of the Property companies. JSC Gazprom Neft. Management Department of the 2007-2008 – Vice-President of President of the Russian Federation. JSC Gazprom Neft. Prior to employment with 2008-2009 – Deputy Chairman JSC Gazprom Neft, he held the of the Management Board of position of Executive Director JSC Gazprom Neft, Deputy Director of Northwestern Investment General for Managerial Matters, Company LLC. JSC Gazprom. Since January 2008 – Member Since February 2009 – Director of the Management Board of General of the Serbian oil company JSC Gazprom Neft, Deputy Director NIS. General for Corporate and Legal Since March 2009 – Deputy Matters. Director General for Foreign Assets Responsible for providing legal and Management at JSC Gazprom Neft. corporate support to the company’s activities.

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Activities of JSC Gazprom Neft’s Additionally, two extended meetings of JSC Management Board in 2010 Gazprom Neft’s Management Board were held. Heads of the company’s structural divisions JSC Gazprom Neft’s Management Board considers and representatives of subsidiary and affiliated matters according to a plan with respect to companies participated. The meetings aimed to decisions of the General Shareholders’ Meeting, analyse the company’s activities based on the the company Board of Directors, and matters results of 2009 and objectives for 2010 (during introduced by Director General and members of the first meeting in March 2010) and six months the Management Board. of 2010 (during the second meeting in September 2010). The work plan of the Management Board is also developed based on proposals by heads of JSC There is a structured, objective programme for Gazprom Neft’s structural divisions. remunerating top and senior company managers. This ensures a link between short-term goals and In 2010, the Management Board of JSC Gazprom the amount of remuneration. The system for Neft held 22 meetings and 7 votes discussing the remunerating company management in general following key issues: follows market principles of remuneration and comprises three components:

zz Updated versions of strategies per direction of zz Monthly remuneration for work duties in activity (in accordance with the Development accordance with the work contract and the Strategy of JSC Gazprom Neft until 2020). company’s staff schedule. This is based on a zz Proposals for developing the General Oil system of grades, in accordance with which, Industry Development Scheme until 2020. each grade corresponds to a certain range of zz Optimizing the corporate centre organisational official salary, specific amount of bonus and structure. additional compensations. zz JSC Gazprom Neft’s consolidated Business Plan for 2011-2013. zz Annual remuneration based on results of zz Risk management system. achieved key performance indicators (KPI). zz Programme of non-government pension A range of KPI is approved for each manager coverage in the companies. with the final amount of annual remuneration zz Corporate culture development. depending on performance. Individual zz Corporate rebranding. objectives include a balanced combination of zz Internal communications. indicators where EBITDA is the main indicator in the chart of every top manager. JSC Gazprom Neft’s Management Board also heard reports from heads of structural divisions zz Long-term motivation. The company approved in 2010. a long-term motivation programme based on the company’s stock value increment in a three- year period applicable to top managers.

Information on JSC Gazprom Neft Shares held by members of the Board of Directors and Management Board (as of 31 December 2010)

Members of the Board of Directors and Number of Common Share in Authorised Management Board, JSC Gazprom Neft Shares Capital, % Dyukov, Alexander Valerievich 123 943 0.002614114 % Yakovlev, Vadim Vladislavovich 4 896 0.000103262 % Zilbermints, Boris Semenovich 20 000 0.000421825 %

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TOTAL AMOUNT OF REMUNERATION TO THE MEMBERS OF THE BOARD OF DIRECTORS AND MANAGEMENT BOARD

In accordance with the decision made by the The total amount of remuneration paid to General Shareholders’ Meeting, members of the members of the Board of Directors in 2010, based Board of Directors who do not hold positions in on results of work in 2009, was 81 mn RUB. The the company’s executive bodies (are not executive remuneration amount includes individual income directors), based on results in 2009, were granted tax. remuneration to the amount of 0.005 % of EBITDA according to data of JSC Gazprom Neft’s Income earned by the members of the consolidated financial statements. This was in Management Board in 2010 was 484 mn RUB. accordance with US GAAP standards in 2009. Payments included salary for the reporting period; taxes assessed on salary and other mandatory In addition to the base portion of remuneration, payments to the relevant budgets and extra- the members of JSC Gazprom Neft’s Board of budgetary funds; payment for annual paid leave Directors received additional remuneration for for work in the reporting period; and treatment executing functions of the Chairman of the Board and medical expenses. of Directors (50 % of the amount for remuneration of a member of the Board of Directors), member No additional remuneration was paid to the of the Committee of the Board of Directors (10 % members of the Management Board for work in of the amount for remuneration of a member management bodies of JSC Gazprom Neft or its of the Board of Directors) and Chairman of the affiliated entities. Committee of the Board of Directors (50 % of the amount for remuneration of a member of the Board of Directors).

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HEALTH, SAFETY AND ENVIRONMENT

Gazprom Neft's leadership strategy not only includes operational Strategy and management and financial indicators. Expanding its operations and achieving new production goals also means improving its environmental management Key tasks in the company's approach to health, quality and work-safety activities. The company set the objective to safety and environment are: become one of the leading worldwide oil brands in industrial and environmental safety and occupational safety. zz developing and introducing an integrated system for complying with environmental legislation requirements in regions of the company's presence in Russia and abroad

Today, the company has created the basis for zz creating a unified regulatory and procedural achieving this objective. There is now a unified base and effective introduction into the corporate health, safety and environment company’s affiliated companies policy. Environmental Safety, the Company Operations Standard, was developed and zz ensuring systematic and effective minimisation introduced, alongside procedural documents for of negative environmental impact resulting implementing the standard. This applies when from operations, and removing the negative re-cultivating disturbed and oil-contaminated impact of previous activities. land, handling production waste, and assessing the environmental safety of purchased assets. The above tasks are complex closely interrelated. The company is successfully implementing the Their success requires precise coordination integrated management system in this area. A set of all company blocks, divisions and affiliated of regulatory and procedural guidelines reflecting companies. Implementing unified health, safety this innovative approach to environmental and environment (HSE) policy is ensured by management is also being introduced. Additionally, the organisational governance structure and the company is developing mechanisms for integrated health, safety and environment actively involving company employees in this management system. work, and interacting with the state and society. The company purposefully implements projects aimed at minimising the environmental impact of its oil producing, oil refining and sales companies. Successfully implementing these projects enables the company to consistently minimise the negative environmental impact of its operations – and maximise its use of natural resources.

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In 2008, the company began realising a zz Improve quality of incidents investigation. programme for implementing the requirements of the policy and Integrated Management System zz Organise production monitoring over in the area of the health, safety and environment compliance with industrial safety requirements (HSE) programme. The programme aims to build and auditing health, safety and environment an up-to-date management system to ensure systems. effective compliance with legislation and minimize incidents. In accordance with this programme, in zz Improve quality of risks assessment and analysis 2010, the company achieved the following tasks: of the management systems status.

Introducing the Health, Safety and Environment Integrated Management System

2008  2009  2010  2011  2012

Statistical base Normative base Investigation quality Introducing corrective Analysing system formation development improvement action plans efficiency and correction Improving incident Training Production monitoring Developing integrated reporting discipline and audit projects and Launching continuous Incident analysis, programmes improvement of the information exchange Risk assessment system and work processes Management system condition analysis

Achieving these tasks became possible based and organise its pilot introduction at several large on the results of previous periods, detailed in enterprises of the company. JSC Gazprom Neft’s 2010 report on sustainable growth. These included improving discipline and Auditing is an integral part of introducing the HSE transparency of reporting incidents, and creating management system. Regular audits allow the a normative base that allowed systematisation of company to evaluate its current status and situation work and a unified approach to safety problems at with new developments and establish justified all company enterprises . recommendations to improve the system. For the first time in 2010, the company conducted the Compliance with legislative and corporate HSE management system audit in four subsidiary requirements at the company’s facilities is regulated companies. The audit was performed by groups of based on a unified approach. This was established auditors comprising representatives of subsidiary in 2010, under the corporate standard 'Integrated companies of various company operation profiles Production Monitoring over Compliance with with respective certification. The audit results Requirements of Normative Legal Acts and allowed the company to reflect clearly on the Corporate Standards in sphere of Industrial Safety'. condition of current systems. The standard reflects the innovative approach to monitoring production and defining safety Based on recommendations from audit results, assurance as a business process aimed ultimately at measures to improve management systems were reducing cost and maximising business economic developed in affiliated companies. The audit efficiency. The standard was subjected to a range also became a platform to exchange experience of expert reviews and approved by supervisory between affiliated companies. The company plans authorities. In 2011, the company plans to develop to continue this work in 2011. software that supports the standard’s processes

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Ensuring the environmental management Lost Time Injury system functions stably requires respective Frequency Rate (LTIFR) staffing. Gazprom Neft devotes special attention to improving professional and qualification 1,5 Source: knowledge of employees working in this area. The Company data company organises regular training of managers 1.36 and specialists responsible for environmental 1,2 safety and production waste disposal. In 2010, 749 managers and specialists took environmental safety training. 0,9

0.76 0.76 The HSE management system applies to third-party 0,6 organisations providing services to the company. Therefore, Gazprom Neft promotes developing 0.36 environmental accountability, following high 0,3 industrial safety requirements for the company’s suppliers. In 2010, Gazprom Neft adopted the 0 Standard 'Procedure of Contractors' Management 2007 2008 2009 2010 and Organisation of Interaction on Health, Safety and Environment Issues'. Protecting employees’ work and health requires mutual responsibility and structural interaction Industrial and occupational safety between the company management and trade unions. Mutual obligations on these matters are The company strives to continuously improve reflected in collective agreements. safety levels and consistently lower risks of injuries, occupational diseases and accidents at work. Minimising injuries at work. Thanks to introducing safety standards and programmes to implement the Since 2008, the company developed and HSE Policy, in 2010 indicators of occupational injuries introduced the 'Health, Safety and Environment decreased. Risks Identification, Assessment and Minimisation Procedure' corporate standard. This supplements Developing safety culture is a prerequisite for the corporate integrated risk management system the company to achieve its HSE goals. Managers and allows risk minimisation measures in such should play the leading the role in this area. situations where the human factor, which cannot Safety depends on their compliant decisions and always be quantified, comes to the fore. The process behaviour at production facilities. So in 2010, proposed in this document is based on qualitative Gazprom Neft organised 'HSE Leadership for risk assessment. The company’s specialists compiled Managers' workshops. risk assessment analysis cards for all types of works and operations performed. Results of this assessment More than 200 top and medium-level managers allowed the company to develop specific measures in the corporate centre and subsidiary companies to minimise and exclude risks. Managers use card took part. Workshop participants reviewed key information when briefing those performing work, components of efficient management behaviour as while drawing up written permits for extremely HSE leader and developed plans to improve safety hazardous work and developing instructions. The culture in their divisions. process of risk-assessment analysis and compiling respective cards became a tool to improve the safety Transport safety. Since 2009, the company has culture. The company’s employees are involved in this been implementing a number of measures to process. Participating in the process allows them to ensure transport safety. These include developing clearly see their role and accountability in improving normative documents, conducting safety months industrial safety. and organising personnel training under various

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programmes. This approach has proved successful. industrial waste generation and disposal. As a In 2009, the number of injured in traffic incidents socially responsible organisation, JSC Gazprom halved, and in 2010, the company saw a decrease Neft understands the impact of its operations on in traffic incidents. The relative incident rate also the environment and strives to ensure the best indicates improvements in transport safety. possible preservation and restoration of natural resources. The company also endeavours to Personal protective equipment. The company comply with every requirement of environmental has a corporate standard that defines the law, fulfil its licence obligations and minimise procedure of providing employees with personal its environmental impact in all areas of oil protective equipment (PPE). PPE purchased by the production, oil refining and in the sales system. company complies with Russian and European safety requirements. Costs for PPE in 2010 were The company devotes much attention to indirect 13,000 RUB per person. environmental impact, by producing goods with improved environmental characteristics. Accidents prevention. Gazprom Neft’s HSE policy and standards focus on minimising risks Gazprom Neft actively develops and introduces and preventing accidents. Maintaining a high innovative technologies to achieve productive, level of readiness for emergencies is also a critical economic and environmental efficiency at the consideration. For this purpose, the company took same time. The company is closely monitoring emergency prevention and response measures, the quality of land, atmospheric air and water to based on action plans. The subsidiary companies identify problems and follow up in an expedient developed and introduced these plans. To be manner. ready to act in emergencies, subsidiary companies created financial and material resource reserves. The readiness of subsidiary companies for Environmental expenditure emergency responses is checked during regular training and drills. Gazprom Neft spends significant resources on implementing environmental programmes and measures. In 2010, environmental expenditure Managing environmental safety remained at the 2009 level. It included financing environmental measures to protect water from Oil companies have an inevitable anthropogenic contamination, modernising effluent treatment impact on the environment, including facilities, conservation (recultivation) of waste tank, atmospheric emissions, discharges into water, and other environmental measures. Current costs also include expenses for developing regulatory documents, environmental monitoring, industrial environmental control, improving environmental Traffic Incident rate (AAR) competence, and environmental training of specialists. 2,0 Source: Company data

1.63 1,5 1.43

1,0

0,5

0 2009 2010

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The company’s expenditure on environmental Lower emissions in refining can be attributed to measures, including using technologies that environmental measures. These include renovating minimise adverse environmental impact, refining capacities, replacing burner units, equipping significantly exceeds the company payments for reservoirs with modern emission lowering devices, environmental contamination. and introducing an installation ensuring precise and leak-proof oil loading. Implementing a large project of OJSC Gazprom Neft-Omsk Refinery’s medium- Atmospheric emissions term investment programme and constructing a new fuel hydrotreatment facility, will minimise the When acquiring new assets and developing the environmental impact of the company’s products. company’s existing enterprises, the scope of Commissioning this facility will ensure the company environmental activities also increases. Minimizing produces high-quality fuel and significantly atmospheric emissions is especially critical for minimises atmospheric emissions. producing facilities, which contribute to the major part of such emissions. The company arranged comprehensive analysis of environmental and economic efficiency of using In 2010, the company’s total atmospheric light oil vapour recovery systems at filling stations emissions increased, compared to 2009. This of affiliated companies. This included integrated relates to purchasing new assets (CJSC Gazprom assessment of capabilities of existing and future Neft Orenburg, OJSC Moscow Refinery, OJSC recovery systems to minimise power costs and NK-Magma) and increasing the number of filling ensure a high level of capturing and process safety, stations. self-sustainment of work, objective recording and recovery of captured hydrocarbons. This will help the The company minimizes greenhouse gas emissions company plan introducing such systems into fuelling by implementing an associated gas disposal station construction and renovation projects. These programme. This provides for constructing gas- measures allow the company to practically prevent collecting systems and gas treatment plants, atmospheric emissions of fuel gases at filling stations including power generating capacities. by 95 %-98 %.

Additionally, minimising greenhouse gas emissions became an item of income for the company, while Utilizing water resources implementing a joint project with Mitsubishi Corporation on Ety-Pur field of Muravlenkovskneft The company’s enterprises seek to utilise water in the framework of the Kyoto Protocol. resources with maximum efficiency. In 2010,

Environmental expenditure, mn RUB Total atmospheric emission, K t

3 000 300 Source: Company data 290.2 2 617.6 2 500 250 Efﬂuent-treatment 2072.8 expenditure 200 2 000 Waste-management 201.5 expenditure Water -use expenditure 159.4 161.8 1 500 150 157.2 1279.6 Regulatory-impact expenditure 1 000 Environment-protection 100 investment 607.6 Other 500 50

Source: 0 Company data 0 2007 2008 2009 2010 2006 2007 2008 2009 2010

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water consumption for the company’s own Water consumption, mn m3 needs reduced by 16 % compared to 2009. The company’s enterprises carefully monitor the impact 120 Source: of production on the condition of water bodies. Company data

Modernising facilities and reconstructing treatment 100 105.1 plants enables consistent quality improvement of industrial effluents. 87.8 80 79.8 82.0 73.9 Waste treatment 60

90 % of waste generated in the company’s 40 activities account for low hazard and essentially

non-hazardous waste (IV and V class). Drilling 20 waste represents the largest share of accumulated waste. 0 2006 2007 2008 2009 2010 When Gazprom Neft-Khantos LLC introduced pitless technology in drill production wells, this decreased waste generation in 2010. It also transferred drilling waste into the ownership of The company works to restore soil fertility at oil- drilling contractors. contaminated land disturbed through pipeline breakages at the company’s fields and return such Minimising waste that would inevitably have for designated utilisation. Preventing accidents is a negative environmental impact is a key also a priority task. environmental task and critical component of production efficiency improvement. Waste In 2010, the amount of spilled oil decreased minimisation tasks in Gazprom Neft Group are compared to 2009. This is a result of overhaul, settled by reducing generation and disposal anticorrosion coating and inhibiting pipeline volumes. Therefore, a unique drilling waste systems in the framework of the Pipeline Integrity processing plant at Gazprom Neft-Khantos Improvement programme. processes the waste into non-hazardous liquid. This is then injected under pressure into the bed at around 2,000 m depth. Preserving biodiversity

The company’s development strategy provides Land utilisation and remediation for a significant increase in exploration and production activities, including developing oil fields Remediation of land disturbed during production in the Russian Arctic shelf. To effectively minimise activities aims to minimise the company's negative impact from offshore operations and to environmental impact. Gazprom Neft must solve include additional environmental requirements tasks relating to current activities and accumulated in field development projects, the company waste. Programmes for remediating disturbed assesses the potential impact of operations related land, slurry ponds, and sites where industrial to exploration, production and transporting waste is collected, include providing an inventory of hydrocarbons on marine ecosystems. disturbed land, assessing land contamination level, and selecting of the most effective technology for disturbed land remediation. Independent experts assess the efficiency of the company's remediation operations. In 2010, 696 ha of contaminated land were remediated.

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Share of waste generation Land remediation per year, 2006 – 2010, ha by directions of activities, 2009-2010

100 % 700 Source: 696.3 Company data 639.7 600 80 %

500

60 % Oil production 400 Reﬁning Sales 300 40 % Services

200 213.5 180.2 20 % 148.0 100

Source: 0 Company data 0 2009 2010 2006 2007 2008 2009 2010

The data on remediation at slurry ponds and oil-contaminated land is provided with respect to the amount of purchased assets. The amount of disturbed land, including oil-contaminated land increased in 2010 due to acquiring new assets: CJSC Gazprom Neft Orenburg, OJSC Moscow Refinery, and OJSC NK-Magma.

With participating specialists from the Russian in the south-eastern part of the Barents Sea and representation of the World Wildlife Fund (WWF), adjacent areas of the Kara and White Seas in 2010, the company assessed the condition and impact on the marine mammal population in the zz Developed proposals to minimise impact Pechora Sea. The assessment: on sensitive marine mammal species and inhabitation, and to include in plans zz identified the most sensitive rare marine environmental activities in the period of mammal species licence validity during the company’s offshore operations. zz assessed the condition of ecosystem components (including baseline studies) which are key for identifying rare marine mammals Utilizing associated gas (AG) species In February 2008, the company’s Investment zz defined main anthropogenic impact factors Committee adopted a medium-term investment on sensitive marine mammal species, resulting programme for 2008-2010 on AG utilisation from planned hydrocarbons production and and more efficient use. During this period in the transportation operations on marine ecosystems framework of the programme, the company financed measures aimed at implementing AG zz prepared proposals to minimise anthropogenic collection and transport projects at Ety-Pur field, impact on sensitive marine mammal species and Shinginskoye field and Yuzhno-Priobskoye licence inhabitation area; and constructing power generation facilities at Chatylkinskoye, Zimneye, Kholmistoye fields and zz prepared analytical materials regarding species Yuzhno-Priobskoye licence area. composition and the status of marine mammals

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In 2010, the company’s AG resources were around Level of AG disposal 4.2 bn m³ and the level of AG utilisation was 54.6 %, in JSC Gazprom Neft, % compared to the planned 49.3 %. The increase of actual level versus the plan was mainly achieved by 60 Source: optimising CJSC SIBUR Holding’s gas-processing Company data 54.6 % capacity loading and connecting the Ety-Pur field 50 to the AG transport and processing system. 46.8 % 48.1 %

40 To maximise AG utilisation and minimise reputation risks, the company developed a medium-term 35.7 % 30 investment programme to increase the efficiency of AG utilisation in 2011-2013. This comprised three regional projects: 20 zz Project for Yuzhno-Priobskoye licence area. zz Noyabrsk integrated project. 10 zz Tomsk integrated project.

0 In the framework of MIP implementation in 2006 2008 2009 2010 2011-2013, JSC Gazprom Neft is strengthening cooperation with CJSC SIBUR Holding. In particular, at Noyabrsk region fields, the company plans to expand AG collection and the external transport system. In turn, CJSC SIBUR Holding will modernise and expand its gas-processing capacities.

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INNOVATIVE ACTIVITIES

Developing innovative activities in priority directions is vital to the Gazprom Neft will spend 760 mn RUB more on company’s successful long-term development. research and development (R&D).

JSC Gazprom Neft's strategic goal is to produce Exploration and production 100 mn TOE by 2020. Achieving the planned target innovations increment of reserves from the current 1.5 bn t to 2–2.2 bn t should be ensured in the foreseeable The main objective in the area of science and future. Taking into account the scope of the technology is to accelerate implementing and target, the sphere of Gazprom Neft’s specialists’ introducing new technologies and equipment. This efforts in innovative activities is quite wide. This will ensure dynamic development of production. includes improving oil production efficiency at the depleted resource base of traditional fields; The priority science and technology areas for developing new regions on Yamal, East Siberia; Gazprom Neft are: starting offshore operations, including the Arctic shelf – offshore of the Pechora, Kara and Barents zz using geographic methods to discover potential Seas; implementing overseas projects; acquiring gas and oil deposits competence in developing non-conventional hydrocarbons sources: bitumen, bituminous sand, zz conducting production log tests in pioneer, bituminous shale and high-viscosity oil. exploration and development wells to dissect the geological cross-section, find productive The company’s innovative development strategy horizons, assess the technical conditions of the until 2020 includes adopting a number of well, and monitor field development programmes that provide for more efficient exploration. Featuring the latest advances in zz conducting research, experimental and geology and geophysics, the programmes will methodological, pilot-plan work, to increase help minimize the company's environmental the geological and economic efficiency of impact. Taking into account that only 14 % of geophysical research, improving its methods Gazprom Neft’s extracted reserves refer today to and techniques the uncomplicated category, the company would have to create and adopt technologies to increase zz developing, testing and implementing new oil production at prematurely flooded fields and technical equipment and technologies for fields with hard-to-recover reserves and low oil studying the subsurface and natural completion, saturation. The company will continue introducing lowering expenses per tonne of produced oil the latest horizontal drilling, multilateral well -construction and sidetracking technologies. zz creating science and technology products: At the same time, due to introducing the latest design and technological documents, plans for innovative technologies, overall expenditure developing fields and producing oil, technical- should be reduced and well workover efficiency economic proposals and justifications (TEP, TEJ), should improve significantly. At the company’s including geological and hydrodynamic models, active fields, Gazprom Neft will begin introducing other documents needed for developing new an energy-saving technologies package. The fields of hydrocarbons total amount of Gazprom Neft’s investment for developing innovative exploration and zz further improving design methods and control production projects will be around 300 mn RUB. over field development at later stages, creating The anticipated effect of implementation will be a permanent geological and mathematical threefold increase on investment. According to the models. company’s medium-term strategy in 2010-2013,

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By the end of 2007, the company’s analytical The main aims of innovating in exploration are department became Gazprom Neft-NTC LLC: an to develop efficient survey complexes, improve independent corporate science production centre reserves-estimation methods, lower geological focused on geological exploration, design, control risks, and achieve precision in identifying and oil and gas production. Establishing Gazprom exploration targets. Neft’s science and technical centre has a vital objective: to transfer science and its generating In 2010, JSC Gazprom Neft conducted innovations into practical enhancements. geotechnical operations (GTO) at 1,236 wells. This resulted in extra production of 4,789,500 t In September 2009, Gazprom Neft-NTC LLC oil. adopted a concept for protecting the company’s intellectual property and innovations. This concept Among the most important results of the defines the main goals, objectives and principles company’s technology improvements are of the company’s policy on managing protection extensive use of oil production intensification and of intellectual property created by the company’s enhanced oil recovery (EOR) methods. own means or with attracted resources. In 2010, total production from the EOR In 2010, Gazprom Neft-NTC LLC spent the operations conducted in the reporting year following on science and technology: (without the carryover effect) was 1.355 mn t or 4.5 % of the company’s total output. These zz geology and exploration — 947.6 mn RUB methods allow Gazprom Neft to substantially (136 % increase compared to 2009) increase recoverable reserves and bring into production low-quality reserves (high viscosity, zz design and control over development — in impermeable reservoirs). 628.1 mn RUB (120 % increase) The company uses physical, chemical, zz planning and surveying — 291.7 mn RUB hydrodynamic and thermal recovery stimulation (266 % increase) methods. The bulk of additional production was attributable to physical methods – first and zz engineering – 492.8 mn RUB (170 % increase). foremost to hydraulic fracturing (HF) — 476 470 t. Hydrodynamic and chemical field-development Including 271.1 mn RUB (118 % increase methods used in difficult geological conditions to compared to 2009) spent on JSC Gazprom Neft’s achieve fuller reserve recovery yielded additional R&D expenditure. oil production of 483 500 t and 248 100 t respectively.

In 2009, Gazprom Neft launched 715 new Geotechnical operations in 2007-2010 wells; 232 HF were created (without HF at the new wells); 31 wells were sidetracked; and 49 Ea. Thous. t 1 500 5 000 deepened into lower beds.

4 919,3 1 194 1 228 The key factor for innovative development in 1 200 4 800 1 088 any industry is an ability to create and use new 4 789,5 1 003 technical solutions, technologies and methods. 4 705,8 900 4 649,3 4 600 Additional Applying the latest technologies becomes production, the most important criteria for a company’s thous. t competitive abilities. Number of wells, ea. 600 4 400 At Gazprom Neft’s request, specialists from 300 4 200 Gazprom Neft-NTC LLC developed the Iskender Programme and Industrial Complex. This is an instrument for analysing 'strata-well-pump' three- 0 4 000 Source: 2007 2008 2009 2010 Company data component system application efficiency. In 2010,

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Iskender PIC successfully passed pilot development from 60 % to 100 %. Squeeze cementing was on Priobskoye and Sugmutskoye fields. Utilizing performed in 90 wells and additional production Iskender PIC with the adapted multi-phase flow was 72,600 t oil. model will help reduce early equipment failures, due to optimally selecting pump equipment for In 2010, production companies of JSC Gazprom well stock with complicated geological conditions. Neft worked jointly with specialists of Gazprom Iskender can be also applied for feasibility studies Neft-NTC LLC on conformance control. 433 tasks and field development projects, analysing new were performed and additional production was production technologies’ risks, and a number of 259 000 t. of oil. Energy savings due to jobs other scientific and application tasks. Iskender done was 18 mn kW, while the total economic PIC's large-scale introduction in the company may gain from introducing this technology was, be evaluated by reducing labour costs five-fold, 846 mn RUB. totalling an annual 12.8 mn RUB. In 2010, in the framework of the Surfactant Water In 2010, the company developed a permanent Flooding on the Pilot Area of Vyngapurovskoye database of idle wells. The company can use this field project, the company performed for creating ranked lists of wells to be returned to laboratory tests to select optimum chemicals production, including those based on economic and concentrations; economic and geological- performance, the reason the well is idle, defining production justification of surfactant water GTO required to return the well into operation, flooding on a pilot area of Vyngapurovskoye field; creating additional reports, selecting submersible the pilot area for surfactant water flooding was equipment, and online working with maps and selected where the first injection with a volume data. Further software development will be of 20,000 m³ of 0.75 % surfactants solution was based on connecting to corporate databases conducted. Additional oil production resulting for faster information access and analysis. On from the project was 1,700 t, revenue from oil introducing the permanent idle stock database sales – 10.5 mn RUB. at OJSC Gazprom Neft-NNG and the branch of Muravlenkovskneft, idle wells analysis will be From December 2009 to December 2010, at speeded up 4.5 times, saving 14.9 mn RUB per fields of OJSC Gazprom Neft-Noyabrskneftegas year. and the branch of Muravlenkovskneft, jointly with Gazprom Neft-NTC LLC, non-productive injection The company studied and indentified the reduction operations were performed. reasons for accelerated corrosion on downhole equipment in production wells at Urmanskoye At OJSC Gazprom Neft-NNG: field of Gazprom Neft-Vostok LLC. Pilot testing of corrosion protection technologies and methods zz technological injection reduced by 6.4 % was planned, as well as development of the procedural base to ensure TBR from 176 to 246 zz productive injection increased (38 % increase), and if possible, to achieve TBR by 4.7 % or 249,000 m³ increase up to 365 days (135 % increase) in 2011. zz non-productive injection reduced In 2010, specialists of Gazprom Neft-NTC LLC by 27.1 % or 771,000 m³ developed and approved the integrated squeeze- cementing programme at JSC Gazprom Neft’s At the branch of Muravlenkovskneft: fields. zz technological injection reduced The company tested squeeze cementing – by 5 % or 367,000 m³ using technologies which had not previously been applied – at fields of OJSC Gazprom zz productive injection reduced Neft-Noyabrskneftegas and a branch of by 1 % or 61,000 m³ Muravlenkovskneft. Four technologies for various squeeze-cementing purposes were tested. zz non-productive injection reduced Efficiency of technology application ranged by 31.8 % or 306,000 m³.

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Non-productive injection reduction was achieved re-interpretation of geological and geophysical due to injection front shift, squeeze cementing, materials, promoting significant growth in the shutting down injection wells with injection beyond attractiveness of investment. external boundaries, and reducing fresh-water injection. Oil refining and petroleum chemistry innovations The company is continuing to develop well field tests. Trialling stationary remote control downhole A number of factors contribute to the need to metering system technologies is a real step in improve oil refining and petroleum chemistry creating 'intelligent wells' at Priobskoye and some technologies. These include technical regulations other fields. The expected effects are reliable regarding fuel quality improvement, aligning duties online information about downhole parameters, on dark and light oil products, new oil refining well mode optimisation and an oil recovery increase and petroleum chemistry products (premium of 2 %–3 %. Tuning up the model based on well brand fuels, oil, new bitumen grades, charred test results helped overcome the tendency in coal), the need to optimise and reduce operating production decline (Priobskoye field). Actual growth expenditure, the growth of dependence on foreign of production on sector 8 of Priobskoye field was catalytic agents and technologies, etc. about 24 %, and the design increase of final oil recovery was 4.7 %. The main tasks of innovative research and development activities in JSC Gazprom Neft’s oil In 2010, the company introduced 2D-modelling refining include ensuring a competitive capability in software for regional projects. Training and engineering, improving product quality, reducing workshops involving leading Russian and foreign operating costs, developing and producing specialists were arranged. Key performance new technologies, solving current engineering indicators of introduction were defined. Based problems and developing the company’s positive on results of regional operations, the company innovative image. discovered future reserves totalling 250 mn t of oil.

The increase of C1+C2 oil reserves was 4,200,000 t The main directions of R&D in 2010 relate to safety (six exploration wells). and the environment, production technologies and product quality conformance, rational use The Geology and Exploration department of of resources including inspecting plants, and Gazprom Neft-NTC LLC implemented a number of providing recommendations to optimise operation projects: among which the most important can be modes. identified. The Caspian project – a seismic model of the Central and South Caspian was created – The company pays special attention to basin planning was performed, and prospects were modernisation and new construction for meeting identified. the technical regulations 'On Requirements for Motor and Aviation Gasoline, Diesel and Marine In the framework of the project, the prospects for Fuel, Jet Fuel and Residual Fuel Oil', which came into the Turkmen shelf were evaluated (as requested force in 2009. To meet legislative requirements, by JSC Gazprom Zarubezhneftegaz) and gained a motor fuel quality upgrade programme was high appraisal from the customer. The Noyabrsk developed for the OJSC Gazprom Neft-Omsk project included a forecast of areal development Refinery and the OJSC Moscow Refinery. of exploration targets within Jurassic oil/gas play (based on own procedure) and quantitative The Omsk refinery is currently undergoing a assessment, and licence areas for oil production large-scale modernisation programme. This aims were recommended. The Frolovsk project included to improve the environmental properties of fuel recommending licence areas for oil production. produced by the plant, extend the refining level The East-Siberian project included assessing the significantly, and expand the volume and range of resources base of Vakunaiskoye, Ignyalinskoye products produced: high-octane gasoline, diesel and Tympuchikanskoye licence areas. This was fuel, aromatic hydrocarbons, charred coal, modern based on results of completed re-processing and bituminous materials, and petroleum chemistry

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products. According to the plan, the overall Haldor Topsoe catalytic agent was loaded at the investment into modernising Omsk refinery over hydrocracking unit to ensure production of diesel 10 years will exceed 100 bn RUB. fuel with sulphur content less than 50 mg/kg.

In October 2010, an isomerisation unit for light Using Euro 4 diesel fuel in vehicles will significantly naphtha – 'Isomalk 2' – was commissioned at extend the engine’s service life, improve the Omsk refinery. This unit will produce the most vehicles’ technical characteristics, and help valuable component for high octane fuel, free from minimise combustion products emissions into the olefin and aromatic hydrocarbons. The project environment. includes engineering solutions allowing production of gasoline with a high octane level conforming In the framework of upgrading NIS refining to Euro 4 and Euro 5 standards. Introducing the capacities at the oil refinery in Pančevo (Serbia), 'Isomalk 2' isomerisation unit will enable processing construction of the light hydrocracking and of oil at deeper levels and increase production of hydrotreatment plant began in 2010. This high-octane petrol. construction will permit an increase in refining volumes up to maximum plant load: 4.8 mn t per In July 2010, a time capsule was placed at the year. This would not only cover the Serbian market construction site of the light naphtha isomerisation demands, but would create conditions to satisfy unit at Moscow refinery. This marked the start fuel export supply to the Balkan countries. Gazprom of a large-scale modernisation programme, Neft’s total investment into Pančevo refinery lasting up to 2020. The programme envisages modernisation projects equals 500 mn EUR up to reconstructing existing assets and constructing 2012. In particular, this involves constructing the new refining capacities, improving process safety, hydrogen unit at Pančevo refinery and modernising and implementing environmental projects at the and constructing the plant’s industrial infrastructure enterprise. and various environmental projects. The company will allocate 396 mn EUR for the hydrocracking In total, the company will invest over 56 bn RUB unit construction alone in the framework of overall into the refinery modernisation programme. financing. In accordance with the modernisation Installing the light naphtha isomerisation unit will programme, unit commissioning will be in the third enable the company to produce motor gasoline quarter of 2012. component with up to 90.5 grade octane number. Commissioning of this unit is planned in 2012. The unit capacity will be 650,000 t per year.

From January 2010, Moscow refinery began producing diesel fuel corresponding to Euro 4 standard for supplying the domestic market.

Previous chapter Content Next chapter Annual report 2010 119 ENERGY AND ENERGY EFFICIENCY

Gazprom Neft is working on ensuring efficient use of energy. The To reduce oil production energy supply costs in 2010, company introduces energy consumption control and reduction the company began implementing a programme measures, and develops and implements efficient energy use of oil production energy efficiency enhancement programmes. aimed at minimising power costs for oil production processes. This resulted in minimisation of specific energy consumption equal to 3.3 % (from 32.8 to 31.7 kW) in 2010 versus 2009. The main directions in enhancing energy efficiency at JSC Gazprom Neft’s group of companies include Overall energy consumption by oil producing implementing a programme for minimising energy companies in 2010 was 5,377 mn kW/h which is consumption and costs of electricity purchase by 107 mn kW (2 %) more than in 2009, while liquid optimizing the energy-preservation scheme. production volumes increased by 1.6 %.

Implementing the programme for energy saving The monitoring system and energy efficiency in oil production in 2006-2010 saved 3,538 mn promotion minimised oil losses from 96,000 RUB, including 1,401 mn RUB in 2010. to 22,000 t per year, while respective revenue increased by 365 mn RUB in four years. Since 2006, energy consumption by oil production companies increased from 4.8 bn kW to 5.4 bn Gazprom Neft is actively developing its own kW in 2010. At the same time, the electricity rate generation. As of the end of 2010, 11 % of the increased 1.8 times, from 0.9 RUB/kW in 2006 to company’s power demand was satisfied by power 1.71 RUB/kW in 2010. generation from internal generators (IG).

Use of purchased energy

2005 2006 2007 2008 2009 2010 Purchased power (minus transferred to third 4 025 062 4 746 331 5 104 650 5 378 749 5 307 669 4 886 405 parties), mW Purchased thermal energy (minus that transferred to third parties), mW GJ 5 246 5 024 6 678 3 546 3 584 4 036 Gcal 1 253 1 200 1 595 847 856 964

The project aims to reduce power costs and thus by 5 % due to commissioning new process plants reduce production costs. As of today, Gazprom (Isomalk at Omsk refinery in November 2010, Neft operates six power plants. The largest plant ELOU-AT-4 at YANOS in March 2010, and gasoline is located on Yuzhno-Priobskoye field – Gazprom isomerisation and gasoline hydrocracking catalytic Neft’s key asset – providing over 20 % to the cracking units). At the same time, the energy rate in company’s production structure. IG’s total capacity 2010 increased in Omsk region by 13 %, in Moscow to the end of 2010 was 140 mW. In December by 29 % and in Yaroslavl region by 13 %. 2010, the company commissioned the second unit of Yuzhno-Priobskoye gas turbine electrical plant OJSC Gazprom Neft-Omsk Refinery (December with a capacity of 96 mW at Priobskoye field of 2010) and OJSC Moscow Refinery (January 2011) Gazprom Neft-Khantos LLC. received statuses of subjects of the wholesale electricity market, which completes the preparatory From 2009, energy consumption by refining technical stage for further re-issue of supply enterprises rose from 2,774 mn kW to 2,982 mn contracts. This would enable minimisation of kW. Consumption increased by 7.5 %, including by expenses for electricity purchase on the electricity 2.5 % due to an oil refining volume increase, and and power wholesale market.

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Electricity consumption 146 mn RUB. The programme implemented by JSC by Gazprom Neft Group Enterprises, mn kW Moscow Oil Refinery aims to ensure a reliable and continuous power supply, due to replacing worn

10 000 out equipment and introducing respective measures with an economic effect equal to 47 mn RUB. 8 337 8 338 8 404 8 000 In 2010, power consumption by oil product suppliers was 0.089 bn kW. Energy tariffs are defined in accordance with the regional location of the oil 6 000 Oil production product supplier. Planned power consumption in Reﬁning 2011 will increase by 14.6 %, due to expanding the Oil product suppliers 4 000 number facilities and scope of services, and will be 0.102 bn kW.

2 000 The company will save up to 50 mn RUB in 2011 after taking measures to minimise power consumption at Source: filling stations. Typical fuelling stations will undergo a 0 2008 2009 2010 Company data power audit in 2011. Based on results, the company will develop a number of unified measures to be implemented by oil product supplies. This will optimise power consumption.

To limit increasing energy costs, oil refineries are Thermal energy consumption increased from implementing energy-efficiency enhancement 334,000 Gcal in 2009 to 359,000 Gcal in 2010 programmes. Gazprom Neft Omsk refinery power due to commissioning boiler plants at three fields: consumption will drop by 4.8 % to 2013. This will Priobskoye, Kholmistoye and Chatylkinskoye. provide an additional economy to the amount of Thermal energy costs in 2010 were 535 mn RUB.

Previous chapter Content Next chapter PERSONNEL DEVELOPMENT

The Company’s growing scale of business and the growing portfolio of projects and assets call for effective and high-quality human resource support, which is why a lot of attention is being paid to personnel development programmes and to HR reserves. In 2010, we also made a big step towards enhancing the corporate culture, by launching and introducing the Com- pany’s Code of Ethics.

Vitaly Baranov Deputy Chairman of the Management Board Deputy General Director for Organisational Issues 122 SOCIAL RESPONSIBILITY JSC GAZPROM NEFT AND REGIONAL POLICY

PERSONNEL, OCCUPATIONAL SAFETY AND HEALTH

Personnel development within Gazprom Neft Group is a key to levels of management to appraise and promptly successfully implementing its business strategy until 2020. monitor personnel performance. The company began reviewing the bonus system (production Gazprom Neft invests in personnel, support initiatives and innovations enterprises, Gazprom Neft-Lubricants, refining designed to enhance operation and management efficiency. The enterprises). company acts as a responsible employer, maintaining equal relations with the employees, ensuring decent wages, career opportunities and The company designed the main directions to comfortable working conditions. develop intangible incentives and social support. Due to expanding the business geography, the company is developing a concept of mobile personnel for transferring personnel in Russia Personnel management policy and abroad. and standards A grading system continued to be introduced in In 2010, in the framework of the personnel production enterprises, oil products suppliers, strategy, the company continued developing its product lines and a number of other SACs. In total, personnel incentives and social welfare standards. the grading system was introduced in 32 SACs. The standards regulate procedures for assessing The system defines unified, clear, and transparent and grading positions; the procedure for setting personnel remuneration, training and appraisal compensation packages and individual grades principles for all enterprises. for employees of the company and subsidiaries and associates of the company [SAC]; the In 2010, work began to introduce a uniform social procedure for calculating, depositing and benefit concept to Gazprom Neft Group. paying bonuses to SACs’ employees for their contribution to implementing corporate projects; The concept includes creating an integrated and the procedure for paying annual bonuses to 'corporate portfolio' standard, which would be employees and other issues. The standards form provided to all JSC Gazprom Neft’s employees, a procedural and normative base to create a and an additional range of benefits. This would be uniform wage and social benefit management selected by the enterprise depending on needs, system. the enterprise’s productivity and efficiency level ('cafeteria'). The typical portfolio will include such The company developed, approved and benefits as voluntary medical insurance, accident recommended standards for adoption by SACs. insurance, childcare allowance, death allowance, These include establishing and modifying etc. organisational structure and making changes in the payroll plan; new versions of standards Currently, a list of benefits to be included in the for preparing and approving job descriptions; company’s social programme has been defined selecting and approving candidates for vacant and benefit rates are being developed. positions, sending employees on business trips; planning and providing vacations; a new In 2010, the company paid on average version of internal regulations; and a new labour approximately 29,000 RUB of social benefits per agreement template. employee, which is 6 % less than in 2009. This insignificant decrease relates to optimizing social In 2010, we continued a large-scale project benefits in a number of SACs. At the same time, to improve the incentives and wages system all key programmes, such as voluntary medical and to develop the performance management insurance, accident insurance, free meals, etc. were system. Using indicators, this enables various retained.

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Average number of personnel, In connection with integrating NIS and Sibir employees Energy into Gazprom Neft’s structure, the average number of personnel has increased by 29 %, while 70 000 Source: the portion of Serbian personnel equals 16.4 %. Company data 64 895 The largest part of Gazprom Neft personnel – 60 000 around a third of the company's total headcount (33 %) – is concentrated in the Yamalo-Nenets 50 000 50 153 47 686 48 339 Autonomous District. The share of Omsk and 45 775 Omsk region is 13 % of company employees 40 000 (40 % of them employed at the Omsk Refinery). Moscow and Moscow region account for around 30 000 14 % of the employees, and approximately 14 %

20 000 of them work at the Head Office.

10 000 Personnel costs and wage growth 0 2006 2007 2008 2009 2010 The company ensures competitive wages and decent social benefits to its employees in line with the market trends. Average wages in the company’s enterprises grow continuously on average by 10 %–15 % per year.

Under a corporate contract of voluntary medical The 2010 average wage amounted to 50,095 RUB, insurance, the company’s employees receive which is 13.3 % higher than the year before. The doctors’ qualified consultations and treatment in overall average wage increase amounts to 72.2 % the country’s leading clinics, if necessary. for the period 2006-2010.

Today, Gazprom Neft enterprises employ over Personnel costs in 2010 increased 44.2 % 65,000 people working in more than 20 regions compared to the year before, and totalled of the Russian Federation, as well as Kyrgyzstan, 40.6 bn RUB. Kazakhstan, Tajikistan, Belarus, Serbia, Austria and Italy. A perfect employee incentive system, providing for effective work by personnel, enables the company to achieve its business objectives. Therefore, the company continues to develop and introduce Distribution of Gazprom Neft personnel by region in 2010 a comprehensive incentive system based on

1.9 % 0.6 % 1.1 % 1.4 % 14.0 % 2.8 % 12.8 % Moscow and Moscow region competitive wages, performance bonuses and St. Petersburg intangible elements. 16.3 % 2.9 % and Leningrad region Khanty-Mansiysk Autonomous District Tyumen region Social package Kemerovo region Omsk region Yekaterinburg & Collective contracts and other provisions and Sverdlovsk region regulations providing for various social benefits Tomsk region and payments to employees exceeding those 2010, % Yamalo-Nenets Autonomous District established by law are applicable in the company’s Novosibirsk region enterprises. Kyrgyzstan Yaroslavl region Chelyabinsk region The social package in most enterprises includes Serbia voluntary medical insurance, accident insurance, Belarus 3.0 % free meals, material aid for certain occasions, Other regions (less than 300 2.2 % 1.0 % 33.2 % 2.5 % 2.6 % 1.7 % employees) payment for business trips, and other allowances.

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Total personnel costs, mn RUB Average monthly wages, RUB

50 000 Source: 60 000 Source: Company data Company data

50 000 50 095 40 000 40 595.8 44 227 40 000 40 060 30 000 28 156.2 33 655 30 000 24 817.7 29 094 20 000 19 957.8 20 000 16 477.6

10 000 10 000

0 0 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

Set up in 2009, the Trade Unions and Labour According to this document: Collectives Coordinating Committee, last year reviewed at four meetings the most urgent zz a list was defined of higher education questions proposed by the chairmen of trade institutions (partners divided into two union committees. These committees represent categories) comprising strategic higher the interests of enterprises’ labour collectives in education institutions and territorial higher all key business directions of the company. Based education institutions on the Committee’s initiative during session of the company’s Management Board, such issues zz the template of a contract for cooperating with like providing employees with a second set of PPE higher education institutions was developed and overalls, establishing a non-state pension and approved insurance fund and introducing a mortgage programme were discussed. Respective guidance zz directions and programmes for financial was given to further study, and introducing and support were defined. settling recommendations of the Committee were discussed at the Management Board. Last year, Gazprom Neft company was awarded in two categories of the first rating of the Russian In 2010, the social package payments increased by higher educational institutions’ business partners, 21.5 % compared to the previous year, due to an which was arranged by the Russian Rectors’ Union: increase in the staff of Gazprom Neft Group (on the 'Largest Youth Employer' and the 'Largest average, 29,000 RUB per employee). Investor in Higher Education'.

Opening the base department, the Hydrocarbon Cooperation with educational Systems Department, in the Gubkin Russian State institutions and recruitment of young University of Oil and Gas, was an important event specialists of the year.

In 2010, the company’s management approved In 2010, the company recruited 309 young Principles of Interaction with Partner Higher specialists. Traditionally, young specialists are Educational Institutions. This aimed to improve graduates of such higher education institutions the efficiency of the company’s cooperation with as Tyumen State Oil and Gas University, Ufa specialised higher education institutions. Technical Oil and Gas University, Tomsk Polytechnic

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University, Omsk Technical University and other coaches. In 2010, six such programmes were specialised higher education institutions. developed. Two programmes previously developed by Gazprom Neft NTC LLC were uploaded into the The Step to the Future programme was developed corporate technical programmes matrix. A project and launched for young specialists in the final to develop the technical competencies system in Oil year. According to the programme, each young Refining was launched. specialist takes target training aimed at developing their competency in accordance with the corporate Last year, the company developed professional management competency model. In the framework competency programmes for six main modules of of the Step to the Future programme, a second the Oil Refining Directorate – Omsk refinery, pilot corporate workshop of young specialists was testing of employees was conducted to assess held in Moscow region. Such events are a critical target directions of development. The professional component in the young specialists’ motivation competency matrix for the design office of Business system developed by Gazprom Neft. Service LLC’s economics and finances block was designed and introduced to assess the level of employees’ professional competence and define Employees’ professional development needs. development In 2010, in the framework of the company’s Gazprom Neft is traditionally committed to the management, potential development modular professional development of its personnel. In 2010, programmes for almost all key categories of 1,461 employees received training. The training employees were developed and implemented. coefficient has remained high (over 1.1) in the The programmes aim to develop key managerial last three years. In 2010, training and professional skills, create a common management culture, development costs totalled 106.5 mn RUB. improve the quality of managerial decisions and strengthen the company’s leadership potential. In 2010, in the framework of professional training Around 300 employees were trained under and development, the company’s employees modular programmes during the year. Heads of participated in more than 750 programmes (open departments/head office directorates, SACs’ programmes in various directions of activities). general directors, SACs’ deputy general directors, The company continued developing professional heads of SACs’ directorates/departments, (technical) competence system-building. In the managers of personnel departments and Exploration of Production competency, models employees reserved to such positions participated were reviewed in accordance with organisational in the programme. and structural changes. Knowledge assessments using tests were also conducted systematically Corporate training was also arranged in the form and the needs of employees' development were of short-term training, aimed at satisfying needs defined. in certain competencies. Approximately 500 employees took part in this training. Based on revealed needs, the Expert Review Centre at Gazprom Neft NTC LLC develops and arranges employee training programmes using internal

Previous chapter Content Next chapter REGIONAL POLICY

Gazprom Neft is establishing a regional policy led by principles of social responsibility towards territories where it conducts operational and commercial activities. In 2010, we strengthened cooperation with administrations of our key regions: Yamalo-Nenets Autonomous Dis- trict, Khanty-Mansiysk Autonomous District, Omsk, Tomsk and Leningrad regions. At the same time, due to our presence in new regions, we have expanded the geography of our social-economic agreements. All this is a real social responsibility, resulting in growth of loyalty to the company, increased recognisabil- Alexander Dybal ity of Gazprom Neft’s brands, and ultimately, business efficiency and risk minimisation. Member of the Management Board Deputy Director General for Corporate Communications Annual report 2010 127

SOCIAL RESPONSIBILITY IN REGIONS OF PRESENCE

Gazprom Neft’s activities have a perceptible effect on developing and Yamalo-Nenets Autonomous Districts, Omsk, territories of presence. In some regions, it bears a system-forming Tomsk and Leningrad regions. character. Sustainable development and social modernisation of territories on which Gazprom Neft’s oil producing, refining and sales The Regional Policy Committee coordinates the affiliates operate is a key condition for successfully implementing implementation of JSC Gazprom Neft’s divisions’ large-scale strategic plans. Gazprom Neft contributes to the social and affiliates’ activities related to regional policy. and economic development of Russian regions as an economic entity, This is organised by the company’s corporate large taxpayer and employer, partner of local authorities and local communications department. The Committee communities in solving priority regional tasks. The company is gradually comprises representatives from operational building partner relations with regional administrations and local departments of the head office and Gazprom communities, based on Russian legislation devoting much attention Neft’s largest affiliates. The Committee defines to tasks of industry and regional development. the procedure for charity, sponsorship, grant programmes, and develops recommendations to the company’s Management Board on interacting with regions of presence.

The company actively participates in forming The Corporate Regional Policy Concept, adopted by a favourable social climate and human capital the company’s Management Board in 2010, defines development in regions through corporate charity a range of principles and mechanisms. These put and sponsorship programmes. Regional specifics, cooperation with regions on a systematic basis, profile and guidelines for developing the company’s focus it on solving Gazprom Neft’s strategic tasks, specific enterprises are taken into account when and enhance the efficiency of social investment. designing such programmes.

The company’s implements its regional policy mainly Priority directions of social activities in the regions in the form of socio-economic agreements with the of the company’s presence include: territories of presence: constituent entities of Russia and municipal formations. The process of preparing zz constructing and repairing educational and concluding socio-economic agreements and medical institutions, sports and fitness is regulated by the company’s standard 'Socio- complexes, and apartment buildings Economic Agreements Preparation and Conclusion Procedure'. Agreements include mutual obligations zz supporting cultural and historical heritage of the company and the regions, describe principles preservation programmes of cooperation in solving social and economic tasks, and develop the scientific and technical potential of zz assisting in implementing socially critical sports the region. and cultural projects, children and youth support programmes In 2010, Gazprom Neft signed socio-economic agreements at the level of constituent entities of zz implementing special programmes for the Russian Federation and at the level of municipal supporting Russia’s indigenous people in the formations with the authorities of Khanty-Mansiysk far north.

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The following important social programmes zz constructing the Chess Academy and implemented by JSC Gazprom Neft in the framework sponsoring the World Chess Olympiad in of socio-economic agreements with regions in 2010 Khanty-Mansiysk include: zz completely overhauling the district surgery, and zz completing a sports and fitness centre in Purpe building the arts school and secondary school settlement of Purov District in Yamalo-Nenets in Tarsky District in Omsk region Autonomous District zz continuing construction of large sports and zz completing a multifunctional gym in Muravlenko fitness complexes in Noyabrsk and Tarko-Sale in Yamalo-Nenets Autonomous District in Yamalo-Nenets Autonomous District.

zz supporting the 'Spirit of Fire' 9th International In total in 2010, the company spent 1.213 bn RUB Cinema Festival in Khanty-Mansiysk on programmes under the aegis of socio-economic agreements within regions of the company’s presence.

Previous chapter Content Next chapter Annual report 2010 129 TO SHAREHOLDERS AND INVESTORS

AUTHORIZED CAPITAL, SHAREHOLDER CAPITAL STRUCTURE

The company’s authorised capital is As of 31 December 2009, the shareholder 7,586,079.4224 RUB and it is accrued through register contains 9,512 accounts, including 16 placing 4,741,299,639 ordinary registered shares. legal entities, 9,485 individuals, 1 trustee and 10 nominee holders. The face value per share is 0.0016 RUB. As of 31 December 2009, JSC Gazprom Neft does The state registration number of JSC Gazprom not have any preference shares. Neft’s issue of ordinary registered shares is 1-01-00146-A.

List of registered entities that carry on their accounts the block of securities worth of no less than 1 % of the authorised capital

As of 31 December 2010 As of 31 December 2009 Entities registered Share in authorised Number of Share in authorised Number of in the shareholder register capital, % shares capital, % shares JSC Gazprom 66.9837 % 3 175 898 234 66.9837 % 3 175 898 234 Gazprom Finance B.V. 5.6791 % 269 261 275 5.6791 % 269 261 275 OOO Deutsche Bank (nominee holder) 20.0138 % 948 915 442 20.0002 % 948 271 442 ZAO Depository Clearing Company 3.1208 % 147 967 444 3.3742 % 159 982 715 (nominee holder) 2.1306 % 101 018 537 2.0960 % 99 379 791 ING Bank (Eurasia) ZAO (nominee 1.2413 % 58 853 227 1.2865 % 60 997 170 holder) 'National Depository Centre' Non-for-Profit Partnership (nominee holder)

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STOCK MARKET AND CAPITALIZATION

Background information on Stock trading information the outstanding securities of JSC Gazprom Neft: JSC Gazprom Neft shares are traded on the main trading floors in Russia: CJSC MICEX, where, as of Ordinary registered shares, State Registration 31 December 2010, they accounted for 0.51 % of Number 1-01-00146-A of 17 June 2003. the index and 0.9 % of OJSC RTS Stock Exchange.

The face value per issued share: 0.0016 RUB. The volume of trading in JSC Gazprom Neft shares on the MICEX Exchange totalled 76 bn RUB Number of issued securities: 4 741 299 639 (2,481 mn USD) in 2010, compared to 77 bn RUB shares. (2,468 mn USD) in 2009. At the end of 2010, the American Depository Receipts (ADR) issued for Issue value: 7 586 079.4224 RUB. JSC Gazprom Neft shares accounted for 0.3 % of total trading volume among foreign company Issuer code: SIBN. ADRs quoted on the London Stock Exchange in the IOB system (827 mn USD).

Changes in the price of JSC Gazprom Neft shares, MICEX Oil and Gas Index and price of Urals in 2010-2011

130 % Source: MICEX

Gazprom Neft 120 % MICEX Urals 110 %

100 %

90 %

80 %

70 %

60 % Jan’10 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan’11

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Changes in the price of JSC Gazprom Neft shares, MICEX Stock Exchange

Mn USD Source: MICEX RUB 800 180 JSC Gazprom Neft’s share trading volume, mn USD JSC Gazprom Neft’s share price, RUB 700 160

140 600

120 500 100 400 80 300 60

200 40

100 20

0 31.01.2010 31.02.2010 31.03.2010 31.04.2010 31.05.2010 31.06.2010 31.07.2010 31.08.2010 31.09.2010 31.10.2010 31.11.2010 31.12.2010

A year-end 2010 decrease in the price of company Despite a decrease in capitalisation in 2010, there shares was recorded. In quarters 1 and 2 of 2010, were serious fundamental prerequisites for further the price dropped but the first drop was immediate growth of the company’s shareholder value. It is and by the end of March, the quote was at the level the best 'value-added' business among Russian of the beginning of the year. After the second drop companies in terms of the extent of refining, the (April-May), a long gradual corrective quotation availability of distribution capacities, and plans shift was observed which did not reach the for further developing the distribution business maximum values of the beginning of the year. The which, under the current tax regime, create company’s share price dropped by 21.6 % during considerable value for the company. Judging by the year (based on trading results at CJSC MICEX) commonly accepted market value indicators, the and was 128.3 RUB at the end of the year. JSC market underestimated JSC Gazprom Neft in Gazprom Neft capitalisation as of 31 December 2010, compared to international oil companies 2010 was 19.95 bn USD. and Russian competitors. All these factors provide a significant competitive edge for the company, Among the major external factors that negatively creating considerable value growth potential in the affected the price of company shares, the long-term. investment community singled out the following::

zz The indefinite future of fiscal policy in the Russian oil and gas industry.

zz A general negative attitude of investors to perspectives of the Russian oil and gas industry development.

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Changes in the price of JSC Gazprom Neft shares in 2010, MICEX Stock Exchange

160 % Source: MICEX Industry average 150 % Gazprom Neft 140 %

130 %

120 %

110 %

100 %

90 %

80 %

70 %

60 % Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

PARTICIPATING IN THE DEPOSITORY RECEIPT PROGRAMME

During 2010, the American and Global Depository Gazprom Neft’s trading in 2010 amounted to 918 Receipt Programmes for company shares traded mn USD, including 827 mn USD at IOB London in the US, UK, German and other over-the- Stock Exchange, 48 mn USD at OTCQX, and counter markets were still operating. One ADR 43 mn USD at other markets in Europe (mainly is the equivalent of 5 JSC Gazprom Neft ordinary Germany). shares. At the end of 2010, the total number of ADRs issued for ordinary shares was equivalent to The depository of JSC Gazprom Neft’s receipts is 83 mn shares (1.7 % of the company’s authorised The Bank of New York Mellon. capital).

Ticker GZPFY (GAZ, SCF) Closing price as of 31 December 2010 USD 20.80 CUSIP 36829G107 52 week maximum price USD 16.95 Ratio 1 ADR: 5 ordinary shares 52 week minimal price USD 16.30 Effective as of 20 April 1999 Average monthly trading volume (IOB) 69 mn USD SEDOL 5109407 ISIN RU0009062467 Depository bank BNY Mellon

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Changes in trading volumes of JSC Gazprom Neft in 2010 on MICEX, RTS, LSE and OTCQX, mn USD

450 Source: Bloomberg, RTS, MICEX LSE 400 MICEX

350 RTS OTCQX 300

250

200

150

100

0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Trading volumes of JSC Gazprom Neft ADRs, Russia FTSE IOB index and Urals oil price in 2010-2011

130 % Source: MICEX Gazprom Neft 120 % Russia FTSE IOB Index Urals 110 %

100 %

90 %

80 %

70 %

60 % Jan’10 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan’11

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DIVIDEND HISTORY

The dividend policy is one of key elements in corporate guidance and zz striving to commit to high standards of corporate a key indicator in maintaining the balance of shareholders’ interests. governance. The company secured the principle of ensuring positive dynamics of dividend payment values subject to the company’s net The main principles of JSC Gazprom Neft’s profit growth. The approved JSC Gazprom dividend policy are: Neft’s Provision on Dividend Policy is posted on the company’s official website, where the history zz ensuring the greatest transparency of the of the company’s dividend payment can be also dividend allocation mechanism and procedure viewed for its payment. The company formalised its dividend policy, which it had been implementing zz commitment to pay dividends within a short in recent years within the Provision on Dividend time-span. In September 2010, JSC Gazprom Policy. In the provision, the company fixed a Neft transferred money to the full amount to minimum amount of annual dividends on shares: accounts of its minority shareholders. 15 % of the company’s net profit, calculated in accordance with US GAAP The resolution of the Annual General Shareholders’ Meeting of the company, dated 29 June 2009, zz observing legislation in force in the Russian established the dividend amount per JSC Gazprom Federation, the Articles of Association and Neft’s ordinary share at 3.57 RUB. The total the company’s bylaws. The right to receive amount of accrued dividends for the 2009 financial dividends is granted to all shareholders of the year was 16,926,440,000 RUB. register as of the date of compiling the list of shareholders entitled to participate in the General Shareholders’ Meeting, at which the resolution to pay dividends was adopted. The registration date for holders of company ADRs is set separately by the depository bank, which is The Bank of New York Mellon

2006 2007 2008 2009 Dividend per share (RUB): 8.0822 5.40 5.40 3.57 Total dividend per class of shares (RUB): 38 320 131 942 25 603 018 051 25 603 018 051 16 926 439 711

as % of US GAAP net income 38 % 24 % 21 % 20 %** Name of the issuer’s governing body which adopted the General General General General resolution to pay dividends: Shareholders’ Shareholders’ Shareholders’ Shareholders’ Meeting Meeting Meeting Meeting Date of the meeting of the issuer’s governing body, at which 22 June 2007 20 June 2008 22 June 2009 29 June 2010 the resolution to pay dividends was adopted, date and no. of Minutes No.42 of Minutes No.45 of Minutes No.47 of Minutes the minutes: 27 June 2007 30 June 2008 3 July 2009 No.0101/01 of 01 July 2010 Dividend payment period: By 31 May 2008 By 31 May 2009 By 31 May 2010 By 31 May 2011 Method of payment and other terms: In cash In cash In cash In cash Unpaid/accrued dividend* ratio,% 0.012 % 0.016 % 0.017 % Obligation term has not yet expired

* Dividends were not paid to the shareholders who failed to provide the data required for dividend transfer under Cl.5 of Article 44 of Federal Law № 208-FZ 'On Joint Stock Companies', dated 26 December 1995. Dividends accrued on shares of unidentified holders are paid as the shareholders’ rights to their securities are established. ** Of net profit corrected by one-off revenue and expenditure.

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OBSERVING THE CORPORATE CONDUCT CODE

JSC Gazprom Neft’s corporate guidance is characterised by strict English) to meet the timeframe stipulated compliance with shareholders’ rights, high-quality investment by the effective legislation of the Russian planning, aligned internal audit and risk management system, high Federation) level of financial and informational transparency, and the professional and effective Board of Directors. –– ensuring the most simple and unobstructed registration procedure for participants of the General Shareholders’ Meeting. A high percentage of the company’s minority The company adheres strictly to the norms of shareholders’ participation in General legislation in force, focused mainly on compliance Shareholders’ Meeting proves absence of and effective protection of shareholders’ rights: technical barriers for this

zz JSC Gazprom Neft is ensuring equal treatment –– providing the opportunity to vote under of company shareholders holding the same power of the attorney at the General class (type) of shares: Shareholders’ Meeting

–– All company’s issued shares belong to one –– voting by using voting papers category. –– using cumulative voting during the Board of –– Each share provides one vote to its holder. Directors’ selection

zz JSC Gazprom Neft is giving shareholders the –– before the vote, explaining to shareholders opportunity to manage their shares at their own the voting procedure for the question discretion, quickly and at will. including detailed clarification of the cumulative voting principle. A 'filling in' zz JSC Gazprom Neft is providing a reliable and sample is shown on the reverse side of each effective system for recording stock ownership voting paper rights. This is ensured by the company cooperating with an independent registrar. –– counting votes at the General Shareholders’ Meeting by a professional registrar zz JSC Gazprom Neft is ensuring the effectiveness of preparing and holding General Shareholders’ –– regulating the General Shareholders’ Meeting procedures: Meeting guarantees equal opportunity for shareholders to voice their opinion and –– notifying shareholders about the Annual ask questions of interest on the agenda General Shareholders’ Meeting not later than (including to members of the company’s 30 days before its date in two ways: sending Management Board, who take part in the a notice to each shareholder and publishing General Shareholders’ Meeting from year it in Rossiyskaya Gazeta newspaper to year)

–– giving shareholders the opportunity to –– declaring the voting outcome at the General read the information (materials) subject to Shareholders’ Meeting disclosure during preparation for the General Shareholders’ Meeting via the internet –– posting protocols based on results of General (the information should be published Shareholders’ Meetings on the company’s online in bilingual format (Russian and official website and making them available to interested parties for acknowledgement.

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zz JSC Gazprom Neft is ensuring shareholders’ right zz JSC Gazprom Neft is striving to ensure maximum to receive profit: transparency of information by:

–– In the reporting year, the company’s Board –– determining the company’s information of Directors approved the Provisions of policy by the Board of Directors Dividend Policy. This defines the procedure to establish the amount and dividend payment –– publishing information about the company practice. The company is responsible for in Russian and English on its corporate incomplete and/or inappropriate dividends website (www.gazprom-neft.ru) payment. –– not avoiding negative disclosures about the –– JSC Gazprom Neft set the minimal dividend company and its operations payment limit: 15% of the company’s net profit in accordance with US GAAP –– regularly disclosing information on the most principles. important events and facts of the company’s operations affecting the interests of its –– The company executes a quick dividend shareholders and other interested parties, payment policy for its minority shareholders using the communication means available to (the company transfers dividends to minority the company, including online press-release shareholder’s accounts within three months publishing after the decision on payment). –– ensuring disclosures about its operations are zz JSC Gazprom Neft is ensuring effective control made as soon as possible to avoid reducing over financial and economic activities: the relevance of such disclosures

–– The largest worldwide auditing services –– using such information dissemination company, PWC, is invited for the annual methods that provide its shareholders and audit of financial documents. other interested parties with free, easy and least expensive access to disclosures –– Establishing the Audit Commission composed of internal auditors from the –– not giving preference to meeting the holding company. interests of one audience over another when making disclosures –– Effective work of the Internal Audit Department comprising professional –– disclosing information (documents) on and qualified specialists. The company’s shareholders’ requests in accordance with subsidiaries comprise auditors reporting the law. to JSC Gazprom Neft’s Internal Audit Department.

–– Establishing the Audit Committee at the Board of Directors in charge of the Internal Audit Department. The Audit Committee holds regular meetings on issues of the company’s activities in accordance with its competence reflected in the Regulation on the Audit Committee.

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zz JSC Gazprom Neft is creating an efficient system zz JSC Gazprom Neft is following international of the company governing bodies, based on: social responsibility standards – tasks in the social sphere are integrated into the company’s –– highly professional executives in the long-term strategy: governing bodies –– JSC Gazprom Neft has been producing and –– clearly stated competence of the governing publishing sustainable development reports bodies set out in the company Articles of for several years. Association –– Implementing large-scale programmes –– absence of persons employed by competitive focused on environmental and industrial entities in the company’s governing bodies safety, and occupational safety improvement. –– absence of persons in the company’s governing bodies that have been found –– JSC Gazprom Neft is participating in the guilty of economic crimes or crimes against regions’ socio-economic development. the state authorities, or state service interests or local governance interests, or those that –– Implementing personnel incentives and were imposed administrative penalties for professional development improvement wrongdoing in entrepreneurship, finance, policy. tax and duties, or the stock market

–– responsibility of governing body members set forth by the company bylaws to refrain from actions that may cause a conflict of interests, and to inform the company about any situations (transactions) that may potentially cause a conflict of interests

–– Accountability of the Board members to General Shareholders Meeting

–– Creating Board of Directors committees: Audit Committee and HR and Remuneration Committee.

–– Collegial executive body (Management Board) – with accountability to the General Shareholders’ Meeting and the Board of Directors.

–– Setting forth the procedure for holding Board of Directors meetings in the bylaws.

Previous chapter Content Next chapter 138 ASSET MANAGEMENT JSC GAZPROM NEFT AND CORPORATE STRUCTURE

Improving the company’s corporate governance structure is designed West-Messoyakha and East Messoyakha fields to enhance the efficiency of Gazprom Neft’s operations as a vertically in С1+С2 categories amount to 560 mn t, and gas integrated company and optimise the core business management reserves of 230 bn m³. structure at the level of subsidiaries. In 2010, the company continued integrating Sibir Energy into Gazprom Neft Group. Sibir Energy’s minority interest (0.35% of charter capital) 2010 was a year of serious organisational was paid, followed by its transformation from modifications for the company. The company a public company into a private company. As a continued operational integration of new assets result of an audit, in 2010, Sibir Energy liquidated into the company’s corporate management 11 non-operational companies. In February structure. Unified corporate guidance standards 2011, Sibir Energy’s charter capital was reduced have been adopted in new organisations of by paying interest to the second shareholder – Gazprom Neft’s Group. By-Laws have also been OAO CTK (Tsentralnaya Toplivnaya Kompaniya), developed, while governing bodies have been representing the Moscow Government. Therefore, formed. in early 2011, Gazprom Neft became the sole shareholder of Sibir Energy. In 2010, on a parity basis with JSC NOVATEK, JSC Gazprom Neft established a joint venture – Fulfilling the contract for NIS (Serbia) shares LLC yamal Razvitie – which has completed acquisition, in January 2011, JSC Gazprom Neft acquiring a 51 % stake in OOO SeverEnergiya sent an offer to buy out a minority interest (19 % from Gazprom. The remaining 49 % is owned by of shares) from NIS, for completion on 16 March Arctic Russia B.V. – a joint venture of Italian ENI 2011. NIS is one of the largest VIOCs (vertically (60 %) and Enel (40 %). OOO SeverEnergiya holds integrated oil companies) in south-east Europe. In blocks of shares totalling 100% of charter capital 2010, it transformed into JSC Gazprom Neft and in JSC Arktikgaz, CJSC Urengoil Inc., and JSC was put on the exchange market. Currently, NIS is Neftegaztekhnologia, which have development the only company in the world with the number of and production licenses for oil and gas condensate shareholders equalling 4.7 mn people – practically fields in Yamalo-Nenets Autonomous District. all the citisens in Serbia. Based on the 2010 results, OOO SeverEnergiya controls licenses to develop the Serbian Chamber of Commerce and Industry the Samburgsky, Yevo-Yakhinsky, Yaro-Yakhinsky, acknowledged NIS as the best Serbian company, and Severo-Chaselsky areas. The areas harbour regarding corporate guidance performance. 919 bn m³ of gas, 330 mn t of oil and 9 mn t of gas

condensate (category ABC1 + 50 % C2). In 2010, the company continued working on acquiring oil fields of JSC Gazprom; coordinated In 2010, JSC Gazprom Neft, jointly with its partner and approved the transfer plan for Novoportovsky TNK-BP, continued dividing the assets of the and Orenburg oil fields; and obtained a portion of Slavneft Group. From December 2010 to February corporate coordination and approvals. 2011, transfer of ownership was completed with respect to shares of CJSC Messoyakhaneftegaz During the year under report, Gazprom Neft on a parity basis. CJSC Messoyakhaneftegaz entered the active phase of separating the oil is the owner of development licenses for the service block from the company’s structure. group of Messoyakha oil and gas fields located The Board of Directors approved the strategy in the Gydan Peninsula, Tazovsky Administrative for separating the oil service assets from the Area, and Yamalo-Nenets Autonomous District. company’s business, and the company took Recoverable oil and condensate reserves of the main preparatory measures. This should

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contribute to minimising Gazprom Neft Group’s holding – allowing Gazprom Neft to execute its expenditure, developing competency on functions in projects in Iraq, Equatorial Guinea specialised markets, and therefore improving and Cuba. A company was registered for each of oil service quality. Programme implementation these international projects within the jurisdiction should be complete by the end of 2011. In January of the Netherlands: Gazprom Neft International 2011, the sale of Muravlenko Transport Company S.A. (Luxemburg), Gazprom Neft Badra B.V. – was completed. for the international project in Iraq – Gazprom Neft Equatorial B.V. – for international project One of the company’s strategic tasks is to in Equatorial Guinea, Gazprom Neft Cuba B.V. – maximise production with international projects. for international project in Cuba. Currently, this International projects management from the structure is subject to various levels of corporate viewpoint of forming corporate structure is control: the supervisory boards and the Boards of quite different to Russian projects. It requires the Directors, which started managing the companies company to form principally different corporate in 2010. control tools. This is conditioned by a foreign element, utilised legislation, taxation and, in particular, specific features of the project. In the framework of the general task set in 2010, the company formed a structure – an international

Previous chapter Content Next chapter 140 CREDIT RATINGS JSC GAZPROM NEFT AND DEBT PORTFOLIO MANAGEMENT

CREDIT RATINGS

Information on the credit ratings assigned to JSC Gazprom Neft in 2010

Agency Scale Rating Outlook Standard & Poor’s International scale in foreign currency ВВВ- Stable International scale in national currency ВВВ- Stable National scale (Russia) ruAA+ Stable Moody’s International scale in foreign currency Ваа3 Stable

Changes in the company’s credit ratings

BBB/Baa2

Invenstment Grade BBB-/Baa3

BB+/Ba1

BB/Ba2

BB-/Ba3

B+/B1

Standart & Poor’s B/B2 Moodys

B-/B3 2003 2004 2005 2006 2007 2008 2009

Standard & Poor’s Ratings Services

On 7 December 2010, Standard & Poor’s (S&P) S&P continues to rate the company's business risks Ratings Services changed the outlook on JSC as 'acceptable' and its financial risks as 'significant'. Gazprom Neft ratings from Negative to Stable The S&P expectations of parental support from and affirmed all the company’s ratings: a 'BBB- JSC Gazprom (BBB/Negative/A-3) holding a 96 % 'corporate credit rating and a ';ruAA+' Russia interest in Gazprom Neft remain unchanged, national scale rating. accounting for a one-point upgrade in the rating.

The change reflects the opinion of S&P Ratings JSC Gazprom Neft’s credit ratings on investment Services that the high free cash-flow would allow level extend opportunities for attracting financing the company to finance recent acquisitions of and reducing loan value. large assets without negatively affecting its credit worthiness or liquidity.

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DEBT OBLIGATIONS

Major borrowing in 2010

Lender Loan amount Date of agreement Due date Interest rate Nordea USD 100 000 000.00 15 February 2010 February 2014 Libor+3.15 % RBA USD 100 000 000.00 23 March 2010 March 2013 Libor+2.75 % Stock bonds RUB 20 000 000 000 13 April 2010 April 2013 7.15 % Credit Agricole USD 250 000 000.00 31 May 2010 June 2013 Libor+2.15 % Syndicated pre-export loan PXF USD 1 500 000 000.00 30 July 2010 July 2015 Libor+2.1 %*

* On 22 February 2011 an additional agreement was signed to reduce the interest rate from 2.1 % p.a. to 1.6 % p.a.

2011 credit portfolio change plans, mn USD The loan agreements contain financial covenants that set requirements for the company’s ratios 8 000 of Consolidated EBITDA to Consolidated Interest 2 142*** 7 000 Payable, Consolidated Indebtedness to Consolidated 7 084 Tangible Net Worth and Consolidated Indebtedness 6 000 6 357 to Consolidated EBITDA. Management believes 5 000 that the company was in compliance with these 1 415** 4 000 covenants as of 31 December 2010.

3 000 2 000 Borrowing plans in 2011 1 000

0 In 2011, the company plans to borrow over Debt Main debt New funds Debt as of 1 January 2011 payment as of 1 January 2012 2 bn USD with the following financial facilities: zz Ruble bonds. ** Information from 2010 GAAP reports. zz Bilateral loans. *** Information from 2011 business plan zz Club-deal credit. zz Syndicated loan. zz ECA financing. JSC Gazprom Neft’s long-term credits and loans as zz Other. of the end 2010 increased by 18.7 % and amounted to 6,357 bn USD. The current share of long-term On 8 February 2011, the company successfully debt in 2010 was 1,415 bn USD. At the same time, completed allocating bond issues 08 (5-year the company’s short-term debt decreased 2.4 times circulation period), 09 and 10 (10-year circulation to 279 mn USD in 2010. period) to the total amount 30 bn RUB (about 984 mn USD). The 08-09 bond coupon rate was In 2010, the company used such financing facilities defined by bookbuilding results at the level of as bilateral loans, stock bonds and pre-export 8.5 %, 10 issue – 8.9 %. In the framework of the financing. 09 issue, 5 years after allocation, the investors will receive an offer for earlier acquisition of bonds. In the framework of the 10 series, the offer will be made in 7 years.

Previous chapter Content Next chapter 142 GLOSSARY OF KEY TERMS, JSC GAZPROM NEFT DEFINITIONS AND ABBREVIATIONS

ADR of JSC Gazprom Neft GE An American depositary receipt issued for JSC Gazprom Geological exploration. Neft shares. It is equivalent to four ordinary shares of JSC Gazprom Neft. Gazprom Neft Group, Group, Gazprom Neft JSC Gazprom Neft (parent) and its subsidiaries taken FS as a whole. Filling station. GEO BOE Geological and engineering operations. Barrel of oil equivalent. Non-CIS Probable reserves Foreign countries, other than the CIS and Baltic states. Unproven reserves which, based on geotechnical data analysis, are much more likely to be extracted. In this SAC sense, if a probabilistic approach is used, a probability of Subsidiaries and associates of the company. at least 50% should exist that actually extracted volumes would equal or exceed the amount of evaluation of Proven reserves proven and probable reserves. Amount of liquid, gaseous and solid hydrocarbons, which, based on geotechnical data, with sufficient VIOC certainty, can be extracted using an industrial method Vertically integrated oil company. from known deposits starting on a definite date under existing economic conditions, utilised operating Possible reserves procedures and applicable governmental regulations. Unproven reserves which, based on geotechnical data analysis, are less likely to be extracted as compared Dollars, USD to probable reserves. In this sense, if the probabilistic US dollars. approach is used, a probability of at least 10% should exist that actually extracted volumes would equal or DNEM exceed the amount of evaluation of proven, probable Differentially-normalised electrical measurements. and possible reserves. EU Hydrocracking European Union. One of the cracking methods, processing of high-boiling oil fraction, oil fuel or goudron to produce petrol, diesel EBITDA and jet fuel, lubricants, etc. Earnings before interest, taxes, depreciation and amortisation. Hydrofining Removing organic sulphur, nitrogen and oxygen Associate compounds from petroleum products using hydrogen A company in which Gazprom Neft Group holds more molecules. The quality of petroleum products improves than 20 % of voting shares (if a joint-stock company) following hydrofining. or 20 % of the authorised capital (if a limited liability company). Extent of refining

Analytical indicator, which is a ratio of quantity of A1+B1+C1 hydrocarbon reserves products produced from oil except for gross oil fuel and Explored reserves by Russian classification standards. amount of processed petroleum raw stock. Measured They represent the part of geological reserves, extraction in percent. of which, as of the date of assessment, is cost-effective, taking into account the market conditions and rational use GPP of modern equipment and technologies, and subject to Gas and/or condensate processing plant. complying with the subsoil and environmental protection requirements. Explored gas reserves (categories

Frac A1+B1+C1) are deemed fully recoverable. For oil and gas Hydraulic fracturing. condensate reserves, a special extraction factor is used, calculated on the basis of geotechnical factors.

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C1+C2 hydrocarbon reserves MET

C1 category – oil or gas reserves established to be Mineral extraction tax. present in specific wells, with favourable production

and geological data also available for other wells. C2 VAT category – oil or gas reserve expected to be present Value-added tax. within certain known gas-bearing areas, based on

geological and geophysical data. C2 reserves are treated R&D as preliminary estimates and serve as the basis for Research and development. organising exploration at a specific field. NPZ Catalytic cracking Refinery. Catalytic thermal treatment of petroleum fractions to produce high-octane petrol. Netback Selling price, excluding transportation expenses. Coking Process of liquid and solid-fuel processing by heating EP without air entry. A solid product – coke – and volatile Environmental protection. products are formed while fuel decomposes. OGF JSC Gazprom Neft’s reserves recovery ratio Own generation facility. Gross increase of proven reserves divided by volume of products received in the period. SAA Surface-active agents. LA Licence area. PBC Polymer-bituminous cement. CS Compressor station. Primary distillation Petroleum refining using an atmospheric-and-vacuum m3 distillation unit. Oil passes to the distillation tower for Cubic meter of natural gas as measured at a pressure of atmospheric distillation (distillation under atmospheric one atmosphere and 20°C. pressure). Here, it is separated into several fractions: light and heavy gasoline fraction, kerosene fraction, diesel oil PRMS and SEC international standards fraction and residue of atmospheric distillation – fuel oil. International classification and estimation of hydrocarbon The quality of the fraction produced does not conform reserves by PRMS (Petroleum Reserves Management to requirements of commercial oil, so the fractions are System) and SEC (Securities and Exchange Commission) subject to further (secondary) processing. standards. The standards not only assess the presence of hydrocarbons. They also provide estimates as to AG the economic practicability of their extraction and the Associated gas. justification of their presence, while accounting for the economic life of a field (term of the licenses for its Prospecting and exploratory drilling development). The volume of prospecting and exploratory drilling in the reporting period. This includes the number of MICEX meters drilled in wells, completed and being drilled, but Moscow Interbank Currency Exchange. completed in the next reporting period.

Processing plants capacity Maximum possible products output at the plant in a JP given period. Joint project

OGCF SC Oil and gas condensate field. Squeeze cementing.

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RTS FC Russian Trading System stock exchange. Filling complex.

MIP CC Medium-term investment program. Charter capital.

CIS FTS of Russia Commonwealth of Independent States – former Federal Tariff Service of Russia. republics of the USSR, other than Latvia, Lithuania and Estonia. FFMS of Russia Federal Financial Markets Service. JV Joint venture. KhMAD Khanty-Mansiysk Autonomous District. LNG Liquefied natural gas. Central Asia Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, PSA Uzbekistan. Production sharing agreement. ETF ISO 14001 Standard Electronic-trading floor. International environmental standard. It identifies the environmental quality management system's YNAD requirements and is used to develop environmental Yamalo-Nenets Autonomous District. policies subject to legislative requirements. It applies to the environmental aspects of an organisation’s activities 2D, 3D that can be controlled and should be influenced. The Seismic survey. standard is voluntary and does not replace legislative requirements. SILCO (Siberian Light) Siberian light crude oil. Baltic states Latvia, Lithuania and Estonia.

TOE Ton of oil equivalent (carbon equivalent). Equal to 877 m³ of natural gas.

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MAJOR TRANSACTIONS AND RELATED PARTY TRANSACTIONS

In 2009, JSC Gazprom Neft did not enter into any major transactions as defined by current legislation of the Russian Federation.

List of Related Party Transactions in 2010, Approved by JSC Gazprom Neft’s Governing Bodies.

No. Party to transaction Subject and material terms of Related party Minutes no., transaction Date TRANSACTIONS APPROVED BY THE BOARD OF DIRECTORS 1 CJSC Football Club Zenit Advertising Services Agreement GPN- 1. 1. JSC Gazprom, holding through its affiliates OJSC № pt-0102/03, 09/09000/02314/P of 1 Jan 2010. GPB and Gazprom Transgaz Sankt-Peterburg, more 24.02.2010 Buyer: JSC Gazprom Neft, than a 20 % interest in CJSC FC Zenit Executor: CJSC FC Zenit. 2. Member of the Board of Directors, General director of Contract value 1.014,2 mn RUB. JSC Gazprom Neft, holding the position of Member of the Board of Directors and President of CJSC FC Zenit: A.V. Dyukov 3. 3. Member of the Board of Directors of JSC Gazprom Neft, concurrently Member of the Board of Directors CJSC FC Zenit: K.G. Seleznev 2 CJSC FC Zenit Additional agreement No.1 to 1. JSC Gazprom, holding through its affiliates OJSC GPB No. PT-0102/24 Advertising Services Agreement GPN- and Gazprom Transgaz Sankt-Peterburg, more than a 1 Sep 2010 09/09000/02314/P of 1 Jan 2010. 20 % interest in CJSC FC Zenit Buyer: JSC Gazprom Neft, 2. Member of the Board of Directors, General director of Executor: CJSC FC Zenit. Scope of JSC Gazprom Neft, holding the position of Member of advertising services changed without the Board of Directors and President of CJSC FC Zenit: change to the total agreement value A.V. Dyukov 3. Member of the Board of Directors of JSC Gazprom Neft, concurrently Member of the Board of Directors CJSC FC Zenit: K.G. Seleznev 3 NP Avangard Hockey Advertising Services Agreement of 1 Member of JSC Gazprom Neft’s Management Board, No. PT-0102/03 Club Jan 2010. member of Supervisory Committee on NP Avangard HC, 24 Feb 2010 Buyer: JSC Gazprom Neft, A.M. Dybal Executor: NP Avangard Hockey Club. Contract value 5.7 mn RUB. 4 NIS a.d., Novi Sad Special Purpose Loan Agreement 1. JSC Gazprom as its affiliate JSC Gazprom Neft owns No. PT-0102/08 of GPN-09/12100/00611 of more than 20 % in charter capital of a party to the 26 Mar 2010 28 Apr 2010. transaction Borrower: NIS a.d. , Novi Sad 2. Members of the Management Board of JSC Gazprom, Lender: JSC Gazprom Neft holding positions in the governing bodies (Board Contract value is 80.0 mn EUR. Interest of Directors) of Nis a.d. Novi Sad: K.A. Kravchenko, rate: Libor+2 % p.a. Maturity date: A.M. Cherner, A.M. Dybal, V.V. Baranov, I.K. Antonov, 31 Dec 2024 V.V. Yakovlev 5 NIS a.d., Novi Sad Special Purpose Loan Agreement 3. JSC Gazprom as its affiliate JSC Gazprom Neft owns No. PT-0102/08 of GPN-09/12100/00612 of more than 20 % in charter capital of a party to 26 Mar 2010 28 Apr 2010. transaction Borrower: NIS a.d. , Novi Sad 4. Members of the Management Board of JSC Gazprom, Lender: JSC Gazprom Neft holding positions in the governing bodies (Board Contract value is 76.8 mn EUR. Interest of Directors) of Nis a.d. Novi Sad: K.A. Kravchenko, rate: Libor+2 % p.a. Maturity date: A.M. Cherner, A.M. Dybal, V.V. Baranov, I.K. Antonov, 31 Dec 2024 V.V. Yakovlev

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No. Party to transaction Subject and material terms of Related party Minutes no., transaction Date 6 LLC National Oil Special Purpose Loan Agreement 1. JSC Gazprom as its affiliate JSC Gazprom Neft owns No. PT-0102/12 Consortium of GPN-09/12100/00375 of 20 % in LLC NOC which is a party to the transaction 26 Apr 2010 26 Mar 2010. 2. Director General of JSC Gazprom Neft (A.V. Dyukov) Borrower: JSC Gazprom Neft who is a member of LLC NOC’s Board of Directors Lender: LLC NOC Contract value is 3 700 mn RUB. 7 Gazprombank Agreement to prepare emission 1. Members of the Board of Directors of JSC Gazprom No. PT-0102/18 (Open Joint Stock documents for registration of JSC Neft, concurrently Members of the Board of Directors 18 Jun 2010 Company) Gazprom Neft’s 06-10 series bonds of OJSC GPB: A.B. Miller, A.B. Kruglov, O.P. Pavlova issue. 2. JSC Gazprom, holding a more than 20 % interest in Parties to transaction: OJSC GPB, and having its affiliates taking positions Issuer - JSC Gazprom Neft in the Bank’s Board of Directors (A.B. Miller, A.B. Consultant – OJSC Gazprombank. Kruglov, O.P. Pavlova, M.L. Sereda, E.A. Vasilieva) Consultant’s remuneration 30 000 RUB. 8 Gazprombank Agreement for initial offering and 1. Members of the Board of Directors of JSC Gazprom No. PT-0102/18 (Open Joint Stock further circulation of JSC Gazprom Neft, concurrently Members of the Board of Directors 18 Jun 2010 Company) Neft’s 06-10 series bonds issue. of OJSC GPB: A.B. Miller, A.B. Kruglov, O.P. Pavlova Parties to transaction: 2. JSC Gazprom, holding a more than 20 % interest in Issuer - JSC Gazprom Neft OJSC GPB, and having its affiliates taking positions Organiser – OJSC Gazprombank. in the Bank’s Board of Directors (A.B. Miller, A.B. Organiser’s remuneration up to 1 % of Kruglov, O.P. Pavlova, M.L. Sereda, E.A. Vasilieva) total nominal value of offered bonds. 9 Gazprombank Agreement for purchase of 1. Members of the Board of Directors of JSC Gazprom No. PT-0102/18 (Open Joint Stock documentary inconvertible interest Neft, concurrently Members of the Board of Directors 18 Jun 2010 Company) bearer bonds, 06-10 series, under of OJSC GPB: A.B. Miller, A.B. Kruglov, O.P. Pavlova public offer. 2. JSC Gazprom, holding a more than 20 % interest in Parties to transaction: OJSC GPB, and having its affiliates taking positions Issuer - JSC Gazprom Neft. in the Bank’s Board of Directors (A.B. Miller, A.B. Purchaser - OJSC Gazprombank. Kruglov, O.P. Pavlova, M.L. Sereda, E.A. Vasilieva) Total transaction value (several related transactions) to purchase by OJSC Gazprombank while offering of JSC Gazprom Neft’s bonds – at least 2 % of JSC Gazprom Neft’s balance sheet assets according to data of accounting reporting on the last reporting date preceding transaction date. 10 NP Avangard Hockey Advertising Services Agreement of Member of JSC Gazprom Neft’s Management Board, No. PT-0102/03 Club 1 Sep 2010. member of Supervisory Committee on NP Avangard HC, 24 Feb 2010 Buyer: JSC Gazprom Neft, A.M. Dybal Executor: NP Avangard Hockey Club. Contract value 5.64 mn RUB. 11 LLC Gazprom Neft Agency contract to print advertising 3. JSC Gazprom as its affiliate JSC Gazprom Neft owns No. PT-0102/24 - Lubricants materials in Saint Petersburg mass 20 % in LLC Gazprom Neft - Lubricants which is a 1 Sep 2010 media. party to transaction Parties to transaction: 4. Member of JSC Gazprom Neft’s Management Board Principal – JSC Gazprom Neft being the member of LLC Gazprom Neft – Lubricants’ Agent – LLC Gazprom Board of Directors, A.M. Cherner Neft – Lubricants Agent’s remuneration – 0.1 % including VAT of cost services in relation to which Agent made transaction for Principal 12 Gazprom Neft Cuba B.V. Loan to Gazprom Neft Cuba B.V. JSC Gazprom as its affiliate (Gazprom Neft Finance B.V.) No. PT-0102/27 Borrower - Gazprom Neft Cuba B.V. will be the sole participant in established Gazprom Neft 4 Oct 2010 Lender – JSC Gazprom Neft Cuba B.V. which is a party to transaction Loan value – up to 50.0 mn USD Maturity period –1 Jul 2015

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No. Party to transaction Subject and material terms of Related party Minutes no., transaction Date 13 OJSC Gazprombank Loan on overdraft to JSC Gazprom 1. Members of the Board of Directors of JSC Gazprom No. PT-0102/29 Neft. Neft, concurrently Members of the Board of Directors 7 Oct 2010 Borrower - JSC Gazprom Neft of OJSC GPB: A.B. Miller, A.B. Kruglov, O.P. Pavlova Lender - OJSC Gazprombank 2. JSC Gazprom, holding a more than 20 % interest in Loan value – at least 8 bn RUB. OJSC GPB, and having its affiliates taking positions Maturity period – 25 Jul 2011 in the Bank’s Board of Directors (A.B. Miller, A.B. Interest rate: MOSPRIME 1M + 2.5 % Kruglov, O.P. Pavlova, M.L. Sereda, E.A. Vasilieva) p.a. on actual debt

14 OJSC Gazprombank Bank guarantees for JSC Gazprom Neft 1. Members of the Board of Directors of JSC Gazprom No. PT-0102/29 on obligations towards legal entities. Neft, concurrently Members of the Board of Directors 7 Oct 2010 Principal - JSC Gazprom Neft of OJSC GPB: A.B. Miller, A.B. Kruglov, O.P. Pavlova Surety - OJSC Gazprombank 2. JSC Gazprom, holding a more than 20 % interest in Guarantee value – at least 3 bn RUB OJSC GPB, and having its affiliates taking positions Guarantee period – 15 Dec 2013 in the Bank’s Board of Directors (A.B. Miller, A.B. Bank commission – 0.5 % p.a. of Kruglov, O.P. Pavlova, M.L. Sereda, E.A. Vasilieva) issued guarantee 15 OJSC Gazprombank Opening of letter of credit for JSC 1. Members of the Board of Directors of JSC Gazprom No. PT-0102/29 Gazprom Neft Neft, concurrently Members of the Board of Directors 07 Oct 2010 Applicant - JSC Gazprom Neft of OJSC GPB: A.B. Miller, A.B. Kruglov, O.P. Pavlova Bank - OJSC Gazprombank 2. JSC Gazprom, holding a more than 20 % interest in Letter of credit value – at least 2 bn OJSC GPB, and having its affiliates taking positions RUB in the Bank’s Board of Directors (A.B. Miller, A.B. Maturity period – 15 Dec 2013 Kruglov, O.P. Pavlova, M.L. Sereda, E.A. Vasilieva) Bank commission – 0.9 % 16 OJSC Gazprombank Provision of guarantee 1. Members of the Board of Directors of JSC Gazprom No. PT-0102/29 Surety - JSC Gazprom Neft Neft, concurrently Members of the Board of Directors 7 Oct 2010 Bank - OJSC Gazprombank of OJSC GPB: A.B. Miller, A.B. Kruglov, O.P. Pavlova Principal – LLC Gazprom Neft 2. JSC Gazprom, holding a more than 20 % interest in – Lubricants OJSC GPB, and having its affiliates taking positions Limit of liability – at least 150 mn RUB in the Bank’s Board of Directors (A.B. Miller, A.B. Guarantee period – 14 Dec 2013 Kruglov, O.P. Pavlova, M.L. Sereda, E.A. Vasilieva)

17 OJSC Gazprombank Provision of guarantee 1. Members of the Board of Directors of JSC Gazprom No. PT-0102/29 Surety - JSC Gazprom Neft Neft, concurrently Members of the Board of Directors 7 Oct 2010 Bank - OJSC Gazprombank of OJSC GPB: A.B. Miller, A.B. Kruglov, O.P. Pavlova Principal – JSC Gazprom Neft 2. JSC Gazprom, holding a more than 20 % interest in – Tyumen OJSC GPB, and having its affiliates taking positions Limit of liability – at least 76.8 mn RUB in the Bank’s Board of Directors (A.B. Miller, A.B. Guarantee period – 31 Jul 2013 Kruglov, O.P. Pavlova, M.L. Sereda, E.A. Vasilieva) 18 OJSC Gazprombank Provision of guarantee 1. Members of the Board of Directors of JSC Gazprom No. PT-0102/29 Surety - JSC Gazprom Neft Neft, concurrently Members of the Board of Directors 7 Oct 2010 Bank - OJSC Gazprombank of OJSC GPB: A.B. Miller, A.B. Kruglov, O.P. Pavlova Principal – JSC Moscow Refinery 2. JSC Gazprom, holding a more than 20 % interest in Limit of liability – at least 3.0 bn RUB OJSC GPB, and having its affiliates taking positions Guarantee period – 15 Dec 2013 in the Bank’s Board of Directors (A.B. Miller, A.B. Kruglov, O.P. Pavlova, M.L. Sereda, E.A. Vasilieva) 19 OJSC Gazprombank Provision of JSC Gazprom Neft’s 1. Members of the Board of Directors of JSC Gazprom No. PT-0102/31 guarantee under CJSC Gazprom Neft Neft, concurrently Members of the Board of Directors 19 Nov 2010 Orenburg’s obligations. of OJSC GPB: A.B. Miller, A.B. Kruglov, O.P. Pavlova Surety - JSC Gazprom Neft 2. JSC Gazprom, holding a more than 20 % interest in Borrower - OJSC Gazprombank OJSC GPB, and having its affiliates taking positions Lender - CJSC Gazprom Neft Orenburg in the Bank’s Board of Directors (A.B. Miller, A.B. Limit of liability – at least 45.5 mn RUB Kruglov, O.P. Pavlova, M.L. Sereda, E.A. Vasilieva) Guarantee period – 30 Jun 2015 20 LLC National Oil Special-Purpose Loan Agreement 1. JSC Gazprom as its affiliate JSC Gazprom Neft owns No. PT-0102/33 Consortium of GPN-09/12100/01672 of 20% in LLC NOC which is a party to transaction 24 Nov 2010 13.10.2010. 2. Director General of JSC Gazprom Neft (A.V. Dyukov) Borrower: LLC NOC who is a member of LLC NOC’s Board of Directors Lender: JSC Gazprom Neft Contract value is 156.7 mn RUB. Maturity period – 31 Dec 2013

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No. Party to transaction Subject and material terms of Related party Minutes no., transaction Date 21 JSC Oil Company Magma Loan Agreement JSC Gazprom as its affiliate (Sibir Energy) owns more No. PT-0102/33 Borrower: JSC Gazprom Neft than 20 % in JSC Oil Company Magma’s charter capital 24 Nov 2010 Lender: JSC OC Magma which is a party to transaction Contract value is 15 bn RUB. Maturity period – not more than 183 days from date of loan provision or each its portion 22 OJSC Gazprombank Provision of JSC Gazprom Neft’s 1. Members of the Board of Directors of JSC Gazprom No. PT-0102/33 guarantee under JSC Gazprom Neft Neft, concurrently Members of the Board of Directors 19 Nov 2010 Omsk Refinery’s obligations. of OJSC GPB: A.B. Miller, A.B. Kruglov, O.P. Pavlova Surety - JSC Gazprom Neft 2. JSC Gazprom, holding a more than 20 % interest in Borrower - OJSC Gazprombank OJSC GPB, and having its affiliates taking positions Lender - CJSC Gazprom Neft Omsk in the Bank’s Board of Directors (A.B. Miller, A.B. Refinery Kruglov, O.P. Pavlova, M.L. Sereda, E.A. Vasilieva) Limit of liability – 105 bn RUB Guarantee period – 30 Jun 2015

23 LLC National Oil Integrated project management 3. JSC Gazprom as its affiliate JSC Gazprom Neft owns No. PT-0102/36 Consortium agreement for development of 20 % in LLC NOC which is a party to transaction 8 Dec 2010 Khunin-6 oil block development. 4. Director General of JSC Gazprom Neft (A.V. Dyukov) Customer – JSC Gazprom Neft who is a member of LLC NOC’s Board of Directors Contractor – LLC NOC Contractor’s remuneration – 801.04 mn RUB Contract validity – 31 Dec 2013 24 LLC National Oil Purchase of share in LLC NOC’s charter 1. JSC Gazprom as its affiliate JSC Gazprom Neft owns No. PT-0102/36 Consortium capital by JSC Gazprom Neft 20 % in LLC NOC which is a party to transaction 8 Dec 2010 Contribution to charter 2. Director General of JSC Gazprom Neft (A.V. Dyukov) capital – 3.52 bn RUB who is a member of LLC NOC’s Board of Directors 25 CJSC Hockey Club SKA Advertising services agreement. A.V. Dyukov, who is concurrently Member of the Board No. PT-0102/42 Advertiser – JSC Gazprom Neft of Directors, single-member executive body of JSC 29 Dec 2010 Advertising distributor – CJSC Hockey Gazprom Neft and Chairman of the Board of Directors of Club SKA CJSC Hockey Club SKA. Contract value – 413 mn RUB Validity – from 3 Dec 2010 until 30 Apr 2011 26 CJSC FC Zenit Advertising Services Additional 1. JSC Gazprom, holding through its affiliates OJSC GPB No. PT-0102/42 Agreement No.2 to Agreement and Gazprom Transgaz Sankt-Peterburg LLC, a more 29 Dec 2010 No. GPN-09/09000/02314/P of than a 20 % interest in CJSC FC Zenit 28 Dec 2009. 2. Member of the Board of Directors, General director of Buyer: JSC Gazprom Neft, JSC Gazprom Neft, holding the position of Member of Executor: CJSC FC Zenit. Change the Board of Directors and President of CJSC FC Zenit: of services cost under agreement A.V. Dyukov depending on success of Zenit team in 3. Member of the Board of Directors of JSC Gazprom Russia’s Football Championship among Neft, concurrently Member of the Board of Directors premier league clubs’ teams CJSC FC Zenit: K.G. Seleznev 27 CJSC FC Zenit Advertising Services Additional 1. JSC Gazprom, holding through its affiliates OJSC GPB No. PT-0102/42 Agreement No.3 to Agreement and Gazprom Transgaz Sankt-Peterburg LLC, a more 29 Dec 2010 No. GPN-09/09000/02314/P of than a 20 % interest in CJSC FC Zenit 28 Dec 2009. 2. Member of the Board of Directors, General director of Increase of services cost under JSC Gazprom Neft, holding the position of Member of agreement to 1.08 bn RUB the Board of Directors and President of CJSC FC Zenit: A.V. Dyukov 3. Member of the Board of Directors of JSC Gazprom Neft, concurrently Member of the Board of Directors CJSC FC Zenit: K.G. Seleznev

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FULL NAME INVESTOR RELATIONS Joint Stock Company Gazprom Neft Investor Relations Department Tel: +7 (495) 662-75-48 ABBREVIATED NAME Email: [email protected] JSC Gazprom Neft Head of the Consolidation and International LEGAL ADDRESS Reporting Department 5A Galernaya ul., Saint-Petersburg, 190000, Russian Andrey Shvetsov Federation Email: [email protected] Company registered on 6 October, 1995 by the Omsk State Registration Chamber Head of the Investor Relations Board State Registration Certificate # 38606450 Anna Sidorkina Primary State Registration Number 1025501701686. Email: [email protected]

MAILING ADDRESS Head of the Investor Relations Department 125A Profsoyuznaya ul., Moscow, 117647, Russian Alexey Kamenskiy Federation Email: [email protected]

INTERNENT ADDRESS AUDITOR http://www.gazprom-neft.ru/ The 2010 accounting (financial) statements were audited by independent auditing firm CJSC INFORMATION SERVICE PricewaterhouseCoopers Audit (CJSC PwC Audit). Tel: +7 (495) 777-31-52 Address: 10 Butyrsky Val, 'Belaya Ploschad' Office Tel: 8-800-700-31-52 Centre, 125047, Moscow, Russian Federation (toll free in Russia) Tel: +7 (495) 967-60-00 Fax: +7 (495) 777-31-51 Fax: +7 (495) 967-60-01 Email: [email protected] www.pwc.ru

PRESS SERVICE REGISTRAR Media Relations Closed Joint Stock Company Tel: +7 (495) 777-31-43 Specialised Registrar – Holder of the Gas Industry Fax: +7 (495) 777-31-42 Shareholder Register (ZAO Spetsializirovanny Email: [email protected] Registrator Derzhatel Reestra Aktsionerov Gazovoy Promyshlennosti) (ZAO SP-DRAGa). SHAREHOLDER RELATIONS Address: 71/32 Novocheremushkinskaya St., 117420, Corporate Governance Department Moscow, Russian Federation Irina Chubarova Phone: +7 (495) 719-40-44 Tel: +7 (495) 961-13-24 Fax: +7 (495) 719-45-85 Fax: +7 (495) 961-27-59 Web: www.draga.ru Email: [email protected] Email: [email protected]

This Annual Report was preliminarily approved by the Board of Directors of JSC Gazprom Neft on 15 April 2011 (Minutes No. PT-0102/07 on 19 April 2011).

A.V. Dyukov Director General

O.N. Makretskaya Chief Accountant

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