ANNUAL REPORT 2016 CONTENTS GAZPROM NEFT IN 2016 OVERVIEW OF RESULTS THE COMPANY TODAY 2 MATERIAL FLOWS OF OIL AND PETROLEUM PRODUCTS 34 KEY INDICATORS 4 RAW MATERIALS BASE AND PRODUCTION 36 Raw materials base 36 Oil and gas production 36 OIL REFINING 40 Oil refining at Company assets 41 Oil refining at joint venture oil refineries 42 SALES OF OIL AND PETROLEUM PRODUCTS 43 Oil sales 44 Gas sales 44 Petroleum product sales 44 Motor fuel and filling stations 46 Aircraft fueling 49 Bunkering 50 Oils and lubricants production and sales 50 Bitumen materials 51 Petrochemicals 51 STRATEGIC REPORT FINANCIAL RESULTS 52 Key indicators 52 Revenues 53 Production and manufacturing expenses 54 MESSAGE FROM THE CHAIRMAN Share of profit of equity accounted investments 56 OF THE BOARD OF DIRECTORS 8 Liquidity and capital resources 57 Reference materials 59 MESSAGE FROM THE CHAIRMAN Main macroeconomic factors affecting OF THE MANAGEMENT BOARD 10 operational results 60 MARKET OVERVIEW 12 R&D AND INNOVATION 62 Global oil and gas market 12 Innovations in production 62 Oil industry of the Russian Federation 16 Innovations in refining and sales 63 Leadership in the Russian market 19 SUSTAINABLE DEVELOPMENT 66 CREATION OF LONG-TERM ADVANTAGES 20 Key challenges 20 SAFE DEVELOPMENT 67 Rapid adaptation to external challenges 20 Industrial and occupational safety 68 Advantages of the business model Mitigating negative environmental in strategy implementation 21 impacts and the effective use of resources 70 Energy consumption and energy efficiency 74 BUSINESS MODEL 22 HUMAN RESOURCE DEVELOPMENT 76 STRATEGY IN ACTION 24 Profile of personnel 77 Strategic benchmarks and priorities 24 Remuneration and social support for personnel 77 Accounting for sustainable development Personnel training and development 78 factors in strategy implementation 31 Development of a talent pool 78 REGIONAL POLICY AND DEVELOPMENT OF LOCAL COMMUNITIES 79 Corporate volunteering 81 MANAGEMENT SYSTEM APPENDICES CORPORATE GOVERNANCE 84 APPENDIX 1. Report on audit results of the consolidated financial statement for 2016 148 Message from the Board of Directors 84 Description of corporate governance practice 85 APPENDIX 2. Consolidated statement Corporate governance system 90 of financial position 156 Meeting of shareholders 91 Board of Directors 91 APPENDIX 3. Company history 218 Management Board and CEO 107 APPENDIX 4. Structure of the Company’s Group 221 Remuneration for members of governing bodies 115 Control 117 APPENDIX 5. Information about the use of energy resources by Gazprom Neft PJSC 222 RISK MANAGEMENT 124 APPENDIX 6. Oil industry taxation 223 Risk management system 124 Crude oil and petroleum products Development of the integrated export duty rates 223 risk Management system 125 Excise duties on petroleum products 225 Key risks and their management 126 Mineral extraction tax (MET) on crude oil 225 INTERACTION WITH INVESTORS AND SHAREHOLDERS 134 Mineral extraction tax (MET) on natural gas and gas condensate 227 Equity capital 134 Tax benefits 228 Listing 134 Participation in depository receipts programme 137 APPENDIX 7. List of major transactions Dividend policy 138 and related party transactions 229 Debt portfolio and credit ratings 140 APPENDIX 8. Glossary 230 Information policy and disclosure 143 Interaction with investors and shareholders 144 DISCLAIMER 232 Q&A 147 ABOUT THE REPORT1 Reporting period from 1 January 2016 to 31 December 2016. The report of Gazprom Neft Public Joint-Stock Company (Gazprom Neft PJSC or the Company) for 2016 includes the performance results of Gazprom Neft PJSC and its subsidiaries, which are referred to as the Gazprom Neft Group (the Group). Gazprom Neft PJSC is the parent company of the Group and provides consolidated information for this annual report about the operating and financial activities of the Group’s key assets. The list of subsidiary companies (subsidiary enterprises) included within the report and the equity interests of Gazprom Neft PJSC are disclosed in the notes to the consolidated IFRS financial statement for 2016. The report is prepared based on an analysis of operational data, consolidated IFRS financial indicators and recommendations of the GRI G4 international standard. The information presented in the report has been confirmed by the Audit Commission and approved by the Company’s Board of Directors and General Meeting of Shareholders. The text of the Report may contain inaccuracies in the calculation of proportions, The online version percentages and amounts when rounding estimated values. The data cited in the Annual Report may differ slightly from previously published data due of the Annual Report see: to the difference in rounding. ar2016.gazprom-neft.com 1 The Annual Report approved by the Board of Directors, Minutes No. ПТ-0102/23 dated 24 April 2017 and approved by the annual General Meeting of Shareholders of the Company, Minutes No. 0101/01 dated 13 June 2017. THE COMPANY TODAY GAZPROM NEFT IS A VERTICALLY INTEGRATED OIL COMPANY WHOSE In terms of proven hydrocarbon reserves according PRINCIPAL ACTIVITIES INCLUDE THE EXPLORATION, DEVELOPMENT, to SPE (PRMS) classification, Gazprom Neft is comparable with the largest oil companies PRODUCTION AND SALE OF CRUDE OIL AND GAS AS WELL AS THE in the world. PRODUCTION AND SALE OF PETROLEUM PRODUCTS. The Company operates in Russia’s largest oil and gas regions and also has production projects outside of Russia in such countries as Iraq and Venezuela, 10 5 among others. The Company’s primary refining facilities are located in Russia’s major production oil refineries1 Omsk, Moscow and Yaroslavl Regions in addition to Serbia. Gazprom Neft projects is currently a major player on the energy market. The Company produces and supplies a broad range of petroleum products for a number of industries both >2,000 in Russia and abroad. petroleum product wholesale and retail network outlets REGIONS OF OPERATION 1. Russia 2. Belarus 3. Bosnia and Herzegovina 4. Venezuela 5. Iraq 6. Italy 7. Kazakhstan 8. Kyrgyzstan 9. Latvia 10. Romania 11. Serbia 12. Tajikistan 13. Estonia The online version of the Annual Report contains additional 1 Oil refining takes placeat three of the Company’s oil refineries – information about the distribution by region of: the Omsk Oil Refinery, Moscow Oil Refinery and NIS. In addition, > new projects Gazprom Neft owns stakes in Slavneft-YANOS and Mozyr Oil Refinery and utilises part of their refining facilities (only on the conditions > geological prospecting of customer-supplied raw materials). The volume of oil refined > production projects at the Mozyr Oil Refinery is determined based on a schedule approved by the Russian Ministry of Energy. Gazprom Neft can refine up to 50% > refining and sales assets of the oil supplied to the refinery. The actual volume at the refinery > average number of employees. is determined based on its cost-effectiveness. 2 Gazprom Neft > Annual report > 2016 GAZPROM NEFT IN 2016 LEADERSHIP ON THE RUSSIAN MARKET No. 1 No. 2 No. 3 Filling station pumping Petroleum product sales in Russia Hydrocarbon production among VIOC in Russia 19.3 t/day 27.11 mn t 86.20 mn TOE Yield of light petroleum products Oil refining depth Oil and condensate refining in Russia 64.4% 81.8% 38.66 mn t Motor fuel sales For more, see the ‘Oil industry of the Russian 14.75 mn t Federation’ section, p. 16 CAPITALISATION AND INCOME FOR SHAREHOLDERS The common shares of Gazprom Neft circulate in Russia on the main The Company’s capitalisation as of 31 December 2016 exceeded trading platforms of the unified exchange Moscow Exchange PJSC. Globally the Company’s shares trade in the form of ADRs, primarily RUB 1 tn in OTC trading in the UK via the LSE IOB system, in the U.S. via the OTCQx system as well as in other countries. The Company paid out dividends for 2015 RUB 6.47 per share For more, see the ‘Dividend policy’ section, p. 138 According to the dividend policy of Gazprom Neft PJSC, at least 15% of the consolidated IFRS result, or 25% of RAS net profit, is distributed for dividends. INVESTMENT APPEAL EFFICIENCY IN A WIDE RANGE OF OIL PRICES STRATEGY IMPLEMENTATION AND FUTURE GROWTH Gazprom Neft’s highly efficient and balanced business The stability of the Company’s position enables model, which combines the advantages of the upstream Gazprom Neft to continue implementing its main and downstream segments, enables the Company development projects, which in turn creates to generate profitwith oil prices at any level. conditions for the Company’s long-term growth and the implementation of its strategy. For more, see the ‘Advantages of the business model in strategy implementation’ section, p. 21 www.gazprom-neft.com 3 KEY INDICATORS LEADING POSITIONS IN HYDROCARBON BALANCED PRODUCTION GROWTH REFINING PROVEN HYDROCARBON RESERVES (PRMS- HYDROCARBON PRODUCTION OIL REFINING2 SPE)1 (mn TOE) (mn TOE) (mn t) 2016 1,514 2016 86.20 2016 41.89 2015 1,518 2015 79.70 2015 43.07 2014 1,443 2014 66.25 2014 43.48 2013 1,343 2013 62.26 2013 42.63 2012 1,200 2012 59.71 2012 43.34 The resource base of the Company’s current assets has The launch of the Gates of the Arctic export terminal The volume of oil refined in 2016 was optimal given deteriorated in terms of the remaining commercial reserves at the Novoportovskoye field, the start of production the existing demand and price situation for oil as most fields are in a late stage development. An increase at the East Messoyakha field, increased output and petroleum products. The Company also increased in high-tech drilling and the use of tertiary methods to boost at the Prirazlomnoye field, Orenburg Region fields the production volume of light petroleum products, while oil recovery has enhanced the efficient development and SeverEnergy (Arcticgas), the consolidation of 50% fuel oil and marine fuel accounted for the biggest decrease of these reserves.