HIGH ACHIEVEMENTS HIGH RESPONSIBILITY ANNUAL REPORT 2014 4 ANNUAL REPORT 2014 KEY RESULTS OF THE YEAR billion 179% +10.8% 85.6% 106.1 roubles RESERVE INCREASE IN SHARE OF EURO 5 OPERATING REPLACEMENT RATIO OIL PRODUCTION GASOLINE IN THE TOTAL CASH FLOW OUTPUT KEY EVENTS OF THE YEAR ©Photobank Lori. P. 46 P. 58 P. 65 P. 73 P. 84 Creation of a new Completion of large-scale Expansion of the Group’s Completion of Change of controlling production cluster in refinery upgrade projects own network of filling reorganization shareholder Western Siberia: acquisi- stations tion of LLC Burneftegaz POSITION IN THE INDUSTRY 3.4% 96.6% 7.5% 92.5%12% 88% 6% 94% SHARE IN OIL SHARE IN OIL SHARE IN GASOLINE SHARE IN SALES OF PRODUCTION IN RUSSIA REFINING IN RUSSIA SALES IN RUSSIA DIESEL FUEL IN RUSSIA We rank sixth in terms of oil We rank fourth among Russian In 2014 we accounted for about In 2014 we accounted for about production among Russian oil companies in terms of crude oil 12% of domestic sales of 6% of domestic sales of diesel companies as Bashneft’s refining; in 2014 Bashneft gasoline. fuel. production totalled 17.8 million processed 21.7 million tonnes of tonnes of oil as of the end of 2014. crude oil. HIGH ACHIEVEMENTS HIGH RESPONSIBILITY 5 BUSINESS MODEL AND GEOGRAPHICAL FOOTPRINT Strategic regions of exploration LICENSING and production Regional sales offices THE STRUCTURE OF THE GROUP’S BUSINESS ENABLES IT TO CONTROL PROCESSES ALONG THE ENTIRE VALUE CHAIN, FROM GAINING ACCESS TO MINERAL RESOURCES TO SELLING PETROLEUM PRODUCTS IN RUSSIA AND ABROAD. GEOLOGICAL EXPLORATION GEOLOGICAL Purchased crude oil, Total liquid hydrocarbons Crude oil production gas condensate and NGLs UPSTREAM Oil refining REFINING Total petroleum Purchased petroleum products products and petrochemicals Export of petroleum products Domestic sales of petroleum Crude oil sales and petrochemicals products and petrochemicals MARKETING Crude oil Domestic sales of Countries outside exports crude oil Customs the Customs Retail sales Wholesale Union Union Countries Customs outside the Union Customs Union REFINING DEPTH AT RUSSIAN OIL COMPANIES IN 2014 100% Bashneft 85.9% 84.8% Other oil 77.5% 77.1% companies 6% 94% 80% 72.3% 68.4% 60% 56.9% SHARE IN EXPORTS OF PETROLEUM PRODUCTS 40% AND PETROCHEMICALS In 2014 we exported 9.5 million tonnes 20% Bashneft’s refining of petroleum products. Thus, our share depth is one of the in the total exports of petroleum 0% highest in the industry products and petrochemicals stood at Gasprom Neft Bashneft TANECO LUKOIL Russia (average) Rosneft Surgutneftegaz at 84.8%. about 6%. 6 ANNUAL REPORT 2014 ACHIEVEMENTS AND A RESPONSIBLE APPROACH TO BUSINESS IN THE UPSTREAM IN REFINING AND MARKETING IN TERMS OF FINANCIAL SEGMENT OF PETROLEUM PRODUCTS RESULTS AND SHAREHOLDER RETURN Sustainably high growth rate Technologically advanced refining Best-in-class shareholder returns of oil production and high-quality business and efficient marketing due to strong financial performance resource base channels / Sustainable annual production growth / A high-technology refining complex / Consistently strong financial results and an ongoing upgrade programme / Successful application of cutting-edge / Highest returns in the oil and gas technologies, including at brownfields / It is now feasible to ensure that 100% industry of engine fuel produced by the Group / Good track record in implementation / Dividend policy attractive to meets the Euro 5 standard in accor- of complex projects on schedule and shareholders dance with the technical regulations within budget / Well-balanced sales structure, devel- / Systematic approach to building the opment of a retail network and greater resource base; a high reserve replace- HOW WE ARE ASSESSED efficiency of small-scale wholesale ment ratio due to implementation of fuel supply to consumers The Group ranks in the top ten global TSR a large-scale geological exploration performers and tops the industry ranking programme of global oil companies with the highest total shareholder return compiled by The / Development of expertise in overseas Boston Consulting Group. project management 800 17.8 18.9 19.6 19.9 20 400 20 637.3 15 532.5 563.3 15.4 16.1 600 15 15 8.83 8.93 10 360.5 8.55 400 10 350 10 321.5 5 200 5 5 106.1 71.1 82.7 307.9 30.8 30.4 48.3 0 300 0 0 0 2012 2013 2014 2012 2013 2014 2012* 2013* 2014 Oil production, million tonnes Refinery throughput, million tonnes Revenue, billion roubles Average daily oil production, Nelson Index, points thousand barrels per day Net cash from operating activities, billion roubles Capital expenditures, billion roubles HOW WE ARE ASSESSED 179 179.2% 200 200 Bashneft has been included in the list of 150 134 the 50 most successful private-sector 123 companies in the BRICS countries and 100 other emerging markets. Bashneft has 40.7% 50 10.2% 100 reinvigorated exploration and produc- tion in legacy regions and launched new 0 projects, boosting output over the past 2012*2013* 2014 five years. It has also modernized and Dividend payout ratio under IFRS (for the years 0 improved the efficiency of its refineries. when payment of accrued dividends was com- 2012 2013 2014 pleted) 2014 BCG Local Dynamos, a report pre- Reserve replacement ratio, % pared by the Boston Consulting Group (BCG). * Certain comparative information has been reclas- sified to ensure its consistency with the method of presentation used in financial statements in 2014. HIGH ACHIEVEMENTS HIGH RESPONSIBILITY 7 THE GROUP’S STRATEGIC PRIORITIES IN CORPORATE GOVERNANCE IN THE UPSTREAM SEGMENT: Consistency and a strong track record in implementing best corporate governance / to boost oil production at brownfields in the Republic of practices Bashkortostan; / to implement the geological exploration programme in all of / Professional and experienced management our core operating regions; team able to deliver strong operating and / financial results to develop new oil-producing regions in Timan-Pechora and Western Siberia; / High level of corporate governance in accor- / dance with international best practices to assess the feasibility of development of gas projects and unconventional hydrocarbon resources. / Transparent corporate and ownership structures IN REFINING: / Highly manageable and efficient business due to a streamlined business model / to further upgrade the refining complex; / to increase refining depth and the share of light products and to cease to produce VGO and fuel oil; IN TERMS OF ENVIRONMENTAL / to improve the energy efficiency of refineries. AND SOCIAL RESPONSIBILITY IN MARKETING OF PETROLEUM PRODUCTS: Commitment to high standards in health, safety and environment (HSE) / to boost sales of high-margin products; / to expand direct access to consumers; / Active involvement of the Group’s top man- agement in ensuring a leading HSE perfor- / to develop sales of niche products: jet fuel, bunker fuel, mance among Russian oil companies bitumen and lubricants. / The only Russian company to have joined IPIECA; a member of OGP IN CORPORATE GOVERNANCE: / An integrated HSE Management System has been established and has undergone / to further improve the corporate governance system and certification adopt best practices in corporate governance; / / Implementation of environmental projects to safeguard the rights and legitimate interests of involves introducing state-of-the-art technol- shareholders and investors unconditionally; ogies developed by global leaders / to make the Group still more attractive to investors and further improve the transparency of its business. IN THE SPHERE OF HEALTH, HOW WE ARE ASSESSED SAFETY AND ENVIRONMENT: International experts from the BRITISH STAN- / to become the top HSE performer among Russian oil DARDS INSTITUTION (BSI) have confirmed the companies; effectiveness of Bashneft’s health, safety and environment management system. / to meet international standards. BSI has concluded that the Group’s HSE sys- tem conforms with the international ISO 14001 and OHSAS 18001 standards. 8 ANNUAL REPORT 2014 CONTENTS REPORT OF THE BOARD OF DIRECTORS: COPROPATE GOVERNANCE 93 ‘HIGH ACHIEVEMENTS. HIGH RESPONSIBILITY’ 3 Fundamental principles of the Group’s corporate SOME DEFINITIONS AND FORWARD-LOOKING governance practice 93 STATEMENTS 9 Structure of Bashneft’s governing ADDRESS BY THE CHAIRMAN OF THE and supervisory bodies 95 BOARD OF DIRECTORS AND THE PRESIDENT OF JSOC BASHNEFT 10 Corporate governance quality audit and self-assessment 97 ABOUT THE GROUP 13 Exercise of shareholders’ rights 98 Our history 13 General Meeting of Shareholders of JSOC Bashneft 98 Highlights of the year 16 Board of Directors of JSOC Bashneft 100 Business model and geographical footprint 18 Committees of the Board of Directors of Position in the industry JSOC Bashneft 116 and macroeconomic factors 23 Corporate Secretary of JSOC Bashneft 121 STRATEGY AND OPERATING RESULTS 29 President and Management Board Strategy and KPIs 29 of JSOC Bashneft 131 Operating results 37 Settlement of potential conflicts of interest of members of JSOC Bashneft’s governing bodies 131 Financial results 68 Risk management and internal control 133 Improvement of the Group’s structure 73 Internal Audit 136 Environmental and social responsibility 77 External audit 138 INVESTOR & SHAREHOLDER INFORMATION 83 Significant corporate events 139 Share capital 83 New Corporate Governance Code Equity market and capitalization 85 of JSOC Bashneft 140 Dividend policy and profit distribution 88 Efforts to improve corporate governance 141 Information disclosure