2016 Annual Report on Regulations on Risk Management Minutes No

2016 ГANNUALОДОВОЙ ОREPORTТЧЕТ 01 6 01 6 2 ОВО Й ОТЧЕТ 2 Д www.transneft.ru О Г ANNUAL REPORT Full corporate name in the Russian primary state registration number General Information language: Публичное акционерное (OGRN) 1027700049486 (certificate 4 общество «Транснефть». of entry into the Unified State Register of Legal Entities on the legal entity Abbreviated corporate name in the registered before July 1, 2002, Series Position in the industry Russian language: ПАО «Транснефть». 77 No. 007893052). 20 The former name in the Russian It is registered in the Russian Fede language is Открытое акционерное ration in the federal city of Moscow. общество «Акционерная компания Location: Moscow, Russia. Development Strategy по транспорту нефти «Транснефть» 36 (ОАО «АК «Транснефть»). The decision Address: 57 Bolshaya Polyanka, to change the name of the Company Moscow, 119180. was adopted on June 30, 2016 in ap- proving the new version of the Articles Contact telephone: (495) 950-81-78. Financial Review of Association (Order of the Federal Fax: (495) 950-89-00. 58 Agency for State Property Manage- ment No. 520-r), the entry into the Website: http://www.transneft.ru. Unified State Register of Legal Entities Email: [email protected]. was made on July 21, 2016. Sustainable development As of December 31, 2016, the num- 74 Full corporate name of the Company ber of employees on the payroll of in the English language: Public Joint Transneft is 1,298. Stock Company “Transneft”. In the present Annual report the terms Corporate Governance Abbreviated corporate name of the Com- Transneft, the Company refer to the 86 pany in the English language: Transneft. Public Joint Stock Company “Trans- neft”. The terms Transneft, Transneft Transneft was registered by the Mos- Group, the Group refer to: Execution of instructions from the President cow Registration Chamber on August • Transneft and legal entities that com- 140 26, 1993, under No. 026.800 (Сertifi prise Transneft subsidiaries in accord- and the Government of the Russian Federation cate of state registration series LA ance with the Articles of Association No. 009851). Information on the state of Transneft in describing business registration of Transneft was entered activities and production results; into the Unified State Register of • Transneft and its subsidiaries defined Legal Entities by the Department of in accordance with the International Annexes Russia’s Ministry for Taxes and Levies Financial Reporting Standards (IFRS) 152 for Moscow on July 24, 2002 under in describing the financial results. General Competitive • Monopoly on the oil pipeline market. • Tariffs for oil pumping are signifi- advantages • Low operating costs in relation to cantly lower than those in the CIS Information the total transported oil compared and European countries. to rail and water transport.

Development prospects The Company’s strategic objective is Tayshet trunk oil pipeline; to develop and modernize the Russian • Development of the trunk pipeline trunk pipeline system in order to satu- system to increase the supply of rate both domestic and export markets petroleum products to the port of with oil and petroleum products trans- Primorsk to 15 million tons per year Largest pipeline company Natural monopoly About ported via pipelines. (the Sever (North) Project); in the world • Reconstruction of the approach dam In 2016, we completed the implementa- of the specialized sea oil-loading thousand tion of the following investment projects: port of Kozmino in order to ensure km • Construction of the Zapolyarye– the approach of tankers with a dead- 69 Purpe trunk oil pipeline; weight of 150,000 tons. of trunk pipelines • Construction of the Kuyumba– Main activity: Investment in infrastructure

organizing and carrying Investment projects, Technical re-equipment and reno- Period RUB billion vation, RUB billion Controlled by the state and out transportation of oil Over is included in the List of and petroleum products 2016 154.4 183.1 Enterprises and Joint Stock through the system of 2017–2021 297.8 861.8 Companies of Strategic Im- trunk pipelines in the Rus- portance. sian Federation. 500 pump stations Information for • The authorized capital is divid- • The Company’s preferred shares shareholders ed into ordinary and preferred (1,554,875) are listed on the Moscow shares. Exchange.

About • 100% of the Company’s ordinary Ticker TRNFP shares (5,546,847) are owned by Price of the preffered shares 197.950 1 the Russian Federation . as of December 31, 2016, rub

MCM Authorized capital, % 23 3,000 Volume Price 250,000 2,500 200,000 of storage tanks 21.9 % 2,000 150,000 1,500 1,000 100,000 500 50,000 0 0 May July April Transportation June March August October January February December November September 78.1 % Volume of trade, RUB million % Price of preferred shares of Transneﬅ, RUB 85 Ordinary shares of the oil produced in Russia Preferred shares 1. In February 2017, 21,901 additionally issued shares were placed.

4 Transneft Annual report 2016 5 Key indicators ₽ 37.3 billion

EBITDA growth in 2016

Transportation of oil and petroleum Oil freight turnover Transportation of petroleum products Revenue, EBITDA and net profit under Number of employees Environmental protection products IFRS, RUB billion

2014 477.5 2014 1,147.2 15.6 2014 31.2 705.8 2014 774.4 2015 115.5 2014 1,969 0.170 31.2 348.1 59.5 2015 1,185.0 16.5 2015 32.2 725.4 2016 114.2 2015 1,417 0.158 2015 481.4 2015 815.7

32.2 2016 1,219.1 17.7 2016 33.1 724.4 371.5 143.4 2016 3,400 0.156 Average number of employees on 2016 483.4 2016 848.1 the payroll of Transneﬅ subsidiaries, 33.1 thousand people Oil freight turnover, billion tkm Volume of petroleum products 408.8 232.9 Investment in environmental transported, million tons protection, RUB million Oil delivery to consignees, million Per unit costs per 100 tkm, RUB tons Per unit operating expenses for the Revenue Specific emissions of pollutants into transport of petroleum products*, the atmosphere, kg/ton RUB/ton EBITDA Petroleum products delivery to consignees, million tons Net profit * For the period of 2014–2015 the expenses are discounted to 2016 (inflation only)

Core assets Transneft tariff for oil pumping compared to similar tariffs in the CIS and Europe based on 2016, USD per 100 tkm

53.3 JSC Polotsktranspetrol Druzhba, average tariﬀ 0.57 2014 18.9 JSC Gomeltransneﬅ Druzhba, average tariﬀ 0.69

52.3 Transneﬅ, average tariﬀ 0.77 2015 17.9 TAL Pipeline (Italy, Austria, Germany), Trieste – Ingolstadt 0.87 52.8 Przyjaźń (Poland), average tariﬀ 1.05 2016 16.2 JSC KazTransOil (Kazakhstan), domestic market 1.17

Length of trunk oil pipelines, JSC Ukrtransnaﬅa, average tariﬀ for Hungary, Slovakia 1.30 thousand km Transpetrol (Slovakia) 1.69 Length of trunk petroleum products pipelines, thousand km JSC KazTransOil (Kazakhstan), for export 1.75 Baku-Tbilisi-Ceyhan Oil Pipeline (BTC Co), average tariﬀ 1.78

Transnaﬅa (Serbia), average tariﬀ 2.24

MERO (Czech Republic) 2.87

JANAF (Croatia), average tariﬀ 3.14

6 Transneft Annual report 2016 7 Address of the Chairman of the Board of Directors

Dear shareholders, namic development of the socio-eco- Corporate governance Dear shareholders, nomic infrastructure. The achievements made in 2016 The most significant outcome of As part of improving of the corporate enabled Transneft to maintain and Transneft’s activities in 2016 was the Results achieved governance principles, the Company’s foster its stand as a Russian major completion of large-scale investment Dividend Policy has been approved. pipeline company in the domestic and projects and the sustained growth of In 2016, the Company successfully This Policy ensures the transparency international fuel and energy industry. the Company’s main production and achieved the production and financial of the procedure for determining divi- The proficiency and cohesion of the economic indicators. goals set by the Board of Directors. dends, unconditional fulfilment of the Company’s team ensure its further The Group’s revenues grew by 4.0% Company’s basic objectives, enhanc- effective development and achieve- Projects implemented and the operating expenses de- ing its investment attractiveness and ment of goals, as well as safeguarding creased by 0.6%. As a result, the financial sustainability. In accordance of the long-term strategic interests of The construction of the Zapolyarye- EBITDA increased by 10.0%. The with the Action Plan (the “road map”) the Russian Federation. Purpe and Kuyumba-Tayshet trunk oil labor productivity increased by 5.6%. approved by the Board of Directors, pipelines (8.6 million tons per annum) The reliability of the piping system in- we continue to work on improving was completed as scheduled. The activi- creased. The share of domestic equip- corporate governance in line with the ties were implemented to develop the ment purchased by Transneft subsid- rules of the Corporate Governance trunk pipeline system in order to in- iaries increased by 0.6% in 2016 as Code recommended by the Bank of Alexander crease the supply of petroleum products compared with 2015, amounting to Russia for joint stock companies. NOVAK to the port of Primorsk to 15 million 91.6%. tons per annum (the Sever Project), and Strategic development Chairman of the Board of Directors the reconstruction of the facilities at Sustainable development of Transneft the specialized sea oil-loading port of The capacity of the trunk pipeline Kozmino was completed as scheduled. In the reporting year, Transneft con- system will be increased over the next sistently implemented the decrees of few years. The capacity of the Eastern The Company’s work is of great the President of the Russian Fed- Siberia – Pacific Ocean (ESPO) Pipeline strategic importance and is unique in eration, as well as the instructions, System is being increased in all areas. technical terms. Due to the commis- recommendations and directives of This will enable Russian producers to sioning of new pipeline capacities, the Russian Government. The Ener- increase oil exports to countries in the active development of prospective oil gy Saving Program and the Plan to Asia-Pacific Region. The Sever (North) and gas fields in Western and East- reduce specific emissions have been and Yug (South) projects are being ern Siberia has begun, and Russian fully implemented. The industrial implemented. They will open up addi- producers have been given additional injuries rate is lower than the rate tional export routes for the increasing opportunities to diversify the trans- specified in Transneft’s Strategy. volume of Russian oil refineries’ light portation directions of raw materials. petroleum products through the ports Advanced domestic technologies The Board of Directors approved the of the Baltic Sea and Novorossiysk. have facilitated the construction of Innovative Development Program for The reconstruction of the trunk pipe- thousands of kilometers of trunk the period up to 2021, which enhanc- line system in the Volga and Central pipelines, alongside with dozens of es the role of innovation in achieving Federal Districts will increase the residential and power facilities in the Company’s strategic objectives, supply of petroleum products, reduce inaccessible and sparsely populated and aims to increase production the load on the transport hub and areas of the country. This has created and eco-efficiency, reduce costs and improve the environmental situation new jobs and contributed to the dy- increase labor productivity. in the Moscow Region.

8 Transneft Annual report 2016 9 Address of the President

Dear shareholders, struction and modernization of its of fuel by pipelines to the Moscow continue to have a significant impact transport facilities. Region. The objective is to increase on the Company for its shareholders. The year 2016 is a significant year the transportation of light petroleum Our team of professionals will carry in the history of Transneft and the As part of the implementation of products and to expand the petrol out all tasks entrusted to them, and Russian oil industry as a whole. The Transneft’s Development Program, mix for consumers in the region. ensure the reliability and the deve Company completed the construc- in 2016, 1,702 new construction lopment of pipeline transport. tion of two strategically important facilities, technical re-equipment and In 2016, all of the main goals set by trunk pipelines, the Kuyumba-Tayshet reconstruction facilities, including the Board of Directors in the areas of and Zapolyarye-Purpe oil pipeline 2,817 km of trunk pipelines, were reliability, environmental and industri- systems. The history of their creation put into operation (1,329 km – new al safety of the trunk pipeline system, has become a feat of labor, engineer- construction, 1,488 km – technical efficiency of operating, investment ing and technological innovation. re-equipment and reconstruction). and innovation activities were met. 471 km of pipelines to be put into Emissions of pollutants into the at- The indicators achieved by Transneft operation in 2017 were connected. mosphere decreased by 295 tons, the in the commodity and transport sec- 525 km of trunk oil pipelines were specific consumption of electricity for tor show positive dynamics. Transneft switched to pumping petroleum oil transportation decreased by 1.73%, fully implemented the plan for the products. 8 new oil pumping sta- the labor productivity increased by Nikolay transportation volumes of oil and pe- tions, 14 facilities within the system 3.6%, and financing for innovation TOKAREV troleum products both to the domes- for measuring the oil quantity and amounted to 1.4% of the revenues. tic market and for exports. quality indicators and 19 items of Chairman of the Management Board, technical security equipment were Significant progress has been made the President of Transneft Compared to 2015, the oil freight also put into operation. in the area of import substitution turnover increased by 2.9%, the and localization of production in the volume of oil delivery to consignees The company has successfully im- Russian Federation. In cooperation increased by 0.4%, oil exports to plemented measures for developing with Italian partners, a plant for the Russia’s neighboring countries and Russian petroleum product pipeline production of pumping equipment countries further afield increased by transport. Transneft’s employees, has been built and put into operation 3.6%. Successful solution of problems in strict accordance with the sched- in Chelyabinsk, and the construction related to oil and petroleum products ule, have been working to expand of the motors factory is underway. transportation, together with lower the capacity of the Sever Project to operating expenses, has had a posi- increase the export of diesel fuel In 2017, the Company has the chal- tive impact on the financial position through the port of Primorsk. New lenge of increasing its productive of the Company and its subsidiaries. facilities of the Yug Project have and financial efficiency, which, given The revenues of Transneft Group been built. The objective of the the increased commodity transport grew by 4.0% in 2016 and reached project is to supply diesel fuel via work, should further increase the fi- RUB 848.1 billion, and the EBITDA pipelines to the domestic market of nancial results. The Company’s team increased by 10.0% and amounted to the Russian Federation and to export should implement new plans in the a record RUB 408.8 billion. to the countries of Europe through areas of reliability, security and ecol- the port of Novorossiysk. ogy, and innovative development. Over the past year, the Company has worked consistently to achieve the In the past year, Transneft launched I am confident that meeting the goals for the development, recon- a project to increase the supply intended objectives of Transneft will

10 Transneft Annual report 2016 11 Key events 32 million tons/year capacity of the Zapolyarye-Purpe pipeline system

The Zapolyarye-Purpe and Kuyumba- Tayshet trunk pipelines were put into The sixth meeting of the Internation- operation. The objectives of the projects al Association of Oil Transporters are to ensure that new oilfields in the (IAOT) was held in Budapest. The final Yamalo-Nenets Autonomous District chord of the Prague Club meeting and the Krasnoyarsky Krai are admit- was the signing by the President of ted to the trunk pipeline system. The 8.4 % the Company Nikolay Tokarev and the Zapolyarye-Purpe pipeline system has a share of imports 100 million tons of oil have been managing director of JSC MOL Sándor length of 485 km and throughput capac- pumped since the beginning of the Fasimon of a new cooperation agree- ity of 32 million tons/year. The length of operation of the ESPO-II trunk oil ment that covers both technical and the Kuyumba-Tayshet trunk oil pipeline pipeline. The trunk pipeline connects organizational issues of accounting is 700 km, the throughput capacity is the fields in Eastern and Western and documenting of oil transported to 8.6 million tons/year. Siberia with the specialized sea Hungary from the Russian Federation. oil-loading port of Kozmino in Pri- morsky Krai. In 2020, the capacity The facilities for the first phase of an of the system will reach 50 million investment project to increase the tons/year. supply of petroleum products to the port of Primorsk to 15 million tons/ The approach dam revamping year (the Sever Project) were put into accompanied by dredging work in operation. This will help to achieve two the area of water of Berth No. 2 at global public objectives: to increase the The plant for production of pumping the port of Kozmino was completed. diesel-fuel exports by pipelines and to equipment was built in cooperation Transneft became The approach dam that has been put improve fuel supply for several regions Transneft closed a transaction for with Italian partners and became a public joint stock into operation ensures access for of the country. The Company is current- the purchase of 50% of Novorossi- operational in Chelyabinsk. The plant tankers with a deadweight of up to ly implementing the second phase of ysk Fuel Oil Terminal, LLC (NFT LLC) creates a full cycle of production of company 150,000 tons. On February 5, 2017, the Sever Project to increase the supply The Regulations on Dividend Policy from Gunvor trader. The other 50% trunk and booster oil pumps in Russia. Nordic Freedom tanker moored to of petroleum products to the port of Pri- were approved, according to which belongs to NCSP Group (Novorossiysk The construction of the motors fac- the berth to load ESPO oil batches morsk to 25 million tons/year. up to 25% of the Group’s normalized Commercial Sea Port), where Trans- tory, which is an important link in the of 140,000 tons. profits under IFRS will be allocated for neft Group owns 35.57%. Given the localization of technological equipment the dividends of all share categories. ownership structure and decision- production in Russia, has also begun. In Following the changes in the Civil However, specific size of the share making on key business issues, the 2016, fundamental progress was made Code of the Russian Federation, dividend will be determined by the investment is classified as a joint in the area of import substitution and the Company’s Annual General Board of Directors in accordance with venture. NFT LLC is an oil terminal localization of production in the Rus- Meeting of Shareholders decided to 15 the directives of the Government of the operating in Novorossiysk, with a sian Federation. The share of imports amend the Articles of Association. million tons/year Russian Federation. In 2016, Transneft maximum throughput capacity of decreased by 1.6 percentage points to The Company became a public joint allocated RUB 12.8 billion (100% of its 4 million tons/year. 8.4% as compared to 2014. stock company. expected supply of petroleum products to net profit) for dividends for 2015. As of the port of Primorsk during the first phase December 31, 2016, the Company has of the Sever project no dividend tax liabilities.

February April June October November December

12 Transneft Annual report 2016 13 Export routes

Geographical Footprint Directon Transportation in 2016, million tons Port of Primorsk 50.6 Port of Ust-Luga 30.1 thousand Druzhba Oil Pipeline 69.0 km Port of Novorossiysk 30.4 53 of trunk oil pipelines are opera Port of Kozmino 31.8 Transneft operates 53,000 km of trunk oil pipelines and ted by Transneft Group Skovorodino – Mohe Oil Pipeline 16.5 16,000 km of trunk petroleum products pipelines. The Com- Omsk – Pavlodar Oil Pipeline 7.6 pany transports 85% of oil and 26% of petroleum products produced in Russia and considerable volumes of hydrocar- Major investment projects bons and petroleum products of the CIS countries. The Com- Throughput capacity, Project million tons per year completion pany’s oil pipelines connect the largest Russian oilfields with Development of trunk oil pipelines thousand refineries and export markets in Europe and Asia directly and Construction of the Zapolyarye – Purpe 32 (suitable for in- 2016 km trunk oil pipeline crease to 45) 16 through sea ports. Construction of the Kuyumba – Tayshet 8.6 (Stage 1) 2016 of trunk petroleum product trunk oil pipeline 15 (Stage 2) 2023 pipelines are operated by Expansion of throughput capacity of the 30 2017 Transneft Group Skovorodino – Mohe oil pipeline Expansion of ESPO at the section from Tay- 80 2020 shet IPS to Skovorodino PS Expansion of ESPO at the section from Skov- 50 2019 orodino PS to the specialized sea oil-loading port of Kozmino Primorsk Sever Project Reconstruction of the trunk pipeline system for the Moscow Development of trunk product pipelines Region Yug (South) project 6 (Stage 1) 2017 6 (Stage 2) 2018 % Primorsk 85 Ust-Luga Sever (North) project 15 (Stage 1) 2016 Construction of the Zapolyarye – of oil produced in Russia are Ust-Luga Purpe trunk oil pipeline 25 (Stage 2) 2018 transported via the Transneft Reconstruction of the trunk pipeline system – 2018 to increase the volume of petroleum prod- Group system Usa ucts transportation to the Moscow Region Andreapol Zapolyarye Druzhba Yaroslavl Moscow Construction of Unecha Expansion of ESPO-I to Expansion of ESPO-II to Nizhny Novgorod the Kuyumba – 80 million tons/year 50 million tons/year Lazarevo Tayshet trunk Perm Purpe oil pipeline % Kazan 26 Nikolskoye Surgut Novorossiysk Konda Kuyumba Aldan of petroleum products produ Klin Lensk Ufa Samotlor ced in Russia are transported Novorossiysk Samara by Transneft Group Tyumen Volgograd Parabel Salavat Skovorodino Tikhoretsk Khabarovsk Tuapse Yurgamysh Bratsk Tomsk Skovorodino – Kozmino Omsk Anzhero- Tayshet Mohe Sudzhensk Omsk – Pavlodar

Expansion of Kozmino Skovorodino-Mohe to Yug Project 30 million tons/year

14 Transneft Annual report 2016 15 History of 2009–2012 Second stage of construction of the Baltic Pipeline System (BPS-2) export- the Company ing oil from the Russian port in the Baltics – Ust-Luga.

2000 Launch of the first major oil pipeline 2010–2012 2017 in modern Russia with a length of Construction of the ESPO-II pipeline Expansion of the throughput capacity The Russian trunk oil pipeline network 1970 312 km bypassing the territory of the transporting oil from oil-producing of the Skovorodino–Mohe pipeline up was initially created as a part of the Establishment of the Main Production Chechen Republic. This resulted in an regions in Western and Eastern to 30 million tons per year, which is United oil supply system. In accord- Department for Oil Transportation increase of oil transit reliability from Siberia to the Far East and Asia- to increase the oil supply to China. ance with the Decree of the Council and Supply (Glavtransneft) based on Azerbaijan on the route Baku–Tikho- Pacific Region markets, 2,046 km of of Ministers of the USSR No. 96 of the existing system of 37,400 km retsk–Novorossiysk. which pass through the Amur and the February 5, 1970, the Main Production of trunk pipelines transporting over Jewish Autonomous Region, and the 2018 Department for Oil Transportation and 300 million tons of hydrocarbons. Khabarovsk and Primorsky Krai. Expansion of the throughput capa Supply (Glavtransneft) of the Ministry 2001 city of the Sever product pipeline of Oil Industry of the USSR was cre- Completion of the Sukhodolnaya–Rodi- up to 25 million tons per year for ated. Its task was to receive oil from onovskaya oil pipeline. This route al- 2011 increasing the export of diesel fuel oilfields and deliver it to consumers 1971–1975 lowed the transport of “black gold” to Launch of the Purpe–Samotlor oil from the Primorsk port. including exporting it abroad. Construction of a record number of Novorossiysk bypassing the territory pipeline. This trunk pipeline allowed trunk pipelines – nearly 19,200 km. of Ukraine. oil transfer from the Vankor Field and Trunk pipeline system reconstruction The main production department The largest of them was the Ust- interlinked the western and eastern in order to increase the transpor- Glavtransneft was closed down in Balyk–Kurgan–Ufa–Almetyevsk oil part of the Russian oil pipeline system. tation volume of light petroleum 1991 together with the Ministry of the pipeline. Oil transportation from products (motor gasoline, diesel fuel, Oil Industry of the USSR. Oil transpor- Tyumen to the European part of the jet fuel) to the Moscow Region up to tation services in Russia were carried country and its export from Novorossi- 2016 14 million tons per year. out under the terms of agreements ysk through the built oil pipeline Kuy- Completion of the first stage of between consignors and Transneft, byshev–Tikhoretskaya–Novorossiysk. the Sever Project providing for an from September 1993 – AK Transneft, increase in the diesel fuel export 2019 from July 1998 – OJSC AK Transneft, through the port in Primorsk up to 15 Expansion of the throughput capacity and from July 2016 – Transneft. million tons per year. of the ESPO-II pipeline system (at the 1973 Skovorodino–Kozmino section) up to Taking into account the legal succes- Construction of the Alexandrovskoye– Completion of the Kuyumba–Tayshet 50 million tons per year. sion of the organizations listed above, Anzhero-Sudzhensk oil pipeline in and the Zapolyarye–Purpe oil trunk Transneft has been in operation since order to transport oil from Western pipelines which included new oilfields 1970. Siberia that became a leader in oil 1980–1990 2006–2009 of the Yamalo-Nenets Autonomous production volumes in the USSR. Glavtransneft transfers all the oil Completion of the first stage of District and Krasnoyarsky Krai into the produced in the USSR (with an aver the ESPO project with a length of oil transportation system. age transportation route length 2,694 km – at the time that was the of 2,300 km) and renovates over largest construction project in Rus- 1975–1980 1,000 km of trunk pipelines yearly. sia allowing it to enter the growing A sharp increase of oil production in The system employs 61,000 people. Asia-Pacific Region markets. Western Siberia from 148 million tons to 312 million tons of liquid hydrocarbons. Two trunk pipelines were 2007–2015 launched: Nizhnevartovsk–Kurgan– Integration of JSC Transneftepro 2020 Kuybyshev and Kholmogory–Surgut. 1993 duct, a natural monopoly owning a Expansion of the throughput capacity Launch of the so-called Northern Establishment of the Transneft com- trunk petroleum products pipeline of the ESPO-I pipeline system (at the Route in Western Siberia – the Surgut– pany on the basis of 16 oil pipeline system, into the Transneft Group Tayshet–Skovorodino section) up to Polotsk oil pipeline. enterprises. subsidiaries. 80 million tons per year.

the 1970s the 1980–1990s the 2000s the 2010s Future Development

16 Transneft Annual report 2016 17 Structure of the Transneft Group

Structure of the Transneft Group as of December 31, 2016

Oil and petroleum product transportation Service and support activities

profit-making84 organizations participated Essential Transneft subsidiaries Mostransnefteproduct, JSC Engineering communications support of by Transneft as of December 31, 2016 Transneft Upper Volga, JSC trunk oil pipelines Svyaztransneft, JSC (engineering Transneft Druzhba, JSC communications support of trunk oil Transneft Volga Region, JSC pipelines) Transneft Kama Region, JSC Transneft Siberia, JSC In-house security service Transneft security services, LLC Transneft Urals, JSC (in-house security service) The list of essential Transneft subsidiaries is approved yearly by the Chernomortransneft, JSC Company’s President on the basis of criteria established by the Board of Directors. On February 7, 2017, the President of Transneft approved Transneft Baltic, LLC Accounting, taxation and management the updated list of essential Transneft subsidiaries. Mostransnefte- Transneft East, LLC records product, JSC was deleted from the updated list and Transneft Western Siberia, JSC was added. Transneft Far East, LLC Transneft Finance, LLC (accounting, taxation and management records)

Authorized capital, %

Other Transneft subsidiaries JSC “Srednevolga Transnefteproduct” Giprotruboprovod, JSC “Transneft Telecom”, LLC 21.9 % Transneft Western Siberia, JSC JSC “NPF “TRANSNEFT” Transneft PCD, LLC Transnefteproduct, JSC The OMEGA Company Transneftstroy, LLC JSC “Transnefteproduct-Samara” Telecomnefteproduct, JSC Transneft Energy, LLC Transneft North, JSC JSC “TELECOM-OILPRODUCT” Transneft Electric Network Service, LLC Transneft Central Siberia, JSC TOMZEL, JSC “Transneft Invest” Management LatRosTrans, LLC Transneft Diascan, JSC Company, LLC 78.1 % Transneft Primorsk Port, LLC Transneft UW Service, JSC PMC ESPO, LLC and others Transneft Kozmino Port, LLC Transneft Metrology, JSC Ordinary shares Transneft Ust-Luga Port, LLC Transneft Service, JSC Preferred shares Zapad-Transnefteproduct, Private Unitary JSC “TNT” Transneft Energyterminal, JSC Transneft R&D, LLC Transneft-Logistics, LLC

Transneft Media, LLC The complete list of Transneft Transneft Supervision, LLC subsidiaries is presented in Transneft Service, LLC Annex 2.

18 ТРАНСНЕФТЬTransneft Annual report 2016 19 Position in the industry

of oil produced in Russia is trans- Company’s position ported by the Transneft Group in the industry 22 % system 85 Economic forecast for 2017-2019 23

Comparison with the peer group 25

Operating results 31 of petroleum products produced in Russia are transported by International Association 26 % Transneft Group of Oil Transporters 34

million tons is the volume of oil and pertoleum products 516.5 transported in 2016

thousand km is the length of pipelines (oil and petroleum 69 products) in 2016

billion tkm is the freight turnover (oil and petroleum 1,263 products) in 2016

20 Transneft Annual report 2016 21 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

network compared to the trunk pipe- Another competitor of Transneft in Company’s position line system, the ability to transport petroleum product transportation small amounts of petroleum products over long distances is water trans- with no loss of quality, and an almost port. However, this type of transport in the industry unlimited range of petroleum products is competitive within a limited navi- that can be transported taking into gation period of about 5-6 months. account the specifics of oil processing at oil refineries. Transneft’s competitor for short distances, mainly in intraregional These advantages allowed the railway transportation, are vehicles, since The oil and petroleum product pro- um product pipelines, and, therefore, Share of oil produced in the Russian sector to take over an essential part of they allows door-to-door transpor- duction volume within the Russian the revenue of the Group from provid- Federation and transported in the light petroleum product transfers (in tation of petroleum products, in Federation defines the transportation ing these services. Transneft system, yearly dynamics particular, of motor gasoline) on the particular, from oil refineries and oil volumes of Transneft’s oil and petrole- Transneﬅ Russian domestic market. storage facilities to local consumers. share 526.3 2016 2015 Change, % 2014 87.4 % 477.5 Oil production volume in the Russian Feder- 547.3 533.6 2.6 ation, million tons 533.6 2015 87.0 % 481.4 Production of light petroleum products in 125.9 124.9 0.8 the Russian Federation, million tons 547.3 2016 84.9 % 483.4 Economic forecast For the reporting year, the oil produc- Company’s dominating position in the Volume of oil production in the tion volume in the Russian Federation oil transportation industry. Russian Federation, million tons 1 amounted to 547.3 million tons, and Oil delivery to consignees by for 2017-2019 the transport of Russian oil in the Oil transportation by activity and Transneﬅ subsidiaries, million tons Transneft Group’s system amounted changes of this indicator for the last to 84.9% of this volum, defining the three years.

At the end of 2016, the Russian econ- According to Rosstat, Russia’s total omy experienced a transition from industrial output increased in 2016 Activity 2014 2015 2016 Share of light petroleum products stagnation to economic recovery. The by 1.1%. In 2017-2019 the produc- produced in the Russian Federation and implementation of the agreement of tion of investment goods is expect- Oil transportation within Russia 87.6% 86.4% 84.9% transported in the Transneft system, OPEC countries and countries outside ed to recover gradually. A stable 85 % yearly dynamics the cartel reinforced the fixation of oil position will be maintained in the share of oil produced in the Russian Transneﬅ prices in the range of USD 50-65 per exporting sectors with more com- Federation in 2016 and transported in Apart from the Transneft Group’s consumers in Kazakhstan and on oil share barrel. At the end of January 2017, petitive products: the fuel and power the Transneft system trunk oil pipeline system, the of Russian consignors. 125.8 the consensus forecast of oil prices sector, metallurgy, and chemical Caspian Pipeline Consortium 2014 24.8 % amounted to USD 55.6 per barrel in production. The implementation of 31.2 (CPC) also operates in Russia, with Transneft’s main competitor in pe- 2017, followed by an increase up to state infrastructure projects will en- an oil transportation volume of troleum product transportation for 124.9 USD 61.2 and USD 63.3 per barrel in sure demand for construction sector 2015 44.3 million tons in 2016, and other export and to Russian regional mar- 25.8 % 2018 and 2019 accordingly. services. 32.2 systems and supply pipelines owned kets is the railway sector. Currently, by oil production companies. about 60% of light petroleum product 125.9 According to the baseline forecast of In 2017, industrial production is ex- 2016 transportation is carried out by it. The 26.3 % the Ministry of Economic Development pected to grow by 1.1%, followed by 33.1 At the present time, Transneft’s Company transports about 26% of all of Russia, in 2017, the GDP growth an increase to 2.1% in 2019. competitor in oil transportation light petroleum products produced at rate will become positive and will % Volume of light petroleum products 26 in the direction of the Novorossi- Russian oil refineries. amount to 0.6%, in 2018, the GDP production in the Russian Federation, share of light pertoleum products ysk port is the Caspian Pipeline million tons growth rate will increase to 1.7%, and produced in the Russian Federation in Consortium (CPC), i.e. CPC’s Marine The railway has several important in 2019 – to 2.1%. 2016 and transported in the Transneft Petroleum products delivery to system Terminal in Yuzhnaya Ozereyevka. advantages in petroleum product consignees by Transneﬅ subsidiaries, The transportation services of transportation on the domestic million tons 1. The section has been prepared on the basis of the Forecast of social and economic development JSC CPC-R are focused on oil of market, such as a branched railroad of the Russian Federation for 2017 and the planned period of 2018-2019 http://economy.gov.ru/ minec/activity/sections/macro/2016241101, as well as the Monitoring of the results of social and economic development of the Russian Federation in 2016 http://economy.gov.ru/minec/activity/ sections/macro/2017070204 prepared by Russia’s Ministry of Economic Development.

22 Transneft Annual report 2016 23 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Changes in macroeconomic indicators of the Russian Federation in 2016 and forecast for 2017-2019* Comparison 2016 2017 2018 2019 with the peer GDP growth rate, % -0.2 0.6 1.7 2.1 Industrial production index, % 1.1 1.1 1.7 2.1 group Investments in fixed capital, % -1.4 -0.5 0.9 1.6

Consumer price index, by year-end, % 5.4 4.0 4.0 4.0

* Baseline scenario of the Forecast of social and economic development of the Russian Federation for 2017-2019.

According to the Ministry of Economic the compression safety of the ESPO-I Mineral extraction growth (decrease), % Example of differences in range of activity as of 2015 Development of Russia, due to the pipeline system, development of a current economic environment and the system of trunk oil pipelines to sup- increased appeal of crude oil export port the expansion of oil shipments 2015 report compared to petroleum products to China up to 30 million tons per export in the baseline version, oil year. This will allow oil exports to be 1.3 production is expected to increase to optimized by unloading less effective -2.7 553 million tons by 2019. Due to the directions and transit risks to be low- 2016 report development of crude oil distillation, ered during transportation. 2.6 the gradual modernization of refinery -1.0 plants and the growth of the refin- Taking into account the time frames 2017 forecast 514 ing depth, oil export will amount to stipulated in the agreements with Transneﬅ 1,226 277.6 million tons by 2019. Oil export oil companies for the modernization 0.7 outside the CIS is expected to amount of oil refineries aimed at increasing -3.2 150 Enterprise 6 to 252.2 million tons by 2019, mainly the conversion rate, a moderate 2018 forecast 184 23 due to the increased shipments to the decrease in refining volume to 0.9 Enbridge 140 Sunoco Asia-Pacific countries. Export sales to 265.5 million tons is expected in Pipeline -1.1 Colonial the CIS countries will remain at the lev- 2019, and the conversion rate will Marathon Pipeline 18 Pipeline 2019 forecast el of 24 million tons during the whole increase to 79.8%. A moderate 75 Exxon forecast period. 0.0 increase in the domestic demand for Mobil Pipeline 11 45 KazTransOil petroleum products and a decrease 0.2 Shell Pipeline Buckeye 7 In terms of the development of pipeline in the economic efficiency of the 8 BP Pipelines 2.2 Platte 18 oil transportation in the medium term export of heavy petroleum products 28 Explorer 29 Plantation Production of oil, including gas PortlandPipeline Pipeline Pipeline Pipeline the following actions are planned: will lead to a gradual reduction in condensate 11 1.5 Chevron Pipeline 0.8 0.2 Genesis Pipeline gradual throughput capacity expansion the export of petroleum products to Volume of transportation (oil and petroleum products), million tons 0 8 16 71.2 Oil received for reﬁning of the Eastern Siberia–Pacific Ocean 145.5 million tons by 2019 (by 8.1% Length of pipelines (oil and petroleum products), thousand km pipeline system (ESPO-I up to 80 mil- vs 2016). Heavy petroleum products lion tons and ESPO-II up to 50 million will be replaced by light petroleum Circle area = Freight turnover (oil and petroleum products), billion tkm Source: companies’ reports tons), implementation of the project for products in the export structure.

Transneft indicators for 2016 516.5 69 1,263 million tons thousand km billion tkm

volume of oil and pertoleum products length of pipelines (oil and petroleum freight turnover (oil and petroleum transported in 2016 products) as of December 31, 2016 products) in 2016

24 Transneft Annual report 2016 25 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Oil turnover, million tkm Weighted average tariff for 100 tkm of oil, USD per 100 tkm

Transneft oil turnover indicators eight, and the combined turnover The 2014-2015 Transneft weighted companies engaged in pipeline trans- are significantly higher than those of all companies analyzed by more 1,219.1 average tariff for 100 tkm of oil turno- portation of oil. In 2016, the Transneft $ 0.77 of foreign companies, exceeding the than a factor of four. In 2016, the billion tkm ver is 3.5 times lower than the median Group weighted average tariff amount- rates of the US leader in terms of oil turnover of Transneft Group for the companies of the peer group ed to USD 0.77 per 100 tkm. per 100 tkm freight turnover, Enbridge Energy amounted to 1,219,134 million oil turnover of Transneft Group (USD 0.8 per 100 tkm vs the median in 2016 Transneft Group weighted average tariff Company, by more than a factor of tkm. of USD 2.9 per 100 tkm in 2015). This for 100 tkm of oil in 2016 tariff rate is one of the lowest among

2014 2015

Median-2015 2.9 3,107 4,727 4,021 2,206 1,511 1,533 6,845 6,308 1.2 0.8 13,214 13,746 14,250 13,222 10,772 16,983 11,212 11,155 11,030 11,095 9,692 10,297 Median-2015 11,125 44,206 45,446 127,858 140,445 1,147,200 1,185,028 12.2 13.0 9.1 9.2 10.9 9.1 4.4 5.3 3.6 3.6 3.1 3.1 2.7 2.9 3.2 2.9 3.7 2.8 2.8 2.7 2.4 2.6 1.8 1.7 2.4 1.4 1.2 1.3 1.3 1.3 1.2 1.1

Shell Platte Shell Excel Platte Sunoco Conoco Conoco Conoco Enbridge Philips Buckeye Chevron Genesis Chevron Sunoco Portland Pipeline MarathonPipeline Pipeline Pipeline Enterprise Pipeline Pipeline Philips Magellan Marathon Enbridge Exxon Mobil PipelineEnterprisePipeline Pipeline Pipeline Oﬀshore Pipeline Pipeline Pipeline Pipeline Pipeline Pipeline Transneﬅ KazTransOil BP Pipelines Transneﬅ Exxon Mobil BP Pipelines Pipelines KazTransOil

Petroleum products turnover, million tkm

In 2015, Transneft occupied the sec- of the USA – 40,926 million tkm vs ond place in terms of the petroleum 184,155 million tkm (4.5 times less). 43.8 products turnover after Colonial In 2016, the petroleum products Revenue from oil transportation, USD million Pipeline, the American company turnover of the Transneft Group billion tkm that is the main petroleum products amounted to 43.8 billion tkm. petroleum products turnover of Trans- In 2015, Transneft was ahead of other The second one was Enbridge haulier in the north-east region neft Group in 2016 companies in terms of revenue from oil Partners with a revenue of $ 9,180.0 transportation. In 2016, revenue from USD 2,303 million, which is 4 times the sale of oil transportation services less than the Transneft Group indi- million amounted to USD 9,180.0 million. cator. revenue from the sale of oil transportation services in 2016

2014 2015 2014 2015

Median-2015 12,387 Median-2015 319 7,681 6,933 2,644 5,961 4,055 4,080 398 483 517 471 447 440 4,146 3,762 354 319 265 302 367 3,050 232 240 165 140 133 139 87 130 48 117 99 80 53 58 1,101 13,287 9,255 2,070 2,303 1,557 1,822 1,498 1,401 1,472 1,132 982 41,700 40,926 178,484 184,155 28,679 28,689 27,920 28,249 23,019 22,776 19,533 17,841

BP RMR Trans Platte Nustar EnLink METRO Colonial Buckeye Sunoco Enbrige Sunoco Conoco Chevron Explorer Magellan Transneﬅ Enbridge Philips Magellan Pipeline PlantationPipeline Pipeline Pipeline Pipeline Pipeline MaraphonPipeline Pipeline Pipeline Pipeline Canada Pipeline Pipeline Pipeline PipelineMarathonPipeline Pipeline Pipeline Jadranski Transneﬅ KazTransOil Enterprise Exxon Mobil Naﬅovod Mid-America Midstream BP Pipelines

26 Transneft Annual report 2016 27 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Revenue from petroleum products transportation, USD million Per unit operating expenses for transportation of 100 tkm of oil, USD per 100 tkm

In terms of revenue from petroleum um products freight turnover. In 2016 products transportation, Transneft revenue from the sale of petroleum $ 963.9 $ 0.3 was the second after Colonial Pipe- products transportation services In 2015, the Transneft per unit opera In 2015, Transneft per unit operating lines, as was the case with the petrole- amounted to USD 963.9 million. million ting expenses for oil transportation expenses in US dollars decreased by per 100 tkm were 4 times lower than the median 35%, as opposed to the main trend of revenue from the sale of petroleum Transneft Group unit operational cost among other companies (USD 0.3 per an increase of the indicator as com- products transportation services in 2016 in 2016 100 tkm vs the median of USD 1.1 per pared to 2014. In 2016, Transneft per 100 tkm). unit operating expenses amounted to USD 0.3 per 100 tkm.

2014 2015 2014 2015 Median-2015 254 Median-2015 254 2014 2015 2014 2015 Median-2015 1.1

68 60 36 39 Median-2015 1.1 20 20 10 11 3 7 68 60 36 39 1,281 949 1,114 1,200 702 696 432 438 432 438 340 373 230 365 297 289 136 271 224 237 176 181 119 117 20 20 10 11 3 7 1.0 1.1 1.1 0.9 1,281 949 1,114 1,200 702 696 432 438 432 438 340 373 230 365 297 289 136 271 224 237 176 181 119 117 1.4 1.3 0.4 0.3 1.2 0.8 0.6 0.7 0.5 0.5 0.2 0.5 0.5 0.4 0.3 0.3 0.2 0.2 1.0 1.1 1.1 0.9 1.4 1.3 0.4 0.3 1.2 0.8 0.6 0.7 0.5 0.5 0.2 0.5 0.5 0.4 0.3 0.3 0.2 0.2 MVL Shell 12.2 8.4 4.7 5.1 2.6 3.5 2.3 2.9 2.3 2.9 4.1 2.7 2.1 2.2 Sunoco Sunoco NuStar MVL 12.2 8.4 4.7 5.1 2.6 3.5 2.3 2.9 2.3 2.9 4.1 2.7 2.1 2.2 Colonial Magellan Explorer Buckeye Shell Chevron Plantation Marathon NuStar Razorback ColonialPipeline Pipeline Pipeline Pipeline Sunoco Buckeye SunocoPipeline Pipeline Pipeline Pipeline Pipeline Pipeline ChevronPipeline Pipeline Transneﬅ Magellan Mid-America Explorer Logostics Exxon Mobil BP Pipelines Pipeline Pipeline Pipeline Pipeline PipelinePlantationPipeline MarathonPipeline Pipeline Pipeline Pipeline Pipeline RazorbackPipeline Logostics Exxon Mobil Transneﬅ Mid-America BP Pipelines Shell Platte Excel Genesis Conoco Sunoco Conoco Chevron Shell Portland Enbridge Excel Magellan PhillipsMaraphon Platte Pipline Pipeline GenesisPipeline Pipeline Pipeline Pipeline EnterprisePipeline Conoco Pipeline SunocoPipeline Pipeline Pipeline ConocoOﬀshore Pipeline Transneﬅ Chevron Exxon Mobil KazTransOil Portland Enbridge West Texas Magellan BP Pipelines PhillipsMaraphon Pipline Pipeline Pipeline Pipeline Pipeline Pipeline Enterprise Pipeline Pipeline Pipeline Pipeline Pipeline Oﬀshore PipelineWest Texas Net profit margin, % Transneﬅ Exxon MobilBP Pipelines KazTransOil

In 2015, the Transneft Group net profit FEC revenue, exchange differences, margin indicator was 9.6% lower than and taking into account adjustments to 28.9 % the median. The adjusted Transneft net property tax. Transneft Group net profit margin (ex- profit margin indicator was 5.5 percent- cluding the influence of the investment Specific emissions of pollutants into the atmosphere age points higher than the unadjusted In 2016, the Transneft Group net profit component and exchange differences) in during transportation, kg per ton indicator. In 2015, the Transneft Group margin amounted to 28.9%, excluding 2016 net profit margin amounted to 22.9%, the influence of the investment compo- 0.156 excluding the results of PRC oil sales, nent and exchange differences. kg/ton In 2015, the indicator of specific emis- Median-2015 Transneft Group indicator of specific Median-2015 sions of pollutants into the atmosphere 0.206 emissions of pollutants into the atmo 0.206 84.2 % 84.2 % during oil and petroleum products sphere in 2016 84.2 % 84.2 % transportation for the Transneft Group 73.6 % 73.6 % 2014 2015 0.170

73.6 % Transneﬅ 73.6 % 2014 2015 decreased by 6.95% as compared to 0.170 Median-2015 27.1 % Transneﬅ 0.158 60.3 % 35.6 % Median-2015 27.1 % 2014, which proves the efficiency of 0.158 60.3 % 35.6 % 13.2 % 15.1 % 15.3 % 22.7 % 22.5 % 22.5 % 21.6 % 20.5 % 19.9 % 18.9 % 21.0 % 27.6 % 27.3 % 27.5 % 20.5 % 19.4 %

17.6 % the environmental impact mitigation 22.5 %

17.4 % 0.401 13.2 % 15.1 % 15.3 % 22.7 % 22.5 % 22.5 % 21.6 % 20.5 % 19.9 % 18.9 % 21.0 % 27.6 % 27.3 % 27.5 % 20.5 % 19.4 % 17.6 %

22.5 % KazTransOil 17.4 % measures taken. In 2016, the indicator 0.401 37.4 % KazTransOil 36.3 % 0.416 34.9 % 34.5 % 34.0 % 37.4 % 32.3 %

36.3 % of specific emissions of pollutants into 9.3 % 9.1 % 8.8 % 6.3 % 5.9 % 5.1 % 8.8 % 8.7 % 8.8 % 9.5 % 0.416 34.9 % 34.5 % 34.0 % 31.4 % 27.1 % 7.0 % 27.5 % 32.3 % 1.4 % 9.3 % 9.1 % 8.8 % 6.3 % 5.9 % 5.1 % 8.8 % 8.7 % 8.8 % 9.5 % 24.9 % 24.9 %

31.4 % the atmosphere for the Transneft Group Enbridge EP 27.1 % 0.282 7.0 % 27.5 % 1.4 % 24.9 % 24.9 % continued to decrease and amounted to Enbridge EP 0.282 0.210 0.156 kg/ton. Transnet 0.210 Transnet 0.206 0.206 -31.0 %

-11.2 % 0.101 -31.0 % KTK -11.2 % 0.101 MERO Trapil KTK 0.095 Buckeye Conpet EnLink MERO Trapil Transnet Conpet EnLink 0.095 Transneﬅ Buckeye KazTransOil Transnet Inter Pipeline TransCanada 2014 2015 Transneﬅ Nustar Energy Kinder Morgan KazTransOil TransMontaigne TransCanada 2014 2015 Portland Pipeline Magellan PipelineColonial ExplorerPipeline Pipeline Inter Pipeline Nustar Energy Kinder Morgan Pembina Pipeline Marathon Pipeline Plantation Pipeline Enbridge Partners Colonial ExplorerPipeline PipelineJadranski Naﬅovod TransMontaigne EnterpriseNord-West-Ölleitung Partners Mid-America PipelinePortlandMarathon Pipeline Pipeline Magellan Pipeline Enbridge Partners Pembina Pipeline Jadranski Naﬅovod Plantation Pipeline Enterprise Partners MineralölverbundleitungMid-America Pipeline Nord-West-Ölleitung Mineralölverbundleitung

28 Transneft Annual report 2016 29 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

In-kind labor productivity, million tkm per person Operating In 2016, Transneft in-kind labor tkm per person, which is 3.5% higher productivity amounted to 17.5 million than the same indicator in 2015. 17.5 million tkm per person results Transneft labor productivity in 2016

Transneft’s main activity is providing the Republic of Belarus, Ukraine and services related to transportation of oil the Republic of Kazakhstan, Transneft through the system of trunk pipelines entered into agreements for the Median-2015 8.6 within and outside the Russian Feder- provision of oil transportation services million tons ation. with JSC Polotsktranspetrol Druzhba, 3 JSC Gomeltransneft Druzhba, PJSC The Company also provides services of UkrTransNafta, and JSC KazTransOil increase in the total oil acceptance oil storage in the system of trunk pipe- (TON-2). into the trunk pipeline system in 2016 lines, compounding of oil, and oil sales. In 2016, the total oil intake into the 16.4 16.9 17.2 17.2 11.5 11.9 15.4 10.7 4.7 8.6 5.4 5.6 7.5 4.1 2.4 2.4 2014 2015 In addition to the transportation of oil trunk pipeline system of Transneft in the Russian Federation, Transneft Group amounted to 483.5 million Pipeline Portland Chevron MaraphonPipeline Pipeline Pipeline Pipeline provides planning and management tons, which is 0.6% higher than in Transneﬅ Exxon Mobil BP Pipelines KazTransOil Shell of the transportation of oil to foreign 2015. The intake of oil from Russian countries and its delivery to the foreign producers grew by 0.8% compared oil delivery and acceptance points, and to the level of 2015 and amounted organizes the collection and consolida- to 464.5 million tons. The oil freight Share of expenditures on R&D, % of revenue tion of information. turnover via routing cables executed in 2016 amounted to 1,219.1 billion In 2015, the indicator of the share of nies. The maximum indicator among Being the agent of Russian consign- tkm, which is 2.9% higher than the expenditure on research and develop- the foreign companies analyzed is 1.4 % ors for the transportation of oil to 2015 indicator. ment to the Transneft transportation almost two times lower – 0.745% of the revenue — Transneft’s financing revenue under the Russian Account- of the revenue. In 2016 Transneft’s for innovative projects, including R&D, ing Standards amounted to 1.40%, expenditures on innovative projects, in 2016 Oil intake and delivery indicators for 2014-2016 which is 0.73 percentage points including R&D, remained at the level higher than the median and is the of 2015 and amounted to 1.40% of 2014 2015 2016 2016 vs highest indicator among all compa- the revenue. Indicator million tons 2015, % Intake into Transneft Group’s system, total 479.00 480.50 483.49 100.6 including: Russian oil 461.12 461.07 464.53 100.8 1.402 % 1.404 % counter deliveries (Kazakhstan oil) 2.20 Kazakhstan oil 16.55 15.28 17.22 112.7 Azerbaijan oil 1.02 1.19 1.30 109.2 2014 2015 Turkmenistan oil 0.31 0.76 0.44 57.9 Oil delivery, total 477.53 481.40 483.40 100.4 0.765 % 0.745 % 0.687 %

0.647 % including: 0.638 % 0.573 % 0.580 % Median-2015 0.268% to Russian oil refineries 262.11 250.18 245.22 98.0 0.494 % 0.490 %

0.413 % Transshipment to the JSC CPC-R system 1.66 1.63 0.39 23.9 0.368 % 0.290 %

0.219 % 0.268 % 0.144 % 0.205 % 0.188 % 0.188 % to the CIS countries, incl.: 21.50 22.05 18.65 84.6 0.177 % 0.136 % to Belarusian oil refineries 21.50 22.00 18.00 81.8 0.038 % 0.066 % 0.036 % 0.038 %

0.024 % 0.023 % to Kazakhstani oil refineries - 0.05 0.65 13 times to countries further afield, incl.: 192.26 207.54 219.14 105.6 ENI Total Shell Statoil Repsol British Lukoil Chevron Petrobras Transnet Philips 66 Indian Oil Transneﬅ PetroChina Petroleum Corporation

30 Transneft Annual report 2016 31 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

2014 2015 2016 2016 vs Indicator million tons 2015, %

Novorossiysk Port 30.37 30.01 30.38 101.2 Primorsk Port 42.28 45.07 50.62 112.3 Ust-Luga Port 23.22 26.77 30.09 112.4 Kozmino Port 24.90 30.44 31.84 104.6 through the Druzhba pipeline 48.89 52.25 52.69 100.8 through the pipelines to China 22.60 23.00 23.50 102.2 shipment via railway loading racks - 0.02 0.02 100.0 Oil freight turnover via routing cables executed, billion tkm 1,147.2 1,185.0 1,219.1 2.9 %

In 2016, Transneft provided oil Transneft provides transportation Performance and structure of the delivery at destination points de- services by transporting petroleum delivery of oil to consignees termined by the agreements to the products to the domestic market and amount of 483.4 million tons, which for export. The share of the Company 0.3 % 4.5 % 479.0 is 0.4% higher than in 2015. Export in the light petroleum products export 2014 54.7 % 40.1 % to the CIS countries and outside the transportation market amounts to 0.3 % 4.6 % CIS amounted to 237.8 million tons 47%, in particular, the share of the 2015 52.1 % 43.2 % 480.5 in 2016, which is 3.6% higher than Company in the market of diesel fuel 0.1 % 3.9 % in 2015. Oil delivery to Russian oil export from the oil refineries connect- 2016 50.7 % 45.3 % 483.5 refineries amounted to 245.2 mil- ed to the system of trunk petroleum Caspian Pipeline Consortium terminal from 700,000 to 1 million For export to the CIS countries lion tons, which is 2.0% lower than products pipelines amounts to 81%. tons, one oil pumping station was put For export outside the CIS in 2015. Transshipment of oil to the Transneft is the trustee of 31% fede into operation, another oil pumping Transshipment to the CPC-R system JSC CPC-R system for further export In 2016, 69,080 km of trunk pipelines rally owned shares of JSC CPC-R and station was filled with crude oil and To Russian oil reﬁneries decreased significantly to 0.4 million were used in the Transneft Group, in- JSC CPC-K. comprehensive tests were started, and Intake into the Transneﬅ Group system, tons, which is 76% lower than in cluding 52,840 km of oil pipelines and total three stations were prepared for filling $ 258 2015. 513 trunk pump ones. CPC (JSC CPC-R and JSC CPC-K) is one with oil. In addition, the Operations of the largest investment projects in Control Center was put into operation million Petroleum products transportation indicators for 2014-2016 the energy industry with participation at the CPC Marine Terminal with a new of foreign capital on the CIS territory. SCADA, a system of control and data total amount of repayments made by CPC 2014 2015 2016 2016 The length of the Tengiz-Novorossiysk acquisition which tracks all stages of to the Russian Federation in 2016 Indicators vs 2015, % pipeline connecting the oilfields in crude oil transportation from Tengiz to million tons Western Kazakhstan with the ma- Novorossiysk online. Shipment of petroleum products, total 31.2 32.2 33.1 102.8 rine terminal near Novorossiysk is including: 1,511 km. In 2016, CPC shipped 44.3 million tons of oil at the Novorossiysk Marine domestic market 9.4 8.7 9.3 107.0 On December 15, 2010, the CPC gov- Terminal, of which 40.8 million tons for export. incl.: 21.7 23.5 23.8 101.2 erning bodies made the final decision were the oil of Kazakhstan consignors to countries outside the CIS 21.0 22.8 21.6 94.5 on investments under the project of (including 0.8 million tons of oil from to the CIS countries 0.7 0.7 2.2 321.2 increasing the Tengiz–Novorossiysk the Kashagan field); 3.5 million tons pipeline throughput capacity and of oil belonged to Russian consignors. signed the agreement On Amending As compared to 2015, the amount of Oil and petroleum products were The utilization of the Transneft Group Performance and structure of the deliv- the Shareholders Agreement of 1996 CPC’s shipment at the Novorossiysk exported through the marine terminals trunk pipelines system capacities ery of petroleum products to consignees (hereinafter referred to as the “Expan- Marine Terminal grew by 1.6 million of the ports of Primorsk, Kozmino, amounted to 89.3% in 2016. sion Project”). According to the Expan- tons, or by 4%. Ust-Luga, and Novorossiysk Commer- 2.2 % sion Project, the pipeline capacity will cial Sea Port. 2014 30.1 % 67.3 % 31.2 increase from 28.2 to 67 million tons Taking into account the sufficiency 2.2 % per year. Over the past year, within the of funds for the implementation of 2015 27.0 % 70.8 % 32.2 framework of the Expansion Project, the Expansion Project, in 2016, CPC 6.6 % works were finished in relation to the continued to make repayments to 2016 28.1 % 65.3 % 33.1 reconstruction and the increase of the shareholders. The total amount of re- total capacity of the oil storage tanks payments made by CPC to the Russian For export to the CIS countries For export outside the CIS within the tank farm of the CPC marine Federation in 2016 is USD 258 million. Domestic market Shipment of petroleum products, total

32 Transneft Annual report 2016 33 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

sharing on the planned loading of ther, taking into account the guide- International transport capacities of the IAOT lines, rules and principles of the members to be used for planning current anti-monopoly legislation, traffic in 2017 and instructed the and to develop the wording of the meetings Association of members of the Permanent Expert basic rights and duties that follow 2 Group of the Association on Legal on from this information sharing. of the Management Board of the Oil Transporters Issues to develop the Forms fur- International Association of Oil Transporters were held in 2016

In 2016, the International Associa- (Czech Republic) in 2013 in order to tion of Oil Transporters (hereinafter make collaboration closer and deve referred to as the “Association” or lop new activities related to pipeline “IAOT”) continued its work. The as- transportation of oil and petroleum sociation was established in Prague products.

Association members as of December 31, 2016

Company Registered address Membership period

JSC MERO ČR Czech Republic Since December 2013

Transneft Russian Federation Since January 2015

JSC Transpetrol Slovak Republic Since April 2015

JSC Gomeltransneft Druzhba Republic of Belarus Since April 2015

JSC MOL Hungary Since April 2015

JSC KazTransOil Republic of Kazakhstan Since September 2015

China National Petroleum Corporation People's Republic of China Since May 2016

IAOT observer as of December 31, Facilities”, as well as the “Bench- 2016 is CPC. marking of Energy Efficiency of the Members of the International In 2016, the Governing Board of the Association of Oil Transporters”. Association held two meetings during “Organization and Implementation which it discussed the operating Procedur”.These documents were results of three Permanent Expert developed by Transneft subsidiary, Groups of the Association (for Energy the Pipeline Transport Institute, Efficiency, Supplies, and Legal Issues). LLC. The research will be conducted twice a year, starting in January In 2016, Association members: 2017, and will be aimed at reduc- • approved the IAOT Regulation of ing the operating expenses of the the Permanent Expert Group on benchmarking participants and Energy Efficiency; increasing the energy efficiency • agreed on the first version of of the oil and petroleum products the “Method of Energy Efficien- transportation trunk pipelines; cy Benchmarking for Transport • accepted the Forms of information

34 Transneft Annual report 2016 35 Development Strategy

Main areas of development 38 million tons/year – the capacity of the Zapolyarye-Purpe oil pipeline Development Strategy 40 system commissioned in 2016 32 Long-Term Development Program 41

Long-Term Development Program implementation audit 42

Changes in the Strategy and the Long-Term Development million tons/year – the capacity of Program 43 the Kuyumba-Tayshet oil pipeline system commissioned in 2016 Key Performance Indicators 8.6 (KPI) System 44

Major Investment Projects 48

Development Program Implementation in 2016 54

Operating Efficiency Increase 56 the planned reduction in opera Innovative Development 57 2 % ting expenses in 2017 Non-Core Asset Divestment Program 57

no less than

the share of Russian products 97% planned for use by 2020

36 Transneft Annual report 2016 37 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Development and upgrade Main areas of Construction of the Zapolyarye–Purpe oil pipeline Throughput capacity up to 32 million tons/year with commissioning in 2016 (completed) development Construction of the Kuyumba–Tayshet oil pipeline Throughput capacity up to 8.6 million tons/year with commissioning in 2016 (completed)

Increase in the throughput capacity of the ESPO pipeline system at To 80 million tons/year with commissioning in 2020 the Tayshet–Skovorodino section

Increase in the throughput capacity of the ESPO pipeline system at To 50 million tons/year in 2019 the Skovorodino–Kozmino section Development Strategy Expansion of the Skovorodino–Mohe TP To 30 million tons/year in 2017 Construction of the Yug product pipeline Throughput capacity of 6 million tons/year with staged Long-Term Development Program completion in 2017 and 2018 Increase in the throughput capacity of the Sever product pipeline The 1st stage – to 15 million tons/year in 2016 (completed); the 2nd stage – to 25 million tons/year in 2018

Reconstruction of the trunk pipeline system to increase It will allow an increase in the volume of light petroleum Innovations Efficiency the volumes of petroleum products transportation products transportation and expansion of the range of motor to the Moscow Region gasolines for consumers in the Moscow Region Application of modern advanced industry-specific tech- Cost reduction when building and operating pipelines; nologies; use of equipment manufactured in Russia effective use of energy resourses; increase in labor productivity Particular key performance indicators*

Innovations Development and upgrade of Scope of financing for innovation projects, including R&D, from own No less than 1.41% in 2017 funds as a percentage of Transneft revenue from oil transportation the trunk pipeline system services (in accordance with the Russian Accounting Standards)

2016 2017 2018 2019 2020 Efficiency Reduction in specific electricity consumption For oil transportation by 0.5% in 2017 Zapolyarye–Purpe Skovorodino–Mohe Sever Project (2nd stage) Skovorodino– Tayshet– Reduction in operating expenses Reduction by 2% in 2017 Kozmino Skovorodino Kuyumba–Tayshet Yug Project Yug Project (2nd stage) Increase in labor productivity 0.88% in 2017 (1st stage) Return on invested capital (ROIC) No less than 7% in 2017 Sever Project Increase petroleum pro (1st stage) ducts transportation to the Moscow Region Reliability Reduction in trunk pipeline accidents No more than 0.086 accidents/1,000 km in 2017

Environmental protection to fully meet Reduction in specific air pollutant emissions during oil and petrole- By 1% in 2017 oil and petroleum products transportation requirements in Russia and for exports um products transportation through trunk pipelines

* The list and values of key performance indicators are presented in the section Key Performance Indicators (KPI) System. Reliability environmental protection

Reduction in trunk pipeline accidents; maintaining Reduction of specific emissions; environmental security; sulfur content in oil; development of social guarantees for elimination of discharge of insufficiently treated waste- employees water

38 Transneft Annual report 2016 39 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Development Strategy Long-Term Development Program

The goal of the Strategy is to develop and upgrade the The Transneft Long-Term Development Program up to trunk pipeline system of the Russian Federation in order 2020 (hereinafter also “LDP”) was developed according to to fully meet the requirements for oil and petroleum the Transneft Strategy and approved by resolution of the products transportation on the domestic market and Board of Directors of Transneft dated November 19, 2014 export destinations (Minutes No. 23).

LDP program measures The Transneft Strategy up to 2020 The Transneft Strategy up to 2020 • ensuring petroleum products trans- (hereinafter – Strategy) is approved by envisages: portation from newly connected Development and upgrade Increasing the capacity of the trunk oil pipelines and petroleum product pipelines system to ensure oil resolution of the Board of Directors of • an increase in the throughput ca- refineries; transportation in accordance with the planned oil extraction volumes from operated and new fields of Transneft dated November 19, 2014 pacity of the ESPO-I pipeline sys- • a reduction in trunk pipeline acci- oil companies and oil refinery volumes at existing and new refineries (Minutes No. 23). tem to 80 million tons and that of dents to 0.072 accidents per year per the ESPO-II pipeline system to 50 1000 km of operated pipelines; The goal of the Strategy is to develop million tons; • complete elimination of discharge of and upgrade the trunk pipeline system • the construction of oil pipelines to insufficiently treated wastewater; Innovations Innovative development of production activity of the Russian Federation in order to ensure oil intake from new fields • maintaining sulfur content in oil fully meet the requirements for oil and in the Yamalo-Nenets Autono- piped through the Transneft system Efficiency Increasing energy efficiency through the implementation of measures aimed at saving energy resourc- petroleum products transportation on mous District and the Krasnoyar- within the limits established by the es the domestic market and export destina- sky Krai; scheme of normal cargo flows; tions based on: • an increase in the throughput • cost reduction when building and Cost reduction when building and operating pipelines capacity of the Sever petroleum operating pipelines, maintaining an • the use of equipment manufactured product pipeline to 25 million optimum cost level for the consum- in the Russian Federation; tons/year in order to redirect ers of services. Ensuring that labor productivity is on a par with the best foreign pipeline companies • the application of modern advanced petroleum products from foreign industry specific technologies en- ports; Reliability Ensuring the reliability of the operated trunk oil pipelines and petroleum product pipelines system by suring high levels of reliability, in- • ensuring petroleum products carrying out reconstruction based on the results of diagnostics and modernization of fixed assets dustrial and environmental safety; supply diversification with the • ensuring revenues from oil and pe- opening of a new direction in troleum products transportation in the South of Russia and with the the amount necessary and sufficient construction of a trunk petroleum Development of social guarantees for the Company's employees for implementing the Development, product pipeline at the Volgo- Technical Re-equipment and Reno grad–Novorossiysk section; Environmental protection Enhancement of the environmental and industrial safety at the Company’s facilities vation of Trunk Pipeline Facilities • a reduction in the use of imported Program. products to 3%;

40 Transneft Annual report 2016 41 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Long-Term Changes in the Strategy and Development Program the Long-Term Development implementation audit Program

Joint Stock Company KPMG conducted all material respects in compliance with In 2016, the LDP was updated. The adjusted LDP is aligned the audit of the Transneft Long-Term the requirements of the applicable law, Development Program implementa- standards, internal regulations of Trans- with the Russian Ministry of Energy, the Russian Ministry of tion for 2016. Based on the results neft and does not contain any significant Economic Development, the Federal Agency for State Property of the audit, an Opinion on the audit deviations. of the Transneft Long-Term Develop- Management, the Ministry for the Development of the Russian ment Program implementation was The auditor thinks that the evidence received. obtained is sufficient and appropriate to Far East, and the Expert Council of the Russian Government, provide a basis for said conclusion. and approved by resolution of the Board of Directors of On the basis of the results of the procedures conducted, the auditor believes The table provides information on the Transneft dated December 30, 2016 that the Report on the Transneft Long- performance of a number of Transneft Term Development Program implemen- indicators in 2016, as well as their com- tation for 2016 has been prepared in parison with actual values in 2015.

In 2016, the LDP was updated. The 2. Including in the LDP a section on the Unit of 2015 2016 No. Indicator adjusted LDP is aligned with the Rus- growth of the Far Eastern Federal Dis- measurement actual planned actual sian Ministry of Energy, the Russian trict in accordance with subparagraph Ministry of Economic Development, ”b” of paragraph 6 of Mandate of the 1. Oil freight turnover billion tkm 1,185.0 1,190.2 1,219.1 the Federal Agency for State Prop- Russian Federation Government dated 2. Volume of petroleum products transportation through the trunk erty Management, the Ministry for September 30, 2016 No. DM-P16- petroleum product pipeline system million tons 32.2 32.3 33.1 the Development of the Russian Far 6658 (Directive of the Government of 3. Value of specific electricity consumption, oil transportation MWh/ East, and the Expert Council of the the Russian Federation dated June million tkm 11.16 11.04 11.03 Russian Government, and approved 28, 2016 No. 4531p-P13). by resolution of the Board of Direc- 4. Value of specific electricity consumption, petroleum products trans- MWh/ tors of Transneft dated December 3. Adjustment of the Development, portation million tkm 15.55 15.47 15.17 30, 2016 (Minutes No. 27). Technical Re-equipment and Reno 5. Increase in labor productivity % 10.2 1.7 5.6 vation of Trunk Pipeline Facilities The LDP adjustment was made for the Program within the LDP framework. 6. Per unit operating expenses on oil transportation per 100 tkm of freight turnover RUB/100 tkm 16.46 17.92 17.68 following main reasons: 4. Adjustment of the reduction in the 7. Total Debt/EBITDA ratio No more 1. Extension of the LDP up to 2021 in specific air pollutant emissions ratio – 2.3 than 2.5 1.7 accordance with the requirement and the reduction in the polluted 8. Net profit margin (excluding the influence of the investment compo- of the Methodological Recommen- wastewater discharge ratio. nent and exchange rate differences) % 22.9 25.4 28.9 dations for the creation of long- term development programs for 5. Accident rate adjustment. 9. Amount of capital expenditure reduction RUB million 5,942.3 8,588 8,920.9 strategic joint stock companies 10. Amount of operating expenses reduction RUB million 4,113 4,604 9,167 and federal state unitary enter- 6. Adjustment of the Program for Local- prises, as well as for open joint ization of Manufacture of Analogs of 11. Scope of financing for innovation projects, including R&D, from own funds as a percentage of Transneft revenue from oil transportation stock companies if the share of Imported Products for oil and petrole- services (in accordance with the Russian Accounting Standards) % 1.4 1.4 1.4 the Russian Federation in their um products trunk pipeline transpor- authorized capital in total exceeds tation in the territory of the Russian fifty percent. Federation within the LDP framework.

42 Transneft Annual report 2016 43 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Key Performance Indicators (KPI) System

While summing up Transneft’s in- • Execution of the financing plan • Integrated impact from internal was caused by the adjustment of con- dustrial and business performance for the Development Program – commercialization of innovation struction and installation works (CIW) results for 2016, the Key Performance RUB 326,313 million (incl. VAT); projects including R&D, during the schedules for a number of investment Indicators (KPI) System is applied • Execution of the fixed capital accounting period and two precedent projects without the change in their (hereinafter - KPI system), approved formation plan under the Develop- 100 % years as a percentage of Transneft deadlines. ₽ 328.1 by the Transneft Board of Directors on ment Program – RUB 318,047 mil- revenue from oil transportation ser- key performance indicator

December 23, 2015 (Minutes No. 32), lion (excl. VAT); accomplishment level in 2016, except vices (in accordance with the Russian When the Board of Directors con- billion including the following indicators with • Execution of the Action plan for for the indicator Execution of the plan Accounting Standards) – 1.45%; sidered the issue on setting targets KPI Execution of the financing plan for the the set target values for 2016: capital expenditure reduction un- for fixed capital formation under the • Quality performance of updated IDP for key performance indicators for Development Program for 2017 der the Development Program – Development Program (Innovation Development Program) Transneft business activities for Overall performance of reliability, RUB 8,588 million; (in the year of its update)/quality 2017, the KPI system was updated. ecological and industrial safety of the • Meeting implementation deadlines performance of IDP implementation Major changes introduced to the trunk pipeline system – target 100%, for Investment Projects – 4 pcs; (in subsequent years) – 70%; Transneft KPI System are related to including: • Complex index of overall quan- the redistribution of key performance • Trunk pipeline accident rate – tity of work as part of the TRR Total Debt/EBITDA ratio – no more indicators’ weights in compliance 0.087 accidents/1,000 km per Program implementation – target than 2.5; with the Federal Agency for State year1; 100%, including: Property Management (Rosimush- • Reduction in specific air pollutant • Execution of the plan for pipe Complex index of additional KPIs ac- chestvo) requirement for increasing emissions during oil and petroleum replacement at line section – complishment, established by execu- the weight of the key performance product transportation via trunk 1,482 km; tive orders and instructions from the indicator Percentage reduction in pipelines – 1%; • Execution of the plan for tank shareholder, President and Govern- operating expenses to 10% in the KPI construction and reconstruc- ment of the Russian Federation – tar- system. Operations’ overall efficiency indica- tion – 63 pcs; get is 100%, including: tor – target 100%, including: • Return on invested capital index In addition, the KPI Share of direct • Percentage reduction in operating Overall performance of innovation (ROIC) – 7%; purchases from small and medi- expenses – 2%; activity efficiency – target 100%, • Dividend amount – um-sized businesses is replaced • Reduction under comparable con- including: RUB 2,934 million; by the indicator, similar by general ditions in specific power consump- • Scope of finance for innovation • Share of direct purchases from content, Annual volume of purchas- tion for oil transportation via trunk projects, including R&D, from own small and medium-sized businesses from small and medium-sized pipelines – 1%; funds as a percentage of Transneft es – 10%. businesses; the change of the KPI • Increase in labor productivity revenue from oil transportation name and calculation algorithm is during oil and petroleum product services (in accordance with the Key performance indicator accom- conditioned by invalidating Executive transportation – 1.7%; Russian Accounting Standards) – plishment level in 2016 scores 100% Order of the Government of the Rus- 1.4%; due to the achievement of higher sian Federation dated May 29, 2013 Overall performance of investment • Number of protection documents results compared to the set targets. No. 867-r. activity under the Development, Tech- based on the intellectual activity The indicator Execution of the plan nical Re-Equipment and Renovation results obtained during the ac- for fixed capital formation under the The Improved Key Performance Indi- of Trunk Pipeline Facilities Program – counting period and two precedent Development Program is the excep- cators System for Transneft business target 100%, including: years – 90 pcs; tion; the deviation from it (- 1.3%) activities was approved by resolution

1. An updated value of the accident rate index on the major pipelines of Transneft, determined by the actual accident rate for 2014-2015, is provided. The planned value of the accident rate index on the major oil pipelines and petroleum products pipelines for 2016, approved by resolution of the Board of Directors of Transneft as of October 28, 2015, amounted to 0.142 accidents/1,000 km per year.

44 Transneft Annual report 2016 45 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

of the Transneft Board of Directors Program implementation – target dated November 30, 2016 (Minutes 100%, including: No. 23), relevant KPI targets for • Execution of the plan for pipe 2017 were approved by resolution replacement at line section – of the Transneft Board of Directors 1,006 km; 2 % dated December 12, 2016 (Minutes • Execution of the plan for tank KPI Percentage reduction in operating No. 25) for the following indicators: construction and reconstruction – expenses for 2017 63 pcs; Overall performance of reliability, ecological and industrial safety of Overall performance of innovation the trunk pipeline system – target activity – target 100%, including: 100%, including: • Scope of finance for innovation pro- • Trunk pipeline accident rate – jects, including R&D, from own funds 0.086 accidents /1,000 km per year; as a percentage of Transneft reve- • Reduction in specific air pollutant nue from oil transportation services emissions during oil and petro- (in accordance with the Russian leum product transportation via Accounting Standards) – 1.41%; trunk pipelines – 1%; • Number of protection documents based on the intellectual activity Operations’ overall efficiency indica- results obtained during the ac- tor – target 100%, including: counting period and two precedent • Percentage reduction in operating years – 91 pcs; expenses – 2%; • Integrated impact from internal • Reduction under comparable con- commercialization of innovation ditions in specific power consump- projects including R&D, during the tion for oil transportation via trunk accounting period and two precedent pipelines – 0.5%; years as a percentage of Transneft • Increase in labor productivity revenue from oil transportation ser- during oil and petroleum product vices (in accordance with the Russian transportation – 0.88%; Accounting Standards) – 1.46%; • Quality performance of updated IDP Overall performance of investment (in the year of its update)/quality activity efficiency under the Develop performance of IDP implementation ment, Technical Re-Equipment and (in subsequent years) – х;1 Renovation of the Trunk Pipeline Facilities Program – target 100%, Total Debt/EBITDA ratio – no more including: than 2.5; • Execution of the financing plan for the Development Program – Complex index of additional KPIs RUB 328,062 million (incl. VAT); accomplishment, established by • Execution of the fixed capi- executive orders and instructions tal formation plan under the from the shareholder, President and Development Program – RUB Government of the Russian Federa- 278,666 million (excl. VAT); tion – target 100%, including: • Execution of the Action plan for • Return on invested capital index capital expenditure reduction (ROIC) – at least 7%; under the Development Program – • Dividend amount – RUB 4,911 million; RUB 30,130 million; • Meeting implementation deadlines • Annual purchase volume from small for Investment Projects – 7 pcs; and medium-sized businesses – 18%. • Complex index of overall quantity of work as part of the TRR

1. The index for 2017 was not established, since in 2017, the Innovation Development Program would not be updated (the Innovation Development Program was updated in 2016 for the period of 2017-2021), assessment of the quality of performance of the Innovation Development Program for 2017 (the first year of implementation) was envisaged in 2018 (in accordance with the Guidelines for annual evaluation of implementation of innovation development programs) and the planned value of the index would be included in the KPI System for 2018.

46 Transneft Annual report 2016 47 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Major Investment Projects

Zapolyarye–Purpe–Samotlor oil pipeline construction in sequence Kuyumba–Tayshet Trunk Pipe- Stage I Pipeline System in two stages in the course of develop- line To ensure oil pipeline capacity in the ment and construction of new oilfield volume of 8.6 million tons/year. Line Project Goal facilities. Project Goal section construction (about 700 km), To ensure oil intake into the trunk To ensure oil intake into the Transneft construction of two new oil pumping pipeline system from new oilfields Stage I Group trunk pipeline system from stations and reconstruction of one oil in the Yamalo-Nenets Autonomous Construction of the Purpe–Samotlor new oilfields in Krasnoyarsky Krai: pumping station with the tank farm. District and the North of the Kras- trunk pipeline with a throughput capac- Kuyumbinskoye (Rosneft, Gazprom noyarsk Region, the Urengoys- ity of 25 million tons/year and a length Neft) and Yurubcheno-Tokhomskoye Status koye group of oilfields (Gazprom), of 429 km with the expansion of two oil (Rosneft) for subsequent delivery to Stage I is complete. The facilities were

Russkoye, Vostochno-Urengoys- pumping stations and the construction refineries in the Russian Federation commissioned in Q4 2016. 80,000 m3 Kuyumba PEPS koye oilfields (Rosneft), oilfields in of a new oil pumping station. and for export. No.1 the Bolshekhetskaya Depression Stage II 80,000 m3 160,000 m3 Zapolyarye PEPS No.1 OPS No.2 (LUKOIL), Zapadno-Messoyakhskoye Status Grounds for Implementation To ensure oil pipeline capacity in and Vostochno-Messoyakhskoye Stage I is complete. The facilities were Executive Order of the Government the volume of up to 15 million tons/ OPS No.3 200,000 m3 Yamal OPS No. 2 Orlovka OPS oilfields (Rosneft, Gazprom Neft) for commissioned in 2011. of the Russian Federation dated year. Construction of two oil pumping OPS No.4 subsequent delivery to refineries of April 17, 2012 No. 532-r (as revised stations, construction of technical 358 km Tayshet OPS the Russian Federation, and also for Stage II by Executive Order of the Govern- communication facilities and external Rybinskoye OPS export. Construction of the Zapolyarye–Pur- 80,000 m3 Purpe OPS ment of the Russian Federation dated power supply facilities for Oil Pumping Kemerovo pe trunk pipeline with a throughput January 16, 2016 No. 31-r) On the Station No. 4.

Grounds for implementation capacity of 32 million tons/year (with Design and Construction of the Trunk Zamzor OPS Executive Order of the Government the possibility of increasing the capac- Pipeline from the Kuyumbinskoye and Status of the Russian Federation dated April ity up to 45 million tons/year) and a Yurubcheno-Tokhomskoye oilfields Due to be commissioned in 2023. Самотлор 22, 2010 No. 635-r On the Design length of 485 km, construction of two Existing oil pipeline along the route: Kuyumba settle- Existing oil pipeline and Construction of the Zapolyar- new oil pumping stations and expan- Built trunk oil pipeline Zapolyarye - Purpe ment – pipe-end oil pumping station Existing OPS ye–Purpe–Samotlor Trunk Pipeline, sion of the existing oil pumping station Built OPS Tayshet ESPO Pipeline System. Built trunk oil pipeline Kuyumba - Tayshet as revised by executive orders of and the construction of auxiliary pro- Reconstructed OPS Built OPS the Government of the Russian cess facilities and infrastructure. Built tanks The project envisages the construc- OPS of the second construction stage Federation dated October 28, 2010 tion of the Kuyumba–Tayshet trunk Reconstructed OPS No. 1884-r, dated November 18, Status pipeline with a capacity of up to 15 Built tanks 2011 No. 2068-r, dated November Stage II is complete. The facilities million tons/year, the implementation 11, 2014 No. 2345-r, envisaging the were commissioned in Q4 2016. of which is scheduled in two stages.

48 Transneft Annual report 2016 49 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Eastern Siberia–Pacific Ocean Construction stage completed. Com- Yug (South) Project to 6 million tons/year to internal (ESPO) Pipeline System missioned in 2009. markets in the Volgograd and Rostov Project Goal Regions and for export to European Project Goal ESPO-I Development To ensure diesel fuel delivery to the countries through Novorossiysk Port To ensure oil transportation from Stage-by-stage capacity development internal market in Krasnodarsky Krai is to be carried out. The project en- Eastern Siberia oilfields to Russian up to 50 million tons/year, with the and for export to European countries visages the construction of a railroad refineries and for export to APR coun- construction of five new oil pumping sta- through Novorossiysk Port. overpass, two new pumping stations, tries through Kozmino Port and to the tions (Stage I) and up to 58 million tons/ and a 495 km-long line section. People’s Republic of China. year with the construction of three new Grounds for Implementation oil pumping stations (Stage II). Russia’s energy strategy for the period Status Grounds for implementation up to 2030, approved by executive or- Main facilities to ensure petroleum 10,000 m3 100,000 m3 Instruction of the Russian President Status der of the Government of the Russian products transportation, process ESPO PTS-I Krymskaya Tikhoretskaya Volgograd dated August 10, 2007 No. Pr–1465, Stage I was completed in 2012, Stage Federation dated November 13, 2009 and infrastructure facilities are LODS OTSD No.14 No.15 No.16No.17 Reﬁnery executive order of the Russian Govern- II – in 2014. No. 1715-r, General Development Plan scheduled for completion in 2017. No.12 Novovelich- Yekateri- No.13 No.18 kovskaya PS novka PS ment dated April 3, 2009 No. 455-r, No.11 for the Russian Oil Sector up to 2020, Completion of production loading No.10 No.19 a list of instructions of the Chairman 3 approved by Order of the Russian railroad overpass construction is ESPO-I Further Development 50,000 m No.9 No.20 Tinguta Skovorodino of the Russian Government following As part of capacity increase to 80 mil- Tayshet No.8 Ministry of Energy dated June 6, 2011 scheduled for 2018. MPS OPS No.21 the results of the meeting concerning lion tons/year, the construction of six PEPS No.7 No. 212, and the Transneft Strategy for No.4 No.5 No.6 Ladozhskaya 80,000 m3 Development perspectives of oil and new oil pumping stations and recon- No.2 the period up to 2020. PS No.3 petroleum products pipeline transpor- struction of the existing oil pumping ТС «ВСТО-I» Novorossiysk Zimovniki Karachaevskaya tation, which took place on February stations is envisaged, as well as the Stage I PS PS 18, 2014, executive order of the construction of a 50 MCM tank. Reconstruction of the Tikhoretsk–No- Government of the Russian Federation vorossiysk trunk pipelines to ensure dated December 31, 2004 No. 1737-r Status 100,000 m3 diesel fuel delivery to the internal Existing pipeline No.17 as revised by executive orders of the Construction completion is scheduled Skovorodino No.23 market in Krasnodarsky Krai and Petroleum products pipeline under Government of the Russian Federation for 2020. OPS No.21 No.24 No.34 for export to European countries construction No.36 No.26 No.32 Pipelines under reconstruction dated September 5, 2006 No. 1246-r, No.29 No.38 through Novorossiysk Port is to be dated February 27, 2008 No. 231-r, De- ESPO-II Construction No.30 No.40 carried out. The Tikhoretsk–Novor- Existing PS No.41 cree of the Government of the Russian Construction of the Eastern Siberia– ossiysk pipeline capacity for diesel PS under construction ESPO PTS-II Kozmino Federation dated March 10, 2009 No. Pacific Ocean trunk pipeline at the sec- Port fuel transfer will amount to up to PS under reconstruction 219. tion from the Skovorodino oil pumping 6 million tons/year. The project Reﬁnery station to the specialized sea oil-load- envisages connection of the existing Delivery and acceptance point under ESPO-I Construction ing port of Kozmino with a capacity of Tikhoretsk–Novorossiysk-2 loop lines construction Construction of the Eastern Siberia– up to 30 million tons/year and with a Existing oil pipeline with the construction of a 90 km line Loading railroad overpass under Pacific Ocean trunk pipeline at the length of 2,046 km with the construc- Existing OPS section and reconstruction of existing construction section from the Tayshet pipe-end oil tion of eight oil pumping stations. OPS under construction stations. Tanks under construction pumping station to the Skovorodino Reconstructed OPS Sea terminal oil pumping station with a capacity Status Tanks under construction Status of up to 30 million tons/year with a Commissioned in 2012. Sea terminal Commissioning is envisaged for 2017. 2,694 km-long line section, and to the specialized sea oil-loading port in ESPO-II Further Development Stage II Kozmino Bay. As part of capacity increase to 50 mil- Construction of trunk petroleum lion tons/year, the construction of product pipelines to ensure diesel Status four new oil pumping stations and fuel delivery by pipeline transport at reconstruction of existing oil pumping the Volgograd–Tikhoretsk section up stations is envisaged, as well as the construction of a 100 MCM tank.

Status Construction completion is scheduled for 2019.

50 Transneft Annual report 2016 51 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Reconstruction of the trunk and the Agreement on cooperation on Development of the trunk reconstruction of existing pumping pipeline system to increase joint projects implementation between pipeline system to increase stations, construction of a 15 km loop the volumes of petroleum Transneft and Gazprom Neft. petroleum products deliv- line and six 10 MCM tanks, as well as products transportation to ery to Primorsk Port (Sever changeover of Yaroslavl–Kirishi–2 and the Moscow Region Description (North) Project) Kirishi–Primorsk trunk pipelines from The project envisages a line section oil pumping to diesel fuel pumping Project Goal construction with an approximate Project Goal (805 km). To increase the volumes of light petro- length of 78 km, construction of one To increase the throughput volume Saint Primorsk Port leum products (gasoline, diesel fuel, pumping station and reconstruction of diesel fuel to the destination of Petersburg Sestroretskaya PS jet fuel) transportation and expand the of existing pumping stations, con- Status 30,000 m3 Nevskaya OPS Primorsk Port. Completed in Q4 2016. Nevskaya OPS range of motor gasolines for consum- struction of tanks with a total capaci- Solnechnogorskaya PS ers in the Moscow Region. Project ty of 240 MCM, and construction of a MNPS Bykovo-3 PS LLC LUKOIL- Moscow Grounds for Implementation Stage II implementation will allow petroleum railroad overpass. Nagornaya PS Permneﬅeorg- 3 3 30,000 m Russia’s energy strategy for the sintez products deliveries to the Moscow Re- 100,000 m Yaroslavl-2 PS Volodarskaya Kolomna PS period up to 2030, approved by To increase diesel fuel export from Yaroslavl MPS 20,000 m3 gion in a volume exceeding 14 million Status LODS 78 km (PS) 40,000 m3 executive order of the Government 15 million tons/year to 25 million Plavsk Venev Zalesye-3 PS tons/year. Stage-by-stage commissioning is Shilovo-3 MPS LODS LODS Ryazan PS Vtorovo PS of the Russian Federation dated No- tons/year to the destination of Pri- envisaged, with completion of the full Ryazan Refinery Ryazan Stepankovo-3 PS vember 13, 2009 No. 1715-r, General morsk Port. LODS Grounds for Implementation range of works in 2018. Nizhny Novgorod Refinery 40,000 m3 Development Plan for the Russian Oil Starolikeevo-4 PS Vorotynets-1 PS General Development Plan for the Rus- Starolikeevo LODS 3 Sector up to 2020, approved by Or- The stage envisages the construc- Nizhnekamsk-2 MPS sian Oil Sector up to 2020, approved by 40,000 m Tingovatovo-1 PS der of the Russian Ministry of Energy tion of new petroleum product pipe- Kovali-1 PS Order of the Russian Ministry of Energy Existing trunk oil pipeline Stalnoy Mikhailovka-1 PS No. 212 dated June 6, 2011, and the lines and reconstruction of existing No. 212 dated June 6, 2011, Transneft Trunk petroleum product pipeline Kon LODS Almetyevsk MPS Transneft Strategy for the period up petroleum product pipelines with Strategy for the period up to 2020, under construction Subkhankulovo LODS to 2020. a total length of 138 km, construc- Changeover of trunk oil pipeline to tion of three pumping stations and Yazykovo LODS Cherkassy trunk petroleum product pipeline LODS Stage I reconstruction of existing pumping Existing trunk petroleum product stations, as well as the changeover Existing petroleum product pipeline pipeline To increase diesel fuel export from of the Gorky–Yaroslavl trunk pipeline Existing oil pipeline Changeover of diesel fuel for PTS 8.5 million tons/year to 15 million to petroleum products pumping Pipelines under construction Existing OPS ( line operation dispatch- tons/year to the destination of Pri- (320 km). er stations) ReconstructedСМНП «pipelinesПриморск» morsk Port. Санкт- PS under construction ПетербургExisting PSППС «Сестрорецкая» Status PS under reconstruction PS under constructionППС «Невская» The stage envisages the construction Commissioning is envisaged for НПС «Невская» Reconstructed PS Tanks under construction of four new pumping stations and 2018. Refinery ППС «Быково-3» ООО «Лукойл- Railroad overpass construction Пермнефте- Tanks under construction оргсинтез» Refinery ГПС «Ярославль-2» ГПС «Ярославль» ППС «Залесье-3» 20,000 m3 ППС «Второво» ППС «Степаньково-3» ППС 40,000 m3 «Староликеево-4» ППС «Воротынец-1» ГПС «Нижнекамск-2» ППС «Ковали-1» ППС «Михайловка-1» ЛПДС ППС «Альметьевск» «Стальной конь» ЛПДС «Субханкулово» ЛПДС ЛПДС «Языково» «Черкассы»

Existing petroleum product pipeline Existing oil pipeline Pipelines under construction Reconstructed pipelines Existing PS PS under construction Reconstructed PS Reﬁnery Tanks under construction

52 Transneft Annual report 2016 53 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Development Program No. Project name Planned Actual Implementation, % 1 Construction of the Zapolyarye–Purpe trunk oil pipeline 30,754.3 32,279.0 105.0 % Implementation in 2016 2 Construction of the Kuyumba–Tayshet trunk oil pipeline 25,194.9 25,311.9 100.5 % 3 Expansion of the ESPO Pipeline System at the Skovorodino oil pumping station– 15,000.3 14,366.1 95.8 % Tayshet pipe-end oil pumping station section up to 80 million tons per year 4 Expansion of the ESPO PTS at the Skovorodino OPS–Kozmino specialized sea 3,023.1 3,026.9 100.1 % oil-loading port section up to 50 million tons per year 5 Reconstruction of the trunk oil pipelines in Western Siberia to increase the vol- 19.6 19.7 100.5 % The Transneft Development Program from borrowed funds and RUB ume of oil transportation to Tayshet is part of the Transneft Long-Term 64,154.7 million was paid from the 6 Capacity increase of the Skovorodino–Mohe oil pipeline up to 30 million tons per 1,938.8 1,853.7 95.6 % Development Program and includes Company’s own funds. year investment projects for the devel- 7 ESPO Pipeline System. Tayshet pipe-end oil pumping station–Skovorodino oil 3,073.0 2,786.5 90.7 % opment of the pipeline system and Although the Transneft Investment ₽ 3 37.5 pumping station section. Pressure safety system for trunk oil pipeline upgrade of its equipment. Program targets were reached in general, the implementation of the billion 8 ESPO Pipeline System–Komsomolsk Refinery pipeline branch 14,972.8 14,551.6 97.2 % The actual amount of the Transneft financing plan of each investment 9 Reconstruction of trunk oil pipelines to transport oil to refineries in Krasnodarsky 606.4 580.2 95.7 % actual amount of the Transneft Krai Development Program financing in project as part of the Investment Development Program financing in 2016 2016 stood at RUB 337,499.0 million Program had its own peculiarities. 10 Reconstruction of trunk oil pipelines’ facilities to decrease sulfur content in oil 1,125.9 1,104.3 98.1 % (RUB 335,428.2 million, accord- In a number of projects, the actu- transported to refineries in the Central Region and Volga Region ing to the plan, thus the im- al financing volumes exceeded the 11 Capacity increase of the Yaroslavl–Moscow trunk oil pipeline 1,155.4 1,087.1 94.1 % plementation was 100.6%), of targets, which was primarily due to which RUB 90,281.2 million was performance of works ahead of con- 12 Reconstruction of the Kuybyshev–Tikhoretsk trunk oil pipeline and the Zhirnovsk– 1,241.6 1,245.6 100.3 % Volgograd trunk oil pipeline to ensure supply of up to 14.5 million tons of oil per paid from borrowed funds and tractual schedules. In other invest- year to Volgograd Refinery RUB 247,217.8 million was paid ment projects, the actual financing 13 Development of the corporate data transfer network to build the Transneft Uni- 5,574.9 5,567.9 99.9 % from the Company’s own funds. volumes failed to reach the targets, fied Information System (UIS) (UIS Program) which was due to some contractors The actual amount of the Transneft needing to be replaced because of 14 The Eastern Siberia–Pacific Ocean pipeline transportation system, the Skovorodino 781.2 779.2 99.7 % oil pumping station–Kozmino specialized sea oil-loading port section (ESPO PTS-II). Investment Program financing in their insolvency and the long pro- Construction of auxiliary facilities 2016 stood at RUB 154,435.9 mil- cess of the execution of land parcels lion (RUB 154,234.5 million, ac- allocation for construction facilities, 15 Expansion of pipeline transportation system to ensure transportation of up to 50.3 27.2 54.1 % 12 million tons of oil per year to RN-Tuapse Refinery LLC cording to the plan, thus the imple- including the establishment of cor- mentation was 100.1%), of which responding easements through legal 16 Capacity increase of trunk oil pipeline to transport up to 14 million tons of oil per 367.1 545.7 148.7 % RUB 90,281.2 million was paid proceedings. year to OJSC TANECO Refinery 17 Capacity increase of the Usa–Ukhta trunk oil pipeline and the Ukhta–Yaroslavl 251.7 251.7 100.0 % trunk oil pipeline

II Investment projects for the development of the trunk petroleum product 49,103.2 49,051.6 99.9 % pipeline system 1 Yug Project The 1st stage. Reconstruction of the Tikhoretsk–Novorossiysk trunk 6,319.7 6,072.8 96.1 % Implementation of the main projects of the Transneft Development Program in 2016 (financing), RUB million, including VAT pipelines

No. Project name Planned Actual Implementation, % 2 Yug Project The 2nd stage. Construction of the Volgograd–Tikhoretsk trunk petro- 10,366.7 10,631.5 102.6 % leum product pipeline Total for the Development Program, including: 335,428.2 337,499.0 100.6 % 3 Yug Project The 3rd stage. 1,065.8 1,099.6 103.2 % - own funds 246,367.0 247,217.8 100.3 % 4 Construction of the Volgograd Refinery–Tinguta MPS trunk petroleum product 1,602.6 1,598.2 99.7 % - borrowed funds 89,061.2 90,281.2 101.4 % pipeline

Total for investment projects, including: 154,234.5 154 435.9 100.1 % 5 Development of the trunk pipeline system to increase petroleum products deliv- 7,296.4 7,198.7 98.7 % ery to Primorsk Port to 15 million tons per year (Sever Project) - own funds 65,173.3 64,154.7 98.4 % 6 Development of the trunk pipeline system to increase petroleum products deliv- 11,611.8 11,438.0 98.5 % - borrowed funds 89,061.2 90,281.2 101.4 % ery to Primorsk Port to 25 million tons per year (Sever Project) Total for the Technical Re-equipment Program (TRP), including: 181,193.7 183,063.1 101.0 % 7 Reconstruction of the trunk pipeline system to increase the volumes of petrole- 10,840.2 11,012.8 101.6 % um products transportation to the Moscow Region - own funds 181,193.7 183,063.1 101.0 % III EUP Program for trunk oil pipelines 160,807.7 162,916.0 101.3 % - borrowed funds 0.0 0.0 100.0 %

I Investment projects for the development of the trunk oil pipeline system 105,131.3 105,384.3 100.2 % IV EUP Program for trunk petroleum product pipelines 20,386.0 20,147.1 98.8 %

54 Transneft Annual report 2016 55 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Operating Innovative Development Efficiency

The Transneft Innovative Development No. DM-P36-7563 by the Govern- Increase Program till 2017 was approved by ment of the Russian Federation dated resolution of the Board of Directors of November 7, 2015, and to Directive the Company dated April 1, 2011 (Mi No. 1471p-P13 of the Government of 98.7 % nutes No. 7), endorsed by the Russian the Russian Federation dated March out of 100% is the evaluation of the Ministry of Energy, the Russian Ministry 3, 2016. The document was devel- Transneft Innovative Development of Education and Science, the Russian oped on the basis of the results of the Program by the interdepartmental group The Operating Efficiency Increase and Increase in resource efficiency: Ministry of Economic Development, and independent technology audit, agreed of independent experts Cost Reduction Program of Transneft • increase in the property, plant and the working group for the development upon by the Russian Ministry of Energy, till 2021 was approved by resolution equipment management efficiency; by of the public-private partnership in the the Russian Ministry of Education of the Board of Directors of the • increase in the efficiency of the pro- 2021 innovation sector affiliated to the Gov- and Science, the Russian Ministry of The Program was highly appreciated Company dated December 12, 2016 cess of management of the property, the non-exceedance of the acceptable ernment Commission on High Technol- Economic Development, and approved by the interdepartmental group of (Minutes No. 25). plant and equipment maintenance number of accidents per 1,000 km of line ogy and Innovation (Minutes No. 15-AK by resolution of the Board of Directors independent experts from the com- and repair; section is planned to be 0.072 dated April 13, 2011). of Transneft dated November 11, 2016 panies of the Russian fuel and power The Program’s main objec- • increase in the efficiency of the ener- (Minutes No. 21). sector, which presented its assess- tives are: gy resources use; The Program is based on projects for the ments at the meeting of the Interde- Increase in reliability and complete- • functional organization develop- development of breakthrough technol- In the new Program, in order to ensure partmental Commission for Technolog- ness of the oil (petroleum product) ment; ogies in the pipeline transportation of continuity, all the main measures and ical Development of the Presidium of transportation services provided: • incentive program and staff remu- oil and petroleum products, improve- projects of the previous Program were the Presidential Council for Economic • fixed assets upgrade; neration optimization; ment of engineering and technology, retained. At the same time, the new Modernization and Innovative Devel- • import substitution and locali- • increase in the working capital man- organization of the release of innovative Innovative Development Program was opment. The Transneft Program was zation of manufacture of ana- agement efficiency; R&D designs, and on key performance expanded and supplemented by meas- evaluated by the interdepartmental logs of imported products; • operating costs reduction; indicators (KPIs). The Program aims to ures to develop a system for managing group of independent experts at the • provision of anti-terrorism se- • modern technology adoption and significantly improve key performance the results of intellectual activity, and level of 98.7% out of 100%, which is curity at Transneft facilities; innovation utilization. indicators of production processes. to ensure cooperation with universities, one of the highest ratings for compa- scientific organizations, the Russian nies partially owned by the govern- The Transneft Innovative Development Academy of Sciences’ institutes, tech- ment. The Commission approved the Program for 2017-2021 was developed nology platforms, development institu- Program (Minutes No. 10-D01 dated by Transneft in 2016 pursuant to Order tions, innovative territorial clusters, etc. October 7, 2016).

Main targets of the Program to reach by 2021

Indicator Target by 2021 Non-exceedance of the acceptable number of accidents per 1,000 km of line section 0.072 Non-Core Asset Divestment Suppression (prevention) of attempted illegal attacks on secured facilities 0.992 Labor productivity in physical terms Min. 16.0 million tkm per person Program Reserve life standard (according to the plan for Repair and Operational Needs) Max. 6 months

Main targets of the Program with an annual target standard On June 22, 2016, the Board of Di- Pursuant to Directive No. 4863p-P13 The Register includes 5 minority stakes Indicator Target by 2021 rectors of Transneft made a decision of the Government of the Russian in the companies scheduled for liqui- (Minutes No. 12) on terminating the Federation dated July 7, 2016, by dation, in which Transneft participates Reduction under comparable conditions in specific power consumption orf core activity 0.5% annually Program for the divestment of non-core resolution of the Board of Directors indirectly, as well as the Transneft Percentage reduction in operating expenses Min. 2% annually assets of the Transneft Group Compa- of Transneft dated October 14, 2016 minority stake in OOO KHL, slated for nies approved on April 1, 2011. (Minutes No. 17), the Transneft sale. Staff turnover rate Max. 5% annually Company-wide Group Non-Core Asset Divestment In 2016, under this Program, two non- Program and the Transneft Group core assets were divested for a total of Non-Core Asset Register (hereinaf- RUB 11,800,000 (Annex 1). ter – Register) were approved.

56 Transneft Annual report 2016 57 Financial Review

Key financial and economic indicators of the Group billion – the increase under IFRS 60 ₽ +32.5 in revenue in 2016 Revenue 61

Operating expenses 63

EBITDA formation 67

Cash flow analysis 68 billion – the reduction in operating expenses Liquidity analysis 70 ₽ in 2016 -2.5 Key financial and economic indicators of Transneft under the Russian Accounting Standards 72

Financial indicators under the Russian Accounting Standards 73

billion – the increase in Sources of funding capital ₽ +37.3 EBITDA in 2016 investments 73

billion – the net profit ₽ 232.9 in 2016

58 Transneft Annual report 2016 59 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Key financial Revenue and economic indicators For the year ended December 31, from crude oil sales and petroleum 2016, the Group’s revenue increased by products sales, revenue for the year RUB 32,482 million or by 4.0%, attribut- ended December 31, 2016 increased by of the Group able mainly to an increase in revenue RUB 60,566 million or by 9.4% com- from crude oil transportation and petro- pared to the year ended December 31, leum products transportation services. 2015 and accounted for 82.9% of total under IFRS Without taking into account revenue revenue for the reporting period.

RUB million Year ended Year ended Share of total Share of total Absolute According to the results of 2016, tion services. In 2016, the Group’s Indicator December 31, December 31, Change, % revenue, % revenue, % change Transneft Group improved its EBITDA increased by RUB 37.3 billion 2016 2015 financial performance. Under the or 10.0% mainly due to the increase Revenue from crude oil transporta- 614,139 72.5 558,775 68.5 55,364 9.9 International Financial Reporting in revenue from the provision of oil tion services Standards (IFRS), the revenue of the and petroleum product transporta- ₽ exports, except the CIS 351,834 41.5 309,788 38.0 42,046 13.6 Group increased by RUB 32.5 billion tion services and operating expens- 232.9 exports in the CIS 16,743 2.0 14,627 1.8 2,116 14.5 or 4.0% mainly due to the increase es reduction. Net profit increased billion in revenue from the provision of oil by RUB 89.5 billion or 62.4% and domestic sale 245,562 29.0 234,360 28.7 11,202 4.8 and petroleum product transporta- amounted to RUB 232.9 billion. the net profit of Transneft Group Revenue from petroleum products 64,485 7.6 57,309 7.0 7,176 12.5 transportation services The Group’s key performance indicators in 2016, RUB million Revenue from oil compounding 6,015 0.7 5,329 0.7 686 12.9 service Other revenue 18,345 2.1 21,005 2.6 (2,660) (12.7) Indicator 2016 2015 Absolute change Change, % Total revenue (without reve 702,984 82.9 642,418 78.8 60,566 9.4 nue from sales of crude oil and Revenue 848,134 815,652 32,482 4.0 petroleum products) Revenue from export sales of 127,113 15.0 143,589 17.6 (16,476) (11.5) Operating expenses excluding amortization and depreciation -439,917 -442,370 2,453 -0.6 crude oil Revenue from sales of crude oil on 15,186 1.8 27,923 3.4 (12,737) (45.6) Operating profit net of amortization and depreciation 408,217 373,282 34,935 9.4 the domestic market Amortization and depreciation -128,523 -118,767 -9,756 8.2 Revenue from sales of petroleum 2,851 0.3 1,722 0.2 1,129 65.6 products Operating profit 279,694 254,515 25,179 9.9 Total revenue 848,134 100.0 815,652 100.0 32,482 4.0

Profit before income tax 301,422 165,553 135,869 82.1

Income tax expense -68,515 -22,126 -46,389 3.1 times Oil and petroleum product Changes and structure of revenue transportation services from oil and petroleum products Profit for the reporting period 232,907 143,427 89,480 62.4 transportation, RUB million Other comprehensive income / (loss), net of income tax 2,321 -5,488 7,809 Х The increase in revenue from oil The increase in revenue from petrole- 8.8 % transportation services amounted um products transportation services 2014 41.0 % 50.2 % 548,024 to RUB 55,364 million or 9.9% for by RUB 7,176 million or by 12.5% for 9.3 % Total comprehensive income, net of income tax 235,228 137,939 97,289 70.5 the year ended December 31, 2016 the year ended December 31, 2016 2015 38.0 % 52.7 % 616,084 compared to the same period of 2015 compared to the same period of 2015 EBITDA* 408,780 371,459 37,321 10.0 9.5 % and was attributable to the change was driven by changes in petroleum 2016 36.2 % 54.3 % 678,624 in tariffs and the change in oil trans- products transportation tariffs as well Debt/EBITDA 1.7 2.4 -0.7 Х Oil transportation for domestic portation and turnover as well as the as changes in petroleum products market * Excluding purchase and sale of crude oil under contracts with Rosneft and China National Petroleum Corporation. setting of new tariffs. transportation and turnover. Petroleum products transportation Oil transportation for export

60 Transneft Annual report 2016 61 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Revenue from sales of crude Other revenue Changes and structure of revenue Operating oil and petroleum products from sales of oil and petroleum pro The increase in revenue from ducts and other income, RUB million expenses Revenue from export sales of crude oil the provision of oil compound- was driven by the start of oil supplies ing services for the year ended 2.0 % 10.9 % 12.7 % to the People’s Republic of China December 31, 2016, compared to 2014 74.4 % 226,356 under a 20-year contract to supply the same period of the previous 0.9 % 14.0 % 13.2 % 6 million tons of crude oil annually year, of RUB 686 million or 12.9%, 2015 71.9 % 199,568 Operating expenses net of amortization effective from January 1, 2011. This was due to the increase in the vol- 1.7 % 9.0 % 14.3 % and depreciation for the year ended contract was signed as collateral for a ume of oil compounding by 12.7% 2016 75.0 % 169,510 December 31, 2016, and the year ended loan obtained from the China Develop- (for the year ended December 31, December 31, 2015, are detailed in the Sales of petroleum products ment Bank. The respective oil volumes 2016 – 42,684,900 tons, for the table below: are being purchased from Rosneft. year ended December 31, 2015 - Sales of oil for export 37,883,800 tons). RUB million The decrease in revenue from export Sales of oil on the domestic market sales of crude oil by RUB 16,476 mil- Other revenue includes revenue Year ended Year ended Share of total December 31, Share of total Absolute Change, lion or by 11.5% for the year ended from connection of companies to Other* Operating expense line items December 31, expenses, 2016 expenses, % change % December 31, 2016 compared to the the trunk pipeline system and rev- 2015 % year ended December 31, 2015 was enue from trunk pipeline expan- mainly a result of the decline in the sion services, information services Salaries, social funds contributions 144,639 32.9 132,202 29.9 12,437 9.4 average oil market price per barrel set related to oil transportation, oil and social expenses in USD as well as the increase of the and petroleum products storage Energy 38,438 8.7 34,471 7.8 3,967 11.5 USD/RUB exchange rate during the services, communication services, Materials 29,505 6.7 24,592 5.6 4,913 20.0 reporting period to the same period of diagnostic services, construction Repair services and maintenance of 15,746 3.6 14,382 3.3 1,364 9.5 the previous year. services, rent services, organiza- the pipeline system tion of transporting services, as Insurance expenses 7,059 1.6 6,640 1.5 419 6.3 The decrease in revenue from do- well as other services. Taxes (other than income tax) 21,362 4.9 17,005 3.8 4,357 25.6 mestic sales of crude oil for the year ended December 31, 2016 by The decrease of other revenue Pension expenses 4,392 1.0 5,878 1.3 (1,486) (25.3) RUB 12,737 million or by 45.6% for the year ended December 31, Other operating expenses 33,901 7.6 36,922 8.3 (3,021) (8.2) compared to the relative period of 2016 compared to the relative Cost of export crude oil sales (includ- 127,676 29.0 141,766 32.0 (14,090) (9.9) the previous year was a result of the period of the previous year was ing export custom duties) decline in sale volumes of crude oil by mainly caused by the decrease of Cost of crude oil sold on the domestic 13,497 3.1 23,680 5.4 (10,183) (43.0) the Group's companies. revenue from connection of facil- market ities to the trunk pipeline system Cost of petroleum products sold 2,956 0.7 1,658 0.4 1,298 78.3 The increase in revenue from sales of and revenue from trunk pipeline Cost of other goods sold 746 0.2 3,174 0.7 (2,428) (76.5) petroleum products for the year ended expansion services. December 31, 2016 amounted to RUB Operating expenses net of amortiza- 439,917 100.0 442,370 100.0 (2,453) (0.6) tion and depreciation 1,129 million or 65.6%.

For the year ended December 31, • decrease in the cost of export crude 2016, compared to the year end- oil sales and cost of crude oil sold ed December 31, 2015, operating on the domestic market; expenses net of amortization • growth of salaries, social funds contri- and depreciation decreased by butions and social expenses; ₽-2.5 RUB 2,453 million or by 0.6%. • growth of material expenses. billion The small decrease in the operating After applying inflation rates*, operating the reduction in operating expenses net of expenses net of amortization and expenses net of amortization and depre- depreciation and amortization in 2016 depreciation was driven by the fol- ciation for the year ended December 31, lowing factors: 2016, and for the year ended December 31, 2015, were as follows:

62 Transneft Annual report 2016 63 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

RUB million Year ended Changes in per unit costs of oil trans Year ended Share of Inflation rates December 31, Share of portation, RUB / 100 tkm Absolute Change, Operating expense line items December 31, total ex- (2016 to 2015 (inflated to total exchange % 2016 penses, % 2015), %* 2016) penses, % Per unit costs, 2015 (inﬂated to 2016) 17.43 -0.49 Salaries, social funds contribu- 144,639 32.9 7.1 141,588 31.2 3,051 2.2 Changes in turnover tions and social expenses Expenses for operation, major repair and diagnostics +0.07 Fuel and energy resources +0.14 Energy 38,438 8.7 8.2 37,298 8.2 1,140 3.1 Salaries, social funds contributions and social expenses +0.26 Materials 29,505 6.7 3.2 25,379 5.6 4,126 16.3 Communication services -0.17 (-1.0 %) +0.12 Repairs services and mainte- 15,746 3.6 8.1 15,547 3.4 199 1.3 nance of relevant technical Security services +0.01 condition of pipeline Other +0.13 Insurance expenses 7,059 1.6 3.2 6,852 1.5 207 3.0 Per unit costs, 2016 17.68 Taxes (other than income tax) 21,362 4.9 3.2 17,549 3.9 3,813 21.7 Exclusion of new facilities -0.42 Per unit costs, 2016, excluding Pension expenses 4,392 1.0 7.1 6,295 1.4 (1,903) (30.2) expenditure on new facilities 17.26

Other operating expenses 33,901 7.6 3.2 38,104 8.4 (4,203) (11.0)

Cost of export crude oil sales (in- 127,676 29.0 (2.8) 137,797 30.3 (10,121) (7.3) Per unit costs for transportation of pe- cluding export custom duties) troleum products per ton for the year ended December 31, 2016 and for the Cost of crude oil sold on the 13,497 3.1 (2.8) 23,017 5.1 (9,520) (41.4) year ended December 31, 2015 were domestic market as follows: Cost of petroleum products sold 2,956 0.7 (8.0) 1,525 0.3 1,431 93.8 Petroleum products transportation services

Cost of other goods sold 746 0.2 3.2 3,276 0.7 (2,530) (77.2) Year ended Year ended Absolute Change, % December 31, 2016 December 31, 2015 change

Operating expenses net of amor- 439,917 100.0 X 454,227 100.0 (14,310) (3.2) Transportation volume, million tons 33.1 32.2 0.9 2.8 tization and depreciation Per unit costs per ton, RUB (2015 figures inflated to 2016) 724.37 725.44 (1.07) (0.1) * The inflation rates used are based on the forecast for social and economic development of the Russian Federation for 2017 and for the planned period of 2018 and 2019 prepared by the Ministry of Economic Development of the Russian Federation Per unit costs per ton excluding expenditure on new facilities, 722.06 725.44 (3.38) (0.5) RUB (2015 figures inflated to 2016)

Per unit costs are analyzed by on aggregated Russian Accounting and for the planned period of 2018 Oil transportation and Petro- Standards data which considers and 2019 prepared by the Ministry of Changes in per unit costs of petrole leum products transportation the previous year data adjusted for Economic Development of the Russian um products transportation, RUB / ton activities based on indicators conditions of the reporting period. Federation. developed under the Russian For calculation of inflated per unit ₽ Accounting Standards costs the index of inflation is used Per unit costs for transportation of oil 722.06 Per unit costs, 2015 which is based on the forecast for per 100 tkm for the year ended Decem- per ton (inﬂated to 2016) 725.44 Per unit costs are calculated using an social and economic development ber 31, 2016 and for the year ended Changes in transportation volume -20.73 operating expenses indicator based of the Russian Federation for 2017 December 31, 2015 were as follows: per unit costs in 2016 excluding Expenses for operation, +26.89 expenditure on new facilities major repair and diagnostics Fuel and energy resources +2.86 Salaries, social funds contributions and social expenses -23.74 Oil transportation service Communication services -3.38 (-0.5 %) -5.89 Year ended Year ended Absolute Change, % December 31, 2016 December 31, 2015 change Security services +12.91 Freight turnover, million tkm 1,219,134 1,185,028 34,106 2.9 Other +6.63 Per unit costs per 100 tkm (indicators of 2015 inflated 17.68 17.43 0.25 1.4 Per unit costs, 2016 724.37 to 2016), RUB Exclusion of new facilities -2.31 Per unit costs per 100 tkm, excluding expenditure on 17.26 17.43 (0.17) (1.0) new facilities, RUB (2015 figures inflated to 2016) Per unit costs, 2016, excluding 722.06 expenditure on new facilities

64 Transneft Annual report 2016 65 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Factor analysis of changes in operat EBITDA ing expenses, RUB million

Operating expenses, 2015 2015 454,227 formation (inflated to 2016) Salaries, social funds +3,051 contributions and social expenses +1,140 Electric energy RUB million Materials +4,126 Year ended Year ended Change, % Oil transportation by -967 December 31, 2016 December 31, 2015 railway transport Net profit for the period 232,907 143,427 62.4 Taxes (except for profit tax) -14,310 (-3,2 %) +3,813 Adjustments for: Net changes in reserves -2,199 for depreciation and decommissioning income tax expenses 68,515 22,126 3.1 times Other expenses -2,534 amortization and depreciation 128,523 118,767 8.2 Cost of goods sold -20,740 result of crude oil sales to China 563 (1,823) x net finance (income)/costs (9,665) 67,212 x Operating expenses, 2016 2016 439,917 share of (profit)/loss from associates and jointly (19,519) 4,119 x controlled entities other expenses 7,456 17,631 (57.7) Reasons for changes in oper- purchased because of the increase in ended December 31, 2016 amounted to ating expense line items freight turnover. RUB 10,183 million or 43.0% as com- EBITDA* 408,780 371,459 10.0 pared to the relative period of 2015 and * Less crude oil sale and purchase operations under contracts with Rosneft and the China National Petroleum Corporation The increase in salaries, social funds Expenses for materials for the year was caused by the decrease in sale vol- contributions and social expenses ended December 31, 2016 as com- umes of oil by the Group’s subsidiaries. for the year ended December 31, pared to the same period of 2015, 2016 compared to the year ended increased by RUB 4,913 million or The cost of petroleum products sold EBITDA is a useful indicator for a basis for estimating and projecting December 31, 2015 in the amount of by 20.0%. The increase expenses for for the year ended December 31, 2016 investors, as it indicates the Group’s the efficiency and value of oil and RUB 12,437 million or 9.4% was mainly materials was mainly caused by the increased by RUB 1,298 million or by operating performance, including its gas companies. This indicator should influenced by an increase of social funds increase of expenses for drag reducing 78.3% as compared to the relative period ability to finance capital expenditures, not be considered separately, as an contributions caused by an increase in agents, minor and major repairs, as of 2015. company acquisitions, and other alternative to net income, operat- ₽ 408.8 the limit for their accrual, indexation of well as preparation and putting into investments, as well as its ability to ing income, or any other of Group’s salaries held in 2016 and putting the operation of new pipeline facilities. The amount of the Group’s other taxes raise and service borrowings and performance indicators reported in billion Zapolyarye-Purpe and Kuyumba-Taysh- recognized in operating expenses primar- loans. Some investors, analysts, and its condensed interim consolidated EBITDA in 2016 et trunk pipelines into operation. The amount of expenses for repair ily contains property tax, tax on land and rating agencies tend to use EBITDA as financial statements under IFRS. services and maintenance of the re transport tax. The increase of these items Pension expenses changed under levant technical condition of pipelines was mainly caused by the increase of the the following factors which influence increased in the reporting period property tax expenses. expenses: by RUB 1,364 million or by 9.5% as • inclusion of pension liabilities of compared to the relative period of Other operating expenses include com- NPF Transneft, JSC in the consol- the previous year because of planned munication services, rent expenses, trans- idated financial statements of the major repair works. portation services, the resulting gains and Group; losses relating to disposal of property, • recognition of obligations of the The cost of export crude oil sales for plant and equipment and other assets, Factor analysis of changes in EBITDA, Group under the defined benefit the year ended December 31, 2016 fines and penalties received and paid, as million RUB plan in accordance with IAS 19 Em- in the amount of RUB 127,676 million well as other income and expenses. ployee benefits and related expens- includes the cost of sales (in the amount es accrued. of RUB 97,669 million) of crude oil EBITDA, 2015 2015 371,459 purchased from Rosneft under a contract Changes in oil transportation volume and traffic flows +19,781 Energy expenses for the year end- signed in April 2009 and custom duties Changes in petroleum products +2,542 ed December 31, 2016 increased by in the amount of RUB 30,007 million. transportation volume and traffic flows RUB 3,967 million or by 11.5% com- This figure is a result of oil supplies to +37,321 (+10.0 %) Changes in income from other types of -2,269 pared to the same period of the previous the People’s Republic of China. activity year. The increase was caused by the Changes in operating expenses and +17,267 growth of tariffs of natural monopolies The decrease in the cost of oil sold transportation tariffs for energy and the growth of energy on the domestic market for the year EBITDA, 2016 2016 408,780

66 Transneft Annual report 2016 67 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Cash flow USD 667 million (RUB 40,721 million Calculating operating cash b. non-cash items such as amortiza- at the rate of the Central Bank of flow using the indirect tion and depreciation, provisions, analysis the Russian Federation on the date method unrealized foreign currency gains of operation), RUB denominated and losses, interest income and bonds were redeemed in the amount Cash flows received from operating expenses, share of profit/loss from of RUB 30,943 million and the loan activities using the indirect method associates and jointly controlled from LatRosTrans was repaid in the are disclosed in the table below in entities; RUB million amount of RUB 1,083 million; addition to the consolidated state- • payments for the acquisition of ment of cash flows prepared using c. all other items for which the cash Year ended Year, ended Absolute non-controlling interests: 36% the direct method and disclosed effects are investing or financing Change, % December 31, 2016 December 31, 2015 change in Transneft Kama Region, JSC in the consolidated financial state- cash flows. Cash flows from operating activities 317,570 329,237 (11,667) (3.5) (formerly SZMN, JSC) and 25% in ments prepared in accordance with OOO Transneft-Terminal amounting IFRS for the year ended December Cash flows used for purchase of property, plant and (319,958) (322,987) 3,029 (0.9) equipment (net) to RUB 15,606 million during the 31, 2016. year ended December 31, 2015; Free cash (outflow)/inflow (2,388) 6,250 (8,638) x • increase of dividends paid out by Under the indirect method, the net Cash flows from other investment activities 69,250 112,213 (42,963) (38.3) RUB 9,855 million during the year cash flow from operating activities is Cash flows used in financing activities (72,510) (149,506) 76,996 (51.5) ended December 31, 2016 compared determined by adjusting profit before Net cash outflow (5,648) (31,043) 25,395 (81.8) to the relative period of 2015; tax for the effects of: Change in cash and cash equivalents due to deviation (12,479) 29,895 (42,374) x • performance of obligations in rela- of currency exchange rate tion to the derivatives, shown in the a. changes during the reporting pe- Net decrease in cash and cash equivalents (18,127) (1,148) (16,979) 15.8 times line “Other cash used in financing riod in inventories and operating activities.” receivables and payables;

RUB million Negative free cash flow excluding Investment activities December 31, 2016 as compared Year ended Year ended investments in securities and depos- to the relative period of 2015 by December 31, 2016 December 31, 2015 its for the year ended December 31, The primary factors resulting in an RUB 76,996 million or by 51.5% were: 2016 amounted to RUB 2,388 mil- increase in cash used in investment • net proceeds from issuance of OPERATING ACTIVITY lion (positive free cash flow as for activities for the year ended December non-convertible interest-bearing Profit before income tax 301,422 165,553 the year ended December 31, 2015 31, 2016 were: documentary exchange-traded Adjustments for: amounted to RUB 6,250 million). • decrease in net cash inflow for the bonds in the amount of Amortization and depreciation 128,523 118,767 year ended December 31, 2016 RUB 79,176 million during the year Loss from disposal of property, plant and equipment 1,249 989 Operating activity from purchase-and-sale trans- ended December 31, 2016; actions of debt securities and • increase of cash used for the Finance income (290,870) (542,902) The main factors which influenced allocation/closure of deposits in repayment of bonds and loans and Finance costs 281,205 610,114 the decrease of cash generated from the amount of RUB 14,875 million borrowings by RUB 56,611 million Gain on disposal of subsidiaries (998) - operating activities for the year end- compared to the relative period of for the year ended December 31, Share of (profit)/loss from associates and jointly controlled entities (19,519) 4,119 ed December 31, 2016 as compared 2015; 2016 as compared to the relative Others (5,611) 6,161 to the same period in 2015 were as • decrease in interest and dividends period of 2015: follows: received by RUB 13,431 million; • for the year ended December 31, Operating profit before changes in working capital and reserves 395,401 362,801 • increase in cash receipts from cus- • consideration paid for acquisition of 2016 monthly repayments of the Changes in operating assets and liabilities: tomers by RUB 27,118 million; 50% authorized capital of Novoros loan to China Development Bank in Changes in inventories 2,939 646 • increase in cash paid to suppliers siysk Fuel Oil Terminal LLC (NFT the total amount of USD 1,827 mil- Changes in trade and other receivables relating to operating activity and (1,652) 24,995 and contractors by RUB 19,655 LLC) in the amount of USD 159 lion (RUB 118,944 million at the VAT assets million; million (RUB 12,497 million at the rate of Central Bank of the Russian Changes in trade and other payables, and accruals relating to operating 15,609 24,178 • decrease in cash received exchange rate of the Bank of Russia Federation on the dates of ope activity from the refund of VAT and on the date of payment). rations), RUB denominated bonds Cash flows from operating activities before payment of income tax 412,297 412,620 other taxes from the budget by were redeemed (repurchased) in expenses and interest RUB 5,849 million; Financing activities the amount of RUB 10,414 million; • increase in income tax paid • during the year ended December Income tax paid (49,078) (39,904) amounting to RUB 9,174 million; The main factors which influenced 31, 2015 monthly repayments of Income tax refund 597 1,267 • increase in amount of interest the decrease of cash flows used in the loan to China Development Interest paid (46,246) (44,746) paid by RUB 1,500 million. financing activities for the year ended Bank were made in the amount of Net cash flows received from operating activities 317,570 329,237

68 Transneft Annual report 2016 69 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Liquidity The debt structure as of Decem- The debt structure as of December 31, ber 31, 2016 assumes the possible 2015 assumes the possible redemption analysis redemption date for non-convertible date for non-convertible interest-bear- interest-bearing documentary bonds ing documentary bonds in the amount of in the amount of RUB 45,208 million RUB 25,427 million at the offer date (2016), at the offer date (2017). RUB 45,000 million at the offer date (2017).

RUB million

December 31, 2016 December 31, 2015 Change, % Transneft debt structure by types of borrowings, RUB billion Debt structure by maturity Current assets 535,607 640,914 (16.4) including: 41.5 % 15.6 % cash and cash equivalents 74,586 92,713 (19.6) 31.12.2014 542 61 156 759 short-term bank promissory notes, deposits and bonds* 349,529 427,192 (18.2) RUB Current liabilities 293,849 240,451 22.2 31.12.2015 652 79 134 865 Net working capital 241,758 400,463 (39.6) 702 Current ratio 1.8 2.7 x billion Quick ratio** 1.6 2.3 x 31.12.2016 432 66 204 702 42.9 % Debt/EBITDA 1.7 2.4 x Debt/equity 0.4 0.6 x Loans Less than 1 year * The main part of short-term bank promissory-notes, deposits and bonds consist of promissory notes, deposits and bonds issued by credit institutions and other companies with credit ratings at Ba1 – Ba3 on the Moody’s adjusted scale. Thus, short-term bank Eurobonds From 1 year to 5 years promissory notes, deposits and bonds consist of financial instruments issued by highly reliable and reliable credit institutions and companies. Ruble bonds More than 5 years ** Quick ratio = (Cash and cash equivalents + Current financial assets + Short-term receivables) / Current liabilities.

The following are the contractu- denominated in foreign currency cal- al repayment periods of financial culated using the Central Bank of the liabilities, including estimated Russian Federation exchange rates as interest payments at the rates as of of December 31, 2016 and December December 31, 2016 and December 31, 2015 respectively. 31, 2015 respectively, with amounts

RUB million

December 31, 2016

Contractual cash flows

More than 5 Book value Total 2017 2018 2019 2020 2021 years Loans and borrow- 701,552 895,916 155,594 140,634 143,184 54,811 68,786 332,907 ings Trade and other 85,823 85,823 85,823 - - - - - payables 787,375 981,739 241,417 140,634 143,184 54,811 68,786 332,907 December 31, 2015 Loans and borrow- 865,003 1,094,932 129,337 133,827 157,312 133,623 65,302 475,531 ings Trade and other 76,592 76,592 76,592 - - - - - payables 941,595 1,171,524 205,929 133,827 157,312 133,623 65,302 475,531

70 Transneft Annual report 2016 71 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Key financial and economic Financial indicators under indicators of Transneft, the Russian Accounting under THE Russian Standards Accounting Standards Financial indicators of Transneft, data on profitability, working capital turnover

December 31, December 31, Absolute devia- No. Indicator 2016 2015 tion +/-

1. Return on equity (excluding sales of crude oil to China), % 17.46 6.64 10.82 Amount, RUB thousand Change, RUB Indicator Change, % 2. Return on invested capital (based on operating profit (excluding sales of 3.86 1.41 2.45 thousand 2016 2015 crude oil to China), adjusted for nominal tax rate), % (ROIC)

Revenue, total 803,083,944 756,936,378 46,147,566 6.1 3. Profitability of sales (products) excluding sales of crude oil to China, % 7.30 2.99 4.31 including: 4. Receivables turnover ratio 7.37 6.41 0.96

Oil transportation services 611,929,692 555,764,721 56,164,971 10.1 5. Critical liquidity ratio (intermediate coverage) 0.80 1.26 -0.45

Petroleum products transportation services 54,671,040 48,539,932 6,131,108 12.6 6. Current ratio 0.80 1.26 -0.45

Oil sales for export 127,113,124 143,589,097 -16,475,973 -11.5

Oil compounding services 6,015,471 5,329,348 686,123 12.9

Property rental 1,201,113 787,417 413,696 52.5

Other 2,153,504 2,925,863 -772,359 -26.4

Costs of core activities, total 754,085,740 736,079,543 18,006,197 2.5 including: Sources of funding capital

Oil transportation services 546,727,889 526,010,716 20,717,173 3.9

Petroleum products transportation services 54,268,087 48,280,585 5,987,502 12.4 investments

Oil sales for export (including commercial expenses) 127,458,055 141,081,452 -13,623,397 -9.7

Oil compounding services 3,609,283 3,197,609 411,674 12.9

Property rental 1,209,237 763,824 445,413 58.3

Management expenses 20,601,555 16,551,734 4,049,821 24.5 Capital investments of Transneft amounted to RUB 72,814.6 million Other 211,634 193,623 18,011 9.3 in 2016. Net profit 30,606,531 12,801,410 17,805,121 2.4 times Sources of funding capital investments in 2016

Amount, RUB Sources of funding capital investments. thousand

Depreciation, 2016 2,136,146

Other own sources, 2016 2,299,469

Other own sources of past years 31,668,832

Borrowed funds 30,719,385

Contribution to the authorized capital of Transneft 5,990,800

Total 72,814,632

72 Transneft Annual report 2016 73 Sustainable development

Sustainable development 76 the Transneft Group’s companies underwent recertification audits Ecology and resources 77 In 2016 that proved their compliance with Environmental safety the ISO 14001:2004 standard and environmental protection 77

Use of energy resources and energy saving 79

Management and monitoring of environmental protection activities 79 the reduction of specific emis- -1% sions of air pollutants in 2016 Innovation in the field of environmental protection 81

Environmental protection expenses and investments 81

Personnel policy and social support of employees 82

Ensuring occupational safety 84 tons – the decrease of gross -295 emissions of air pollutants Charity and social responsibility 85

billion – current spending on environmental protection in ₽ 190 2016

billion – the investments in environmental protection in ₽ 340 2016

74 Transneft Annual report 2016 75 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Sustainable Ecology and development resources

Environmental safety and environmental protection

Environmental protection and environ- • rational use of natural resources at mental safety of production facilities all stages of production activities, are the main priorities of Transneft. complying with legal acts; increase in energy efficiency of production In 2016 Transneft updated the environ- processes at all stages; in 2016 mental policy and it was put into effect • disclosure of significant informa- by order of October 6, 2016 No. 198. tion on environmental protection the Transneft Group’s In accordance with the order, the main activities. principles of the Company’s activities in companies underwent the environmental field are: Specific emissions of air recertification audits • compliance with the requirements pollutants of Russian legislation, international that proved their treaties, standards and regulations Reduction of specific emissions of air in the field of nature management, pollutants is a key indicator charac- compliance with the environmental protection and envi- terizing the Company’s efficiency in ISO 14001:2004 ronmental safety; reducing the negative impact on the • continuous improvement of environ- environment during oil and petroleum standard mental activities and of the corpo- products transportation via trunk pipe- rate environmental management lines. “Reduction of specific emissions system; of air pollutants” is one of the key • compensation for damage caused to performance indicators (KPIs) defined the environment by the Company; under the Transneft Long-Term Deve • allowance for the remote ecological lopment Program until 2021. consequences during the design, construction and operation of oil and Specific emissions of air pollutants in In accordance with the Transneft tive impact on the environment and petroleum product pipeline facilities; 2016 decreased by 0.002 kg/ton (by Strategy until 2020, the Company’s provide social support for the popula- • compulsory assessment of the 1%) compared to the previous year and main objective is to develop the tion through regular charity events in impact of planned activities on the amounted to 0.156 kg/ton. The annual trunk pipeline system of the Russian the Company’s regions of presence. environment when deciding on the reduction plan for this indicator was Federation to fully meet the oil and construction of production facilities; 100% fulfilled. This result was achieved petroleum products transportation Staff is a key factor in the Company’s • prevention and reduction of the due to the following measures taken: needs. effective operation and commercial negative impact on the environment • efficient operation of the oil vapor re- success; we strive to attract the best through implementing innovative covery unit at the specialized sea oil- At the same time, the Company real- employees in the industry, not only technologies and improving the loading terminal of Transneft Kozmino izes its responsibility to the present offering competitive employment environmental safety of pipeline Port, LLC and the jet absorption unit and future generations and strives to conditions and opportunities for pro- transport facilities, reducing specific at the Krotovka railway oil-loading constantly improve the level of reli- fessional development, but we are also emissions, pollutant and production platform of Transneft Volga Region, ability, industrial and environmental constantly improving the comfort and waste discharges into the environ- JSC (11,200 tons of pollutants were safety of its work, reduce the nega- safety of workplaces. ment; caught and rendered harmless);

76 Transneft Annual report 2016 77 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

• reconstruction of tank farms; areas Sokur-3 (14.630 hectares) and Specific emissions of air pollutants, Use of energy resources • implementation of the Program for Sokur-5 (10.268 hectares) and, as a kg/ton Energy Saving and Increasing Energy result, the reduction of the discharge and energy saving Efficiency. of industrial and storm wastewater 2014 0.170 from them into the industrial sewerage -6.95 % In addition, in 2016 the gross emissions system. 2015 0.158 of air pollutants decreased by 295 tons -1.0 % In 2016, Transneft carried out ac- pany achieved a reduction in the 2016 0.156 (by 0.36%). Within the framework of implementation tivities within the framework of the specific electricity consumption of the Innovative Development Program approved Program for Energy Saving for oil transportation via trunk Water use and wastewater in 2016, the Company built and put into and Energy Efficiency Improvement. pipelines in comparable conditions discharge operation 5 wastewater treatment facili- Due to these activities, the Com- by 1.73%. ties for industrial and storm wastewater Discharge of insufficiently treated waste- with a total capacity of 1,520 m3/day Gross emissions of air pollutants, 2016 (actual) water into water bodies decreased by and 5 wastewater treatment facilities for thousand tons Including oil and petroleum 3 Use of energy resources Total 69,381 m (by 37%) in 2016 compared to domestic wastewater with a capacity of products transportation 2015, and amounted to 117,158 m3. The 225 m3/day. It also carried out recon- 2014 86.735 annual reduction plan for this indicator struction, technical re-equipment and -6.56 % nat. value RUB thousand nat. value RUB thousand 2015 81.045 was only 3%. To a large extent, the re- major repair of 6 treatment facilities Electric energy (purchased) (taking into account the cost of power), MW*h 14,904,974 42,486,851 14,843,419 42,070,514 -0.36 % duction of the discharge of insufficiently with a total capacity of 505 m3/day, in 2016 80.750 (without VAT) (without VAT) treated wastewater ahead of the annual particular, 4 sewage treatment plants Thermal energy (purchased), Gcal 209,547 315,449 189,225 274,500 plan was achieved through the liquidation are for domestic wastewater, 2 are for Fuel for internal consumption, tons of fuel oil equivalent, total 412,167 5,165,196 333,548 4,284,500 of tank farms and open technological industrial and storm wastewater. including oil for heat production, tons 89,608 1,058,651 76,094 897,474 including oil for power generation, tons 24,427 281,070 21,752 250,294 including natural gas for heat generation, MCM 74,519 344,450 60,526 287,045 Water use and wastewater discharge, MCM 2016 including diesel fuel for heat generation, tons 4,939 140,280 4,678 133,588 Water intake, total 9,231.520 including diesel fuel for power generation (at emergency DPPs), tons 156 5,114 156 5,107 including from underground sources 3,457.425 including heavy fuel oil, tons 16,267 158,209 500 4,090 Water use, total 7,696.065 including motor fuel for automobile transport and special equipment, 93,084 3,077,840 80,449 2,653,417 tons including for production needs 5,252.694 Effluent discharge into surface water bodies, total 9,052.612 including those treated according to the standard 8,935.454 Effluent discharge to land surface, total 496.771 including those treated according to the standard 496.771 Management and monitoring of environmental protection activities

The Transneft environmental policy The Company developed an ef- is developed in accordance with the fective industrial environmental requirements of the international monitoring system for atmospheric standard ISO 14001:2004. Certifica- air, water and land resources at all tion of Transneft and other compa- of its production facilities. 56 labo- nies of the Group was carried out by ratories accredited by the Federal the DQS Group which is a founding Accreditation Service serve this member of the IQNet International system. They are all staffed with Certification Association. In 2016, specialists and equipped with mo the Transneft Group’s companies dern analytical facilities. In 2016, underwent recertification audits that three new ecological and analytical proved their compliance with the ISO laboratories were additionally com- 14001:2004 standard. missioned.

78 Transneft Annual report 2016 79 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

The Company exercises environmental pany submits all research records to Transneft developed, implemented and Innovation in the field and analytical control in accordance the supervisory authorities in time, in is constantly improving an Environmen- with the schedules approved by the accordance with the approved control tal Management System (hereinafter of environmental protection regulatory authorities. In 2016, more schedules. Based on the results of anal- referred to as “EMS”) in accordance with than 290,000 analyses of environmen- yses conducted in 2016, no excesses of which it distributes the responsibility for tal conditions took place. The Com- established standards took place. environmental issues as follows:

In accordance with the Resolution of Platform Environmental Development content in water was completed. Rec- the Governmental Commission on Technologies in 2016, Transneft em- ommendations for the implementation High Technologies and Innovations ployees performed the technological of on-line analyzers at the facilities Special Management Representative for EMS of July 5, 2011 and the recommen- work Development of reclamation of Transneft subsidiaries were also Vice-President dations of the Ministry of Economic technology for lands polluted by oil developed. Development of Russia, Transneft de- and petroleum products in summer cided to join the Technology Platform and winter in hard-to-reach places Chairman of Coordination Board Environmental Development Tech- using biosorbents. Director of Department for Health, Industrial, Fire and Environmental Safety nologies coordinated by the All-Rus- sian Public Organization Russian In addition, in 2016 the R&D work Geographical Society. As part of the Investigation of existing technologies research program of the Technological for on-line analysis of the oil products Deputy Chairman of Coordination Board Head of Environmental Safety and Environmental Management Unit, Department for Health, Industrial, Fire and Environmental Safety Environmental protection Subpanels and members of Coordination Board for Transneft lines of activity expenses and investments

Due to sufficient financing of programs Subpanel for management of Subpanel for management of envi- Subpanel for management of in the field of environmental safety, Current expenses for environmental Investments for environmental protec- operation and provision of indus- ronmental protection, environmen- training and advanced training of construction and reconstruction of protection, RUB million tion, RUB million trial and fire safety at Transneft tal management and environmental specialists and public relations environmental facilities and environ- facilities safety (including protection against • Organization of professional mental equipment, Transneft managed natural and man-caused emergency • Construction and strategic devel- selection and advanced training of to ensure compliance with the most 2014 1,769 2014 1,969 opment situations) personnel stringent Russian and international -12.2 % -28.0 % 2015 1,552 1,417 • Supervisory control • Organization of environmental • Organization of interaction with environmental standards and require- 2015 2.4 management and environmental mass media and public organiza- ments. +24.8 % • Operation of trunk oil pipelines 2016 1,937 3,400 times protection tions 2016 and bulk plants • Organization of activities for emer- • Provision of industrial and fire gency prevention and recovery safety • Organization of legal regulation of environmental activity • Organization of R&D support and information exchange

Updating and upgrading of EMS

Members of Coordination Board for Transneft lines of activity

Secretary of Coordination Board – specialist of Environmental Safety and Environmental Management Unit, Department for Health, Industrial, Fire and Environmental Safety

80 Transneft Annual report 2016 81 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

sioners and to create conditions for Considerable attention is paid to the In addition, production and technical Personnel policy and social the treatment, health and recreation training and professional development competitions are held annually. Their of staff, and the promotion of healthy of personnel. Employees of Transneft aim is to develop a creative attitude lifestyles. subsidiaries regularly improve their towards work and foster pride in the support of employees professional skills in accordance with profession. In order to provide the employees with specially developed training programs timely and high-quality medical care, taking into account modern trends in a system of collective voluntary health the leading specialized organizations insurance is applied which ensures of higher and secondary vocational reducing working time losses due to education of the Russian Federation. 115.5 114.2 temporary incapacity to work. Training of the employees is carried 1.6 1.1 In addition, employees are insured out on the premises of a number of 8.5 8.4 Transneft’s policy in the field of material and non-material incen- Average number of employees on against accidents and illnesses corporate and state educational insti- 14.2 personnel management is aimed at tive systems taking into account which ensures reliable protection of tutions under contracts concluded with 14.2 115.5 the payroll of Transneft subsidiaries, achieving the Company’s strategic regional factors and114.2 the situation of thousand people the employee and his or her family the Company. These institutions pro- 1.6 development goals. Implementation certain8.5 professional and1.1 skill groups members from declining living stand- vide vocational training services and 19.5 of19.1 projects to develop the trunk in the labor market,8.4 ensuring ards associated with temporary or professional development programs pipeline system of the Russian Fede a competitive14.2 wage system; permanent disability resulting from for more than 50% of the total number 14.2 2015 50.6 64.9 115.5 ration should be taken into account. • improvement of the quality of an accident. of trainees. The main goal of the personnel training, retraining and advanced 19.5 19.1 2016 51.5 62.7 114.2 30.4 policy30.2 is to ensure staffing of the training of personnel in accordance Transneft system companies with with the directions of the Compa- Managers, professionals, highly qualified personnel focused on ny’s innovative development. employees 30.4 30.2 1.5 long-term1.4 labor relations. Workers Geography of the corporate training system 10.4 10.4 The turnover rate of personnel in 1.5 In 2016 there were 114,200 em- 2016 was 3.8% for the Transneft1.4 9.4 10.4 10.4 ployees9.5 of Transneft subsidiaries, Group which is 0.5% lower than in Managers and specialists Workers which is 1% lower than in 2015. The 2015. 9.4 9.5 20.2 decrease20.0 in the number is due to the reorganization of Transneft subsid- An important20.2 part of20.0 the Transneft iaries, outsourcing of certain activi- personnel policy is the social policy 2015 ties2016 and selling assets in Ukraine. implemented2015 to attract,2016 consolidate and motivate employees of Transneft • Higher education • Advanced training • Secondary vocational education Other countries TheVolga main Federal objectives District of the Transneft Иныеsubsidiaries. страны Приволжский ФО • Professional retraining • Employer-sponsored education Far Eastern personnelNorth Caucasian policy are: Дальне- Северо-Кавказский ФО (training courses, precertification • Vocational training Federal District Federal District восточный ФО • Workshops, training sessions • ensuring staffing of the Transneft As part of the social Южныйpolicy, aФО set of training) Siberian systemSourthern companies Federal District with highly Сибирскийmeasures ФОis implementedСеверо-Западный to improve ФО Federal District qualifiedNorth-Western personnel and maintain- Уральскийthe quality ФО of life andЦентральный the efficiency ФО Federal District Urals Federal ing their stability level; level of staff, support employees and District Central Federal District • increasing the elasticity of the their families and non-working pen-

Ukhta Structure of the average number of employees on the payroll of Transneft Moscow subsidiaries by region, thousand people Kanash

Samara 1.5 1.6 Ufa 2015 20.2 9.4 10.4 30.4 19.5 14.2 8.5 115.5 Tyumen Belogorsk Tomsk 2016 20.0 9.5 10.4 30.2 19.1 14.2 8.4 114.2 1.4 1.1

Other countries Urals Federal District Sourthern Federal District State-funded higher Vladivostok Far Eastern Volga Federal District North-Western educational institutions Federal District North Caucasian Federal District Corporate educational Siberian Federal District Federal District Central Federal District institutions

82 Transneft Annual report 2016 83 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Ensuring occupational Charity and social safety responsibility

Transneft defines the protection • openness of significant information 2014 2015 2016 of employees’ life and health and on occupational safety and health provision of safe working conditions activities. Workplace 0.19 0.19 0.21 among the key priorities of its activ- injuries in 2014- 2016, persons ities. When forming and developing Transneft developed and implement- (per year)/1,000 its corporate labor protection policy, ed an occupational safety and health employees Transneft is guided by the require- management system based on the ments of Russian legislation, treaties requirements of the international stand- of the Russian Federation, occupa- ard BS OHSAS 18001:2007. Transneft tional safety standards and strives for confirmed the conformity of its OSH continuous improvement of working management system to the internation- conditions, as well as minimizing the al standard BS OHSAS 18001:2007 by number of workplace injuries and oc- a certificate issued in 2016 based on cupational diseases of employees. the results of the audit conducted by international auditors of the DQS certifi- The Transneft labor protection policy cation system. updated and put into effect by order of October 6, 2016 No. 198 defines In order to take into account the the basic principles of the Company’s employees’ opinions in terms of operation in this area: improving working conditions and en- • priority of employees’ life and suring occupational safety and health health in relation to the result of at the Company’s facilities, annual production activities; field meetings are held under the • personal responsibility of each chairmanship of heads of Transneft employee for his or her own safety, subsidiaries. the right of each employee to stop work and the duty to refuse to carry The indices of the resulted workplace out work performed with violations injuries do not exceed the level of the of safety requirements; established values determined by the • involvement of all employees in ac- Transneft Strategy until 2020. The tivities to reduce workplace injuries increase of the index of the resulted and occupational diseases; workplace injuries in 2016 is caused, • leading role of managers at all levels inter alia, by a decrease in the average in ensuring safe working conditions; number of Transneft employees. Social responsibility towards the so- The Company is actively involved in the are aimed at the revival of spiritual ciety and its individual citizens is an construction of social infrastructure in the values and religious traditions in Russia. essential part of Transneft’s policy. pipeline route areas and allocates signifi- Transneft is actively involved in the cant funds for constructing houses, schools, restoration of historical and cultural Charity and sponsorship activities, nursery schools and outpatient clinics. monuments at monasteries, churches various actions in support of cul- and metochions (ecclesiastical embassy ture, science and education, physical Transneft is committed to supporting churches). culture and sports, promotion of a World War II Veterans, internationalist healthy lifestyle, and protection and soldiers, Chernobyl victims and other Sponsorship and charity expenses restoration of historic monuments citizens who have fulfilled their military (charitable donations) of Transneft are of great importance to the Com- and patriotic duty. and its subsidiaries amounted to pany. RUB 14,9 billion in 2016. Sponsorship Many years of cooperation with the Russian expenses amounted to RUB 359.0 mil- Orthodox Church and other confessions lion in 2016.

84 Transneft Annual report 2016 85 Corporate Governance

Governing and control bodies 88 proportion of the Corporate Governance Code recommendations observed by the General Meeting of Shareholders 90 % Company in full or in part 89 Board of Directors 91 Executive governing bodies 103

System of remuneration for the key management personnel 108

Revision Commission 110

Risk Management System 111 independent directors are members of the 3 Board of Directors Risk Insurance 114 Main Risks 115

Internal Control System 119

Internal Audit System 120

External Audit 122

meetings of the Board committees were Anti-Corruption Measures 24 held in 2016 and Fraud Prevention 123 Information on Compliance with Recommendations of the Corporate Governance Code 124

Information on transactions, participation in legal entities and court proceedings 130

the proportion of independent directors Authorized capital 132 in the Board committees in 2016 55% Credit ratings 135 Company bonds 136

Dividend policy and profit distribution 137

Shareholder and investor relations 139

86 Transneft Annual report 2016 87 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

General Meeting of Shareholders Transneft’s supreme governing body. The Regulations on the General Meeting of Shareholders (approved by resolutions of the Gene Governing and ral Meeting of Shareholders, Minutes No.1 of June 28, 2002, Minutes No. 1 of 2004) establish the procedure for preparing, convening, holding and announcing the outcome of the General control bodies Meeting of Shareholders of Transneft.

Board of Directors The Board of Directors is responsible for the general management of Transneft’s operations. It ensures protection and implementation of shareholders’ rights. The Board of Directors oversees the development of and approves the Company’s strategy, long-term plans and major programs of its activities, and considers the reports on their implementation. It also participates in the development of effective tools for internal control over the Company’s financial and The governing bodies of Transneft are mine the strategic directions of its business operations and the Risk Management System, approves the Company’s budget, defines the General Meeting of Shareholders, development and control its produc- the Company’s key performance indicators, the President, the Management Board members. It ensures timely disclosure of complete and accurate information about the Company’s activities, the Board of Directors, the Management tion, business and financial activities. and makes decisions on key issues related to substantive Transneft subsidiaries’ activities, key Board and the President, and the control The Company’s Board of Directors projects and significant transactions. body is the Revision Commission. includes independent directors; spe- The procedure for forming the Board of Directors, its status, membership, functions, aims and cialized committees were established objectives, its powers, the procedure for its work and cooperation with other governing bodies Representatives of the state in the under the Board of Directors. of Transneft are stipulated in the Company’s Articles of Association and the Regulations on the Board of Directors (approved by resolutions of the General Meeting of Shareholders, Minutes Company’s governing bodies deter- No. 1 of June 28, 2002, Minutes No. 1 of 2004).

Structure of Governing and Control Bodies Committees under Committees under the Board of Directors are an advisory body which provides preliminary the Board of Directors examination of issues and prepares recommendations to the Board of Directors. The Regulation on the Strategy, Investments and Innovations Committee under the Transneft Board of Directors was approved by resolution of the Board of Directors of Transneft on January 19, 2017 (Minutes No. 1). Governing bodies Control bodies The Regulation on the Audit Committee under the Transneft Board of Directors was approved by resolution of the Board of Directors of Transneft of January 19, 2017 (Minutes No. 1). The Regulation on the Personnel and Remuneration Committee under the Transneft Board of Directors was approved by resolution of the Transneft Board of Directors on January 19, 2017 Russian Federation (78.1% of (Minutes No. 1). the authorized capital; 100% Minority shareholders (21.87% of the of ordinary shares) authorized capital; 99.9%* of pre- External independent ferred shares) auditor President The President is sole executive body. The President manages the day-to-day activities. He/she is accountable to the Board of Directors and the General Meeting of Shareholders. The President is appointed by the General Meeting of Shareholders for a period of 5 years and is the Chairman Shares belonging to the Transneft General Meeting of of the Management Board. subsidiaries (0.02% of the authorized Shareholders Since 2007, Nikolay Tokarev has been the President of Transneft. capital; 0.1%* of preferred shares)

Revision Commission Management Board The collective executive body is responsible for the day-to-day management of Transneft and control of the Transneft subsidiaries in relation to the key issues of their operations. * Calculated figures Meetings of the Management Board are held as required, but at least once a month, both in in person and in absentia, according to the approved schedule. The Management Board is chaired by the President of Transneft. The Management Board is guided in its activity by the current legislation, the Articles of Association of Transneft and the Regulations on the collegial execu- Strategy, Investments and Chairman of the Board tive body (Management Board) (approved by resolution of the General Meeting of Shareholders, Innovations Committee of Directors Minutes No. 1 of June 28, 2002). Audit Committee Personnel and Remuneration Board of Directors Committee Revision Commission The Revision Commission is a permanent elective body that controls the financial and business operations of Transneft. Its activities are regulated by the Articles of Association and the Regulation on the Revision Commission of Transneft approved by resolution of the Extraordinary General Meeting of Share- President Department of Internal holders of Transneft (order of the Federal Agency for State Property Management No. 734-r of Audit and Analysis of Main October 6, 2015). Management Board Activities

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

88 Transneft Annual report 2016 89 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

General Meeting Board of of Shareholders Directors

Membership of the Board of Directors The General Meeting of Shareholders is Since all of the Company’s voting the supreme governing body. The Board shares belong to the Russian Feder- of Directors, the Management Board, the ation, decisions on issues within the President and the Revision Commission competence of the General Meeting of are accountable to the General Meeting Shareholders are formalized by orders of Shareholders. The competence of the of the Federal Agency for State Prop- Strategic management of Transneft’s of the Federal Agency for State General Meeting of Shareholders, as well erty Management. activities is carried out by the Board of Property Management dated as its timing, procedure for preparation Directors which makes decisions on signifi- June 30, 2015 No. 541-r, con- and conduct are determined by the In 2016, two General Meetings of cant matters of the Company’s activities in sisting of: Federal Law “On Joint Stock Compa- Shareholders were held: one annual accordance with the competence defined • Matthias Warnig; nies”, the Articles of Association and and one extraordinary. by the Federal Law “On Joint Stock Com- • Mikhail Ignatyevich Grishankov 3 Regulations on the General Meeting of panies” and the Articles of Association. (independent director); independent directors are members of Shareholders of Transneft. • Valery Sergeevich Katkalo; the Board of Directors as of December 31, 2016 The activities of the Board of Directors • Ilya Iosifovich Klebanov (independ- are regulated by the Articles of Associa- ent director); Annual General Meeting of Shareholders The Annual General Meeting of Shareholders approved the Annual Report for 2015 tion and the Regulations on the Board of • Alexander Valentinovich Novak of Transneft and the annual accounting (financial) statements, including the financial results for Directors. (Chairman); June 30, 2016 2015, approved the distribution of profits for 2015, approved the redrafted Articles of • Nikolay Petrovich Tokarev; Order of the Federal Agency for State Prop- Association of Transneft and the auditor for 2016. Decisions were also taken to elect the erty Management dated June 30, 2016 No. composition of the Board of Directors and the Revision Commission, to pay dividends on The redrafted Articles of Association of • Artur Nikolaevich Chilingarov 520-r shares based on the results of 2015, and to pay remuneration to members of the Board Transneft approved by the Federal Agency (independent director); of Directors and the Revision Commission. for State Property Management Decree No. 520-r dated June 30, 2016 define 2. by the annual General Meeting of the number of members of the Board Shareholders, executed by order of Directors – 8 persons. The Company of the Federal Agency for State considers the composition of the Board Property Management dated June Extraordinary General Meeting of Share- The Extraordinary General Meeting of Shareholders decided to increase the authorized holders of Transneft capital of Transneft by RUB 21,901 by placing additional ordinary registered uncertifi- of Directors to be balanced and adequate 30, 2016 No. 520-r, consisting of: October 18, 2016 cated shares on the following conditions: to the scale of the Company’s activities • Matthias Warnig; Order of the Federal Agency for State Prop- • number of additional ordinary registered uncertificated shares: 21,901 pcs.; applicable to the requirements of the • Darya Vladimirovna Vasilevskaya; erty Management dated October 18, 2016 • nominal value of placed additional ordinary registered uncertificated shares: legislation of the Russian Federation and • Mikhail Ignatyevich Grishankov No. 816-r RUB 1 each; the Listing Rules of the Moscow Stock (independent director); • way of placing additional ordinary registered uncertificated shares: private offering; • form of payment for placed additional ordinary registered uncertificated shares: Exchange. The main shareholder of the • Valery Sergeevich Katkalo; non-monetary assets in the form of property in federal ownership established as Company elects candidates to the Board • Ilya Iosifovich Klebanov (independ- a result of implementation of the investment projects Trunk Pipeline Pumping of Directors taking into account their ent director); Station “Pumping Station Kaleykino-Nizhnekamsk Refinery” and Reconstruction of personal and business qualities, as well as • Alexander Valentinovich Novak the Nizhnekamsk–Almetyevsk–Kstovo Trunk Oil Pipeline (7 pieces of real estate and compliance with the independence criteria (Chairman); 625 land parcels) according to the list following the order of the Government of the Russian Federation of December 26, 2015 No. 2723-r; stipulated in the Listing Rules of the • Nikolay Petrovich Tokarev; • scope of persons among whom it is planned to place additional ordinary registered Moscow Stock Exchange. As of December • Artur Nikolaevich Chilingarov uncertificated shares: the Russian Federation represented by the Federal Agency 31, 2016, the Board of Directors had three (independent director). for State Property Management; independent directors (37.5% of the num- • price of additional ordinary registered uncertificated shares: RUB 273,540 for one ber of members of the Board of Directors). Since September 23, 2016, Artur share. Chilingarov suspended his activities During the reporting period, the as a member of the Board of Direc- Board of Directors operated, which tors in connection with his election was elected: as a deputy of the 7th State Duma of the Federal Assembly of the Russian 1. by the annual General Meeting of Federation. Shareholders, executed by order

90 Transneft Annual report 2016 91 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Membership of the Board of Directors as of December 31, 2016 Information on the members of the Board of Directors As of December 31, 2016: Directors representing executive bodies (executive directors) N.P. Tokarev Directors who are not members of the executive bodies or other governing bodies A.V. Novak, M. Warnig, D.V. Vasilevskaya, V.S. (non-executive directors) Katkalo Independent directors M.I. Grishankov, I.I. Klebanov, A.N. Chilingarov

Total 8 persons

Duration of service on the Board

Members of the Board Duration of service on Novak Alexander Valentinovich Tokarev Nikolay Petrovich Warnig Matthias Status of Directors the Board of Directors Chairman of the Board of Directors Member of the Board of Directors (Repre- Member of the Board of Directors (Repre- (Representative of the interests of the sentative of the interests of the Russian sentative of the interests of the Russian Chairman of the Board of Directors 1.5 years A.V. Novak Russian Federation) Federation) Member of the Strategy, Federation) Member of the Strategy, Director who is not a member of the executive bodies or other governing bodies Investments and Innovations Committee Investments and Innovations Committee M. Warnig Director who is not a member of the executive bodies or other governing bodies 5.5 years President, Chairman of the Board D.V. Vasilevskaya Director who is not a member of the executive bodies or other governing bodies 0.5 years M.I. Grishankov Independent director 3.5 years V.S. Katkalo Director who is not a member of the executive bodies or other governing bodies 3.5 years Born in 1971. Born in 1950. Born in 1955. I.I. Klebanov Independent director 1.5 years Graduated from Norilsk Industrial Institute Graduated from Karaganda Polytechnic In- Graduated from the Higher School of N.P. Tokarev Director representing executive bodies 8 years 9 months in 1993, majoring in Economics and Man- stitute in 1973, majoring in Electrification Economics named after Bruno Leischner, A.N. Chilingarov Independent director 1.5 years agement in Metallurgy and from and Automation of Mining. Berlin-Karlshorst, in 1981, majoring in Lomonosov Moscow State University in Positions held in the last 5 years: National Economy. 2009, majoring in Management. • 2007 to the present day – President, Positions held in the last 5 years: Independent directors Positions held in the last 5 years: Chairman of the Board of Transneft. • 2008 to the present day – Director of • 2012 to the present day – Minister of Participation in governing bodies of Interatis AG (Switzerland); Energy of the Russian Federation. other legal entities: • 2006-2016 - Managing Director of Participation in governing bodies of • 2013 to the present day – member of Nord Stream AG; Independent directors play an impor- As of December 31, 2016, the Com- Length of work of the Board mem- other legal entities: the Board of the Russian Union of In- • 2015 to the present day – Executive tant role in the implementation of the pany’s Board of Directors included bers as the members of the Board of • 2012 to the present day – member dustrialists and Entrepreneurs (RSPP); Director of Nord Stream 2 AG (Swit- Board of Directors’ functions, espe- three independent directors – a num- Directors of the Supervisory Board of the state • 2013 to the present day – member of zerland). cially in matters aimed at protecting ber sufficient to significantly influence atomic energy corporation Rosatom; the Management Board of the All-Rus- Participation in governing bodies of • 2015 to the present day – member of sian Association of Employers RSPP; other legal entities: the shareholders’ interests. In this the decision-making process. >7 years 1 the Board of Directors of Rosneft; • 2015 to the present day – member of • 2007 to the present day – member of area, such directors have independ- • 2015 to the present day – Chairman the Governing Board of the Interna- the Supervisory Board of VTB Bank ent judgments and their constructive The Audit Committee consisted en- 1 year – 7 years 6 of the Board of Directors of PJSC tional Association of Oil Transporters. (PJSC); Rosseti; Shareholding in the Company’s authorized • 2011 to the present day – Chairman criticism at meetings of the Board of tirely of independent directors. <1 year 1 Directors contributes to the develop- • 2015 to the present day – member of capital: none. of the Administrative Council of the Board of Directors of Gazprom. Ordinary shares of the Company held: GAZPROM Schweiz AG; ment of corporate governance in the The Personnel and Remuneration Number of the members Shareholding in the Company’s authorized none. • 2011 to the present day – member of Company. Committee consisted mainly of inde- of the Board of Directors capital: none. First elected to the Board of Directors on the Board of Directors of Rosneft; pendent directors (two independent Ordinary shares of the Company held: March 6, 2008. • 2014 to the present day – Deputy The independence criteria of the directors out of three, including the none. Chairman of the Board of Directors of First elected to the Board of Directors on Rosneft; members of the Company’s Board of Chairman of the Committee). Structure of the Board of Directors June 30, 2015. • 2012 to the present day – Chairman of Directors are determined in accord- the Board of Directors of JSC RUSAL; ance with the Listing Rules of PJSC The Strategy, Investments and In- • 2013 to the present day – Chairman Moscow Exchange (CJSC MICEX Stock novations Committee included one 2011–2012 4 3 of the Supervisory Board of Gas Exchange) and the provisions of the independent director who headed the 2012–2013 4 3 Project Development Central Asia AG Corporate Governance Code recom- Committee. (G.P.D.) (Switzerland); 2013–2014 4 3 • 2013 to the present day – Chairman mended for application by the Bank 2014–2015 6 1 of the Administrative Council of Inter- of Russia Letter No. 06-52/2463 dat- atis Engineering AG (Switzerland); ed April 10, 2014 “On the Corporate 2015–2016 4 3 • 2013 to the present day – Chairman of the Administrative Council of Inter- Governance Code”. 2016–2017 5 3 atis Consulting AG (Switzerland). Shareholding in the Company’s authorized Representatives of the major capital: none. shareholder Ordinary shares of the Company held: Independent directors none. First elected to the Board of Directors on June 30, 2011.

92 Transneft Annual report 2016 93 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Transactions with shares and issue of loans and credits to members of the Board of Directors

No transactions were made by members of the Board of Directors with Transneft shares in 2016.

Vasilevskaya Darya Vladimirovna Grishankov Mikhail Ignatyevich Katkalo Valery Sergeevich Klebanov Ilya Iosifovich Chilingarov Artur Nikolaevich No loans (credits) were issued to Member of the Board of Directors (Repre- Member of the Board of Directors (inde- Member of the Board of Directors (Repre- Member of the Board of Directors (inde- Member of the Board of Directors (inde- members of the Company’s Board sentative of the interests of the Russian pendent director) Chairman of the Strategy, sentative of the interests of the Russian pendent director) pendent director) of Directors in 2016. Federation) Member of the Stra tegy, Invest- Investments and Innovations Committee Federation) Chairman of the Audit Committee Member of the Audit Committee ments and Innovations Committee Member of the Personnel and Remunera- Chairman of the Personnel and Remunera- Member of the Personnel and Remuner- tion Committee tion Committee ation Committee Conflict of interest

According to the information available in the Company, there is no conflict of interest among the members Born in 1977. Born in 1965. Born in 1964. Born in 1951. Born in 1939. of the Board of Directors, including Graduated from Gubkin Russian State Graduated from Chelyabinsk Polytechnic Graduated from Leningrad State Universi- Graduated from Leningrad Polytechnic Graduated from Admiral S.O. Makarov those related to the participation University of Oil and Gas (National Re- Institute in 1988, majoring in Radio Engi- ty in 1986, majoring in Political Economy, Institute named after M. I. Kalinin in Leningrad Higher Naval Engineering School of these persons in the governing search University) in 2000, majoring in neering, in 1998 – from Chelyabinsk State in 1989 – postgraduate studies at Lenin- 1974, majoring in Electrophysics. in 1963, majoring in Oceanology (Sea Jurisprudence, in 2009 – from the Russian University, majoring in Economics. grad State University, PhD in Economics, Positions held in the last 5 years and Hydrology). bodies of Transneft’s competitors. Academy of National Economy and Public Positions held in the last 5 years: Dr. hab. of Economics, Professor. participation in governing bodies of Positions held in the last 5 years: Administration under the President of the • 2011-2016 – First Vice-President of Positions held in the last 5 years: other legal entities: • 1990 to the present day – President of Membership in corporate Russian Federation, Ph.D., Dr. hab. of Law. Gazprombank (Joint Stock Company); • 2012-2014 – Director of ANO Corpo- • 2011 to the present day – Chairman the Interregional Public Organization director associations Positions held in the last 5 years: • 2016 to the present day – Deputy rate University of Sberbank; of the Board of Directors of PJSC Association of Polar Explorers; • 2012 to the present day - Assistant to General Director for Relations with • 2014 to the present day – President Sovcomflot; • 2008 to the present day – Special the Deputy Prime Minister of the Rus- the Government of the Russian Feder- of ANO Corporate University of Sber- • 2012 to the present day – Chairman Representative of the President of the Members of the Board of Directors sian Federation Arkady Dvorkovich. ation of JSC CPC-R. bank; of the Board of Directors of Neftegaz Russian Federation for International are not members of professional Participation in the governing bodies of Participation in the governing bodies of • 2015 to the present day – Vice-Presi Industry-Invest LLC; Cooperation in the Arctic and Antarctic; associations of corporate directors other legal entities: none. other legal entities: none. dent of the European Foundation for • 2013 to the present day – Chairman • 2010 to the present day – First (managers). Shareholding in the Company’s authorized Shareholding in the Company’s authorized Management Development (EFMD). of the Board of Directors of JSC Vice-President of the All-Russian Public capital: none. capital: none. Participation in the governing bodies of Schwabe. Organization Russian Geographical Ordinary shares of the Company held: Ordinary shares of the Company held: other legal entities: Shareholding in the Company’s authorized Society; Corporate Secretary none. none. • 2008 to the present day – member of capital: none. • 2011-2014 – member of the Council of First elected to the Board of Directors on First elected to the Board of Directors on the Board of the European Founda- Ordinary shares of the Company held: Federation of the Federal Assembly of The functions of Transneft’s corpo- June 30, 2016. June 28, 2013. tion for Management Development none. the Russian Federation; rate secretary are carried out by a (EFMD); First elected to the Board of Directors on • 2016 to the present day – Deputy of the special structural unit – the Corpo- • 2015 to the present day – member of June 30, 2015. 7th State Duma of the Federal Assem- the Board of Trustees of the Autono bly of the Russian Federation. rate Governance Department. mous Non-Profit Organization for Participation in governing bodies of oth- Higher Education “Skolkovo Institute er legal entities: The Board of Directors approved of Science and Technology”; • 2015 to the present day – member of the Regulations on the Corpo- • 2015 to the present day – member of the Board of Directors of JSC Zapsib- rate Governance Department and the Supervisory Board of the Global gazprom. Council of Corporate Universities Shareholding in the Company’s authorized agreed on the head of this special (Global CCU). capital: none. structural unit which acts as the Shareholding in the Company’s authorized Ordinary shares of the Company held: none. Company’s corporate secretary on capital: none. First elected to the Board of Directors on January 19, 2017 (Minutes No. 1). Ordinary shares of the Company held: June 30, 2015. none. First elected to the Board of Directors on June 28, 2013.

94 Transneft Annual report 2016 95 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Results of the Board Minority report of the mem- Considered and approved: bers of the Board of Directors • Operational Efficiency Increase and of Directors’ activities Cost Reduction Program until 2021; In 2016, members of the Board of • Methodology for calculating the op- Directors did not send any minority erating expenses reduction index; 27 reports. • Budget of Transneft for 2017; Con- meetings of the Board of Directors were solidated budget of revenues and held in 2016 Report on the Board of Direc- expenses of the Transneft Group for In 2016, 27 meetings were held, 4 of Distribution of consideration of issues Total number of meetings of the tors’ performance in 2016 2017; Consolidated cash flow budget them in person and 23 in absentia1. by type Board of Directors in 2014-2016 of the Transneft Group for 2017; The total number of issues considered In 2016, the Board of Directors gave • Redrafted system of key perfor- is 93, of which 30 are related to the 2014 64 15 9 88 2014 25 4 29 close attention to the financial and mance indicators of business oper- approval of documents, and 14 issues business operations and corporate ations; are about reports on the execution 2015 52 11 13 76 2015 26 6 32 governance development strategy. • Change to the Methodology for and implementation of the Company’s 2016 49 14 30 93 2016 23 4 27 assessing achievement of key main programs of activities. Strategy performance indicators of business On approval of documents (including By absentee voting operations; regulations, programs, action plans, In person Implementation results considered: • Planned values of key performance etc.), amendments to previously approved documents • Long-term development program indicators of business operations for Reports on the execution, implemen- until 2020 for 2015 and for the first 2017; tation of the Company's main half of 2016; • Plan for introducing professional programs, quarterly reports on • Program for the development, tech- standards in Transneft and Transneft business areas of the Company nical re-equipment and reconstruc- subsidiaries for 2016-2020; Other issues tion of trunk pipelines for 2014- • Transneft Group’s non-core assets 2020 for 2015 and development alienation program; prospects until 2021; • Register of the Transneft Group’s • Innovative Development Program non-core assets; until 2017 for 2015. • Plan for the implementation of the Transneft Group’s non-core assets Participation of members of the Board of Directors in meetings in 2016. The statements of work for auditing alienation program; the implementation of the Long-Term • Regulations on the sale of Transneft Total number of meetings In person participation Development Program for 2015 and for and Transneft subsidiaries’ non-core Remote Member of the Board of Directors attended by the member 2016 were approved. assets; participation of the Board of Directors Personal Written • Program for the sale of Transneft participation opinion Taking into account the results of imple- subsidiaries’ non-core assets. Novak Alexander Valentinovich 27 4 0 23 mentation of the Innovative Develop- ment Program, the Company approved Corporate Governance Warnig Matthias 23 1 3 19 a new Innovative Development Program Vasilevskaya Darya Vladimirovna* 14 2 0 12 for 2017-2021. Transneft approved The Dividend Policy was approved, the adjusted Long-Term Development which provides for allocation of 25% Grishankov Mikhail Ignatyevich 27 4 0 23 Program. of the Group’s normalized net profit Katkalo Valery Sergeevich 27 3 1 23 under IFRS to dividends. Klebanov Ilya Iosifovich 27 3 1 23 Financial and business operations Documents in the field of policy and Tokarev Nikolay Petrovich 27 4 0 23 determining the amount of governing Chilingarov Artur Nikolaevich** 16 2 0 14 Reports and issues considered: bodies’ remuneration were considered • quarterly reports on procurement and approved: results; • Changes in the Remuneration Sys- * Vasilevskaya D.V. has been a member of the Board of Directors since July 1, 2016. • quarterly reports of the executive tem on the basis of performance for ** On September 23, 2016, Chilingarov A.N. suspended his activities as a member of the Board of Directors due to his election as a deputy of the 7th State Duma of the Federal Assembly of the Russian Federation. body on the financial and economic the year of the managers and em- performance of Transneft and the ployees of Transneft and Transneft Transneft Group; subsidiaries; • execution of directives of the Gov- • Redrafted regulation on remuner- ernment of the Russian Federation; ation of the sole executive body of 1. Dates of meetings, number of minutes of the Board of Directors: January 15, 2016 No. 1; March 1, 2016 No. 2; March 14, 2016 No. 3; March 15, 2016 No. 4; March 22, 2016 No. 5; March 31, 2016 No. 6; April 20, 2016 No. 7; April 26, 2016 No. 8; April 29, 2016 No. 9; June 9, 2016 No. 10; June 21, 2016 • on the Company’s charitable activ- Transneft. No. 11; June 22, 2016 No. 12; June 29, 2016 No. 13; July 28, 2016 No. 14; August 9, 2016 No. 15; September 14, 2016 No. 16; October 14, 2016 No. 17; ities; October 25, 2016 No. 18; October 28, 2016 No. 19; November 9, 2016 No. 20; November 11, 2016 No. 21; November 29, 2016 No. 22; November 30, 2016 No. 23; December 8, 2016 No. 24; December 12, 2016 No. 25; December 20, 2016 No. 26; December 30, 2016 No. 27. • on the approval of transactions.

96 Transneft Annual report 2016 97 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Documents in the field of risk In addition, in the reporting year, Company in 2012, approved as a relat- Evaluation of the Board management were considered and procedural issues related to the ed-party transaction, by the General approved: organization of the activities of the Meeting of Shareholders (Order of the of Directors’ performance • Currency and interest rate risk man- Company’s Board of Directors and Federal Agency for State Property Man- agement policy; Board committees, and other issues agement No. 1017-r of June 29, 2012). • Currency and interest rate risk man- related to the Board of Directors’ agement strategy; competence were considered. The amount of insurance premium • Key parameters of the Risk Manage- under the insurance contract was ment System; Information on decisions on the most USD 685,000 for the entire period of In October 2016 Transneft carried of the Company’s Board of Direc- • List of critical risks; significant issues is disclosed in the the insurance contract; Total insur- out an unbiased evaluation of the tors participated in meetings in the • Action plan (“road map”) on risk form of statements of material facts ance amount (total limit of liability) – members of its Board of Directors form of joint presence and held by management and internal control in accordance with the legislation of USD 25 million for each year. who held their positions from June absentee voting, and in cases where processes in the field of corruption the Russian Federation on the secu- 30, 2015 through June 30, 2016, and it was not possible to participate in 24 prevention and management. rities market. who continued to exercise their po meetings in the form of joint pres- meetings of the Board Committees were wers in the current corporate year, as ence they provided written opinions held in 2016 Documents in the field of internal con- Insurance of the Board part of organizing the effective work on voting on the agenda items. In trol were considered and approved: members’ liability of the Board. This evaluation char- addition, all proposals of the Board of • Corporate standard for conduct- acterizes the individual work of each Directors members are included both ing public technological and price The Company provides insurance of member of the Board of Directors in in the Board of Directors’ work plan audit of major investment projects; civil liability of the Board of Directors terms of participation/non-participa- and in the plans of the specialized • Redrafted regulations on the members, the President and members tion in corporate events, as well as Board committees. procurement of goods, works and of the Management Board aimed at voting/non-voting on the agenda of services; recovering the possible harm (losses) corporate events. The results of the objective evalua- • Norms of the procurement of caused to shareholders, creditors and tion were considered by the Person- certain types of goods, works and other persons as a result of errors Analysis of the individual evaluations nel and Remuneration Committee services; and unintentional actions (inaction) carried out showed that all members (Minutes No. 6 of October 7, 2016). when performing their management Approved: activities. • Exchange bonds program; • Decision on additional issue of In the reporting year, liability insur- securities; ance was carried out on the basis of • Prospectus; the 5-year contract concluded by the Board Committees

In order to increase the efficiency of Board of Directors’ competence and Issues considered by the committees decisions made by the Board of Di- to produce recommendations for the in 2016 rectors and to enable a more detailed Board of Directors. preliminary consideration of key issues 18 and preparation of relevant recom- Both Company employees and third mendations, there were three Board parties may attend meetings of the 23 Committees in the reporting year: committees at the Committee Chair- 8 • Strategy, Investments and Innova- man’s invitation. However, they do not tions Committee; have voting rights on the agenda items. Strategy, Investments and Innova- • Audit Committee; tions Committee • Personnel and Remuneration Com- The Committees under the Board of Audit Committee mittee. Directors held 24 meetings in 2016. Personnel and Remuneration During these meetings the Committees Committee The key task of each Committee is to considered issues and prepared de- ensure preliminary consideration of tailed recommendations and proposals the most important issues within the for the Board of Directors.

98 Transneft Annual report 2016 99 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Participation in meetings of the Board of Directors committees in 2016 Statistics on Operations of the Com- External audit 2016 No. 7; December 5, 2016 No. 8; mittees under the Board of Directors • Regulations on holding an open ten- December 8, 2016 No. 9. Strategy, Invest- Personnel and der to select an audit organization to Audit Member of the Board ments and Innova- Remuneration 2014 Committee perform the statutory annual audit of During reporting period, the Commit- of Directors tions Committee Committee (9 meetings) SIIC 4 2 Transneft for 2016 and review of the tee operated elected: % (8 meetings) (7 meetings) 55 interim consolidated financial state- AC 3 3 proportion of independent directors in Novak Alexander Valentinovich ments for Q1 of 2017; 1. by resolution of the Board of the Board committees in 2016 Warnig Matthias 6/8 PRC 3 3 • Regulations on the tender commis- Directors of September 18, 2015 Vasilevskaya Darya Vladimirovna 5/5 2015 sion to select an audit organization to (Minutes No. 23): perform the statutory annual audit of • Chairman of the Committee (inde- Grishankov Mikhail Ignatyevich 9/9 8/8 SIIC 4 4 Transneft; pendent director) – I.I. Klebanov; The Audit Committee consisted entirely Katkalo Valery Sergeevich 3/3 7/7 AC 4 4 • composition of the tender commis- • Independent director – of independent directors. Klebanov Ilya Iosifovich 9/9 7/7 sion to select an audit organization to M.I. Grishankov; PRC 1 5 The Personnel and Remuneration Tokarev Nikolay Petrovich 8/8 perform the statutory annual audit of • Independent director – Committee consisted mainly of independent directors (two independent Chilingarov Artur Nikolaevich 5/5 5/5 2016 Transneft; A.N. Chilingarov; SIIC 4 4 • scope and plans for the audit of the directors out of three, including the Note: The first figure shows the number of meetings attended by a member of the Board annual accounts for 2016 by the 2. by resolution of the Board of Chairman of the Committee). of Directors, while the second figure shows the total number of meetings in which he/ AC 4 5 she was entitled to participate in 2016. external auditor; Directors of September 14, 2016 The Strategy, Investments and PRC 1 6 • Report of Transneft on the remarks (Minutes No. 16 of September 16, Innovations Committee included one discovered by the auditor for 9 2016): independent director who headed the said Committee. Audit Committee budget of the Transneft Group for Face-to-face meetings months of 2015, and measures for • Chairman of the Committee (inde- 2016 and on the Transneft’s budget Meetings held by absentee voting their elimination. pendent director) – I.I. Klebanov; The Audit Committee under the Board and the consolidated budget of the • Evaluation of the opinion issued by • Independent director – of Directors (hereinafter referred to as Transneft Group for 2017; the auditor for compliance with the M.I. Grishankov; the Committee) is a consultative and • on consideration of the report of the requirements of the Federal Law No. • Independent director – advisory body that provides a prelim- executive body of Transneft on the 307-FZ dated December 30, 2008 “On A.N. Chilingarov. inary study of issues and preparation financial and economic performance Auditing Activity” and Federal Auditing of recommendations to the Board of Transneft and the Transneft Group Standards (FSAD 1/2010) “Auditor’s Personnel and Remuneration of Directors on matters within its (quarterly); report on accounting (financial) re- Committee competence in terms of supervising • on consideration of the report on porting and formation of opinion on its • on the payment of remuneration to the Company’s financial and business currency and interest rate risk man- reliability”; the audit report on financial The Personnel and Remuneration Com- the members of the Transneft Board operations of Transneft and on other agement of Transneft for 2015; statements of Transneft for 2015 committee under the Board of Directors of Directors; matters delegated to the Committee • on the Currency and Interest Rate piled by KPMG on March 16, 2016 was (hereinafter referred to as the Commit- • on the payment of remuneration by the Board of Directors. Risk Management Policy of Trans- recognized by the Audit Committee as tee) is a consultative and advisory body to the members of the Transneft neft; meeting the requirements established that provides a preliminary study of Revision Commission; The Committee’s activities are • on key parameters of the Risk Man- by the federal standards for auditing issues and preparation of recommen- • on the composition of the Transneft regulated by the Regulations on the agement System; activities approved by the Ministry of dations to the Board of Directors on Management Board; Audit Committee under the Board of • on approval of the appointment Finance of the Russian Federation. In issues of personnel and social policies • on conducting an objective assess- Directors. of the head of the internal audit 2017, the auditor’s report of Trans- and remuneration policy. ment of the Transneft Board of Direc- department; Personal composition of the Board of neft’s financial statements for 2016 tors members’ activities; Key issues on which recommendations • on consideration of the general are- Directors committees in 2016 was considered. The Committee’s activities are regulat- • on the preliminary approval of the were developed in 2016: as of implementation of Transneft’s ed by the Regulations on the Personnel terms of the new liability insurance • on consideration of the opinion of internal audit for 2017; 9 % Internal audit and Remuneration Committee under agreement for the members of the Transneft’s auditor on the results of • on consideration of Transneft’s criti- • Annual evaluation of the effectiveness the Board of Directors. Board of Directors, members of the the audit of Transneft’s financial and cal risks list; of the internal audit function. Based Management Board, the sole execu- business operations for 2015 and • on Transneft’s Currency and Interest on the performance for 2016, the Key issues considered in 2016 on which tive body (President of Transneft) and evaluation of the auditor’s report Rate Risk Management Strategy; 27 % 55 % effectiveness of the internal audit recommendations were developed: on selecting the insurer; due to persons entitled to participate • on the proposal of an initial (max- function will be assessed in June • on the payment of remuneration • on the introduction of professional in the Annual General Meeting of imum) contract price for an open 2017 in accordance with the Board to Transneft managers and em- standards in 2016-2020. Shareholders of Transneft; tender to select an audit organiza- Audit Committee work plan. ployees and Transneft subsidiaries • on consideration of the Transneft tion to perform a statutory audit of on the basis of performance for Dates of Personnel and Remuneration Annual Report, annual accounting Transneft for 2017 and review of 9 % Dates of Audit Committee meetings, 2015; Committee meetings, numbers of the (financial) statements, including the the interim consolidated financial numbers of the minutes: January 28, • on the combination of positions in minutes: February 4, 2016 No. 1; March profit and loss account, as well as statements for Q1 of 2018. Independent directors 2016 No. 1; March 15, 2016 No. 2; governing bodies of other organ- 4, 2016 No. 2; April 7, 2016 No. 3; June distribution of profits for 2015; Executive directors April 7, 2016 No. 3; June 9, 2016 No. izations by the Transneft sole ex- 9, 2016 No. 4; September 15, 2016 • on the expected execution of Trans- The most important issues discussed 4; September 15, 2016 No. 5; Novem- ecutive body and members of the No. 5; October 7, 2016 No. 6, November Non-executive directors neft’s budget and the consolidated concerning external and internal audit: ber 18, 2016 No. 6; November 22, Transneft Management Board; 18, 2016 No. 7. Other members of the committees

100 Transneft Annual report 2016 101 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

During the reporting period, the Com- • on the implementation of the During the reporting period, the Com- mittee operated elected: Program for the sale of Transneft’s mittee operated elected: Executive subsidiaries’ non-core assets; 1. by resolution of the Board of • on the implementation of the work 1. by resolution of the Board of Directors of September 18, 2015 plan for Transneft’s participation in Directors of September 18, 2015 governing (Minutes No. 23): the Technology Platform Environ- (Minutes No. 23): • Chairman of the Committee (inde- mental Development Technologies • Chairman of the Committee (independent director) – A.N. Chilingarov; in 2015; pendent director) – M.I. Grishankov; bodies • Non-executive director – • on the implementation of the • Non-executive director – M. Warnig; V.S. Katkalo; Transneft Program for the develop- • Non-executive director – • Independent director – I.I. Klebanov; ment, technical re-equipment and V.S. Katkalo; reconstruction of trunk pipelines for • Executive director – N.P. Tokarev; 2. by resolution of the Board of Di- 2014-2020 for 2015; • Representative of the Transneft rectors dated September 14, 2016 • on the implementation of the Consumer Council – G.I. Shmal; (Minutes No. 16), taking into account Transneft Innovative Development The current activities of the Company of competence of the executive bodies the decision of the Board of Direc- Program until 2017; 2. by resolution of the Board of shall be guided by the collegial and includes resolution of all issues related tors of October 28, 2016 (Minutes • on the implementation of the Directors of September 14, 2016 sole executive bodies, the President to the day-to-day operations of Trans- No. 19): Transneft Long-Term Development (Minutes No. 16): and the Management Board of Trans- neft, except for issues falling within the • Chairman of the Committee (inde- Program for the first half of 2016; • Chairman of the Committee (inde- neft, which ensure that the Company’s competence of the General Meeting of pendent director) – I.I. Klebanov; • on the implementation of measures pendent director) – M.I. Grishankov; objectives and development strategy Shareholders and the Board of Direc- • Non-executive director – to reduce operating expenses for • Non-executive director – are effectively implemented. The area tors. V.S. Katkalo; Q3 of 2016; D.V. Vasilevskaya; • Independent director – • on the Transneft Innovative Devel- • Non-executive director – M. Warnig; A.N. Chilingarov. opment Program for 2017-2020; • Executive director – N.P. Tokarev; • on the Transneft Innovative Devel- • Representative of the Transneft Strategy, Investments and opment Program for 2017-2021; Consumer Council – G.I. Shmal. Innovations Committee • on the Methodology for calculating the operating costs reduction index President The Strategy, Investments and Innova- of Transneft; tions Committee (hereinafter referred to • on the redrafted System of Key Per- as the Committee) is a consultative and formance Indicators of Transneft; advisory body providing a preliminary • on the approval of Amendment No. The sole executive body, the President of extended by resolution of the Extraor- study of issues and preparation of rec- 1 to the Methodology for assessing Transneft, is responsible for the day-to- dinary General Meeting of Sharehold- ommendations to the Board of Directors the achievement of key perfor- day management of the Company and is ers of Transneft (fixed in Order of the on issues aimed at the development of mance indicators of business opera- the Chairman of the Management Board. Federal Agency for State Property the Transneft strategy for the long term, tions of Transneft; Management dated May 5, 2012 No. forming investment, innovation and div- • on the Transneft Long-Term Devel- Nikolay Tokarev was elected as the 679-r) for three years. idend policy, and improving Transneft’s opment Program; President of Transneft by resolution performance. • on the Transneft Dividend Policy; of the Extraordinary General Meeting Nikolay Tokarev was elected as the • on the statement of work for of Shareholders (fixed in Order of the sole executive body, the President The Committee’s activities are regulated auditing the implementation of the Federal Agency for State Property of Transneft, for a new period of five by the Regulation on the Strategy, Invest- Transneft Long-Term Development Management dated October 12, 2007 years by resolution of the Extraordi- ments and Innovations Committee under Program until 2020 for 2016; No. 3264-r) for a period of five years. nary General Meeting of Shareholders the Board of Directors. • on the Transneft Operational Effi- (fixed in Order of the Federal Agency ciency Increase and Cost Reduction The employment agreement with the for State Property Management dated Key issues considered in 2016 on which Program until 2021. President Nikolay Tokarev has been April 24, 2015 No. 264-r). recommendations were developed: • on the implementation of key per- Dates of the Strategy, Investments formance indicators of Transneft’s and Innovations Committee meet- financial operations for 2015; ings, numbers of the minutes: April 6, • on the implementation of the 2016 No. 1; May 10, 2016 No. 2; Transneft Long-Term Development June 9, 2016 No. 3; September 15, Program until 2020 for 2015; 2016 No. 4; October 20, 2016 No. 5; • on the conclusion of the audit of October 28, 2016 No. 6; November 24, implementation of the Transneft 2016 No. 7; December 8, 2016 No. 8. Long-Term Development Program until 2020 for 2015;

102 Transneft Annual report 2016 103 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Management Board

As of December 31, 2016, the Management Board of Transneft consisted of 10 members.

Number of years on the Management Board

10 %

30 % Nikolay Tokarev Sergey Andronov Mikhail Barkov Maxim Grishanin Boris Korol President, Chairman of the Management Member of the Management Board, Member of the Management Board, Member of the Management Board, Member of the Management Board, Board of Transneft Vice-President Vice-President First Vice-President Vice-President Member of the Board of Directors 60 %

< 1 year 1 year– 7 years >7 years

Members of the Management Board Born in 1950. Born in 1969. Born in 1951. Born in 1968. Born in 1955. as of December 31, 2016 In 1973 he graduated from Karaganda In 1991 he graduated from Lesgaft Nation- In 1978 he graduated from Moscow State In 1995 he graduated from Christian In 1981 he graduated from the Military Polytechnic Institute majoring in Electrifi- al State University of Physical Education, University, majoring in Law. In 1990 he Albert University (Germany), majoring in Institute of Foreign Languages, majoring cation and Automation of Mining. Sport and Health, qualified as a coach-in- graduated from the All-Union Foreign Political Economics. In 1989 he graduated in Law. Nikolay Tokarev President, Positions held in the last 5 years: structor. In 1997 he graduated from Trade Academy, majoring as an Economist from Moscow Finance Institute. Positions held in the last 5 years: Chairman of the 2007 to the present day – President, Lobachevsky State University of Nizhny with Foreign Language Skills. Positions held in the last 5 years: 2010 to the present day – Vice-President Management Chairman of the Management Board of Novgorod, qualified as an economist-man- Positions held in the last 5 years: 2011 to the present day – Vice-President of Transneft. Board Transneft; ager. 2007-2016 – Vice-President of Transneft. of Transneft. Participation in governing bodies of Maxim Grishanin First Vice- Participation in governing bodies of Positions held in the last 5 years: Participation in governing bodies of Participation in governing bodies of other legal entities: President other legal entities: 2012-2014 – Assistant to the President of other legal entities: other legal entities: 2011 to the present day – member of the Sergey Andronov Vice-President 2013 to the present day – member of the Rosneft; 2014-2016 – member of the Board of 2011 to the present day – member of the Board of Directors of LLC KHL; Board of the Russian Union of Industrial- 2014 to the present day – Vice-President Directors of JSC CPC-R; Supervisory Board of Trans-Balkan Pipeline 2014 to the present day – member of the Mikhail Barkov Vice-President ists and Entrepreneurs (RSPP); of Transneft. 2014-2016 – member of the Board of B.V.; Board of Directors of JSC IC Transneft. Boris Korol Vice-President 2013 to the present day – member of the Participation in governing bodies of Directors of JSC CPC-K; 2012 to the present day – Chairman of the Shareholding in the Company’s authorized Management Board of the All-Russian other legal entities: 2016-2016 – member of the Board of Board of Directors of NCSP Group; capital: none. Mikhail Margelov Vice-President Association of Employers RSPP; 2010-2012 – member of the Board of Directors of NCSP Group. 2014 to the present day – Chairman of the Ordinary shares of the Company held: Pavel Revel-Muroz Vice-President 2015 to the present day – member of the Directors of JSC CPC-R; Shareholding in the Company’s authorized Board of Directors of JSC IC Transneft. none. Governing Board of the International Asso- 2011 to the present day – member of capital: none. Shareholding in the Company’s authorized Vladimir Rushaylo Vice-President ciation of Oil Transporters. the Supervisory Board of Trans-Balkan Ordinary shares of the Company held: capital: none. Alexey Sapsay Vice-President Shareholding in the Company’s authorized Pipeline B.V.; none. Ordinary shares of the Company held: none. capital: none. 2015 to the present day – member of the Rashid Sharipov Vice-President Ordinary shares of the Company held: Board of Directors of NCSP Group; none. 2016 to the present day – member of the Board of Directors of JSC CPC-R. Shareholding in the Company’s authorized capital: none. Ordinary shares of the Company held: none.

104 Transneft Annual report 2016 105 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Number of Management Board members

2014 53 2015 61 2016 58

Mikhail Margelov Pavel Revel-Muroz Vladimir Rushaylo Alexey Sapsay Rashid Sharipov Issues considered Member of the Management Board, Member of the Management Board, Member of the Management Board, Member of the Management Board, Member of the Management Board, Vice-President Vice-President Vice-President Vice-President Vice-President 2014 166 2015 163 2016 191

Born in 1964. Born in 1974. Born in 1953. Born in 1972. Born in 1968. In February 2017, the powers of the In 1986 he graduated from Lomonosov In 1996 he graduated from Chelyabinsk In 1976 he graduated from Omsk Higher In 2001 he graduated from Ufa State Pe- In 1991 he graduated from Moscow State Management Board member, Mikhail Moscow State University (Institute of State University of Agroengineering, School of Police, USSR Ministry of Internal troleum Technological University, majoring Institute of International Relations (MGI- Asian and African countries), majoring in majoring in Mechanization of Agriculture. Affairs, majoring in Law. in The Design, Construction and Operation MO), majoring in International Relations. Barkov, were terminated. Vice-Presi History, and was awarded the qualification In 2000 he graduated from Ufa State Pe- Positions held in the last 5 years: of Gas and Oil Pipelines and Oil and Gas Positions held in the last 5 years: dent Larisa Kalanda joined the Man- of historian-orientalist, Arabic language troleum Technological University, majoring 2008-2013 – First Deputy Chairman of the Storage Facilities. 2005-2013 – Deputy Director General of agement Board. interpreter. In 2005 he graduated from St. in The Design, Construction and Operation Council of the Federation Committee on Positions held in the last 5 years: LLC KFK-Consult; Petersburg State University with a PhD in of Gas and Oil Pipelines and Oil and Gas Constitutional Legislation, Legal and Judi- 2009 to the present day – Deputy 2013-2013 – Executive Vice-President of Transactions with shares and Political Science. Storage Facilities. cial Affairs and Civil Society Development; Vice-President, Vice-President of Trans- Gazprombank (JSC); Positions held in the last 5 years: Positions held in the last 5 years: 2013 to the present day – Vice-President neft. 2013-2015 – Vice-President, Head of the issue of loans and credits to 2000-2014 – member of the Federation 2008 to the present day – Vice-President of Transneft. Participation in governing bodies of Executive Office of Rosneft’s President; members of the Management Council of the Federal Assembly of the Rus- of Transneft. Participation in governing bodies of other legal entities: 2016 to the present day – Deputy Board sian Federation from the Pskov Region – Participation in governing bodies of other legal entities: 2008-2012 – member of the Board of Vice-President, Vice-President of Transneft. representative at the Federation Council other legal entities: 2008 to the present day – Chairman of the Directors of PMC ESPO, LLC; Participation in governing bodies of In 2016, members of the Management of the Federal Assembly of the Russian 2012 to the present day – Chairman of Supervisory Board of the Griboedov Insti- 2010-2012 – member of the Board of other legal entities: Federation from the administration of the the Board of Directors of Nevskaya Pipe tute of International Law and Economics. Directors of LLC DSD; 2009-2013 – member of the Board of Board made no transactions in Trans- Pskov Region; Company LLC. Shareholding in the Company’s authorized 2012-2014 – member of the Board of Directors of SO UPS, JSC; neft’s shares. 2014 to the present day – Vice-President of Shareholding in the Company’s authorized capital: none. Directors of JSC CPC-R. 2010-2013 – member of the Board of Transneft. capital: none. Ordinary shares of the Company held: Shareholding in the Company’s authorized Directors of PJSC RusHydro; During 2016, the President was not Participation in governing bodies of Ordinary shares of the Company held: none. capital: none. 2013-2015 – member of the Management granted loans (credits). In 2016, one other legal entities: none. Ordinary shares of the Company held: Board of Rosneft; 2015 to the present day – member of the none. 2016 to the present day – member of the member of the Management Board Board of Directors of JSC CPC-R; Board of Directors of NCSP Group; received a special-purpose loan to buy 2015 to the present day – Chairman of the 2016 to the present day – member of the an apartment. Board of Directors of LLC TK-BA; Board of Directors of JSC CPC-R. 2015 to the present day – member of the Shareholding in the Company’s authorized Conflict of interest Supervisory Board of Trans-Balkan Pipeline capital: none. B.V. Ordinary shares of the Company held: Shareholding in the Company’s authorized none. According to information available in capital: none. Company, there was no conflict of inter- Ordinary shares of the Company held: est among the members of the Manage- none. ment Board during 2016.

The main results of the Man- agement Board operation in 2016

In 2016, the Company’s Management Board held 58 meetings, during which 191 issues were considered.

106 Transneft Annual report 2016 107 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

The members of the Board of Direc- Members of the Board of Directors System of remuneration tors were not compensated for the who are subject to restriction or expenses they incurred while perform- prohibition of receiving remune ing their functions as members of the ration from for-profit organizations for the key management Board of Directors. shall not be paid the remuneration. personnel

In accordance with the consolidated the work of the management body. The Remuneration system for the President financial statements of Transneft under Annual General Meeting of Shareholders IFRS, the key management personnel approves the remuneration payable to and the Management Board members includes members of the Board of the members of the Board of Directors. Directors and of the Management Board Members of the Management Board of of the Company, the general directors the Company and general directors of of the companies within the Group. the companies within the Group receive Members of the Board of Directors re- salaries and other payments specified in ceive remuneration for participation in employment agreements. Types of remuneration, 2016 Transneft sole executive body’s remu- RUB thousand neration policy is approved as revised by resolution of the Board of Directors Remuneration for work in dated January 15, 2016 (Minutes No. the governing body ₽ 902,271.2 1) and provides for the dependency of the remuneration on key performance Salary 395,233.3 thousand Remuneration system for members indicators. This Policy is applied to Bonuses 463,484.3 remuneration paid to the Management Board determine the remuneration of Trans- members in 2016 neft’s President, starting with the of the Board of Directors Commission fees – payment for the performance in 2015.

Benefits 24,512.1 The members of the Management Board of Transneft, as employees Compensation of expenses 19,041.5 of Transneft, receive remuneration, The Transneft Board of Directors Directors. The variable part of the monthly salaries and other payments Other types of remuner- – Members’ Remuneration Policy was remuneration is paid for achieving (including annual remuneration, ation approved by the Annual General the key performance indicators depending on the performance of Meeting of Shareholders (order of the established by the Regulation. corporate key performance indicators Total 902,271.2 Federal Agency for State Property ₽ 43,800 for the reporting period). Management No. 541-r dated June 30, 2015). thousand The total remuneration of the Man- No separate remuneration is payable Additional duties allowances are paid agement Board members of Transneft for the performance of the duties of the remuneration paid to the members of the The remuneration of members of the to members of the Board of Direc- Board of Directors in 2016 paid by the Company in 2016: members of the Management Board, Board of Directors for their participa- tors performing additional duties re- additional costs are not reimbursed. tion in the operation of the governing lated to exercising the powers of the body is divided into three parts: Chairman of the Board of Directors • fixed part; and work in the specialized Commit- • variable part; tees under the Board of Directors. • additional duties allowances. The total amount of remunera- The fixed part of the remuneration tion paid to the members of the is payable for exercising the author- Board of Directors in 2016 was ities of a member of the Board of RUB 43,800,000.

108 Transneft Annual report 2016 109 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Revision Commission Risk Management System

The Revision Commission carries out Management dated June 30, 2015 Property Management No. 734-r dated Interaction between parties to functions of control over Transneft’s No. 541-r), consisting of: October 6, 2015). the Transneft Risk Management System financial and economic activity and is • Oleg Zenkov (Chairman); composed of three persons. • Pavel Shumov; Remuneration paid to members of the • Olga Tregubenko; Revision Commission in 2016 amounted Transneft Board of • approval of principles and approaches to organization of the Risk Management System; The procedure for the work of the to RUB 972,500. In 2014-2015 no remu- • approval of key parameters of the Risk Management System; Directors • approval of critical risks; Revision Commission is governed by 2. by the Annual General Meeting of neration was paid to the members of the • approval of annual reports on risk management, including control of reliability and efficiency of the Risk the Regulation of Transneft’s Revision Shareholders (order of the Federal Revision Commission. Management system, as well as analysis and assessment of execution of these Regulations on the Risk Commission, approved by resolution of Agency for State Property Man- Management System.

the Extraordinary General Meeting of agement dated June 30, 2015 No. No compensation of expenses incurred • Preliminary consideration and preparation of recommendations for the Board of Directors concerning: Transneft (order of the Federal Agency 520-r), consisting of: during performance of functions as Audit Committee of • principles and approaches to the organization of the Risk Management System; for State Property Management dated • Alexander Gladkov (Chairman); members of the Revision Commission was Transneft Board of • key parameters of the Risk Management System; • critical risks; October 6, 2015 No. 734-r). • Oleg Zenkov; made for the members of the Revision Directors • annual reports on risk management, including control of reliability and efficiency of the Risk Management System, • Pavel Shumov. Commission. as well as analysis and assessment of execution of these Regulations on the Risk Management System. During the reporting period, Transneft’s Revision Commission operated elected: Transneft’s Revision Commission Mem- Members of the Revision Commissionn • approval of the Risk management rules of procedure; bers’ Remuneration and Compensation who are subject to restriction or prohi- Transneft • approval of key parameters of the Risk Management System; 1. by the Annual General Meeting of Policy was approved by the Extraordi- bition of receiving remuneration from Management Board • consideration and approval of annual reports on risk management, including control of reliability and efficiency of the Risk Management System, as well as analysis and assessment of execution of these Regulations on the Risk Shareholders (order of the Fed- nary General Meeting of Shareholders for-profit organizations shall not be paid Management System. eral Agency for State Property (order of the Federal Agency for State the remuneration.

• risk prioritization to identify critical risks; Risk Management • approval of critical risk owners; Council • analysis of the risk portfolio, respond strategy and resource deployment for the risk management; • control over risk management by risk owners and business units of the Company; Members of the Revision Commission in 2016 Position held • consideration and approval of periodic reports on the monitoring of critical risks. Alexander Gladkov 2013 to the present day – Director of the Oil and Gas Production and Transportation Chairman of Transneft’s Revision Commission Department of the Ministry of Energy of the Russian Federation. • general coordination of risk management processes, including monitoring of the risk management process; Risk Assessment Unit • development of required guidelines and regulations for risk management and respective amendments; Oleg Zenkov 2012-2016 – Advisor to the Head of the Federal Agency for State Property Management. • development of parameters for the Risk Management System; Olga Tregubenko 2015 to the present day – Director of the Practice of Topcompetence LLC. • organization of the Company employees’ training in the Risk Management System; • support of procedures for risk identification by business units of the Company, including with the use of results of Pavel Shumov 2010 to the present day – Councillor, Deputy Head of Division, Department of Compe- control procedures performed by the internal audit unit; tition Development, Head of the Department for the State Regulation of Tariffs, Infra- • formation and updating of the Company’s risk register and approval of access to that by other business units of the structure Reforms and Energy Efficiency, Russia's Ministry of Economic Development. Company; • consolidation of data and preparation of materials concerning the functioning of the Risk Management System, including all types of risk reporting; • consulting and methodological support of risk analysis and assessment processes, together with authorized business The members of the Revision Commission • audit of the purchases made by Trans- performance of Transneft for 2016 units; have no shares in the Company’s author- neft in 2016; and the annual financial statements of • participation in quantitative assessment of critical risks. ized capital. • verification of the execution of in- Transneft for 2016; structions from the President and the • consideration of the opinion of the The members of the Revision Commission Government of the Russian Federa- Audit Committee on the review of do not hold any of the Company’s ordinary tion; the financial and business activities shares. • verification of Transneft’s alienation of by Transneft for 2016 and the annual non-core assets in 2016; accounting records of Transneft for Risk owners Business units authorized for ALL business units of the In the reporting year, the work plan of the • rectification by Transneft of violations/ 2016. risk management Company Revision Commission included the following: implementation of recommendations • the audit of the financial and business reflected in previous reports of the Following the audit of the Company’s • risk identification; • determination of authorized business units for the • analysis and assessment of critical risks; • primary analysis of identified risks; activities of Transneft; Revision Commission; financial and business activities, a management of identified critical risks; • development of risk management measures; • affecting the Company’s risks • approval of key risk indicators; • verification of the correctness of the • procedure for revision and update of certificate was prepared for the period • control of risk management measures; (except for critical risks). • approval of action plans for the management of calculation, accrual and transfer of divi- the Long-Term Development Pro- from January 1, 2016 to December 31, • monitoring of critical risks; critical risks; • preparation of periodic reports on the dends for 2015; gram; 2016, and an opinion was issued on • approval of periodic and annual reports on the monitoring of critical risks. • analysis of the regulations of Transneft • consideration of the certificate of the the validity of the data contained in the monitoring of critical risks. governing the work of the Revision Revision Commission following the Company’s financial statements and Commission; review of the financial and economic annual report.

110 Transneft Annual report 2016 111 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Coordination of all processes for RMS formation and func- As part of corporate RMS formation dated November 29, 2016 (Minutes in 2016, Transneft implemented No. 22): tioning is entrusted to the Risk Management Council formed the procedure for risk identification, • currency and interest-rate risks; by the Transneft Management Board formed a risk register, prioritized risks • state regulation of tariffs for oil/ and approved a critical risk list. For petroleum products transportation; each critical risk the risk owner was • fiscal risks; designated. Such an owner determined • failure to comply with the plan on divisions responsible for managing the new trunk pipeline utilization; risk, and also approved key indicators • impact of changes in state policy for monitoring critical risk dynamics. regarding oil industry taxation on freight turnover; At the end of 2015 Transneft initiated Government of the Russian Federation Coordination of all processes for RMS • acts of unlawful interference, the formation of the corporate Risk dated 24.06.2015 No. 3984p-P13 formation and functioning is entrusted including acts of terrorism or at- Management System (RMS). It has (Rosimushchestvo (Federal Agency for to the specially formed Risk Manage- tempted acts of terrorism; been carried out in pursuance of an State Property Management) letter ment Council. • external supply disconnection at executive order of the President of dated July 7, 2015 No. 11/27343) and Transneft facilities; the Russian Federation following the in accordance with the Guidelines on The Council consists of: • risk of changes in laws and regu- results of the meeting on the im- drafting regulations on a risk man- • Nikolay Petrovich Tokarev (President lations establishing and regulating provement of performance in publicly agement system developed by the of Transneft, Chairman of the Risk technical requirements and condi- owned companies dated December Ministry of Economic Development of Management Council); tions of the Company’s production 27, 2014 No. Pr-3013, Directive of the Russia. • Maksim Sergeyevich Grishanin (First operations; Vice-President of Transneft); • risk of license revocation from the • Vladimir Borisovich Rushaylo counterparty bank. List of documents approved by Transneft in 2015-2016 as part of corporate RMS formation and tasks resolved due to their (Transneft Vice-President); approval • Pavel Aleksandrovich Revel-Muroz The Department of Internal Audit and Approved Documents Level, date and Minutes of approval Resolved tasks on RMS formation (Transneft Vice-President); Analysis of Core Business Activities • Rashid Ravelevich Sharipov (Trans- shall assess RMS development effi- Regulations on Risk Management • Resolution of the Transneft Board of • Establishment of general principles for RMS neft Vice-President). ciency and control its development at System Directors dated November 16, 2015, formation; Minutes No. 28 • Determination of RMS goals and objectives; all stages (including process organiza- • Designation of general approaches to RMS organ- Risks were prioritized during the face- tion, regulatory-methodological provi- ization; to-face meeting of the Risk Manage- sions, interrelation between divisions, • Determination of functions and responsibility ment Council (Minutes No. 3 dated financial reporting, completeness and among parties to RMS and the nature of their October 12, 2016), following which accuracy of identified risks, reasona- interactions; • Transfer of functions on RMS methodological the below decisions were made: bleness in the use of funds allocated and regulatory documents development to the for these purposes and information Risk Assessment Section of the Directorate of 1. To approve a preliminary list of analysis about occurred risks). Financial Security and Risk Assessment with the Transneft critical risks, following Transneft Department of Economics. the results of prioritization, in order Since the start of 2017, responsible Risk Management Rules of Proce- • Resolution of the Transneft Man- • Determination of the order of interaction between to submit it for consideration by divisions have been analyzing critical dure agement Board dated April 1, 2016, Company divisions as part of RMS functioning. the Audit Committee under the risks and monitoring their dynamics, Minutes No. 13 Transneft Board of Directors and as well as developing action plans to RMS Key Parameters • RMS Key Parameters • • Designation of levels for preferred and admissible for approval by the Transneft Board manage such risks. Resolution of the Transneft Board risk for each risk type; of Directors. of Directors dated June 29, 2016, • Formation of risk assessment scale and matrix for Minutes No. 13 risk rating as critical. As part of summing up the results for 2. To approve Transneft critical risk 2016, the Transneft Board of Directors Risk Management Rules of Proce- • Resolution of the Transneft Man- • Formation of the Risk Management Council for dure agement Board dated April 1, 2016, general coordination over RMS functioning; owners. approved the 2016 Annual Report on Regulations on Risk Management Minutes No. 13; • Approval of the Risk Management Council Mem- Transneft risk management (resolu- Council • Resolution of the Transneft Manage- bers. The preliminary list of critical risks tion dated March 15, 2017, Minutes Risk Management Council Mem- ment Board dated May 12, 2016, was considered by the Audit Com- No. 3), which included a performance bers Minutes No. 21 mittee with the Transneft Board of evaluation of the Risk Management Critical Risk Register • Decision of the Risk Management • Risk prioritization; Directors and approved by resolution System taking into account internal Council dated October 12, 2016, • Approval of Critical Risk List; of the Transneft Board of Directors audit reports. Minutes No. 3; • Determination of critical risk owners. • Resolution of the Transneft Board of Directors dated November 29, 2016, Minutes No. 22

112 Transneft Annual report 2016 113 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Risk Main Risks Insurance

Below is a brief description of the main risks managed in 2016, and measures undertaken by the Compa- Insurance is viewed as an instrument of the Company’s ny to compensate for their potential risk management allowing complete or partial com- adverse impact. pensation of losses from these risks

Measures undertaken to decrease the probability of Risks Actual risk occurrence in 2016 risk occurrence and occurred risk mitigation

Risk of illegal actions: • At the Company’s facilities, • Engaging the Company’s departmental security • terrorist and sabotage threats at security officers detained 11,400 (Transneft Security, LLC), private security providers, trunk pipeline facilities; offenders of access mode, more units of the Federal Agency of Russia’s National • theft of oil and petroleum products, than 6,200 offenders of internal Guard Troops (Rosgvardiya) to ensure security of component parts of pipeline equip- security policy and recorded property and engineering and manufacturing com- ment, cable and wires, dismantled about 3,000 violations of trunk plexes. In 2016, 1,132 of the Company’s facilities out pipes etc. pipeline line section protected of 1,681 were guarded. The Company continues to effective- • principle of standardization; zone, in relation to which rele- • Facility classification and safety certificates issuance ly use the system of property risk • principle of reasonableness in deci- vant acts were drawn up. in accordance with Federal Law dated July 21, 2011 insurance alongside the risk mana sion-making on voluntary types of • 300 illegal tappings were spot- No. 256 “On the Security of the Fuel and Power Sec- gement instruments introduced as insurance; ted at oil and petroleum product tor Facilities”. In 2016, 3 facility safety certificates part of RMS. The core principles of • principle of applying adequate trunk pipelines on the territory were developed and 162 were updated. All facilities of the Russian Federation. are included in the register of the fuel and power its formation, application procedures retention; • The Company’s security divi- sector facilities, maintained by the Russian Ministry and insurance types used in trunk • principle of quality, reliability and sions, both independently and in of Energy. pipeline transportation of oil and transparency of risk placement in cooperation with law-enforce- • Maintenance of access mode and internal security petroleum products are stipulated insurance. ment authorities, stopped 38 policy, revealing and stopping of intruders’ penetra- in the Regulations on own proper- instances of oil and petroleum tion attempts to the facility, gun-running, carrying products theft from trunk pipe- weapons, explosives and explosive devices. ty risk insurance for Transneft and All types of movable and immovable lines, and detained 124 persons • Increased security of the Company’s facilities on Transneft subsidiaries (approved by property (with the exception of land par- for these violations as well weekends and public holidays. Transneft Order No. 26 dated Febru- cels) form subject matters of property as 26 cars with stolen oil and • Conducting anti-terrorist exercises and drills (in ary 27, 2014). insurance contracts. Operated property petroleum products. More than 2016 – more than 3,000, including 714 with the is insured against loss, damage caused 10,000 tons of oil and petro- participation of employees from the Russian Federal leum products were reclaimed Security Service and the Russian Ministry of Internal Insurance is viewed as an instrument by fire, explosion, lightning, water dam- from law-breakers. Pursuant Affairs). of the Company’s risk management age, acts of nature, third parties’ illegal to all crimes related to oil and • Construction of technical security equipment fa- which will allow the complete or partial actions and other risks (depending on petroleum products theft, 315 cilities (in 2016 – for a total amount of RUB 1.355 transfer of financial losses from the oc- the property type). In addition, Transneft claims were submitted to law billion). currence of insurable risks to insurance subsidiaries maintain civil liability insur- enforcement authorities, upon • Protection of trunk oil and petroleum product pipe- which 260 criminal cases were lines’ line sections from unauthorized tapping. companies and thus compensate (reim- ance against inflicting damage to third initiated and 111 persons were • Optimization of the number of security divisions, im- burse) losses from risk occurrence. parties and the environment. convicted of criminal offenses, provement of their material and technical resources of which 62 went to prison. and conducting in-line inspections. When insuring own property risks, In the process of its business activi- • Implementation of investigative and preventive the Company applies the following ties, Transneft’s subsidiaries, as and measures in the regions with trunk oil pipelines and petroleum product pipelines (in 2016 3,835 events principles: when necessary, insure cargos and were conducted – raids, ambushes, covert observa- • principle of centralization; builder’s risks independently. tions etc., 995 facilities were checked).

114 Transneft Annual report 2016 115 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Risk of changes in freight turnover: Throughout 2016, Russian oil com- • This risk is outside of the Company’s control. To Credit Risks: - • Preliminary analysis and monitoring of counterpar- • change in the dynamics of production panies continually adjusted: reduce its potential negative consequences, the • failure of counterparties to fulfill ties’ financial and economic performance. and commercial activities of Russian • plans for volumes and time in- Company has maintained continuous cooperation their financial obligations, including • Use of guarantee and penal sanction mechanisms in oil-producing and refining companies tervals for recovering at oilfields with the largest clients and public regulators and non-repayment of advance payments, contracts. due to changes in prices for crude oil where oil was planned for trans- has been developing a system of agreed and long- non-payment for rendered services, • Conclusion of contracts on core activity on a prepaid and petroleum products; portation along the Company’s term tariffs. etc. basis. • change in cost structures of Russian existing pipelines and those • Update of the Regulations on limit setting and ob- oil-producing and refining companies under construction; servance for transactions with counterparty banks due to changes in oil transit tariffs • volumes and directions of oil of Transneft subsidiaries (Transneft Order No. 83 and export duties. and petroleum product trans- dated April 19, 2016): portation along the pipeline • determination of selection criteria for counter- system operated by Transneft party banks for the purpose of placing temporar- Group. ily free cash and acceptance of bank guarantees; • establishing the procedure of limit approval for Currency and interest risks: • In 2016, the RUB/USD exchange • The Company’s core business activities in the Rus- transactions with counterparty banks. • changes in financial and business rate demonstrated a variety of sian Federation and no material investments into performance depending on exchange trends: weakening from 72.93 foreign companies whose net asset value is exposed Risk of mutual international sec- • In 2016, discriminating foreign • Adopting a centralized policy of external loans to rate fluctuations due to the Com- RUB/USD at the beginning of to the currency gap risk. tor-based restrictions: pressure remained in relation ensure that the cost of debt for Transneft Group is pany’s present currency loans and January 2016 to 83.59 RUB/ • Development and/or updating in 2016 of the Com- • financial sanctions. to Russian companies, which as low as possible. Fund raising by the parent com- temporarily free cash. USD at the end of January 2016, pany’s internal regulations aimed at currency and affected Transneft as one of pany with subsequent transfer of funds to Group and subsequent strengthening interest risk management: the backbone companies of the companies as part of intra-group loans. to 60.27 RUB/USD by the end • Transneft Currency and Interest Risk Manage- Russian oil and gas sector. • Plan development for current debt refinancing and of 2016. ment Policy (approved by regulation of the procurement of new loans with a new, efficient • Interest rates on loans in US Transneft Board of Directors dated June 29, repayment profile and elimination of peak loads on dollars increased in 2016, which 2016, Minutes No. 13); cash flows. caused a rise in the cost of loan • Transneft Currency and Interest Risk Manage- • Accounting for the existing parameters of the debt servicing in China Development ment Procedure (approved by Transneft Order portfolio in 2016 in the Company’s financial eco- Bank; the interest payments No. 170 dated September 8, 2016); nomic model. for such a loan depend on the • Transneft Currency and Interest Risk Manage- Risk of import/export ban on goods - • Implementation of measures on local content in changes in the LIBOR 6M rate ment Strategy (approved by resolution of the and services: manufacturing certain categories of imported prod- which rose from 0.85% to Transneft Board of Directors dated December 22, • considerable reduction in the volume ucts. In 2016, manufacturing of six product types 1.32% in 2016. 2016, Minutes No. 22); and quality of works carried out was set up in the Russian Federation: • When necessary, forex hedging transactions are by the Company due to cessation • main line and booster pumps; carried out to minimize the potential adverse im- of deliveries of components and • ball-type pressure and flow controllers; pact from changes in foreign exchange rates on the constituent parts for certain product • slide gate valves; Company’s performance indicators. categories. • oil quantity and quality metering system • Currency diversification of Company’s placed tem- (OQQMS); porarily free cash, taking into account the currency • fire auto-foam towers; profile of the debt, more than 75% of which was in • drag reducing agents. currency loans in 2016. • Planned replacement throughout 2016 of US dol- lar-denominated credit in the China Development Regulators’ decisions (tariff, customs, - • Regular work with regulatory authorities and largest Bank with long-term bonds in rubles with the cou- dividend): clients to reduce uncertainty and the level of poten- pon fixed rate (during 2016 bonds were placed for a • tariff changes by resolutions of the tial adverse impact of these risks on the Company’s total amount of RUB 77 billion, which was sent for Federal Antimonopoly Service (FAS performance. During 2016 cooperation was imple- early repayment of the credit in the China Develop- of Russia); mented on the issues of applying current regulatory ment Bank in the amount of USD 1.16 million). • changes to the customs legislation documents and agreements. and rules; • Core activity within the Russian Federation, omis- Tax and Legal Risks: - • Under the conditions of imperfect and often changing • changes to conditions of government sion of exports and operating the active policy on • various interpretations and exposure legislation, Transneft, being a law-abiding commercial regulation in the sector, including the import substitution of the purchased equipment. to frequent changes in the Russian entity, uses its best endeavors aimed at observing accepted practice of tariff setting. tax, currency and customs legisla- such legislation, and when necessary resorts to legal tion. defense. Risks of changes in price for pur- • Development and implementation of the Action Plan • Internal control and auditing work. chased goods, works and services: on reduction in operating and capital expenditure • Careful analysis of potential sources and consequenc- • inflation development in the economy (approved by resolution of the Transneft Board of es of legal and tax risks. of the Russian Federation; Directors dated April 10, 2014, Minutes No. 5) – sug- • Expert review on complicated issues with the involve- • restriction of opportunities to in- gests a reduction in operating costs (expenditures) ment of professional advisors. crease tariffs on services related to by at least 2-3% per year, which makes it possible to • Independent market-value assessment of assets. In oil and petroleum product transpor- greatly alleviate the impact of the mentioned risk. general, the impact of these risks on the Company’s tation via the trunk pipeline system activities is rated as limited. by government regulation; • changes in the Company’s costs, mainly ruble-denominated, in accordance with the inflation rates.

116 Transneft Annual report 2016 117 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Risks related to natural and climatic • In the last decade (including • Mitigation of adverse effects from natural phenome- conditions: 2016), the frequency of hazard- na due to regular monitoring of technical conditions Internal Control • severe climatic conditions and dan- ous natural phenomena was at a of the Company’s industrial facilities and introduc- gerous geological processes in the maximum for the whole period tion of innovative solutions. regions of operation (East Siberia, of records due to anomalous • Preparatory measures prior to the beginning of the Far East, High North), resulting in temperature deviations from autumn and winter period. System marsh formation, erosion processes, long-time average annual • Preparation of emergency material and equipment landslide developments, permafrost values. reserves. soils etc.; • Training of Emergency Response and Restoration • general climatic trend in temper- Teams. atures, indicating warming over • Production facilities’ insurance. The Company employs the Internal them, to identify and mobilize Russian Federation, decisions of a substantial area of the Russian Control System aimed at improving in-house possibilities and reserves governing bodies and local regula- Federation. corporate governance and ensuring for profit earning, and to render tory documents; Risks of accidents and incidents: - • High-technology in-line inspections. the productivity of Transneft opera- assistance to the Company’s Man- • securing property safety and effi- • short-time shutdowns at local sec- • Constant monitoring of pipeline technical conditions, the reliability and authenticity of agement in the efficient fulfillment cient resource utilization; securing tions of the trunk pipeline system; tions. financial statements and the compli- of managerial functions, the inter- execution of financial and economic • incurrence of additional costs and • Efficient system of pipeline repairs and maintenance ance of operations with legislation. nal control enforces the following: plans. losses. of safe operation. • Insurance of property and responsibility of Trans- Regulations on internal control proce- • securing investor confidence, pro- neft subsidiaries, including line section facilities, oil dures, being the key internal docu- tection of shareholders’ capital The internal control is carried out, pump stations, oil storage facilities, buildings and ment regulating the internal control investments and assets; among others, by the Transneft Board facilities, transport vehicles and specialized machin- function, were approved by resolution • maintaining a high-level business of Directors, Audit Committee, Revi- ery, and also equipment and crude oil/petroleum of the Board of Directors dated Sep- reputation; sion Commission, governing bodies, linefill in trunk pipelines and tank farms. tember 10, 2009 (Minutes No. 12). • securing completeness and accu- and divisions authorized to execute HR and social risks: - • Ensuring Transneft subsidiaries are staffed with racy of financial statements and internal control. • increased necessity to hire extra highly qualified personnel and maintaining their With the objective of preventing risks management reporting; staff, including for engineering due stability level. to the extension of trunk pipeline • Improvement of the quality of personnel train- in financial and business operations, • ensuring compliance with the line sections and the number of oil ing, retraining and professional development in taking timely measures to eliminate laws and regulations of the pumping stations; accordance with the directions of the Company’s • changes in the demographic situation innovative development. in the Russian Federation; • Increasing flexibility of financial and non-financial • change in competitive conditions on incentive systems taking into account regional the labor market. factors and the situation on the labor market, ensuring competitive remuneration. • Improvement of the performance management system, including due to introduction of innovations, modern equipment and new technologies aimed at labor cost reduction.

118 Transneft Annual report 2016 119 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Internal Audit System

Internal Audit Regulations (approved by • determination of criteria validity for risk management, including resolution of the Transneft Board of Direc- established to analyze the extent of the efficiency of utilizing resources List of internal documents regulating the internal audit function and issues related to functions of the risk management tors dated November 16, 2015, Minutes accomplishment (achievement) of allocated for these purposes; and internal control system No. 28) determine the Company’s internal the set objectives; • analyzing information on occurred audit policy. In accordance with this docu- • identifying internal control system risks (including those on violations, • Regulations on internal audit (approved by resolution of the Transneft Board of Directors dated November 16, 2015 (Minutes ment, internal audit is the activity whose drawbacks which did not (do not) instances of failure to achieve the No. 28); aim is to assist the Company’s governing allow the Transneft system, the set goals, instances of court pro- • Regulations on the Department of Internal Audit and Analysis of Core Business Activities of Transneft dated December 8, 2015 No. 08-03/001; bodies, Transneft subsidiaries in improv- Company, Transneft subsidiaries to ceedings and other facts revealed ing efficient governance by the Transneft achieve the set targets; as a result of checking). • Code of Internal Auditor Conduct (approved by Transneft Order dated April 21, 2016 No. 87); system, the Company and Transneft • assessment of the results of the in- • Program of internal audit quality assessment and improvement (approved by Transneft Order dated July 14, 2016 No. 136); subsidiaries, improving their financial and troduction (implementation) of meas- 3. Corporate Governance evaluation: • Regulations on planning internal audit activity, auditing and analysis of core business activities of Transneft and Transneft subsidiaries (approved by the President of Transneft on November 24, 2016). business operations through a systematic ures to eliminate violations, draw- • checking the observance of ethical and coherent approach to analysis and backs and the improvement of the principles and corporate values of assessment of the risk management, Internal Control System implemented the Transneft system, the Compa- internal control and corporate governance by the Company, Transneft subsidiar- ny, Transneft subsidiaries; systems of the Transneft system, the ies at all management levels. • checking the goal setting proce- Company and Transneft subsidiaries. • checking the efficiency and feasibil- dure of the Transneft system, the ity of utilizing Company, Transneft Company and Transneft subsidi- The Department of Internal Audit and subsidiaries’ resources; aries and monitoring/exercising Analysis of Core Business Activities ex- • checking Company and Transneft control over their achievement; ercises the internal audit function in the subsidiaries’ asset protection; • checking the level of regulato- Company and Transneft subsidiaries. • checking compliance with the re- ry compliance and information quirements of legislation, Company cooperation procedures (including As part of an internal audit, the follow- and Transneft subsidiaries’ Articles of on the issues of risk manage- ing actions are performed: Association, Company and Transneft ment and internal control) at all subsidiaries’ regulatory documents. management levels of the Trans- 1. Performance evaluation of the Inter- neft system, the Company and nal Control System: 2. Risk Management System perfor- Transneft subsidiaries, including • analyzing compliance of targets of mance evaluation: interaction with stakeholders; the Company’s business processes, • checking the sufficiency and maturity • checking enforcement of the projects, divisions and Transneft of elements of the Transneft System, shareholders’ rights, including from subsidiaries’ business processes, Company, Transneft subsidiaries’ Risk affiliated companies and efficiency projects, divisions with the Transneft Management System for efficient risk of relationships with stakeholders; system, Company, Transneft subsid- management: goals and objectives, • checking procedures on informa- iaries’ targets; checking efficiency, infrastructure, including organization disclosure about the Trans- reliability and consistency of busi- tional structure, automation facilities neft system, the Company and ness-processes (activities) and infor- etc., process structuring, regulatory Transneft subsidiaries activity. mation systems, including reliability and methodological support, division of procedures for countering illegal interaction as part of the Risk Man- The Audit Committee under the actions, abuse and corruption; agement System, reporting; Transneft Board of Directors evalu- • checking the authenticity of accounting • checking the completeness of risk ates the performance of the internal (financial) statements, statistical, gov- identification and risk assessment ac- audit function annually. Following the ernance and other reporting, deter- curacy on the part of the Company’s 2016 results, performance evaluation mining to what extent the performance and Transneft subsidiaries’ manage- of the internal audit function will be of business processes and divisions of ment at all levels of its management; made in June 2017 in accordance the Company and Transneft subsidiar- • checking the efficiency of control with the work plan of the Audit Com- ies comply with the set targets; procedures and other measures mittee under the Board of Directors.

120 Transneft Annual report 2016 121 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

External Anti-Corruption Audit Measures and Fraud Prevention

In accordance with the legislation of Results of the audit process Auditor Information Since October 2014, Transneft has system for preventing and countering the Russian Federation, agreements efficiency assessment by the Company’s auditor name: Joint Stock been a member of the Anti-Corrup- corruption. on the statutory audit of accounting Audit Committee Company KPMG (JSC KPMG). tion Charter of Russian Business. Location: 129110, Moscow, 18/1 Olimpi- (financial) statements of an organ- yskiy Prospekt, Room 3035. The members of the Charter declare Employees and third parties can ization, the authorized capital of The Audit Committee under the Mailing address: 123112, Moscow, 10 their commitment to the principles of submit information concerning viola- which includes the state owned share Transneft Board of Directors checked Block C Presnenskaya Naberezhnaya, rejection of all forms of corruption in tions that have signs of corruption at amounting to at least 25%, are con- the report issued by the auditor for Floor 31. business activities and intentions to any time by filling out an Electronic cluded on the basis of an open tender compliance with the requirements Telephone: +7 495 937 44 77, fax: +7 promote the principles of preventing Application Form for Citizens on the 495 937 44 99. which is held at least once every five of Federal Law dated December 30, JSC KPMG is registered in the Moscow and countering corruption in interac- Company’s public Internet resource. years in accordance with the pro- 2008 No. 307-FZ “On Audit Activities Registration Chamber. Certificate dated tions with public authorities, counter- cedures established by Federal Law and the Federal Standard of Audit May 25, 1992 No. 011.585. parts, and in corporate relations. In 2016, the Company conducted dated April 5, 2013 No. 44-FZ “On Activity (FSAA 1/2010) Auditor’s Listed in the Unified State Register of a training session for personnel on the Contract System in the Procure- Report on Financial Statements and Legal Entities by Interdistrict Tax Office Internal documents of Transneft de- the topic: Improving the efficiency of of the Ministry of the Russian Federation ment of Goods, Works and Services Formation of an Opinion on These for Taxes and Levies No. 39 for Mos- termine the organization of a system anti-corruption measures in federal for State and Municipal Needs”. Financial Statements”. The Audit Com- cow city under No. 1027700125628 on for preventing and countering cor- foundations, state companies and mittee declared the auditor’s report August 13, 2002. Certificate No. 77 No. ruption, responsibilities, restrictions corporations. A competitive tender for the selection on Transneft financial statements for 005721432. and rules of conduct for employees of auditing firms for 2016 was held in 2016, prepared by KPMG on February JSC KPMG is a member of the self-reg- of all levels and from all divisions of ulatory organization of auditors, The accordance with the Regulations on 28, 2017 to be in compliance with Russian Union of Auditors (Association). the Company with a view to prevent open tenders for the selection of an the requirements established by the Primary Number of Registration Entry in possible cases of corruption and the auditing firm for the statutory annual Federal Standards of Audit Activity the Register of auditors and audit organi- emergence of a conflict of interest in audit of Transneft for 2016, approved approved by the Ministry of Finance of zations: 11603053203. the exercise of official duties. Every by Transneft Order dated February 1, the Russian Federation. year, the Company assesses the 2016 No. 18. necessity for updating the internal documents that establish procedures JSC KPMG was announced the winner. aimed at preventing and countering corruption. Auditor remuneration for audit services was determined following In pursuance of Article 13.3 of the the results of the open tender and Federal Law “On Countering Cor- amounted, under the agreement on ruption”, the Company carries out Transneft accounts audit for 2016, to anti-corruption measures on a reg- RUB 32,450,000, including VAT. ular basis. Within the framework of implementing the instructions of the Following the tender results, the Government of the Russian Federa- Company Board of Directors nom- tion on the execution of provisions inated the winner for approval by of the National Anti-Corruption Plan the Company’s General Meeting of for 2016-2017, measures are being Shareholders. taken to increase the efficiency of the

122 Transneft Annual report 2016 123 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Information on Compliance Progress of implementation of the Code requirements in the corporate govern- with Recommendations of ance practice of the Company the Corporate Governance Code

The Company observes most of key principles of the The most important aspects of the implementation of the Company’s tion of the Board of Directors of the model and the practice of corporate development strategy. The list Company dated December 12, 2016). Corporate Governance Code; moreover, the CGC re- governance did not change in the Com- of these significant subsidiaries • Amendments to the agreement quirements are still being implemented in the Compa- pany compared to 2015. The Company shall be annually approved by the with the registrar, recommended continued to implement the Code in its President of the Company based by the Code, were introduced (the ny’s corporate governance practice activities. on the criteria established by the Agreement on Provision of Services Board of Directors. for Keeping the Register of Security Key activities carried out in 2016: • the authority of the Board of Holders with Registrar ROST, JSC, • The new version of the Articles of Directors was expanded in the was approved by the Board of Di- Association of Transneft was ap- following areas: approval of rectors of the Company and signed proved (Directive No. 520-r of the strategy, main activity programs, on July 28, 2016). In the sphere of corporate govern- governance in order to ensure greater tion Plan (the “road map”) of Transneft Federal Agency for State Property budget of the Company; control ance, the Company strictly abides by transparency in the management of for implementation of the Corporate Management dated June 30, 2016). over the Company’s executive Preferred shares of Transneft have the applicable legislation and also fol- the Company. In 2014, the Bank of Governance Code was approved by Most of the amendments to the bodies, internal control, risk been traded on the Moscow Exchange lows the Listing Rules of the Moscow Russia approved the Corporate Gov- resolution of the Board of Directors of Articles of Association of the Com- management and internal audit; since 2004 and were included into the Exchange, PJSC (hereinafter – Ex- ernance Code (hereinafter – Code) and Transneft dated September 18, 2015 pany were related to bringing the business performance evaluation; highest quotation list. In this regard, change). Currently, the Company has recommended it for use by joint stock (Minutes No. 23). provisions of the current version of control over Transneft subsid- the Company observes and reports a certain potential for improvement companies, the securities of which are the Articles of Association in line iaries and decision-making on on compliance with the Listing Rules and systematization of corporate admitted to organized trading. The Ac- with the requirements of the Code, significant transactions; established by the Exchange, includ- the orders of the President of the • issues requiring decisions by the ing in terms of corporate governance. Russian Federation, the directives majority of votes of all elect- To confirm the compliance with the of the Government of the Russian ed members of the Company’s Rules, the Company carried out a Federation and the practice of Board of Directors were deter- number of measures during 2016 – corporate governance developed by mined; early 2017: the Company in previous years. The • the list of issues that predomi- • the document defining the Compa- following amendments to the Arti- nantly require face-to-face meet- ny’s dividend policy was approved; cles of Association were introduced: ings of the Board of Directors • new versions of the Regulations on • the term “subsidiaries” was was determined; the Audit and Human Resources replaced by the term “Transneft • the authority of the Board of Di- and Remunerations Committees subsidiaries” in relation to organ- rectors and the executive bodies under the Board of Directors were izations, where the Company’s of the Company in terms of con- approved; stake (direct and (or) indirect) in trol over Transneft subsidiaries • the requirement of the Exchange the authorized capital exceeds 20 was increased; related to the order of appoint- percent; • the competence of the Company’s ment of the head of the Compa- • significant Transneft subsidiaries governing bodies to approve inter- ny’s Internal Audit division was were identified. This was done in nal documents was delineated. fulfilled; order to ensure special control • Approval of the Regulation on Risk • the functions of the Corporate over Transneft subsidiaries that Management of Transneft (resolu- Secretary were assigned to a spe- have or may have a signifi- tion of the Management Board of cial division of the Company – the cant impact on the Company’s the Company dated April 1, 2016). Corporate Governance Department financial, economic and other • Approval of the Regulation on the (hereinafter – CGD) and the Regula- performance indicators, and/or Dividend Policy of Transneft (resolution on the CGD was approved.

124 Transneft Annual report 2016 125 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

The Methodology for Assessment of Results of the Assessment of Compliance with the Principles of Compliance with the Principles of 2 The number of non-observed tems Signiﬁcant corporate actions decreased Corporate Governance, Stipulated by Corporate Governance of the Code 2 The number of fully observed items increased the Code Disclosure of information about the Company 1

Remuneration system for members of the Board of Directors and key executives of the Company 1

Board of Directors 2 Table on compliance with the principles of the Corporate Governance Code for the years 2015 and 2016 Shareholder rights and equal treatment 1 of shareholders when exercising their rights 2015 2016 2 Principles recommended by Principles of Corporate Governance the Corporate

Governance Partially Partially observed observed Observed Observed Code Not observed Not observed Not observed

Shareholder rights and equal treat- 13 7 3 3 9 2 2 ment of shareholders when exercising their rights

Board of Directors 36 13 19 4 15 17 4 2016

Corporate Secretary of the Company 2 2 – – 2 – – Signiﬁcant corporate actions 3 1 1 Observed Remuneration system for members of 10 6 2 2 7 1 2 Partially observed the Board of Directors and key execu- Disclosure of information about the Company 3 4 tives of the Company Not observed Risk management and internal Risk management and internal control 6 3 3 – 3 3 – control system 3 3 system Remuneration system for members of the Board 7 1 2 Disclosure of information about the 7 2 5 – 3 4 – of Directors and key executives of the Company Company Corporate Secretary of the Company 2 Significant corporate actions 5 1 1 3 3 1 1

Total score 79 34 33 12 42 28 9 Board of Directors 15 17 4

100% 43.0% 41.8% 15.2% 53.2% 35.4% 11.4% Shareholder rights and equal treatment of shareholders when exercising their rights 9 2 2

The Company carried out an assess- In accordance with the Recommen- The ratio of the number of observed, not observed and partially observed 2015 ment of adherence to the principles dations, an explanation of the key principles of corporate governance under the Code as of December 31, 2015 Signiﬁcant corporate actions 11 3 Observed of corporate governance based on the reasons, factors and (or) circumstanc- and December 31, 2016 methodology set out in the Recom- es, by virtue of which Transneft does Partially observed Disclosure of information about the Company mendations on preparation of a report not observe/partially observes the 2 5 % 2015 2016 Not observed on compliance with the principles principles of corporate governance 89 Risk management and internal and recommendations of the Cor- stipulated in the Corporate Govern- proportion of recommendations of the 15.2 % 11.4 % control system 3 3 Code observed by the Company in full or porate Governance Code (Annex to ance Code, is presented in the Report Remuneration system for members of the Board in part 6 2 2 the Letter of the Bank of Russia No. on Compliance with the Principles and Observed of Directors and key executives of the Company IN-06-52/8 dated February 17, 2016) Recommendations of the Corporate Not observed Corporate Secretary of the Company (hereinafter – Recommendations). Governance Code (Annex No. 7). 41.8 % 35.4 % 2 Partially observed Board of Directors 13 19 4

Shareholder rights and equal treatment of shareholders when exercising their rights 7 3 3 43.0 % 53.2 %

126 Transneft Annual report 2016 127 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Progress of the Code introduction into the corporate governance of the Company in 2016 Company’s plans on further 2 The number of non-observed tems improvement of the corporate Signiﬁcant corporate actions decreased 2 The number of fully observed items increased governance practice Disclosure of information about the Company 1

Remuneration system for members of the Board of Directors and key executives of the Company 1

Board of Directors 2

Shareholder rights and equal treatment 1 of shareholders when exercising their rights 2 To improve corporate governance, Directors and Committees under the Transneft planned the following Board of Directors; measures for 2017: • develop and approve the Informa- • adopt new regulations on the tion Policy of the Company and General Meeting of Sharehold- the Regulation on Preparation and ers, the Board of Directors and Disclosure of Information; The structure of compliance with the principles of corporate governance by the Management Board of the • conduct other activities in accord- sections of the Code as of December 31, 2015 and December 31, 2016 Company; ance with the Transneft Action Plan • develop regulations for the prepa- (the “road map”) for implementation 2016 ration of meetings of the Board of of the Corporate Governance Code.

Signiﬁcant corporate actions 3 1 1 Observed Partially observed Disclosure of information about the Company 3 4 Not observed Risk management and internal control system 3 3 Remuneration system for members of the Board of Directors and key executives of the Company 7 1 2

Corporate Secretary of the Company 2

Board of Directors 15 17 4

Shareholder rights and equal treatment of shareholders when exercising their rights 9 2 2

2015

Signiﬁcant corporate actions 11 3 Observed Partially observed Disclosure of information about the Company 2 5 2015 2016 Not observed Risk management and internal 15.2 % 11.4 % control system 3 3 Remuneration system for members of the Board 6 2 2 Observed of Directors and key executives of the Company Not observed 41.8 % 35.4 % Corporate Secretary of the Company 2 Partially observed Board of Directors 13 19 4

Shareholder rights and equal treatment of shareholders when exercising their rights 7 3 3 43.0 % 53.2 %

128 Transneft Annual report 2016 129 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Information on transactions, participation in legal entities and court proceedings

Information on major of business partnerships of underpayment of dividends for On June 27, 2016, Vneshprombank By resolution of the Moscow Com- transactions made by and entities, including data 2013, corresponding to it as the appealed to the Commercial Court mercial Court dated June 10, 2016, Transneft on the parties, subject mat- owner of preferred shares. Also, the with claims against Galteks LLC left unchanged by the decision of the ter, price and other terms plaintiff made a claim for recovery for recovery of debts, interest and Ninth Arbitration Court of Appeal No major transactions were made and conditions of these of RUB 16,294,532.68 as interest penalties under the loan agree- dated August 24, 2016, the claim by Transneft in 2016. agreements. for the use of other’s funds. The ment in the total amount of RUB was dismissed. By resolution of the Russian Federation, represented 346,959,965.03 and against Delkon Commercial Court of Moscow District Information on related- Information on agreements for the by the Federal Agency for State LLC for recovery of debts, inter- dated January 30, 2017, the said party transactions of sale and purchase of shares (stakes) Property Management, was involved est and penalties under the loan judicial acts were annulled, the case Transneft of business entities concluded by in the case as a third party that had agreement in the total amount of was returned to a trial court. The Transneft in 2016 is presented in no independent claims regarding the RUB 320,576,039.53. Referring to next hearing on the case will be held In 2016, Transneft made 14 relat- Annex No. 4. subject of the dispute. the fact that in accordance with the in the Moscow Commercial Court on ed-party transactions. The report guarantee contracts Transneft was July 17, 2017. on related-party transactions Information on investments The Moscow Commercial Сourt the joint debtor under the above concluded by the Company in the of Transneft with an expec found the claims of the plaintiff un- mentioned loan agreements, Vnesh- Information on unfinished reporting period was prepared ted level of income of more founded and issued a decision dated prombank involved Transneft in the legal proceedings on claims in accordance with Clause 1.1 of than 10% per year November 24, 2016 on the rejection cases as a co-defendant. for debt recovery in which Article 81 of the Federal Law “On of the claim. Transneft acts as a plaintiff Joint Stock Companies” dated De- In the reporting period, Transneft On April 26, 2017, the proceedings cember 26, 1995 No. 208-FZ and made no investments with an ex- UCP Industrial Holdings, Ltd. did not were suspended until the sentence At the end of 2016 there were no un- is presented in Annex No. 5. pected level of income of more than agree with the resolution of the trial on the criminal case against the finished legal proceedings on claims 10% per year. court and filed an appeal with the management of Vneshprombank for debt recovery in which Transneft Information on Transneft’s Ninth Arbitration Court of Appeal. came into force. acted as a plaintiff. participation in business Information on unfinished entities and nonprofit legal proceedings on claims On March 13, 2017, during the On January 18, 2016, Inform Proekt organizations for debt recovery against court session of the Ninth Arbitra- LLC appealed to the Moscow Com- Transneft tion Court of Appeal, UCP Industrial mercial Court with claims against Transneft is a holding company. Holdings, Ltd. withdrew the claim; Transneft for recovery of RUB Information on Transneft partic- In 2016, Transneft acted as a defend- the withdrawal was accepted by the 12,227,172.59, including the debt ipation in business entities and ant in the following legal proceed- court, the proceeding was disconti for works delivered under the agree- nonprofit organizations as of ings on claims for debt recovery: nued. ment on the creation of an informa- December 31, 2016 is presented in tion project management system in Annexes No. 2 and No. 3. Infor- On March 17, 2016, UCP Industrial By resolution of the Moscow Com- the amount of RUB 11,115,611.48 mation on dividends received by Holdings Ltd., an owner of pre- mercial Court dated March 14, 2016, and penalties in the amount of Transneft is presented in Annex ferred shares of Transneft, applied Vneshprombank LLC was declared RUB 1,111,561.10. The claims were No. 6. to the Moscow Commercial Court insolvent (bankrupt), bankruptcy related to the unjustified, in the with a claim against Transneft proceedings were started against it, plaintiff’s opinion, evasion of accept- Information on concluded for recovery of damages in the and the responsibilities of the bank- ance of works performed under the agreements for the sale form of lost profit in the amount ruptcy trustee were assigned to the agreement and, as a result, evasion and purchase of shares, of RUB 84,654,130.24, caused, State Corporation Deposit Insurance of their payment on the part of stakes and equity interest according to the plaintiff, as a result Agency. Transneft.

130 Transneft Annual report 2016 131 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Share in the Share of ordinary Share of preferred Name Location authorized Authorized capital shares shares capital The Russian Federation represented by the 9 Nikolsky per., 103685, 78.1057% 100% None Federal Agency for State Property Manage- Moscow ment National Settlement Depository (nominee) 12 ul. Spartakovskaya, 21.2280% None 96.9567% 105066, Moscow Transneft 57 ul. Bolshaya Polyanka, None None None 119180, Moscow Legal entities controlled by Transneft – 0.0220% None 0.1004% (1,561 100% of ordinary voting shares of Company’s performance over the preferred shares) Transneft belong to the Russian course of a year. Other – 0.6443% None 2.9429% Federation represented by the Federal Agency for State Property Information on securities of the Management. Preferred shares of Company as of December 31, 2016, the Company are not voting and including placement of additional only grant their owners the right to shares and capital flow for the There is no special right of the Russian Structure of the authorized capital as of December 31, 2016 receive fixed dividends based on the year: Federation to participate in the management of the Company (the “golden share”). 21.23 % The Russian Federation represented by the Federal Agency for State Property State registration number of the issue and the date As of December 31, 2016, the following Management Type of shares Total number Par value of all shares of state registration: persons were registered in the share- 0.02 % 0.64 % National Settlement Depository (nominee) Ordinary shares 5,546,847 RUB 5,546,847 No. 1-01-00206-А dated December 20, 20071 holder register: • 2,864 natural persons; Shares that belong to Transneﬅ subsidiaries Preferred shares 1,554,875 RUB 1,554,875 No. 2-01-00206-А dated December 20, 2007 • 25 legal entities, including 1 nominee. Other 78.11 % On October 18, 2016, the Extraordi- shares and the date of state reg- As of December 31, 2016, 0.02% of nary Meeting of Shareholders made istration of the additional issue of the authorized capital belonged to the a decision to increase the author- ordinary shares: 1-01-00206-А-002D Transneft Group companies. ized capital of Transneft by RUB dated November 17, 2016). Place- 21,901 through placement of addi- ment of the additional issue of 100 % Full name and address of the General information on the preferred shares of Transneft tional ordinary registered book-entry shares took place on February 2, registrar of ordinary voting shares of Transneft shares. Payment for the shares being 2017. belong to the Russian Federation Parameter Value placed was made out of property in represented by the Federal Agency for Joint Stock Company R.O.S.T. Registrar, Share category common registered book-entry share federal ownership. For the purpose The shareholders of the Company State Property Management korp. 13, 18 ul. Stromynka, 107996, of placement, the price of 1 ordinary whose share in the authorized capi- Moscow. Par value RUB 1 share of the Company was set at the tal of Transneft exceeds 2% and in- Moscow Exchange ticker TRNFP amount of RUB 273,540. formation on the shares that belong Market Data on the securities to organizations of the Transneft of the Company ISIN code RU0009091573 2 On November 17, 2016, the addi- Group as of December 31, 2016 : Bloomberg code TRNFP RX tional issue of ordinary shares was Transneft’s shares are traded on the registered (state registration number organized securities market in Russia. of the additional issue of ordinary Preferred shares of the Company are The weight of the preferred shares of Transneft in the stock indices as of traded on the Moscow Exchange and December 30, 2016 have been included in the unified base for calculation of main indices of the Index name weight, % Moscow Exchange. On June 9, 2014, Broad Market Index 2.86 1. 21,901 additionally issued shares were placed in February 2017, state registration number: 1-01-00206-А-002D dated November 17, 2016. Emission preferred shares of Transneft were report was registered on March 20, 2017. included in the First Tier quotation list MICEX index 2.94 of the Moscow Exchange. 2. The information is presented based on the list of persons registered in the shareholder register of Transneft as of December 31, 2016. If the Company’s MICEX Oil and Gas Index 10.68 shares amounting to two or more percent of the authorized capital or the ordinary shares are registered in the shareholder register of the Company under the name of a nominee, this fact is specified. As of December 31, 2016, the Company had no information on the existence of any shareholding of preferred shares in an amount exceeding 2% of the authorized capital. In accordance with the Federal Law “On the Securities Market”, the list of security holders of the Company can be provided, if it is necessary to fulfill obligations stipulated by federal laws. As of December 31, 2016, the Company had no obligations stipulated by federal laws, fulfillment of which required compilation and obtainment of the list of security holders.

132 Transneft Annual report 2016 133 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Trading results for preferred shares of the Company Credit Ratings 2014 2015 2016 Trading volume, RUB billion 114.6 91.0 104.2 Minimum price, RUB 70,555 115,500 132,600 Maximum price, RUB 149,770 194,500 235,700 Price as of the end of the year 126,000 194,000 197,950 As of the end of 2016 the levels of international credit ratings of the Company, assigned by agencies Information on the trading of pre- At the end of 2016, the price of Moody’s and Standard & Poor’s, did ferred shares of Transneft is available preferred shares of Transneft in- not change. During 2016 Standard & at http://www.transneft.ru in the sec- creased slightly – by 2.04% (from Poor’s changed its outlook from Nega- tion For Shareholders and Investors / RUB 194,000 at the end of 2015 to tive to Stable. Stock Quotes. RUB 197,950 at the end of 2016). Information on credit ratings as of December 31, 2016

Dynamics of the value of preferred shares and trading volumes of Transneft on Rating value the Moscow Exchange Rating agency For foreign currency For national currency liabilities liabilities Share price Trading volume 250.00 12,000 Standard & Poor’s ВВ+ ВВВ- Outlook: Stable Outlook: Stable 10,000 200.00 Moody’s Ва1 – 8,000 Outlook: Negative 150.00 6,000 100.00 4,000 Dynamics of Transneft’s rating and the sovereign rating of the Russian Federa- tion in foreign currency 50.00 2,000 Price of preferred shares, RUB Moody’s. www.moodys.com 0 0 Trading volume January February March April May June July August September October November December А1

A3 Dynamics of the value of preferred shares of Transneft in comparison with Baa1 the MICEX index and the MICEX Oil and Gas Index in 2016

60 % Baa2 Sovereign rating of the Russian 50 % Baa3 Federation in foreign currency 40 % Ba1 Transneﬅ 30 % 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20 % 10 % 0 % Transneﬅ Standard & Poors’s. www.standardandpoors.ru -10 % MICEX index -20 % А- MICEX Oil and Gas Index -30 % BBB+ -40 % January February March April May June July August September October November December BBB

Market capitalization of preferred shares of Transneft BBB- BB+ As of December 31, As of December 31, As of December 31, Sovereign rating of the Russian 2014 2015 2016 BB Federation in foreign currency Transneﬅ Market capitalization of preferred shares of Transneft*, 195.9 301.6 307.8 BB- RUB billion 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 * According to the Moscow Exchange

134 Transneft Annual report 2016 135 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Company Dividend Policy and Profit bonds Distribution

Eurobonds On December 12, 2016, the Board cial investments, a positive balance of of Directors of Transneft approved exchange rate differences and other Issues of corporate bonds in circulation the Dividend Policy of the Company irregular (non-recurring) non-monetary (hereinafter – Policy), under which the components of net profit. ISIN code Date of placement Maturity date Nominal volume, USD Coupon rate (current), % per annum following principles should be ob- % served when determining the amount In case of exceeding the limit of debt 100 XS0381439305 July 31, 2008 August 7, 2018 1,050,000,000 8.70% of dividends on shares of all catego- burden, a lack of the required amount of dividend payout ratio of net profit under RAS ries (types): free cash flow or insufficient funds for Ruble-denominated bonds • transparency of the procedure for investment activities and repayment of determining the amount of divi- the principal debt, the level of payments Issues of corporate bonds in circulation dends; is set at 20% or 15% of the normalized • unconditional fulfillment of the main net profit under IFRS. Series Date of placement Maturity date / offer date Nominal volume, RUB Coupon rate (current), % per annum objectives of the Company, established by the Articles of Association, In addition, the amount of dividends 1 May 25, 2009 May 13, 2019 / May 14, 2018 35,000,000,000 8.50% including implementation of invest- cannot exceed the amount of free cash October 1, 2019 / October 3, 2 October 13, 2009 35,000,000,000 11.00% ment activities for the development flow, calculated as the average value for 2017 of the production base, expansion, the next three years (in case of divi- 3 September 30, 2009 September 18, 2019 65,000,000,000 12.05% reconstruction and upgrading of the dend payment of more than 15% of the trunk pipeline system; consolidated profit), and cannot be less Issues of corporate bonds in circulation • focus on increasing the Company’s than 25% of the Company’s net profit, investment attractiveness; according to the financial statements Series Date of placement Maturity date / offer date Nominal volume, RUB Coupon rate (current), % • ensuring financial stability and min- under the Russian Accounting Standards per annum imizing possible negative effects on for the reporting year. Series BO-03 October 22, 2014 October 9, 2024 / April 19, 2017 25,000,000,000 8.50% the Company’s credit ratings; • consideration of the amount of Distribution of the total amount of divi- Series BO-04* July 16, 2015 July 3, 2025 / January 11, 2018 17,000,000,000 8.00% dividends on shares of all catego- dends between categories (types) of the Series BO-05 April 21, 2016 April 9, 2026 / April 15, 2021 17,000,000,000 10.10% ries (types) in the calculation of Company’s shares is made in accord- Series BO-06 September 6, 2016 August 25, 2026 / August 30, 2022 17,000,000,000 9.30% tariffs for oil transportation services ance with the Articles of Association and Series BO-07 April 26, 2017 April 14, 2027 / April 17, 2024 17,000,000,000 8.75% through trunk pipelines established the requirements of the legislation of by the Federal Antimonopoly Ser- the Russian Federation. * Issue of the BO-04 series was purchased by the Group. vice; • adequacy of funds available to the In April 2017, amendments to the Arti- Issues within the framework of the Exchange Bond Program (registration number 4-00206-A-001P-02E dated April 6, 2016) Company (received for the provi- cles of Association of Transneft concern- sion of oil transportation services ing the determination of the amount Series Date of issue Maturity date Nominal volume, RUB Coupon rate (current), % per annum through trunk pipelines according to of dividends on preferred shares were established indexation of tariffs) for registered. The new version establishes Series BO-001R-01 June 10, 2016 June 2, 2023 20,000,000,000 9.90% financing operating, investment and that 10% of the Company’s net profit Series BO-001R-02 July 8, 2016 June 30, 2023 10,000,000,000 9.65% financial activities. should be allocated to dividend payment Series BO-001R-03 August 11, 2016 August 3, 2023 15,000,000,000 9.45% on all preferred shares at the end of Series BO-001R-04 October 6, 2016 September 29, 2022 15,000,000,000 9.30% According to the approved Policy, the year. And the amount of dividend Series BO-001R-05 February 3, 2017 January 26, 2024 15,000,000,000 9.25% the base level of dividend payments payment per one preferred share can- amounts to 25% of consolidated net not be less than the amount of dividend Series BO-001R-06 March 29, 2017 March 24, 2021 20,000,000,000 9.00% profit of the reporting year, calculated payment per one ordinary share. Series BO-001R-07 May 3, 2017 October 28, 2020 30,000,000,000 8.75% under IFRS and normalized with respect to shares of the profit of dependent and To ensure the transparency of the Divi- jointly controlled companies, incomes dend Policy, the Company publishes the received from the revaluation of finan- Dividend Policy and the amendments to

136 Transneft Annual report 2016 137 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

it on the Transneft website: 823.31 per share and in the total http://www.transneft.ru. amount of RUB 1,280,144,204.06; Shareholder and

The order of the Federal Agency for Dividends for 2015 were paid in full State Property Management dated and within the time limits established Investor Relations June 30, 2016 No. 520-r approved the by the legislation of the Russian decision on dividend payment on shares Federation. of Transneft based on the performance results for 2015 in the total amount of As of December 31, 2016, Transneft RUB 12,801,410,067.79, including: has no debt on dividend payments to • on ordinary shares (5,546,847 the federal budget. shares) in the amount of RUB 2,077.08 per share and The dividend payout ratio of net profit in the total amount of RUB under the Russian Accounting Stan 11,521,265,863.73; dards amounted to 100%, which was The company complies with all re- Company’s official website: http:// • on preferred shares (1,554,875 a record for the Company’s dividend quirements of the applicable legisla- www.transneft.ru/. The website con- www.transneft.ru the official website of the Company shares) in the amount of RUB history. tion with regard to disclosure of infor- tains data on all major business areas used for information disclosure mation by public companies. Transneft of the Company, sustainable develop- ensures regular, timely, reliable and ment, information for shareholders meaningful information disclosure and investors, press releases, news, Dividend history of Transneft for all stakeholders. Great attention annual reports and other important is paid to simultaneous provision of information. In addition to posting essential information to all sharehold- mandatory information on its website, 2012 2013 2014 2015 2016 ers, investors and analysts. the Company also publishes quarterly (for 2011) (for 2012) (for 2013) (for 2014) (for 2015) financial statements under IFRS and According to the Regulation on the Russian Accounting Standards, Share category, Ordinary 301,31 685,1 1 221, 38 318,67 2 077,08 RUB per share Information Policy, the Company analysis of the financial condition and Preferred 716,58 685,1 724,21 757,87 823,31 discloses information on its activities performance of the Transneft Group in news-lines of information agencies carried out by the Company’s man- Total number of shares 7,101,722 7,101,722 7,101,722 7,101,722 7,101,722 on the Internet, provided by one of agement and a presentation of the the distributors of information on the Company’s results compared to IFRS. Total amount of dividends, RUB 2,785,512,797.07 4,865,389,742.20 7,900,864,012.61 2,946,006,849.74 12,801,410,067.79 securities market in the Russian Fed- Mandatory information disclosure in Dividend payout ratio from net 25% 45.7% 70.16% 25% 100% eration, on the Company’s website and compliance with Russian federal laws profit under the Russian Accounting in other ways. and regulatory documents of the Bank Standards of Russia is carried out by the Compa- Currently, the main channel for ny on the page: http://www.e-disclo- Resolution on dividend payment AGSM on June AGSM on June AGSM on June AGSM on June AGSM on June 30, information disclosure is the official sure.ru/portal/company.aspx?id=636. 29, 2012 28, 2013 30, 2014 30, 2015 2016

Profit distribution of Transneft,U R B thousand

2012 2013 2014 2015 2016

(for 2011) (for 2012) (for 2013) (for 2014) (for 2015)

Retained earnings (loss) of the reporting 11,141,791 10,652,445 11,260,439 11,783,833 12,801,410 period, including:

Financing capital investments 2,841,826 - 1,894,820 5,398,140 -

Dividend payment 2,785,513 4,865,390 7,900,864 2,946,007 12,801,410

Foundation of Target Capital of the Skolk- 108,000 - - - - ovo Institute of Science and Technology

Provisions for repayment of borrowed funds used to implement investment 5,406,452 5,787,055 1,464,756 3,439,686 - projects

138 Transneft Annual report 2016 139 Execution of instructions from the President and the Government of the Russian Federation

Information on the actual On September results of the execution of instructions from the President of the Russian Federation and the Government of the 12, 2016, Russian Federation 142

The Chairman of the Management Board, the Presi- dent of Transneft Nikolay Tokarev informed the head of state about current activities of the Company

For details see: www.transneft.ru/news/view/id/12792

140 Transneft Annual report 2016 141 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

Property Management No. On suggestions and recommen- ducted 24 EMS certification audits in Information on the actual GN-13/1359 dated January 24, dations on encouraging the Transneft and Transneft subsidiaries 2011, No. GN-15/10587 dated development of environmen- for compliance with requirements April 9, 2012, No. EA-15/48093 tal liability mechanisms based of the international standard ISO results of the execution dated October 25, 2012), in- on international standards, 14001:2004. cluding information on the including such as non-finan- consideration of divestment cial statements and the volun The EMS is considered as the system of instructions from the of non-core assets both of tary certification system, that meets the requirements of ISO the parent company and sub- are subject to independent 14001:2004, based on the results President of the Russian sidiary companies and affili- check and approval (subitem of the audits. The Company and 23 ates at meetings of the Board «L» of Item 1 of the list of Transneft subsidiaries received new of Directors and approval of instructions of the President international certificates DQS. Federation and the programs on the disposal of of the Russian Federation No. these assets Pr-1640 dated June 6, 2010, Annual audits will be conducted by Letter of the Federal Agency international auditors in order to Government of the Russian Information is stipulated in Section for Property Management No. confirm compliance of the Company’s Program of non-core divestment and GN-13/37524 dated December 5, EMS with requirements of the in- Annex No. 1 of the Annual Report. 2011) ternational environmental standard Federation ISO14001–2004 in all organizational On approval of the Innovative The voluntary environmental liabili- structures. Development Program develo ty mechanism of Transneft consists ped (updated) under guidelines in the system of additional liabili- In 2016, in order to implement approved by Instruction No. ties that the Company assumed to Directive of the Government of the DM-P36-7563 dated November 7, maintain a science-based balance of Russian Federation No. 1710p-P13 2015 (Directive of the Govern environmental and economic inter- dated March 30, 2012 «On Statutory ment of the Russian Federation ests with socio-economic needs of Annual Disclosure of Nonfinancial No. 1471p-P13 dated March 3, the society that contribute to the sus- Statements», Transneft posted the 2016) tainable development of the Russian nonfinancial report on the sustaina- Formation of specialized com- Company is stipulated in the sub- in 2016-2021 (hereinafter – the Pro- Federation. ble development of the Company, in- mittees under the Board of section “System of key performance gram) was developed and is being im- In 2016, under Guidelines approved by cluding information on environmen- Directors of the Company in indicators (KPI)”. plemented in Transneft. The Program Instruction No. DM-P36-7563 dated In order to implement the Environ- tal liability, on the official Transneft accordance with Instruction is an integrated part of the Transneft November 7, 2015, Transneft devel- mental Policy, in accordance with the website. of the Government of the On implementation of the Long-Term Development Program. oped the Innovative Development Pro- requirements of the international Russian Federation No. V3- strategy of energy saving gram of Transneft in 2017-2021. The standard ISO 14001:2004, in Trans- In order to encourage the develop P13-6294 dated July 23, 2009 and energy efficiency by the Information on the results of the Com- Program was approved by resolution neft and Transneft subsidiaries the ment of environmental liability Company (Item 8 of Instruc- pany’s activities in the area of energy of the Board of Directors of Transneft Environmental Management System mechanisms based on international Since 2008, committees under the tion of the Government of saving is posted on the Interdepart- dated November 11, 2016 (Minutes (hereinafter – EMS) was developed, standards, the key environmental ef- Board of Directors of Transneft have the Russian Federation No. mental Portal in order to implement No. 21), by the Russian Ministry of introduced and updated permanently. ficiency indicator «Reduction of spe- functioned in the Company: ISh-P9-3772 dated June 18, the Letters of the Federal Agency for Energy, the Ministry of Education and cific air pollutant emissions in the • The Strategy, Investments and Inno- 2008 on implementation of the State Property Management No. GN- Science of the Russian Federation, the The EMS was developed for the Com- process of transportation of oil and vations Committee; Decree of the President of the 15/2957 dated February 6, 2012. In- Ministry of Economic Development of pany’s administrative management petroleum products through trunk oil • The Audit Committee; Russian Federation dated June formation on the results of Transneft’s the Russian Federation and approved structure. 19 EMS regulations were pipelines» was determined and ap- • The HR and Remuneration Com- 4, 2008 No. 889 «On Certain activities in the area of energy saving at the meeting of the Interdepart- approved and determine liabilities, proved by resolution of the Board of mittee. Measures of Improving Energy is posted in the Other documents sec- mental Commission for Technological authorities and the interaction of per- Directors of Transneft dated Decem- Efficiency and Ecological Ef- tion of Transneft Personal Account. Development of the Presidium of sonnel in the EMS. ber 23, 2014 (Minutes No. 27). The KPI system was approved for ficiency of the Russian Feder- the Council under the President of the Company by resolution of the ation Economy», the Letter of In 2016, the Program of Energy Saving the Russian Federation on Economic The Matrix of Responsibility for In 2016, specific air emissions Board of Directors of Transneft the Federal Agency for State was completed in full. Modernization and Innovative Implementation of Requirements of decreased by 0.002 kg/ton (1%) dated September 5, 2011 (Minutes Property Management No. Development of Russia (Minutes No. Environmental Law was defined in compared with the previous year to No. 14); this System was altered and GN-13/28934 dated November On the disposal of non-core 10-D01 dated October 7, 2016). accordance with the international 0.156 kg/ton; it was planned to re- updated on several occasions for 27, 2008, No. GN-15/2957 dated assets in accordance with the standard ISO 14001:2004. duce specific air pollutant emissions the purposes of its improvement. February 6, 2012) Decree of the President of the The relevant description of the by 1% in 2016 (approved by reso- Information on the availability of the Russian Federation No. 596 Innovative Development Program is In accordance with Agreement No. lution of the Board of Directors of approved system of key performance The Program of Energy Saving and In- dated May 7, 2012 (Letter of publicly available on the Transneft 119/05-02/16 dated February 15, Transneft dated December 23, 2015, indicators (hereinafter – KPIs) in the creasing Energy Efficiency of Transneft the Federal Agency for State website. 2016, in 2016, LLC (MSC) DQS con- Minutes No. 32).

142 Transneft Annual report 2016 143 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

In 2016, the planned value of the key August 15, 2014), Transneft devel- • Reconstruction of the trunk pipeline plement investment projects technological and environmental safe- ment and oil quality systems, flow performance indicator “Reduction of oped and approved the Transneft system to increase the volumes of and daily operations based on ty of different types of equipment, ma- transducers, density and viscosity of specific air pollutant emissions” was Long-Term Development Program by petroleum products transportation economic and technological terials, and complementary parts was liquids, pipe piston provers); fully achieved. resolution of the Board of Directors of to the Moscow Region; feasibility principles; addi- analyzed taking into account shares of Transneft dated November 19, 2014 • Development of the trunk pipeline tion of the list of measures Russian and imported products. There are 9 types of products in Group On the reasonability of im- (Minutes No.23). system to increase the supply of and values of indicators of II of the Program: plementation of recommenda- petroleum products to the port of the measures implementation In the context of the Program, 26 • external and internal anticorrosive tions on intellectual proper- On the technological and Primorsk to 25 million tons per to the Company’s Long-Term types of products for trunk oil pipeline coating; ty ownership management in price audit of investment pro- year (the Sever (North) Project). Development Program taking transportation of oil and petroleum • systems of oil pumping stations au- accordance with Instruction jects. In order to implement into consideration guide- products will be localized. tomatization (measuring complexes of the Government of the Rus- Directive of the Government Expert reports developed by expert lines on the development of for oil quantity and quality metering sian Federation No. ISh-P8-800 of the Russian Federation No. organization OJSC Kim and Part- this Program (Directive of Separate Action Plans on the Locali systems, radar level transmitters, dated February 4, 2014 2988p-P13 dated May 30, 2013 ners, based on the results of the the Government of the Rus- zation of Manufacture of Analogs of programmed controllers for oil technological and price audit on the sian Federation No. 1346p-P13 Import Products for Oil and Petroleum pumping stations, systems of Measures on intellectual property In order to implement the Directive investment projects, were approved dated March 5, 2015) Products Trunk Pipelines within the measuring levels and temperature ownership management were devel- of the Government of the Russian at the meeting of the Consumer Russian Federation were developed in tank farms); oped and are being implemented in Federation, Transneft organized a Council. In accordance with the resolutions of for each type of product included in • large marine containment booms; Transneft in accordance with recom- technological and price audit on two the Commission under the President of the Program. The Action Plans were • fire auto-foam tower; mendations on intellectual property new investment projects included On including information on the Russian Federation, Transneft de- approved by manufacturers involved • drag reducing agents. ownership management (Instruction of in the Program of Development, requirements for a labor veloped the Program of Localization of in the localization of manufacture the Government of the Russian Feder- Upgrading and Reconstruction of force and engineering skills Manufacture of Import Product Equiva- within the Russian Federation. Technical specifications of received ation No. ISh-P8-800 dated February Facilities of Trunk Oil Pipelines of in the Long-Term Development lents within the Russian Federation for samples conform to the technical 4, 2014). Measures on intellectual Transneft in 2016-2021 which is an Program. List of instructions Oil and Petroleum Products Trunk Oil In order to put import-substituting specifications of import equivalents property ownership management is integrated part of the Transneft Long- of the President of the Rus- Pipeline Transportation (hereinafter – equipment into production, more than and requirements of Transneft. an integrated part of the Innovative Term Development Program. sian Federation No. Pr-1627 the Program), that was approved by 25 national companies were involved: Development Program of Transneft dated July 1, 2014 (Directive of resolution of the Board of Directors of LLC Gazkholodtekhnika, LLC Gusar, In 2017-2020, 5 types of products for in 2017-2021 approved by resolution In 2016, Transneft organized a tech- the Government of the Rus- Transneft dated November 19, 2014 CJSC Konar, I. Ya. Postovsky Institute trunk oil pipeline transportation of oil of the Board of Directors of Transneft nological and price audit on the third sian Federation No. 7439p-P13 (Minutes No. 23) and is an integrated of Organic Synthesis and S.V. Lebedev and petroleum products will be put dated November 11, 2016 (Minutes stage of investment of the Yug (South) dated November 5, 2014, Letter part of the Transneft Long-Term Synthetic Rubber Research Insti- into production: No. 21). project and investment project Capac- of the Federal Agency for Development Program. The Program tute, TOMZEL, JSC, LLC ENKHA, JSC • electronic components for diag- ity increase of the Usa–Ukhta trunk oil State Property Management was updated in 2016 and approved by Penztyazhpromarmatura, JSC Neft- nostic equipment (put into produc- On the development and pipeline and the Ukhta–Yaroslavl trunk No. 11/39404 dated September resolution of the Board of Directors of eavtomatika, CJSC Impuls-Avia, CJSC tion – Q2 2017); approval of the Long-Term oil pipeline. The audit completion date 15, 2014) Transneft dated December 30, 2016 Scientifically Industrial Holding VMP, • ball bearing piston for turboblower Development Program of the was Q2 2017. At present, the expert (Minutes No. 27) as part of the Long- LLC APP, LLC Scientific development stations (put into production – Company in order to implement organization LLC FBK is conducting The Transneft Long-Term Develop- Term Development Program. and production center ROKOR, JSC Q4 2017); subitems 33, 34 of Item 1 of In- the audit of the projects and the audit ment Program up to 2020 (approved UralPOZHTECHNIKA, CJSC Morozov • straight-type electrical drive for struction of the President of report is being formed. by resolution of the Board of Directors The Program continues work on import Chemical Plant and other companies. shutoff and control valves (put into the Russian Federation No. Pr- dated October 28, 2015) includes substitution that the Company imple- production – Q4 2019); 3086 dated December 27, 2013 Also, in February 2016, the Company information on requirements for mented in previous years. It is aimed at During the implementation of the • power-generating equipment (Directive of the Government convened a meeting of the Consumer personnel of Transneft subsidiaries the implementation of the localization Program, the manufacture of 21 types (electric motors) (put into produc- of the Russian Federation No. Council to consider audit reports of up to 2020, including engineering strategy, creating conditions for the of products was fully developed within tion – 2018). On October 8, 2015 4955p-P13 dated July 17, 2014, the technological and price audit on specialities (Chapter 10 Personnel manufacture of equipment, materials, the Russian Federation. in Chelyabinsk, JSC Transneft Urals Letter of the Federal Agency Transneft’s investment projects. management). and complementary parts within the and LLC Konar-Invest formed Joint for State Property Manage- • Capacity increase of Yaroslavl– Russian Federation and increasing the There are 12 types of products in the Stock Company RUSSIAN ELECTRIC ment No. PF-11/35222 dated Moscow trunk oil pipeline; On the development of the set share of Russian technologies in the priority area of the Program (Group I): MOTORS (hereinafter – JSC REM) August 15, 2014) • Reconstruction of the Kuybyshev– of measures (list of measures) production process. • mechanical and technological that in 2016–2017 built a plant in Tikhoretsk trunk oil pipeline and for scheduled and phased equipment (main line and booster Chelyabinsk to ensure the transfer In order to implement Instruction of the Zhirnovsk–Volgograd trunk oil replacement of the procure- The Program is aimed at ensuring pumps, four-way cock, slide gate of manufacturing methods (know- the President of the Russian Federa- pipeline to ensure a supply of up to ment of foreign products the technological safety of trunk oil valves, air fans for cooling main how), engineering and technologi- tion No. Pr-3086 dated December 27, 14.5 million tons of oil per year to (works, services) with the pipeline transportation of oil and pumping units, disk, axiosymmetri- cal documentation from the Italian 2013 (Directive of the Government of Volgograd Refinery; procurement of Russian prod- petroleum products by reducing the cal and spherical pressure and flow side – Nidec ASI (Italy) to JSC REM, the Russian Federation No. 4955p- • Construction of the Volgograd ucts (works, services) having dependence on imported products. rate controllers); as well as personnel training. At P13 dated July 17, 2014, Letter of Refinery–Tinguta pipe-end pumping equivalent technical charac- • equipment and tools for recording the present moment, the plant at the Federal Agency for State Property station trunk petroleum product teristics and consumer prop- In the process of the Program devel- the quantity and quality of oil and Industrial Park Stankomash is un- Management No. PF-11/35222 dated pipeline; erties that are used to im- opment, the impact on the reliability, petroleum products (measure- der construction in Chelyabinsk;

144 Transneft Annual report 2016 145 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

• activated recuperative charcoal of the Russian Federation In order to implement Directive of the On the development of a set following measures on operating ex- March 10, 2016, Transneft developed (put into production – Q1 2020). No. 1250-r dated July 9, 2014 Government of the Russian Federation of arrangements (list of penses reduction: the updated Calculation Methodology (Directive of the Government No. 4750p-P13 dated July 4, 2016, in measures) aimed at achieving of the Operating Expenses Reduction The share of Russian equipment of the Russian Federation No. August 2016, Transneft subsidiaries the indicator value of oper- Energy costs reduction is ensured by: Indicator approved by resolution of the acquired by Transneft subsidiaries in 7389p-P13 dated October 31, updated Action Plans on the Reduction ating expenses reduction of • optimization of operating practices Board of Directors of Transneft dated total purchases in monetary terms is 2014, Letter of the Federal of Operating Expenses of Transneft at least 2-3% annually (here- of trunk pipelines; November 30, 2016 (Minutes No. 23) equal to: Agency for State Property subsidiaries in 2016. inafter – the OE reduction • capacity optimization of trunk pipe- for the calculation of achieving the • 2014 – 90%, import – 10%; Management No. 11/47056 indicator); addition of the list lines’ facilities; key performance indicator Percentage • 2015 – 91%, import – 9%; dated November 5, 2014) Transneft’s report on the implementa- of measures, values of imple- • increase of the efficiency factor of reduction in operating expenses, begin- • 2016 – 91.6%, import - 8.4%. tion of measures on reducing operating mentation indicators of these energy-intensive equipment. ning with the results of 2016. The Transneft Long-Term Develop- expenses in Q3 2016 was considered measures, as well as values of On improving the system of key ment Program approved by resolu- by the Board of Directors of Transneft the OE reduction indicator, be- Procurement optimization is ensured At the end of 2015, the Board of Di- performance indicators of the tion of the Board of Directors dated on February 21, 2017 (Minutes No. 2). ginning with its value in 2016 by: rectors of Transneft approved KPIs for Company’s activity in order to December 30, 2016 (Chapter 10 to the Long-Term Development • import substitution under the 2016, including: Percentage reduction implement Item 4 of the List Personnel management) includes the The economic effect from the imple- Program; inclusion of key val- condition of maintaining the quality in operating expenses – a planned of instructions of the Presi- list of measures of Transneft aimed at mentation of measures on reducing ues of the OE reduction indica- and reliability of equipment and value in 2016 of 2%, an actual value dent of the Russian Federation increasing labor efficiency. operating expenses of Transneft in tor in the list of key manage- complementary parts; of 3.1%. No. Pr-1474 dated July 5, 2013 2016 was RUB 9,167 million or 10.4% ment performance indicators, • formation of a lot base cost taking (Directive of the Government On the development (updating) of the sum of the operating expenses as well as coordination of into account non-exceedance of the The labor contract with the sole of the Russian Federation No. of measures in the context of of the corresponding period, which achieving these values of the previous year’s prices. executive body of the Company (the 2579p-P13 dated April 25, 2014) the Long-Term Development proves the efficiency of measures on OE reduction indicator with President of Transneft) stipulates Program that are aimed at reducing expenses and implementing the remuneration of the Com- Fuel consumption reduction is ensured implementation of measures aimed In order to implement Item 4 of the reducing operating expenses the resolution of the Board of Directors pany’s management; amending by: at achieving purposes and indicators List of instructions of the President of at least by 10% in 2016 taking of the Company dated July 28, 2016 the employment agreement • integration of GLONASS and control provided by The Transneft Long-Term the Russian Federation No. Pr-1474 into account the implementa- (Minutes No. 14) as part of achieving with the sole executive body of tracks of transport and special Development Program. The main pur- dated July 5, 2013 (Directive of the tion of measures mentioned in the planned level of reduction year on of the Company as related to vehicles; poses, directions and planned results of Government of the Russian Federa- Directive of the Government year by Transneft in 2016. the responsibility for achiev- • installation of modern automatized reducing operating expenses, and the tion No. 2579p-P13 dated April 25, of the Russian Federation ing values of the OE reduction and highly efficient equipment in procedure of organizing and controlling 2014), as well as other instructions of No. 2303p-P13 dated April 16, At the end of 2015, the Board of Di- indicator stipulated in the boiler rooms, reduction of thermal the implementation of the operating federal bodies of state power of the 2015, including subsidiaries; rectors of Transneft approved KPIs for Company’s Long-Term Develop energy loss in heat networks by expenses reduction plan are stipulated Russian Federation that were issued quarterly consideration of 2016, including: Percentage reduction ment Program (Directive of means of using modern heat-insu- in the Transneft Long-Term Develop- in 2016, the Company developed the reports of managers on the in operating expenses – a planned the Government of the Rus- lating materials. ment Program in Chapter 18 Reduction improved System of key performance implementation of measures value in 2016 of 2%, an actual value of sian Federation No. 2303p-P13 of operating expenses. indicators of Transneft’s business on the reduction of operating 3.1%. In accordance with Item 9.6 of dated April 16, 2015) Reduction of expenses for services is activity and Evaluation Methods of expenses at meetings of the the Guidelines on using KPIs and the ensured by: On the inclusion of the inte- Implementation of Key Performance Board of Directors, in order Letter of the Russian Ministry of Ener- Implementation indicators of the Ac- • optimization of the production gral key performance indi- Indicators of Transneft’s Business to implement Item 4 of Section gy No. KM-14391/06 dated December tion Plan on the Reduction of Operating activity, installation of modern cator of innovative activity Activity. These documents were ap- 2 of the Minutes of the meet- 18, 2014, “previously determined tar- Expenses of Transneft in 2017–2021 equipment in divisions of the Trans- since 2016 that was devel- proved by resolution of the Board of ing with the Chairman of the get values of indicators for the current were approved by resolution of the neft system, integration of efficient oped in accordance with the Directors of Transneft dated Novem- Government of the Russian calendar year shall not be altered”. Board of Directors of Transneft dated technologies. recommendations approved ber 30, 2016 (Minutes No. 23). Federation No. DM-P13-2pr Therefore, the value determined by December 12, 2016 (Minutes No. 25) as by Instruction of the Govern- dated January 18, 2016 (Direc- resolution of the Board of Directors of part of the Program of the Increase in In the context of the implementation of ment of the Russian Federa- Detailed information on the Company’s tive of the Government of the Transneft dated December 23, 2015 Operating Performance and Reduction Item 5 of Instruction of the President tion No. DM-P36-7563 dated KPIs is stipulated in the section System Russian Federation No. 4750p- (Minutes No. 32) is used as a target of Expenses of Transneft. of the Russian Federation No. Pr-2821 November 7, 2015 (Directive of of key performance indicators (KPIs) of P13 dated July 4, 2016) value for this indicator. dated December 5, 2014 on the imple- the Government of the Rus- this Report. The basic business areas that ensure mentation of the Presidential Address sian Federation No. 1472p-P13 In the context of scheduled updating The main purposes, directions and operating expenses reduction of to the Federal Assembly of the Russian dated March 3, 2016, Letter of On the increase in labor pro- of the Long-term Development Pro- planned results of operating expens- Transneft are the following: Federation dated December 4, 2014, in the Federal Agency for State ductivity, creation, and up- gram, taking into account the Direc- es reduction, and the procedure of • electricity costs reduction; accordance with the Guidelines on the Property Management No. AT- grading of high-performance tive of the Government of the Russian organizing and controlling the imple- • procurement optimization; Calculation of Expenses Reduction for 2424/02 dated March 11, 2016) workplaces. In order to im- Federation No. 2303p-P13 dated mentation of the operating expenses • fuel consumption reduction; Joint Stock Companies with more than plement subitems 6.2, 6.3 and April 16, 2015, the list of measures reduction plan are stipulated in the • reduction of expenses for services. a 50% Government Share in Author- Transneft’s integral key performance 6.4 of Item 6, Section 2 of the on reducing Transneft’s operating Transneft Long-Term Development ized Capitals, that were approved by indicator of innovative activity was Plan of Measures approved by expenses was updated (expanded) in Program in Chapter 18 Reduction of In the context of the above-mentioned Order of the Federal Agency for State developed in 2015, approved by the Regulation of the Government June 2016. operating expenses. areas, the Company developed the Property Management No. 90 dated Ministry of Economic Development of

146 Transneft Annual report 2016 147 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

the Russian Federation, the Russian In order to implement Directive Corporate Governance Code recom- Government of the Russian Fede meets Transneft’s requirements mentation of conditions of Ministry of Energy, and the Deputy of the Government of the Russian mendations. ration No. ISh-P13-1872 dated April for business process automation contracts for the supply of Chairman of the Government of the Federation No. 3984p-P13 dated 1, 2016 (Directive of the Govern- regarding a passport system and goods (works, services), in Russian Federation A.V. Dvorkovich June 24, 2015, by resolution of On the creation of consoli- ment of the Russian Federation No. technical conditions control, as well order to implement Instruc- (Minutes No. AD-P36-247pr dated the Board of Directors of Transneft dated treasuries in parent, 4972p-P13 dated July 11, 2016), as operation and repair of primary tion of the Government of December 17, 2015) and included in dated November 16, 2015 (Minutes subsidiary companies, and the following projects using Russian equipment. Adding of ERP Galaktika the Russian Federation No. the Transneft Long-Term Develop- No. 28), the following internal affiliates. In order to imple- competitive software for the Compa- System and Galaktika EAM – Produc- DM-P13-1100 dated March 1, ment Program (by resolution of the documents of the Company were ment Item 1 of Instruction of ny’s activity were implemented. tion Management System to the re 2016 (Directive of the Govern Board of Directors of Transneft dated approved: the President of the Russian gister of Russian software is a further ment of the Russian Federa October 28, 2015, Minutes No. 26) and • Procedural Rules for Transneft Federation No. Pr-1032 dated 1. Upgrading information security of advantage of using this product. At tion No. 7704p-P13 dated Transneft’s System of Key Perfor- Investment and Operating Per- May 7, 2014 (Directive of the local area networks of Transneft present, the IT strategy of Transneft October 11, 2016) mance Indicators of Business Activity formance Improvement and Cost Government of the Russian and Transneft subsidiaries. and Transneft subsidiaries is being (by resolution of the Board of Direc- Reduction; Federation No. 5110p-P13 revised regarding replacing the SAP In accordance with Directive of the tors of Transneft dated December 23, • Transneft Internal Audit Regula- dated August 8, 2014) In integrating the system of ERP automation platform with ERP/ Government of the Russian Federa- 2015, Minutes No. 32 for 2016; by tion; confidential information leakage EAM Galaktika. tion No. 7704p-P13 dated October resolution of the Board of Directors of • Transneft Quality Management In order to implement the resolution prevention, the Russian product 11, 2016, the Board of Directors Transneft dated November 30, 2016, System Regulation; of the Board of Directors of Trans- InfoWatch Traffic Monitor Enter- On amendments in procure- of Transneft decided (November 9, Minutes No. 23 for 2017). • Transneft Risk Management Sys- neft dated April 27, 2015 (Minutes prise Edition was chosen. ment policy of PJSC regard- 2016, Minutes No. 20) to amend the tem Regulation; No. 10) On annual analysis of the ing innovative construction Regulation on the Procurement of The structure of the integral indi- • Transneft Regulations on the creation of consolidated treasuries in Moreover, solutions to protect materials in order to imple- Goods, Works, Services by Trans- cator of innovative activity and the Development and Implementation Transneft, its subsidiary companies of local area networks from the ment Item 7 of the Minutes of neft regarding the establishment calculation methodology of included of the Innovative Development and affiliates, Transneft sent there leakage of confidential informa- the meeting with the Chair- of a procedure of assignment of indicators were developed in accor Program. port of the economic effect from the tion, based on InfoWatch Traffic man of the Government of claims (factoring) in the process of dance with the results of researching creation of consolidated treasuries Monitor, are being integrated in the Russian Federation No. implementation of contracts for the innovative activity indicators of 49 The documents were developed based in Transneft, its subsidiary compa- some Transneft subsidiaries. For DM-P9-38-pr dated June 14, supply of goods (works, services) foreign companies – world leaders in on the Guidelines approved by the nies and affiliates to the Ministry of example, this product is being 2016 (Directive of the Govern concluded by the Company with oil and petroleum products transpor- Government of the Russian Federation. Finance of the Russian Federation integrated in Transneft Kama ment of the Russian Federa small and medium-sized businesses, tation, conducted by KPMG consulting and the Federal Financial Monitoring Region, JSC and Transneft Urals, tion No. 6558p-P13 dated as a result of procurement stipu- company. On the introduction of the Service. JSC. September 5, 2016) lated by the Regulation, excluding Corporate Governance Code. competitive bidding, in accordance On the development, in ac- In the context of the imple- In accordance with the letter of the 2. Upgrading the net information In accordance with Directive of the with the Civil Code of the Russian cordance with the Guidelines mentation of Instruction Intrerregional Operational Adminis- infrastructure of of Transneft Government of the Russian Federa- Federation. approved by the Government of the Government of the tration of the Federal Treasury No. and Transneft subsidiaries. tion No. 6558p-P13 dated September of the Russian Federation in Russian Federation No. ISh- 95-09-11/05-1033 dated October 21, 5, 2016, the Board of Directors of On the development and the context of the implementa- Sh3-5859 dated July 31, 2014, 2015, Transneft sent information on In the context of the project, the Transneft decided (November 9, 2016, adoption of local regulato- tion of Instruction No. Pr-3013, Item 4 of Section I of the the results of analyzing the creation of antivirus software of the for- Minutes No. 20) to amend the Regula- ry enactments of PJSC stipu approval and introduction of Minutes of the meeting of the consolidated treasuries in Transneft, eign company TrendMicro was tion on Procurement of Goods, Works, lating the standardizing the following internal docu Government of the Russian its subsidiary companies and affiliates replaced by Russian software Services by Transneft regarding: of separate types of goods, ments of the Company: proce- Federation No. 5 dated Feb- to the Intrerregional Operational Kaspersky Total Security for • consideration of Russian inno- works, services; on the dural rules for investment ruary 13, 2014 (Directive of Administration monthly within the Business. vative construction materials as placement of procurement and operating performance the Government of the Rus- prescribed time. priority materials for procure- standards on PJSC official and cost reduction; Regula- sian Federation No. 5667p-P13 3. Creation of a consolidated ment; website in the Internet data tion on Internal Audit; Regu dated September 2, 2014) On the procurement of Rus- corporate integral information • possibility of long-term contracts telecommunications net- lation on Risk Management sian competitive software management system (hereinaf- with Russian construction materi- work; on the mandatory use System; Regulation on Quality The Transneft Action Plan (the “road for the Company’s activity, ter – CCIIMS). als manufacturers for the supply of procurement standards Management System; Regula- map”) for the introduction of the in order to implement In- of secured volumes of innovative in the process of planning tion on the Development and Corporate Governance Code was ap- struction of the Govern- In 2016, Transneft conducted a construction materials in future and conducting PJSC activi Implementation of the Inno- proved by resolution of the Board of ment of the Russian Federa- benchmarking study using ERP-plat- periods, as well as with manufac- ty in order to implement vative Development Program Directors of Transneft dated Septem- tion No. ISh-P13-1872 dated forms from SAP AG and Galaktika turers that entered into special Item 2 of Instruction of the (Directive of the Government ber 18, 2015 (Minutes No. 23). The April 1, 2016 (Directive of the Corporation. The study showed investment contracts on the Government of the Russian of the Russian Federation detailed report on the introduction Government of the Russian that the integration of the Galaktika integration of manufacturing these Federation No. DM-P9-8413 No. 3984p-P13 dated June 24, of the Corporate Governance Code in Federation No. 4972p-P13 ERP-platform solution as more products in accordance with the dated December 12, 2015 2015, Letter to the Federal the Company’s business activity and dated July 11, 2016) economically feasible and will speed established procedure. (Directive of the Government Agency for State Property on its observation over the course of up the creation of the consolidated of the Russian Federation Management No. 11/27343 the year is stipulated in Section 10 In 2016, in the context of the im- CCIIMS. In addition, the base func- On expanding the use of No. 2793p-P13 dated April 19, dated July 7, 2015) Information on the observation of plementation of Instruction of the tionality of the Galaktika product factoring during the imple- 2016)

148 Transneft Annual report 2016 149 Position in the industry Development Strategy Financial Review Sustainable development Corporate Governance Execution of instructions from the President and the Government of the Russian Federation

In accordance with Directive of the Ministry of Labor and Social Protec- and Services by Certain Types of was approved by resolution of the Pursuant to Directive of the Govern Government of the Russian Federation tion of the Russian Federation on the Legal Entities. Board of Directors of Transneft ment of the Russian Federation No. 2793p-P13 dated April 19, 2016, organization of professional stan dated December 30, 2016 (Minutes No. 4863p-P13 dated July 7, 2016, by the Board of Directors of Transneft de- dards introduction, the Consolidated The list of investment projects imple- No. 27). resolution of the Board of Directors cided (July 28, 2016, Minutes No. 14) R&D Plan of Transneft and Transneft mented by Transneft, as part of the of Transneft dated October 14, 2016 to approve the Procurement Stand- subsidiaries in 2016–2018, as well Long-Term Development Program, On the procedure for the (Minutes No. 17), the Transneft Group ards of Goods, Works, Services by as requirements of the Company’s does not include projects that satisfy identification and disposal Non-Core Asset Divestment Program Transneft (hereinafter – the Procure- internal documents. the criteria of selection and addition of non-core assets in order and the Transneft Group Non-Core ment Standards). to the investment projects register to implement Instruction of Asset Register were approved. The Plan up to 2020 stipulates the managed by the Ministry of Economic the President of the Russian The approved Procurement Standards following measures on: Development of the Russian Feder- Federation No. Pr-348 dated are posted on the Transneft official • professional standards introduction; ation in accordance with Regulation February 22, 2016 (Directive of website in the Internet data telecommu- • development of professional stan of the Government of the Russian the Government of the Russian nications network (www.transneft.ru). dards for occupations that are in Federation No. 1516 dated Decem- Federation No. 4863p-P13 dated demand in Transneft; ber 30, 2015. Transneft sent Letter July 7, 2016) The Procurement Standards are used • professional training and/or sup- AK–07.3‑01–10/32243 dated June by Transneft in the process of planning plementary professional education 15, 2016 with information on the procurement, preparing documenta- of employees taking into account absence of these projects to the Mi tion on procurement, as well as price regulations of professional stan nistry of Economic Development of control regarding contracts concluded dards introduced. the Russian Federation. as a result of procurement. On the approval of the re- On amending development The Procurement Standards stipulate cording procedure of invest- plans, including long-term monitoring the results of implement- ment projects included in the development programs, ing the Procurement Standards and list of investment projects strategies and investment annually updating the Procurement in order to implement Item programs of the Company Standards. 6 of the Regulation of the regarding separate sections Government of the Russian (special measures) ensured On the introduction of pro- Federation No. 1516 dated De- priority of financial pur- fessional standards in a JSC’s cember 30, 2015 (Directive of poses (development of such activity, in order to implement the Government of the Russian measures if needed) of the Item 3 of meeting of the Go Federation No. 1659p-P13 socio-economic development vernment of the Russian Fede dated March 15, 2016) of the Far East in order to ration No. 9 dated March 24, implement subitem «b» of Item 2016 (Directive of the Govern In order to implement the Directive 6 of Instruction of the Govern- ment of the Russian Federa of the Government of the Russian ment of the Russian Federation tion No. 5119p-P13 dated Federation, Transneft developed the No. DM-P16-6658 dated Septem- July 14, 2016) industry-based rules OR-03.100.50- ber 30, 2015 (Directive of the KTN-107-16 Transneft investment Government of the Russian The Action Plan on the Introduction projects. The procedure of recording Federation No. 4531p-P13 of Professional Standards in Trans- the list of projects was approved by dated June 28, 2016) neft and Transneft subsidiaries in the Management Board of Transneft 2016–2020 was approved by reso- on June 15, 2016 (Minutes No. 25). In the context of implementation of lution of the Board of Directors of subitem “b” of Item 6 of Instruction Transneft dated December 8, 2016 The Rules stipulate the procedure of of the Government of the Russian (Minutes No. 24). The Plan is formed recording the list of Transneft invest- Federation No. DM-P16-6658 dated in compliance with the regulations ment projects taking into account September 30, 2015 (Directive of and standards of the Federal Law, the Regulation of the Government the Government of the Russian explanations of the Ministry of of the Russian Federation No. 1516 Federation No. 4531p-P13 dated Labor and Social Protection of the dated December 30, 2015 in order June 28, 2016), the section of the Russian Federation (Letter No. 14 to include investment projects of Far East Development (Chapter 23 0/10/13/2253 dated April 4, 2016 Transneft in the investment projects Transneft activity in the territory of Information of the Ministry of Labor register mentioned in Item 1 of Part the Far Eastern Federal District) was and Social Protection of the Russian 1 of Clause 3.1 of the Federal Law included in the Transneft Long-Term Federation on Using Professional No. 223-FZ dated July 18, 2011 On Development Program. The updated Standards), recommendations of the the Procurement of Goods, Works, Long-Term Development Program

150 Transneft Annual report 2016 151 Annexes Annex No. 2

Information about Transneft participation in for-profit organizations as of December 31, 2016

Participation interest, including No. Company name Area of activity via controlled Annex No. 1 entities, % 1 2 3 4 Information on Non-Core Assets Sale by Transneft Subsidiaries in 2016 Information on business entities with the Company’s equity stake in the authorized capital from 50 percent + 1 share to 100 percent

1 Joint-Stock Company «Transneft Siberia» Oil and petroleum products transportation 100 Deviation of Bookkeeping accounts (Transneft Siberia, JSC) Balance sheet line Asset book actual sale (taking into account Reason for Identification where the asset value, Actual sale value from Non-Core Asset analytics) with recorded deviation of actual 2 Joint-Stock Company «Transneft Druzhba» Oil and petroleum products transportation 100 No. number (if was recorded on RUB value, RUB the asset book Name return and expenditure sale value from the (Transneft Druzhba, JSC) applicable) the reporting date, thousand thousand value, on asset disposal asset book value preceding its sale RUB thousand (91.1ХХ/91.2ХХ) 3 Joint-Stock Company «Transneft Volga Region» Oil transportation 100 (Transneft Volga Region, JSC)

4 Joint-Stock Company «Transneft Kama Region» Oil transportation 100 1 2 3 4 5 6 7 8 9 (Transneft Kama Region, JSC) 1 OJSC AVB Bank - Financial Investments 91.04 Revenue from 18,000 0.0016 -17,999,9984 Transfer of 5 Joint-Stock Company «Transneft Western Siberia» Oil and petroleum products transportation 100 conversion of unlisted ownership during (Transneft Western Siberia, JSC) securities / 91.05 repurchase at Value of converted the request of a 6 Joint-Stock Company «Transneft Urals» Oil and petroleum products transportation 100 unlisted securities person holding (Transneft Urals, JSC) 95%. Cl. 21 Art. 189.50 No. 127-FZ 7 Joint-Stock Company «Transneft Upper Volga» Oil and petroleum products transportation 100 On Bankruptcy (Transneft Upper Volga, JSC) (Insolvency) dated October 26, 2002 8 Joint-Stock Company «Transneft Central Siberia» Oil transportation 100 (Transneft Central Siberia, JSC) 2 Lesnoe Ozero 100_3984, Fixed assets 91.04 030102 18,023.19 11,800 -6,223.1901 Open tenders in Recreation 100_4098, Zero residual value Revenue from other 2013-2015 did 9 Joint-Stock Company «Transneft North» Oil transportation 100 Center 100_4099, on off-balance sheet sales of fixed assets; not take place due (Transneft North, JSC) 100_4100, accounts 030103 Revenue from to the absence of 200_1001, other sales of fixed buyer requests. 10 Joint-Stock Company «Black Sea Oil Trunk Pipelines» Oil transportation 100 200_1003, assets, requiring state The asset was (Chernomortransneft, JSC) 200_1004, registration; 030602 sold without 200_1005, Revenue from sales announcing its 11 Limited Liability Company «Transneft Baltic» Oil and petroleum products transportation 100 200_4107, of materials, besides value under book (Transneft Baltic, LLC) 200_90210, those assigned for value to the only 200_91524, Capex / 91.05 050102 buyer at the price 12 Limited Liability Company «Transneft East» Oil transportation 100 200_91525, Residual value of other exceeding the (Transneft East, LLC) 200_91526, sold fixed assets; facility market 200_91909 050103 Residual value value 13 Limited Liability Company «Transneft Far East» Oil transportation 100 of other sold fixed («Transneft Far East, LLC») assets, requiring state registration 14 Transnefteproduct Joint-Stock Co. Fuel wholesale 100 (Transnefteproduct, JSC)

Total (in round - - - 36,023 11,800 -24,223 - 15 Moscow oil pipeline transport Company Petroleum product transportation 100 figures) (Mostransnefteproduct, JSC)

16 Joint Stock Company «Srednevolga Transnefteproduct» Petroleum product transportation 100 (JSC «Srednevolga Transnefteproduct»)

17 Joint Stock Company «Transnefteproduct-Samara» Petroleum product transportation 100 (JSC «Transnefteproduct-Samara»)

18 Joint Stock Company «Transnefteproduct-Zapad» Financial intermediation 100 (JSC «Transnefteproduct-Zapad»)

19 Limited Liability Company «Transneft Primorsk Port» Cargo-handling operations 100 (Transneft Primorsk Port, LLC)

20 Limited Liability Company «Transneft Kozmino Port» Oil transportation 100 (Transneft Kozmino Port, LLC)

21 Joint-Stock Company «Transneft Underwater Service» Underwater crossings diagnostics and repair 100 (Transneft UW Service, JSC)

22 Joint-Stock Company «Institute for Design of Oil Trunk Pipelines» Development of design and estimate 100 (Giprotruboprovod, JSC) documentation

23 Joint-Stock Company «Oil Transportation and Production Securing engineering communication of the 100 Telecommunications» (Svyaztransneft, JSC) facilities of oil trunk pipelines

24 Joint-Stock Company «Transneft Diascan» Oil trunk pipeline line section diagnostics 100 (Transneft Diascan, JSC)

152 Transneft Annual report 2016 153 Participation Participation interest, including interest, including No. Company name Area of activity No. Company name Area of activity via controlled via controlled entities, % entities, %

1 2 3 4 1 2 3 4

25 Joint-Stock Company «Transneft Metrology» (Transneft Metrology, JSC) Metrological support of oil transportation 100 55 Unitary production enterprise Zapad-Telecomnefteproduct Rendering of communication services 100 (Unitary enterprise Zapad-Telecomnefteproduct)

26 Limited Liability Company «Eastern Siberia – Pacific Ocean» Project Performance of customer-builder functions 100 56 Unitary production enterprise Zapad-Transnefteproduсt Petroleum products transportation 100 Management Center» (PMC ESPO, LLC) (Unitary enterprise Zapad-Transnefteproduсt)

27 Limited Liability Company Far East Construction Directorate (FECD, LLC) Performance of customer-builder functions 100 57 Joint-stock company The Sanatorium «Prometheus» (The Sanatorium Sanatorium and health resort services 100 «Prometheus», JSC) 28 Limited Liability Company «Transneft - Pipeline Construction Directorate» General construction works 100 (Transneft PCD, LLC) 58 Limited Liability Company Transneftstroy-Tyumen General construction works 100 (Transneftstroy-Tyumen, LLC) 29 Joint-stock company «Non-State Pension Fund «TRANSNEFT» Non-state pension scheme 100 (JSC «NPF «TRANSNEFT») 59 FESTINA ALLIANCE LTD Any activity not prohibited by law 100

30 Limited Liability Company «Transneft Invest» Management Company Non-state pension fund assets trust management 100 60 SWELTON INVESTMENTS LTD Any activity not prohibited by law 100 («Transneft Invest» Management Company, LLC) 61 Fenti Development Ltd. Any activity not prohibited by law 100 31 Limited Liability Company «Transneft Media» (Transneft Media, LLC) Publishing activities 100 62 MCGRAW LIMITED Any activity not prohibited by law 100 32 Limited Liability Company «Transneft Finance» (Transneft Finance, LLC) Rendering services as regards accounting, tax and 100 management accounting 63 TIMOTHE LIMITED Any activity not prohibited by law 100

33 Limited Liability Company «Transneft Energy» (Transneft Energy, LLC) Power sales 100 64 WEMOR LIMITED Any activity not prohibited by law 100

34 Limited Liability Company Research and Development Institute for Research activities 100 65 Limited Liability Company Ceramic Materials Plant Production of ceramic and construction materials 99.99 Pipeline Transportation (Transneft R&D, LLC) (Ceramic Materials Plant, LLC)

35 Limited Liability Company «Transneftstroy» (Transneftstroy, LLC) Construction of buildings and facilities 100 66 Limited Liability Company Sibnefteprovod Workers' Supply Rendering public catering and retail services 99.9 Administration (Sibnefteprovod WSA, LLC) 36 Limited Liability Company «Transneft Service» (Transneft Service, LLC) Cargo handling services 100 67 Joint Stock Company OMEGA (The OMEGA Company) Pipeline monitoring system production 60 37 Joint Stock Company «Transneft-Terminal» (JSC «TNT») Rendering services for oil and petroleum products 100 transportation 68 Joint Stock Company Transneft Oil Pumps (Transneft Oil Pumps, JSC) Development, production and sale of pumping 51 equipment for trunk pipeline transportation 38 Joint-Stock Company «Transneft Service» (Transneft Service, JSC) Fuel wholesale 100 facilities

39 Limited Liability Company «Transneft Ust-Luga Port» Oil transshipment 100 69 RUSSIAN ELECTRIC MOTORS, Joint Stock Company (REM, JSC) Power sale 51 (Transneft Ust-Luga Port, LLC) 70 Limited Liability Company «Transneft Synthesis» Petroleum products production 51 40 Joint Stock Company «TELECOM-OILPRODUCT» Provision of all types of communication, 100 (Transneft Synthesis, LLC) (JSC «TELECOM-OILPRODUCT») telecommunication and information services to petroleum products supply system enterprises 71 Joint-Stock Company «Transneft Energyterminal» Freight transport logistics 50.04 (Transneft Energyterminal, JSC) 41 Limited liability company «Transneft security services» Departmental security service 100 (Transneft security services, LLC) Information on business entities with the Company’s equity stake in the authorized capital from 20 to 50 percent

42 Limited liability company «Transneft-Logistics» (Transneft-Logistics, LLC) Freight transport logistics 100 72 Limited Liability Company Novorossiysk Fuel Oil Terminal (NFT, LLC) Services for cargo handling (loading, unloading, 50 transshipment, including stevedore works) and 43 Limited Liability Company Institute of Energy Resources Transportation Scientific research and experimental development 100 storage (including intra-warehousing) Problems (IPTER, LLC) in natural sciences and engineering 73 Limited Liability Company «Nefte-Shipping Agency» Maritime transport support activities 50 44 Limited Liability Company Gruzovaya (Gruzovaya, LLC) Railway transport activity 100 (LLC «Nefte-Shipping Agency»)

45 Joint Stock Company Tomsk Plant of Electric Drives (TOMZEL, JSC) Precision engineering 100 74 GYNURA TRADING LIMITED Any activity not prohibited by law 50

46 Limited Liability Company «Transneft Electric Network Service» Power transmission services 100 75 DELFYS LIMITED Any activity not prohibited by law 50 (Transneft Electric Network Service, LLC) 76 OMIRICO LIMITED Any activity not prohibited by law 50 47 Limited Liability Company «Transneft Technology» Servicing automation facilities, telemechanization 100 («Transneft Technology», LLC) and computer-aided manufacturing systems 77 Limited Liability Company LatRosTrans (LatRosTrans, LLC) Petroleum product transportation 34

48 Limited Liability Company TN-Fininvest (TN-Fininvest, LLC) Investment consulting services, portfolio 100 management 78 Pipeline Consortium “Burgas – Alexandroupolis” Limited (PC-BA Ltd.) Burgas – Alexandroupolis oil pipeline design and 33.34 construction 49 Limited Liability Company «Transneft Supervision» Technical and building supervision and monitoring 100 (Transneft Supervision, LLC) 79 Limited Liability Company Nevskaya Pipe Company (Nevskaya Pipe Cargo-handling operations 26 Company, LLC) 50 Limited Liability Company Transneft – Ust-Luga (Transneft – Ust-Luga, Investments in securities 100 LLC) 80 Limited Liability Company «RUSENERGORESOURCE» Power sale 25 (RUSENERGORESOURCE, LLC) 51 Limited Liability Company «Transneft Telecom» Telecommunication activities 100 («Transneft Telecom», LLC) 81 Stusara N.V. Any activity not prohibited by law 25

52 Joint Stock Company PROMSFERA (PROMSFERA, JSC) Real estate leasing 100 Information on business entities with the Company’s equity stake in the authorized capital from 2 to 20 percent

53 Limited Liability Company «Tikhoretsk-Nafta» (LLC «Tikhoretsk-Nafta») Cargo-handling operations 100 82 Joint Stock Company Saint-Petersburg International Mercantile Exchange Management and control over stock, commodity, 20 (SPIMEX, JSC) monetary and currency and stock exchanges' activity

54 Subsidiary of the state-owned enterprise for industrial communication Rendering of communication services 100 83 Joint stock company «Sea port service» (JSC «Sea port service») Cargo handling, sea vessel servicing 20 of the petroleum product support system – Rovensky Tsekh Elektrosvyazi (Rovensky Telecommunication Shop) 84 KHL Limited Company (OOO KHL) Rendering services for sporting events 11.7647

154 Transneft Annual report 2016 155 Annex No. 3 Annex No. 5

Information about Transneft participation in nonprofit organizations as of December 31, 2016 The report on interested-party transactions, concluded by Transneft in 2016, prepared in accordance with Clause 1.1 of Article 81 of the Federal Law “On Joint Stock Companies” dated December 26, 1995 No. 208-FZ The Company's role (place) and functions No. Name of Group, Holding Company or Association Participation time frame in the nonprofit organization Deadline for Information on Date of contract Subject matter and other the fulfilment transaction approval; Interested party No. (supplementary Counterparty essential terms of the Price of the governing bodies who (parties) 1 2 3 4 agreement) transaction obligation adopted the decision 1 International Association of Oil Transporters (IAOT) Since 2015 A member, forms part of the Assembly –Association supreme body 1 January 17, Insurer –Joint Supplementary Additional January Transaction approved First Vice-President, 2016 Stock Company agreement to voluntary insurance 17, 2016 to by Transneft Board Member of the INSURANCE health insurance premium January 24, of Directors, Minutes Management Board 2 Russian International Affairs Council (RIAC) Since 2015 Council member COMPANY contract on a change in amounts to RUB 2016 dated December 24, of Transneft M.S. TRANSNEFT (JSC the number of insured 851,456.80 2014 No. 28 Grishanin 3 Non-Profit Partnership Russian National Committee of the World Petroleum Since 1998 Founder member IC TRANSNEFT) persons Vice-President, Council on Organizing and Holding International Oil Congresses Member of the Management Board of Transneft B.M. Korol 4 The Russian Union of Industrialists and Entrepreneurs (RSPP) Since 2014 Union member

2 January 20, Borrower – Special-purpose loan Loan amounts 2 years from Transaction approved Vice-President, 5 Non-Profit Partnership Ecological Development Technologies Technological Since 2013 Partnership member 2016 Vice-President, agreement on transfer to RUB the moment by Transneft Board of Member of the Platform Member of the to the borrower's 25,000,000.00 of granting Directors on January Management Board of Management ownership of monetary loan amount 15, 2016, Minutes Transneft Board of funds dated January 18, M.V. Margelov Transneft M.V. 2016 No. 1 Margelov

3 January 27, Insurer – Joint Supplementary Insurance December Transaction approved First Vice-President, 2016 Stock Company agreement to Third premium to be 29, 2015 to by Transneft Board of Member of the INSURANCE Party Liability Insurance returned to the February 13, Directors on September Management Board COMPANY Contract in the course insurer amounts 2016 18, 2015, Minutes of Transneft M.S. TRANSNEFT (JSC of vehicle operation to RUB 61.16 dated September 21, Grishanin IC TRANSNEFT) on exclusion of one 2015 No. 23 Vice-President, Annex No. 4 means of transport from Member of the insurance Management Board of Transneft B.M. Korol Information on agreements for sale and purchase of business entities’ shares (participatory interests), concluded by Transneft in 2016

4 January 28, Insurer – Joint Supplementary Insurance Contract Transaction approved First Vice-President, Deadline for the fulfilment 2016 Stock Company agreement to Voluntary premium to be applicable to by Transneft Board of Member of the No. Parties Subject matter and other essential terms of the transaction Price, RUB of the obligation INSURANCE Vehicle Insurance returned to the relations of Directors on September Management Board COMPANY Contract on exclusion of insurer amounts the Parties 18, 2015, Minutes of Transneft M.S. 1 2 3 4 5 TRANSNEFT (JSC one means of transport to RUB 1,622.42 as from dated September 21, Grishanin IC TRANSNEFT) from insurance December 29, 2015 No. 23 Vice-President, 1 Transneft Urals, JSC Purchase and sale of JSC Transneft – Urals registered ordinary book-entry 3,397,970,042.40 Shall remain in effect until 2015. Member of the (Issuer) shares as a result of the increase in the Company's authorized capital the Parties fulfill their Management Board of Transneft with par value of RUB 1 in the amount of 20,443 pieces, sell price per obligations completely. Transneft B.M. Korol (Shareholder) share is RUB 166,216.80, state registration number of issued securities: Deposit of shares to 1-01-30774-D-001D. Transneft current account 5 February 21, Insurer – Joint Supplementary Additional February 21, Transaction approved First Vice-President, on September 13, 2016. 2016 Stock Company agreement to accident premium 2016 to May by Transneft Board Member of the INSURANCE and health insurance amounts to RUB 31, 2016 of Directors, Minutes Management Board 2 Transneft Western Purchase and sale of JSC Transneft – Western Siberia registered ordinary 620,635,753.99 Shall remain in effect until COMPANY contract on a change in 139,092.95 dated December 24, of Transneft M.S. Siberia, JSC book-entry shares as a result of the increase in the Company's authorized the Parties fulfill their TRANSNEFT (JSC the number of insured 2014 No. 28 Grishanin; Vice- (Issuer) Transneft capital with par value of RUB 1 in the amount of 2087 pieces, sell price per obligations completely. IC TRANSNEFT) persons President, (Shareholder) share is RUB 297,381.77, state registration number of issued securities: Deposit of shares to Member of the 1-01-00049-F-003D. Transneft current account Management Board of on October 7, 2016. Transneft B.M. Korol 3 Transneft Upper Purchase and sale of JSC Transneft – Upper Volga registered ordinary 1,332,563,976.24 Shall remain in effect until Volga, JSC book-entry shares as a result of the increase in the Company's authorized the Parties fulfill their 6 March 28, Donee – The Earmarked donation Donation March 28, Transaction approved Member of the (Issuer) Transneft capital with par value of RUB 1 in the amount of 6951 pieces, sell price per obligations completely. 2016 Russian Union of agreement in the form of amounts to RUB 2016 for an by Transneft Board Board of Directors, (Shareholder) share is RUB 191,708.24, state registration number of issued securities: Deposit of shares to Industrialists and gratuitous transfer to the 500,000.00 indefinite of Directors, Minutes Chairman of the 1-01-10152-Е-002D. Transneft current account Entrepreneurs donee of monetary funds period dated March 22, 2016 Management Board, on November 10, 2016. (RSPP) in order to implement No. 5 President of Transneft statutory objectives N.P. Tokarev 4 Transneft Baltic, LLC Increase in the Company's authorized capital due to the participant's (Transneft) 2,897,537,000.00 Changes in the Unified (Company) Transneft contribution in the form of monetary resources in the amount of RUB State Register of Legal (Participant) 2,897,537,000. Entities were registered on 7 May 6, 2016 Insurer – Joint Supplementary Additional March 1, 2016 Transaction approved First Vice-President, November 7, 2016 under Stock Company agreement to accident premium amounts to May 31, by Transneft Board Member of the SRN (state registration INSURANCE and health insurance to RUB 48,818.12 2016 of Directors, Minutes Management Board number) 2167848761496. COMPANY contract on changing in dated December 24, of Transneft M.S. TRANSNEFT (JSC the number of insured 2014 No. 28 Grishanin; 5 Sogaz, JSC (Buyer) Purchase and sale of JSC IC Transneft registered ordinary book-entry shares 101,381,580.00 Shall remain in effect until IC TRANSNEFT) persons Vice-President, Transneft (Seller) with par value of RUB 24,049 in the amount of 954 pieces, sell price per the Parties fulfill their Member of the share is RUB 106,270.00, state registration number of issued securities: obligations completely. Management Board of 1-04-10281-Z. Derecognition of shares Transneft B.M. Korol from Transneft current account on June 10, 2016.

156 Transneft Annual report 2016 157 Deadline for Information on Deadline for Information on Date of contract Subject matter and other Date of contract Subject matter and other the fulfilment transaction approval; Interested party the fulfilment transaction approval; Interested party No. (supplementary Counterparty essential terms of the Price No. (supplementary Counterparty essential terms of the Price of the governing bodies who (parties) of the governing bodies who (parties) agreement) transaction agreement) transaction obligation adopted the decision obligation adopted the decision

8 November 29, Rosneft Oil Supplementary Planned amount January 1, Transaction approved Member of Transneft 13 December 1, Public Joint Stock Service contract on Ceiling revenue January 1, Transaction approved Member of Transneft 2016 Company agreement on of revenue from 2017 by Transneft Board of Board of Directors 2016 Company oil storage. Storage for rendering oil 2017 to by Transneft Board of Board of Directors prolongation for 2017 information to December Directors on December A.V. Novak Gazprom is carried out in storage services December 31, Directors on December A.V. Novak of Agreement dated services rendering 31, 2017 20, 2016, Minutes Member of Transneft storage facilities with for 2017 will 2017 20, 2016, Minutes November 28, 2014 for 2017 will dated December 22, Board of Directors anonymization on the amount to RUB dated December 22, No. 11/13-03/15 amount to RUB 2016 No. 26 M.A. Warnig basis of Gazprom’s 49,680,000.00 2016 No. 26 On Information Services 1,363,874.16 request in the volumes (VAT inc.) Rendering Delivery of (VAT inc.) and within time periods information and advice agreed upon by the on Rosneft petroleum parties, or in case of products transportation. impossibility of oil Services shall be paid for transportation arisen on a monthly basis through no fault of 9 December 1, Rosneft Oil Service contract on Planned revenue January Transaction approved Member of Transneft Transneft. Services shall 2016 Company oil storage. Storage for rendering oil 1, 2017 to by Transneft Board of Board of Directors be paid for in the month is carried out in storage services December 31, Directors on December A.V. Novak following the storage storage facilities with for 2017 will 2017 20, 2016, Minutes Member of Transneft month. anonymization on amount to RUB dated December 22, Board of Directors the basis of Rosneft’s 118,000,000.00 2016 No. 26 M.A. Warnig 14 December 8, Rosneft Oil Supplementary Long-term tariff January Transaction approved Member of Transneft request in the volumes (VAT inc.) 2016 Company Agreement to Contract rate for 2017 1, 2017 to by Transneft Board of Board of Directors and within time periods dated October 10, shall amount to December 31, Directors on December A.V. Novak agreed upon by the 2013 No. 30/13- RUB 149.99 per 2017 20, 2016, Minutes Member of Transneft parties, or in case of 1/13/100013/04227С ton (VAT inc.). dated December 22, Board of Directors impossibility of oil On Establishing of 11- Planned amount 2016 No. 26 M.A. Warnig transportation arisen year Long-Term Tariff of revenue through no fault of for oil transportation for 2017 shall Transneft. Services shall services via the amount to RUB be paid for in the month Tikhoretsk-Tuapse-2 oil 1,447,403,500.00 following the storage pipeline to RN-Tuapse (VAT inc.) month. Refinery. Supplementary 10 December 1, Rosneft Oil Service contract on Planned revenue January 1, Transaction approved Member of Transneft agreement determines 2016 Company compounding (bringing from rendering 2017 to by Transneft Board of Board of Directors the amount of the of oil quality to a certain compounding December 31, Directors on December A.V. Novak long-term tariff rate for level through special services of 2017 20, 2016, Minutes Member of Transneft 2017. Services shall be technical aids) of high- high-sulfur dated December 22, Board of Directors paid for on a monthly sulfur and especially and especially 2016 No. 26 M.A. Warnig basis. high-sulfur oil taken into high-sulfur oil the trunk pipeline system for 2017 will for transportation (in the amount to RUB amount of approximately 547,520,000.00 9.82 million tons). (VAT inc.) Services shall be paid for on a monthly basis against Statements of Services Rendered 11 December 1, Rosneft Oil Service contract on Planned revenue January 1, Transaction approved Member of Transneft 2016 Company compounding (bringing from rendering 2017 to by Transneft Board of Board of Directors of oil quality to a certain compounding December 31, Directors on December A.V. Novak level through special services on 2017 20, 2016, Minutes Member of Transneft technical aids) of high- high-paraffin dated December 22, Board of Directors paraffin oil taken into the oil for 2017 will 2016 No. 26 M.A. Warnig trunk pipeline system amount to RUB for transportation (in the 325,680,000.00 amount of approximately (VAT inc.) 2.88 million tons). Services shall be paid for on a monthly basis against Statements of Services Rendered 12 December 1, Rosneft Oil Service contract on Planned revenue January 1, Transaction approved Member of Transneft 2016 Company petroleum product for rendering 2017 to by Transneft Board of Board of Directors storage (in the amount petroleum December 31, Directors on December A.V. Novak of approximately 2.0 products 2017 22, 2016, Minutes Member of Transneft million tons). Storage storage services dated December 22, Board of Directors is carried out in for 2017 will 2016 No. 26 M.A. Warnig storage facilities with amount to RUB anonymization on 223,306,575.26 the basis of Rosneft’s (VAT inc.) request in the volumes and within time periods agreed upon by the parties, or in case of impossibility of petroleum products transportation arisen through no fault of Transneft. Services shall be paid for in the month following the storage month.

158 Transneft Annual report 2016 159 Annex No. 6 Provision of the Code to which the Information on other clauses that are not observed or partially observed: 2.1.3, 2.1.7, 2.2.2, 2.3.4, 2.5.3, 2.6.1, explanation refers 2.6.3, 2.6.4, 2.8.1, 2.8.2, 2.8.3, 2.9.1, 2.9.2, 3.1.1, 3.1.2, 4.2.1, 4.2.2, 4.3.2, 5.1.1, 5.1.2, 5.1.4, 6.1.1, 6.1.2, 6.2.1, 6.3.1, 7.1.2, 7.2.2. Dividends Received by Transneft in 2016 Description of circumstances of Due to the fact that all voting shares (100%) belong to one shareholder – the Russian Federation, the Company operation and reasons for non- had no need to implement a number of corporate governance procedures, however, after the Code was No. Company name Amount, RUB Governing body who adopted the decision compliance with the clauses of the recommended for use by Letter of the Bank of Russia No. 06-52/2463 dated April 10, 2014, the Company has Code been working to bring the corporate governance practice in line with the recommendations of the Code. 1 2 3 4

1 Transnefteproduct, JSC 1,530,937,206 Shareholder's (Transneft) decision dated June 27, 2016 Description of measures aimed at To prevent emerging risks the Board of Directors of Transneft approved the Action Plan (the «road map») for (Decision No. 1) reducing emerging risks implementation of the Corporate Governance Code (Minutes No. 23 dated September 18, 2015). With respect to the applied clauses, the Company established planned dates for the implementation of the Code’s provisions. 2 Transneft Druzhba, JSC 6,830,916,625 Shareholder's (Transneft) decision dated December 30, Intentions to comply with clauses of The dates are indicated in the table of compliance with the Code individually for each clause. Other measures for 2015 (Decision No. 4) the Code in the future reducing the risks are not currently used, if not stated otherwise in the table of compliance with the Code.

3 SPIMEX, JSC 3,675,000 Decision of the Annual General Shareholders' Meeting of SPIMEX, JSC dated June 21, 2016 (Minutes dated June 22, 2016 No. 21)

4 PC-BA Ltd. 13,336,000 Decision of the Extraordinary General Shareholders' The table below provides an explanation of the reasons why the principle is not observed fully or not observed as well as planned measures and timelines for Meeting of PC-BA Ltd. dated June 13, 2016 (Minutes compliance with the principles where applicable. dated June 14, 2016 No. 2)

No. Status of of the compliance with Explanations concerning failure to meet the Principles of corporate Criteria for assessment of compliance with a corporate Code’s a corporate criteria for assessment of compliance with governance governance principle clause governance a corporate governance principle principle 1.1 The Company should treat all shareholders equally and fairly when they exercise their right to participate in the management of the Company. 1.1.2 The procedure for notifying 1. The notification of the General Shareholders’ ☐ observed Not observed with regard to paragraphs of a General Shareholders’ Meeting is posted (published) on the Internet ☑ partially 1 and 2. Annex No. 7 Meeting and providing website at least thirty days before the date of the observed Given the peculiarities of the structure materials for the meeting meeting. of the authorized capital of the Company ☐ not observed enables the shareholders to 2. Notification of the meeting states where it is to be (100% of the voting shares belong to the REPORT on Compliance with the Principles and Recommendations of the Corporate Governance Code prepare for it properly. held and the documents needed in order to enter Russian Federation), the said rules are the premises. not applied by virtue of law: at a time The Board of Directors of Transneft confirms that the given data contains full and reliable information for 2016 on the Company’s compliance with the 3. Shareholders were given access to the information when all voting shares of the Company principles of corporate governance of the Corporate Governance Code, approved by the Board of Directors of the Bank of Russia on March 21, 2014. on persons who had proposed agenda items and belong to one shareholder, decisions Principles of corporate governance of the Corporate Governance Code under the numbers 1.1.1, 1.1.4, 1.2.1, 1.2.2, 1.2.3, 1.2.4, 1.3.1, 1.3.2, 1.4, 2.1.2, 2.1.4, nominated candidates to the Board of Directors on issues within the competence of 2.1.5, 2.1.6, 2.2.1, 2.4.1, 2.4.3, 2.5.2, 2.6.2, 2.7.1, 2.7.2, 2.7.4, 2.8.4, 2.8.5, 2.8.6, 4.1.1, 4.1.2, 4.1.3, 4.2.3, 4.3.1, 4.3.3, 5.1.3, 5.2.1, 5.2.2, 6.2.2, 6.2.3, 6.3.2, and the Company’s Revision Commission. the General Shareholders’ Meeting are 7.1.1, 7.1.3, 7.2.1 are fully observed. made by the shareholder (the Russian General observations on the clauses of the Corporate Governance Code (hereinafter – the Code) that are not observed or partially observed. Federation represented by the Federal Agency for State Property Management) on a unilateral basis and executed in Provision of the Code to which the Information on clauses 1.1.2, 1.1.3, 1.1.5, 1.1.6, 2.3.2, concerning the General Shareholders’ Meeting. writing. explanation refers See explanations in the preamble. 1.1.3 During the preparation for 1. During the reporting period, shareholders were ☐ observed Not observed with regard to paragraphs Description of circumstances of Transneft has unique conditions, which is the reason why its procedures for compliance with the Code are different the General Shareholders’ given an opportunity to ask members of executive ☑ partially 1 and 3. operation and reasons for non- from those of other public companies. In particular, all voting shares (100%) belong to one shareholder – the Meeting and the meeting bodies and of the Company’s Board of Directors observed Given the peculiarities of the structure compliance with the clauses of the Russian Federation. In this regard, the recommendations of the Code related to providing equal opportunities itself, the shareholders had questions before and during the Annual General of the authorized capital of the Company Code and informing shareholders, when they exercise their rights related to voting procedures in the Company, are an opportunity to receive Shareholders’ Meeting. ☐ not observed (100% of the voting shares belong to the not applied. In addition, it is not necessary to publish materials for General Shareholders' Meetings, since the information on the meeting 2. The position of the Board of Directors (including Russian Federation), the said rules are interaction that takes place during such meetings is strictly bilateral: between the Company and one shareholder. and related materials easily minority reports included in the minutes) on not currently applied by virtue of law. The timing of such meetings and the procedure for the exercise of shareholder rights are established directly by and in a timely manner, as each agenda item of the General Shareholders’ The Company constantly interacts with the decision of the shareholder in accordance with the legislation of the Russian Federation. well as to ask the Company’s Meetings, held in the reporting period, was the major shareholder and ensures that executive bodies and members included in the materials for the General it has access to information. Description of measures aimed at Additional measures aimed at reducing emerging risks are not required, since there are no risks of inequality of of the Company’s Board of Shareholders’ Meeting. See explanations in the preamble. reducing emerging risks shareholders' rights. Directors questions and 3. The Company provided authorized shareholders with communicate with each other. access to the list of persons eligible for participation in the General Shareholders’ Meeting, starting Intentions to comply with clauses of In case the number of shareholders who own voting shares increases in the future or the owners of preferred with the date of its receipt by the Company, in all the Code in the future shares receive the voting right, the Company intends to observe all applicable clauses of the Code. instances when General Shareholders’ Meetings were held during the reporting period

1.1.5 All shareholders could freely 1. An internal document (internal policy) of the ☐ observed Given the peculiarities of the structure exercise their right to vote in Company contains provisions whereby each of the authorized capital of the Company Provision of the Code to which the Information on clauses 2.1.1, 2.3.1, 2.3.3, 2.4.2, 2.4.4, 2.5.1, 2.7.3, concerning the Board of Directors. ☐ partially the way that was the easiest participant of the General Shareholders’ Meeting (100% of the voting shares belong to the explanation refers observed and most convenient for them. may request a copy of the ballot filled in by him/ Russian Federation), the said provisions Description of circumstances of Due to the fact that all voting shares (100%) belong to one shareholder – the Russian Federation, the Company her and certified by the Company’s counting ☑ not observed are not currently applied by virtue of law. operation and reasons for non- had no need to implement a number of corporate governance procedures, however, after the Code was commission before the end of the respective See explanations in the preamble. compliance with the clauses of the recommended for use by Letter of the Bank of Russia No. 06-52/2463 dated April 10, 2014, the Company has meeting. Code been working to bring the corporate governance practice in line with the recommendations of the Code.

Description of measures aimed at Individual measures aimed at reducing the risks related to the applied clauses are presented in the table of reducing emerging risks compliance with the Code individually for each clause.

Intentions to comply with clauses of The Action Plan (the "road map") for implementation of the Corporate Governance Code was approved by the the Code in the future Board of Directors of Transneft (Minutes No. 23 dated September 18, 2015). However there are no established plans for a number of clauses applied. Decisions on these clauses depend on the shareholder owning 100% of the voting shares – the Russian Federation.

160 Transneft Annual report 2016 161 No. Status of No. Status of of the compliance with Explanations concerning failure to meet the of the compliance with Explanations concerning failure to meet the Principles of corporate Criteria for assessment of compliance with a corporate Principles of corporate Criteria for assessment of compliance with a corporate Code’s a corporate criteria for assessment of compliance with Code’s a corporate criteria for assessment of compliance with governance governance principle governance governance principle clause governance a corporate governance principle clause governance a corporate governance principle principle principle

1.1.6 The procedure for holding the 1. In the reporting period, when conducting the ☐ observed Given the peculiarities of the structure 2.3 The Board of Directors is an effective and professional governing body of the ompany,C able to make objective independent judgments General Shareholders’ Meeting General Shareholders’ Meeting in the form of ☐ partially of the authorized capital of the Company and make decisions in the interests of the Company and its shareholders. established by the Company a joint presence of shareholders, a sufficient observed (100% of the voting shares belong to the provides everyone present with amount of time was provided to make reports on Russian Federation), the said rules are 2.3.1 Only persons having an 1. The Company’s procedure for performance ☐ observed Not observed with regard to paragraph 1. ☑ not observed equal opportunity to express agenda items and to discuss the issues. not currently applied by virtue of law. impeccable business and assessment of the Board of Directors also includes ☑ partially Given the peculiarities of the structure their opinion and ask questions 2. Candidates to the governing and supervisory See explanations in the preamble. personal reputation and the evaluation of the professional qualifications of its observed of the authorized capital of the Company on matters of their concern. bodies of the Company were available for knowledge, skills and experience members. (100% of the voting shares belong to the ☐ not observed answering questions of shareholders at the required for making decisions 2. In the reporting period, the Board of Directors (or Russian Federation), the composition of meeting at which their nominees were put to vote. within the competence of the its Nominations Committee) assessed candidates the Board of Directors of the Company is 3. While making decisions related to the preparation Board of Directors and for to the Board of Directors in terms of experience, determined by the sole shareholder who and holding of General Shareholders’ Meetings, efficient performance of its knowledge, business reputation, lack of conflict of owns the voting shares. the Board of Directors addressed the issue of functions are elected to the interest, etc. See explanations in the preamble. using telecommunications to provide shareholders Board of Directors. with remote access to participate in General Meetings in the reporting period. 2.3.2 Members of the Board of 1. In all cases when the agenda of a General ☐ observed Given the peculiarities of the structure Directors are elected through Shareholders’ Meeting held in the reporting ☑ partially of the authorized capital of the Company a transparent procedure period included election of the Board of Directors, observed (100% of the voting shares belong to the that enables shareholders to the Company provided its shareholders with Russian Federation), the composition of 2.1 The Board of Directors is responsible for the strategic management of the Company, it establishes the main principles and approaches to creating the risk obtain information about the biographical details of all candidates to the ☐ not observed the Board of Directors of the Company is management and internal control system, supervises the work of the Company’s executive bodies, and performs other key functions. candidates, sufficient to form Board of Directors, results of the assessment determined by the sole shareholder who 2.1.1 The Board of Directors is 1. The Board of Directors has powers stipulated in ☐ observed Not observed with regard to appointment an opinion about their personal of such candidates carried out by the Board of owns the voting shares. responsible for making the Articles of Association regarding appointing ☑ partially of the President of the Company. and professional qualities. Directors (or its Nomination Committee), as well See explanations in the preamble. decisions related to the and relieving members of executive bodies of observed In accordance with the Articles of as information on whether the candidate met appointment and dismissal of their posts, as well as determining the terms and Association of the Company, the Board the criteria of independence in accordance with members of executive bodies, conditions of agreements in relation to them. ☐ not observed of Directors is responsible for forming Recommendations No. 102-107 of the Code and including due to improper 2. The Board of Directors considered the report(s) the Management Board (the President of the written consent of the candidates to election to performance of their functions. of the Sole Executive Body and members of the the Company is appointed by the General the Board of Directors. The Board of Directors also Collective Executive Body on implementation of Shareholders’ Meeting). ensures that the Company’s the Company’s strategy. The Board of Directors considers reports 2.3.3 The membership of the Board 1. As part of performance assessment of the ☐ observed As part of performance assessment of executive bodies act in of the executive bodies including reports of Directors is balanced, Board of Directors in the reporting period, the ☑ partially the Board of Directors of the Company, accordance with the approved on implementation of the Strategy. including in terms of its Board of Directors analyzed its needs in terms observed the above mentioned needs were members’ qualifications, of professional qualifications, experience and analyzed by the HR and Remuneration development strategy and See explanations in the preamble. ☐ not observed the key business areas of the experience, knowledge and business skills. Committee of the Board of Directors. Company. business skills, and enjoys the See explanations in the preamble. confidence of shareholders.

2.3.4 The number of members of the 1. As part of performance assessment of the Board ☐ observed In the reporting period, the Board of Company’s Board of Directors of Directors in the reporting period, the Board of Directors did not consider whether the 2.1.3 The Board of Directors 1. The Board of Directors determined principles and ☐ observed Not observed with regard to internal ☐ partially allows it to organize its activity Directors considered whether the number of its number of its members met the needs determines the principles approaches to creating the risk management and control. observed ☑ partially in the most efficient way, which members met the needs of the Company and the of the Company and the interests of the and approaches to creating internal control system in the Company. The Board of Directors approved the observed includes forming Committees interests of the shareholders. ☑ not observed shareholders. The consideration of the the risk management and 2. The Board of Directors carried out an assessment Regulation on the Risk Management under the Board of Directors, issue is planned for 2017. internal control system in the of the Risk Management and Internal Control ☐ not observed System (resolution dated November 16, and gives the Company’s According to the new version of the Company. System of the Company in the reporting period. 2015, Minutes No. 28), that stipulates substantial minority Articles of Association of the Company, general principles of formation of the shareholders an opportunity to approved by resolution of the sole Risk Management System, its goals and elect to the Board of Directors shareholder, owner of the voting shares, objectives, general approaches to the a candidate for whom they dated June 30, 2016, the number of organization, distribution of functions and vote. members of the Board of Directors responsibilities between the actors of the increased from 7 to 8 persons. Risk Management System and the nature See explanations in the preamble. of their interaction. In summing up the results of 2016, the 2.4 The Board of Directors includes a sufficient number of independent directors. Board of Directors of Transneft approved the Annual Report for 2016 on Risk 2.4.2 The Company assesses 1. In the reporting period, the Board of Directors ☐ observed The HR and Remuneration Committee Management in Transneft, which included whether the candidates to (or the Nominations Committee of the Board of ☑ partially of the Company annually assesses the a performance evaluation of the Risk the Board of Directors meet Directors) formed an opinion on the independence observed independence of the candidates to the Management System. the independence criteria and of each candidate to the Board of Directors and Board of Directors. Additionally, the ☐ not observed In the effective Regulation on the Internal regularly analyzes whether provided the shareholders with the relevant report. Company consults with the Exchange Control Procedures of the Company the independent members 2. In the reporting period, the Board of Directors and the Federal Agency for State (approved by the Board of Directors of the Board of Directors (or the Nominations Committee of the Board of Property Management regarding the of Transneft on September 10, 2009, comply with the independence Directors) considered the independence of the independence of the members of the Minutes No. 12) this issue has not been criteria. When carrying out the current members of the Board of Directors who Board of Directors. fully reflected. The Provision will be assessment, the content should are specified in the Annual Report as independent In the reporting period, the Board of updated during 2017. prevail over the form. directors at least once. Directors considered whether M. I. See explanations in the preamble. 3. The Company developed procedures that Grishankov was an independent member determine what actions are required from a of the Board of Directors. 2.1.7 The Board of Directors controls 1. In the reporting period the Board of Directors ☐ observed The Board of Directors did not consider member of the Board of Directors if he/she ceases The implementation of paragraph 3 is the corporate governance considered the issue of corporate governance ☐ partially the issue of corporate governance to be an independent director, including obligations planned through incorporation in the practice in the Company and practice in the Company. observed practice in 2016. The consideration of to inform the Board of Directors of this fact in a internal documents of the Company in plays a key role in significant the issue is planned for 2017. timely manner. 2017. corporate events of the ☑ not observed See explanations in the preamble. See explanations in the preamble. Company. 2.4.4 Independent directors play a 1. Independent directors (who have no conflict of ☐ observed Independent directors assess significant key role in preventing internal interest) carry out a preliminary assessment of ☐ partially corporate actions related to a potential 2.2 The Board of Directors is accountable to the Company’s shareholders. conflicts in the Company and significant corporate actions related to a potential observed conflict of interest as a part of analyzing in carrying out significant conflict of interest and submit the results of this materials for the members of the Board 2.2.2 ☐ observed The Chairman of the Board 1. The Company has a transparent procedure Applied in practice. The implementation corporate actions. assessment to the Board of Directors. ☑ not observed of Directors. of Directors is available for enabling shareholders to send their questions and ☑ partially of this principle is planned through The independent directors did not communication with the opinions on them to the Chairman of the Board of observed incorporation in the internal documents submit to the Board of Directors specific Company’s shareholders. Directors. of the Company in 2017. ☐ not observed results of such evaluation. See explanations in the preamble. See explanations in the preamble.

162 Transneft Annual report 2016 163 No. Status of No. Status of of the compliance with Explanations concerning failure to meet the of the compliance with Explanations concerning failure to meet the Principles of corporate Criteria for assessment of compliance with a corporate Principles of corporate Criteria for assessment of compliance with a corporate Code’s a corporate criteria for assessment of compliance with Code’s a corporate criteria for assessment of compliance with governance governance principle governance governance principle clause governance a corporate governance principle clause governance a corporate governance principle principle principle

2.5 The Chairman of the Board of Directors ensures that functions assigned to the Board of Directors are performed as efficiently as 2.8 The Board of Directors establishes committees for preliminary consideration of the most important issues related to the Company’s possible. business.

2.5.1 An independent director 1. The Chairman of the Board of Directors is an ☐ observed Not observed with regard to paragraph 1. 2.8.1 An Audit Committee consisting 1. The Board of Directors formed the Audit ☐ observed Not observed with regard to paragraph 2 of independent directors was Committee consisting of independent directors in the reporting period. was elected Chairman of the independent director or a senior independent ☑ partially The Chairman of the Board of Directors is ☑ partially established for preliminary only. The new version of the Regulation Board of Directors, or a Senior director has been elected from among observed a not an independent director. observed Independent Director was independent directors. See explanations in the preamble. consideration of issues related 2. The Company’s internal documents set out the on the Audit Committee of the Board ☐ not observed ☐ not observed appointed from among the 2. The role, rights and duties of the Chairman of the to monitoring the Company’s objectives of the Audit Committee, including those of Directors, that determines the elected independent directors Board of Directors (and, if applicable, of the Senior financial and business specified in Recommendation No. 172 of the Code. goals of the Committee based on to coordinate the work of Independent Director) are properly specified in operations. 3. At least one member of the Audit Committee, Recommendation No. 172 of the Code, the independent directors internal documents of the Company. being an independent director, has experience and was approved by the Board of Directors and communicate with the knowledge in preparation, analysis, evaluation and of the Company on January 19, 2017 Chairman of the Board of audit of accounting (financial) statements. (Minutes No. 1). Directors. 4. Meetings of the Audit Committee were held at least See explanations in the preamble. once a quarter in the reporting period.

2.5.3 The Chairman of the Board of 1. The duty of the Chairman of the Board of Directors ☐ observed Applied in practice. The implementation Directors takes all necessary to take measures that ensure timely provision of ☑ partially of the corresponding principle is planned 2.8.2 A Remunerations Committee 1. The Board of Directors formed a Remunerations ☐ observed Not observed with regard to paragraphs measures that ensure timely information, required to make decisions on the observed through incorporation in the internal provision of information, agenda items of the meeting, to members of the documents of the Company in 2017. consisting of independent Committee consisting of independent directors ☑ partially 1 and 3 in the reporting period. required to make decisions on Board of Directors is stipulated in the Company’s ☐ not observed See explanations in the preamble. directors and chaired by an only. observed The Company created an HR and independent director, who is 2. The Chairman of the Remunerations Committee is Remuneration Committee, and only the agenda items, to members internal documents. ☐ not observed of the Board of Directors. not the Chairman of the Board an independent director who is not the Chairman one of its three members is not an of Directors, was created for of the Board of Directors. independent director. preliminary consideration 3. The Company’s internal documents set out the The new version of the Regulation on the of any issues related to objectives of the Remunerations Committee, HR and Remuneration Committee, that 2.6 Members of the Board of Directors act reasonably and in good faith in the interests of the Company and its shareholders on the basis of establishment of an efficient including those specified in Recommendation No. determines the goals of the Committee sufficient information, exercising due diligence and care. and transparent remuneration 180 of the Code. based on Recommendation No. 180 of 2.6.1 Members of the Board of 1. The Company’s internal documents stipulate ☐ observed Applied in practice. The implementation practice. the Code, was approved by the Board of Directors make decisions that a member of the Board of Directors should of the corresponding principles is Directors on January 19, 2017 ☑ partially (Minutes No. 1). taking into account all available notify the Board of Directors if there is a conflict observed planned through incorporation in the information, in the absence of interest in relation to any agenda item of the internal documents of the Company in See explanations in the preamble. of a conflict of interest, and meeting of the Board of Directors or a Committee ☐ not observed 2017. given equal treatment of of the Board of Directors prior to the discussion of See explanations in the preamble. 2.8.3 A Nomination (Appointment, 1. The Board of Directors established the Nomination ☐ observed Not observed with regard to paragraph 2 shareholders of the Company, that agenda item. HR) Committee consisting Committee (or another committee performs its ☑ partially in the reporting period. within a standard business risk. 2. The Company’s internal documents stipulate that mostly of independent duties specified in Recommendation No. 186 of the observed The new version of the Regulation on the a member of the Board of Directors should refrain directors was established for Code) consisting mostly of Independent Directors. HR and Remuneration Committee, that ☐ not observed from voting on any issue in relation to which he/ preliminary consideration of 2. The Company’s internal documents set out the determines the goals of the Committee she has a conflict of interest. any issues related to workforce objectives of the Nomination Committee (or a based on Recommendation No. 186 of 3. The Company established a procedure which planning (succession planning), respective committee with shared functions), the Code, was approved by the Board of allows the Board of Directors to obtain professional composition and including those specified in Recommendation No. Directors of the Company on January 19, professional advice on issues within its performance of the Board of 186 of the Code. 2017 (Minutes No. 1). competence at the expense of the Company. Directors. See explanations in the preamble.

2.6.3 ☐ observed Members of the Board of 1. Individual attendance of meetings of the Board Applied in practice. The implementation 2.9 The Board of Directors arranges a performance assessment of the Board of Directors, its Committees and members. Directors have sufficient time and the Committees, as well as time devoted to ☑ partially of the corresponding principles is to perform their duties. preparation for the meetings, were taken into observed planned through incorporation in the account when performing the assessment of the internal documents of the Company in 2.9.1 Performance assessment 1. Self-assessment or an external assessment of ☐ observed The HR and Remunerations Committee ☐ not observed Board of Directors in the reporting period. 2017. of the Board of Directors performance of the Board of Directors carried ☑ partially examined the results of an objective 2. In accordance with internal documents of the See explanations in the preamble. is aimed at evaluating the out in the reporting period included performance observed evaluation of all members of the Board efficiency of the Board of assessment of its Committees, individual members of Directors of the Company, carried Company, members of the Board of Directors ☐ not observed should inform the Board of Directors of their Directors, its Committees and the Board of Directors as a whole. out on the basis of the Methodology for intention to join governing bodies of other and members, determining 2. Results of self-assessment or an external Individual Assessment of Members of organizations (apart from organizations controlled whether their work meets assessment of the Board of Directors conducted in the Board of Directors of Joint Stock by or affiliated with the Company) and of the fact of the Company’s development the reporting period were considered at a face-to- Companies with State Participation. their appointment. needs, intensifying the work face meeting of the Board of Directors. See explanations in the preamble. of the Board of Directors 2.6.4 All members of the Board of 1. In accordance with internal documents of the ☐ observed Applied in practice. The implementation and identifying opportunities Directors have equal access to Company, members of the Board of Directors have ☑ partially of the corresponding principles is for improvement of its documents and information of the right to access documents and make inquiries observed planned through incorporation in the performance. the Company. Newly elected concerning the Company and its controlled entities, internal documents of the Company in members of the Board of and the Company’s executive bodies are obliged to ☐ not observed 2017. 2.9.2 ☐ observed Directors are provided with provide the said information and documents. See explanations in the preamble. Assessment of performance 1. In the last three reporting periods an external It is planned to engage an external sufficient information on the 2. The Company has a formalized orientation of the Board of Directors, its organization (consultant) was engaged to perform ☐ partially organization to perform an independent Company and the work of program for newly elected members of the Board Committees and members an independent assessment of performance of the observed assessment of performance of the Board is carried out on a regular Board of Directors at least once. of Directors in 2017. the Board of Directors in the of Directors. ☑ not observed shortest time possible. basis at least once a year. See explanations in the preamble. An external organization (consultant) is engaged to 2.7 Meetings of the Board of Directors, preparation for them and participation of members of the Board of Directors in the meetings ensure perform an independent efficient performance of the Board of Directors. assessment of performance of 2.7.3 The form of the meeting of 1. The Articles of Association or other internal ☐ observed The Articles of Association of the the Board of Directors at least the Board of Directors is document of the Company provides that the most ☑ partially Company determines the list of issues once every three years. determined taking into account important issues (according to the list given in observed that should be addressed predominantly the importance of agenda Recommendation No. 168 of the Code) should be at face-to-face meetings of the Board of items. The most important addressed at face-to-face meetings of the Board. ☐ not observed Directors. issues are addressed at face- See explanations in the preamble. to-face meetings.

164 Transneft Annual report 2016 165 No. Status of No. Status of of the compliance with Explanations concerning failure to meet the of the compliance with Explanations concerning failure to meet the Principles of corporate Criteria for assessment of compliance with a corporate Principles of corporate Criteria for assessment of compliance with a corporate Code’s a corporate criteria for assessment of compliance with Code’s a corporate criteria for assessment of compliance with governance governance principle governance governance principle clause governance a corporate governance principle clause governance a corporate governance principle principle principle

3.1 The Company’s Corporate Secretary facilitates efficient ongoing communication with shareholders, coordinates the Company’s efforts 5.1 The Company has created an effective risk management and internal control ystems aimed at providing reasonable assurance that the aimed at protecting the shareholders’ rights and interests and supports efficient work of the Board of Directors. Company will achieve its goals.

3.1.1 The Corporate Secretary has 1. The Company has adopted and disclosed an ☐ observed Not observed in the reporting period. 5.1.1 The Board of Directors of the 1. Functions of various governing bodies and ☐ observed Not observed with regard to internal knowledge, expertise and internal document: the Regulation on the ☐ partially The Board of Directors approved the Company has established the divisions of the Company in the risk management ☑ partially control. qualification sufficient for Corporate Secretary. observed Regulation on the Corporate Governance principles and approaches and internal control system are clearly defined in observed The Board of Directors approved the performing his or her duties, 2. The biography of the Corporate Secretary is Department (a special division that to organization of a risk internal documents/a corresponding policy of the Regulation on the Risk Management excellent reputation and enjoys published on the Company’s website and in the ☑ not observed carries out the functions of the Corporate management and internal Company approved by the Board of Directors. ☐ not observed System (resolution dated November 16, shareholders’ confidence. Annual Report; it is as detailed as that of the Secretary of the Company) on January control system in the Company. 2015, Minutes No. 28) that stipulates the members of the Board of Directors and the 19, 2017 (Minutes general principles of formation of the executive management of the Company. No. 1). Risk Management System, its goals and See explanations in the preamble. objectives, general approaches to the organization, distribution of functions and 3.1.2 The Corporate Secretary is 1. The Board of Directors approves the appointment ☐ observed Not observed in the reporting period. responsibilities between the actors of the fairly independent from the and dismissal of the Corporate Secretary and his ☐ partially The Board of Directors agreed on the Risk Management System and the nature Company’s executive bodies or her additional remuneration. observed head of the special division that carries of their interaction. and has necessary powers and out the functions of the Corporate The Board of Directors has not established resources to perform his or her ☑ not observed Secretary of the Company on January the principles and approaches to duties. 19, 2017 organization of an internal control system. (Minutes No. 1). In the effective Regulation on the Internal See explanations in the preamble. Control Procedures of the Company (approved by the Board of Directors of 4.2 The system of remuneration for the members of the Board of Directors ensures that the directors’ financial interests are aligned with Transneft on September 10, 2009, Minutes the long-term financial interests of shareholders. No. 12) this issue was not fully reflected. The Provision will be updated during 2017. 4.2.1 The Company pays fixed annual 1. Fixed annual remuneration was the only form of ☐ observed Additional remuneration is provided to See explanations in the preamble. remuneration to the members financial remuneration paid to the members of the ☑ partially the members of the Board Directors of 5.1.2 1. ☐ observed of the Board of Directors. Board of Directors for their work in the reporting observed the Company for performing additional Executive bodies of the 1. The Company’s executive bodies ensured Not observed with regard to internal The Company does not pay period. duties (membership, chairmanship in the Company ensure creation distribution of functions and powers regarding risk ☑ partially control. ☐ not observed remuneration for participating specialized Committees under the Board and support of an effective management and internal control among heads observed The Board of Directors of Transneft in individual meetings of the of Directors). system of risk management (managers) of units and divisions accountable to approved the Regulation on the Risk ☐ not observed Board or Committees under According to the Regulation on and internal control in the them. Management System (resolution dated the Board of Directors. Remuneration of Members of the Board Company. November 16, 2015, Minutes No. 28). The Company does not offer of Directors approved by the resolution of Key parameters of the Risk Management any short-term and additional the sole shareholder – the owner of the System were endorsed by the financial incentives to the voting shares – dated June 30, 2015, the Management Board of Transneft (Minutes members of the Board of amount of remuneration of members of No. 13 dated April 1, 2016), considered by Directors. the Board of Directors consists of the fixed the Audit Committee under the Board of (guaranteed) and variable (bonus) parts. Directors of Transneft and approved by the Board of Directors of Transneft (Minutes See explanations in the preamble. No. 13 dated June 29, 2016). In 2016, based on the general 4.2.2 ☐ observed Long-term ownership of the 1. If an internal document (documents), namely the The Regulation on Remuneration of requirements for organization of the Company’s shares is the Company’s policy (policies) on remuneration, ☐ partially Members of the Board of Directors Risk Management System, provided in most important factor for stipulate(s) provision of members of the Board of observed approved by the resolution of the sole the Regulation on the Risk Management aligning the financial interests Directors with shares, clear rules regarding the shareholder – the owner of the voting ☑ not observed System, the Company developed the of members of the Board of ownership of shares by members of the Board shares – dated June 30, 2015, does not Risk Management Policy (approved by Directors with the long-term of Directors, aimed at encouraging long-term stipulate provision of the Company’s resolution of the Management Board of interests of shareholders. At ownership of such shares, should be introduced shares to the members of the Board of Transneft Minutes No. 13 dated April 1, the same time, the Company and disclosed. Directors. 2016), which determines the procedure does not associate the See explanations in the preamble. for interaction of the Company’s divisions rights to sell shares with in the framework of the Risk Management achieving certain performance System. indicators, and the members To facilitate the overall coordination of the Board of Directors do of the Risk Management System of the not participate in stock option Company, the Management Board of programs. Transneft approved the Regulation on the Risk Management Council of Transneft 4.3 The system of remuneration of members of executive bodies and other key managers of the Company ensures that the remuneration is (Minutes No. 13 dated April 1, 2016) and linked to the Company’s performance and reflects their personal contribution to this performance. established the Risk Management Council, the members of which were approved 4.3.2 The Company has implemented 1. The Company implemented a long-term incentive ☐ observed Incentives for members of executive by decision of the Management Board of a long-term incentive program for members of executive bodies and bodies and other key managers of the Transneft (Minutes No. 21 dated May 12, ☐ partially 2016). program for members of other key managers that involves the use of observed Company do not provide for the use of executive bodies and other key Company’s shares (financial instruments based on Company’s shares. managers involving the use the Company’s shares). ☑ not observed See explanations in the preamble. In the effective Regulation on the Internal of Company’s shares (options 2. The long-term incentive program for members of Control Procedures of the Company or other derivative financial executive bodies and other key managers of the (approved by the Board of Directors of instruments, the underlying Company provides that the right to sell shares Transneft on September 10, 2009, Minutes asset of which constitutes the and other financial instruments used in such a No. 12), this issue was not fully reflected. The Provision will be updated during 2017. Company’s shares). program may be exercised no earlier than three See explanations in the preamble. years from the date of their provision. At the same time, the right to sell them is related to achieving certain performance indicators of the Company.

166 Transneft Annual report 2016 167 No. Status of No. Status of of the compliance with Explanations concerning failure to meet the of the compliance with Explanations concerning failure to meet the Principles of corporate Criteria for assessment of compliance with a corporate Principles of corporate Criteria for assessment of compliance with a corporate Code’s a corporate criteria for assessment of compliance with Code’s a corporate criteria for assessment of compliance with governance governance principle governance governance principle clause governance a corporate governance principle clause governance a corporate governance principle principle principle

5.1.4 The Board of Directors takes 1. In the reporting period, the Board of Directors or ☐ observed Not observed with regard to internal 7.1 Actions that have or may have a substantial impact on the authorized capital structure and financial position of the Company and, all necessary measures to the Audit Committee of the Board of Directors ☑ partially control. accordingly, on the shareholders’ position (significant corporate actions) are taken on fair conditions safeguarding the rights and ensure that the Company’s assessed the performance of the Company’s observed In summing up the results of 2016, the interests of the shareholders and other stakeholders. Risk Management and Internal Risk Management and Internal Control System. Board of Directors of Transneft approved ☐ not observed Control System is in line with Information on the key results of such evaluation the Annual Report for 2016 on the Risk 7.1.2 The Board of Directors plays a 1. 1. The Company has established a procedure, in ☐ observed In 2017, the Company plans to develop Management in Transneft, which included the principles and approaches was included in the Company’s Annual Report. key role in making decisions or accordance with which independent directors ☐ partially and approve a procedure, in accordance performance evaluation of the Risk to its organization, established recommendations with regard express their opinions on significant corporate observed with which independent directors will by the Board of Directors, and Management System. to significant corporate actions; actions prior to their approval. express their opinions on significant functions efficiently. the Board of Directors relies on ☑ not observed corporate actions prior to their approval. In the effective Regulation on the Internal the opinion of the Company’s See explanations in the preamble. Control Procedures of the Company independent directors. (approved by the Board of Directors of Transneft on September 10, 2009, Minutes No. 12) this issue was not fully reflected. 7.2 The Company ensures that significant corporate actions are taken in a waythat enables the shareholders to receive full information The Provision will be updated during 2017. on such actions in a timely manner, provides them with an opportunity to influence such actions and guarantees that their rights are See explanations in the preamble. observed and properly protected when such actions are taken.

6.1 The Company and its operations are transparent to shareholders, investors and other stakeholders. 7.2.2 The rules and procedures for 1. The Company’s internal documents establish the ☐ observed Paragraphs 1 and 3 are not observed. implementation of significant procedure for engaging an independent appraiser ☑ partially In 2017, the Company plans to approve 6.1.1 The Company has developed 1. The Board of Directors approved the Information ☐ observed Not observed with regard to paragraph 2. corporate actions are set forth to carry out a valuation of the property disposed of observed internal documents that will stipulate the and implemented an Policy of the Company developed taking into In 2016, neither the Board of Directors, in the Company’s internal or acquired as a result of a major or related-party procedure for engaging an independent ☑ partially ☐ not observed information policy ensuring account the recommendations of the Code. observed nor any of its Committees considered documents. transaction. appraiser to carry out a valuation of the effective communication 2. The Board of Directors (or one of its Committees) issues related to the Company’s 2. The Company’s internal documents establish the property for transactions. between the Company, considered the issues related to the Company’s ☐ not observed compliance with the Information Policy. It procedure for engaging an independent appraiser See explanations in the preamble. shareholders, investors and compliance with the Information Policy at least is planned to consider this issue in 2017. to assess the value of purchase and buyback of the other stakeholders. once in the reporting period. See explanations in the preamble. company’s shares. 3. The Company’s internal documents provide for an 6.1.2 The Company discloses 1. The Company discloses information on its corporate ☐ observed Paragraph 3 is not observed. expanded list of grounds on which members of the information on the system governance system and general principles of ☑ partially It is planned to publish such a Company’s Board of Directors and other persons and practice of corporate corporate governance used by the Company, observed memorandum in the event of its stipulated by applicable laws can be recognized as governance, including detailed including on the Company’s website. development in 2017. related parties in the Company’s transactions. ☐ not observed information on compliance 2. The Company discloses information on the See explanations in the preamble. with the principles and composition of executive bodies and the Board of recommendations of the Directors, independence of its members and their Code. membership in the Committees under the Board of Directors (in accordance with definitions given in the Code). 3. In the case there is an entity controlling the Company, the Company publishes a memorandum of the entity detailing its plans in relation to corporate governance in the Company.

6.2 The Company discloses comprehensive, up-to-date and accurate information on the Company in a timely manner to ensure that the Company’s shareholders and investors are able to make informed decisions.

6.2.1 The Company discloses 1. The Company’s Information Policy stipulates ☐ observed Paragraph 1 is not observed. information in accordance with approaches to and criteria for identifying ☑ partially In 2017, the Company plans to approve the principles of regularity, information which may have a significant impact observed a new version of the Information Policy consistency and promptness, on the value of the Company and its securities, as that will stipulate approaches to and as well as availability, accuracy, well as procedures ensuring timely disclosure of ☐ not observed criteria for identifying information which comprehensiveness and such information. may have a significant impact on the comparability of disclosed 2. If the Company’s securities are traded on foreign value of the Company and its securities, data. regulated markets, disclosure of material as well as procedures ensuring timely information in the Russian Federation and in such disclosure of such information. markets is simultaneous and equivalent during the See explanations in the preamble. reporting year. 3. If foreign shareholders own a considerable number of shares in the Company, information was disclosed not only in Russian, but also in one of the prevailing foreign languages during the reporting year.

6.3 The Company provides equal and easy access to information and documents at the shareholders’ request.

6.3.1 The Company provides 1. The Company’s Information Policy stipulates that ☐ observed In 2017, the Company plans to approve information and documents shareholders must be granted easy access to ☑ partially a new version of the Information at shareholders’ requests in information, including information on legal entities observed Policy that will define the procedure of accordance with the principles controlled by the Company, at the shareholders’ providing shareholders with information, of fairness and ease. request. ☐ not observed including information on legal entities controlled by the Company, at the shareholders’ request. See explanations in the preamble.

168 Transneft Annual report 2016 169

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