Annual Report 2019 Neft at a glance

Online TABLE CONTENTS OF Annual Report 2019

4 Gazprom Neft at a glance 6 Geographical footprint 8 Gazprom Neft investment case 10 2019 highlights 12 Letter from the Chairman of the Board of Directors

About this Report This Report by the Public Joint Stock Company Strategic report Gazprom Neft (Gazprom Neft PJSC, the company) for 2019 includes the results of operational activity of Gazprom Neft PJSC and its subsidiaries, collectively referred to as the Gazprom Neft Group (the Group). Gazprom Neft PJSC is the parent company of the Group and provides consolidated information on the operational and financial performance of the Group’s key assets for this Annual Report. The list of subsidiaries 16 The implementation of Strategy 2030 covered in this Report and the shares held by Gazprom Neft PJSC in their capital are disclosed 18 Letter from the Chairman in notes to the consolidated IFRS financial of the Management Board statements for 2019. 20 Market overview This Report is prepared based on analysis of operational data, consolidated IFRS financial 28 Global trends and their impact indicators and international GRI guidelines. on the Gazprom Neft strategy Information provided in the Report has been verified 30 Strategy 2030 by the Audit Committee and approved by the Board of Directors and the Annual General Meeting 34 Business model of Shareholders of the Company. 36 2019 results In calculations of shareholdings, percentages, 38 Digital transformation and total amounts, the Annual Report may contain discrepancies as a result of rounding. Data provided 42 Operational transformation in the Annual Report may differ insignificantly 46 Organisational transformation from previous disclosures, also as a result of rounding. 48 Cultural transformation The Gazprom Neft PJSC ‘s Annual Report has been provisionally approved by the Board of Directors, Minutes No. PT-0102/16 of 27.04.2020. The Gazprom Neft PJSC 2019 Annual Report has been approved by the General Meeting of Shareholders held on 11 June 2020 (Minutes 0101/01 of 15 June 2020). Performance Governance review system

52 Performance 114 Corporate governance 54 Resource base and production 162 Internal control and risk management 68 Refining and manufacturing 184 Investor and shareholder relations 78 Sales of oil, gas and petroleum products 98 Financial results

Technological Sustainable development development

104 Technological development 196 Sustainable development 106 Innovation management 198 Health, safety and environment (HSE) 111 Import substitution 200 Environmental safety 204 Employee development 208 Social policy

Appendices

213 Consolidated financial statements 331 List of major transactions and related-party as of and for the year ended 31 December transactions 2019 with independent auditor’s report 332 Excerpts from management’s discussion 290 Company history and analysis of financial condition and results 302 Structure of the Gazprom Neft Group of operations 304 Information on energy consumption 344 Glossary by Gazprom Neft 347 Disclaimer 305 Taxation in oil industry 348 Addresses and contacts 314 Report on compliance with the principles and recommendations set out in the corporate governance code HOW TO EXTRACT OIL NOWDAYS?

Denis Mikolae, oil and gas production operator ANNUAL REPORT 2019

Gazprom Neft at a glance

Gazprom Neft at a glance Geographical footprint Gazprom Neft investment case 2019 highlights Letter from the Chairman of the Board of Directors GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system The company's Sustainable development official website Appendices GAZPROM NEFT AT A GLANCE Gazprom Neft 1 PJSC is a vertically mtoe integrated oil 1,583 proved hydrocarbon company reserves

mtoe

Its core activities include exploration, 96.1 production and sales of oil and gas, oil hydrocarbon production refining, and production and distribution in 2019 of petroleum products.

The company operates in ’s are located in Russia (Omsk, mt major oil and gas regions as well and Yaroslavl) and Serbia. as abroad. Gazprom Neft and its upstream subsidiaries are engaged The company’s filling station 41.5 in oil and gas exploration, network throughout Russia, the CIS development and production and the Balkans has a total of 2,077 refining throughput in the Yamalo-Nenets and Khanty- outlets. Mansi Autonomous Okrugs, the Tyumen Oblast, the Republic Gazprom Neft is one of the world’s of Sakha, the , Omsk, top 10 public companies by proved Orenburg and Oblasts, hydrocarbon reserves, and a leader the Krasnoyarsk Krai, the Nenets in terms of reserves replacement billion Autonomous Okrug; on the Russian under the PRMS classification2. Arctic Shelf and offshore in the Sea of Okhotsk, as well ₽795.1 as in Iraq and Serbia. The company’s main refining facilities adjusted EBITDA

4 ANNUAL REPORT 2019 Leader in the commercial development of the Russian Arctic

Prirazlomnoye Novy Port Messoyakha The first — and so far only — A unique logistics strategy The northernmost oil production project to ensure the year-round onshore oilfield in Russia on the Russian Arctic shelf transportation of Arctic oil

An industry leader in technology A company setting its

By 2030, thanks to new technology, Gazprom Neft intends to halve the time sights on the future it takes to see the first commercial inflows from an oilfield, to speed up the implementation of major oil and gas projects by 40%, and to reduce The company’s strategy is to become a leader production management costs by 10% in priority areas of technology: increasing the oil recovery factor (ORF) at mature fields, Artificial intelligence (AI) Smart logistics developing multi-phase deposits and low- in geological exploration – A pioneering Arctic-specific permeability reservoirs, undertaking safe – Using AI to analyse geological data logistics management system and efficient offshore operations under ice and search for new oil deposits – Automated systems for loading conditions, and utilising cutting-edge refining – Building digital twins of oilfields, and dispatching oil products catalysts and processes. Implementing and creating a digital platform – Digitised vehicle fleet to transport a number of major initiatives – including for asset development forecasting petroleum products cutting unit well costs at new production – Developing software to eliminate projects in the Yamalo-Nenets Autonomous uncertainties and support decision Digitalisation in product Okrug; developing a range of technologies making distribution system for developing non-traditional reserves; – Robotised refuelling complexes facilitating the viable deployment of ASP- Enhanced hydrocarbon recovery – Petroleum-product quality-control flooding and miscible gas displacement technologies system deployed throughout technologies; and building a high-tech catalyst – The Integrated Field Development the entire logistics chain plant – will bring tens of millions of tonnes Centre – Mobile apps and services developed of additional oil into production, as well – Technologies for the production for partners and clients as allowing the company to increase efficiency of hard-to-recover oil in oil refining. – Unique expertise in working on the Russian Arctic Shelf

High-technology oil refining – The Gazprom Neft Downstream Efficiency Control Centre, For more details, see For more details, see – Digital twins of process units pp. 52–111 p. 16 and facilities – The Neftekontrol (oil control) system

A company committed to sustainable development values

Health and safety Human resources development – ‘Target Zero’ as a strategic – Single incentive model priority3 for employees – A developing safety culture – Partnership with trade unions – Digital platform for operational – Training, leadership and career- risk management development programmes For more details, see

Environmental protection Wellbeing of local communities pp. 196-212 – Environmental management – The 'Home Towns' social system investment programme / 1 / Hereinafter referred to as 'the company'or – Biodiversity conservation – Supporting the ethnic minorities 'Gazprom Neft'. programme of the Russian Far North / 2 / Petroleum Resources Management System. – Greenhouse gas emissions – Import substitution and local / 3 / Zero harm to people, the environment, accounting and monitoring preference programmes or property in our operations.

01 THE COMPANY TODAY 5

GAZPROM NEFT

Company profile a

Strategic report e S Performance n Technological development ia r Governance system e GEOGRAPHICAL FOOTPRINT ib Sustainable development S Appendices t 21. s Ea

18.

Gazprom Neft

Baren ts 17. Sea

on the world 9. k f ts Pe o o cho h ra a k Se e O a S 19. map Belgium 20. Russia St Petersburg 5. 15. 16. 3. 14. 11. 1. Moscow 2. 13. 6. 12. Serbia 4. 7. 10. Italy Bosnia and Herzegovina 8. Gazprom The geographic range of the company’s presence includes1 countries Neft worldwide 110 in Russia Iraq

Head office St Petersburg

1. Moscow 12.

2. 13. Tyumen Oblast Subsoil rights 3. Krasnoyarsk Krai 14. Khanty-Mansi Autonomous Okrug - Yugra Hydrocarbon production Upstream assets in Production facilities in Refining 4. Moscow Oblast 15. Yamalo-Nenets Autonomous Okrug16.

Oils and lubricants (production) 5. Nenets Autonomous Okrug 16. Yaroslavl Oblast Bitumen products (production) countries countries 6 6 6. Nizhny Novgorod Okrug 17. Barents Sea Petrochemicals 7. Omsk Oblast 18. East Siberian Sea Bunkering business Filling stations 8. Orenburg Oblast 19. Sea of Okhotsk

9. Sakha Republic (Yakutia) 20. Sea Angola 10. Ryazan Oblast 21. Chukchi Sea

Singapore 11. Smolensk Oblast

/ 1 / Including Russia.

6 ANNUAL REPORT 2019

a e S n ia r e ib S t 21. as E

18.

Baren ts 17. Sea

9. k f ts Pe o o cho h ra a k Se e O a S 19. Belgium 20. Russia St Petersburg Estonia 5. 15. Latvia 16. 3. 14. Belarus 11. 1. Moscow 2. 13. 6. 12. Serbia 4. 7. Romania 10. Italy Bosnia and Herzegovina 8. Bulgaria Gazprom Kazakhstan Neft Kyrgyzstan in Russia Iraq Tajikistan

Head office St Petersburg

1. Moscow 12. Tomsk Oblast

2. Irkutsk Oblast 13. Tyumen Oblast Subsoil rights 3. Krasnoyarsk Krai 14. Khanty-Mansi Autonomous Okrug - Yugra Hydrocarbon production Products sold in Refining 4. Moscow Oblast 15. Yamalo-Nenets Autonomous Okrug16.

Oils and lubricants (production) 5. Nenets Autonomous Okrug 16. Yaroslavl Oblast Bitumen products (production) countries >100 6. Nizhny Novgorod Okrug 17. Barents Sea Petrochemicals 7. Omsk Oblast 18. East Siberian Sea Bunkering business Filling stations 8. Orenburg Oblast 19. Sea of Okhotsk

9. Sakha Republic (Yakutia) 20. Pechora Sea Angola 10. Ryazan Oblast 21. Chukchi Sea

Singapore 11. Smolensk Oblast

01 THE COMPANY TODAY 7 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices GAZPROM NEFT INVESTMENT CASE

trillion Ongoing digitalisation across the entire production chain to improve ₽1.99 business efficiency market capitalisation as at 31 December 2019 Extensive resource base % Highly efficient refining thanks to the modernisation +21.2 of refineries share price growth in 2019 Managing every link The goal in the value chain together, as a single integrated asset of the Gazprom Credit ratings Neft Strategy to 2030 is to build An operational efficiency a new-generation and HSE system covering all areas of the company’s ACRA company, business and to become a benchmark An adaptive system (RU) for global industry supporting investment AAA decision-making peers in terms INVESTMENT GRADE of safety, efficiency Growth in both operating Moody’s and technological cash flow and dividend advancement. payments Baa2 Following the best available environmental INVESTMENT GRADE practices Fitch

Organisational, operational, cultural BBB and digital transformation across the company INVESTMENT GRADE

S&P ‘Target Zero’: zero harm to people, the environment, or property in our operations BBB-

INVESTMENT GRADE 8 ANNUAL REPORT 2019 The company’s standing in the industry

28.6% EBITDA margin ₽1,507.2 EBITDA per barrel of oil ₽795.1 billion adjusted EBITDA 20.1% ROE (return on equity) produced 96.1 mtoe hydrocarbon production 16.8% ROACE (return on average ₽453.0 billion CAPEX 63.3 mt oil and oil-condensate capital employed) 0.70x Net debt/EBITDA production

Market valuation as at 31 December 2019

EV/EBITDA at year-end 20191 Value growth potential A consensus forecast provided 10 0 4 6 8 2 by financial analysts confirms that ₽531.6 8.46 the company has strong upside Company 1 potential. average price (consensus forecast) 3.94 Company 2 Distribution of analysts’ 3.48 recommendations on Gazprom % Gazprom Neft Neft shares +27 3.29 Company 4 upside potential (consensus forecast) % % 0 30 / 1 / Calculations are based on data as at 31 December 2019. Peer companies are NOVATEK, Rosneft and LUKOIL. BUY HOLD

Market capitalisation and shareholder return Steady dividend growth Share of IFRS net profit, % Total dividends per share, ₽ % 50 30.00 50 30 40 40 40 35 25 28 20 18.14 30 25 15.00 of IFRS net profit – dividend 15 20 10.68 10 payout ratio in 1H 2019 10 5

0 0 2016 2017 2018 2019 Plan 2016 2017 2018 2019F (6 M)

01 THE COMPANY TODAY 9 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices 2019 HIGHLIGHTS

The company increased hydrocarbon production in 2019 primarily through its projects in the Arctic, allowing it to maintain revenue and EBITDA year on year and to increase dividend payments. This is in spite of a significant fall in oil prices on the domestic and international markets.

Reserves and production growth

+32 +3.5 % Gazprom Neft ended the 2019 financial new licence blocks increase in hydrocarbon year with a good production financial and operational performance, price adjustments on the global oil market Proved reserves, mtoe Hydrocarbon production, notwithstanding. Various mtoe projects throughout 1600 1,583 100 96.1 1,564 92.9 the company’s refining 92 89.7 1550 86.2 facilities involving 1,518 1,514 1,522 84 79.7 the construction of major 1500 new complexes moved 76 1450 into their final stages. 68 With the protection 1400 60 of the environment 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 being an overriding Gazprom Neft actively expanded its Hydrocarbon production (including and non-negotiable resource base throughout 2019, adding joint-venture interests) was up 3.5% priority for the company, 32 new licence blocks in the year. year on year in 2019: this growth it is vital that our plants The company also increased its project was driven by higher production comply with the highest portfolio significantly, having started at the Novoportovskoye and Vostochno- environmental standards. developing oil-rim deposits, Achimovsky Messoyakhskoye fields, in the Orenburg deposits, and Necomian-Jurassic Oblast and at new oil-rim projects, gas and gas-condensate deposits as well as the company increasing its Alexander Dyukov at Gazprom PJSC fields, using long-term interest in Arcticgas. risk-operatorship agreements. Chairman of the Management Board, CEO, Gazprom Neft PJSC

For details, see p. 54 the Resource Base and Production section

10 ANNUAL REPORT 2019 Advanced Stable financial Strong safety oil-refining performance performance technologies

Adjusted EBITDA, ₽ billion 0 mt accidents 799.5 795.1 41.5 800 700 % refining volumes 600 551.0 456.2 500 404.8 -34 400 300 2 200 reduction in FAR to a 100 five-year average 0 Refineries throughput, 2015 2016 2017 2018 2019 mt % Adjusted EBITDA remained almost flat 50 -42 43.1 42.9 41.9 40.1 41.5 year on year in spite of a decline in oil 40 prices on the domestic and international reduction in associated 30 markets. petroleum gas (APG) flaring 20 For details, see the Financial p. 98 Performance section. 10 APG utilisation rate, %

0 1,0 79.64

2015 2016 2017 2018 2019 0,8 Net profit1, 78.37 79.78 76.16 Refining throughput decreased in 2019 ₽ billion 0,6 89.00 as a result of planned refurbishment 0,4 at the Group’s refineries. The company 500 has continued its refineries development 401.0 422.1 0,2 400 programme directed at increasing both 0,0 the conversion rate and the output 300 269.7 2015 2016 2017 2018 2019 of in-demand petroleum products, 209.7 200 as well as improving the environmental 116.2 Gazprom Neft is committed to increasing performance of its refineries. 100 APG utilisation levels as it brings new fields into commercial development 0 and increases hydrocarbon production: 2015 2016 2017 2018 2019 the company's objective in this regard is to achieve an APG-utilisation level The company reached a record-high net of at least 95% by 2022, even in the face profit in 2019 thanks to the appreciation of increasing production. of the rouble and the positive impact For details, see the Refining of net financial income and expenses. p. 68 section. / 1 / Including profit attributable to non-controlling interest. / 2 / Fatal accident rate

01 THE COMPANY TODAY 11 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

LETTER FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS

Dear shareholders and investors, In 2019, Gazprom Neft continued developing its business in line with its new long-term Strategy adopted by the Board of Directors.

In the reporting year, Gazprom Neft increased hydrocarbon production by 3.5%, to almost 100 million tonnes of oil equivalent. This growth was driven both by more efficient development of mature fields and by new major projects such as the Novoportovskoye, Vostochno-Messoyakhskoye and Prirazlomnoye fields. Arctic assets were responsible for a significant contribution to the company’s total production, with about 30% of all of today’s oil production occurring within the Arctic Circle. A stable supply of Arctic oil to the global market is made possible by the world’s first digital Arctic logistics management system developed by Gazprom Neft specialists.

billion 32 >₽ 400 new licence net profit attributable to Gazprom Neft shareholders areas

12 ANNUAL REPORT 2019 Today, a major priority for the industry the entire Russian oil-refining industry history. The company continues is to produce technological solutions to achieve its overarching goal to increase dividend payments for the economically viable development of allowing Russian refineries to see to shareholders: dividends for 1H 2019 of non-traditional and hard-to-recover an end to their dependency on imports totalled as much as 40% of Gazprom reserves. In 2019, Gazprom Neft of catalysts; at the moment most Neft’s net profit for the period. continued to make progress towards are being supplied from abroad. this goal. By developing and introducing Gazprom Neft celebrates its 25th new technologies, the company’s year- In the reporting year, Gazprom Neft anniversary in 2020. During that time, end results showed a 2.5-fold year- made significant progress in developing the company has increased the sheer on-year increase in oil production its petrochemical segment, scale of its business; it has evolved at the Bazhenov Formation, whereas as the company and its partner, SIBUR, from a regional player with a number production costs almost halved. consolidated a 100% shareholding of local operating assets into a world- in the Poliom plant in Omsk. Integrating class company and an industry leader The company expanded its resource Poliom and the Gazprom Neft Omsk in technology. In the face of constantly base in 2019. Thirty two new licence Refinery’s technological capabilities changing market conditions, Gazprom blocks were added to the Gazprom and resources will allow the company Neft continues to give priority Neft portfolio, including in new to improve efficiency by using refinery to safety, environmental responsibility prospecting areas on the Gydan feedstocks to produce high-value- and business efficiency. It does and Taymyr Peninsulas. One of the key added products. this by applying new technologies areas for developing Gazprom Neft’s across the entire value chain. I believe resource base is the development Gazprom Neft is becoming increasingly that this will enable Gazprom Neft of oil-rim deposits, Achimovsky prominent in the global petroleum- to remain resilient and to continue its deposits, and Necomian-Jurassic products market. The company steady progress towards achieving its gas and gas-condensate deposits offers its consumers products that strategic goals, despite momentous at Gazprom’s flagship assets meet the highest international new challenges that the entire world in Western and Eastern Siberia; standards. New restrictions on sulphur is facing. these include the Chayandinskoye, content in bunker fuels are a global Bovanenkovskoye, Yamburgskoye challenge for the oil and shipping and Kharasaveyskoye fields. This has industries. Gazprom Neft responded been possible thanks to the introduction to this challenge in 2019 by launching of new forms of cooperation – namely the production of a new fuel containing long-term risk-based operatorship less than 0.5% sulphur. High- contracts – that allow Gazprom Neft technology marine oils produced to develop hydrocarbon production by the company are also consistent projects at fields belonging to its with the International Convention parent company, on terms identical for the Prevention of Pollution to the licences it owns. from Ships, and are in demand on the global market. Gazprom Construction of a number of modern Neft currently supplies bitumen process units at the company’s products to 57 countries worldwide. refineries entered their final stages The company is working systematically Alexey Miller in the reporting year. Once they have to develop bitumen technology, and has Chairman of the Board been commissioned, the company a proven track record in developing of Directors will be able to make significant and using innovative bitumen materials. Gazprom Neft PJSC improvements to the operational and environmental performance of its Strong operational performance refineries. Construction of Russia’s was reflected in Gazprom Neft first cutting-edge catalyst production financial results: in 2019, Gazprom facility in Omsk moved into an active Neft net profit exceeded ₽400 billion phase in 2019. This project will help for the first time in the company’s

01 THE COMPANY TODAY 13 ‘ASK THE OIL EXPERT’ ONE OF A SERIES OF INTERVIEWS ABOUT OIL PRODUCTION IN THE ARCTIC

Dmitry Starodumov Head of the Emergency and Rescue Unit ANNUAL REPORT 2019

Strategic report

Strategic report Letter from the chairman of the management board Market overview Global trends and their impact on the gazprom neft strategy Strategy 2030 Business model Digital transformation Operational transformation Organisational transformation Cultural transformation GAZPROM NEFT

2019 p. 57 Gazprom Neft leads the way towards the “smart HIGHLIGHTS energy” of the future The company has embarked As a flagship in Arctic development, we are setting ourselves ever more ambitious goals as we move into new geologically on the comprehensive and technologically challenging regions, such as the Yenisei transformation Project on the Gydan Peninsula. This is a major challenge of its business. Why and involves the use of unique technological solutions. do we need to change? Because the top league of oil companies is known for fierce competition, rapid STRATEGIC REPORT change and technological development. We have already made great progress in the Russian market but, in order to become a benchmark for industry peers The implementation globally, the company needs new approaches to doing business: we need to be even of Strategy more efficient, flexible and agile, make use of state-of-the-art technology, and develop 2030 a new corporate culture. p. 16

Alexander Dyukov CEO and Chairman will make of the Management Board, Gazprom Neft PJSC the company Efficiency at Gazprom Neft is founded on innovation a global and digital technology. benchmark In September 2019, the Gazprom Neft Board of Directors approved a Digital Gazprom Neft’s development strategy Transformation Strategy. The company is developing to 2030 sets an ambition to grow ahead in-house solutions in artificial intelligence of market trends, while maintaining (AI), the Industrial Internet a high level of return on capital of Things (IIoT), robotics, unmanned aerial vehicles employed. The company is determined (UAV or drones), and other Industry 4.0 technologies. to consolidate its position in the top league of global public oil companies, and become a benchmark for industry 1,000 peers in terms of safety, efficiency digital and IT projects and technological advancement. 2019 and initiatives was the first year in which Strategy 2030 was successfully implemented

For details, see the Digital Transformation section on

p. 38 16 ANNUAL REPORT 2019 p. 20 The oil market is expected to remain highly p. 46 The new strategy fundamentally changes existing volatile in 2020 business processes The global economic slowdown, trade wars, and increased The company needs an adaptive product-based operating oil production in the US and elsewhere put oil prices model as it moves towards becoming a global benchmark under pressure. The situation has been exacerbated in terms of efficiency and technological advancement. That further by the global COVID-19 pandemic and the de facto requires changes to its existing business processes, including termination of the OPEC+ agreement in 2020. putting in place flexible cross-functional teams.

Strategy in detail

In 2019, Gazprom Neft’s business s) le development efforts and its short-term sa ( plans were in line with the long-term ts n a development areas and goals set out c ri b in the Strategy. u l d n a s il O

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39 l 1 a BUSINESS AREA o 4 Bunkering h W 3 Refining 3 Bitumen products (production) 5

A 6 ) v s ia le t a io (s n s f ct ue du l ro su n p pp me ly Bitu

/ 1 / including Russian Federation

02 STRATEGIC REPORT 17 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

LETTER FROM THE CHAIRMAN OF THE MANAGEMENT BOARD

Dear shareholders and investors, Despite the deteriorating global oil market, Gazprom Neft delivered a good financial and operational performance in 2019, successfully increasing hydrocarbon production – up 3.5%, at 96.1 million tonnes of oil equivalent (mtoe) – predominantly through major assets including the Novy Port and Eastern Messoyakhskaya projects, as well as the Orenburg production cluster.

Entering into long-term risk-operator agreements with Gazprom will play an important role in the company’s continuing growth in the future. By collaborating with our parent company in this way we have been able to get involved in developing a whole range of assets, including Neocomian-Jurassic gas-condensate deposits at the Bovanenkovo and Kharasavey fields. These projects significantly increase our resource base, as well as facilitating a significant proportional increase in gas and gas condensate in terms of total production volumes. The company also acquired 32 new licences last year, with our reserves- replacement ratio reaching 120%.

Total refining volumes throughout % % the company’s own refineries 120 3.5 reached 41.5 million tonnes in 2019. We are continuing reserve-replacement hydrocarbon production our full-scale modernisation ratio growth in 2019

18 ANNUAL REPORT 2019 of refining facilities in Moscow, reserves: something that remains the size and scale of its oil production Omsk and Pančevo (Serbia). A Euro+ a priority not just for our company, and refining businesses over the last facility will be commissioned but for the entire oil industry. 10 years, increasing premium sales at the Moscow Refinery in 2020, and entering new markets. Our goal directly replacing five outdated units One of our key objectives in the next now is to consolidate our position and significantly increasing efficiency few years will be further improving among the world’s top-league oil and environmental friendliness. safety throughout our business companies, and to become a flagship Construction starting on our catalyst and production processes. in the “smart-energy” of the future. plant in Omsk – the launch of which The company has committed We want to be a benchmark will resolve the problem of Russian to a risk-based approach, in terms of efficiency, technological refining’s dependence on foreign which will be developed as part advancement and safety, maintaining catalyst supplies – marked a major of an integrated “Safety Framework” a high level of business growth milestone in 2019. project, identifying key risks and return on capital employed and putting barriers in place to protect (ROACE). Gazprom Neft’s sales of oil products against these. We are also engaging through premium channels reached proactively with our contractors Events such 26.5 million tonnes in 2019. Bitumen to take their approach to safety as current coronavirus pandemic products saw significant growth, up to a whole new level. and the sharp drop in oil prices 20%. The company began selling inevitably bring considerable environmentally-friendly ultra-low- Protecting the environment, uncertainty to expectations for 2020. sulphur marine fuel in 2019, fully and an effective corporate But – given our experience of working compliant with MARPOL Convention social responsibility (CSR) policy effectively through previous standards. We are also continuing in all locations in which the company periods of market crisis – we can preparations for entering the LNG- operates, are overriding priorities look to the future with confidence, bunkering market. for Gazprom Neft. The company’s and remain confident in our strategic refinery modernisation programme goals Gazprom Neft is a team Despite the downward trend includes a large number of projects of likeminded, pro-active, passionate in the global oil price, Gazprom directed at further reducing manmade and engaged people. Developing Neft succeeded in maintaining environmental impacts. Our “Green a new-generation company EBITDA (earnings before interest, Seismic” programme has already is our common goal: a goal that I have tax, depreciation and amortisation) saved more than 3.5 million trees no doubt we will achieve. and turnover at 2018 levels. from being felled. The company showed growth in free cash flow and net profit The company is investing and, for the first time in our history, in renewables, having launched the latter exceeded ₽400 billion1 a solar electricity plant at the Omsk in 2019. A stable and sustainable Refinery in 2019. Serbian oil company financial position, together with a low Naftna Industrija Srbije (NIS), debt burden, means we can be flexible in which we are a shareholder, in implementing our investment is managing a wind farming programme, as well as ensuring project. Gazprom Neft’s CSR policy a high dividend distribution. is managed through its ‘Home Towns’ programme, the main focus Technological development of which is an integrated and cohesive remains Gazprom Neft’s key focus, approach to improving living Alexander Dyukov with the company proactively standards in those locations in which CEO and Chairman researching, developing the company operates. of the Management Board, and deploying cutting-edge Gazprom Neft PJSC physical and digital technologies, The company will celebrate its throughout the entire value chain. 25th anniversary in 2020. We have Deploying innovations means we can reached this anniversary having be more effective in addressing successfully implemented our long- – inter alia – the challenge term strategy to 2020, and having set of the viable development of hard- ourselves new and ambitious goals. to-recover and non-traditional Gazprom Neft has more than doubled

/ 1 / Profit attributable to shareholders in Gazprom Neft PJSC.

02 STRATEGIC REPORT 19 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices MARKET OVERVIEW

Global oil prices in 2019 were lower, albeit more stable, compared to 2018. The average annual Brent price stood at around $64/bbl against $71/bbl in 2018.

Brent price, 2013–2020, $/bbl

100 52 43 54 71 64 year-average

80

60

40

20

0 2015 2016 2017 2018 2019

The relative stability of the market Instability was heightened was the result of several divergent in 2020 by the coronavirus pandemic $/bbl factors. On the one hand, oil and the de facto termination 64 prices were supported by political of the OPEC+ agreement, which volatility across production regions caused prices for oil and other average annual Brent price and by the actions of the OPEC+ resources to plunge. High uncertainty in 2019 countries to curb supply. On the other and volatility on hydrocarbon markets hand, prices came under pressure may remain beyond 2020. from a global economic slowdown, trade wars, and growth in oil . production in the US and elsewhere.

20 ANNUAL REPORT 2019 Global economy

The declining global economic growth GDP of key economies in 2015–2019, in 2019 was the most noticeable % year on year factor affecting demand, prices and expectations in the oil and other 10 commodity markets. According to the IMF, the global economy grew 8 by only 2.9% last year (as against 6 3.6% in 2018), the lowest figure since 2009. This slowdown affected both 4 developed and emerging economies. 2 ’s GDP growth decreased to 6.1% in 2019, which is just 0 above the lower limit of the target -2 set by the country’s government.

India’s economic growth also -4 2015 2016 2017 2018 2019 remains fragile: in 2019, it was well below projections, with a number US Eurozone China India Russia of indicators pointing to persistent obstacles for sustainable growth. remains in question, as was production, logistics and consumption The main reasons for the slowdown demonstrated by the withdrawal was exacerbated by coronavirus of the world economy include trade of the UK from the European Union outbreak in early 2020 which caused wars, primarily the US and China’s in 2020, preparations for which significant deterioration in the global conflicts, which resulted in several had been under way since the 2016 economy and affected financial rounds of mutual trade restrictions referendum. markets. Slowing growth and the risk and a drop in trade turnover of recession in key economies between the world’s two largest The global economic slowdown forced regulators to strengthen economies. In late 2019 to early 2020, in 2019 was at odds with financial their stimulation efforts. the countries came to agreements markets, whose stability is supported to resolve trade disputes which, if by regulatory incentives. Central successfully implemented, could banks chose to maintain their key International situation reduce trade tensions between them. rates or cut them as the US Federal Reserve did following the attempted While there have been no major Trade wars may be part of a broader increase in 2018. In this context, conflicts, the high level of international trend: the spread of protectionism market valuation of assets against and regional tensions in 2019 had and the regionalisation indicators such as profit reached a considerable impact on the oil of the world economy both their highest point for many years. market. pose a risk to economic growth and energy demand. The growth The world economy entered 2020 The effect of the US sanctions on Iran of international trade has for some with persistent problems of high debt, and Venezuela has led to a cumulative years lagged behind the growth the stark divide between the financial decline of 1.8 million bpd in production of the world economy, which was and real sectors, heterogeneous in these countries. Although production not the case over the preceding performance of national economies, there saw stabilisation in the second period and in the paradigm and economic instability in some half of the year, the situation in foreign of economic globalisation. The future countries. The situation in global policy and economics remains difficult. of some integration associations

02 STRATEGIC REPORT 21 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

Drone strikes on Saudi Arabia’s Global shortfall in oil production, oil infrastructure in September mbbl/d 2019 were unprecedented in terms of their implications, demonstrating 10 the sector’s vulnerability to geopolitical factors. As a result of the attacks, global oil production 8 dropped, albeit for a short time, by 5%. 6 Regions that have traditionally been somewhat volatile were able 4 to maintain relatively stable oil production throughout the year. The situation in Libya, however, 2 remains uncertain. Overall, especially

in view of OPEC+’s voluntary 0 production cuts, the volume of lost January July January July January July January production in 2019 turned out to be 2017 2017 2018 2018 2019 2019 2020 high by historical standards.

As at early 2020 there remained considerable potential for changes Global carbon dioxide emissions by the energy, in oil supplies, in either direction. billion tonnes per annum As demand fell amid the coronavirus

pandemic, OPEC+ was unable to agree 40 on further tactics, with the curtailment of OPEC+ countries’ production having 35

been stopped from April 2020. 30

25

Regulation and climate agenda 20

International organisations, 15 governments and society continue 10 to pay close attention to climate change and pollution. Climate risks 5

are at the top of the agendas of major 0 international conferences, although 2000 2005 2010 2015 2020 2025 2030 2035 2040 commitment at a national level IEA base case scenario IEA Sustainable Development Scenario is variable. Russia joined the Paris Agreement in September 2019, whereas the US may formally withdraw, but not before November 2020. to become carbon-neutral by buying such companies lead initiatives electricity from renewable sources to develop low-carbon technologies While actual carbon dioxide emissions on the market or by financing other and reduce the environmental impact are already a long way off the original actions to offset their carbon footprint of their sector. More specifically, targets set in the Paris Agreement, that appear to be more realistic. some major funds have limited many countries are publicly confirming their investments in conventional their intention to reduce their carbon Environmental and social aspects energy or are planning to consider footprint in the long term. Some of operations occupy an increasingly the carbon footprint in asset portfolio have stated their vision to become higher position on the agendas management. carbon-neutral by 2050. Nonetheless, of industrial companies. Often it is the ambitions of corporations acting in their investors’ interests,

22 ANNUAL REPORT 2019 Renewable energy Car sales on major markets, EV sales on major markets, and automotive markets millions of units thousands of units.

The situation around renewable 25 energy remains stable. Annual 24 24 1139 1110 investment in renewable energy, 21 including hydropower, has remained at the $300 billion level over the past 17 17 17 17 15 15 15 15 decade, with renewable energy 587 remaining ahead of other sectors 461 of the global electric power industry. 361 331 301 336 287 China continues to be a key market 200 217 254 159 156 194 player, accounting for almost half 115 of all renewable energy investment. Stable investments help to expand US EU China US EU China Other the installed capacity and increase the share of renewables. 2016 2017 2018 2019 2016 2017 2018 2019 is a case in point, where electricity from renewable sources accounted for 46% of the total electricity output of electric vehicles will appear in demand from freight transport, in 2019. on the market in 2020-2022 which, aviation and petrochemicals will together with the efforts of regulators, ensure a moderate, but nonetheless Sales of electric vehicles (EVs) will revive the market. positive, trend in market volumes. grew only marginally in 2019, as a result of a reduction in subsidies More radical scenarios, which by China causing EV sales to slump Oil demand envisage a peak in oil demand around at midyear amid low overall demand 2030, suggest significant changes for cars. Passenger car sales were Growth in global consumption in the regulatory environment markedly down on the world’s two of liquid hydrocarbons slowed and reallocation of investment largest markets, China and the US. down in response to low levels towards low-carbon energy. There The EU saw sales spike at year-end of economic growth and competition are currently no viable mechanisms as manufacturers sought to maximise from electricity and gas. According to ensure consistent implementation sales by offering cars on special terms to the International Energy of the low-carbon agenda, ahead of the forthcoming new limits Agency (IEA), liquid hydrocarbon and the issue of energy transition on emissions. consumption rose by only 0.9 mbbl/d and its adoption by consumers in 2019, the lowest growth rate remains open. New energy and transport since 2013. Analytical agencies segments retain their high expected to see some acceleration dependence on government support in demand growth in 2020, Oil supply and regulation. While reducing but downgraded their forecasts subsidies for renewable energy because of the coronavirus pandemic. As in previous years, the US was and electric transport, regulators As a result, global oil consumption the main contributor to global are at the same time increasing is expected to decline for the first time oil supply growth in 2019: its oil the load on traditional power since 2009. production averaged 12.23 mbbl/d, up generation and internal combustion 1.24 mbbl/d year on year. Total liquid engines. The EU has adopted a new The long-term outlook of market hydrocarbons supply was up 1.58 plan to limit motor vehicle emissions, watchers, however, remained largely mbbl/d (19.51 mbbl/d as against 17.93 and China is increasing mandatory unchanged. Under the IEA’s base- mbbl/d), once again outpacing global quotas on EV production. Car case scenario, oil demand growth demand growth. manufacturers’ plans and agencies’ will not stop until 2040 at the earliest. outlooks on the development The decrease in the consumption of oil This growth, according of electric transport are ambitious. products by passenger transport after to Baker Hughes, was driven It is expected that many new models 2020s notwithstanding, the growth mainly by shale production, while

02 STRATEGIC REPORT 23 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

Changes in oil consumption Oil drilling and production from low-permeability reservoirs in the US, by sector to 2040 (forecast), mbbl/d. mbbl/d

9 1500

8 1300

7 1100 6 900 5 700 4 500 Petrochemicals Air and marine transport vehicles freight Road Industry vehicles Passenger Utilities Energy Other sectors 3 300 2

1 100 4,2 4,2 (100) 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 3,2 Shale oil production, mbbl/d (LHS) Active oil-drilling rigs, units. (RHS)

0,1 0,2

-1,4 -1,3 Diesel fuel/high-sulphur fuel oil price differential in Northern , -1,75 $/tonne

the number of operating drilling rigs in the US decreased from 885 to 677 450

over the year. The drop in oil prices 400 in early 2020 led companies to reduce drilling activity further, and agencies 350 to revise their estimates significantly. 300 Under the impact of decreasing 250 demand and prices, oil production in the US may slump in 2020 200 for the first time in several years. 150

100 The slowdown in shale production may be offset by the supply 50 from new production projects 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 in non-OPEC+ countries. Major projects launched in 2019 have already had a significant impact on oil supply across various regions. in the following months due to lower Petroleum-products market Given the slowdown in demand, seasonal demand over winter months. this has limited the capacity of OPEC+ The global petroleum-products countries to increase production; In March 2020, OPEC+ members failed market remained well balanced throughout 2019 they continued to reach a common position on further for most of 2019. There were no to take steps towards balancing production cuts and so moved supply disruptions amid the slowing supply and demand on the global oil to independent production planning. demand, and even a higher market. In December 2019, OPEC+ As a result, oil prices hit their lowest level of refinery maintenance members agreed not to include gas since the early 2000s and the global did not noticeably affect condensate numbers in the overall market saw a significant surplus of oil the crude and product differentials. oil output for the Russian Federation in the first quarter of 2020. The supply was supplemented further and to lower oil production quotas by the commissioning of major new

24 ANNUAL REPORT 2019 Investments by major foreign oil companies, $ billion

1000 32,7 % 35 29,9 % 30,7 % 900 30 25 800 19,3 % 18,0 % 20 15,3 % 16,6 % 16,6 % 15,2 % 700 13,3 % 11,5 % 12,8 % 15 9,7 % 8,3 % 8,6 % 7,8 % 10 600 0,4 % 5 500 0 –1,3 % 400 –3,0 % –2,0 % –5 –10 –8,9 % 300 –15

200 –20 –21,5 % –25 100 –24,6 % 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Investment index, 1996 = 100% (LHS) Change in investment, year on year (RHS) refining facilities in China, the Middle Strategy adopted by oil hub, where major discoveries East and Africa. companies in recent years allowed companies working in that area to declare The most notable – and expected For the majority of oil companies, several billion barrels of recoverable – market highlight was the drop financial discipline remains oil reserves and, by 2025, initiate in prices for high-sulphur fuel oil as relevant as before. Nevertheless, projects with total production at the end of the year, as the shipping oil price stabilisation and paybacks volumes standing at about 750,000 industry was actively preparing obtained in 2019 enabled producers bbl. Given the ongoing exploration for new International Maritime to relaunch projects that had been activities in Central America, Organization (IMO) regulations initiated earlier and to actively it is possible that production to take effect. The new rules approve new ones. The sector’s expectations will grow. restricted the use of marine fuels ability to launch sophisticated with sulphur content exceeding projects quickly has eased experts’ About a quarter of investment 0.5% in international waters without fears over potential oil shortages in global exploration and production additional exhaust gas cleaning. resulting from underinvestment related to shale oil assets which, As suppliers had to build up reserves in 2015–2017. for the first time since 2016, of low-sulphur fuel, demand for high- saw a significant fall in drilling sulphur fuel plunged. Total global investments operations. Independent producers in hydrocarbon production facing strict financial discipline Fuel-oil prices nonetheless increased in 2019. According to IEA requirements had to cut their drilling began to recover in early 2020. estimates, they totalled $505 billion programmes. This, in turn, affected The subsequent slump in global in 2019, up 6% on the previous year. the performance of oilfield service petroleum-products consumption A global recovery in the number companies. Oil majors that had amid the coronavirus outbreak of prospecting surveys led previously announced ambitious offset the impact of new regulations to an increase in discovered shale-oil production plans had on prices. reserves. Some estimates suggest to adjust them in early 2020 as oil that oil and gas discoveries in 2019 prices fell. exceeded 20 billion tonnes of oil equivalent (btoe), of which two-thirds International oil and gas companies are attributable to gas. have not lost sight of the diversification of their business. This mainly The Guyana Shelf has the potential involves putting in place a value chain to become the new global production in the gas business by developing

02 STRATEGIC REPORT 25 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

their LNG segment, acquiring Inventories of oil and petroleum products in the OECD countries, power-generation and distribution mbbl. businesses, and developing renewable energy capacities. Investments in new mobility 3 000 64

(batteries, EV charging stations, 63 and car sharing) and the environment (plastic recycling, forestry) are done 2 900 62 primarily through venture funds 61 and have a much smaller scale. 2 800 60

Overall, the sector maintains its 59 2 700 financial and operational efficiency 58 priorities, including the use of ‘agile’ 57 methods and accelerated adoption 2 600 of technology. Environmental 56 matters and corporate social 2 500 55 responsibility (CSR) are receiving 2017 2018 2019 2020 Inventories in OECD Average for 2010–2014 Five-year average Inventories in days of consumption ever more attention. countries (LHS) (OPEC+ target) (LHS) (LHS) in OECD countries (RHS)

Market balance, inventories and key drivers for 2020 of the coronavirus pandemic, falling global hydrocarbon prices, but also by weather factors, progress and a budget surplus. Expectations Despite production cutbacks in EV adoption and government of a significant acceleration in Iran and Venezuela, restrictions on the use of internal of inflation against the backdrop and the repercussions of the attacks combustion engines. Instability of VAT growth proved misplaced. in Saudi Arabia, the global oil of financial markets and fragile In fact, the year-end growth market did not experience any investor sentiment add to price in consumer prices slowed to 3%, shortages throughout 2019. uncertainty. In this context, it is likely which was another record. Low In fact, the OECD countries’ total that the global oil market will inflation allowed the Central Bank inventories of crude oil and petroleum continue to experience price volatility, to continue reducing its key rate products grew year on year. Given fluctuations in supply and demand, (6.25% at year-end). the situation around the coronavirus as well as a wide range of forecasts. outbreak, and the termination Taxation changes in 2019 were of OPEC + agreement, we may see not substantive; they continued a considerable surplus on the global Russian oil industry the thinking behind previous oil market in 2020. decisions. The procedure The macroeconomic situation for calculating the damper The set of factors affecting global oil in the Russian economy in 2019 component for motor fuel was markets and companies’ operations - early 2020 remained stable. further clarified; the list of excisable remains complex. On the supply The economic growth continued, middle distillates was expanded; side, in addition to the ability albeit on a modest scale. In 2019, and the roadmap for introducing of various countries to maintain Russia’s GDP grew by 1.3% against tax concessions in oil production production levels amid price 2.5% a year earlier. was approved. The reduction volatility, the market will be affected of netback indices for motor fuels by the political situation in the Middle Economic stability was supported in the context of moderate global East and North Africa. Demand, by a strong export balance, despite prices and stable rouble rates in turn, is likely to be driven not only made it possible not to extend by economic growth and the impact

26 ANNUAL REPORT 2019 Russian oil production and exports, million tonnes

600

500

400

300

200

100

0 2011 2012 2013 2014 2015 2016 2017 2018 2019 Production Export Refining

domestic price constraints. Overall, forecasts, this trend may continue domestic petroleum-products prices in 2020. Real disposable income remained stable. declined in 1H 2019, triggering a slight reduction in the annual The limitations of the OPEC+ gasoline demand. By contrast, deal notwithstanding, crude diesel-fuel consumption continued oil and condensate production to grow (by approximately 1.3%), in Russia hit an all-time high of 560.2 which was supported by growth mt in 2019 (+0.8% on 2018). Oil in the key sectors of consumption exports grew considerably (268.4 (mining, agriculture, construction, mt as against 258.2 mt in 2018), railway transport). As ever, changes despite the Druzhba oil pipeline in consumption levels by the air contamination. The ongoing transportation sector were more modernisation of domestic refineries pronounced: passenger traffic spiked meant a boost in output of gasoline, 12.9%, while cargo traffic plunged diesel-fuel and aviation fuel, 6%. Demand for jet fuel edged up 3% reducing overall volumes of primary over the year, although early 2020 distillation which, in turn, led saw a substantial reduction. to growth in production of fuel oil and heavy marine fuels. The decline in global oil prices in spring 2020 put pressure The economic climate was mirrored on the rouble exchange rate on the petroleum-products market and other indicators, exacerbating and in the key drivers of demand. the macroeconomic situation Sales of new cars in Russia in Russia as a result. were down 2.3% to 1.759 million units and, according to industry

02 STRATEGIC REPORT 27 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices GLOBAL TRENDS AND THEIR IMPACT ON THE GAZPROM NEFT STRATEGY

Significant changes Global trend Description Challenge for the industry How the company is responding in the global Increasing pace of external Major changes in market, technological, – Fast and efficient decision-making New technologies, digitalisation and operational change social and regulatory factors that – Strategy flexibility and business resilience under any scenario transformation enable the company to make the best energy sector place have a continuous and hard-to-predict – A deep understanding and continuous analysis of the external decisions, and improve performance and viability across high demands impact on the operating environment environment the entire value chain, both in the upstream and downstream of the company. segments. on the efficiency, For details, see the speed and flexibility p. 16 Strategy 2030 section of the companies Growing competition Competition among companies in various – Managing the asset portfolio to maximise its value Gazprom Neft is a technology flagship in the Russian oil in the sector. in traditional markets sectors for consumers, resources – Ensuring asset efficiency across the entire value chain industry. It has experience in implementing projects that and economic value drives the number, – Developing products and services to complement the existing are unique in Russia and globally, including the only Arctic quality and diversity of energy resources business oil platform in the world and construction of complex Gazprom Neft’s and related products and services. infrastructure in permafrost conditions. development strategy For details, see the to 2030 is driven p. 104 Technological Development section by the key trends in the energy sector Growing technological Growing complexity of energy production, – Efficiently developing in-house technological competencies Gazprom Neft is continuously increasing the proportion complexity of the business processing and transportation – Engaging in developing advanced industry-wide technologies of high-technology projects in its portfolio, using best practices and industry. technologies. This is in the context – Reducing reliance on imported technologies and equipment and technologies in geological exploration. 3D-modelling of the gradual depletion of reserves, systems, cloud technologies, big data, and artificial intelligence We strive to be technological progress and increasingly deliver vast improvements in efficiency. The company is also proactive in responding tight requirements for processes developing its own proprietary technologies, such as those and products in the energy sector. for the Bazhenov Formation. to change and are closely For details, see the engaged in shaping p. 54 Resource Base and Production section markets, technologies and influencing A growing role for digital Rapid development of data acquisition – Digitalising production and management processes The company’s digital transformation covers the entire value technology across multiple and processing technologies, which helps – An efficient system for implementing new digital solutions chain. It is intended to improve the flexibility and efficiency the environment. sectors to substantially improve and transform in the company of business management. Gazprom Neft is developing its production and management processes. – Developing digital competencies and proprietary digital own solutions in artificial intelligence, the Industrial Internet solutions of Things, robotics, unmanned aerial vehicles, and other Industry 4.0 technologies

For details, see the p. 38 Digital Transformation section

Growing relevance Greater requirements, standards – Production reliability and safety As a socially responsible company, Gazprom Neft is putting of environmental and social and community demand for the safety – Minimising environmental impacts in place an HSE strategy based on international best practice. factors of people and processes, environmental – Involvement in the social development of those regions in which The company is committed to sustainable development values and other social aspects of the business. the company operates and is engaging effectively with its stakeholders.

For details, see the p. 196 Sustainable Development section

28 ANNUAL REPORT 2019 Global trend Description Challenge for the industry How the company is responding Increasing pace of external Major changes in market, technological, – Fast and efficient decision-making New technologies, digitalisation and operational change social and regulatory factors that – Strategy flexibility and business resilience under any scenario transformation enable the company to make the best have a continuous and hard-to-predict – A deep understanding and continuous analysis of the external decisions, and improve performance and viability across impact on the operating environment environment the entire value chain, both in the upstream and downstream of the company. segments.

For details, see the p. 16 Strategy 2030 section

Growing competition Competition among companies in various – Managing the asset portfolio to maximise its value Gazprom Neft is a technology flagship in the Russian oil in traditional markets sectors for consumers, resources – Ensuring asset efficiency across the entire value chain industry. It has experience in implementing projects that and economic value drives the number, – Developing products and services to complement the existing are unique in Russia and globally, including the only Arctic quality and diversity of energy resources business oil platform in the world and construction of complex and related products and services. infrastructure in permafrost conditions.

For details, see the p. 104 Technological Development section

Growing technological Growing complexity of energy production, – Efficiently developing in-house technological competencies Gazprom Neft is continuously increasing the proportion complexity of the business processing and transportation – Engaging in developing advanced industry-wide technologies of high-technology projects in its portfolio, using best practices technologies. This is in the context – Reducing reliance on imported technologies and equipment and technologies in geological exploration. 3D-modelling of the gradual depletion of reserves, systems, cloud technologies, big data, and artificial intelligence technological progress and increasingly deliver vast improvements in efficiency. The company is also tight requirements for processes developing its own proprietary technologies, such as those and products in the energy sector. for the Bazhenov Formation.

For details, see the p. 54 Resource Base and Production section

A growing role for digital Rapid development of data acquisition – Digitalising production and management processes The company’s digital transformation covers the entire value technology across multiple and processing technologies, which helps – An efficient system for implementing new digital solutions chain. It is intended to improve the flexibility and efficiency sectors to substantially improve and transform in the company of business management. Gazprom Neft is developing its production and management processes. – Developing digital competencies and proprietary digital own solutions in artificial intelligence, the Industrial Internet solutions of Things, robotics, unmanned aerial vehicles, and other Industry 4.0 technologies

For details, see the p. 38 Digital Transformation section

Growing relevance Greater requirements, standards – Production reliability and safety As a socially responsible company, Gazprom Neft is putting of environmental and social and community demand for the safety – Minimising environmental impacts in place an HSE strategy based on international best practice. factors of people and processes, environmental – Involvement in the social development of those regions in which The company is committed to sustainable development values and other social aspects of the business. the company operates and is engaging effectively with its stakeholders.

For details, see the p. 196 Sustainable Development section

02 STRATEGIC REPORT 29 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices Our aim is not only STRATEGY 2030 to gain a foothold in the top league of oil companies, but also to become a benchmark for industry peers, both locally Strategy 2030: priorities and globally, in terms of safety, technological advancement and efficiency. We strive to maximise maximise the value of every barrel of oil that we produce. Our aim is to achieve growth by maximising efficiency through investing in new projects, rather than merely BUSINESS GOALS expanding scale at any cost.

Alexander Dyukov, CEO and Chairman of the Management Board, AREAS OF LEADERSHIP Gazprom Neft PJSC

Gazprom Neft strives to become a benchmark for industry peers in such crucial areas as safety, efficiency and technological advancement. COMPANY TRANSFORMATION

Gazprom Neft has made remarkable progress in the last 10+ years, and is now a major player in the global oil and gas sector. The key objective Implementing Strategy 2030 means being of the company’s new development flexible in adopting new approaches in operational planning and adapting Strategy to 2030 adopted in 2018 to external challenges. is to build a new-generation company The company has identified key areas and to become a benchmark for both of the business that it plans to transform Russian and international industry in order to achieve its objectives. These peers. strategic transformations are both interconnected and mutually supportive.

30 ANNUAL REPORT 2019 Our Our goal mission

To become one of the world’s leading Evolving, to change the world. Creating, industrial companies, driving industry to be proud of our creations. We produce transformation, making the impossible resources for the future, enriching a reality, and inspiring our peers the world with the energy, knowledge, in Russia and beyond. and technology to advance.

1 2 3

Gazprom Neft is one of the world’s Maximising the added value of every Leadership in terms of return top-10 public companies in terms barrel of oil produced. The company on average capital employed1. This of liquid-hydrocarbon production. This needs to manage the entire value objective requires effective project goal reflects the scale of the business. chain efficiently in order to maximise and asset management, focused The company is committed to continuing financial performance. on maximising profit. its growth in line with the market, or above.

/ 1 / ROACE. 1 2 3

Safety. A responsible attitude Efficiency. Creating value under any Technological advancement. to employees, partners external scenario. This is a key driver Seizing opportunities for growth and the environment. As Gazprom of competitiveness in a challenging and improved operational efficiency Neft is working to become a leader external environment. by developing and implementing in industrial safety, it is guided advanced technological solutions, by the key principle: ‘Target Zero’,which and by continuously developing key means zero harm to people, competencies. the environment, or property in our operations.

1 2 3

Digital transformation will ensure Cultural and organisational Operational transformation involves that additional value is created transformation involves transforming deploying the “Etalon (Touchstone)” from data across the entire value chain: Human Resources management system as a basis for day-to-day from geological exploration to fuel from a support function into a driver operations, and a constant focus sales to end-users. for continuous development. on efficiency and improvements.

A key factor in recruiting the best employees and high-potential talent is to offer opportunities for continuous development, both individually and collectively.

02 STRATEGIC REPORT 31 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

Strategy in detail: 2019 highlights

Gazprom Neft’s business development efforts in 2019 and its short- term plans are consistent with the long-term development areas and goals set out in the Strategy 2030.

BUSINESS GOALS

In the upstream segment, Yamal development Nadym-Pur- Sakhalin the company continues to develop Developing Tazovsky region Developing mature fields. A wide range the resource base Developing a hydrocarbon of opportunities for further of the Yamal Peninsula and monetising production cluster development is grouped into and building a gas uniquely high volumes on Sakhalin Island’s several strategic areas. pipeline connecting of liquid hydrocarbon continental shelf. the Novoportovskoye reserves in a region % field to the Unified Gas- of strategic importance p. 297 +3.5 Supply System. to the company. pp. 65, 67 p. 58 year on year growth in hydrocarbon Strategic initiatives: production

in exploration and production, improving efficiency in: – reserves growth; LEADERSHIP – production growth; AREAS – ongoing production;

in logistics, processing and sales: – optimising the product Safety Efficiency portfolio and improving ‘Target Zero: zero Maximising the added operational efficiency harm to people, value of every barrel in refining; the environment, in any oil market – Improving efficiency or property development scenario. in sales and distribution. in our operations.’ COMPANY p. 198 TRANSFORMATION p. 42 pp. 54, 68, 78

32 ANNUAL REPORT 2019 In the downstream sector, the company continues to modernise its refineries and improve its operating efficiency, as well as expanding its retail network and making it more efficient.

Areas for long-term strategic development:

Increasing the conversion Improving efficiency Developing Developing rate and light-product and technological the petrochemical the marketing and sales yield advancement business business Adding value throughout Optimising resources, Increasing Maintaining market the company’s oil product cutting costs the sustainability leadership and increasing portfolio to ensure and transforming of the company’s traditional market share in existing refineries’ economic processes throughout business by developing and new product sectors. viability and technological the value chain to secure petrochemicals. flexibility under any market market leadership in new p. 78 conditions. and existing markets. p. 96

p. 68 p. 71

APG utilisation Non-traditional Technological New prospecting areas Commissioning gas resources development Preparing the resource infrastructure facilities, Developing non-traditional Bringing currently base for production beyond and increasing APG reserves of the Bazhenov unprofitable remaining 2025. utilisation volumes. Formation (Domanic recoverable reserves into and Palaeozoic deposits). production by developing p. 56 pp. 67, 200 and implementing new pp. 60, 61, 108 technologies.

p. 104

Creating technologies – Improving the oil recovery – Catalyst production; for future factor at mature fields; – Deployment development: – Developing multi-phase of proprietary deposits and low- processes throughout p. 104 permeability reservoirs; the company’s refineries; – Operating – Using import substitution in the challenging as a tool to help environment of the Arctic; Gazprom Neft become – safe and efficient offshore a technological leader operations; and achieve sustainability.

Operational Organisational Cultural Digital Implementing the “Etalon Becoming Moving from “management Improving speed (Touchstone)” Operational a flexible organisation and control” to “leadership and quality of decision Management System (OMS) with a streamlined by engagement” as a new making by deploying digital to ensure systemic safety and agile operating collaborative ideology. technologies. and efficiency in all day-to- environment. day activities. Developing an ecosystem p. 48 beyond the company. p. 38 p. 42 p. 46

02 STRATEGIC REPORT 33 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices BUSINESS MODEL

Gazprom Neft’s business A well-balanced model is based on the principle portfolio of upstream in Russia of vertical integration. assets 0.04 abroad

Operating at all stages 10.82 The Gazprom Neft portfolio covers an extensive resource base Gas sales, of the production chain (in both to ensure the sustainable development of the company. The portfolio mtoe the upstream and downstream includes traditional and offshore oil and gas fields in various stages of development (from geological prospecting to mature fields) 10.86 segments as well as sales in Russia and abroad, allowing the company to expand production Internal gas in order to maximise profit in line with market conditions. consumption, and marketing) it allows mtoe the company to remain resilient and enhance its operating .12 efficiency in the future. Oil inventories at year-end, Oil purchases , mt Direct wholesale distribution , mt 0.32 mt 18.98 in Russia 9.29 Gas, oil and condensate Petroleum-products sales through joint inventories at ventures3, mtoe year-end, mt Hydrocarbon production, abroad 1.51 mtoe 0.23

7.78 18.33 Premium sales, 96.10 1 Petroleum- mt products Petroleum-products in Russia abroad 4 production, balance , 26.46 105.0?0139 41.4 mt mt mt of oil 40.23 45.44 mtoe Filling stations 2.44 0.01 5.30 and tank farms 19.51 mt

O i 55.55 l

p r 0.54 o abroad d Jet fuel u c 3.22 mt t t in Russia io 4.37 n m , , m n o t ti Petroleum-products 22.02 c u Oil sales, purchases, d o 2.98 Bunkering r p mt abroad mt 32.26 2.99 mt te a 2.03 s in Russia n e 26.39 5.01 d on Bitumen5 C

0.42 mt

/ 1 / Including stable gas condensate

purchases from NOVATEK (25% Oils and Gas production2, mtoe of Arcticgas production) lubricants / 2 / The conversion factor (from bcm 0.32 mt into mtoe) is 0.803

34 ANNUAL REPORT 2019 Modern Directly-owned retail in Russia and efficient network in Russia 0.04 abroad refineries and abroad

10.82 Gas sales, The high efficiency of Gazprom Neft With an extensive distribution network in Russia mtoe refineries is thanks to their strategically and abroad, Gazprom Neft is able to maximise located, upgraded facilities and ongoing margins from sales of crude oil and oil products 10.86 technological projects. A wide to a wide range of customers, from retail Internal gas range of high-quality petroleum consumers to major traders. The company offers consumption, products offered by the company, high-quality products and services on the motor- mtoe and an advantageous geographical fuel, bunkering, jet-fuel, petrochemicals, location in close proximity to end lubricants and bitumen markets. markets, enable Gazprom Neft to meet demand and cater to the high standards 8.87 of its customers. Oil inventories at year-end, Oil purchases , mt Direct wholesale distribution , mt 0.32 mt 18.98 in Russia 9.29 Gas, oil and condensate Petroleum-products sales through joint inventories at ventures3, mtoe year-end, mt Hydrocarbon production, abroad 1.51 mtoe 0.23

7.78 18.33 Premium sales, 96.10 1 Petroleum- mt products Petroleum-products in Russia abroad 4 production, balance , 26.46 105.390?01 41.4 mt mt mt of oil 40.23 45.44 mtoe Filling stations 2.44 0.01 5.30 and tank farms 19.51 mt

O i 55.55 l p r 0.54 o abroad d Jet fuel u c 3.22 mt t t in Russia io 4.37 n m , , m n o t ti Petroleum-products c 22.02 u d Oil sales, purchases, o 2.98 Bunkering r mt abroad mt p 2.99 mt 32.26 e t 2.03 sa in Russia en 5.01 d 26.39 n 5 Co Bitumen 0.42 mt

Oils and Gas production2, mtoe / 3 / Sales through the Northgas and Arcticgas joint ventures lubricants / 4 / Including internal consumption and changes in inventories 0.32 mt / 5 / Polymer-modified asphalt cement (PMAC) and bitumen emulsions

02 STRATEGIC REPORT 35 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

Creating stakeholder value

Shareholders Customers and investors and consumers Long-term value growth Readily available and stable energy supplies High level of dividend yield Good consumer value and environmental performance of products

WHAT WE DO

– Ongoing communications with investors, – Expanding direct sales to corporate clients through shareholders and analysts to maintain a fair price the directly-owned distribution network for Gazprom Neft securities – Expanding the Gazpromneft filling station network – Developing a well-balanced corporate governance and developing its loyalty programme system to ensure compliance with Russian – Partnerships with leading petroleum-product and international best practices, taking into account customers the specifics of the industry – Developing and manufacturing products – Transparent reporting of development strategy with enhanced consumer and environmental implementation properties – Fair dividend policy – Increasing the efficiency of distribution channels – Respecting minority shareholders’ rights by business process digitalisation and developing – Continuously developing a risk-management system communication channels for customers with highly detailed levels of responsibility and contractors

2019 RESULTS

– Gazprom Neft share price as at 31 December 2019: – Leading positions in premium petroleum-products markets ₽420.2 per ordinary share (+21.2% year on year) – 11.9 million participants in the Gazpromneft filling station – Dividend payout for 6M 2019: 40% of consolidated network’s loyalty programme IFRS result – All motor fuels are compliant with the Euro 5 environmental standard – Dividend yield: 8% for 2019 – Jet fuel supplied to 283 airports in 67 countries worldwide – Bunkering in 35 ports in Russia, Romania, Latvia and Estonia – Lubricants supplied to 80 countries – Gazprom Neft is the first Russian oil company to have its own bitumen terminal network

36 2019 ANNUAL REPORT Employees Local Government communities A stable employer offering Corporate responsibility Energy security professional development and regional development opportunities Tax payments Technological development A competitive compensation of the Russian oil and gas industry package

– Systematic recruitment – Making significant tax – Stable production growth and employee rotation contributions to local budgets and efficient oil refining programmes – Contributing to the development with an extensive distribution – Talent management, of social infrastructure network for petroleum products competency development – Minimising negative environmental – Implementation of the first major and training impact offshore project (Prirazlomnoye) – Developing motivation – Supporting local initiatives and integrated development programmes and building of the Russian Arctic shelf a culture of engagement – Developing a centre – Increasing employees’ of technological excellence productivity and organisational and ensuring technological efficiency independence – Increasing efficiency of human resources management

– The company has topped – Gazprom Neft is a major taxpayer – Hydrocarbon production: 96.1 mtoe the Randstad Award ranking in the key regions of its operation – Over ₽700 billion paid in tax and other of the most attractive employers – ₽37 million allocated in 2019 for grants statutory payments in 2019 in Russia under the ‘Home Towns’ Programme; – Extending productive life of mature fields – The average monthly salary 143 projects implemented through the use of cutting-edge technologies in the company is ₽134,000 (up – Social investments by Gazprom – Creating tools to remove regulatory industry 9.3%). Neft under social and economic barriers through the Digital Oil and Gas agreements with regional industry-wide working group governments totalled ₽2.9 billion

02 STRATEGIC REPORT 37 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices DIGITAL TRANSFORMATION

In September 2019, the Gazprom Neft Board of Directors confirmed the company’s digital transformation strategy. This new document was developed in line with the company’s wider business development strategy to 2030, and supports its implementation.

The company’s digital (IIoT), robotics, unmanned aerial and operational processes transformation covers its vehicles (UAV or drones), and other at Gazprom Neft. Each of these entire value chain. It is intended Industry 4.0 technologies. programmes is intended to deliver to improve flexibility and efficiency key economic and business impacts in business management, based The digital transformation in the medium and long term. on data and digital twins of assets. management system uses a highly- The company is developing its own organised, programme-based solutions in artificial intelligence approach. It consists of a set of major (AI), the Industrial Internet of Things change programmes in technological

Portfolio of digital transformation tools and processes Meeting the objectives we have set • Regulation governing To establish in-house expert ourselves requires: the implementation communities specialising in technology, • A transparent and simple business- of digital projects (describing and to communicate more efficiently architecture management model to owners of digital products with business units, the company has to ensure flexible, rapid and efficient and product teams the procedure created centres of excellence focusing on: digital transformation; for securing funds, resources • Machine learning and AI; • High-quality digital resources and infrastructure); • Virtual and augmented reality; and cutting-edge processes; • Guidelines for launching digital • Video analytics; • An efficient, readily accessible projects (containing a step-by-step • Blockchain; and scalable IT infrastructure. description of the digital project • Robotics and additive manufacturing; implementation process); • Unmanned technologies; To which end, the company has • A procedure for securing • IIoT, and wearable technology. developed the following tools: investment and implementing digital projects to carry out a proof The centres of excellence are tasked Corporate knowledge-sharing system: with: • A glossary of digital transformation of concept (POC) and deliver value promptly; • Expert evaluation of solutions; containing over 250 terms, designed • Identifying technological solutions to unify terminology used throughout • Quick-start of IT and digital transformation projects. and assessing their maturity; the company; • Providing expert support for core • A knowledge-sharing system Technical tools: business projects; spanning all divisions including • A corporate cloud-based sandbox; • Developing implementation regular events to raise awareness • Technical regulations (streamlining scenarios for Gazprom Neft; of digital technologies and digital the process in terms of architecture • Developing digital projects projects. approval and information security and services that meet the needs Methodological tools: requirements, and designed of the business; • A methodology to determine to remove critical barriers • Solution integration and support; economic impact of investment to project implementation). • Developing new solutions; programmes, IT- and digital- • Testing technological solutions; transformation projects; • Prototyping.

38 ANNUAL REPORT 2019 Breakthrough digital-transformation projects implemented at Gazprom Neft

Digital transformation covers every stage of the company’s operations, from geological prospecting and drilling of multilateral wells to refining and delivery of finished products. Thanks to new technologies, by 2030 Gazprom Neft will halve the lead times in obtaining ‘first oil’, improve lead times for implementing major oil and gas production projects by 40% and reduce production management costs by 10%

AI in geological Gazprom Neft has been successfully using machine models of fields that exceed the scale of many exploration learning in its search for additional oil reserves, European countries. They can also help to achieve with neural networks using geological data to identify a significant reduction in the duration of the geological blocks with potential oil reserves that are undetectable analysis cycle. using conventional methods. In 2019, a pilot project using this cognitive system at an existing oilfield on the Yamal Peninsula helped to achieve additional inflow. Using probabilistic calculations, the cognitive pp. 58–63 algorithms make it possible to build detailed digital

Electronic Asset The EAD Programme is a strategic programme (a digital workstation for geological and field- Development comprising IT projects being implemented by Gazprom development engineers), EAD: REMONTY (computer- Neft in the upstream segment. Projects implemented aided well-workover management) and EAD: ProActive (EAD) by the company include EAD: ISKRA (an integrated (comprehensive analysis of data on hydrocarbon reserves). design system that assists with decision-making on field infrastructure development), EAD: GRAD

Digital logistic- To ensure uninterrupted year-round shipments of all about 300 parameters, and allows the fleet’s operational management oil produced in the Arctic (ARCO and Novy Port blends), efficiency to be assessed in real time. the company has developed a unique digital Arctic logistics system management system. The system tracks vessels in real Using this system, the company has reduced the unit cost for use in the Arctic time, develops an optimal schedule for the fleet and for oil of oil transportation from northern fields by 15%. ‘Captain’ shipments from terminals, and monitors the movement of each vessel at every stage of its voyage. It analyses over 65 million potential options per hour, processes

100% digital Using a mobile app to place orders and pay for fuel Corporate clients now have the opportunity to sign customer at Gazpromneft filling stations can cut motorists’ time an agreement with the company online, issue virtual spent filling up by as much as half. The ability to issue service cards via the app and exchange documents the ‘On Our Way’ loyalty programme virtual card without having to meet the company’s managers. All these right in the app means the entire chain of interaction transactions can be made through the personal account with the customer can be executed digitally, while in the OPTI24 app. There are now legal entities who the ‘Refill’ button allows clients to refuel their car without are fully-digital clients. leaving it. This button first appeared in the AZS.GO app and is currently being replicated in the filling station network’s app, as well as in partners’ apps.

Analytical This solution is Russia’s first integrated platform that is responsible for motor-fuel sales. Currently, for data processing, storage and analysis 50% of all analytical projects in this division are being platform with fully integrated Data Governance components. implemented using this platform. The project won for managing data It is designed for big data processing and storage, the 2019 Project of the Year award from Global CIO advanced analytics, and for improving data and the 2020 CDO Award. management efficiency. Most importantly, it ensures the quality of various data at a Gazprom Neft unit

Geo-analytical The company has leveraged data to create a unique traffic flows and identifies the best locations platform integrated AI-powered solution that models for the development of the filling station network.

02 STRATEGIC REPORT 39 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

2019 achievements 2019 transformation results

By the end of 2019, 30 digital Gazprom Neft transformation programmes aims to become had been approved. Once they a leader in the digital reach their full design capacity, 1,000+ transformation of the fuel the programmes will have delivered and energy sector and their target economic effect of 3–5% digital and IT projects a leading technology brand. of EBITDA per annum starting and initiatives It will do this by attracting from 2022. Investments in IT and supporting qualified and digital transformation in 2019 personnel and embedding accounted for up to 5% of Gazprom the development Neft’s cumulative investment of talent in the company. programme. We have a growing 700+ number of initiatives: An important milestone in the digital we are developing both digital- transformation process at Gazprom scenarios analysed to assess and IT-project portfolios Neft was the Digital Technology potential technological and we are creating tools Vision (DTV), which is a long- application to manage these efficiently term planning tool for developing in terms of increasing and applying digital technologies. It economic benefits is based on intelligence, information for the company. on innovative digital projects, The transformation process academic research, and products has got off to a great start; offered by leading technology 30 it is attracting great interest, companies. and more and more people programmes in the digital are getting involved. The DTV addresses the following transformation portfolio questions: Andrey Belevtsev, – How mature is a digital CDO (Chief Digital Officer) technological solution in terms of its practical applicability? – Which digital technological solutions does the company need 192 today and in the future? – Which technological solutions proof-of-concept projects is the company ready for today completed, the results of 46 and which does it need to make of which are currently being sure it is ready for in the future? implemented – What needs to be done to ensure the company is prepared for emerging technologies?

As part of its digital technological vision, Gazprom Neft has developed over 700 forward-looking scenarios for the use of digital technologies across Gazprom Neft’s entire value chain.

40 ANNUAL REPORT 2019 Plans for 2020

The company has identified several key development areas for 2020. Utilisation of artificial intelligence (AI) in the company 1. Operational transformation in IT. In order to develop and implement AI-based solutions across the entire value The key challenge for the company chain, the company has established its Data Monetisation and Development Centre is to achieve an efficient and flexible (DMDC), as well as several data-science teams within Gazprom Neft’s divisions and in the Gazprom Neft Science and Technology Centre. alignment of roles in order to create a well-defined and transparent The Data Monetisation Centre is designed to improve the efficiency of internal system to support the development processes in the company by leveraging data, analytics, and mathematical modelling and optimisation techniques. The DMDC develops solutions for all areas of Gazprom of digital transformation Neft’s business. The company is building a corporate data analysis platform based programmes and assist the business on machine learning and optimisation methods, in-depth training and image to implement them. The system analysis, and natural language processing, aimed at accelerating the development should also help to create digital and implementation of solutions based on data analysis and mathematical modelling. The most significant DMDC projects in 2019 involved processing and interpreting seismic and IT products, and to provide easy data, analysing and processing magnetograms, and conducting core analysis. access to information infrastructure and services. 2. Development of a corporate digital platform comprising the following 35 2,000+ components: projects models – A corporate platform for applications and data using AI/machine learning developed (Platform-as-a-Service, PaaS) as the basis of a new technological landscape; – Operational platforms enabling 120 100+ business-process integration throughout the entire value data models chain; analysts with real-life application – Application platforms allowing the delivery of centralised solutions for highly specific tasks such as video analytics, wearable technology, Gazprom Neft is involved in the development of AI augmented and virtual reality, in Russia and blockchain. As part of ongoing projects in artificial intelligence (AI), the company has become one 3. A corporate platform of the founding members of the Science and Education Centre for Artificial Intelligence in Industry, cooperating to this end with Russia’s leading higher educational institutions for data analytics and management, (ITMO University (the St Petersburg State University of Information Technologies, and digital service development. Mechanics and Optics), St Petersburg State Electrotechnical University, the St This will help to significantly Petersburg campus of the Higher School of Economics, the St Petersburg State speed up project implementation University of Aerospace Instrumentation, St Petersburg State University, and the Peter the Great St Petersburg Polytechnic University). and increase the scale of the launch of AI-based solutions. In September 2019, Gazprom Neft, Yandex, Mail.ru Group, Sberbank, MTS 4. Putting previously launched and the Russian Direct Investment Fund worked together to establish the AI-Russia Alliance, Russia’s first cross-industry alliance for developing AI, with Gazprom Neft projects into commercial operation, becoming the first industrial company to join the Alliance. and rolling out the results of digital transformation in subsidiaries. The Alliance seeks to facilitate the implementation of AI technologies in Russia, and is helping to develop a regulatory framework governing AI development in Russia, 5. Expansion of a partnership as well as legislation governing industrial and personal data. ecosystem for digital developments. 6. Transition to a product-based The AI-Russia Alliance will also work towards developing a professional community of experts and organisations specialising in AI and data analytics. This will include approach throughout the company. an initiative to develop an advanced training programme in AI for university teachers, postgraduate students and undergraduates.

02 STRATEGIC REPORT 41 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices OPERATIONAL TRANSFORMATION

The operations management system (OMS) transformation is a key programme to improve efficiency and achieve the goals of Strategy 2030. 2019 saw the start of the programme’s expansion across the company’s main operating assets.

The Etalon OMS is a structured efficiency by enabling reliable adhered to in order to improve set of interconnected practices, and safe operation and engaging all operational processes across all procedures and processes used employees in a culture of continuous assets. This will bring the company by managers and employees at each improvement. closer to maximum operational organisational level in the course efficiency. of operations. The Etalon OMS The OMS Development Code, adopted is designed to maximise by the company in 2019, sets out the company’s operational common principles that must be

THE ETALON OMS STRUCTURE Ensuring that managers play a leading role in creating an engaging environment to enable Element 1 Leadership and culture the company to achieve strategic goals Achieving the target level of production asset safety and cost-effectiveness throughout its entire Element 2 Reliability management life cycle through targeted risk-oriented maintenance, reasonable extension of service life and the durability of technical equipment Element 3 Process flow management Ensuring that production processes are safe, efficient and sustainable Organisational development Ensuring that organisational resources are effectively secured and allocated; assigning Element 4 and competency management responsibility and developing staff competencies Ensuring that a uniform, risk-based approach to operations management has been adopted, Element 5 Operational risk management in order to improve operational efficiency by minimising unplanned losses from operational risk through actions to reduce their likelihood and mitigate the consequences Contractor and supplier Ensuring the efficiency and safety of work performed/services provided by contractors, Element 6 management and the efficiency of materials and equipment supplied Element 7 Project management Ensuring that project goals are achieved efficiently Data, information and document Element 8 Making the best management decisions based on data, information, and documentation management Environmental and social impact Element 9 Preventing unacceptable impacts on people and the environment management Element 10 Change management Ensuring that changes within the company are efficient, and maintaining operational continuity Identifying stakeholders in operations, communicating with them and building constructive Element 11 Stakeholder management stakeholder relationships as part of operations Performance management Element 12 Improving operational efficiency by using continuous improvement tools and continuous improvement

42 ANNUAL REPORT 2019 The OMS Development Programme

The “Etalon (Touchstone)” OMS 1. OMS maturity assessment or rolling it out to other processes; development programme brings and preparing for implementation this involves training together the objectives of achieving at an asset in the use of forward-looking full compliance with all elements tools, and providing resources of the management system, 2. Comprehensive potential to support project teams at the asset changing the approach to setting assessment, and planning implementing those tools. objectives in production planning, the implementation of OMS tools and encouraging the engagement and practices in a pilot process flow, Once Stage 4 is completed, the focus of all employees to improve business area or process of OMS development will shift away processes. 2019 saw the Etalon OMS from projects, and the objective development programme moving 3. Pilot implementation of developing and improving to the ‘Implementation’ stage, and developing prioritised OMS the system will be integrated into with the company adopting a model elements day-to-day operations as part for implementing OMS practices of a continuous improvement cycle. and tools at its assets that comprises 4. Scaling up and developing the following four stages: the system across the asset and/

IMPLEMENTATION STAGES FOR OMS PRACTICES AND TOOLS

• Pilot areas identified • Assessment of potential • Developing tools updated for scale-up across and practices the asset Training in the use for Elements 1 to 12 • Initiatives implemented of forward-looking tools to achieve the potential and implementation support Pilot 3implementation 4 Scale-up

Point of no return Subsidiaries identified as being ready to develop the system independently Maturity Comprehensive 1assessment 2 assessment of potential

System 3Development 4 • Current asset status • Asset potential development determined determined prioritisation • Aligned • Cultural management action transformation plan developed plan developed • Prioritise those elements • Develop tools and practices whose development will on the growing list of prioritised help to reach the potential elements across the asset • Develop prioritised • Initiatives implemented elements across the asset to achieve the potential

Continuous improvement cycle

02 STRATEGIC REPORT 43 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

2019 achievements?

In 2019, the company continued STATUS OF OMS TOOLS ROLLOUT ACROSS KEY OPERATING to introduce forward-looking ASSETS AND ENGAGEMENT OF SUBSIDIARIES IN OPERATIONAL OMS development tools such TRANSFORMATION as the Operational-Reliability 1 2 Management Model (ORMM), Regular 1 2.6 12 MA CPA SUBSIDIARIES IN THE UPSTREAM DIVISION Management Practices (RMPs), Value Gazprom Neft Orenburg Creation Flow Mapping, and Standard ■ ■ ■ ■ ■ Operating Procedures. By year- Slavneft-Megionneftegaz ■ ■ ■ ■ ■ end, over 4,300 employees had been Gazpromneft-Khantos ■ ■ ■ trained in the use of RMPs, lean Gazpromneft-Vostok ■ ■ ■ production tools and the operational- Gazpromneft-Noyabrskneftegaz ■ ■ ■ reliability management model. Gazpromneft-Yamal ■ ■ ■ ■ ■ Messoyakhaneftegaz ■ ■ ■ ■ During the year, the company Gazprom Neft Development ■ carried out a diagnostic assessment Gazprom Neft Science and Technology Centre ■ ■ of compliance of eight production Gazpromneft-NoyabrskNefteGazAvtomatika assets with the OMS Code, Gazpromneft-Nefteservis ■ including the current maturity Noyabrskenergoneft (pilot) ■ level of the management system. Gazprom Neft Shelf ■ ■ ■ ■ ■ It then prepared an action plan Gazpromneft-Prirazlomnoye ■ ■ ■ ■ ■ for prioritised development areas. Gazpromneft-Sakhalin ■ Following a comprehensive Morneftegazproekt potential assessment (which serves SUBSIDIARIES IN THE DOWNSTREAM DIVISION as a tool to identify opportunities The Gazprom Neft Omsk Refinery ■ ■ ■ ■ ■ for operational efficiency The Gazprom Neft Moscow Refinery ■ ■ ■ ■ ■ improvement), it was confirmed Gazprom Neft Logistics ■ ■ ■ ■ that nine assets had an incremental Gazpromneft-Lubricants ■ ■ achievable economic potential Omsk Lubricants Plant (branch of Gazpromneft-Lubricants) ■ ■ ■ ■ ■ of over ₽21 billion. The relevant (pilot) measures to achieve this level were Gazpromneft Bitumen Materials ■ ■ ■ included in medium-term business The Gazprom Neft Ryazan Bitumen Binders Plant (pilot) ■ ■ ■ ■ ■ plans. Gazpromneft-Aero ■ ■ ■ ■ Koltsovo Fuelling Company (branch of Gazpromneft-Aero) (pilot) ■ ■ Gazpromneft Marine Bunker ■ ■ Etalon Programme Subsidiaries of Gazpromneft Marine Bunker (pilot) ■ ■ implementation format Customer service of the Regional Sales Directorate ■ ■ Tools forming part of OMS element Fuel and logistics operations of the Regional Sales Directorate ■ ■ ■ ■ ■ 1 (Leadership and Culture) are being (pilot at Gazpromneft-Terminal) implemented Gazpromneft Energoservis ■ ■ Tools forming part of prioritised OMS elements (elements 2 and 6) Avtomatika-Servis ■ ■ are being implemented Gazprom Neft Trading GmbH ■ Tools forming part of OMS element CORPORATE FUNCTIONS AND SUBSIDIARIES OUTSIDE THE SCOPE 12 (Operational Efficiency) are being OF THE DIVISIONS implemented Gazprom Neft PJSC ■ Diagnostic Assessment (maturity assessment) completed. Naftna Industrija Srbije (NIS) ■ ■ ■ ■ ■ Asset Potential Assessment Paradnaya Complex completed / underway Gazprom Neft Business Service ■ ■ 2020 focus Gazprom Neft Procurement ■ ■ ■ Information Technology Service Company (ITSK) ■ ■ Noyabrskneftegazsvyaz ■ / 1 / Maturity assessment / 2 / Comprehensivepotential assessment

44 ANNUAL REPORT 2019 Operational transformation in questions and answers

Glossary Successful Practices Contractor engagement Roadshow Safe and efficient contractor engagement is a key focus area Asset (OMS) of operational transformation. Subsidiaries, joint ventures In 2019, the company developed managed by the company, business a Contractor Engagement units, business divisions, corporate Code. The Code is designed centre functions or other units. >100 to create a new system for market engagement and establishes practices a special type of relationship for implementing joint projects Lean production presented and creating added value. A management concept based on continuous improvement In 2019, Gazprom Neft launched and commitment to eliminating all the Open Book project, to create types of losses, with all employees a partnership model for contracts being involved in the improvement that stipulates a procedure for cost process. reimbursement, remuneration 29 and risk sharing with capital construction contractors. This will enable the company to improve OMS Code subsidiaries project efficiency and engage A description of 98 requirements took part financially sustainable contractors. for 12 Operations Management Compared to traditional System Elements which must be arrangements, the new model met in order to achieve OMS goals. is more transparent, gives a clearer picture of pricing and efficiency drivers, and introduces a flexible Comprehensive potential approach to construction budgeting. The company also implemented assessment 62 An assessment of all of an asset’s the Partnerships project, which covers drilling and well-intervention strategic resources, including practices services. As part of this project, operational, financial, and human resources. A key OMS tool enabling identified new operational engagement with major partners was arranged the company to meet its objectives. customers with assistance from account managers. In September 2019, the second Competency, efficiency and safety Regular management practices Successful Practices Roadshow remain the key requirements Tools used by managers took place at Slavneft- for contractors. The company’s to improve operating performance Megionneftegaz. This event contractor engagement policy and safety. They contribute serves as an official platform that is focused on engaging contractors to the adoption of the company enables divisions to exchange in continuous improvement values and the creation of a cultural expertise and successful practices processes and integrating them into environment that enables in continuous improvement. A total the Safety Framework System. the company to achieve its strategic of 164 notional ‘acquisitions’ goals. of practices were made at the event. An ‘acquisition’ is a participant’s commitment to test whether a practice can be rolled out to their operations. The roadshow helped identify new customers for 62 out of 104 practices.

02 STRATEGIC REPORT 45 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices ORGANISATIONAL TRANSFORMATION

To achieve its strategic goals, the company needs to significantly accelerate its decision-making and execution. This requires a fundamentally new perspective on business processes and management models.

The company is implementing are quickly formed to bring feature of the new model is that and mastering modern, cutting- together specialists in various the corporate centre now focuses edge development and management disciplines to address a specific task on tasks in the Change category, approaches that are based and that are able to look for solutions whereas tasks in the Run category on a network structure. These independently, and coordinate (day-to-day operations) are more include flexible teams that with other teams. An important often delegated to subsidiaries.

Operating model

In its Strategy 2030, the company Asset of the Future Transformation mapped out a journey towards being of the Downstream Division a global benchmark in efficiency The target operating model and technological advancement for subsidiaries in the Upstream The organisational scale that requires a flexible and adaptive Division is based on a value-chain of the Downstream Division has product-based operating model principle: from identifying new already changed significantly, thanks focused on the object of management: development options, developing to the extensive business development the product. The product business cases and value-creation that has been underway since in this context is a comprehensive levers, to launching respective 2010. In 2018, the company began business solution created by a cross- projects and implementing to manage the Division as a single functional product team. To be able these safely and efficiently. asset. This involved changes to assemble such teams, the company At the same time, this model in processes, a shift in the balance needs to revise its existing business is focused on the principal object of powers and responsibilities processes, and create an environment of management: the asset. and changes to resource allocation, where experts can be mobilised KPIs, and the way that managers from different divisions. As part of the Asset of the Future of individual businesses viewed project, the company has identified the consolidated result. The company has selected a number key end-to-end business processes of pilot projects to test the product- ensuring the integrity of managing To support this transformation, based model, including: the asset potential and increasing the company conducted – The Asset of the Future project its efficiency. The development an assessment of its organisational (Upstream Division); of methods to assess the technological health; this is a tool for improving – Organisational transformation potential of assets, as well efficiency and productivity within (Downstream Division); as concepts of upstream control the Division. It also identified those – Establishing its Science centres and standard approaches elements and key characteristics and Education Centre (SEC); to the organisational design of the operating model directed – Transformation of the company’s IT of the Asset of the Future at improving organisational function. is ongoing. Furthermore, work efficiency. Further, the company has is underway to establish a new developed a model of the product- For the latter two projects, concepts business management ecosystem, based approach to be adopted and key approaches to transformation and to help employees acquire those by the division which involved are currently under development skills required for implementing identifying key structural elements and will be presented for internal the company’s ambitious strategy. and preparing a conceptual design discussion in 2020. of the organisational structure.

46 ANNUAL REPORT 2019 pr ojec 85 ts com pl ete s d 0 oces 4 n pr PROFESSIONALS 4.0 ts i jec PLATFORM pro 125 PROJECTS 6,200 UPLOADED PARTICIPANTS

2019 achievements

To date, the company has formed Furthermore, in 2019, the company The management company has more than 300 flexible teams. These completed the transformation consolidated the management teams have developed and tested new of its operating model for offshore of the following assets: practices and mechanisms that help project management. The divisional – Gazpromneft-Prirazlomnoye to remove barriers and streamline transformation was designed (operator of the Prirazlomnaya activities. Candidates are selected to improve flexibility of management platform); through the Professionals 4.0 and introduce new formats – Gazpromneft-Sakhalin (offshore platform and by the company’s HR of work (e.g. operator agreements, exploration); function. The company has developed partnerships, investments) – Morneftegazproekt (an staff relocation mechanisms with mitigation of business risks engineering company and algorithms for training cross- in offshore operations. responsible for the full range functional project managers. It also A management company was of FEED and design work as part introduced non-financial incentives established within Gazprom of offshore projects). for flexible-team members (such Neft Shelf which now acts as additional training and priority as the centre of expertise, career planning). responsibility and decision-making for Gazprom Neft’s offshore projects.

02 STRATEGIC REPORT 47 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices CULTURAL TRANSFORMATION

Gazprom Neft is implementing a large-scale project to transform its corporate culture. Its new engagement philosophy involves a shift from top- down management to facilitative leadership.

Corporate culture transformation – A leader is a role model for all them to its specific needs. involves shaping behaviour in a way employees; The supporting elements are: that helps the company to achieve – A leader creates an engaging – Providing a rationale its goals. This behaviour needs environment for the team; for the cultural transformation to be supported by appropriate – A leader is committed and target vision; processes, organisational structure to continuous development. – Developing new behaviour models and operational settings. Gazprom for employees; Neft has developed a leadership To implement a new corporate – Making changes to processes behaviour model where: culture, the company is using to encourage such behaviour; international best practices, tailoring – Ongoing communication.

2019 achievements

In 2019, the company continued Practices’. This is a format that Neft subsidiaries. To do so, to develop its corporate culture will be used to train all top managers Gazprom Neft employees formed workshops for managers. and will then be cascaded through a community of 142 in-house By March 2019, more than 6,000 the management hierarchy. coaches who ran corporate culture managers throughout all Gazprom workshops throughout the year. Neft subsidiaries had attended The company is developing In addition, the company developed the workshop. Given the need a community of change ambassadors a special training and recognition for managers to take specific actions to drive its corporate culture. programme for change ambassadors, to create an engaging environment, 2019 saw the launch of a project which includes training courses Gazprom Neft developed Workshop to train a second wave of change and an annual forum. 2.0 ‘Facilitative Leadership ambassadors across Gazprom

48 ANNUAL REPORT 2019 Gazprom Neft’s values

The company’s values a culture of rules, of success, the culture of success is centred are shaped by its vision, mission, and of consensus. Gazprom Neft’s around efficiency and determination; and strategy. The target corporate values support this process: and the culture of consensus is based culture at Gazprom Neft the culture of rules is underpinned on collaboration and innovation. is a synthesis of multiple cultures: by responsibility and safety;

Collaboration communication means collaboration

Safety is our priority Innovation is our way of thinking

Gazprom Neft’s values

Responsibility is our work ethic Determination is in our nature

Efficiency is our strategy

02 STRATEGIC REPORT 49 HOW NEW DIGITAL STANDARDS ARE TRANSFORMING JET REFUELLING

Alexey Shnyakin, airfield tanker driver ANNUAL REPORT 2019

Performance review

Resource base and production Refining and production of petroleum products Sales of oil, gas and petroleum products Financial results GAZPROM NEFT

2019 p. 80 The company unveiled the world's first digital Arctic Today, logistics-management system we are a whole highlights The core objective of the new system named 'Captain of the Arctic' new company is to manage logistics in the Arctic safely, and to ensure that all oil in many respects: produced is dispatched at the lowest possible cost. It takes the system from production under five minutes to draw up a vessel schedule for a month, while a long- volumes to the size term three-year plan, broken down into one-hour intervals, takes about two hours. Every day, the system analyses around 7,000 input parameters, of our resource base choosing an optimum solution from more than 66.5 million options and the complexity every hour. The Captain of the Arctic System is able not only to manage of the projects the current situation, but can also forecast the future. we are undertaking. To progress further, the company needs to take business PERFORMANCE process organisation to a new level. We want to become a lodestar for industry peers globally Reliance in technology, efficiency and safety. And this calls for fundamental on innovation change – in ourselves and our business. p. 58 ensures Vadim Yakovlev Deputy CEO for exploration and Production, Gazprom our leadership Neft PJSC in the industry The innovation development programme Consistently strong financial currently underway in the company performance includes, specifically, technology projects Gazprom Neft showed to enhance oil recovery at brownfields, resilience across all financial metrics, bring hard-to-recover hydrocarbon with the company achieving reserves into production, bring continuous a record net profit of ₽422.1 billion in 2019, an increase improvement to the productivity of wells, of 5.3%. as well as the initiative to develop and produce hydro-processing and cat- cracking catalysts.

Net profit, Market-leading AI-based Consolidation of a 100% ₽ billion solutions shareholding in Poliom In September 2019, Gazprom Neft, Petrochemical production 500 Yandex, Mail.ru Group, Sberbank, MTS is a strategically important growth and the Russian Direct Investment Fund area for the company. In order 400 established the AI-Russia Alliance, to strengthen the position of Gazprom Russia’s first cross-industry alliance Neft on the petrochemical market, 300 for developing artificial intelligence (AI). the company, together with SIBUR Gazprom Neft was the first industrial Holding, secured a 100% shareholding 200 company to join the Alliance. in Poliom LLC in 2019.

100

0 2015 2016 2017 2018 2019

52 ANNUAL REPORT 2019 p. 97 Construction of a new catalyst production p. 91 A new hybrid marine fuel for facility is underway environmentally-friendly bunkering Gazprom Neft’s project is designed to meet Russian refineries’ New restrictions on sulphur content in marine fuels introduced demand for efficient cat-cracking and hydrotreatment catalysts by the International Maritime Organisation (IMO) took effect in early necessary for the production of Euro-5 standard gasoline 2020, meaning sulphur content in any marine fuel used for international and diesel fuels, as well as hydrocracking catalysts used in deep transportation must not exceed 0.5%. To prepare for a significant increase oil refining processes. This new facility in Omsk will have capacity in demand, the Gazprom Neft bunkering operator extended its product range to produce 15,000 tonnes of cat-cracking catalysts and 6,000 with a new hybrid fuel not exceeding the 0.5% sulphur cap. The company tonnes of hydroprocessing catalysts per year, in addition to which has already piloted bunkering operations using the new fuel in the ports the plant will regenerate about 2,000 tonnes of spent diesel-fuel of St Petersburg, Primorsk and Ust-Luga. Commercial production hydrotreatment catalysts per year. of this environmentally-friendly product began at the Gazprom Neft Omsk Refinery in January 2020. It has already been certified as meeting the Eurasian Economic Union standards.

2017

4,022

16 2 20 01 8 4,0 45 08 3,9

1,522

1 5 ,5 1 4 6 2 5 1 4 0 5 0 7 , 2 1 1 8 , 9 3 719 7 26 34 8 7 1 5 , 1 0 8 6 4,28 63 1,583

/ 1 / Petroleum Resources DEVELOPED Management System HYDROCARBON RESERVES UNDER THE PRMS PROVED CLASSIFICATION (MTOE)1

Changes in operational indicators, The development strategy covers every stage million tonnes of the company’s operations Digital transformation covers every stage of the company’s Oil Refining Petroleum-products Petroleum-products operations, from geological prospecting and drilling production production sales of multilateral wells to refining and delivery of finished products. Thanks to new technologies, by 2030 Gazprom Neft will halve the lead times in obtaining ‘first oil’, improve lead times 70 for implementing major oil and gas production projects by 40% 60 and reduce production management costs by 10%.

50

40

30 2015 2016 2017 2018 2019 03 PERFORMANCE REVIEW 53 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices RESOURCE BASE AND PRODUCTION

The key areas in Gazprom Neft’s resource base development strategy include organic growth of existing assets, development of oil assets owned by Gazprom PJSC, investigating and bringing non-traditional reserves into commercial development, and proactive geological exploration at new prospecting zones and offshore.

Resource base

Gazprom Neft Group 3,875 3,908 4,022 4,045 4,287 We are successfully hydrocarbon reserves1 developing complex under the SPE-PRMS 5000 multi-component classification2, mtoe 4000 oil and gas reserves, Source: company data. 3000 applying cutting-edge technologies, and using 2000 digital models of assets 1000 to perform calculations 0 and find the most efficient solutions. Type of reserves 2015 2016 2017 2018 2019 Recognition Developed 680 726 719 734 763 from the industry globally demonstrates Undeveloped 838 788 803 830 820 that the company Proved 1,518 1,514 1,522 1,564 1,583 remains at the cutting Probable 1,181 1,205 1,259 1,277 1,278 edge of technological development Proved + probable 2,699 2,719 2,781 2,841 2,861 and is ready to tackle Possible 1,176 1,189 1,240 1,204 1,426 the most complex TOTAL 3,875 3,908 4,022 4,045 4,287 projects.

Vadim Yakovlev Deputy CEO for Exploration and Production, Gazprom Neft PJSC

/ 1 / Excluding NIS reserves. / 2 / Petroleum Resources Management System: a system developed by the World Petroleum Council and the Society of Petroleum Engineers, in cooperation with the American Association of Petroleum Geologists.

54 ANNUAL REPORT 2019 2019 highlights year-round oil shipments • Laser altimetry and aerial and transportation from the photography became an obligatory • Sustained positive growth rate Novoportovskoye field stage in the detailed design of of 2P1 reserves under PRMS • Long-term risk-operator seismic field surveys. standards. agreements with Gazprom PJSC, • Full-scale deployment of Green • Successful licensing programme allowing Gazprom Neft to bring into Seismic2 technology in the KhMAO- including access to 32 licence development reserves at oil-rim Yugra. 100% of field seismic blocks, including joint ventures. and Neocomian-Jurassic deposits. operations in the winter seismic • A 2020 flexible field portfolio • Start of construction of a full- season in the Okrug used this management roadmap developed. scale complex of oil and gas technology. • Agreements to expand infrastructure at the Otdalennaya • Opening of Integrated Field cooperation in production and ('Remote') group of fields (OGF). Development Centre (Tyumen), field development, development • An asset swap transaction which provides support for major of digital technologies and (NOVATEK-Yarsaleneftegaz) oil-production projects at all experience-sharing with major • Approval from the Main stages, from infrastructure design market participants State Expert Review Board to well drilling and the production • Completed development of (Glavgosexpertiza) to construct a process. logistical arrangements for gas pipeline crossing the Gulf of .

The condition of the company’s The company’s reserves are (bcm) of gas), excluding NIS reserves: resource base is characterised by audited in accordance with the a year-on-year increase of 0.7%. the deteriorating structure of its SPE-PRMS standards and the remaining commercial reserves, as more conservative SEC4 standards. Gazprom Neft’s reserves-to- the majority of fields are entering According to a reserves evaluation by production ratio in terms of proved their late stage of development. independent consultants DeGolyer hydrocarbon reserves (SPE-PRMS The efficiency of developing these and MacNaughton5, Gazprom Neft’s standards), including the company’s fields is improved through the use proved and probable hydrocarbon interest in joint operations and joint of advanced drilling and tertiary3 reserves (including allocations ventures, currently stands at 17 (enhanced oil recovery) techniques. proportional to the company’s years. Total hydrocarbon production In addition to this, Gazprom Neft interests in affiliated companies) in 2019 was offset by new reserves expands its resource base each year under the SPE-PRMS international (including acquisitions) in the order through geological exploration and standards as at 31 December 2019 of 120%. the acquisition of new assets. are estimated at 2,861 mtoe (1,865 mt of oil and 1,241 billion cubic metres

/ 1 / 2P – proved and probable reserves. / 2 / Green Seismic is a seismic survey technology that leads to a reduction in tree felling. It uses wireless recording equipment that can be installed using lightweight machinery. This makes it possible to reduce the width of clearings for vehicles from between four and five metres to one metre. / 3 / Tertiary recovery techniques are used to enhance oil flow and the oil recovery factor by injecting gas, chemicals, steam or other substances into formations. / 4 / An oil reserve classification developed by the US Securities and Exchange Commission, which requires the use of a 12-month average of the first- of-the-month prices in the reporting period. / 5 / An oil and gas consultancy.

03 PERFORMANCE REVIEW 55 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

Replacement of hydrocarbon reserves: key achievements 1, mtoe Source: company data.

Exploration, development Proved reserves Hydrocarbon and revision of prior Proved reserves Enterprise (2018) production estimates Asset swap (2019) Gazprom Neft 872.96 (58.25) 57.30 50.33 922.34 Tomskneft 72.71 (4.80) (0.26) – 67.65 Slavneft 129.84 (7.37) 8.07 – 130.54 Salym Petroleum 22.95 (3.25) 3.54 – 23.24 Development Messoyakhaneftegaz (joint 16.32 (2.81) 2.66 – 16.17 venture) Arcticgas 386.29 (15.22) 29.26 (40.78) 359.56 Northgas 62.95 (3.12) 3.40 – 63.23 TOTAL 1,564.02 (94.82) 103.97 9.55 1,582.73

In 2019, as part of an asset swap deal field began several years ago and levels of geological investigation and with NOVATEK, Gazprom Neft obtained full-scale development of the are relatively remote from transport a 100% shareholding in NOVATEK- Kharasaveyskoye field started in and oil and gas infrastructure. The Yarsaleneftegaz, which owns the 2019. To date, however, transport company obtained subsoil rights on Malo-Yamalsky licence block in the infrastructure for liquid hydrocarbons a declarative basis for geological Yamalo-Nenets Autonomous Okrug. remains missing at both these fields. prospecting at 12 licence blocks in The new asset will be included in the the west of the Taymyr Peninsula, “Yamal Gas” project. Furthermore, in 2019, Gazprom and also won bidding rounds for the Neft went into two new prospecting Severo-Yamburgsky licence block, In 2019, Gazprom Neft also secured areas: the Taymyr Peninsula (in the which allowed the company to create access to field development at a Dolgano-Nenetsky District in the a new potential opportunity for growth number of further licence blocks Krasnoyarsk Krai) and the north of in the north of the Tazovsky Peninsula belonging to the Gazprom Group. Gas the Tazovsky Peninsula. These two (YaNAO). production at the Bovanenkovskoye regions are marked by very limited Overall, in 2019, the company secured exploration and production rights

Licences obtained in 2019 Source: company data.

Number Region of licences Licence blocks Krasnoyarsk Krai 13 Zapadno-Taymyrsky blocks 1–12, Omorinsky Khanty-Mansi Autonomous Okrug- Severo-Vaysky, Srednevaysky, Polevoy, Severo-Ingolsky, Vostochno-Kinyaminsky, 8 Yugra, Sverdlovsk Oblast Vostochno-Shapshinsky 1, Sverdlovsky 4, Yuzhno-Ostrovnoy Severo-Stakhanovsky, Novoromanovsky, Pukhutsyayakhsky, Yamalo-Nenets Autonomous Okrug 6 Blizhnenovoportovskoye field, Yuzhno-Obsky, Malo-Yamalsky Orenburg Oblast 4 Nadezhdinsky, Zapadno-Rubezhinsky, Kornavarinsky, Pervomaysky Tyumen Oblast 1 Yuzhno-Zimny TOTAL 32

/ 1 / Excluding NIS reserves.

56 ANNUAL REPORT 2019 to 32 new licence blocks in the Register. The company also confirmed Yamalo-Nenets and Khanty-Mansi the oil- and gas-bearing potential of 215 Autonomous Okrugs, and other 48 new hydrocarbon deposits. This regions. The total number of licences expansion of the company’s resource held by the company in Russia base was facilitated by successful total number of licences reached 215 (including seven offshore geological prospecting activities at held by the company licences). Three new fields were the Alexander Zhagrin field in the in Russia discovered across Gazprom Neft’s Khanty-Mansi Autonomous Okrug, concessions (in the Orenburg and and at assets in the Yamalo-Nenets Tomsk Oblasts) and were recorded in Autonomous Okrug, Orenburg Oblast, the Russian State Mineral Reserves and the Krasnoyarsky Krai.

Partnerships Developing exploration cluster in the Gydan Peninsula In 2019, the company not only actively In June 2019, Gazprom Neft and Royal Dutch Shell signed an agreement developed cooperation with existing confirming their intention to create a joint venture to develop the Leskinsky and Pukhutsyayakhsky licence blocks. The transaction is expected to be concluded partners, but also entered into in 3Q 2020 once all necessary corporate and regulatory approvals have been dialogues on a broad agenda with obtained, and all legal preconditions met. As a result, Gazprom Neft and Shell other companies. will each have a 50% interest in the joint venture. Establishing this joint venture is intended to bring both parties’ resources and skills together in developing an By building partnerships, the under-researched exploration cluster in the north–east of the Gydan Peninsula. company seeks to gain a wide The company is currently working on these and a number of other deals, on which range of benefits, including risk and significant progress was made in 2019. In addition to focusing on current projects, in 2020 the company will continue to develop its portfolio of joint projects with investment sharing, obtaining or existing and potential partners. jointly developing new technologies, accelerating return on capital, and more. In addition to this, cooperation with other companies enables Gazprom Neft to replicate successes it has had in its other projects.

03 PERFORMANCE REVIEW 57 GAZPROM NEFT

Company profile Strategic report Performance Technological development Gazprom Neft digital system Governance system identifies new oil strata Sustainable development in the Yamalo-Nenets Appendices Autonomous Okrug

Geological prospecting and oilfield development

The company is developing projects More than 12 million tonnes of ARCO complex of field oil-rims united grouped into large clusters on the (Arctic) oil have now been produced by a single infrastructure. The Yamal Peninsula, in Eastern and over the six years in which the fields currently being developed Western Siberia, in the Orenburg Prirazlomnaya platform has been in include Pestsovoye, En-Yakhinskoye Oblast, as well as through joint continuous operation, with 19 wells and Zapadno-Tarkosalinskoye, ventures with foreign partners. having been drilled. Three further with exploration activities under wells will be built and commissioned way at the Yamburgskoye field. In 2019, Gazprom Neft expanded at Russia’s first ever project on the Furthermore, in July 2019 Gazprom its resource base primarily through Russian Arctic Shelf in 2020. Neft secured development rights to organic growth at its existing assets. the Urengoyskoye field and Achimov This involved drilling 59 exploration gas-condensate deposits at the wells (including joint ventures). The Pestsovoye field. total drilling in 2019 (including joint mt ventures and projects) reached 167.7 Of those projects mentioned kilometres. According to Russian 12 above, Yamburg is set to become assessment standards, the success the largest new project in the rate for exploration drilling in 2019 of ARCO oil produced Arctic; estimated oil reserves of was 76%. the Achimov deposits within the licence block exceed four billion Two-dimensional (2D) seismic tonnes. Gazpromneft-Zapolyarye surveys covered 15,757 linear LLC has concluded long-term risk- kilometres in 2019 – a 2.9-fold 19 based operatorship agreements increase on 2018 – including with Gazprom subsidiaries; these 14,377 kilometres offshore, with a wells drilled have enabled the company to start record volume of seismic surveys developing the Achimovsky strata undertaken in the Arctic (the Chukchi at the Yamburgskoye oil and gas- Sea) using only one vessel without A key area in Gazprom Neft's condensate field, as well as oil- icebreaking support and covering development strategy is its rim deposits at the Pestsovoye 8,377 kilometres. Three-dimensional engagement in oil-rim development. and En-Yakhinskoye fields. The (3D) seismic surveys covered 3,886 The company has both the latest company plans to start developing square kilometres, including 515 technologies and extensive oil-rim deposits at the Pestsovoye square kilometres offshore. competencies, as well as valuable and En-Yakhinskoye fields at experience in developing such the end of 2021, and the start of The “Yuzhny Yamal (Southern Yamal)” complex reserves. commercial hydrocarbon production is one of the key exploration projects from the Achimovsky strata at the in the YaNAO initially comprising the The reporting year of 2019 marked Yamburgskoye field is scheduled Surovy and Yuzhno-Novoportovsky an important milestone in the for 2024 or 2025. Annual production licence blocks. In December development of Gazprom Neft's volumes could reach up to 10 mtoe. 2019, the scope of the project was projects at the assets of its parent expanded following Gazprom Neft’s company, Gazprom Group. Currently, In Eastern Siberia, Gazprom Neft is success in the licensing round for Gazprom Neft-Zapolyarye LLC is developing a new production cluster the Khambateysky licence block. developing nine fields on the basis of where a key element will be an oil In 2019, 2D seismic investigations long-term risk operator agreements, deposit at the Chayandinskoye oil were undertaken at the Yuzhno- with subsoil rights to these fields and gas-condensate field in the Novoportovsky licence block. In 2020, being owned by Gazprom PJSC and its Sakha Republic (Yakutia). This field a 2D seismic survey will be conducted subsidiaries. is unique in terms of the size of at the Surovy licence block and, in its reserves in place, estimated at 2021, field geological exploration will Accordingly, the Nadym-Pur- 263 mt. The Chayandinskoye field, start at the Khambateyskoye field. Tazovsky region comprises a whole at the same time, is characterised by a complex geological structure,

58 ANNUAL REPORT 2019 'Geological exploration of the future is a safe, technology-intensive Gazprom Neft’s digital and efficient business' tools will improve (interview) drilling

with the presence of a gas cap and account the specifics of logistics, % exceptionally low formation pressure infrastructure and technological 76 and temperatures. complexity. prospecting The company is developing the Gazpromneft-GEO has put in place a oil rim at this field under an matrix-based organisational model and exploration drilling- operating agreement with Gazprom that best matches the specifics and success rate in 2019 Dobycha Noyabrsk (a subsidiary challenges of geological exploration. of Gazprom that holds the licence This structure enables Gazpromneft- for the field). This subsidiary GEO to manage employees’ is currently developing the gas workloads efficiently, form project portion at this asset and Gazprom teams quickly when initiating new Over the past few Neft intends to develop the oil exploration projects, and apply years, the company portion. In late 2019, Gazprom accumulated knowledge and best has significantly Neft moved into pilot development practices in all exploration projects in expanded its portfolio of the field, and dispatched the the company portfolio. of exploration projects, first batch of marketable oil. Full- in terms of both scale development of this oil-rim Improving the efficiency of geological volume and value. will continue in 2020. The central exploration depends largely on the The portfolio structure processing facility (CPF) which has development of employees’ skills. has also changed a planned capacity of one million 2019 saw the launch of the GEO a great deal. tonnes per year, is expected to be Academy, a training project for Currently, the portfolio expanded and modernised by 2022. exploration specialists. This is a includes projects multilevel integrated environment with a whole new level for competency development; it of risk and complexity Gazpromneft-GEO includes a system that enables for the company. specialists, experts, methodologists In the industry, The Gazprom Neft Group’s projects and supervisors to share experience projects of this kind are managed on a turnkey basis by in this professional area. are called frontier the Gazpromneft-GEO Competency exploration projects. Centre, which is implementing about 20 projects. Its task is to enable the company to continuously replenish its Yuri Masalkin resource base with viable reserves, Director for Geological and to maximise the efficiency of Prospecting and Resource equity financing. Base Development, Gazprom Neft The Gazpromneft-GEO approach to exploration is based on: – managing a portfolio of major exploration projects; – concentrating financial and managerial exploration resources in a single centre; – optimising the transition of prepared business cases for further development; and – assessing each project in terms of geology and investment attractiveness, taking into

03 PERFORMANCE REVIEW 59 GAZPROM NEFT

Company profile Strategic report Learn more: Performance Gazprom Neft Technological development is starting to develop Governance system the Achimov Sustainable development Formation Appendices

Top five projects in Gazprom Neft’s exploration technology project portfolio

“Cognitive Vega 2.0 Exploration Digital Twin “The 365” Geologist” Designer for Seismic a project enabling year- Modelling an AI-based platform ​a system designed a project to enhance round prospecting and designed to speed up to support decision the efficiency of a project for building exploration drilling. geological data analysis making during exploration and digital twins of fields and support decision geological and eliminate geological that shortens lead making. economic assessments uncertainties. times along the full of new projects. cycle of processes, from an investment decision to creating a geological model.

A technology centre for developing Achimovsky deposits The Achimovsky stratum is an oil- and equipment and software producers, reserves in the Achimovsky strata gas-bearing formation overlying the academic institutions, research under current licences held by Bazhenov Formation in the central part organisations and innovation centres. Gazpromneft-Noyabrskneftegaz. The of the West Siberian Basin. Its complex A test-site will be established on the project is implemented together with structure, great depth and abnormally basis of Achimovsky deposits of the Gazpromneft-GEO and the Gazprom high formation pressure demand Yamburgskoye field. The company Neft Science and Technology Centre. the use of innovative exploration and also plans to create an integrated production techniques. More than half information platform and a data A range of geological exploration of these reserves are concentrated in centre in order to facilitate experience works are to be undertaken at the the Yamalo-Nenets Autonomous Okrug sharing. four most promising licence blocks: (YaNAO). Novoromanovsky, Sugmutsky, Gazprom Neft has already built the Sutorminsky and Severo-Yangtinsky. In 2019, Gazprom Neft and the industry’s first digital model of the Processing and interpretation of 3D Government of the Yamalo-Nenets Achimovsky strata covering the seismic data, core surveys, testing of Autonomous Okrug embarked on the entire territory of Western Siberia. existing wells and drilling of several establishment of a technology centre In 2019, the company launched new ones, and the building of a local for developing Achimovsky deposits. Achimovka NNG, a major new project geological and petrophysical model to This centre will enable cooperation involving comprehensive geological confirm resource potential, are all due between subsoil licence holders, exploration of hard-to-recover to be completed by 2023.

The “Bolshaya Achimovka” project

million billion mtoe ~ 1km2 >60 tonnes 20–40 total area reserves in place hydrocarbons production potential

60 ANNUAL REPORT 2019 Use of UAVs for hydrocarbon prospecting Gazprom Neft is the first company in Magnetic prospecting is traditionally from −30 to +40°C; they have made Russia to use unmanned aerial vehicles performed both on the ground, and flights of up to 90 minutes, covering (UAVs) successfully in multilevel from the air using aeroplanes and 35 to 55 kilometres. It is expected that magnetometrical surveys, allowing the helicopters. UAVs that enable the this technology will be used further company to obtain initial information company to conduct prospecting in exploring northern territories of on rock structure by measuring the surveys in hard-to-reach areas Western Siberia: in the Yamal, Taymyr geomagnetic field at the surface. throughout the year have been tested and Gydan Peninsulas. at the Novoportovskoye field. The UAVs can operate at temperatures ranging × × km2 10 2 100 speed improvement cost reduction compared covered compared to on-ground to piloted aerial surveys by testing methods

New enhanced oil recovery techniques for the Bazhenov Formation The “Bazhenov formation” refers to a Gazprom Neft acting as a production has facilitated a 66% increase in specific geological stratum identified in partner. hydrocarbon production at those wells the centre of Western Siberia, running on which it was tested. to depths of 2,000–3,000 metres and In 2019, specialists from the Bazhenov with a thickness of 30 to 80 metres, Technology Centre (a Gazprom Neft Xanthan gum is an alternative to covering an area of approximately one subsidiary) successfully tested a unique traditional guar-gum gels. It dissolves million square kilometres. Best-case new enhanced oil recovery technique completely in water after hydraulic estimates suggest that oil reserves at at the Bazhenov Formation, using a fracturing is completed. the Bazhenov formation (categorised as xanthan-gum-based fracking fluid. non-traditional reserves) could amount This is a water-soluble polysaccharide to as much as 18–60 billion tonnes. One produced through bacterial For more information of the largest research consortiums fermentation of any high-sugar p. 108 on the Bazhenov Technology in Russia was established in order to material, such as corn, wheat, dairy Centre explore the Bazhenov formation, with waste, etc. Using this new technology +66 % 19-stage 12 m3 hydrocarbons high-speed injection production increase hydraulic fracturing rate per minute at the well

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Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

PROJECT PORTFOLIO – FUTURE OUTLOOK

Current projects Southern Yamal Meretoyakha Yenisei (2019–2023) 101 332 306 mtoe mtoe mtoe Medium-term projects (2024–2026 ) Long-term projects (202+)

Southern Orenburg Ouryinskoe field Zima Otdalennaya group Chona Sakhalin 36 4 60 of fields (OGF) 60 115 mtoe mtoe mtoe 20 mtoe mtoe mtoe / 1 / Under long-term risk operatorship agreements with Gazprom.

* На основании рисковых операторских договоров с Газпромом.

62 ANNUAL REPORT 2019 Russia develops a new oil blend from West Siberia’s “tight” reserves

Non-traditional reserves

Bazhenov Domanic Palaeozoic

Current projects Southern Yamal Meretoyakha Yenisei mtoe (2019–2023) 101 332 306 550 mtoe mtoe mtoe Medium-term projects (2024–2026 ) Oil rim reserves1 Long-term projects Pestsovoye (202+) En-Yakhinskoye Zapadno-Tarkosalinskoye Orenburgskoye Chayandinskoye 145 mtoe

Neocomian-Jurassic deposits1

Kharasaveyskoye Bovanenkovskoye 766 mtoe

Achimovsky strata1

Urengoyskoye Yamburgskoye mtoe Southern Orenburg Ouryinskoe field Zima Otdalennaya group Chona Sakhalin 787 36 4 60 of fields (OGF) 60 115 mtoe mtoe mtoe 20 mtoe mtoe mtoe

* На основании рисковых операторских договоров с Газпромом.

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Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

Hydrocarbon production

The company consolidated its market Some production will come from reserve classes (including the Bazhenov leadership as one of Russia's top-three a new resource base with diverse Formation, the Domanic strata hydrocarbon producers in 2019, having geographical, geological and and Palaeozoic oil deposits), liquid increased total production (including technological characteristics. It hydrocarbons at Gazprom Group fields, shares in joint ventures) by 3.5% to 96.1 includes new prospecting areas, new offshore projects on Sakhalin, etc. mtoe. Growth in production was driven primarily by the company’s projects in the Orenburg Region and in the Arctic (including the Novoportovskoye and Vostochno-Messoyakhskoye fields), as well as oil-rim development projects.

The current project portfolio enables Hydrocarbon production, 79.70 86.20 89.75 92.88 96.10 strong year-on-year growth of liquid mtoe1 hydrocarbon production and ensures Source: company data 100

a reserves-to-production ratio (RPR) 80

of 17 years. Growth in production up to 60 2030 is expected to come mainly from existing and soon-to-be-commissioned 40 assets in the Khanty-Mansi 20 Autonomous Okrug, the Yamalo-Nenets 0 Autonomous Okrug, the Tomsk Oblast, the Orenburg Oblast, as well as from / 1 / Including shares in subsidiaries and joint ventures. major Arctic projects. / 2 / Consolidated companies. / 3 / Share in production.

Enterprise 2015 2016 2017 2018 2019 Gazprom Neft 2 55.36 59.89 63.28 65.36 67.58 Slavneft 3 8.11 7.88 7.52 7.28 7.37 Arcticgas 3 12.13 13.47 13.50 14.57 15.22 Northgas 3 4.10 4.59 3.83 3.36 3.12 Messoyakhaneftegaz 3 0.00 0.36 1.62 2.30 2.81

TOTAL, INCLUDING SHARES IN SUBSIDIARIES 79.70 86.20 89.75 92.88 96.10

Average daily hydrocarbon production by the Gazprom Neft Group, 218.35 235.52 245.89 254.45 263.31 thousand tonnes of oil equivalent

64 ANNUAL REPORT 2019 Prirazlomnoye project

High-technology production management at Gazprom Neft Gazprom Neft opened its Integrated accuracy, and enabling faster and better following basic exploration to the Field Development Centre (IFDC) investment decision-making. completion of the 'Implementation' in Tyumen in 2019. The centre’s stage and the launch of a field. activities focus on using digital tools The IFDC objectives are as follows: for working with large databases, • To ensure effective field development The Drilling Control Centre (DCC, St integrated modelling and integrated and operation at all stages, from Petersburg) works to maximise drilling information analytics. A business model preparing for the production of “first efficiency at every development well by for managing production projects oil” to decommissioning the asset; proactively managing geological and that is new to the industry has been • To provide integrated and engineering operations at drilling sites implemented at the centre, and cross- comprehensive oversight of all remotely around the clock. major projects being implemented functional expert teams are being The Upstream Control Centre (UCC, formed. in Gazprom Neft’s main production hubs; Khanty-Mansiysk) manages upstream This single integrated organisational • To provide round-the-clock projects centrally. It is tasked with and digital space will enable the geological and engineering support unlocking the full potential of the company to halve the lead time for for advanced well drilling. company assets by using digital tools the commissioning of major upstream (integrated modelling, integrated projects and the time to “first oil”. The planning, and capacity management). Integrated Field Development Centre IFDC subdivisions will also deliver significant reductions The Project Management Centre (PMO, in infrastructure development costs at St Petersburg) supports projects from new assets, while improving planning the beginning of the 'Selection' stage

Oil production are extremely challenging in many ways, from geology to climate. Oil and condensate production across Development of logistics strategy the group increased by 0.5% year on to ensure the year-round dispatch year to 63.30 mt. At year-end 2019, and transportation of Arctic oil the company was the third-largest oil was completed in 2019 at the mt producer in Russia after Rosneft and Novoportovsjoye oilfield. At the final LUKOIL. stage of the four-year project, the 63.3 company’s second icebreaker, the Gazprom Neft is one of the first Andrey Vilkitsky, was deployed in of oil and condensate Russian oil companies to implement the waters of the Gulf of Ob, and the were produced in 2019 major Arctic projects, both onshore world’s first-ever digital logistics- and offshore. In the future, new assets management system designed for beyond the Arctic Circle are expected use in the Arctic was launched. The to occupy an increasingly important core objective of the new system is to place in the company’s project manage logistics in the Arctic safely, portfolio, as traditional reserves are and to ensure that all oil produced is being depleted and technologies are dispatched at the lowest possible cost. being developed for oil production in the Arctic.

The Yamalo-Nenets Autonomous Okrug (YaNAO) is a key production region for Gazprom Neft. The company has extensive experience in successfully developing the unique fields of the Yamalo- Nenets Autonomous Okrug – the Novoportovskoye and Vostochno- Messoyakhskoye fields – which

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Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

Oil production1, mt Source: company data

Enterprise 2015 2016 2017 2018 2019 Gazprom Neft 2 44.00 47.71 49.65 49.65 49.18 Slavneft 3 7.74 7.50 7.15 6.91 6.98 Arcticgas 3 3.42 3.77 3.67 3.89 4.13 Northgas 3 0.51 0.52 0.38 0.31 0.28 Messoyakhaneftegaz 3 0.00 0.35 1.58 2.23 2.73 TOTAL, INCLUDING SHARES IN SUBSIDIARIES 55.67 59.85 62.43 62.99 63.304

Average daily oil production by the Gazprom Neft Group (thousand tonnes) 152.52 163.52 171.05 172.58 173.43

Top-producing oilfields in 2019

Field 2019 production, mt Change on 2018, % Priobskoye 10.48 (8.1) Novoportovskoye 7.73 +8.0 Prirazlomnoye 3.14 (1.6) Messoyakhaneftegaz assets 3 2.73 +22.4

/ 1 / Including gas condensate. / 2 / Consolidated companies. / 3 / The company’s share of production. / 4 / Including condensate and natural gas liquids (NGL) production.

Novy Port: the best project in the industry One of the company’s projects in The award is given for a project involving The Novoportovskoye field is one of the the Arctic—development of the investment exceeding $500 million that largest oil- and gas-condensate fields Novoportovskoye field—has won adds value to the industry and exemplifies currently under development on the Yamal the Excellence in Project Integration excellence throughout the value chain: Peninsula in the Arctic Circle. Recoverable Award, which is made every year at the in project management, geological B1 and B2 reserves stand at more than 250 International Petroleum Technology exploration, drilling, engineering, million tonnes of oil and condensate, and Conference (IPTC) held by the American construction, HSE and regional more than 320 billion cubic metres of gas. Association of Petroleum Geologists development. International experts Novy Port-blend crude is classified as light, (AAPG), the European Association of assessed a total of 17 projects from nine with low sulphur content (about 0.1%). The Geoscientists and Engineers (EAGE), the countries worldwide. Gazprom Neft’s development of the Novoportovskoye field is Society of Exploration Geophysicists (SEG) Arctic asset received the highest possible a unique project that has enabled the first- and the Society of Petroleum Engineers score from the professional community ever year-round deliveries of Yamal oil to (SPE). Gazprom Neft is the first Russian for the company’s unique achievements in European customers via the Northern Sea company to receive this prestigious industry managing and overseeing an integrated oil Route. award. and gas project.

66 ANNUAL REPORT 2019 Gas production neighbouring licence blocks. In the in 2022. Given the substantial gas future, the company will build a gas resources of the Yamal Peninsula, Gazprom Neft is actively developing pipeline that will run from the Yamal the new pipeline will be an important its gas business, with a special focus Peninsula to the Gydan Peninsula and component of the company's strategic on commercialising associated and on to the Yamburgskoye field, where infrastructure in this region. natural gas reserves produced at it will be connected to the integrated oilfields, and increasing their value. In gas supply system. The pipeline 2019, gas production across the group is scheduled to be commissioned increased by 9.8% to 40.85 bcm. This was achieved primarily as a result of Gas production (utilisation) 1, bcm commissioning the second stage of Sourсe: company data integrated gas treatment units at the Novoportovskoye field, commissioning Enterprise 2015 2016 2017 2018 2019 a gas-compressor station in the Gazprom Neft 2 14.15 15.18 16.98 19.56 22.92 Orenburg Oblast, and increasing Slavneft 3 0.46 0.47 0.45 0.47 0.48 natural gas production at Arcticgas fields. Arcticgas 3 10.85 12.09 12.25 13.31 13.81 Northgas 3 4.47 5.07 4.29 3.79 3.53 The company is currently developing Messoyakhaneftegaz 3 0.00 0.01 0.05 0.09 0.11 its capacity to increase gas utilisation TOTAL, INCLUDING SHARES at the Novoportovskoye field and 29.92 32.82 34.02 37.22 40.85 develop the resource base from IN SUBSIDIARIES

Associated petroleum gas utilisation

2019 results utilisation of gas equipment and a high pipeline connecting the Urmanskoye APG utilisation rate (up to 97–99%) and Shinginskoye fields, an 18-kilometre Gazprom Neft is actively developing at assets with well-developed gas gas pipeline connecting the Archinskoye its gas business through the infrastructure. and Urmanskoye fields, and a gas commercialisation of associated and metering and pressure-reduction unit natural gas reserves produced at In order to sell gas, Gazpromneft- at the Shinginskoye field. The target oilfields, and increasing their value. In Vostok has commissioned several annual throughput capacity is 400 2019, gas production across the group gas infrastructure facilities: a booster million cubic metres. Commissioning increased by 9.8% to 40.85 bcm. This compressor station at the Urmanskoye gas infrastructure has made it possible growth was driven primarily by good field, a 97-kilometre high-pressure gas to achieve APG utilisation of 95%.

Plans for 2020 Vostochno-Messoyakhskoye field as Once gas infrastructure facilities part of a comprehensive approach to are commissioned at the Vostochno- As the company develops its oil and APG utilisation. This project will enable Messoyakhskoye field, the company gas production in new areas of the Messoyakhaneftegaz to prepare and will be able to reach its target APG Yamalo-Nenets Autonomous Okrug, it transport up to 1.5 bcm of APG per utilisation rate, conserve valuable continues to increase the APG utilisation year and pump it into an underground energy resources, and reduce its rate. The active stages of construction storage facility at the Zapadno- environmental footprint in the Arctic. of infrastructure facilities and a gas Messoyakhsky licence block. pipeline are both underway at the

/ 1 / Gas production includes marketable gas and gas for the company’s own consumption, including gas reinjection to maintain formation pressure. Gas production excludes gas used in the manufacture of gas-processing products. / 2 / Consolidated companies. / 3 / Share in production.

03 PERFORMANCE REVIEW 67 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices REFINING AND MANUFACTURING

Gazprom Neft continues the wide-ranging technological and environmental modernisation of its refining facilities directed at achieving the company’s strategic goals in the refining segment, which include – among other things – increasing the conversion rate to 99% by 2025.

2019 highlights • The first solar power plant in combined oil refining unit began at the region went into operation at the Moscow Refinery. • Construction of Russia’s first modern the Omsk Refinery, and the first- • The NIS Pančevo Refinery is oil-refining catalyst production phase construction of its innovative preparing for the launch of a deep facility began in Omsk. “Biosphere” treatment facility was conversion complex involving delayed • Together with SIBUR the company also completed there. coking technology. consolidated 100% of the charter • An automated system for loading capital in the Poliom LLC and dispatching fuel brought into polypropylene plant in Omsk. operation and preparations for pre-commissioning of a new Euro+

In 2019, Gazprom Neft continued to Refining throughput, 43.07 41.89 40.11 42.91 41.47 develop its downstream business million tonnes in line with the company’s strategic Source: company data 50

goals approved by the Board of 40

Directors. In accordance with 30 Strategy 2030, the company intends 20 to become an industry benchmark in terms of safety, efficiency and 10 technological advancement. In the 0 face of constantly changing market conditions, the Gazprom Neft Enterprise 2015 2016 2017 2018 2019 business demonstrates resilience Omsk Refinery 20.90 20.48 19.58 21.00 20.72 by maintaining its market-leading Moscow Refinery 11.00 10.71 9.37 10.50 10.08 position in the refining and sales of oil products. NIS 1 2.94 3.10 3.34 3.55 3.14 Slavneft-YANOS 2 7.63 7.47 7.74 7.86 7.53 The ongoing large-scale modernisation Mozyr Refinery 0.60 0.13 0.08 0.00 0.00 of Gazprom Neft’s refining assets will enable the company to reduce TOTAL REFINING THROUGHPUT ACROSS THE GAZPROM NEFT 43.07 41.89 40.11 42.91 41.47 production of heavy petroleum GROUP products, increase the output of diesel and aviation fuels, as well as to process residual volumes of heavy petroleum products into high-margin quality products. Total investment in the development of the company’s Omsk and Moscow refineries to 2025 exceeds ₽550 billion, with ₽99 billion invested / 1 / Gazprom Neft has a 56.15% shareholding in NIS (Serbia), which operates two refineries (in in 2019. Pančevo and Novi Sad), as well as upstream projects in the Balkans. / 2 / Gazprom Neft’s share.

68 ANNUAL REPORT 2019 2019 events. A pilot project in renewable energy launched. 2019 events. A pilot project in renewable energy launched. A solar power plant is built and commissioned at the Omsk Refinery in record time. By introducing renewable energy technologies, the refinery will improve its energy efficiency and environmental performance.

Refining volumes were down 3.4% almost complete closed-loop water The unique to 41.5 mt in 2019 due to planned consumption, reducing the burden on Biosphere water refurbishment at all Gazprom Neft municipal wastewater facilities and treatment complex refineries and at those refineries in increasing efficiency in wastewater comprehensively which Gazprom Neft has a share in treatment to 99.9%. Construction addresses refining. This maintenance, however, of the Biosphere is expected to be the issues of reducing will enable uninterrupted operation complete by 2021. the environmental of equipment and improve the impact of production. performance of these facilities. Year- Production of low-sulphur bunker fuel In introducing end results showed the conversion with sulphur content of less than 0.5% new-generation, rate at the company refineries was also started at the Omsk Refinery. environmentally reaching 82.7%, and light product This fuel meets the requirements of friendly technologies yield 64.4%. the International Convention for the we are conserving Prevention of Pollution from Ships resources as well At the Omsk Refinery, construction (MARPOL 2020) (see the case study as achieving significant is underway of a crude oil distillation 'Producing and selling bunker fuel economic benefits. unit, a deep conversion facility, a compliant with the MARPOL 2020 The Biosphere sets delayed coking unit, a diesel-fuel requirements'). new standards hydrotreatment/dewaxing unit, in environmental and a Biosphere treatment facility. safety and contributes The Biosphere complex will deliver to technological advancement, enabling the company to match Breakdown of petroleum- industry leaders. 41.10 39.95 38.63 41.40 40.23 products production, million tonnes 50 Source: company data 40 Oleg Belyavsky

30 General Director of the Gazprom Neft 20 Omsk Refinery 10

0

Metric 2015 2016 2017 2018 2019 Motor gasoline 9.08 9.18 8.60 8.86 8.02 Naphtha 1.45 1.56 1.38 1.95 2.01 % Diesel fuel 11.87 12.02 11.45 12.32 11.87 82.7 Jet fuel 3.00 3.04 3.04 3.47 3.34 Marine fuel 3.67 2.41 2.67 2.58 2.49 conversion rate Fuel oil 7.20 6.72 5.70 6.20 6.45 at the company refineries Bitumen and coke 2.02 2.19 2.73 3.07 2.95 in 2019 Oils 0.40 0.42 0.48 0.49 0.54 Other 2.41 2.41 2.58 2.46 2.56 TOTAL PETROLEUM-PRODUCTS 41.10 39.95 38.63 41.40 40.23 % PRODUCTION 64.4 light-product yield in 2019

03 PERFORMANCE REVIEW 69 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

The Moscow Refinery is now Other assets completing the construction of the % Euro+ oil refining complex comprising A sulphuric acid production unit was up to 99.9 primary distillation and reforming commissioned at the Slavneft-YANOS units, a hydrotreatment facility for refinery; it will enable the company The «Biosphere» project diesel fuels and a number of ancillary to improve the environmental safety improves efficiency facilities. This new complex will allow of its production process. The in wastewater treatment the company to decommission five refinery continues to implement a units built in the 1950–1960s, and to number of technical development and increase the yield of light oil products performance improvement projects, to 60%. The facility is expected to be including the construction of a deep brought into operation in the first half conversion facility. of 2020. Commissioning the Euro+ complex will increase production of At the NIS Pančevo Refinery, motor and aviation fuels, as well as construction of a new deep stepping up the output of diesel-fuel. conversion complex is nearing completion. This facility will process tar using delayed coking technology; this will enable the refinery to stop producing fuel oil. The refinery also launched a project to revamp its cat-cracking unit. Cutting-edge technologies that are planned to be used during the renovation will help to maximise propylene output using existing feedstock. Investment in the project will total over €72 million, and the work is scheduled to be completed in 2024.

70 ANNUAL REPORT 2019 The importance of flexibility for modern refineries (interview)

Value chain as a single asset

The digital transformation of Smart sensors and systems monitor products on a daily or monthly basis. the Gazprom Neft Downstream key qualitative and quantitative By 2021, the integrated scheduling Division aims to manage the entire metrics of all petroleum product system will cover all Gazprom Neft’s value chain as a single asset. The flows in real time, sending downstream assets and, as a result, transformation is focused on the information to the Neftekontrol planning accuracy will increase key tasks of optimising resources, System. System tools build a digital to match the global benchmark of minimising losses and increasing model of the movement of petroleum 97–98%. efficiency at each stage, as well products, identifying potential as improving the safety, reliability risks, and improving performance The overall integration of these two and environmental performance of along the chain by forecasting and systems takes place at the Gazprom assets. The practical application of reducing the risks of petroleum- Neft’s Downstream Efficiency this concept is based on developing products losses. The Ministry of Control Centre (ECC). By leveraging end-to-end digital solutions covering Energy of the Russian Federation modern data analysis technologies, the entire value chain and creating and the Federal Agency for predictive analytics methods and digital ecosystems to increase Technical Regulation and Metrology working with big data, the ECC efficiency in each segment of the (Rosstandart) have recognised enables the company to maximise chain. Neftekontrol as the industry the operational efficiency of all standard for the fuel traceability processes in the value chain. A As part of this approach, a single system for all state market single and cohesive environment for and cohesive database is being participants. managing refining assets makes it created for the downstream possible to implement solutions that segment, which will ensure the Today, 90% of Downstream assets increase the efficiency and reliability high quality and availability of are connected to this unique system. of the entire production process all performance indicators and This oversight and control system is hierarchy, from basic processes to analytical and business information expected to be deployed across all groups of production facilities and to meet the needs of the entire value assets in the company’s value chain entire enterprises. chain. by 2020, including all of Gazprom Neft’s refining, logistics and retail The Arctic is a strategically The Gazprom Neft Neftekontrol facilities. important region for the whole ('Oil Control') System is an end-to- of Russia and, in the oil supply end operational efficiency tool for Neftekontrol is linked to another segment, Gazprom Neft is the the downstream segment. It was end-to-end solution that affects first among Russian companies to developed in-house to continuously the efficiency of the value chain: create a Digital Arctic ecosystem to monitor and control the volume and an integrated scheduling system. manage logistics there effectively. quality of oil products at various Covering the entire value chain, the stages, from the refinery to the system generates an optimum plan customer. for production and distribution of oil

03 PERFORMANCE REVIEW 71 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

The company’s refining assets have reached a level of digital maturity, First Russian industrial The establishment such that a transition to a new control system of production control production-management model is In 2019, a methyl tert-butyl ether centres at refineries assured. Gazprom Neft continues (MTBE) production unit was is another major to develop new approaches, based commissioned at the Gazprom Neft Moscow Refinery, where step in transforming on the smart management of a sophisticated domestically- the company’s process units, to utilise the most designed process control system downstream business. innovative digital tools and manage was used for the first time. We are building its production assets. The creation The design of the automated a new system that will system piloted at the Moscow of the Production Control Centre Refinery takes into account the enable us to manage (PCC) is a prime example of the new requirements of local production the business as a single management model. An initial pilot processes, and complies with asset. The system uses project at the Omsk Refinery will industrial safety requirements. real data, algorithms, take over operational production The new automated process control system allows the mathematical models management, including control company to achieve its strategic and state-of-the-art over daily plan fulfilment, product objective of increasing its share of digital systems. quality, energy consumption, domestically-designed solutions equipment status assessments, relating to production automation. and the monitoring of industrial and Anatoly Cherner environmental safety. Deputy CEO for Logistics, Refining and Sales, The new centre will be built around Gazprom Neft PJSC the work of cross-functional teams, united in a cohesive environment of IT tools and big data analytics systems. Thanks to the implementation of “digital twins” – precise mathematical models of all of the refinery’s technological facilities and complexes – the PCC will be able to predict and to eliminate, proactively, any deviations from optimum operation and integrated planning. The pilot project will be implemented at the Omsk Refinery in 2020 at the Moscow Refinery by 2021. The Production Control Centre will become a part of the “digital refinery of the future”, which will be managed from a single control centre, using digital tools running on a single platform.

72 ANNUAL REPORT 2019 Automated fuel-loading system at the Moscow Refinery From the very An automated light-products collects escaping vapours and turns start, the new fuel- loading terminal for road tankers them into liquid condensate that is loading terminal with a daily capacity of 6,500 tonnes then reused in the production cycle. was designed to meet was commissioned at the Moscow A completely leak-proof bottom- Refinery in 2019. The complex loading system provides additional key requirements: includes 12 stations with the ability to protection, as it prevents any the highest possible dispense, simultaneously, gasoline, emissions of petroleum products into safety standard, zero diesel and aviation fuel into road the atmosphere, and prevents dust impact on air quality, tankers. Technological solutions or precipitation from entering tanker used at the terminal significantly compartments. All loading stations high-speed processes, increase its throughput, which in are equipped with the latest accident and continuous quality turn reduces loading times. prevention and fire-fighting systems. control. Thanks Modern environmental technologies to new technology, and control systems at the terminal we are improving help to maintain the highest level production efficiency of environmental safety. The new while reducing loading terminal is equipped with a vapour-recovery system that the environmental footprint. tonnes billion Vitaly Zuber General Director 2.5 6.500 of the Gazprom Neft ₽ Moscow Refinery investments daily throughput 4× faster loading

03 PERFORMANCE REVIEW 73 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

Development of NIS: a decade with Gazprom Neft 2019 marked the tenth anniversary Today, NIS is one of the most important and €150 million to developing the of Gazprom Neft’s acquisition of a energy companies in south-east sales network. The second stage controlling interest (56.15%) in a Europe, owning one of the best state- of the refinery modernisation will Serbian oil and gas company, Naftna of-the-art refineries in the region, and see the construction of a deep Industrija Srbije (NIS). At that time, NIS managing a filling station network conversion complex, which will put was a national oil and gas company across Serbia, Romania, Bulgaria, and the Pančevo refinery on a par with the with debt exceeding $1 billion and Bosnia and Herzegovina. Apart from world’s leading refineries in terms whose enterprises required immediate developing oil production and its own of technology and efficiency. Once and large-scale upgrades. power generation, the company is the the complex goes into operation, the leading supplier on the domestic fuels refinery will cease production of high- Gazprom Neft’s principal investment market and exports oil products to sulphur fuel oil, with the conversion project in Serbia concerned the markets throughout the Balkans. It rate reaching 99.2%. In addition, NIS construction of a mild hydrocracking provides a workplace to over 11,000 will begin producing coke, which is and hydrotreatment complex at the people and contributes over €1 billion not currently produced anywhere in NIS refinery in Pančevo. In addition, per year to the Serbian budget. Power Serbia. the company’s retail network has generators with a total installed been extensively overhauled. All capacity of 14 MW operate across the NIS is implementing a joint power- the company’s filling stations were company’s eight oil and gas fields. generation project together with rebranded as NIS Petrol and, in 2012, Gazprom Energoholding. It involves the premium Gazprom brand was By 2025, a further €1.4 billion will be building a cogeneration power station introduced. More than €3 billion in invested in the development of NIS, of combined steam-and-gas cycle in total has been invested in developing including over €800 million to be Pančevo, with a capacity of up to 200 NIS over the past 10 years. allocated to oil and gas exploration MW. The new plant is scheduled to be and production, €400 million to operational in 2020. refinery upgrades and development, billion billion >€3 €1.4 invested by Gazprom planned investments Neft in NIS development until 2025 between 2009 and 2019

1.2 mtoe 14 MW annual hydrocarbon installed production capacity

74 ANNUAL REPORT 2019 NIS to invest €72 million to upgrade its production facilities

Implementing alternative energy technologies Our ambition at the Omsk Refinery is to develop Gazprom Neft has successfully photovoltaic power plant is likely to be a fully-fledged implemented a pilot alternative 1.2 gigawatt hours (GWh). company-wide energy project at the Omsk Refinery: the company has built and By introducing renewable energy energy business, commissioned a one-megawatt solar technologies, the refinery will using the latest power plant in record time. improve its energy efficiency and energy technologies environmental performance. This will The new power station, occupying be achieved by providing the Omsk and creating a two-and-a-half-hectare plot and Refinery with additional generation synergies with its comprising 2,500 solar panels, while reducing its dependence on traditional business. meets the Omsk Refinery’s full external energy suppliers, as well The development energy requirements for all of its as by utilising land not otherwise of the energy business administrative buildings, including involved in the technological process. a standalone amenities building will focus on captive for 2,600 employees. Given the power generation amount of sunshine in Omsk, the using renewable annual electricity output from the and innovative energy sources, establishment of a power engineering centre, and intelligent energy management solutions based on digital technologies. million Gazprom Neft kWh refineries will become well-balanced 2,500 1.2 energy hubs serving as benchmarks solar panels annual output in terms of reliability and energy efficiency.

Vladimir Andreev Head of Department for Power Engineering, 1 MW Gazprom Neft PJSC capacity

03 PERFORMANCE REVIEW 75 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

Company refineries: 2019 highlights

Modernisation and technological developments Installed Volume refined Conversion Light-product key projects key projects Refinery capacity, mt in 2019, mt rate, % yield, % implemented in 2019 scheduled for 2020 – Commissioning a cat-cracking regeneration gas treatment – Continuing the implementation of the second stage unit; of the modernisation; – Completing the reconstruction of the diesel-fuel – Completing the reconstruction and commissioning a number hydrotreatment unit, delivering a 10% capacity increase; of process units, including the catalytic reforming unit. – Commissioning the first (1 MW) solar-power electricity station in the region; Omsk Refinery – Implementing the second stage of refinery modernisation, 22.23 20.72 89.5 70.6 including the construction of a crude oil distillation unit (CDU/ VDU), a deep conversion complex (DCC), a delayed coking unit (DCU), a diesel-fuel hydrotreatment/dewaxing unit, and the Biosphere treatment facility.

– Commissioning an air-tight and leak-proof road-transport – Commissioning of the Euro+ combined oil refining unit; loading rack for light oil products; – Active phase of construction of the automated railcar oil- – Completing the main construction and installation works products loading facility. Moscow Refinery 12.76 10.08 81.6 59.3 at the Euro+ unit, starting pre-commissioning works.

– Completing the construction of a deep conversion complex – Commissioning the deep conversion complex; based on delayed tar coking technology. – Reconstruction of the catalytic cracking unit, and construction NIS Pančevo of an ethyl-tert-butyl ether (ETBE) unit. Refinery (Serbia) 4.60 3.14 81.5 77.4

– Commissioning of the “Wet Catalysis – 2” hydrogen sulphide – Continuing the construction of the deep conversion complex; removal unit; – Continuing the upgrade of the VT 6 vacuum distillation unit; – Converting the hydrogen production unit (UPV 2) to natural – Completing the reconstruction of the gas-loading rack. Slavneft-YANOS gas; 15.00 7.53 65.3 54.5 – Continuing the construction of the deep conversion complex.

– Construction of the hydrocracking unit for heavy oil residues. – Completing the construction and installation of the hydrocracking unit for heavy oil residues and initiating start-up works. Mozyr Refinery 14.03 0.001 79.8 60.5

/ 1 / Gazprom Neft’s share in the Mozyr Refinery’s refining volumes is subject to the oil supply schedule as approved by the Ministry of Energy of the Russian Federation. The company may process up to 50% of oil supplied to the refinery. Actual refining volumes will depend on its economic efficiency. The company did not process any of its oil at the Mozyr Refinery under tolling arrangements in 2019.

76 ANNUAL REPORT 2019 Modernisation and technological developments Installed Volume refined Conversion Light-product key projects key projects Refinery capacity, mt in 2019, mt rate, % yield, % implemented in 2019 scheduled for 2020 – Commissioning a cat-cracking regeneration gas treatment – Continuing the implementation of the second stage unit; of the modernisation; – Completing the reconstruction of the diesel-fuel – Completing the reconstruction and commissioning a number hydrotreatment unit, delivering a 10% capacity increase; of process units, including the catalytic reforming unit. – Commissioning the first (1 MW) solar-power electricity station in the region; Omsk Refinery – Implementing the second stage of refinery modernisation, 22.23 20.72 89.5 70.6 including the construction of a crude oil distillation unit (CDU/ VDU), a deep conversion complex (DCC), a delayed coking unit (DCU), a diesel-fuel hydrotreatment/dewaxing unit, and the Biosphere treatment facility.

– Commissioning an air-tight and leak-proof road-transport – Commissioning of the Euro+ combined oil refining unit; loading rack for light oil products; – Active phase of construction of the automated railcar oil- – Completing the main construction and installation works products loading facility. Moscow Refinery 12.76 10.08 81.6 59.3 at the Euro+ unit, starting pre-commissioning works.

– Completing the construction of a deep conversion complex – Commissioning the deep conversion complex; based on delayed tar coking technology. – Reconstruction of the catalytic cracking unit, and construction NIS Pančevo of an ethyl-tert-butyl ether (ETBE) unit. Refinery (Serbia) 4.60 3.14 81.5 77.4

– Commissioning of the “Wet Catalysis – 2” hydrogen sulphide – Continuing the construction of the deep conversion complex; removal unit; – Continuing the upgrade of the VT 6 vacuum distillation unit; – Converting the hydrogen production unit (UPV 2) to natural – Completing the reconstruction of the gas-loading rack. Slavneft-YANOS gas; 15.00 7.53 65.3 54.5 – Continuing the construction of the deep conversion complex.

– Construction of the hydrocracking unit for heavy oil residues. – Completing the construction and installation of the hydrocracking unit for heavy oil residues and initiating start-up works. Mozyr Refinery 14.03 0.001 79.8 60.5

03 PERFORMANCE REVIEW 77 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices SALES OF OIL, GAS AND PETROLEUM PRODUCTS

Gazprom Neft is engaged in the wholesale distribution of crude oil and petroleum products both in Russia and abroad. Small wholesale and retail sales, including through its filling station network, are managed by dedicated subsidiaries.

Oil sales

Oil sales increased by 8.8% year on Oil sales on international markets own fleet, designed to support and year to 26.4 mt in 2019, as a result totalled 22 mt, up by 10.4% year on service the company’s Arctic fields. of increased oil production at the year. The growth was driven by a 12.4% Two new-generation icebreakers of the Novoportovskoye and Vostochno- increase on 2018 in exports to non-CIS Icebreaker 8 class — the Alexander Messoyakhskoye fields, and a slight countries. Oil sales on the domestic Sannikov and the Andrey Vilkitsky — decrease in refining throughput across market grew by 1.4%. built to order for the company are the company’s refineries. transporting Arctic oil. In addition Gazprom Neft had previously to this, the fleet includes seven completed the establishment of its “Shturman”-series Arc7-class tankers,

DISTRIBUTION OF OIL AND PETROLEUM PRODUCTS

Customers Customers Customers in the CIS in non-CIS in Russia countries countries

Gazprom Neft

A trading company, part of the Gazprom Neft Group Oil sales Wholesale distribution of petroleum products

78 ANNUAL REPORT 2019 each of which has a cargo-bearing Oil sales, mt 16.61 22.71 26.53 24.26 26.39 capacity of 42,000 tonnes, and one Source: company data Arc5 ice-class tanker with a capacity of 30 19,800 tonnes. 25 20 A unique logistical arrangement 15 created by Gazprom Neft has enabled 10 year-round, maximum-efficiency 5 transportation of oil from the Arctic 0 fields to the global market, and has reduced the risk of logistical Metric 2015 2016 2017 2018 2019 disruptions caused by negative external Domestic sales 6.14 7.43 5.57 4.31 4.37 factors. The core objective of the new Non-CIS exports 8.11 12.89 18.19 17.05 19.16 digital Arctic-logistics management system is to manage logistics in the CIS exports 1.88 1.66 1.71 1.65 1.71 Arctic safely, and to ensure that all oil International sales 0.48 0.73 1.06 1.25 1.15 produced is dispatched at the lowest TOTAL OIL SALES 16.61 22.71 26.53 24.26 26.39 possible cost.

Large- and small-scale wholesale Customers distribution and retail sales through in non-CIS sales subsidiaries to consumers countries in Russia, the CIS and non-CIS countries

Large- and small- scale wholesale and retail sales Customers in Russia and the CIS, including commodity exchange traders

Petroleum-products suppliers, part of the Gazprom Neft Group The Gazpromneft Filling Station Small-scale Network wholesale distribution

03 PERFORMANCE REVIEW 79 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

The “Captain” digital Arctic-logistics management The question system of uninterrupted Gazprom Neft has launched the constraints that vessels may face and effective world’s first digital Arctic-logistics along the route, and to offer optimal logistics is critically management system. This innovative routes that are safe. project has been developed to ensure important for Gazprom uninterrupted year-round shipments By optimising vessel speed, reducing Neft’s Arctic fields, of all ARCO and Novy Port crude fuel consumption and sub-leasing which are some distance produced. surplus capacities in the summer, over the past two years (2018 and from accessible Every hour, the system collates all the 2019) the company made additional infrastructure: necessary information in real time, savings exceeding ₽3.5 billion. production volumes and develops an optimal schedule for are directly dependent the fleet and for oil shipments from on the timely shipment terminals. The system analyses over 65 million potential options per hour, of hydrocarbons. Using factors in about 300 parameters and digital technologies prepares the optimal schedule. The has allowed system’s accumulated historical us to increase efficiency data and predictive capabilities make it possible to predict potential in the company’s operations in the Russian Arctic: pilot tests have already allowed Gazprom Neft to achieve cost reductions of 10% under the existing logistics strategy for year-round shipments of Arctic crude blends.

Vadim Simdyakin Head of Crude Oil Supply Department, Gazprom Neft PJSC

80 ANNUAL REPORT 2019 Gas sales, bcm

Gas sales 13.78 13.46 14.00 13.20 13.53 Source: company data 15 1 Gas sales on the domestic and 12 international markets grew by 2.5% 9 year on year as a result of an increase 6 in associated petroleum gas and natural gas production by Gazprom 3 Neft subsidiaries. 0

Metric 2015 2016 2017 2018 2019 Domestic sales 13.56 13.28 13.89 13.13 13.48 Global sales 0.22 0.18 0.11 0.07 0.05 Petroleum- TOTAL GAS SALES 13.78 13.46 14.00 13.20 13.53 products sales

Petroleum-products sales remained almost flat year on year in 2019 Sales breakdown by 44.84 43.59 43.48 45.91 45.44 and totalled 45.4 mt. The company product, mt focused on improving the efficiency of Source: company data 50 petroleum-products sales, improving 40 margins on retail and small-scale 30 wholesale distribution of motor fuels, 20 and increasing premium sales of jet and bunker fuels and bitumen 10 materials. Favourable market 0 conditions enabled the company to increase fuel-oil and petrochemical Metric 2015 2016 2017 2018 2019 sales. Motor gasoline 10.83 11.08 11.09 11.32 10.22 Diesel fuel 12.81 13.27 13.37 14.01 13.91 In 2019, product sales on the Russian and international markets totalled Aviation fuel 3.62 3.36 3.51 3.84 3.90 28.6 mt and 16.8 mt respectively. Sales Bunker fuel 3.98 2.87 3.29 2.89 2.65 on foreign markets grew by 3.5% Oils and lubricants 0.43 0.45 0.41 0.49 0.47 year on year, driven by an increase in jet-fuel, diesel-fuel, bitumen and Bitumen products 2.05 2.17 2.65 2.97 2.92 petrochemicals exports. Petrochemicals 1.45 1.35 1.25 1.35 1.55 Fuel oil 7.42 6.62 5.23 6.09 6.40 Other petroleum products 2.25 2.42 2.68 2.95 3.41 TOTAL SALES 44.84 43.59 43.48 45.91 45.44

/ 1 / Natural and associated petroleum gas. Excluding the Gazprom Neft share in Northgas and Arcticgas joint ventures.

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In implementing the programme Petroleumproducts sales, 44.84 43.59 43.48 45.91 45.44 of transferring reciprocal mt settlements with counterparties Source: company data 50

using Russian roubles, the company 40

has now switched payments for 30 petroleumproduct exports under 20 export contracts with companies in the EAEU and CIS member states 10 to the currency of the Russian 0 Federation. In April 2019 Gazprom Neft received its first such payment in Metric 2015 2016 2017 2018 2019 roubles, totalling almost ₽255 million, Domestic sales 27.50 27.11 27.96 29.67 28.63 for the delivery of 6,000 tonnes of Non-CIS exports 11.81 10.77 9.54 10.00 10.76 diesel fuel by tanker to . CIS exports 2.28 2.41 2.50 2.49 2.35 Global sales 3.25 3.30 3.48 3.75 3.70 Sales breakdown by channel TOTAL PETROLEUMPRODUCTS 44.84 43.59 43.48 45.91 45.44 SALES Premium sales1 in 2019 reached 26.5 mt. While premium sales of motor-fuels decreased slightly in the reporting period, the company increased premium sales of aviation Sales breakdown by and marine fuels, bitumen materials channel, mt 44.84 43.59 43.48 45.91 45.44 and lubricants. Sales of aviation Source: company data 50 fuel through premium channels 40 were up 3.2% as a result of growth in volume on both the domestic and 30 international markets. Improved 20 business efficiency in the North- 10

West and Black Sea regions saw 0 a 2.4% year-on-year increase in premium sales of marine fuel. Metric 2015 2016 2017 2018 2019 Expanding the geographic range of Premium channels 25.70 25.16 26.13 27.10 26.46 company’s export routes led to a Large-scale wholesale 19.14 18.43 17.35 18.81 18.98 20% increase in sales of premium channels bitumen products. TOTAL SALES 44.84 43.59 43.48 45.91 45.44

/ 1 / Premium sales include the following: – sales of petroleum-products through premium distribution channels, including both retail and small-scale wholesale. This segment includes all sales through filling stations and distribution centres, as well as “wing-tip” and “deck-to-deck” sales, and small wholesale through refuelling terminals at airports and seaports; – sales of packaged products. This segment includes all sales of oil in barrels and canisters, polymer-modified asphalt cement (PMAC) in Clovertainer® containers, etc; – sales of premium petroleum products, i.e. value-added products that have certain advantages over other products in the same category in terms of quality. This group includes sales of premium-branded liquid lubricants (Gazpromneft, G-Family, Texaco), premium-branded bitumen materials (PMAC, PMB, bitumen emulsion, etc), all brands of bitumen-based products, and premium-branded motor fuels (G-Drive, etc.) available for wholesale distribution.

82 ANNUAL REPORT 2019 Sales of motor gasolines and diesel fuels in Russia in 2019 were optimal New filling-station formats in view of market conditions, and Gazprom Neft is the first fuel retailer advantage of such filling stations is ensured an increase in the efficiency in Russia to launch mixed-format that, given their small size, they can of retail and small wholesale of filling stations. These operate as be installed on parking lots next to service stations with a cafe and a shop shopping malls and housing estates. motor fuels. during the day, and as automated The company plans to scale up the stations at night. The mixed format project in 2020. is used widely around the world, In 2019, the Gazpromneft network Retail and small wholesale and helps to improve the efficiency of filling stations by optimising their launched a filling-station redesign distribution of motor fuels operation. After switching to the project in Moscow and St Petersburg, mixed format, fuel throughputs at which involves transforming filling Key areas in developing the filling stations increased by 2%. stations into digitally-enabled interactive facilities. Filling stations company’s retail and small wholesale In 2019, Gazprom Neft started are being converted to the interactive distribution of petroleum products developing a network of fully format as part of the Gazprom Neft in 2019 included expanding the automated modular filling stations, digital network-transformation company’s retail network, developing which have been designed by Russian strategy aimed at making filling- new forms of cooperation with manufacturers specifically for station services more customer- the Gazprom Neft retail network. friendly. Media screens which serve independent market players, Investment required to launch a as a modern tool for interaction with improving efficiency in fuel sales, modular filling station is three and customers are one of the highlights of digitalising customer services, and a half to four times less than for a this new format. By the end of 2020, developing the company’s product conventional station. It takes only media screens will be installed at a week to instal the module, which more than 50 flagship stations in key storage facilities. occupies a 150–300 square-metre regions across Russia in which the plot. A filling station of this kind can network operates. refuel up to 350 vehicles per day Filling station network with gasoline and diesel fuel. The

In 2019, the company accelerated the development of its retail network, filling stations and digitally-enabled stations, of which 1,251 stations are having opened 198 new filling interactive filling stations. directly owned by the company and stations under Gazpromneft and 207 are franchisee-operated. As the OPTI brands throughout Russia. In 2019, the Gazpromneft filling company expanded into new large With new filling stations launched on station network made a step regional markets—the Republic of a franchise basis, the company has change in the development of its Bashkortostan and the Republic expanded the geographic coverage retail network across a number of Tatarstan—in the second half of of its retail business to 46 regions of business areas. For instance, the year, the company’s share of throughout Russia. Gazpromneft the network became the first fuel the retail motor-fuels market in filling stations began operating retailer in Russia to introduce those regions in which the network in seven new regions: the Kursk, mixed-format filling stations. These operates decreased from 24.0% to Lipetsk, and Voronezh Oblasts, operate as service stations with 20.3% as at end 2019. Republics of Bashkortostan, a cafe and a shop during the day, Mordovia, Tatarstan, the Chuvash and at night as automated stations, Outside Russia, the Gazprom Republic and the Perm Krai. where customers refuel their Neft retail network comprises cars themselves using payment 619 filling stations, including 205 In addition to conventional filling- terminals. The mixed format filling stations in the CIS countries station formats developed in recent helps to improve the efficiency of (Belarus, Kazakhstan, Tajikistan years (full-service filling stations, filling stations by optimising staff and Kyrgyzstan) and 414 in South- stations with a cafe and a shop, workloads. After switching to the East Europe (Serbia, Bosnia and automated filling stations), in 2019, mixed format, fuel throughputs at Herzegovina, Bulgaria and Romania). the company launched several filling stations increased by 2%. The number of filling stations new filling-station formats that in Europe decreased as a result are innovative for the Russian As at the end of 2019 the company’s of a retail network optimisation market, including mixed-format filling station network comprised programme that made the network filling stations, automated modular 1,458 Gazpromneft and OPTI more cost-effective.

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The company continued to expand its Filling station network 1, autogas sales network by increasing units 1,852 1,866 1,866 1,878 2,077 the number of filling stations selling Source: company data 2500 liquefied petroleum gas (LPG). The 2000 number of autogas filling stations integrated into multi-fuel filling 1500 facilities under Gazpromneft brand 1000 grew by 11 to 156 stations. 500

0 The reporting year saw the completion of the transaction with Metric 2015 2016 2017 2018 2019 Gazprom Gazomotornoye Toplivo LLC Russia 2 1,189 1,244 1,255 1,260 1,458 for the sale of the main portion of the CIS 243 200 188 201 205 company’s compressed natural gas (CNG) production and distribution Europe2 420 422 423 417 414 assets. Under this deal Gazprom TOTAL 1,852 1,866 1,866 1,878 2,077 Neft sold its gas-filling compressor station network. Russia “Gladkoye” fuel terminal in the Leningrad Oblast was commissioned, 2019 marked an important allowing the transshipment of up milestone in the development of the to one million tonnes of petroleum infrastructure of the company’s fuel- products every year. supply terminals. The new and the most technologically advanced in

Developing the OPTI filling station network In 2019, the number of filling stations agreements, fair profit distribution, Despite in the OPTI network reached 120, and and technological solutions to the challenging now covers 27 regions across Russia. optimise filling-station management. market The OPTI filling station network The terms of the partnership offers a unique approach to the include a one-time membership fee environment, we invest retail fuel market. The partnership and a monthly fee calculated as a in the development model developed by Gazprom Neft percentage of revenue. Within two of this project involves managing stations through a or three months of the start of their and support our partners, bespoke IT platform, operating under operation under a new brand name, because we believe that a highly popular brand, and ensuring some filling stations show a 40% high standards of service and fuel increase in daily fuel sales and an OPTI is a promising quality. The key principle behind the average two- or three-fold increase model for modern fuel OPTI business model is mutually in non-fuel revenue; in some cases retailing. It is based beneficial cooperation: partnership this growth may be ten-fold. on a platform solution and the principles of fair profit OPTI filling station network in 2019 distribution and business transparency. 120 in 27 Alexander Krylov outlets regions across Russia Head of Regional Sales Directorate, Gazprom Neft PJSC

/ 1 / Operating stations only. / 2 / Including franchisee-operated filling stations.

84 ANNUAL REPORT 2019 Motor-fuel and natural-gas Retail and small-scale motor-fuel sales wholesale distribution of 1,852 1,866 1,866 1,878 2,077 motor fuels and LPG 2500 Total small-scale wholesale and retail Source: company data 2000 sales of motor fuels decreased by 4.4% year on year to 19.5 mt. This change in 1500 motor-fuel sales volumes was shaped 1000 by current conditions in the Russian 500 market, as well as those measures 0 taken to improve sales efficiency and maximise profit margin. Despite the Metric 2015 2016 2017 2018 2019 decrease in sales volumes, operating Retail sales and small-scale 18.58 19.26 20.01 20.40 19.51 profit from this business grew by more wholesale of motor fuels (mt) than 20% thanks to the improved cost- – sales in Russia only 14.76 15.17 15.92 16.16 15.39 effectiveness of retail sales and small- scale wholesale of motor fuels. Retail sales of motor fuels (mt) 10.16 10.45 11.04 11.34 10.49 – sales in Russia only 8.08 8.25 8.84 9.12 8.30 In 2019, retail sales of motor fuels LPG sales (thousand tonnes) 105 115 97 120 108 through filling stations declined by 7.5% – sales in Russia only 66 69 56 75 64 year on year to 10.5 mt, including 8.3 mt in Russia. A deteriorating market environment and the company’s focus on improving retail sales margins resulted in average per-station sales A high-technology fuel terminal in Russia decreasing to 18.5 tonnes The new “Gladkoye” fuel terminal has year, and has storage facilities per day (tpd). The Gazprom Neft been commissioned in the Tosnensky capable of holding up to 40,000 cubic filling station network nevertheless District of the Leningrad Oblast. This metres of manufactured goods at any maintained its market-leading position facility, which is unique in terms one time. of the technological capabilities in Russia in terms of this metric. In supporting its management All of the company’s target Europe, average daily sales increased processes, has become Gazprom terminals will be upgraded on by 6.5% to 6.6 tpd in 2019. Neft’s first asset built as part of the the basis of the Gladkoye model company’s comprehensive terminal by 2025. It is expected that once infrastructure development strategy. the comprehensive terminal Despite this trend in motor-fuels sales, reconstruction programme is sales of G-Drive premium branded Gladkoye is the only fuel terminal complete, transshipment through fuel were maintained at 2018 levels. In in Russia equipped with metering the company's own network will see 2019, branded-fuel sales throughout facilities allowing oil products’ an increase of more than 20%, with volumes and other metrics to average per-terminal transshipment Russia and the CIS totalled 722,000 be controlled automatically. A volumes rising by 58%. tonnes (-1% on 2018), with the share of digital twin of this fuel terminal G-Drive fuel in total sales growing from contains all project information Today, Gazprom Neft operates a wide network of terminals comprising 172 7.3% to 7.9%. Year-end results show since the start of construction. The terminal’s infrastructure allows the own and partner facilities throughout the G-Drive-brand family accounting transshipment of up to one million Russia and the CIS. for every third litre of AI-95 or higher tonnes of petroleum products every grades of gasoline sold at filling stations, with the number of filling stations offering this fuel reaching cubic 1,235 outlets. metres The market environment caused LPG mt sales to decline by 11,300 tones, to 1 40,000 108,000 tonnes – a drop of 10%. oil-products transhipment tank farm storage capacity/year capacity

03 PERFORMANCE REVIEW 85 GAZPROM NEFT

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Customer relations Marketing campaigns and sales 2019, revenue from non-oil sales promotions conducted by the company totalled ₽20.6 billion (including value- The more sensitive customers are to in the reporting year to stimulate added tax). fuel pieces at filling stations, the more sales of petroleum-products reached relevant are marketing programmes a total of 14.3 million customers and In addition, the Gazpromneft filling and campaigns aimed at retaining generated additional sales exceeding station network has for several various customer segments and 200,000 tonnes. years been offering opportunities for increasing customer loyalty towards the management of its own filling the Gazpromneft filling station An important focus of the company's stations to third-party retailers. In network. In 2019, the penetration of customer-relations initiatives is the 2019, 117 stations were transferred the “On Our Way” loyalty programme development of digital sales channels to partnership-based management grew, with about 800,000 new and digitalisation of customer models. By changing filling-station members joining the programme. services. In 2019, the share of digital management models, the company channels (the virtual loyalty card, the has been able to improve operational At year-end 2019, the number of virtual co-branded card and the AGS. efficiency and increase revenue loyalty card holders throughout Russia GO app) in total retail sales through across the Gazpromneft network by and the CIS increased by 7% year on the Gazpromneft filling station reducing the fill-up costs. As a result year, to 11.9 million. Participants in network was about 6%. The number of of putting filling stations under various the loyalty programme accounted active users of the Gazpromneft filling management models, the company’s for 79% of total sales to individuals station network’s mobile app reached 2019 year-end results will see EBITDA through the filling station network. 1.6 million. increase by ₽222 million. According to Ipsos data, “On Our Way” is Russian motorists' favourite loyalty As the company expanded its range of programme, with popularity levels1 additional goods and services offered reaching 30% over the past year (up at shops across the Gazpromneft 5% on 2018). filling station network, non-oil sales increased by 6.1% year on year. In

Smart equipment-monitoring system

In 2019, Gazprom Neft was the first can be monitored online, and downtime data is transferred to the Gazprom Neft vertically integrated oil company (VIOC) and maintenance lead-times reduced. “Neftekontrol” system, online. in Russia to bring the monitoring of all The IMC’s software core processes up It is expected that by 2021 all equipment equipment at automated filling stations to 100,000 signals, and makes more at service and automatic filling stations together in a single “smart” system: than 50,000 calculations, every second. – from coffee machines to fuel tanks – its “Infrastructure Monitoring Centre” Information on oil-product stocks will be connected to the Infrastructure (IMC). The automated monitoring and is received continuously from every Monitoring Centre. predictive analytics capacities mean station in the Gazpromneft filling station filling stations’ operational processes network connected to the IMC, and this >50,000 –30 % –21 % 99 % calculations per second downtime repair and uptime maintenance time

/ 1 / Share of motorists covered by the Ipsos survey who are familiar with the Gazprom Neft “On Our Way” loyalty programme brand.

86 ANNUAL REPORT 2019 The company uses the following partnership-based filling-station Digital products Strategic priorities management models: and services for the development – COPO (company-owned, partner- for motorists of our network operated): a filling station In 2019, Gazprom Neft introduced include diversifying is managed by a network an innovative product: NFC-enabled management models, employee acting as an individual virtual co-branded Gazpromneft- developing filling entrepreneur; Gazprombank cards, which are stations as hubs available through the Gazpromneft – CODO (company-owned, dealer- filling station network mobile offering additional operated): a station is managed app. This card can now be issued services, introducing by a professional dealer selling through the Gazpromneft filling specialised fuel supplied by Gazprom Neft and station network mobile app, added station formats, benefiting from the company’s to the virtual wallet, and used and digitalising as a method of payment for fuel brand, and growth is driven by ordered through the app and any customer experience. a high volume of petroleum- other purchases. In addition, the products sales; card functions as the “On Our – CORO (company-owned, retailer- Way” loyalty card. In the first five Alexander Krylov, months after this function was operated): filling stations are made available, customers issued Regional Sales Director, managed by a non-fuel retailer 290,000 virtual co-branded cards, Gazprom Neft PJSC under its brand name, and the which is almost 100,000 more than retailer earns revenue from non- the number of plastic co-branded oil sales. cards. As part of customer-service development, the functionality of the Gazprom Neft mobile app was also expanded. For example, users of the mobile app became the first customers in Russia to be able to operate coffee machines via their smartphones in Drive Cafes at Gazpromneft filling stations. Another addition to the app is the Space.GO game, in which motorists can answer questions on various subjects to earn additional bonus points under the “On Our Way” loyalty programme. The digitalisation initiative covered not only customer services, but also filling stations themselves: equipment at filling stations was integrated into a single smart system: the Infrastructure Monitoring Centre (IMC). The automated monitoring and predictive analytics capacities of the IMC make it possible to monitor the status of equipment and the operation of filling stations online, which helps to improve the reliability and longevity of equipment.

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Petroleumproducts sales to corporate customers

Aviation fuel supplies Russia (Tunoshna and Gagarin) and Under its long-term business 15 airports abroad (nine in China, development strategy to 2030, Growth in premium sales is the result two in Saudi Arabia, one in each of Gazpromneft-Aero is committed to of both higher sales on the internal Egypt, France, Italy and Tunisia). At becoming one of the top-10 companies market, and higher “wing-tip” sales end-2019, the Gazpromneft-Aero on the international aviation refuelling abroad. distribution network comprised 61 market, expanding its international refuelling terminals in Russia and sales network to cover 350 airports, At year-end 2019, the Gazpromneft- another in Kyrgyzstan. In addition, and increasing direct sales of aviation Aero distribution network covered Gazpromneft-Aero supplies aviation fuels to 5.3 million tonnes per year. 283 airports in 67 countries, including fuel to its customers at 10 Russian Russia. In 2019, the network grew airports through third-party refuelling by 17 units, including two airports in terminals and at 211 airports abroad.

Premium sales, mt Airports of presence2 Number of refuelling Share of the Russian terminals 3 market, % 4 2.80 2.62 2.83 3.12 3.22 213 239 254 266 283 40 45 46 46 47 26.6 26.8 25.9 26.7 26.3 3,5 300 50 30 3,0 250 40 25 2,5 200 20 2,0 30 150 15 1,5 20 100 10 1,0 10 0,5 50 5 0,0 0 0 0 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019

Aircraft refuelling, mt 1 Source: company data

Metric 2015 2016 2017 2018 2019 Premium sales, mt 2.80 2.62 2.83 3.12 3.22 Number of airports at which the company has a presence2 213 239 254 266 283 Number of refuelling terminals 3 40 45 46 46 47 Russian market share, % 4 26.6 26.8 25.9 26.7 26.3

/ 1 / Hereinafter, figures reflect total petroleum-product sales and premium sales by the Gazprom Neft Group. / 2 / In 2020, the company changed its procedure for calculating the number of airports/aerodromes at which it has a presence. Figures on airports where the company has a presence have been adjusted accordingly for all reporting periods. / 3 / In 2020, the company changed its procedure for calculating the number of airports/aerodromes at which it has a presence. Figures on the company’s own refuelling terminals have been adjusted accordingly for all reporting periods. / 4 / In 2020, the company reviewed its market-share calculation procedure, taking into account Petromarket data with respect to market volumes, as well as other internal adjustments.

88 ANNUAL REPORT 2019 Development of the aviation refuelling business abroad Gazpromneft-Aero Total international sales volumes Gazpromneft-Aero also saw a is a technological were up 30% by the end of the year, significant increase in refuelling leader in Russia’s reaching more than 315,000 tonnes. volumes for Russian and international aviation refuelling The company has developed a airlines in India, Malaysia, strategic partnership with China's Montenegro, Serbia, South Korea, industry. We national fuel supplier, China Aviation Spain, Thailand and Vietnam. The are implementing Oil Hong Kong Co. Ltd. (CAOHK), company has begun supplying TS-1 the concept which is designed to supply aviation jet fuel to Uzbekistan’s national of full automation fuel to CAOHK-partner airlines at airline, Uzbekistan Airways. Overall, those airports at which Gazpromneft- Gazpromneft-Aero will supply 100,000 in technological Aero operates. This partnership with tonnes of this product to Uzbekistan process management CAOHK will allow Gazpromneft-Aero throughout 2019–2020. at Gazprom Neft’s to increase the amount of refuelling it Gazpromneft-Aero’s clients include state-of-the art offers its clients at Chinese airports aviation refuelling every year. In 2019, the company had more than 190 airlines, including already seen a three-and-a-half- Russian market leaders , S7 complexes. In addition, fold increase in sales of aviation Airlines, Airlines, and Volga- the company fuels in China compared to 2018, Dnepr, as well as leading international carriers including Lufthansa, is implementing reaching 78,000 tonnes. In China, another two projects Gazpromneft-Aero has established Emirates, Air France and KLM. its largest in-country sales network that are important outside Russia, covering 32 airports for the industry. throughout the country’s major cities. The first involves implementing – together with IATA – XML standards to enable paper- Aviation refuelling volumes abroad in 2019. free document management. tonnes The second is a transition to a new % form of contracts, +30 315,000 and a new form of settlements based on blockchain technology. It will accelerate settlements, reduce operating expenses and make cash transactions transparent. Airlines will be able to pay for fuel instantly when refuelling aircraft, without any prepayment, bank guarantees or financial risks for the parties to the transaction.

Vladimir Egorov, CEO, Gazpromneft-Aero

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Bunkering Improved business efficiency across to its flagship vessel, Gazpromneft the key markets in the North-West Marine Bunker plans to commission Gazpromneft Marine Bunker, the and Black Sea regions enabled the two additional LNG bunkers by 2030. operator of the Gazprom Neft company to increase bunkering bunkering business, provides volumes by 2.4% year on year to At the end of 2019, the company bunkering services at all key ports 2.99 mt in 2019. An important area started selling a new marine fuel with in Russia (including 20 sea and 12 of focus in the development of the sulphur content not exceeding 0.5%. river ports), as well as in the ports of company’s bunkering business It is in demand with shipowners, Constanța (Romania), Riga (Latvia) concerned bunkering of vessels especially in light of a new version of and Tallinn (Estonia). The company’s transporting oil from the company’s the International Convention for the clients include major Russian and fields in the Arctic. Prevention of Pollution from Ships international shipping companies. (MARPOL 2020) taking effect from The company's own fleet comprises: 2019 saw the keel of Russia's first 1 January 2020, setting a limit on – 12 bunkering vessels, including LNG-bunkering vessel, the Dmitry sulphur content in emissions from one Arctic-class vessel for Mendeleev, laid down as part of the vessels in international waters. refuelling ships in the White and implementation of the company's Barents Seas; development strategy in LNG – four Arctic-class shuttle tankers bunkering. This pilot LNG-bunkering and two icebreakers to ensure vessel with a cargo-bearing capacity uninterrupted oil shipments from of 5,800 cubic metres is expected to the Novoportovskoye field. be commissioned in 2021. In addition

Premium sales, mt Ports of presence Russian market share , % 4 3.92 2.77 2.71 2.92 2.99 36 36 37 34 35 21.0 19.1 16.6 15.8 15.7 4,0 40 25 3,5 35 20 3,0 30 2,5 25 15 2,0 20 1,5 15 10 1,0 10 5 0,5 5 0,0 0 0 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019

Bunkering Source: company data

Metric 2015 2016 2017 2018 2019

Premium sales (bunkering, million tonnes) 3.92 2.77 2.71 2.92 2.99 Ports at which the company has a presence 36 36 37 34 35 Russian market share, % 21.0 19.1 16.6 15.8 15.7

90 ANNUAL REPORT 2019 Marine fuels compliant with the MARPOL 2020 Thanks requirements to the advanced With effect from 1 January 2020 environmental standards. Following infrastructure the requirements of the MARPOL testing, this fuel has been certified of terminals at its Convention forbidding the use of fuels as conforming with the Eurasian refineries, Gazprom with sulphur content above 0.5% are Economic Union requirements. Neft will meet introduced throughout international navigation. In December 2019, in In December 2019, the company sold the growing demand order to supply marine fuel compliant 100,000 tonnes of this new marine for environmentally with these requirements, the fuel with sulphur content of less than friendly marine fuels 0.5%. It is expected that supplies of company started selling marine fuel on the Russian market. with sulphur content not exceeding this fuel to the Russian market in 0.5% produced at the Omsk Refinery. 2020 may exceed 1.5 mt. Following completion Gazpromneft Marine Bunker — In 2019, the company also introduced of the construction the operator of the Gazprom Neft a new marine oil for engines of the deep bunkering business — bunkered operating on ultra-low sulphur fuel processing complexes the first vessel with this new oil with sulphur content not exceeding at the Moscow environmentally-friendly fuel in the 0.1%. The Gazpromneft Ocean CCL17 and Omsk refineries, port of Murmansk. high-technology product fully meets the new MARPOL requirements. This we expect to abandon The composition of the RMG-180 (type fuel-oil production M) hybrid fuel has been developed oil has been approved by the world's by Gazprom Neft specialists. Ultra- leading manufacturers of marine completely. low-sulphur and heavy petroleum equipment and is currently available products are used as components; in more than 200 ports worldwide. these are mixed to produce a low- Alexey Medvedev sulphur product meeting international CEO, Gazpromneft Marine Bunker >1.5 mt of the new marine fuel to be supplied to the Russian market in 2020

03 PERFORMANCE REVIEW 91 GAZPROM NEFT

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Oils and lubricants production Its continuously growing product to 23.4%. The company exported oils and sales line currently includes over 950 oils, to 80 countries. grease lubricants and service fluids. The company has an extensive Over the past year, 70 new premium In 2019, the Gazprom Neft Omsk modern production base for the products were launched on the Lubricants Plant started producing manufacturing of oils and lubricants, market. Furthermore, in 2019, the new Gazpromneft Drill Flow drilling and a widespread sales network in company increased by 26,000 tonnes fluids, with 4,000 tonnes of these the B2C and B2B segments. Oils per year the capacity of its facilities products supplied to drilling services and lubricants are sold through the producing oils packaged in large companies. The company was Gazpromneft filling station network, and small plastic containers at the awarded a prize by Gazprom PJSC retail outlets and online shops, and Moscow Lubricants Plant. as part of its annual competition for service stations, as well as supplied projects in science and technology directly to enterprises, including In 2019, oils and lubricants sales for designing a production method car assembly lines. Gazpromneft- totalled 0.47 mt, with premium sales and base formulation used in Lubricants aims to become a top-10 totalling 0.32 mt. The Gazprom Neft Gazpromneft DrillLine drilling fluids. global lubricants manufacturer by share of the packaged-oils and 2030. lubricants market in Russia increased by 1.4 percentage point year on year

Total oils and lubricants Premium sales, mt G-Energy Service Share of the Russian sales, mt garage network, outlets packaged-oils and lubricants market , % 0.43 0.45 0.41 0.49 0.47 0.23 0.27 0.29 0.31 0.32 26 70 120 170 210 17.1 20.0 21.3 22.0 23.4 0,5 0,5 250 25

0,4 0,4 200 20

0,3 0,3 150 15

0,2 0,2 100 10

0,1 0,1 50 5

0,0 0,0 0 0 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019

Oils and lubricants sales, mt Source: company data

Metric 2015 2016 2017 2018 2019 Total oils and lubricants sales (mt) 0.43 0.45 0.41 0.49 0.47 Premium sales (mt) 0.23 0.27 0.29 0.31 0.32 G-Energy Service network (outlets) 26 70 120 170 210 Share of the Russian packaged-oils and lubricants market, % 17.1 20.0 21.3 22.0 23.4

92 ANNUAL REPORT 2019 Developing the international oils and lubricants Gazprom Neft’s distribution network development In 2019 Gazprom Neft registered The range of marine oils and strategy to 2030 Gazpromneft Marine Lubricants, an lubricants under Gazpromneft and includes expanding operating company with an office in Gazpromneft Ocean brands includes the international Singapore. This new enterprise will 43 high-technology products for all geographical reach enable Gazprom Neft to develop its types of marine equipment, including international marine-oils production 15 types of Gazpromneft Ocean of marine-oil sales. and logistics network effectively, motor oils for two- and four-stroke The company including in Southeast Asia and engines. The composition of these plans to increase Europe. The company’s products, oils has been developed taking into its production which are approved by key marine account the needs of the international equipment manufacturers, are shipping industry and the MARPOL and sales of specialised already available in more than 250 2020 requirements. lubricants significantly. ports worldwide. An operating company established in Singapore, a centre of international shipping where one of the world's largest port hubs is located, 250 43 will enable Gazprom Neft to develop The company’s marine The company’s product its production and logistics network lubricants are available range includes 43 high- in the most efficient at 250 ports worldwide tech Gazpromneft way, including its own and Gazpromneft Ocean lubricant production branded marine lubricants plants in Russia and partner blending facilities abroad.

Alexander Trukhan CEO, Gazpromneft-Lubricants

Over the past year, Gazprom Further expansion of the production Neft expanded its international and logistics network will allow Gazpromneft Ocean marine-oils Gazprom Neft to build up production business, as it launched production volumes significantly, expand its and subsequent sales in Singapore, distribution coverage and, by 2030, the Netherlands, Turkey and South secure a 4% share in the global Korea. The company established a marine-oils market. subsidiary in Singapore in 2019 to enable further efficient development The company also continues to of its international marine-oils develop a network of its own production and logistics network. premium-brand G-Energy Service service stations. In 2019, 40 new Thanks do the development of its service stations were added to the international marine-oils business, network, with the total number of Gazprom Neft is already present branded service stations reaching at more than 250 ports worldwide. 210 at year-end.

03 PERFORMANCE REVIEW 93 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

Bitumen materials Total sales of bitumen materials, Premium sales, mt mt Gazprom Neft is one of the largest manufacturers and suppliers of bitumen products in Russia. Gazprom 2.05 2.17 2.65 2.97 2.92 0.18 0.23 0.29 0.35 0.42 3,0 3,0 Neft has its own bitumen production 2,5 2,5 facilities in Russia (in Moscow, Omsk, 2,0 2,0 Yaroslavl, Ryazan, Vyazma, and 1,5 1,5 Salsk), Serbia and Kazakhstan. 1,0 1,0 In 2019, sales of bitumen materials 0,5 0,5 exceeded 2.9 mt. Premium sales of 0,0 0,0 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 bitumen materials reached 0.42 mt, up 20% year on year. The growth was driven by the development of Sales of bitumen materials, mt the distribution network (ensuring Source: company data availability of bitumen-derived products throughout all Federal Metric 2015 2016 2017 2018 2019 Okrugs of Russia), growth in exports, Total sales of bitumen materials, 2.05 2.17 2.65 2.97 2.92 as well as by cooperation with mt regions to introduce modern bitumen materials into construction. Premium sales, mt 0.18 0.23 0.29 0.35 0.42

2019 marked the start of premium product sales in Latvia, Lithuania and Armenia. Supplies to Latin America, production and logistics terminal Ryazan Plant rising by 60% year on under strategic transnational in Salsk also demonstrated strong year to 64,000 tonnes. Key markets projects, saw a 2.5-fold growth. In performance, with more than 172,000 for packaged products include 2019, Gazprom Neft expanded the tonnes of bitumen shipped during remote regions of Russia, Europe, geography of bitumen-products sales the first year of the asset’s operation and countries of Latin America. to cover all 85 Russian regions, and under Gazprom Neft’s management. 57 countries worldwide. Expanding geography and entering The company continues to make new global markets enabled the steady progress towards the In 2019, the range of products company to increase the productivity introduction of products for a manufactured at the Moscow of its Ryazan Bitumen Binders new volumetric asphalt-mix Refinery’s large bitumen unit was Plant significantly by as much as design system currently being expanded to three types of bitumen 33% to 109,000 tonnes, with binder implemented in Russia. In addition binders, and the maximum daily shipments in Clovertainer containers to facilities in Ryazan and Vyazma, capacity was maintained at 5,500 and other types of packaging from the the bitumen terminal in Salsk and tonnes per day. A high-technology

94 ANNUAL REPORT 2019 Supplying bitumen materials to Latin America Many Gazprom Neft has supplied region’s climatic conditions: high air of the products polymer-bitumen binders (PBB) temperature coupled with tropical in our bitumen- for the construction of the largest humidity. The region’s mountainous products line have no infrastructure facility in Latin America: terrain, as well as future car and HGV equivalents in Russia the Bi-Oceanic Corridor. This highway traffic, were also taken into account will connect the east and west coasts in developing the PBBs. The binders’ or anywhere else. of the South American continent and special formulation is expected to This competitive make them into a single transport ensure the highway’s reliable operation advantage – alongside network. for a period of more than 10 years. technologies, modern Innovative bitumens produced by PBB deliveries to Latin America from production capacity, the Gazprom Neft Ryazan Bitumen Russia were undertaken by sea and an extensive logistics Materials Plant are being used in road transport, in special patented network, and scientific asphalt road coverings throughout medium-tonnage cuboid containers the 277-kilometre border section of – Clovertainers, which guarantees and technical expertise the highway, in Brazil and Paraguay. that the high-performance features of – mean we can expand The specialist formulation of the bitumen are preserved. geographic coverage PBBs used on the Bi-Oceanic Corridor of our business highway was developed at Gazprom and be involved Neft’s Science and Technology Centre in Ryazan, under the international in implementing Superpave mix design method. major international The composition of this innovative infrastructure projects. bitumen has been adapted to the

Dmitry Orlov CEO, Gazpromneft a processing site in Omsk have also BPG-50 Plus, intended for use in the Bitumen Materials started manufacturing products Arctic, at temperatures ranging from graded in accordance with the PG -50 to +30°C. The properties of this (Performance Grade) classification sealant will ensure the stability of (based on performance at different piles supporting storage tanks in the temperatures). construction of facilities in the Arctic.

In expanding the product range and areas of application, the specialists at the Gazprom Neft bitumen- business operator have developed an innovative bitumen sealant, Brit

03 PERFORMANCE REVIEW 95 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

Petrochemicals

Sales of basic petrochemical products, mt Source: company data

Metric 2015 2016 2017 2018 2019 Total petrochemicals sales (mt) 1.45 1.35 1.25 1.35 1.55

Gazprom Neft is Russia’s largest SIBUR Holding, consolidated a 100% producer of a number of basic shareholding in Poliom LLC in 2019. Increasing petrochemicals: aromatic the holding in Poliom hydrocarbons (benzene, paraxylene, In 2019, polypropylene production is an important orthoxylene, toluene) and the propane- totalled 139,000 tonnes at Neftekhimiya milestone in implementing propylene fraction (PPF, propylene- (+4% year on year) and 213,000 tonnes Gazprom Neft’s containing LPG). Basic petrochemicals at Poliom (flat year on year). In addition, long-term strategy, are produced at all Gazprom Neft Neftekhimiya achieved a maximum the key priorities of which refineries (in Omsk, Moscow and hourly production rate of 17.4 tonnes include developing Yaroslavl). Downstream petrochemical per hour in 2019. the petrochemicals products (polypropylene) are produced business. at integrated enterprises: NPP Developing the petrochemicals The integration of refining Neftekhimiya (Moscow) and Poliom business is part of the Gazprom Neft’s and petrochemical assets (Omsk). long-term strategy to 2030. By that will allow the company time, the share of petrochemicals in to improve efficiency The development of petrochemical the product mix is expected to increase in using feedstocks production is a growth area that is to 15%. supplied by our own strategically important to the company. refineries to produce In order to strengthen Gazprom high value-added Neft’s position on the petrochemicals products. Strengthening market, the company, together with the company’s technological partnership with SIBUR will, at the same time, give our products a competitive advantage on the Russian and international markets. Consolidation of a 100% shareholding in Poliom Launched in 2013, Poliom is one of Poliom makes use of the best available Russia's most important polypropylene solutions and zero-waste production Levan Kadagidze producers. With annual capacity of technologies. Head of Commercial 218,400 tonnes, the plant produces and supplies up to 80 different grades In 2019, Gazprom Neft together with Affairs Directorate, of polypropylene. The main feedstock SIBUR Holding purchased a 50% Downstream Division, in polypropylene production is the shareholding in Poliom from a partner Gazprom Neft propane-propylene fraction which is on a parity basis. As a result, Gazprom supplied to the plant by the Gazprom Neft and SIBUR Holding became 100% Neft Omsk Refinery. Having been owners of the plant. certified to international standards,

96 ANNUAL REPORT 2019 Catalyst production

Construction of a cutting-edge catalyst production The new facility in Omsk production facility Gazprom Neft has begun active catalysts every year. The catalyst will allow construction of its modern high-tech production technologies developed us to reduce oil-refining catalyst production facility by Gazprom Neft in conjunction in Omsk. The new 21,000-tonne per- with leading Russian scientific and our heavy dependence year capacity plant will be producing technology institutions are protected on the supply modern catalysts for key processes in by international patents; products will of imported catalysts. deep oil refining and the production of be manufactured using raw materials Gazprom Neft Euro 5 fuels. from Russian suppliers. catalysts will outstrip Gazprom Neft’s project is designed The Ministry of Energy of the foreign alternatives to meet Russian refineries’ demand Russian Federation has awarded on a number for modern and efficient cat-cracking the initiative the status of a National of criteria. Eventually, and hydrotreatment catalysts Project. Construction is expected to necessary in producing Euro-5- be completed in 2020. The project the company’s share standard gasoline and diesel fuels, includes modern treatment, hermetic of the cat-cracking as well as hydrocracking catalysts containment and control and and hydroprocessing used in deep oil refining processes. monitoring systems, as a result of catalysts market The project’s configuration envisages which environmental emissions will be production of 4,000 tonnes of almost cut in half, despite a seven-fold may exceed 70%. hydrotreatment catalysts, 2,000 increase in output. Theoretically, tonnes of hydrocracking catalysts, the company and 15,000 tonnes of cat-cracking is in a position to fully meet domestic demand. Any surplus will be exported.

Alexander Chembulaev CEO, Gazpromneft Catalytic Systems

03 PERFORMANCE REVIEW 97 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices FINANCIAL RESULTS

Key financial indicators (IFRS)

Key indicators , ₽ million

Item 2015 2016 2017 2018 2019 ∆ 2019/2018, % REVENUE1 Crude oil, gas and petroleum products sales 1,581,777 1,637,553 1,870,790 2,418,717 2,393,444 (1.0) Less: export duties and sales related excise (187,832) (150,156) – – – – Other revenue 73,998 58,211 63,799 70,575 91,864 30.2 TOTAL REVENUE FROM SALES 1,467,943 1,545,608 1,934,589 2,489,292 2,485,308 (0.2) COSTS AND OTHER DEDUCTIONS Purchases of oil, gas and petroleum products (345,909) (351,294) (456,037) (617,306) (663,068) 7.4 Production and manufacturing expenses (214,267) (201,862) (216,530) (228,618) (260,688) 14.0 Selling, general and administrative expenses (100,176) (108,981) (106,629) (114,882) (125,592) 9.3 Transportation expenses (133,320) (132,984) (141,982) (147,182) (143,474) (2.5) Depreciation, depletion and amortisation (114,083) (129,845) (140,998) (175,451) (181,372) 3.4 Taxes other than income tax (353,145) (381,131) (492,269) (652,784) (591,193) (9.4) Export duties – – (76,658) (94,916) (71,601) (24.6) Exploration expenses (922) (1,195) (963) (1,411) (1,752) 24.2 Total operating expenses (1,261,822) (1,307,292) (1,632,066) (2,032,550) (2,038,740) 0.3 OPERATING PROFIT 206,121 238,316 302,523 456,742 446,568 (2.2) Share of profit of associates and joint ventures 24,956 34,116 45,504 90,704 83,906 (7.5) Net foreign exchange gain/(loss) (67,910) 28,300 (241) (33,558) 10,518 – Finance income 14,732 11,071 10,098 7,506 22,906 >200 Finance expense (33,943) (34,282) (25,127) (21,476) (32,772) 52.6 Other loss, net 1,494 (17,982) (7,557) (19,796) (23,292) 17.7 Total other income (60,671) 21,223 22,677 23,380 61,266 162.0 PROFIT BEFORE INCOME TAX 145,450 259,539 325,200 480,122 507,834 5.8 Current income tax expense (38,026) (21,290) (43,695) (59,585) (52,502) (11.9) Deferred income tax benefit/(expense) 8,774 (28,524) (11,827) (19,544) (33,244) 70.1 Total income tax expense (29,252) (49,814) (55,522) (79,129) (85,746) 8.4 PROFIT FOR THE PERIOD 116,198 209,725 269,678 400,993 422,088 5.3 Less: profit attributable to non-controlling interest (6,537) (9,546) (16,404) (24,326) (21,887) (10.0) PROFIT ATTRIBUTABLE TO GAZPROM NEFT 109,661 200,179 253,274 376,667 400,201 6.2

/ 1 / Starting from 1 January 2018, the Group has been applying IFRS 15 Revenue from Contracts with Customers

98 ANNUAL REPORT 2019 In 2019, Gazprom Neft’s financial At the same time, the company’s net performance was stable. The profit went up by 5.3% to a record company’s revenue totalled ₽2.49 amount of ₽422.1 billion thanks to trillion, a slight decrease of 0.2 % the strengthening of the rouble and year on year. The negative price a positive impact of net financial trend on the oil market was offset by income (expense). growth in sales volumes.

Revenue, ₽ billion Net profit, ₽ billion 116.2 209.7 269.7 401.0 422.1 1,467.9 1,545.6 1,934.6 2,489.3 2,485.3 500 2500 400 2000 300 1500 200 1000 100 500 0 0 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019

03 PERFORMANCE REVIEW 99 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

2019 financial results

Adjusted EBITDA, ₽ billion Factor analysis of the adjusted EBITDA1 2019 vs 2018, ₽ billion 404.8 456.2 551.0 799.5 795.1 800 -32 28 5 -6 795 800 800 167 167 700 700 600 600 Internal 633 factors: 628 500 500 +27 400 400 300 300 200 200 100 100 0 0 2015 2016 2017 2018 2019 2018 Prices Upstream Downstream Repairs at 2019 refineries

Group share in the EBITDA of JVs

The figures may not constitute final amounts due to rounding.

Cash flow in 2019, ₽ billion 609 -453 156 -22 116 -33 -227 -34 -45 800 700 600 500 400 300 200 100 0 Operating Investments2 Free Acquisitions3 Proceeds Net Dividends Other Net cash cash flow cash flow; from sale of borrowings flow property, plant and equipment, net of tax

/ 1 / Including the Gazprom Neft share in the EBITDA of associates and joint ventures. / 2 / Capital investment includes changes in reserves and advance payments. / 3 / Acquisition of oil and gas licences, and other cash flows from investment activities.

100 ANNUAL REPORT 2019 Peak investments in refining projects and the expansion of the production project portfolio have resulted in higher capital expenditure

Investments1, ₽ billion Net debt, ₽ billion, 22.4 % and Net debt/EBITDA 453 370 654.7 641.9 584.0 527.9 497.7 year on year in capital 800 investment growth 700 31 600 500 21 400 1.9 Capital expenditure at brownfields 300 16 1.6 increased by 18.9% due to: 200 1.19 118 – an increase in drilling and 100 0.73 0.7 16 workover at new fields in 0 18 2015 2016 2017 2018 2019 traditional production regions. 16 95 Capital expenditure at greenfields increased by 17.5% due to: – an increase in drilling and Credit ratings 121 construction of infrastructure • In February 2019, Moody's facilities; upgraded the company rating to 103 – seismic surveys at new licence Baa2, and revised the outlook to "stable" blocks; • In August 2019, Fitch Ratings – commencing oil rim projects. upgraded the company rating to BBB, with the "stable" outlook The growth of capital expenditure in 145 In late December 2019, all the downstream segment amounted Gazprom Neft ratings were 122 to 21.3% year on year, and is related investment-grade. to an active phase of deep conversion projects at the Omsk Refinery, and construction of a catalyst plant. Debt portfolio • In November 2019, the company successfully placed five-year 2018 2019 bonds worth ₽25 billion, with a coupon of 6.85% per annum. Brownfields Marketing • In December 2019, the company Greenfields and distribution successfully placed 10-year Refining Other Advances paid bonds worth ₽20 billion, with a coupon of 7.15% per annum. The coupon rates were the lowest in the history of the Russian market2

/ 1 / The figures may not constitute final amounts due to rounding. / 2 / Placement for comparable periods.

03 PERFORMANCE REVIEW 101 ARTIFICIAL INTELLIGENCE ISN’T A MAGIC BOX: GAZPROM NEFT SPECIALIST ANNA DUBOVIK ON THE IMPORTANCE OF DIGITAL PRODUCT SAMPLES

Anna Dubovik, Head of Advanced Analytics and Machine Learning ANNUAL REPORT 2019

Technological development

Innovation management Import substitution GAZPROM NEFT

2019 p. 109 The company opened an Integrated Upstream We have started HIGHLIGHTS Engineering Centre considering technological An Integrated Upstream Engineering Centre (a division of the Bazhenov Technology Centre) was opened solutions development at the Skolkovo Institute of Science and Technology. It provides not only as our core R&D support for non-traditional hydrocarbon reserves operations supplement, development. but also as a separate process with intrinsic value. Today, technology is not just a way of responding TECHNOLOGICAL DEVELOPMENT to challenges, but also a separate investment portfolio. In order to ensure the product developed enjoys wide-ranging demand from business High once it goes into reproduction, you need a good understanding – right technology from the very beginning – as to exactly what p. 110 value it is going to bring to the end- is key to solving customer or end- user. For instance, hydraulic fracturing major software designed by the company has become one challenges of the most successful and promising projects in the oil industry. New technology will enable the company to manage large oil production projects Alexey Vashkevich effectively and achieve a leading position Director for Technological in strategic areas. Development, Gazprom Neft PJSC

First stage of the Technology Strategy (completed in 2019) billion projects ₽25 27 completed OUTCOMES invested in 2019 under the ₽130 110 600 Gazprom Neft billion mtoe mtoe Innovative Development total NPV across incremental incremental Programme the portfolio hydrocarbon hydrocarbon production by 2025 reserves by 2025

104 ANNUAL REPORT 2019 p. 110 The company established the New Industry p. 111 Russian-made seabed stations conduct offshore Ventures Fund seismic surveys A joint venture fund, New Industry Ventures, was Seismic surveys at the Ayashsky licence block in the Sea established by the company together with Gazprombank, of Okhotsk is an example of import substitution in practice. RVC and VEB Innovations. The fund will invest During these surveys, Gazprom Neft has become the first in companies developing new materials, technologies, oil company in Russia to use the domestically produced products and services for the oil and gas industry. standalone “CRAB” seabed station for seismic surveys. Previously, these surveys were largely conducted using the foreign equipment.

A digital system helps to find promising formations

The company has achieved 19 20 incremental oil production at the Vyngapurovskoye field 98 during pilot tests, using digital

system recommendations. The system was designed to search for the missed 138 18 20 intervals. A machine-learning PROGRAMMES model is used to process 2015–2019 geological data and identify 2 9 promising formations that 20 have not been detected using 15 conventional methods due 2 to their small size or complex SOFTWARE 01 6 structure.

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7 26 1 2 0 1 0

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6 1 3 20 143 PATENTS 7 2015–2019 201

2015 2016

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PATENT APPLICATIONS 336 APPLICATIONS 2015–2019

04 TECHNOLOGICAL DEVELOPMENT 105 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices INNOVATION MANAGEMENT

Gazprom Neft's approach aligns technology development projects with strategic goals. The company develops and deploys technological solutions that address strategic challenges.

Focus areas

Technological development – Oil recovery factor increase Each priority area is undergoing is a priority of the Gazprom Neft at mature fields; development or realization Strategy 2030. New technology will – Multiphase fields development; projects, which aimed to design, enable the company to manage – Low-permeability reservoirs test or implement necessary large-scale oil production projects development; technologies. effectively and achieve a leading – Efficient and safe offshore position in strategic areas. development in the ice-bound sea; – Efficient refining catalysts Priority areas of technological and processes. development are the following:

Basic documents

Upstream Technology Strategy – Development of non-traditional In 2019, Gazprom Neft updated its reserves; Technology Strategy and prioritised The Upstream Technology – Development of oil rims; flagship technological programmes Strategy covers all focus areas – Electronic Asset Development that will help to achieve the Strategy of the Upstream Division, including: (EAD); 2030 goals. – Exploration and resource expansion – Development of carbonate technologies; and fractured reservoirs; – Well drilling and completion – New-generation infrastructure; technologies; – Capital construction. – Enhanced oil recovery and well stimulation;

billion mtoe 27 ₽130 110 projects completed billion total portfolio mtoe incremental hydrocarbon production by 2025

106 ANNUAL REPORT 2019 Offshore Technology Strategy petrochemical production Gazprom Neft intellectual processes); property (IP) portfolio In 2018, the company approved – Catalyst production technologies, an Offshore Technology Strategy including for catalytic cracking with the following priority areas: and hydrogenation. 64 89 115 174 175 – Exploration; – Monitoring, prevention and response to accidents in ice Innovative Development conditions; Programme 175 92 98 – Logistics in the Arctic; – APG utilisation on the Arctic shelf; The company is undergoing – Offshore field development; an Innovative Development – Safety of offshore projects; Programme with core focus 150 – Digitalisation. on enhanced oil recovery at brownfields, hard-to- recover hydrocarbon reserves 125 Downstream R&D Strategy development, continuous improvement of well productivity, 61 Downstream Research and development and production and development is aligned of catalysts for catalytic 100 with a long-term R&D strategy. cracking and hydrogenation 49 Technological solutions processes. In 2019, investments 52 30 are developed in partnership under the Programme totalled 75 with Russia's leading research about ₽25 billion, of which R&D costs and educational institutions. constituted almost ₽3 billion. 36 Technology implementation enables 18 the company to increase the output 50 47 of high-margin products, depending 26 on technological capabilities 36 12 30 of individual refineries, while 25 reducing operating expenses. 16 14

The company has about 30 projects 0 in its R&D portfolio: 2015 2016 2017 2018 2019 – Advanced refining processes Patents (high-octane gasoline and needle Computer software coke production; tar hydrotreating; Patent applications

600 mtoe incremental hydrocarbon reserves by 2025

04 TECHNOLOGICAL DEVELOPMENT 107 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

Innovation infrastructure

Gazprom Neft Science of collaboration between oil and gas in horizontal wells. Field tests and Technology Centre and oilfield service companies, are conducted to validate increasingly the scientific community, equipment complex drilling and completion The Gazprom Neft Science manufacturers, investors technology: longer laterals, more and Technology Centre (STC) and the government. Participants use fracking stages per well and higher provides analytical, methodological this platform to test new technologies fluid injection rates. The main goal and R&D support for all key and equipment, including horizontal is to reduce the unit drilling cost production and engineering functions well drilling at the Bazhenov to enable commercial oil production of the Upstream Division. Its Formation, multistage fracking, from the Bazhenov Formation. science and engineering expertise enhanced oil recovery Is a commercially viable technology supports upstream investment techniques, software systems, development on the Bazhenov and management decisions. Its key logging tools, and equipment Formation by 2025. competencies include: for hydraulic fracturing, oil gathering – Geological modelling; and treatment. The Bazhenov Technology Centre – High-tech wells drilling support; has started first exploration well – Science and engineering expertise; The Palyanovsky area within drilling and coring at the Savitsky – Integrated field development the Krasnoleninskoye field licence block in the Orenburg planning; in the Khanty-Mansi Autonomous Oblast. The survey is expected – Development and implementation Okrug-Yugra, is the main site to confirm the presence of moveable of digital solutions; of the Bazhenov Technology hydrocarbons within the intervals – Technology Strategy project Centre. Advantages of the asset of Domanic formations. Commercially management; include compact size, availability viable technologies for Domanic – Sharing best practices of comprehensive geological oil production could open in technology management. data and field infrastructure, the access to a new major source and commercial flow rates of non-traditional hydrocarbons The STC has over 1,000 employees, from the Bazhenov formation. with the estimated resource base of 3 who work in St Petersburg billion to 6 billion tonnes of oil. and Tyumen offices. Federal Law No. 396-FZ 'On Amendments to the Law In 2019 the Bazhenov Technology Bazhenov Technology Centre of the Russian Federation on Subsoil Centre discovered a new Palaeozoic as Concerns Improving the Legal oil deposit at the Urmansky field The Bazhenov Technology Centre Regulation of Relations in the Field in the Tomsk Oblast. The discovery is a Gazprom Neft subsidiary of Geological Surveys, Exploration has confirmed the presence of oil established in 2018. It provides and Extraction of Non-traditional in deeper Paleozoic horizons and has an open industry-wide platform Minerals' was adopted in 2019. provided access to pre-Jurassic The law introduces a new type reserves. of subsoil rights, allowing companies to test and validate new technology Other oil and gas companies rather than conduct exploration are involved in projects run and production. When the law comes by the Bazhenov Technology Centre. into force, all the relevant regulations For instance, in 2019, Gazprom >1,000 are adopted and the licence Neft and Zarubezhneft signed is renewed, the Palyanovsky area will an agreement on establishing employees work in the become the first technology test site a joint venture for the exploration, Gazprom Neft Science in Russia. development and production of hard- to-recover oil reserves, including and Technology Centre offices The national project on the Bazhenov non-traditional hydrocarbons. in St Petersburg and Tyumen formation proved the viability The joint venture portfolio will include of multistage hydraulic fracturing the Salymsky-3 and Salymsky-5

108 ANNUAL REPORT 2019 licence blocks located in the Khanty- technology extending the service life – Manufacturing execution Mansi Autonomous Okrug, which of road coverings. systems (MES) for dispatching are currently owned by the Bazhenov and scheduling; information Technology Centre. The R&D Centre has unique management systems laboratory facilities enabling full- for laboratories; New enhanced oil recovery p. 61 techniques cycle research not only on bitumen – High-technology solutions, for the Bazhenov Formation and its derivatives but also on asphalt including process modelling concrete mixtures. Given its high and optimisation, monitoring An Integrated Upstream level of expertise, the Centre serves and diagnostic systems, Engineering Centre (a division as an independent laboratory and computer-based simulators. of the Bazhenov Technology Centre) under the Safe and High-Quality was opened at the Skolkovo Institute Roads Federal Project in some Corporate Information of Science and Technology in 2019. Russian regions. Technology Technopark The new Centre provides R&D support for the development of non- Industrial Automation The Corporate Information traditional hydrocarbon reserves, Technopark Technology Technopark including the Bazhenov Formation, in St Petersburg is designed Domanic and pre-Jurassic deposits. The Industrial Automation to facilitate direct cooperation Technopark was established in Omsk between technology developers The Integrated Engineering as part of the company's import and IT equipment manufacturers Centre specialists have access substitution strategy. It is a platform for the oil and gas industry. Gazprom to the research and engineering for research and development, pilot Neft provides the participants infrastructure of the Skolkovo testing and design of high-technology of the Technopark with a platform Institute of Science and Technology. solutions for refinery automation. for testing and assessing promising Skolkovo’s resident organisations, It comprises training, testing solutions and innovative technologies. independent business and R&D centres, a data centre, Regular information sessions and scientific experts, and venture a co-working space (a shared office are held at the Technopark in order investors can also be engaged space), and a communication centre to present potential customers to assist in addressing technological where working meetings and R&D with new IT solutions that proved its challenges. conferences are held. effectiveness.

Bitumens Research The Technopark focuses House of Innovations and Development Centre on the development of: – Instrumentation and controls, The Gazprom Neft House In 2016, Gazprom Neft established such as pressure and temperature of Innovations is a unique cross- the Bitumens Research sensors, analysers, etc.; functional space for projects and Development Centre, an in-house – Automated process control involving the use of new end-to- R&D facility designed to provide systems, including distributed end technologies and data. This R&D support for its bitumen control systems, accident project brings together leading business. The key task of the Centre prevention systems, and software specialists in machine learning, is to develop bitumen products systems;

04 TECHNOLOGICAL DEVELOPMENT 109 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

digital platforms, the Industrial of new materials, technologies, and on implementing innovative Internet of Things (IIoT), blockchain products and services for the oil solutions for industrial infrastructure technologies, augmented and virtual and gas industry. construction and management reality, and other Industry 4.0 of large-scale projects. Its technologies. The fund’s activities will be focused investment focus will also include on developing technologies resource- and energy-saving New Industry Ventures Fund for hydrocarbon exploration, technologies, and digital products, production, processing, including Industry 4.0 technologies. In 2019, the company together transportation, distribution with Gazprombank, RVC and VEB and utilisation, as well Innovations established a joint as energy transmission and storage, venture fund, New Industry Ventures. The fund will invest in companies specialising in the development

Key projects and 2019 highlights

Upstream deployment will require lower-cost at the Vyngapurovskoye field during chemicals. The company plans new pilot tests, using digital system As part of a national project to develop surfactant-polymer compositions recommendations. The system was technology for the Bazhenov testing at the Kholmogorskoye designed to identify oil-bearing formation Gazprom Neft confirmed and Sutorminskoye fields intervals. A machine-learning model the viability of multistage fracking in the coming years. is used to process geological data in horizontal wells (see above). and identify promising formations The company continued to explore Miscible displacement technology, that have not been detected Domanic deposits in the Orenburg which proved high efficiency using conventional methods due Oblast (the Domanic project), during laboratory tests, will enable to their small size or complex develop a technological solution the company to achieve incremental structure. The company will be able for hydrocarbon prospecting in pre- production at fields with a high gas/ to boost production without extra Jurassic horizons (the Palaeozoic oil ratio. In 2020, the company plans costs on infrastructure by rolling out project) and explore the Achimov surface infrastructure construction this technology across its sites. Formation (see the Resource Base to implement this technology and Production section). at the sites. Gazpromneft-Yamal has tested self-learning software designed In 2018, the company validated Digital tools implementation enhance to predict changes in rock types the effectiveness of chemical Gazprom Neft key competencies in the course of drilling. The system flooding, a technique that could (geological evaluation, drilling, alerts the operator to the possibility extend the life of depleted fields production and construction of exiting the pay zone, which in Western Siberia. The Zapadno- management) through faster enables real-time drilling trajectory Salymskoye field pilot resulted in a 17 and more efficient decision-making. adjustment. percentage point increase in the oil For instance, the company has recovery factor. Commercial-scale achieved incremental oil production

110 ANNUAL REPORT 2019 Refining Gazprom Neft’s strategic priority gasoline. The first pilot batch is to develop refining processes of premium-grade needle coke was Gazprom Neft has implemented that deliver unmatched efficiency. produced at the Omsk Refinery Captain, a digital logistics These include the Aroforming in 2019. The technology used management system for projects technology that allows low-grade in its production is an R&D result in the Arctic. This system feedstock (straight-run gasoline) patented by the company. This enables uninterrupted oil processing into high-octane motor product is used to manufacture shipments from Prirazlomnoye gasoline component. The testing ultra-reliable graphitised petroleum and Novoportovskoye fields. was successfully completed in 2019, coke cathodes, which are used Gazprom Neft produces aluminium and the company is developing plans in the metals industry. The company oxide catalysts for deep conversion, for this technology commercialising. also develops processes and develops efficient catalytic- to convertheavy feedstock, such cracking, hydrotreatment Another priority for the downstream as tar, asphalt or pyrolysis resin, into and hydrocracking catalysts segment is new products high-quality bunker fuel that comply as part of a national project. manufacturing technologies MARPOL 2020 standards, or into A state-of-the art catalyst plant development, such as needle raw materials for hydrocracking is under construction in Omsk. coke and unleaded aviation and catalytic cracking facilities.

IMPORT SUBSTITUTION

One of Gazprom Neft priorities is an example of import substitution the government, domestic is to increase the share of Russian in practice. During these surveys, technology developer and equipment products in procurement structure. Gazprom Neft has become manufacturer, and a Russian service The company implements solutions the first oil company in Russia company. Its outcomes prove available on the market and supports to use the domestically produced that Russian companies are able the development of new products standalone “CRAB” seabed station to take on complex technological to achieve this goal. Substantial for seismic surveys. Previously, these challenges and produce solutions part of import substitution projects surveys were largely conducted using promptly. The company also are implemented by partnering the foreign equipment. implements a number of other companies. joint projects to create domestic The seabed stations development technologies for offshore exploration Seismic surveys at the Ayashsky is an example of successful and production. licence block in the Sea of Okhotsk partnership between Gazprom Neft,

04 TECHNOLOGICAL DEVELOPMENT 111 GAZPROM NEFT STEPS UP EXPLORATION DRIVE, INVESTMENTS

Vadim Zakharov, operator of the filling-and- sealing machine ANNUAL REPORT 2019

Governance system

Corporate governance Internal control and risk management Investor and shareholder relations GAZPROM NEFT % Company profile Strategic report 40 Performance Technological development of the consolidated net profit was distributed as dividends in Governance system Sustainable development 2019 Appendices CORPORATE GOVERNANCE

the protection of shareholders’ Corporate rights and interests, and maintaining an open dialogue with the investment community, governance – together with full transparency of information – the Gazprom Neft Board of Directors was successful best practice in addressing all of these in 2019.

The Gazprom Neft Board equals of Directors saw considerable changes for this reporting year, with five new representatives – each having the appropriate higher qualifications and experience – being elected. Board meetings examined more than 100 issues of strategic income importance to the company, with the resulting decisions having a major impact on the effective development of Gazprom Neft’s business. The Board Chairman’s letter of Directors was responsible for overseeing the fulfilment of the company’s investment programme, management of the company’s debt portfolio, plans for international business development and the development of the aviation and bitumens sectors, the outcomes of the first year of the company’s Dear shareholders new development strategy, and investors, and other issues. The Board of Directors’ Effective corporate governance assessment of Gazprom is vital to the stable Neft’s activities in 2019, and sustainable development and the company’s business- of any company. And the Board development plans, confirm of Directors is a key element their full compliance in that system. Strategic with the objectives outlined business management, ensuring

120 ANNUAL REPORT 2019 ₽18.14 of the consolidated net profit was distributed as dividends in 2019

in Gazprom Neft’s long-term standards in every location The Board of Directors will business strategy to 2030. in which the company operates. continue its strategic management It is of no small importance that of the company in improving The Board of Directors approved Gazprom Neft’s Sustainability the sustainability and increasing various pieces of internal Report was subjected the scale and scope of Gazprom regulation developed in 2019, to its first ever independent Neft’s business throughout 2020. including the company’s external audit in 2019 – with experts audit policy, regulations on insider verifying the document as being Alexey Miller, information, and regulations fully compliant with the Global Chairman of the Board of Directors governing the procurement Reporting Initiative’s best practice Gazprom Neft PJSC of goods, works and services – all and international standards of which are directed at further in sustainable development. improving the company’s management and business Senior management at Gazprom processes, and all of which Neft has been proactive outline Gazprom Neft’s approach in engaging with shareholders to upholding independence and the investment community and avoiding conflicts of interest. throughout 2019, discussing the company’s free cash flow This reporting year saw the Board (FCF) utilisation, sustainable of Directors adopt Gazprom development policy, Neft’s Digital Transformation and increasing dividend payments Strategy: this document to shareholders during meetings having been developed in line with representatives from global with the company’s Development investment funds. Strategy to 2030, and being designed to ensure full support Gazprom Neft made dividend for (and implementation of) payments to shareholders on two that strategy. Changes being occasions in 2019, increasing made within Gazprom Neft the amounts paid on both as a result of new technologies occasions, with dividends for 2018 (mainly based around “Big Data” representing 38% of consolidated and “digital twins” of company net profit, and dividends assets) are improving flexibility for the first half of 2019 being 40% and effectiveness in business of consolidated net profit for that management. period.

Key priorities for Gazprom This reporting year has made Neft include safety, care clear the considerable efficiency for the environment, of the company’s governing and the meticulous management bodies, and their positive of natural resources – as well impact on the outcomes as working to improve living of Gazprom Neft’s activities.

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Corporate governance practice overview

Gazprom Neft’s corporate governance – the Company’s by-laws provide and shareholders, including framework encompasses all for a regular review of shareholder the annual Investor Day, the key elements of public companies data, the data is updated jointly and participates in investment with established governance with the registrar; and broker conferences. Regular structures and is fully aligned – the Company uses a tender site visits to the company’s with the applicable statutory procedure for contracts exceeding upstream and downstream requirements and the Listing Rules specific thresholds in line facilities are organized to acquaint of the Moscow Exchange. This helps with the Company’s internal investors and shareholders the Company provide shareholders regulations; with the company’s production and investors with sufficient – the Board of Directors assets. confidence about the consistency reviews matters related – the company has adopted of its strategy and decision making. to the procurement policy the Dividend Policy, that on a regular basis; outlined the main principles, Gazprom Neft’s corporate governance – the Board of Directors criteria for dividend calculation, is underpinned by sustainability has an extended authority as well as the procedure, periods, and the mission to enhance to make decisions on material and forms of payment; the Company’s shareholder value transactions; – Online Shareholder Account in the long term. To achieve that, – the list of insider information is available on the registrar’s the Company works to build was defined and the procedure website to provide those responsible, trust-based relations of usingwas determined; listed in the register with its employees, suppliers, – the company has adopted with access to the Company’s customers, and local communities. the Regulation on the General news, information about dividends Meeting of Shareholders, and taxes, payment document Gazprom Neft’s PJSC majority formalizing the process numbers, reasons for refunds, shareholder is PJSC “GAZPROM”, of planning and execution etc.; which owns 95.68% of its capital. of the meetings; – shareholders are entitled to vote The remaining ordinary shares – shareholders are notified using two electronic systems are held by minority shareholders of General Meetings at least 30 – the Online Shareholder represented by both individuals days in advance; Account, and the e-voting service and legal entities. – the company has a dedicated of the National Settlement telephone line (a hotline) Depository (NSD). and email address for shareholder Shareholders protection communications during the General Meetings Governance and control bodies The Gazprom Neft PJSC corporate of Shareholders preparation; governance ensures full protection – the results of the General Meeting Gazprom Neft’s corporate governance of shareholders’ rights. The following of Shareholders are announced framework is designed to ensure factors contribute to this: during the meeting; thehighest level of internal – the company has no restrictions – materials for the General Meetings and external control. To achieve that: on acquisition and sale of shares, of Shareholders are posted – the Regulation on the Board and no restrictions on the number on the company website; of Directors was approved; of shares owned by a single – internal regulation secures – members of the Board of Directors shareholder; the shareholders right have all the key skills required – the company’s Charter provides to question the members for their role; shareholders with an extended of governance and control bodies – an induction programme for newly period (compared to уestablished during the General Meeting assigned directors is in place; by law) to submit proposals of Shareholders, and establish – majority of the questions that on agenda of the Annual General the procedure to answer that; requires in-person meetings Meeting of Shareholders; – Gazprom Neft PJSC holds under the Corporate Governance regular meetings with investors

122 ANNUAL REPORT 2019 Code are actually debated – the Secretary of the Board Sustainable development on in-person meetings; of Directors responsibilities and social responsibility – the competency of the Gazprom are aligned with those Neft Board of Directors includes recommended by the Corporate Gazprom Neft PJSC is a socially control over material transactions Governance Code for the corporate responsible company that operates of major legal entities, controlled secretaries. in full compliance with applicable by the company; laws and business ethics standards. – liability insurance of the Board Initiatives to enhance corporate social of Directors members is in place; Information Disclosure responsibility (CSR) and sustainability – the Company has a practice include: of settlement of conflicts The Company strives to ensure full – approval and public disclosure of interest between directors transparency for all stakeholders. of internal documents focusing and executive bodies; The Board of Directors approved on CSR; – the Board of Directors the Information Policy Regulation – approval and public disclosure has the Audit Committee based on recommendations of the revised Corporate Code and the Human Resources of the Corporate Governance of Conduct; and Compensation Committee Code. The Company’s financial – approval and public disclosure governed by respective and non-financial disclosures cover of the Anti-Fraud and Anti- Regulations; the following matters: Corruption Policy; – the Gazprom Neft Board – share capital structure; – corporate social of Directors has a self- – detailed information projects for employees assessment/evaluation practice on the members of the Board and local communities, charitable in place; of Directors and the Management and sponsorship initiatives; – the Company has the Management Board; – the Gazprom Neft Group operating Board, a collegial executive body – remuneration of the Board companies are certified to comply governed by a relevant Regulation; of Directors and the Management with the requirements of ISO 9001 – the Board of Directors approved Board; in quality management, and ISO by-laws on remuneration – key forms of financial 14001:2018 in environmental and incentivisation of members statements under IFRS and RAS protection; of the Company’s executive bodies; and the Management Discussion – formalisation of corporate – a talent pool was established and Analysis; conflicts settlement standards to provide continuity in the roles – related party transactions. in the Company’s by-laws; of the CEO, their deputies, heads – Company’s Sustainability of directorates, departments, Gazprom Neft’s corporate Report for 2018 was prepared divisions, and units; website contains up-to-date and disclosed on the corporate – the Board of Directors information about the Company website. The report was approved by-laws setting forth and its performance, and is updated prepared in accordance the key principles, components regularly. with the GRI Standards (basic and procedures of internal control version), ISO 26000:2010 and risk management systems; This Annual Report is fully (Guidance on social responsibility), – the Company has dedicated complied with all the Corporate and the Basic Performance structural unit responsible Governance Code recommendations. Indicators of the Russian Union for the key risk management roles; The Company’s previous reports of Industrialists and Entrepreneurs – the Board of Directors annually were multiple award winners both (RUIE). Sustainability Report reviews the efficiency of internal- in Russia and globally. passed independent audit control and risk-management by PricewaterhouseCoopers Audit. systems; The Company has business units – responsibilities of the Internal responsible for shareholder Audit Department are aligned and investor relations with best practices in corporate with their managers contacts governance; are available on the website.

05 GOVERNANCE SYSTEM 123 GAZPROM NEFT % Report on compliance Company profile p. 315 Strategic report with the Corporate >77 Performance Governance Code Technological development share of fully Governance system Sustainable development compliant principles Appendices and recommendations

Compliance with the Corporate Governance Code1

Source: company data PRINCIPLES

Principles SECTION and recommendations Full compliance Partial compliance Non-compliance Shareholder rights and equitable treatment 13 11 2 0 of shareholders Board of Directors, competencies, 36 24 8 4 Committees, independence Corporate secretary 2 2 0 0 Remuneration of directors, members 10 9 0 1 of executive bodies and other key officers Risk management and internal controls 6 6 0 0 Disclosures and the Company's information policy 7 6 1 0 Material corporate actions 5 3 1 1 TOTAL 79 61 12 6

2019 Information disclosure by type

Information type Amount Bonds issuance 13 The agenda and decisions of the governance bodies 102 Various reports disclosure (quarterly reports, lists of affiliates, Annual reports, consolidated financial statements, 16 annual financial statements) On transactions of the issuer and its related parties 23 On receipt, renewal and withdrawal of the licences of material importance for the Company 9 On income accrued and paid 34 Other material facts 22 TOTAL 219

/ 1 / Statistics is based on the report on Compliance with the Corporate Governance Code, recommended by the Central Bank of Russian Federation, Informational Letter dated 17 February 2016, № IN-06-52/8

124 ANNUAL REPORT 2019 The Gazprom Neft p. 303 Group structure.

Role of the Corporate Centre in improving the management of subsidiaries

Gazprom Neft PJSC is the group of Directors in most subsidiaries. This of the parent company representative corporate centre that ensures aimed to improve the performance in the General Meetings of Participants effective control over all processes. of subsidiaries’ governance bodies (Shareholders) of subsidiaries, As of 31 December 2019, Gazprom including: introduction of voting system Neft structure comprised 141 – reducing bureaucracy; and preliminary materials approval Russian and foreign legal entities. – reduced decision-making time; at the level of the Gazprom Neft core – empowering the role business units, in line with a decision- Gazprom Neft PJSC is the parent and responsibility of Gazprom making matrix, and through the regular company with regards to the Gazprom Neft Deputy CEOs throughout audit of corporate governance Neft Group entities, regardless of its the entire chain of subsidiaries of subsidiaries. share in subsidiary’s capital. This under their control; is duly documented in their respective – empowering Transition to the two-link corporate charters. the role and responsibility governance system will distribute of the subsidiaries’ CEO. the issues previously considered In 2019, the Management Board by the Board of Directors of Gazprom Neft PJSC has agreed Under the two-link governance system in subsidiaries, between the General the transition to two-link corporate Gazprom Neft controls subsidiaries Meeting of Participants (shareholders) governance system through performance through the participation and the CEO, strengthening the abolishment of the Boards the performance of the subsidiaries’

Subsidiaries decision-making matrix

The Gazprom Neft Board of Directors makes decisions on the following issues related to the subsidiaries activities: – Increase or reduction of the authorised capital; – property contributions; – acquisition, disposal, encumbrance of shares/interest in other entities; – property contributions to other entities; – stock issuance and distribution; – reorganisation or liquidation. The Gazprom Neft Management Board addresses strategic development of subsidiaries, and provides preliminary approval on acquisition/ disposal of shares/ interest transactions in other entities. General Meeting of Shareholders (Participants) of subsidiaries The legally prescribed sole responsibility of the General Meeting of Shareholders (Participants) of a subsidiary includes key business decisions, transactions on loans and borrowings provision/receipt, property sale/other alienation or encumbrance, acquisition/ disposal of shares in capital, stocks, bonds, promissory notes, shares/stocks encumbrance, free-of-charge property alienation valued above ₽1 million, conclusion of corporate agreements or other joint operating agreements, acquisition/disposal of interest in other entities, preliminary decisions on questions within the competency of the General Meetings of legal entities under control. The responsibility of a Chief Executive Officer of a subsidiary includes taking decisions on the following operating activities: – immovable property lease; – conclusion of settlement agreements (regardless of the amount); – other transactions outside the sole responsibility of the General Meeting of Shareholders (Participants).

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governance bodies, while retaining Executive bodies of the Gazprom Neft in using refinery feedstock to produce the management and control functions Group’s entities (including the CEO) high value-added products. at Gazprom Neft PJSC, as well are appointed to their position subject Strengthening the Gazprom Neft as collegial nature of decision-making. to approval by the Corporate Centre, and SIBUR technological partnership The Board of Directors was retained regardless of the level of corporate will provide competitive advantages in those subsidiaries and joint ventures ownership and authorised capital on the Russian and international of Gazprom Neft PJSC (hereinafter – structure of a subsidiary. markets. JV), where its existence and functioning are required by national legislation October 2019 or existing agreements between Key changes to the Gazprom Neft partners on JV governance bodies corporate structure Gazprom Neft has registered a new design and functions. operating company, Gazpromneft July 2019 Marine Lubricants, with an office One of the means used to ensure in Singapore. The new business will effective corporate governance Gazprom Neft PJSC and SIBUR manage the effective development and monitoring of subsidiary operations Holding PJSC have consolidated 100 of an international sales and logistics is the review of subsidiaries’ key % of the charter capital in Poliom LLC network for Gazprom Neft marine operational matters by the Gazprom polypropylene plant in Omsk. lubricants, including, specifically, Neft PJSC governance bodies. in the Southeast Asian and European Launched in 2012, Poliom is one markets. The company’s products, The Company has developed of Russia’s largest polypropylene endorsed by leading marine and approved procedures that allow producers. In 2014, Poliom became equipment producers, are already for coordinating and monitoring the basis for a joint venture between available in more than 250 ports the subsidiaries’ operations Gazprom Neft (25%), SIBUR (25%) worldwide. under the guidance of the Corporate and the Titan Group (50%). The plant Centre as part of the Company’s has capacity to produce 218,000 The marine lubricants and oils range, Development Strategy. tonnes of high-technology product available under the Gazpromneft every year, with a range covering 100 and Gazpromneft Ocean brands, Participation of any entity brands of polypropylene. The key includes 43 branded high- of the Gazprom Neft Group in another feedstock for production — propane- tech products for all kinds entity, whether commercial or non- propylene fraction — is sourced of marine equipment, with the range commercial, is only approved via from the Gazprom Neft Omsk Refinery, including, specifically, 15 kinds collective decision-making by a group with SIBUR managing the distribution of Gazpromneft Ocean engine of duly authorised persons. Matters of end-products throughout Russia lubricants for two- and four- pertaining to subsidiaries’ strategic and the CIS. stroke engines, the formulations development are submitted of which have been developed for preliminary approval to Gazprom Poliom LLC deploys best-practice in line with international shipping Neft’s Management Board. R&D solutions and technologies requirements and the provisions to ensure waste-free production. of the MARPOL-2020 convention1. The joint ventures in which Increasing the interest in Poliom the Gazprom Neft Group’s entities marks an important milestone November 2019 hold a stake have a formalised in Gazprom Neft’s long-term and approved governance structure. strategy implementation, a key Within a framework of the Gazprom In order to manage these ventures element of which involves developing Neft Group internal restructuring efficiently, the Company established petrochemical production. and in order to optimise the corporate the role of an asset supervisor Integrating the assets in the refining governance of its assets, the Group who is responsible for coordinating and petrochemical sectors enables has transferred the ownership the management efforts. the company to improve efficiency of Salym Petroleum Development N.V.

126 ANNUAL REPORT 2019 Transition to a two-link p. 119 corporate governance system

(SPD, registered in the Netherlands) to improve the governance to the newly created Russia-based efficiency; subsidiary, GPN-Salymskiye Proekty – the revised version of the Insider LLC. SPD is developing the Salym Information Regulation was group of fields in the Khanty- approved, determining Mansi Autonomous Okrug (Khanty- the restrictive periods Mansi Autonomous Okrug-Yugra). on transactions with the company The Salym project is the largest shares for insiders; onshore investment project – the Board of Directors approved with foreign capital in the Russian the Regulation on Procurement oil industry. The company’s of Goods, Works and Services cumulative production since the start to regulate the procurement of the Salym group development has activities of Gazprom Neft exceeded 83 mt of oil. PJSC and its subsidiaries. The Regulation establishes December 2019 the single centre of responsibility for the procurement control, Gazprom Neft PJSC and Nexign JSC approves the annual procurement have established a joint venture plan for the Gazprom Neft GX Tech LLC, with the Gazprom Group, applies the procedure Neft Group interest totaled 50%. for determination and justification The main activity of this JV is develop of the initial (maximum) and implementation of domestic contract price, and enables software for oil and gas industry. the procurement in line with a closed list of procurement As part of the sales assets methods used by Gazprom PJSC; optimization project, Universal-Neft – the External Audit Policy JSC was merged into GazpromNeft- of Gazprom Neft PJSC Terminal JSC in December 2019, and its subsidiaries was completing its reorganisation. approved. The Policy sets out the main principles of organisation and conducting the external Commitment to better corporate audit of Gazprom Neft PJSC governance and its subsidiaries, the procedure and criteria for selecting The Company closely monitors auditors, and approaches corporate laws and best practices to ensure that the auditors both in Russia and globally in attempt comply with the principles to improve its corporate governance of independence and absence framework. of conflicts of interest.

In 2019, the steps taken to enhance / 1 / The International Convention corporate governance were for the Prevention of Pollution from Ships as follows: (MARPOL), adopted in 1973. New IMO – the transition to the two-link 2020 emissions standards took effect subsidiaries governance system from 1 January 2020, including stricter was completed, which aims requirements for sulphur content in marine fuels

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Company profile KEY INFORMATION CHANNELS Strategic report available to a wide range Performance of stakeholders Technological development Governance system The company’s official Sustainable development website Appendices

Initiatives on corporate A highly professional management Focus on the protection team and an effective system of shareholder rights governance practices of corporate governance and control includes efforts to: development are a prerequisite for the successful • improve disclosure Following the general update management of a complex multi- transparency; of Strategy 2030, corporate tiered vertically integrated oil company • update the shareholder register and upgrade the Online governance is also undergoing with domestic and foreign upstream Shareholder Account including transformation. In 2018 the company and downstream assets. The Company provision of additional started automating corporate currently has a well-defined opportunities on sale of shares procedures including organisation organisational structure encouraging for registered shareholders. of the governance bodies routine, seamless interaction between information disclosure, transactions its governance bodies and clear Focus on greater efficiency approval, and control of subsidiaries distribution of governance and control of the Company’s and joint ventures. In 2019, definition roles to guarantee progressive growth governance bodies and selection stages were completed. of the shareholder value in the long includes efforts to: term. • improve operating procedures; The solutions are expected • automate of the processes to enable automotive processes Accountability and financial control. control of Gazprom Neft PJSC transparency (with adjustments and its subsidiaries, by establishing made for the Company’s concerns Focus on information the control over the group about the protection of trade secrets disclosures includes efforts of companies and embedding and other confidential data) play to: the corporate procedures. This a pivotal role in Gazprom Neft’s • automate information transfer will be attained through the automation corporate governance system. and approval from the source of the event to its final disclosure of the documents preparation on the securities market. and verification, acceleration The Company’s website offers of the required information receipt, access to the latest news, financial Focus on corporate and by reduction of the risk and operating results, reports governance improvements of corporate control loss. and other useful information, while and adoption of best also making available the documents practices includes efforts on Gazprom Neft’s governance to: and control bodies, including the Charter, Regulation on the General • improve the governance system Corporate of subsidiaries; Meeting of Shareholders, Regulation • update by-laws and procedures, governance system on the Board of Directors, Regulation regulating corporate-governance on the Management Board, issues within the group; The key targets, goals and principles Regulation on the Chief Executive • organise internal control to prevent, detect, and suppress underpinning Gazprom Neft’s Officer, and Regulation on the Audit misuse of insider information. corporate governance framework Committee. include preserving and growing the Company’s asset base, increasing To ensure equitable access its market value, maintaining to information for all stakeholders, financial stability and profitability the materials at Gazprom Neft’s official of the Company, and respecting website are available in both Russian the rights and interests of its and English. shareholders, investors and other stakeholders.

128 ANNUAL REPORT 2019 IR section of the website

GAZPROM NEFT PJSC GOVERNANCE AND CONTROL BODIES

Management The Internal Audit Board Department As part of the Internal Audit and Risk Manage the company’s Chief Executive Management Directorate, the Internal ongoing operations, Audit Department is responsible accountable to the General Officer for offering the Board of Directors Meeting of Shareholders Executive (through the Audit Committee) and the Board of Directors. bodies and the Company’s management (the CEO and the Management Board) independent, unbiased, reasonable and substantiated guarantees and consultations aiming to improve Audit the Company’s performance Committee and achieve the Company’s goals by advocating a systematic and consistent approach to assessing Board and enhancing the efficiency Exercises control of Directors of corporate governance, risk over the financial and business management and internal control Responsible for the general management operations of the Company. processes. of the Company and determining its strategy, policies and core operating principles. It is accountable to the General Meeting of Shareholders and must act in the best interests of the Company and all shareholders Annual General Meeting of Shareholders

The supreme governance body responsible Secretary of the Board for the most significant aspects of the company’s activities of Directors

The Human Resources Appointed by the Board of Directors. Ensures and Compensation effective communication Committee External auditor with shareholders, A professional audit organisation makes necessary approved by the General arrangements to protect Evaluates the effectiveness Meeting of Shareholders upon their rights and interests, of HR management Audit Committee the recommendation of the Board and provides policy and remuneration of Directors issued following operating support system, determines An elected body, overseeing the assessment by the Audit to efficiency of the Board the criteria for selecting nominees the company’s financial Committee. External auditor of Directors. to the Board of Directors, and economic activities. conducts an independent review and assesses the Board of the Company’s financial of Directors performance. and business operations.

Election, setup Administrative reporting Appointmentby resolution of the Board Reporting Functional reporting of Directors

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General Meeting of Shareholders

The General Meeting of Shareholders is the supreme governance body, responsible for the most significant aspects of the company’s activities.

General Meetings of Shareholders Gazprom Neft PJSC held in 2019

Extraordinary General Meeting of Shareholders The number of members of the Gazprom Neft PJSC Board of Directors was determined (11 members). 19 April 2019 The company’s Annual Report and accounting statements for 2018 were approved. Gazprom Neft shareholders supported the recommendation of the Board of Directors to pay dividends Annual General Meeting in the total amount of ₽142.2 billion (₽30 rubles per ordinary share, 38% of the company’s IFRS of Shareholders consolidated net profit for 2018). 14 June 2019 Financial and Accounting Consultants (FBK) LLC was appointed as Gazprom Neft’s auditor for 2019. New members of the Board of Directors and the Audit Committee were elected. Remuneration of the Board of Directors and the Audit Committee was approved. Extraordinary General Meeting of Shareholders The number of members of the Gazprom Neft PJSC Board of Directors was determined (13 members). 1 August 2019 Extraordinary General The powers of the members of the Gazprom Neft PJSC Board of Directors were terminated Meeting of Shareholders prematurely. The Board of Directors was elected based on the membership of 13 persons. 2 September 2019 Extraordinary General The resolution to pay interim dividends for the six months of 2019, in the total amount of ₽86.01 billion Meeting of Shareholders (₽18.14 per ordinary share), which accounts for 40% of the company’s IFRS consolidated net profit 30 September 2019 for the six months of 2019.

Board of Directors

The Board of Directors is responsible differentiated from the remit is to set up strong executive for the Company’s strategic of the Company’s executive bodies bodies and exercise oversight management, determining priority responsible for managing its ongoing over their performance. On top development areas, defining operations. of that, the Board regularly reviews key principles and approaches reports on the implementation of risk management and internal The election of executive of the Company’s strategy controls, exercising control bodies, termination and business plans. over the Company’s executive bodies, of their powers and control and performing other functions. over the incentive system are all The Board of Directors approves The scope of authority of the Board reserved to the Board of Directors. the Internal Control and Risk of Directors is set out in Gazprom One of the key responsibilities Management Policy and ensures Neft’s Charter and is clearly of the Board of Directors implementation of the risk

130 ANNUAL REPORT 2019 management and internal control of responsibilities in the Board All directors have a balanced set initiatives. Also, the Board manages of Directors and its committees. of skills and experience required key risks related to the Company’s for their roles. The directors possess strategic objectives. The scope of authority skills in strategic management, of the Board of Directors, corporate governance, corporate The Board of Directors its operating arrangements finance, risk management, is also responsible for improving and the existing corporate accounting, and other areas specific the Company’s corporate governance procedures make it possible to adopt to the Company’s operations. system and practices, assessing a substantial part of resolutions the corporate governance framework, by a simple majority vote. That said, The current composition of the Board and reviewing reports on progress the Chairman must take into account of Directors ensures sufficient against the corporate governance the opinion of each director and seek independence from the Company’s improvement programme to ensure a consensus on key items. management and enables effective on a regular basis. control over the performance In 2019, the Board of Directors of the Management Board. Given the strategic importance was chaired by Alexey Miller who of its objectives, it is crucial did not sit on any of the Board’s for the Board of Directors to have committees. Even though at that time trust of the Company’s shareholders Alexey Miller served as a director and make sure that all of its tasks in some other companies and fulfilled are fulfilled in the most efficient way the responsibilities of the Management possible. Committee Chairman at Gazprom, the Company believes that The main functions of the Chairman these roles did not prevent of the Board of Directors are set him from effectively chairing forth in the Charter, the Regulation the Board of Directors of Gazprom on the Board of Directors, Neft. and the Corporate Governance Code. Those include: – providing organizational support Composition of the Board to the Board of Directors activities, of Directors including setting up the work plans; Based on the decision – promoting an open discussion of the Extraordinary General of the agenda items and ensuring Meeting of Shareholders held thoughtful consideration on 1 August 2019, the Board of all opinions expressed of Directors comprises 13 members. by the directors; With 95.68% of the Company’s – identifying key matters to be ordinary shares held by Gazprom reviewed by the Board of Directors PJSC, the overwhelming majority and choosing the right meeting of Gazprom Neft’s directors format for the discussion; are elected upon the recommendation – representing of Gazprom PJSC, the Company’s the Board of Directors in relations controlling shareholder. As at the end / 1 / The independence criteria used by Gazprom with shareholders, management of the reporting year, the Gazprom Neft are based on recommendations and other stakeholders; Neft Board of Directors did of the Corporate Governance Code – preparing proposals not include independent directors.1 of the Central Bank of the Russian for the distribution Federation (Bank of Russia).

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Gazprom Neft has a transparent – uses cumulative All members of the company Board procedure for the board members voting and provides of Directors have high professional election, specifically: comprehensive explanation reputation and extensive experience – provides shareholders with two about the associated voting in the company. They perform months to propose nominees procedure to the shareholders; the duties in close collaboration to the Board of Directors – provides quorum details with the company management, (applicable law only provides and the number of votes cast business units, registrar and auditor. for a one-month nomination for each option when announce period); the voting results; The Board of Directors is balanced – discloses information – publishes resolutions by age; 85% of directors are aged about the current composition of the General Meetings between 40 and 60. of the Board of Directors, and its of Shareholders on its corporate nominees in due time; website.

Key competencies of the Gazprom Neft Board of Directors

KEY COMPETENCIES MEMBER OF legal issues THE BOARD OF PERIOD OF SERVING ON THE BOARD OF finance and corporate risk PR DIRECTORS DIRECTORS strategy and audit oil and gas governance management and GR Alexey Miller 14 years (starting from October 2005) + + + + Sergey Kuznets four months (starting from September 2019) + + Famil Sadygov four months (starting from September 2019) + + Vitaly Markelov four months (starting from September 2019) + + + Sergey four months (starting from September 2019) + + + Menshikov Alexander six months (starting from June 2019) + + + + Medvedev Kirill Seleznev 14 years (starting from October 2005) + + + Elena Mikhailova seven years (starting from June 2012) + + + Alexander 12 years (starting from November 2007) + + + + Dyukov Vladimir Alisov 10 years (starting from June 2009) + Mikhail Sereda six years (starting from December 2013) + + Valery seven years (starting from December 2012) + + Serdyukov Andrey Dmitriev one year (starting from June 2018) + + Valery Golubev 12 years (from June 2007 through June 2019) + + + 14 years (from October 2005 through Andrey Kruglov + + + + September 2019) six years (from February 2015 through June Sergey Fursenko + 2019) 15 months (from June 2018 through Igor Fedorov + + + September 2019) Vsevolod eight years (from June 2011 through June + + Cherepanov 2019)

132 ANNUAL REPORT 2019 The number of directors is aligned to get a clear idea of their personal Age of the Board of Directors with the company’s current goals and professional skills. Immediately members, % and objectives, and industry after drafting the minutes practices. It also ensures the required of the relevant meeting, information 8 balance of competencies in the Board on nominees to the Board of Directors 23 of Directors. is communicated to stakeholders 31 by issuing a corporate action Simultaneous participation notice. Afterwards, full information 13 of the members of the Board is published on the corporate members of Directors in other companies’ website in Russian and English 30 boards of directors did not affect days prior to the General Meeting their performance in respect of Shareholders which will vote 38 of Gazprom Neft’s Board of Directors. on the nominees. Younger than 45 Aged between 56 and 65 Directors are elected in a manner Aged between 46 and 55 Aged 66 and older providing shareholders with sufficient information on candidates

Composition of the Board Composition of the Board of Directors in 2019 of Directors by age Members of the Board Members of the Board Members of the Board of Directors from 01/01/2019 of Directors from 14/06/2019 of Directors from 02/09/2019 Full name Age through 13/06/2019 through 01/09/2019 through 31/12/2019 Alexey Miller 57 INDEPENDENT DIRECTORS Sergey Kuznets 49 Valery Serdyukov Valery Serdyukov1 – Famil Sadygov 51 Sergey Fursenko – – Vitaly Markelov 57 NON-EXECUTIVE DIRECTORS Sergey Menshikov 51 Alexey Miller Alexey Miller Alexey Miller Alexander Valery Golubev – Vitaly Markelov 64 Medvedev Andrey Kruglov Andrey Kruglov Famil Sadygov Kirill Seleznev 45 Igor Fedorov Igor Fedorov Sergey Kuznets Elena Mikhailova 42 Kirill Seleznev Kirill Seleznev Kirill Seleznev Alexander Dyukov 52 Vladimir Alisov Vladimir Alisov Vladimir Alisov Vladimir Alisov 59 Vsevolod Cherepanov – Sergey Menshikov Mikhail Sereda 49 Mikhail Sereda Mikhail Sereda Mikhail Sereda Valery Serdyukov 74 Elena Mikhailova Elena Mikhailova Elena Mikhailova Andrey Dmitriev 45 Andrey Dmitriev Andrey Dmitriev Andrey Dmitriev – Alexander Medvedev Alexander Medvedev / 1 / Lost the status of independent director starting from December 2019, based – – Valery Serdyukov on seven years membership. EXECUTIVE DIRECTOR Alexander Dyukov Alexander Dyukov Alexander Dyukov

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Members of the Board of Directors as at 31 December 2019

ALEXEY MILLER Chairman of the Board of Directors

Interest in the authorised capital (as at 31 December 2019) None

BIOGRAPHICAL DETAILS

Born in 1962. Graduated from the N.A. Voznesensky Leningrad Financial and Economic Institute. From 2001, Chairman of the Management Board, Gazprom PJSC. From 2002, Deputy Chairman of the Board of Directors, Gazprom PJSC. A PhD in Economics.

POSITIONS HELD IN OTHER ORGANISATIONS

From 2003 – Chairman of the Board of Directors of Bank GPB (JSC); from 2003 – Chairman of the Board of Directors of SOGAZ JSC; from 2007 – Chairman of the Board of Directors of Gazprom-Media Holding JSC; from 2010 – Chairman of the Supervisory Board of Gazprom Neft International S.A.; from 2012 – Chairman of the Board of Directors of Rosippodromy JSC; from 2012 – member of the Board of Trustees of the Graduate School of Management, St Petersburg University; from 2012 – member of the Board of Trustees of the All-Russian Non-Governmental Organisation «Russian Geographical Society»; from 2012 – member of Board of Trustees of the Charitable Fund for the Restoration of the New Jerusalem Resurrection Stavropegial Monastery of the Russian Orthodox Church; from 2012 – member of the Board of Trustees of the All-Russian Non-Governmental Organisation «Association of Lawyers of Russia”; from 2012 – member of the Management Board of the All-Russian Association of Employers «Russian Union of Industrialists and Entrepreneurs»; from 2012 – member of the Management Board of the All-Russian Non-Governmental Organisation «Russian Union of Industrialists and Entrepreneurs»; from 2012 – First Deputy Chairman of the Board of Trustees of the Russian Cycling Federation; from 2013 – member of the Supervisory Board of the Global Energy Association; from 2013 – President – Chairman of the Management Board of the Equipment Manufacturers Association «New Technologies of the Gas Industry»; from 2013 – member of the Board of Trustees of the Federal State Budget Educational Institution of Higher Professional Education «Lomonosov Moscow State University»; from 2013 – member of the Board of Trustees of the Moscow City Church Construction Support Foundation; from 2014 – Chairman of the Board of Trustees of the Federal State Budget Educational Institution of Higher Education St Petersburg State Economic University; from 2015 – member of the Board of Trustees of the Russian Academy of Education; from 2016 – President, Chairman of the Presidium of the International Business Congress (IBC) e. V; from 2017 – member of the Board of Trustees of the Federal State Autonomous Educational Institution of Higher Education “National Research University – Higher School of Economics”; from 2017 – member of the Board of Trustees of the «Doctors, Innovations, Science for Children» Foundation for Support and Development in Children’s Haematology, Oncology, and Immunology; from 2018 – member of the Board of Trustees of the Fund for the Conservation and Development of the Solovetsky Archipelago; from 2018 – member of the Presidential Council of the Russian Federation for the Development of Physical Culture and ; from 2018 – member of the Board of Directors of joint stock company the non-government Pension Fund Gazfond; from 2019 – member of the Board of Trustees of the Foundation for Support of Scientific and Project Activities of Students, Postgraduate Students and Young Scientists “National Intellectual Development”; from 2019 – Chairman of the Board of Trustees of the Alexandrinsky Theatre.

134 ANNUAL REPORT 2019 VLADIMIR ANDREY ALISOV DMITRIEV member of the Human member of the Audit Resources and Compensation Committee Committee

Interest in the authorised capital (as at 31 December 2019) Interest in the authorised capital None (as at 31 December 2019) None

BIOGRAPHICAL DETAILS BIOGRAPHICAL DETAILS

Born in 1960. Graduated from the Volga State Academy of Water Transport Graduated from the Law Faculty of the Leningrad State University and Stockholm School of Economics (ЕМВА). named after A. Zhdanov. 2016–2019 – First Deputy Head of Department, Gazprom PJSC. From 2008 – First Deputy Head of Department, Gazprom PJSC.Member From 2019 – Chief Executive Officer, Gazprom Gas-Engine Fuel LLC. of the Association of Lawyers of Russia, member of the Professional Board for Corporate Governance under FFMS of Russia. POSITIONS HELD IN OTHER ORGANISATIONS In 2010, under a decree of the President of the Russian Federation, he was awarded an honorary title of the Honoured Lawyer From 2017 – Chairman of the Board of Directors of Himsorbent CJSC; of the Russian Federation. from 2018 – member of the Board of Directors of OGK-2 JSC; from 2018 – member of the Board of Directors of PJSC TGC-1; POSITIONS HELD IN OTHER ORGANISATIONS from 2018 – member of the Board of Directors of JSC Metaclay; from 2019 – member of the Board of Directors of Mosenergo; From 2007 – member of the Board of Directors of Daltransgaz JSC; from 2019 – member of the Board of Directors of МIРС JSC. from 2016 – member of the Board of Directors of DRAGA JSC; from 2018 – member of the Supervisory Board of the Belarusian and Russian.

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Members of the Board of Directors as at 31 December 2019 (continued)

ALEXANDER SERGEY KUZNETS DYUKOV Chairman of the Human Resources and Compensation Interest in the authorised Committee capital (as at 31 December 2019) Interest in the authorised capital 0.005357244% (254,003 (as at 31 December 2019) shares.) None

BIOGRAPHICAL DETAILS BIOGRAPHICAL DETAILS

Born in 1967. Born in 1970. Graduated from the Leningrad Shipbuilding Institute. Graduated from Lomonosov Moscow State University. In 2001, Mr. Dyukov received the IMISP MBA degree. 2006–2019 – Deputy Head of Department, Gazprom PJSC. From 2006 – President, from December 2007 – Chairman of the Management From 2019 – member of the Management Board, Head Board, Chief Executive Officer, Gazprom Neft PJSC. of Department, Gazprom PJSC.

POSITIONS HELD IN OTHER ORGANISATIONS POSITIONS HELD IN OTHER ORGANISATIONS

From 2005 – member of the Board of Directors, Chairman of the Board of Directors, From 2018 – Director for Legal Affairs, GAZPROM Germania GmbH; Deputy Chairman of the Board of Directors of «SIBUR Holding» PJSC; from 2018 – member of the Board of Directors of Shtokman from 2007 – member of the Supervisory Board of the Union of Oil and Gas Industry Development AG; Organisations «Russian Gas Society»; from 2019 – member of the Supervisory Board, JSC EuRoPol GAZ from 2008 – member of the Board of Trustees of the Federal State Budget Transit Gas Pipeline System; Educational Institution of Higher Education «St Petersburg Mining University»; from 2019 – member of the Board of Directors of joint stock company from 2010 – member of the Board of Directors of SKA Club CJSC; the non-government Pension Fund Gazfond; from 2010 – member of the Board of Trustees of the All-Russian Non-Governmental from 2019 – member of the Supervisory Board of Moldovagaz JSC; Organisation «Russian Geographical Society»; from 2019 – member of the Board of Directors of Gazprom-Media from 2012 – member of the Board of Directors of Hockey City LLC; Holding JSC; from 2013 – member of the Management Board, member of the Bureau from 2019 – member of the Supervisory Board of Gazprom Holding of the Management Board, Chairman of the Committee on Industrial Security, Coöperatie U. A.; Co-Chairman of the Commission on Oil and Gas Industry of the All-Russian Non- from 2019 – member of the Board of Directors of South Stream Governmental Organisation «Russian Union of Industrialists and Entrepreneurs»; Transport B.V.; V.; from 2014 – member of the Presidium of the Football Federation of St Petersburg; from 2019 – member of the Board of Directors of Lazurnaya LLC; from 2014 – member of the Executive Committee, Chairman of the Committee from 2019 – member of the Board of Latvijas Gāze JSC; of Football Development Programmes of the Football Union of Russia; from 2019 – member of the Board of Directors of REP Holding JSC; from 2014 – member of the Board of Trustees of the Chess Federation of Russia; from 2019 – member of the Supervisory Board of Gazprom Transgaz from 2015 – member of the Board of Trustees of the Foundation for Support Belarus OJSC; of Scientific and Project Activities of Students, Postgraduate Students and Young Scientists “National Intellectual Development”; from 2015 – member of the Board of Trustees of the Federal State Budgetary Educational Institution of Higher Education «Gubkin Russian State University of Oil and Gas (National Research University)»; from 2018 – member of the Board of Trustees of the Lomonosov Moscow State University High School (a boarding school); from 2019 – President of the Football Union of Russia; from 2019 – member of the Presidential Council of the Russian Federation for the Development of Physical Culture and Sport; from 2020 – member of the Governmental Commission on the Use of Information Technologies for Improving Quality of Life and Business Environment.

136 ANNUAL REPORT 2019 ALEXANDER ELENA MEDVEDEV MIKHAILOVA member of the Audit Committee Interest in the authorised capital (as at 31 December 2019) Interest in the authorised capital 0.00105456% (as at 31 December 2019) (50,000 shares) None

BIOGRAPHICAL DETAILS BIOGRAPHICAL DETAILS

Born in 1955. Graduated from the Moscow Institute of Physics and Technology. Born in 1977. 2013–2019 – Deputy Chairman of the Management Board, member Graduated from the Moscow State Industrial University, majoring of the Management Board of Gazprom PJSC. in jurisprudence, received an MBA from the Academy of National From 2019 – member of the Board of Directors, Chairman of the Board Economy under the Government of the Russian Federation. of Directors of FC JSC. From 2011 – Head of Department, Gazprom PJSC. A PhD in Economics. From 2012 – Member of the Management Board, Gazprom PJSC. 2003–2019 – Deputy CEO for Corporate and Property Relations, POSITIONS HELD IN OTHER ORGANISATIONS Gazprom Mezhregiongaz LLC.

From 2013 – member of the Management Board, member of the Board of Directors, Panrusgaz Zrt.; from 2013 – Chairman of the Board of Directors, Prometheus Gas S.A.; POSITIONS HELD IN OTHER ORGANISATIONS from 2013 – Chairman of the Board of Directors, Overgaz Inc. AD; from 2013 – Chairman of the Board of Directors of OJSC From 2012 – member of the Board of Directors, Chairman Severneftegazprom; of the Board of Directors of Mosenergo; from 2013 – Chairman of the Board of Directors of KazRosGas LLP; from 2012 – member of the Board of Directors from 2013 – Chairman of the Supervisory Board of SGT EuRoPol GAZ of Severneftegazprom OJSC; s.a.; from 2012 – member of the Board of Directors of Leader CJSC; from 2013 – Chairman of the Supervisory Board of Yugorosgaz AD; from 2012 – member of the Board of Directors of Gazprom Gas- from 2013 – Chairman of the Board of Directors, Deputy Chairman Engine Fuel LLC; of the Board of Directors, member of the Board of Directors, SKA Ice from 2013 – member of the Board of Latvijas Gāze JSC; Hockey Club LLC; from 2017 – member of the Supervisory Board of the Autonomous from 2013 – member of the Supervisory Board of Gazprom EP Non-Profit Organisation «VC Zenit St Petersburg»; International B.V.; from 2018 – member of the Board of Directors of FC Zenit JSC; from 2013 – Chairman of the Supervisory Board, Deputy Chairman from 2018 – member of the Board of Directors of joint stock of the Supervisory Board, Erdgasspeicher Peissen GmbH; company the non-government Pension Fund Gazfond; from 2013 – member of the Management Board, Chairman from 2019 – member of the Board of Directors, Chairperson of the Management Board, Chairman of the General Assembly, of the Board of Directors of Lazurnaya LLC; Association «JHL»; from 2019 – member of the Board of Directors of Vostokgazprom from 2013 – Chairman of the Board of Directors, Hockey City LLC; OJSC; from 2013 – member of the Supervisory Board, Moravia Gas Storage from 2019 – member of the Board of Directors of Tomskgazprom a.s.; JSC; from 2014 – Chairman of the Supervisory Board, member from 2019 – member of the Board of Directors of Gazprom LNG of the Supervisory Board, GAZPROM Austria GmbH; Technologies LLC. from 2015 – member of the Advisory Board, WIGA Transport Beteiligungs-GmbH & Co. KG; from 2015 – Director of the Autonomous Non-Profit Organisation «Social, Cultural and Club Gazpromexport»; from 2016 – member of the Board of Directors, Nord Stream 2 AG; from 2017 – Chairman of the Board, Gaso JSC; from 2017 – member of the Board of Directors, KHL LLC; from 2019 – member of the Board of Directors, Chairman of the Board of Directors, BC Zenit LLC; from 2019 – Chairman of the Management Board, International Business Congress e. V.

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Members of the Board of Directors as at 31 December 2019 (continued)

VITALY SERGEY MARKELOV MENSHIKOV

Interest in the authorised Interest in the authorised capital capital (as at 31 December 2019) (as at 31 December 2019) None None

BIOGRAPHICAL DETAILS BIOGRAPHICAL DETAILS

Born in 1963. Born in 1968. Graduated from the Kuibyshev Aviation Institute. Graduated from the Grozny Oil Institute, the National University of Oil From 2012 – member of the Board of Directors, member and Gas «Gubkin University». of the Management Board, Deputy Chairman of the Management 2008–2019 – Chief Executive Officer of Gazprom Dobycha Nadym LLC. Board, Gazprom PJSC. From 2019 – member of the Management Board, Head of Department, Gazprom PJSC. POSITIONS HELD IN OTHER ORGANISATIONS A PhD in Economics.

From 2012 – Editor-in-chief of Gas Industry Magazine; POSITIONS HELD IN OTHER ORGANISATIONS from 2012 – member of the Board of Directors, Chairman of the Board of Directors of JSC Gazprom Space Systems; From 2019 – member of the Management Board of the Equipment from 2012 – member of the Board of Directors of USC JSC; Manufacturers Association «New Technologies of the Gas Industry»; from 2012 – President, Pipe Producers Association; from 2019 – member of the Board of Directors, Sakhalin Energy from 2012 – member of the Management Board, Vice-President Investment Company Ltd.; and Deputy President–Chairman of the Management Board from 2019 – member of the Board of Directors of Vostokgazprom OJSC; of the Equipment Manufacturers Association «New Technologies from 2019 – member of the Board of Directors of Tomskgazprom JSC; of the Gas Industry»; from 2019 – member of the Supervisory Board of joint stock company from 2014 – member of the Supervisory Board of Wintershall AG; Wintershall AG; from 2014 – Chairman of the Board of Directors of Gazprom Kyrgyzstan from 2019 – member, Chairman of the Board of Directors of Achim LLC; Development LLC; from 2014 – Chairman of the Board of Trustees of the V.I. Vernadsky from 2019 – member of the Board of Directors of JSC Achimgaz; Non-Governmental Ecological Foundation; from 2019 – member of the Board of Directors of Gazprom Kyrgyzstan from 2016 – member of the Supervisory Board of Gazprom EP LLC; International B.V.; V.; from 2019 – member of the Board of Directors of LLC «Gazpromviet»; from 2016 – member of the Presidium, International Business from 2019 – member of the Supervisory Board of Gazprom EP Congress (IBC) e. V.; International B.V. from 2017 – member of the Board, Chairman of the Board, Association of Gas-Industry Construction Organisations; from 2017 – member of the Board of Directors, Chairman of the Board of Directors, Gazprom Armenia CJSC; from 2018 – Chairman of the Board of Directors, Deputy Chairman of the Board of Directors, RusKhimAlyans LLC; from 2019 – member of the Supervisory Board of the Federal State Budgetary Educational Institution of Higher Education «Gubkin Russian State University of Oil and Gas (National Research University)»; from 2019 – Non-executive director of Sakhalin Energy Investment Company Ltd; from 2019 – member of the Board of Directors, Chairman of the Board of Directors of Gazprom Teploenergo JSC; from 2019 – Chairman of the Board of Directors of RusGazAlyans LLC; from 2019 – member of the Supervisory Board, First Vice-President of the Union of Oil and Gas Industry Organisations «Russian Gas Society»; from 2019 – member of the Supervisory Board of Gazprom Transgaz Belarus OJSC.

138 ANNUAL REPORT 2019 FAMIL KIRILL SADYGOV SELEZNEV

Interest in the authorised Interest in the authorised capital capital (as at 31 December 2019) (as at 31 December 2019) None None

BIOGRAPHICAL DETAILS BIOGRAPHICAL DETAILS

Born in 1968. Born in 1974. Graduated from the Sergo Ordzhonikidze State Academy Graduated from the Baltic State Technical University named after D.F. of Management (Moscow). Ustinov, the St Petersburg State University. 2009–2019 – member of the Management Board, Deputy Chairman 2002–2019 – Head of Department, Gazprom PJSC. of the Management Board, Gazprombank (JSC); 2003–2019 – member of the Management Board, Gazprom PJSC. from April 2019 – member of the Management Board, Deputy 2003–2019 – Chief Executive Officer, Gazprom Mezhregiongaz LLC. Chairman of the Management Board, Gazprom PJSC. From 2019 – Chief Executive Officer, member of the Board of Directors A PhD in Economics. of RusKhimAlyans LLC. A PhD in Economics. POSITIONS HELD IN OTHER ORGANISATIONS POSITIONS HELD IN OTHER ORGANISATIONS From 2019 – member of the Board of Directors of Gazprombank (JSC); from 2019 – member of the Board of Directors of joint stock company From 2003 – member of the Supervisory Board of the Union of Oil the non-government Pension Fund Gazfond; and Gas Industry Organisations «Russian Gas Society»; from 2019 – member of the Presidium, Chairman of the Law, Banking from 2006 – member of the Board of Directors of FC Zenit JSC; and Finance working committee, International Business Congress (IBC) from 2006 – member of the Board of Directors, Chairman of the Board e. V.; of Directors of Latvijas Gāze JSC; from 2019 – Chairman of the Board of Directors of Belgazprombank; from 2009 – member of the Supervisory Board of KazRosGas LLP; from 2019 – member of the Board of Directors of SOGAZ JSC; from 2011 – member of the Board of Directors of BANK «ROSSIYA»; from 2019 – member of the Board of Directors of GAZPROM Germania from 2013 – member of the Supervisory Board of Bank RRDB (JSC); GmbH; from 2017 – member of the Board of Directors of RusGazAlyans LLC. from 2019 – Chairman of the Supervisory Board of Gazprom Holding Coöperatie U.A.; from 2019 – member of the Supervisory Board, Chairman of the Supervisory Board of Gazprom EP International B.V.V.; from 2019 – member of the Board of Directors of Gazprom Gas-Engine Fuel LLC.

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Members of the Board of Directors as at 31 December 2019 (continued)

VALERY MIKHAIL SERDYUKOV1 SEREDA Independent Director Chairman of the Audit Committee

Interest in the authorised Interest in the authorised capital capital (as at 31 December 2019) (as at 31 December 2019) None None

BIOGRAPHICAL DETAILS BIOGRAPHICAL DETAILS

Born in 1945. Born in 1970. Graduated from the G.V. Plekhanov Leningrad Mining Institute. Graduated from the St Petersburg State University of Economics 1999–2012 – Governor of the Leningrad Oblast. and Finance. A PhD in Economics. From 2002 – member of the Board of Directors of Gazprom PJSC. He has government and industry awards. From 2004 – Deputy Chairman of the Management Board – Head of the Management Board Administration, Gazprom PJSC. From 2020 – First Deputy CEO, Gazprom Export LLC; CEO, Gazprom Trading LLC.

POSITIONS HELD IN OTHER ORGANISATIONS

From 2002 – member of the Board of Directors, Chairman of the Board of Directors of Gazprom (U.K.) Limited; from 2002 – member of the Board of Directors, Deputy Chairman of the Board of Directors of Bank GPB (JSC); from 2002 – member of the Board of Directors, Chairman of the Board of Directors of OJSC Vostokgazprom; from 2003 – member of the Board of Directors, Chairman of the Board of Directors of JSC Gazprom Tsentrenergogaz; from 2004 – Chairman of the Board of Directors of OJSC Tomskgazprom; from 2005 – member of the Board of Directors, Chairman of the Board of Directors of JSC Gazpromtrubinvest; from 2007 – member of the Board of Directors of JSC Gazprom Space Systems; from 2015 – chairman of the Administrative Board of Gazprom Schweiz AG; from 2016 – member of the Supervisory Board, Chairman of the Supervisory Board of Gazprom Austria GmbH; from 2016 – member of the Presidium, International Business Congress (IBC) e. V.; from 2017 – member of the Advisory Board, WIGA Transport Beteiligungs-GmbH & Co. KG; from 2017 – member of the Board of Directors, Chairman of the Board of Directors of Gazprom Transservice LLC; from 2018 – member of the Board of Directors of Panrusgas Gas Trading Plc.; from 2019 – Chairman of the Advisory Board of Gazprom Germania GmbH.

/ 1 / From 1 January 2019 through December 2019, member of the Human Resources and Compensation Committee.

140 ANNUAL REPORT 2019 Membership of the Board of Directors (continued) Members of the Board of Directors, whose authority was terminated in the reporting year

VALERY ANDREY GOLUBEV1 KRUGLOV2

Interest in the authorised Interest in the authorised capital capital (as at 31 December 2019) (as at 31 December 2019) None None

BIOGRAPHICAL DETAILS BIOGRAPHICAL DETAILS

Born in 1952. Born in 1969. Graduated from the V. I. Ulyanov (Lenin) Leningrad Electrotechnical Graduated from the St. Petersburg Technological Institute Institute, and the Academy of National Economy under the Government of Refrigeration Industry. of the Russian Federation. 2015–2019 – Deputy Chairman of the Management Board, Gazprom 2006–2019 – Deputy Chairman of the Management Board, Gazprom PJSC. PJSC. From 2019 – Deputy Minister of Finance of the Russian Federation. A PhD in Economics. A Grand PhD in Economics.

/ 1 / He was a member of the Board of Directors, and the member of the Audit Committee until 13 June 2019. / 2 / He was a member of the Board of Directors, and the member of the Human Resources and Compensation Committee until 13 June 2019.

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Membership of the Board of Directors (continued) Members of the Board of Directors, whose authority was terminated in the reporting year

SERGEY IGOR FURSENKO1 FEDOROV2

Interest in the authorised Interest in the authorised capital capital (as at 31 December 2019) (as at 31 December 2019) None None

BIOGRAPHICAL DETAILS BIOGRAPHICAL DETAILS

Born in 1954. Born in 1965. Graduated from the Leningrad Polytechnic Institute. Graduated from the Leningrad State University, the St Petersburg 2017–2019 – President of FC Zenit JSC. State Academy of Service and Economics, and the St Petersburg From 2019 – Vice-President of Gazprombank (JSC). International Institute of Management. A PhD in Economics. 2012–2019 – member of the Management Board, 2017–2019 – Head of Departmen, Gazprom PJSC.

VSEVOLOD CHEREPANOV1

Interest in the authorised capital (as at 31 December 2019) The members of the Board of Directors made no None transactions related to the acquisition or disposal of the company shares, in the reporting year. In 2019, no claims were made against the members of the Board of Directors.

BIOGRAPHICAL DETAILS / 1 / He was a member of the Board of Directors, and the member Born in 1966. Graduated from Lomonosov Moscow State University. of the Human Resources and Compensation Committee until 2010–2019 – member of the Management Board, Head of Department, 13 June 2019. Gazprom PJSC. / 2 / He was a member of the Board of Directors, and the member A PhD in Geology and Mineralogy. of the Human Resources and Compensation Committee until 1 September 2019.

142 ANNUAL REPORT 2019 In 2019, Viktoriya Nenadyshina was included into the Top 50 Corporate Governance Directors Ranking of the Kommersant1 Publishing House, and became an award winner of the 12th prize of the Russian Corporate Counsel Association (RCCA, non- commercial partnership) nominated in the «Achievement of the Year».2

Secretary of the Board VIKTORIYA of Directors NENADYSHINA The Secretary of the Board Secretary of the Board of Directors since 25 September 2018. of Directors ensures effective ongoing communication with shareholders, Interest in the authorised coordination of the company’s efforts capital (as at 31 December 2019) to protect their rights and interests, and supports the effective work None of the Board of Directors.

The Secretary of the Board BIOGRAPHICAL DETAILS of Directors’ main tasks are to make sure that the Company and its officers Born in 1984. comply with the rules and procedures Graduated from the Université des Sciences Sociales de Toulouse (France), majoring in DU European and International Business Law, and the Russian Law Academy of the Ministry of Justice of corporate governance of the Russian Federation, majoring in jurisprudence. established by Russian laws, 2009–2011– Head of the Legal Department, OJSC OC Magma; the Company’s Charter 2011–2012 – Head of the Legal Section, JSC Moscow Oil and Gas Company; 2012–2014 – Head of the Legal and Corporate Affairs Section, Gazpromneft Marine Bunker LLC; and internal documents; to prepare 2014–September 2018 – Deputy CEO for Legal, Corporate and Property Affairs, Gazpromneft and hold the General Meeting Marine Bunker LLC; of Shareholders and meetings September 2018 – June 2019 – Head of the Corporate Governance Department, Gazprom Neft PJSC; of the Board of Directors and its from June 2019 – Head of the Corporate and Project Support Department, Gazprom Neft PJSC. committees; to disclose information about the Company, and improve its A member of the Board of Directors of the following companies: Tomskneft VNK JSC, Nortgaz corporate governance practices. CJSC , Information Technology Service Company (ITSC LLC), Gazpromneft Lubricants Italia, TsentrCaspneftegaz LLC. A member of the Board of Directors of AS Baltic Marine Bunker, a member of the Supervisory Board of Gazpromneft Marine Bunker Balkan S. A. In Gazprom Neft International The Secretary of the Board S.A., she is the member of the Supervisory Board, and its Secretary. of Directors is responsible for: – providing organisational She does not own any shares of Gazprom Neft PJSC, and has no shares and interest in its and information support subsidiaries. to the Board of Directors and its Ms Nenadyshina has no family connections with other persons, who are members of the governance committees; bodies and/or bodies which control financial and business operations of the company. – preparing and running of the General Meeting of Shareholders; – assisting the Chairman – disclosing information impeccable professional reputation, of the Board of Directors about the Company; while also continuing to upgrade his/her in organising and planning – arranging interaction between professional skills on an ongoing basis the activities of the Board the Company and its shareholders; and being a notable figure in the professional of Directors; – other functions in line community. – arranging storage of the Board with the Regulation on the Board of Directors’ documents; of Directors, the Company’s In order to ensure the Secretary’s – exercising control over the Board internal documents and requests independence, the Secretary is appointed of Directors’ resolutions; from the Chairman of the Board by the Board of Directors based – interacting with members of Directors. on recommendations from the Chairman. of the Board of Directors, The Secretary of the Board of Directors advising them on corporate The Secretary of the Board and the Secretary of the Management Board governance matters, providing of Directors has sufficient skills, are two different persons. them with necessary documents experience and qualifications and information; to perform his/her duties and enjoys The role of the Secretary of the Board of Directors is formalised by the Regulation / 1 / More details on the ranking https://www.kommersant.ru/doc/4109977. on the Secretary of the Board of Directors. / 2 / For more information on the award, see https://www.rcca.com.ru/about/award-2019.shtml.

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Report on progress made Agenda items Number of meetings by Gazprom Neft’s Board reviewed in 2015-2019 held by the Board of Directors of Directors on priority areas by the Board of Directors, in 2015–2019 in 2019 by area

As part of its work during the year, 52 68 59 66 57 112 the Board of Directors remained 131 143 127 114 committed to addressing the key tasks in Gazprom Neft’s priority areas, including strategic operations, 87 investment case, oversight over asset management, investing and financing 59 80 57 activities, improved performance 76 and transparency of governance tools, enhancement of internal 40 51 controls, and accountability 59 48 of the Company’s governance bodies. 46

Gazprom Neft’s Board of Directors operated under the approved semi- annual work plans. The Board held 52 meetings in 2019. 13

51 27 18 12 15

33 27 28 22

9 9 9 2 8 3 3 4 6 3 8 3 4 5 4 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019

Strategy Budget planning In-person HR and financing In absentia Corporate Other governance

144 ANNUAL REPORT 2019 Attendance at the meetings of the Board of Directors in 2019

Total number of meetings, which Number of meetings attended could be attended by the member Member of the Board of Directors by the member of the Board of Directors1 of the Board of Directors Alexey Miller Chairman of the Board of Directors 51 52 Non-Executive Director Vitaly Markelov 17 17 Non-Executive Director Sergey Menshikov 17 17 Non-Executive Director Sergey Kuznets 16 17 Non-Executive Director Famil Sadygov 17 17 Non-Executive Director Alexander Medvedev 28 28 Non-Executive Director Kirill Seleznev 52 52 Non-Executive Director Alexander Dyukov 52 52 Executive Director Vladimir Alisov 51 52 Non-Executive Director Mikhail Sereda 51 52 Non-Executive Director Elena Mikhailova 52 52 Non-Executive Director Valery Serdyukov Until December 2019 – Independent Director, since 51 52 December 2019 – Non-Executive Director Andrey Dmitriev 51 52 Non-Executive Director Igor Fedorov 24 24 Non-Executive Director Vsevolod Cherepanov 24 24 Non-Executive Director Valery Golubev 24 24 Non-Executive Director Sergey Fursenko 24 24 Independent Director Andrey Kruglov 14 24 Non-Executive Director

/ 1 / He also presented a written opinion.

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Strategic development The company activities in value-chain management, in 2019 and its short-term business increasing the conversion rate development plans are fully aligned and light product yield, developing Key issues: with its long-term objectives, set its petrochemicals sector, • implementation of the Gazprom out in the Strategy. In the Upstream and maintaining its market-leading Neft Development Strategy to 2030; segment the company retained its position on the existing and expanding • long-term development programme for the Eastern focus on maximising the recovery its share on the new product markets. block of the Orenburgskoye oil profitability by introducing new and gas condensate field, aimed technologies and developing projects. As part of the large-scale technical at increasing oil recovery; For instance, it is continuing drilling and environmental upgrade • Gazprom Neft PJSC plans in the Nadym-Pur-Tazovsky district, of Gazprom Neft refineries, for international business growth; • results of Gazprom Neft PJSC building new onshore infrastructure construction of a crude oil production entities portfolio and facilities at the Tazovskoye distillation unit, hydrocracking analysis, Upstream Division and Severo-Samburgskoye and delayed coking units development plans in terms fields, and at the En-Yakhinskoye is continuing at the Omsk Refinery, of current assets and geological exploration projects; and Pestsovoye fields. The company the modernisation of the filtration • prospects of development conducted seismic survey system for a small catalytic cracking of the Orenburg cluster, as part at the Kheisovsky and Severo- unit was completed. Construction of the Gazprom Neft PJSC resource Vrangelevsky licence blocks of the Euro+ combined oil refining base development strategy; on the Arctic Shelf. The company unit (CORU) at the Moscow Refinery • Gazprom Neft PJSC Digital Transformation Strategy approval; also increased its resource is being completed, and a new light • Gazprom Neft PJSC bitumen base, winning licensing rounds products road-transport loading business organisation, its results for geological prospecting, facility was built. Construction and perspectives; exploration and production at several of a delayed coking unit at the NIS • Gazprom Neft PJSC aviation refuelling business organisation, its blocks in the Yamalo-Nenets Pančevo refinery is in its final stage. results and perspectives. Autonomous Okrug, the Khanty- Construction of the first modern Mansi Autonomous Okrug-Yugra, oil-refining catalyst production and the Orenburg Oblast. Gazprom facility in Russia started, as part Neft also obtained the licences of the development of the Gazprom for the Blizhnenovoportovskoye Neft catalyst business in Omsk. field, and for geological prospecting Gazprom Neft and SIBUR consolidated at blocks in the western part 100% of the authorised capital of the Taymyr Peninsula. of the Poliom polypropylene plant in Omsk. Integration of assets in the Gazprom Neft successfully used oil refining and petrochemicals The Gazprom Neft Board of Directors machine learning to search segments will improve the efficiency considered and took note for additional oil reserves. Based of using feedstock from the company on the information on implementation on the geological data, the neural refineries to produce high value-added of the Strategy 2030. Current network predicted the blocks, products. long-term Strategy was approved where oil deposits may occur. by the Board of Directors in November In the future, the company plans Gazprom Neft continued 2018. It defines the key strategic to use the new digital tool at the fields to develop its own sales network, goals in Gazprom Neft development in the Noyabrsk Region – the potential and the expansion of its product until 2030, and the ways to achieve of which is estimated at three million range. The new “Gladkoye” fuel them, taking into account the changes barrels of oil. terminal in the Leningrad Oblast in the global economy and new was commissioned as part of challenges for the industry. In 2019, Gazprom Neft continued integrated development of fuel- to improve the efficiency supply infrastructure. Gazprom

146 ANNUAL REPORT 2019 Neft continued the implementation and effective response to changes of a strategic project to develop In 2018, the Board of Directors in macroeconomic conditions. LNG bunkering in the Baltic basin, approved an approach to portfolio which is aimed at developing a new analysis of the company upstream In the reporting year, bunkering market segment in Russia. enterprises, and ranking geological the Board of Directors also The total number of airports, exploration in terms of priorities approved the Gazprom of Gazpromneft-Aero (the operator and efficiency. That methodology Neft Digital Transformation of the Gazprom Neft aviation refuelling allowed improving the quality Strategy, which fully complies business) presence, exceeded of the portfolio analysis, by ensuring with the Strategy 2030 and is aimed 280. The Gazpromneft bitumen- additional impact due to integrating at achieving its goals and objectives. materials range, and the geography projects at early stages of geological The Digital Transformation of production and supply were exploration and technological analysis, Strategy covers the entire expanded. A company subsidiary was with the current production projects. value chain, the management established in Singapore to develop In 2019, the methodology was and support systems, and ecosystems the international marine-lubricants developed to implement prioritisation of the company partners business. and analysis of uncertainty in a single and customers. The Gazprom Neft portfolio-management system, rather PJSC flexibility and performance In 2019, the Board of Directors than in separate groups of assets, are to increase due to transforming considered and took into account projects and opportunities, taking the company business processes the information on the plans into account both the project logic and business models, through for international business development, and ranking on the basis of individual systematic use of digital technologies and noted the company role indicators. and data-based management. Target as the rightful and prominent vision of the digital transformation: participant of the global oil and gas Further development of the tools – creating an effective organisational community, which is actively involved for portfolio analysis is a priority structure, which allows swift in forming the development agenda, for making management decisions. adaptation and end-to-end and is cooperating at global forums The methodology improvement optimisation throughout the value and conferences at the highest is mainly focused on automating chain; level. Currently, the Gazprom the portfolio analysis. Automated – achieving the100% asset potential Neft PJSC portfolio comprises calculation allows improving and “Target Zero” in safety through over 20 projects on upstream the quality and speed of portfolio management based on digital and downstream operations analysis, avoiding repeated work twins, and by reducing the impact outside the Russian Federation. during data collection between of human error; The opportunities for participating the blocks, forming a single – opening up new business- in new projects in foreign information space for all subdivisions, development opportunities, due regions, which are interesting and eliminate discrepancies to the partnering ecosystem for the company, depend on external in the initial data. and platform solutions; environment. In current conditions – achieving a new level Gazprom Neft is also considering Integrating the regular portfolio in data management, IT, partnership with foreign companies analysis of production enterprises, and the development of digital as an effective tool for developing and ranking geological survey products and solutions. Russian assets. Gazprom Neft and production in terms of priority PJSC is partnering with foreign and efficiency of projects allow In 2019, the Board of Directors companies in the following areas: formulating a balanced plan considered the performance capital-intensive assets, for developing the company Upstream and prospects of the Gazprom mature fields requiring new Division, taking into account strategic Neft PJSC bitumens business. competencies, and high-risk projects goals, and ensuring an immediate By 2019, Gazpromneft Bitumen at the prospecting surveys stage. Materials (Gazpromneft BM LLC)

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Innovations became a leader on the bitumen, updated its long-term business polymer-bitumen binders (PBB) strategy to 2030. During that and bitumen-derivative markets, period, it expects to become a top- Key issues: and in terms of the R&D potential ten international jet-fuel company, • on approval of the Report in development, technologies and use by doubling the volume of retail fuel on Gazprom Neft Innovative of bitumen binders and asphalt sales, including by considerable Development Programm concrete. Currently, Gazpromneft expansion of international business. implementation for 2018; BM LLC is the most rapidly To achieve that, further expansion • on the main outcomes and key priority areas in the company’s developing company on the Russian of the sales-network geography R&D activities in oil refining bitumen market. The company and digital transformation • on implementing oil- strategic goals by 2030: retaining of business are required — rim projects to ensure leadership on the bitumen market by introducing advanced technologies production volumes of liquid hydrocarbons at the Severo- and the PBB market in Russia, in production and accounting. Samburgskoye, Pestsovoye and becoming the industry leader Gazprom Neft Aero LLC long- and at the En-Yakhinskoye in terms of technologies among term goals include improving fields, and subsequently bitumen-materials manufacturers. the performance and increasing sending the feedstock In the medium term, the company the scale of business, and achieving to the Urengoyskaya pumping station, based aims to develop a highly competitive strategic competitive advantage, on the perfomance in 2018; service portfolio, expand due to digital management of all • on carrying out the Action the production and bitumen-logistics production processes. Plan to ensure hydrocarbon geography to ensure maximum production during the development of coverage of consumers and improve In the reporting year, the Achimov Formation blocks the group performance, and develop the Board of Directors at the Urengoyskoye oil and gas innovative products ans technology considered and took into account field, and oil rims, taking into solutions. The Gazprom Neft PJSC the information on implementing account the development bitumen business is ready for scaling the Gazprom Neft PJSC Innovative of facilities, which refine and transport liquid its best practices and coming Development Programme for 2018. hydrocarbons in northern on new niche markets. Therefore, The Programme includes the four key parts of the Tyumen Oblast, the possibility of becoming a top-ten innovative projects: and on the status of building global producer of premium bitumen – developing the alkaline- oil-supply infrastructure, metering stations, and facilities materials is being a key goal. surfactant-polymer flooding supplying liquid hydrocarbons technology; to the Transneft pipeline Besides, in 2019 the Board – preparing the technologies system and the Gazprom PJSC of Directors took into account for developing unconventional alternative routes system. the performance and prospects oil reserves (the national project of the company’s aviation refuelling to study the Bazhenov Formation); business. Currently, Gazprom Neft – implementing technologies Aero LLC is the most efficient jet- to increase well productivity; fuel company on the Russian market. – developing and starting The company is an acknowledged production of oil refining industry leader in developing catalysts – for catalytic cracking and using new technologies and hydrogenation process (the and competencies in the aviation national «Aluminium Oxide-Based refuelling segment, and in unique Crude Deep Conversion Catalysts» digital services for consumers. project). In 2019, Gazprom Neft Aero LLC

148 ANNUAL REPORT 2019 The Gazprom Neft Board of Directors cat-cracking catalysts outperform Financial and economic activity, considered and took into account imported analogues. risk management the information on the main outcomes and priority areas of the company R&D The Gazprom Neft R&D programme activities in hydrocarbon processing. also includes projects on developing Gazprom Neft currently holds 115 (and improving efficiency in) oil- Key issues: patents for inventions in oil refining, refining and petrochemicals petrochemicals and catalysis, 45 of which technologies; such projects form • on the debt structure and management of the Gazprom are already used in production, while a large part of the programme. In 2019, Neft Group debt portfolio; the remaining solutions are prepared the company successfully did bench • on the performance of the Gazprom for commercial implementation. tests of the aeroforming process – Neft PJSC Internal Audit and Risk The company is creating and developing the conversion of low-octane fractions Management Directorate for 2018; • on updating the Gazprom Neft technologies in partnership into a high-octane gasoline component. PJSC key risks for 2019; with the leading Russian R&D The company is also actively developing • on executing the Investment institutions, which include the Boreskov processes to facilitate the conversion Programme, the Budget (financial Institute of Catalysis (part of the Siberian of heavy raw materials – such as tar, plan), and the financial borrowing Branch of the Russian Academy asphalt or pyrolysis resins – into high- programme of the Gazprom Neft Group for 2018, on the basis of Sciences), the Center of New Chemical quality bunker fuel meeting MARPOL of the group performance in 2018; Technologies BIC of the Boreskov 2020 standards, or the raw materials • on the progress and efficiency Institute of Catalysis, the St Petersburg for hydrocracking and catalytic cracking of implementing the Budget State Institute of Technology, the facilities. and the Investment Programme of the Gazprom Neft Group Polytech, etc. for 2019, on the basis Gazprom Neft also formed an effective of performance in the first six As a result system for developing and deploying months of 2019; of the implementation of the Gazprom innovative applied solutions, aimed • on the preliminary results Neft R&D programme on catalyst- at developing catalytic systems and oil of performing the Investment Programme and the Budget production technologies, a range of unique refining technologies, and expanding of the Gazprom Neft Group oil-refining catalysts for high-quality the product range. The company will for 2019; motor fuels was put into production. continue systematic work on patenting • on the draft Investment The Gazprom Neft highly effective new, highly effective products Programme and the draft Budget (financial plan), including and technologies, and their further the Gazprom Neft Group commercial use. financial borrowings programme, and the Cost Optimisation (Reduction) Programme of the Gazprom Neft Group for 2020, and the forecast to 2022; • on loans from Russian banks.

The Gazprom Neft Board of Directors is giving careful attention to control over the Gazprom Neft Group financial and business operations, and its investment activity.

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Despite limited opportunities The Board of Directors considered Centre. The most significant to attract long-term financing information on the Gaprom Neft risks of the company subsidiaries in foreign currency, the Gazprom PJSC risk-management system, are being consolidated to form Neft Group achieved considerable the assessment results, and updates the risk registers of divisions, used results in terms of managing its debt on the main risks for 2019 at its as a basis for drafting the company portfolio: in-person meetings throughout key-risk register, to be approved – optimising the portfolio structure 2019. In general, the company by the Management Board. by increasing the share of long- risk-management and internal- term borrowings in rubles; control system was recognised to be To improve the quality of information – increasing the average portfolio effective. on the Gazprom Neft PJSC risks, maturity, and simultaneously in the reporting period the company reducing the interest rate The company main risks were implemented initiatives to develop on the debt in rubles; assessed, and information on them and introduce tools, methods – performing the financial was updated due to the work for analysis and risk-management borrowings programme, approved in all areas of the integrated risk- (including quantitative risk- as part of the 2019 budget management framework, including assessment, simulation modelling, (financial plan), in the required development and introduction and the bow-tie and decision-tree volume, and using the most of tools, methods for analysis methodologies). To improve staff effective tools; and risk management, and increasing competencies in risk management, – reducing the Net Debt/Operating the level of risk-management the Monitoring Division of the Risk- Profit ratio as at 31 December competencies of the staff. Management Framework (MDRMF) 2018, compared to 31 December developed new training modules, 2017, to 0.70 (the reduction by 0.03 The company is updating organised and held training events in absolute terms, and by 4% the information on its risks for the company employees. in relative terms). in accordance with regulatory and methodological documents, The report on the areas of developing In 2019, the Board of Directors also which govern the functioning internal control at Gazprom Neft determined the Gazprom Neft Group of the Integrated Risk-Management PJSC in 2018, and the internal-control strategic performance indicators Framework (IRMF).1 It is based development plan for 2019, also for 2019–2021. The following on a bottom-up approach, starting underwent preliminary consideration documents were approved: from the company subsidiaries, by the Audit Committee of the Board – the Gazprom Neft Group and involving all the key managers of Directors. The main projects Budget (financial plan) for 2019, and experts at subsidiaries, divisions, to develop internal control, including the financial borrowings and the Gazprom Neft Management implemented in the reporting period, programme; Board. were related to assisting the business – the Gazprom Neft Group further development of control Investment Programme for 2019; The company subsidiaries procedures in the company business – the Gazprom Neft Group Cost are reassessing risks, developing processes (selling petrochemicals Optimisation (Reduction) measures to manage them, and liquefied hydrocarbon gas, Programme for 2019. and approving risk registers selling bitumen materials wholesale, with respective functions conducting geological exploration, The drafts of the Investment and supervising subdivisions and developing the resource base). Programme, the Budget and the Cost at the Gazprom Neft Corporate Optimisation (Reduction) Programme for 2020, and the forecast to 2022 / 1 / The Risk Management Policy (SK-11.03.01, approved on 7 February 2013), the Master Standard were also considered. for the Integrated Risk Management Framework (OSK-11.07, approved on 1 March 2016), and the Methodology Guidelines for the Risk Management Process (M-11.07-01, approved on 1 In the reporting year, March 2016). the Board of Directors carried out the performance assessment of the company risk-management and internal-control system.

150 ANNUAL REPORT 2019 Social activity, industrial safety Corporate governance and environment In 2019, the Board of Directors approved the External Audit Policy of Gazprom Neft Key issue: Key issues: PJSC, its subsidiaries • on the programme on utilisation • on approving participation and organisations. The Policy sets and more effective use of the members of the Gazprom out the main principles of organising of associated petroleum gas Neft PJSC Management and conducting the external (APG) carried out in 2018, Board in governance bodies and future plans for 2019−2021. of organisations; audit of Gazprom Neft PJSC • on convening General Meetings and its subsidiaries, the procedure of Shareholders; and criteria for selecting • on reorganising subsidiaries, auditors, and approaches and increasing the authorised Gazprom Neft PJSC is aiming capital of Gazprom Neft PJSC to ensuring that the auditors comply to ensure a required level of APG companies; with the principles of independence utilisation, and simultaneously • on approving the Regulations and absence of conflicts of interest. start commercial development on the Procurement of Goods, Works and Services by Gazprom To meet statutory requirements of greenfields, Neft PJSC; and increase oil and gas production. • on approving the Regulation related to insider information, The Board of Directors considered on Insider Information; the Board of Directors approved the information on the company • on approving the External Audit a revised version of the Regulation events and plans for APG utilisation Policy of Gazprom Neft PJSC, its on Insider Information of Gazprom subsidiaries and organisations. at the current assets, and increasing Neft PJSC, which determines the efficiency of its use in accordance the periods when insiders with the programme on utilisation The Regulations on the Procurement are prohibited from making and more effective use of associated of Goods, Works and Services transactions with the company petroleum gas. An active investment of Gazprom Neft PJSC, approved shares. The powers of the Chief policy and timely implementation by the company Board of Directors, Executive Officer were expanded of programme events are to ensure are the main document governing in terms of approving the list that the utilisation rate is retained, the procurement of Gazprom of the company insider information, and that the value-added APG use Neft PJSC and its subsidiaries. and appointing a dedicated in the company reaches 95% by 2022, The Regulations provide subdivision, which is to exercise with gas production growth. for establishing and approving internal control to prevent a single annual procurement and identify unauthorised use plan for the Gazprom Neft Group, of the insider information. and forming a single responsibility centre to control procurement.

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Committees of the Gazprom – promoting constructive representatives of the external Neft Board of Directors communication with an external auditor, the Management Board auditor, bodies controllling members, the chief accountant, The company has two committees the financial and business the head of the Internal Audit of the Board of Directors: operations, and the company and Risk Management Directorate, the Audit Committee, and the Human internal-audit subdivisions. and heads of the company Resources and Compensation departments. Committee. The Committee acitvities are directly related to the work plan The Committee prepared relevant of the Board of Directors, and include recommendations on the issues Audit Committee consideration of the following issues: which require recommendations accounting (financial) statements, from the Board of Directors. The Audit Committee supervises consolidated financial statements, the company financial risk management, internal control During the reporting period, and business operations. Its members and corporate governance, internal the Committee fully carried out its are elected by the Board of Directors, and external audit, and combating tasks. and the Committee acts on the basis illegal actions. of the Charter and internal regulations. The Committee competency The Committee membership, The Audit Committee and duties cover the following status, work procedures, membership key areas: accounting (financial) competency and functions, From 22 June 2018 through 13 June statements, consolidated financial the procedure for convening 2019: statements, risk management, and holding meetings, formalising • Mikhail Sereda (Chairman) internal control and corporate resolutions, and the responsibility • Valery Golubev • Elena Mikhailova governance (in terms of internal of the Committee members audit), internal and external audit, are set out in the Regulation From 19 July 2019 through 31 and combating illegal actions. on the Committee. December 2019: • Mikhail Sereda (Chairman) • Andrey Dmitriev The Audit Committee does The members of the Board • Elena Mikhailova the following as part of its duties: of Directors have sufficient relevant – assisting the Board of Directors experience and skills in finance, controlling the company financial which are necessary for working and business operations; with financial statements, – assessing the effectiveness analysing business, and financial of internal control systems, management. The Audit Committee including mechanisms does not include the company senior for controlling preparation executives. and submission of financial and other statements, its The Committee members participated completeness and accuracy; in all meetings. In accordance – monitoring the risk-management with the issues under consideration, system; the following persons were invited to the Committee meeting:

152 ANNUAL REPORT 2019 Human Resources In accordance with the approved Work Plan for 2019, the Audit Committee held 14 meetings and considered and Compensation Committee the following key issues: The Human Resources • on the performance of the Gazprom Neft PJSC Internal Audit and Risk and Compensation Committee Management Directorate for 2018; • on updating the Gazprom Neft PJSC key risks for 2019; is an advisory body of the Board • on assessing candidates for becoming the Gazprom Neft PJSC auditors, of Directors. The Committee and providing recommendations for the Gazprom Neft PJSC Board membership, status, work of Directors; procedures, competency • on the Gazprom Neft Group consolidated financial statements (IFRS) for 2018; and functions, the procedure • on the results of the external audit for 2018; • on the interim condensed financial statements (unaudited) of the Gazprom Neft for convening and holding Group (IFRS) for the three, six, and nine months of 2019; meetings, formalising resolutions, • on the areas of developing the internal control in Gazprom Neft PJSC for 2018, and the responsibility and on the plan for developing the internal control for 2019; of the Committee members are set • on the results of measures for ensuring internal-control procedures in the Gazprom Neft PJSC information systems for 2018; out in the Regulation on the Human • on the Gazprom PJSC 2018 draft Annual Report; Resources and Compensation • on the programme of guarantees and improving the internal-audit quality Committee. of Gazprom Neft PJSC in 2018; • on the results of assessing the Gazprom Neft PJSC external auditor’s work In accordance with the Regulation, in 2018; • on the External Audit Policy of Gazprom Neft PJSC, its subsidiaries the Committee main tasks and organisations; are the following: preliminary • on information disclosed to third parties, including analytical and rating comprehensive examination agencies, and on disclosing indicators not included in the IFRS; of the issues within • on determining the amount of payment for the auditor services for 2019; • on the performance of the Gazprom Neft PJSC Internal Audit and Risk the Board of Directors competency, Management Directorate for the first six months of 2019; and preparing recommendations • on preparing proposals for a competition commission to select an audit for decision-making by the Board organisation to carry out the mandatory annual audit of Gazprom Neft PJSC; of Directors in relation to improving • on the Risk Management Policy and the Internal Control Policy of Gazprom the work procedures of the Board Neft PJSC; • on the results of internal control, aimed at counteracting unauthorised use of Directors and its committees, of insider information for the first six months of 2019; the company work in terms • on preparing the Gazprom Neft PJSC plan of audits for 2020–2022. of HR policy and the management succession system, compensation for members of governance bodies and the company Audit Committee.

The Human Resources and Compensation Committee duties are the following: – analysing and assessing the Board Number of meetings of the Board of Directors’ Audit Committee of Directors membership in terms of specialisation, expertise, Indicator 2015 2016 2017 2018 2019 independence, and of its members involvement in the Board work; Number of meetings 8 11 12 13 14 – determining the priority areas Number of issues considered 22 30 34 35 29 for strengthening the Board membership;

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– initiating and monitoring According to the Human Resources self-assessment or external and Compensation Committee, Membership assessment of the Board the following conclusions were made of the Human Resources of Directors and its committees, due to analysing the candidates: and Compensation in terms of their performance – The expertise and education, Committee in general, and individual knowledge and great From 22 June 2018 through 13 June contribution of directors professionalism of the candidates 2019: in the work of the Board for the Board of Directors will • Igor Fedorov (Chairman); • Andrey Kruglov of Directors and its committees; enable them to perform the duties • Vsevolod Cherepanov – preparing a report on the results of the Board of Directors • Sergey Fursenko (Independent of self-assessment or external members, and to directly assist Director). assessment, to be included the effective work of the entire From 19 July 2019 through 1 in the company Annual Report; Board of Directors in the interests September 2019: – approving the programme of the company and its • Vladimir Alisov (Chairman); of an introductory course shareholders. • Valery Serdyukov (Independent for newly elected members – All candidates have excellent Director); • Igor Fedorov of the Board of Directors, aimed professional and personal at effectively making new reputation, which means, among From 25 September 2019 through 31 December 2019: directors familiar with business other things, absence of criminal • Sergey Kuznets (Chairman); practice, organisational structure, liability at present or in the past. • Valery Serdyukov (Independent the key assets and strategy, – The Board of Directors Director until December 2019); the company key employees, is to include one executive • Vladimir Alisov and with the work procedures director, which complies of the Board of Directors; with the recommendations supervising the implementation of the Corporate Governance Code. of the introductory course. – At the end of the reporting year, In 2019, the Audit no independent directors are to be Committee held six The Committee prepared relevant included in the Board of Directors. meetings and considered recommendations on the issues, – The Board of Directors the following key issues: which require recommendations will be sufficiently balanced • on the proposals from shareholders from the Board of Directors. in terms of gender and age. regarding candidates for the Board of Directors During the reporting period, The Committee prepared relevant and the Audit Committee of Gazprom Neft PJSC; the Committee fully carried out its recommendations on the issues, • on assessing the candidates tasks. which require recommendations for the Gazprom Neft PJSC Board from the Board of Directors. of Directors; In the reporting period, the Human • on the compensation for the members of the Gazprom Resources and Compensation During the reporting period, Neft PJSC Board of Directors; Committee formed an opinion the Committee fully carried out its • on the compensation on independence of each candidate tasks. for the members of the Gazprom for the Board of Directors. Neft PJSC Audit Committee; • on participation of the members of the Gazprom Neft PJSC Management Board in governance Number of meetings of the Board of Directors’ Human Resources bodies of other organisations; and Compensation Committee • on appointing the First Deputy CEO of Gazprom Neft PJSC; Indicator 2015 2016 2017 2018 2019 • on assessing the performance of the Gazprom Neft PJSC Board Number of meetings 6 7 6 4 6 of Directors. Number of issues considered 10 10 10 5 7

154 ANNUAL REPORT 2019 Assessing the Board of Directors and how the Board of Directors members of the Board of Directors work members are informed. On the basis familiar with the company production, of the assessment, the issues financial and business activities, In accordance with recommendations related to whether information and with its corporate-governance of the best corporate governance on implementing development plans, practice, as quickly and effectively practices, the Board of Directors and analysing the company key as possible. conducts annual analysis and self- performance indicators was provided assessment of its performance. in a timely manner, and regularly, were The Programme provides The Human Resources and included in the areas to be developed. for the following measures: Compensation Committee approved – meeting with the Chairman new assessment criteria and deemed In general, the activity of the Board of Directors, it advisable to engage an independent of the Board of Directors, its discussing the work plan service provider for the Board’s review Chairman and Secretary, the Audit of the Board of Directors, at least once in three years. Committee, and the Human Resources and the company priority and Compensation Committee activities; determining the future The performance of the Gazprom Neft is highly effective. The number role of a director in the Board PJSC Board of Directors is assessed of the Board of Directors members of Directors, on the basis in the form of a survey (questionnaire). meets the company requirements. of his or her expertise; The questionnaire includes about 30 The level of the Board of Directors – meeting with senior managers, questions regarding the main areas engagement in analysing critical risks, receiving the main information of activity: membership, the nature and in analysing the achievement on the company business, of activity, the Board of Directors of management performance discussing the company procedures, performance indicators, is high. The Board operational and financial assessment of the Chairman of Directors assists and supports structure, and introduction of the Board of Directors, its its members in developing to the Management Board; Committees and Secretary, their competencies and knowledge. – consultations with the Secretary and the level of relations within of the Board of Directors. the Board of Directors, etc. The Board of Directors achieved The Secretary of the Board a high level in many issues related of Directors describes procedural Analysis of the questionnaires to meeting efficiency. The level and legal aspects of the work of the Board of Directors members of communication between the Non- of the Board of Directors and its allows quickly understanding Executive Director and the Chairman committees, clarifies the rights the current condition of the key Board of the Board of Directors is also and duties of a Board member, of Directors processes, including high. All Committees of the Board issues related to paying strategy, the principles of business, of Directors and its Secretary remuneration and compensation, the company performance are functioning effectively. and the liability and liability management, organising the work insurance; of the Board and its committees, – becoming familiar and assessing contribution Onboarding of newly elected with the company main documents, of the Board of Directors members, members of the Board and the written Guidelines including its Chairman and Secretary. of Directors for the Board of Directors member, with description The analysis of the Board To ensure effective work of the Board of the key business issues, internal of Directors work, conducted of Directors, the company has procedures, and organisation in the reporting period, showed the Onboarding Programme for newly of the work of the Board improvement of the following: elected members of the Board of Directors and its Committees; determining the company strategic of Directors. The Programme goals – the Programme may also include plans, interaction with executives, include making the newly elected visits to the company main

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facilities, participation in public they hold management positions events, and meetings with the key in the Gazprom Group companies, managers. and have the main information on the company business; therefore, The Human Resources they did not have to undergo and Compensation Committee the entire onboarding programme. is monitoring the Programme The new directors were familiarised implementation. with the rules of the Board of Directors work, their rights Throughout 2019, and duties, issued related to paying the Board of Directors members remuneration and compensation, were re-elected twice, and five new and liability insurance. directors were included in it: V. Markelov, S. Kuznets, S. Menshikov, F. Sadygov, and A. Medvedev;

The Management Board and the CEO

The Management Board and the CEO PJSC Management Board members one of his deputies performs are the Gazprom Neft PJSC executive are set out in the Gazprom Neft PJSC his functions: V. Yakovlev or A. bodies. The company Management by-laws. Cherner. The deputy is elected upon Board is a collective executive body, the recommendation of the Chairman which manages its ongoing business. The company CEO A. Dyukov of the Management Board In accordance with the Gazprom Neft (in December 2006, by a majority of votes of elected PJSC Charter, the Management Board he headed the company Management Board members. is formed by the Board of Directors for the first time, and in December In the absence of the Chairman upon the recommendation 2016 he was re-elected for the next of the Management Board of the company Chief Executive five years) is also the Chairman and his deputies, any Management Officer. The term of the Management of the Management Board, whose Board member may perform Board members office is also functions include organising the functions of the Chairman, determined by the Board of Directors. the Management Board work. in accordance with the Management Requirements for professional In the absence of the Chairman Board decision. qualification of the Gazprom Neft of the Management Board,

156 ANNUAL REPORT 2019 Competencies of the Management Board and the CEO

Main issues within the Management Board competency Main issues within the CEO competency The Management Board competency is determined The CEO reports to the Gazprom Neft PJSC Board of Directors by the company Charter. and the General Meeting of Shareholders. The key functions of the Management Board: The CEO manages the company ongoing business, and acts within – to arrange control over implementation the competency established by the Gazprom Neft PJSC Charter. of resolutions of the General Meeting The key issues within the competency: of Shareholders and the company Board – to enter into transactions on behalf of the company and manage of Directors; the company’s assets subject to by-laws governing the transaction – to develop for submission to the company Board handling procedure and interaction with investee entities; of Directors, long-term plans and the most – to approve the stuffing profile of the company, its branch offices important programmes of the company business, and representative offices, determining the form, systems and amount including annual budget and investment of remuneration; programmes, preparation of reports – to approve the company by-laws, which regulate its ongoing business; on performing them, and develop and approve – in coordination with the Board of Directors, to appoint and dismiss current plans for the company business; the CEO deputies, the chief accountant, the head of the legal – to monitor the implementation of long- service, the head of the internal audit (control) subdivision, the head term and short-term plans and programmes of the security service, the head of the subdivision for preparing of the company along with investment, financial, and implementing competitive procurement, and the heads and other projects of the company; of the company branch offices and representative offices; – to prepare and submit to the Board of Directors – to ensure the implementation of resolutions of the General Meeting proposals regarding Gazprom Neft PJSC of Shareholders, the Board of Directors, and the Management participation and termination in other Board of the company, and performance of obligations to the budget organisations (including foreign entities), opening and contractors; and closing branch offices and representative – to make resolutions on participation and termination of the company offices of the company. participation in other entities, if such resolution involves a transaction in the amount not exceeding 0.2% of the company assets book value, determined on the basis of its accounting statements as at the last reporting date, or is connected with the reorganisation or liquidation of an entity with the book value of assets not exceeding ₽1 billion; – to make resolution in accordance with the procedure for transactions, on transactions in the amount not exceeding 0.2% of the company assets book value, determined on the basis of its accounting statements as at the last reporting date.

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Members of the Management Board as at 31 December 2019

ALEXANDER IGOR DYUKOV ANTONOV Chairman Member of the Management of the Management Board, Board, Deputy CEO Chief Executive Officer for Security

Interest in the authorised capital Interest in the authorised (as at 31 December 2019) capital 0.005357244 % (254,003 (as at 31 December 2019) shares) None

BIOGRAPHICAL DETAILS BIOGRAPHICAL DETAILS

Born in 1967. Born in 1951. Graduated from the Order of Lenin Leningrad Shipbuilding Institute. Graduated from the Leningrad Institute of Aviation Instrumentation. In 2001, Mr. Dyukov received the IMISP MBA degree. 2005–2007 – Vice-President for Security, Sibneft. From 2006 – President. From December 2007 the Deputy CEO for Security, Gazprom Neft PJSC. from December 2007 – Chairman of the Management Board, Chief Executive Officer, Gazprom Neft PJSC.

POSITIONS HELD IN OTHER ORGANISATIONS

From 2005 – member of the Board of Directors, Chairman of the Board of Directors, Deputy Chairman of the Board of Directors of «SIBUR Holding» PJSC; from 2007 – member of the Supervisory Board of the Union of Oil and Gas Industry Organisations «Russian Gas Society»; from 2008 – member of the Board of Trustees of the Federal State Budget Educational Institution of Higher Education «St Petersburg Mining University»; from 2010 – member of the Board of Directors of SKA Ice Hockey Club CJSC; from 2010 – member of the Board of Trustees of the All-Russian Non- Governmental Organisation «Russian Geographical Society»; from 2012 – member of the Board of Directors of Hockey City LLC; from 2013 – member of the Management Board, member of the Bureau of the Management Board, Chairman of the Committee on Industrial Security, Co-Chairman of the Commission on Oil and Gas Industry of the All-Russian Non- Governmental Organisation «Russian Union of Industrialists and Entrepreneurs»; from 2014 – member of the Presidium of the Football Federation of St Petersburg; from 2014 – member of the Executive Committee, Chairman of the Committee of Football Development Programmes of the Football Union of Russia; from 2014 – member of the Board of Trustees of the Chess Federation of Russia; from 2015 – member of the Board of Trustees of the Foundation for Support of Scientific and Project Activities of Students, Postgraduate Students and Young Scientists “National Intellectual Development”; from 2015 – member of the Board of Trustees of the Federal State Budgetary Educational Institution of Higher Education «Gubkin Russian State University of Oil and Gas (National Research University)»; from 2018 – member of the Board of Trustees of the Lomonosov Moscow State University High School; from 2019 – President of the Football Union of Russia; from 2019 – member of the Presidential Council of the Russian Federation for the Development of Physical Culture and Sport. from 2020 – member of the Governmental Commission on the Use of Information Technologies for Improving Quality of Life and Business Environment.

158 ANNUAL REPORT 2019 ALEXANDER ELENA DYBAL ILYUKHINA Member of the Management Member of the Management Board, Deputy Board, Deputy CEO for Legal CEO for Corporate and Corporate Matters Communications Interest in the authorised Interest in the authorised capital capital (as at 31 December 2019) (as at 31 December 2019) None None

BIOGRAPHICAL DETAILS BIOGRAPHICAL DETAILS

Born in 1966. Born in 1969. Graduated from the Leningrad Electrotechnical Institute. Graduated from the Ulyanov (Lenin) St Petersburg State From 2007 – member of the Management Board of Gazprom Neft PJSC, Electrotechnical University, the St Petersburg State University. Deputy CEO for Corporate Communications. In 2001, Ms. Ilyukhina got a PhD in Economics. Mr. Dybal is in charge of regional and information policy, internal From 2007 – member of the Management Board of Gazprom Neft PJSC, and marketing communications in the Company. Deputy CEO for Legal and Corporate Affairs. In charge of legal and corporate support of the Company’s activities.

POSITIONS HELD IN OTHER ORGANISATIONS

From 2015 – member of the Board of Directors of Gazprom-Media; POSITIONS HELD IN OTHER ORGANISATIONS from 2015 – member of the Board of Directors of TNT TV network; from 2017 – member of the Board of Directors of Gazprom-Media From 2009 – Chief Executive Officer of Gazpromneft Eastern European Entertainment TV LLC; Projects JSC (previously, MFC Lakhta Centre JSC); from 2018 – Chairman of the Board of the ’Home Towns’ Social from 2010 – member of the Supervisory Board of Gazprom Neft Initiatives Support Foundation. International S.A.; from 2012 – member of the Board of Directors of Gazpromneft-Sakhalin; from 2018 – member of the Board of Directors, Chairman of the Board of Directors of FC Zenit JSC; from 2018 – member of the Supervisory Board of the St Petersburg Electrotechnical University «LETI».

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Members of the Management Board as at 31 December 2019 (continued)

KIRILL ANATOLY KRAVCHENKO CHERNER Member of the Management Deputy Chairman Board, Deputy CEO of the Management Board, for Administration Deputy CEO for Logistics, Processing and Sales (Downstream) Interest in the authorised capital Interest in the authorised (as at 31 December 2019) capital (as at 31 December 2019) 0.000068462 % (3,246 shares) None

BIOGRAPHICAL DETAILS BIOGRAPHICAL DETAILS

Born in 1976. Born in 1954. Graduated from Lomonosov Moscow State University, the Open Graduated from the Grozny Oil Institute. University (UK), and IMD Business School. Holds a Grand PhD From 2007 – member of the Management Board of Gazprom Neft PJSC, in Economics, Professor Deputy CEO for Logistics, Processing and Sales (Downstream). 2009–2017 – CEO of Naftna Industrija Srbije A.D., Novi Sad; Mr. Cherner is in charge of oil refining, logistics, and sales of oil 2009–2017 – member of the Management Board of Gazprom Neft PJSC, and petroleum products in the Company. Deputy CEO for Foreign Asset Management, Gazprom Neft PJSC. From 2017 – member of the Management Board, Deputy CEO POSITIONS HELD IN OTHER ORGANISATIONS for Administration, Gazprom Neft PJSC. From 2006 – member of the Board of Directors of SLAVNEFT; POSITIONS HELD IN OTHER ORGANISATIONS from 2007 – member of the Board of Directors, Chairman of the Board of Directors of Slavneft-YANOS; From 2017 – member of the Board of Directors, Chairman of the Board from 2009 - member of the Board of Directors of SPIMEX JSC; of Directors of the Information Technology Service Company (ITSC); from 2009 – member of the Board of Directors, Naftna Industrija Srbije from 2019 – member of the Board of Directors, Chairman of the Board A.D., Novi Sad; of Directors, Noyabrskneftegazsvyaz LLC. from 2009 – member of the Supervisory Board of Mozyr Oil Refinery JSC; from 2016 – member of the Board of Directors of Gazpromneft Lubricants Italia.

160 ANNUAL REPORT 2019 VADIM ALEXEY YAKOVLEV YANKEVICH Deputy Chairman Member of the Management of the Management Board, Board, Deputy CEO Deputy CEO for Upstream for Economics and Finance

Interest in the authorised Interest in the authorised capital capital (as at 31 December 2019) (as at 31 December 2019) 0.001051526 % None (49,856 shares)

BIOGRAPHICAL DETAILS BIOGRAPHICAL DETAILS

Born in 1970. Born in 1973. Graduated from the Moscow Engineering Physics Institute, Graduated from the St Petersburg Electrotechnical University «LETI», and the Higher School of Finance of the International University the LETI-Lovanium International School of Management. in Moscow. In 2004, Mr, Yankevich received the Certified Management Accountant In 1999, Mr. Yakovlev received the qualification of the Chartered (CMA) qualification. Association of Certified Accountants (ACCA), and in 2009, Mr. Yakovlev 2007–2011 – Head of the Budgeting and Planning Department, Head received a diploma from the British Institute of Directors (IoD). of the Economics and Corporate Planning Directorate, Gazprom Neft 2007–2011 – member of the Management Board, Deputy CEO OJSC. for Economics and Finance, Gazprom Neft PJSC. From 2012 – member of the Management Board of Gazprom Neft PJSC, 2011–2019 – First Deputy CEO, Deputy Chairman of the Management Deputy CEO for Economics and Finance. Board, Gazprom Neft PJSC. From 2019 – Deputy Chairman of the Management Board, Deputy CEO for Upstream, Gazprom Neft PJSC. POSITIONS HELD IN OTHER ORGANISATIONS In the Company, Mr. Yakovlev supervises the upstream matters, strategic planning, and M&A transactions. From 2011 – member of the Board of Directors, Chairman of the Board of Directors, Gazpromneft Lubricants Italia; POSITIONS HELD IN OTHER ORGANISATIONS from 2013 – member of the Board of Directors of SLAVNEFT; from 2013 – member of the Board of Directors, Naftna Industrija Srbije From 2007 – member of the Board of Directors of SLAVNEFT; A.D., Novi Sad. from 2009 – member of the Board of Directors, Chairman of the Board of Directors, Naftna Industrija Srbije A.D., Novi Sad; from 2011 – Chairman of the Supervisory Board, member of the Supervisory Board, Salym Petroleum Development N. V.; from 2012 – member of the Board of Directors of Gazpromneft-Sakhalin; from 2016 – member of the Supervisory Board of the University of Tyumen; from 2019 – member of the Board of Directors, Chairman of the Board of Directors, MP IP New Industry LLC;

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Members of the Management Board, whose Member of the Management Board authority was terminated in the reporting year after the reporting date

PAVEL ANDREY KOLOBKOV PATRUSHEV Member of the Management Member of the Management Board, Deputy CEO Board, Deputy CEO for Federal Government for Offshore Development Relations (from 2 March until 25 October 2019. 2020) Interest in the authorised Interest in the authorised capital capital (as at 5 October 2019) None None

BIOGRAPHICAL DETAILS BIOGRAPHICAL DETAILS

Born in 1969. Born in 1981. Graduated from the State Central Order of Lenin Institute of Physical In 2003, graduated from the Academy of the Education, and Kutafin Moscow State Law University (MSAL). of the Russian Federation, majoring in jurisprudence; An Honoured Master of Sport. in 2006, Mr. Patrushev graduated from the Diplomatic Academy From 2007 – Deputy CEO, Sports Club. of the Ministry of Foreign Affairs of the Russian Federation, majoring from 2010 – Deputy Minister of Sport, Tourism and Youth Policy in global economics; (following the restructuring of the ministry in 2012 — Deputy Minister in 2008 – from the National University of Oil and Gas «Gubkin of Sport), simultaneously being a member of the Civic Chamber University», majoring in oil and gas engineering. of the Russian Federation. From 2015 through October 2019, Mr. Patrushev held the position 2016–2020 – Minister of Sport of the Russian Federation. of the member of the Management Board, Deputy CEO for Offshore from 2016 – Full State Counsellor (2nd class) of the Russian Federation. Development, Gazprom Neft PJSC. Awarded the Order of Honour medal, the Order of Friendship medal, the Order of Alexander Nevsky medal, and the Order for Service to the Fatherland medal (1st and 2nd classes). from March 2020 – member of the Gazprom Neft PJSC Management Board, Deputy CEO for Federal Government Relations. VLADISLAV BARYSHNIKOV Member of the Management Board, Deputy CEO for International Business Development from 18 November 2009 through 18 November 2019.

Interest in the authorised capital (as at 18 November 2019) None

BIOGRAPHICAL DETAILS

Born in 1965. Graduated from the Red Banner Military Institute. There were no transactions related to the acquisition 2002–2009 – Director of the Gazprom OJSC representative office or disposal of the company shares by the Chairman in the People’s Republic of China, the regional representative office in the countries of the Asia-Pacific Region. and members of the Management Board in the reporting The State Counsellor of the Russian Federation, 3rd Class. year. In 2009–2019, Mr. Baryshnikov held the position of the member of the Management Board, Deputy CEO for International Business Development, Gazprom Neft PJSC. In 2019, no claims were filed against the Chief Executive In the Company Mr. Baryshnikov supervised the issues related Officer and members of the Management Board. to international business development, and interaction with foreign partners.

162 ANNUAL REPORT 2019 Report on performance Issues considered In 2019, 20 meetings of the Gazprom of the Management Board in 2019 by the Management Board Neft Management Board were held, in 2019, a breakdown by area and seven of them were in-person The Gazprom Neft Management meetings. At the meetings, various Board meets on a regular basis, Issue 2019 issues related to the current activity taking into account the resolutions of the company Management Board Strategic 5 were considered, including: of the General Meeting • on approving the updated Key-Risk Corporate governance 5 of Shareholders, the Board Register of Gazprom Neft PJSC; of Directors, and the issues raised Budget planning • on the results of the Partnership 5 by the CEO and members and financing Management programme, of the Management Board. and proposals for development Other 12 of the partnership management The Management Board work plan TOTAL 27 system in Gazprom Neft PJSC; is developed based on the suggestions • on executing the Investment coming from heads of the Gazprom Programme, the Budget (financial Neft subdivisions. plan), and the financial borrowing programme of the Gazprom Neft Group for 2018, based on the group Number of meetings held by the Management Board in 2015–2019 performance in 2018; • on establishing subsidiaries, Meeting format 2015 2016 2017 2018 2019 and disposal of assets; • on information disclosed In-person 8 15 12 8 7 by Gazprom Neft PJSC; In absentia 6 7 4 13 13 • on improving corporate governance efficiency TOTAL 14 22 16 21 20 in the Gazprom Neft Group; • on the strategy of the Upstream Division development in the MENA region; Attendance of the Management Board members at meetings in 2019 • on the Gazprom Neft PJSC talent management programme; Total number • on the business plan Number of meetings of meetings, which of the Downstream Division attended by the Management could be attended for 2020—2022; Board member, including by the Management • on transforming the business Full name written votes Board member model for the Regional Sales Alexander Dyukov, Directorate of the Downstream Chairman of the Management 20 20 Division, Gazprom Neft PJSC; • on the business plan Board of the Upstream Division for 2020—2022; Igor Antonov 18 20 • on the business plan of the Gazprom Neft Group Alexander Dybal 20 20 for 2020—2022. Elena Ilyukhina 18 20 Kirill Kravchenko 19 20 Anatoly Cherner 20 20 Vadim Yakovlev 18 20 Alexey Yankevich 20 20 Vladislav Baryshnikov, Management Board member until 12 14 18 November 2019 Andrey Patrushev, Management Board member until 25 October 11 12 2019

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Remuneration payable to governance bodies

Remuneration of the Board positions in the company executive of Directors), and the Chairman of Directors bodies (do not serve as executive of the Board of Directors committee directors), in 2019 amounted to 0.005% (50% of the remuneration paid Remuneration payable of EBITDA, based on the Gazprom to committee members). to the Board of Directors Neft consolidated financial statements is linked to the financial performance (IFRS) for 2018. The total amount of remuneration of the company, and is approved annually paid to the members of the Board by shareholders. The discretionary Apart from the base remuneration, of Directors in 2019 was ₽531.7 million control by shareholders is necessary the members of the Board of Directors (the amount includes personal income to prevent potential abuse received the additional compensation tax). Members of the Board of Directors of the remuneration process. for serving as the Chairman were not reimbursed for their expenses of the Board of Directors (50% related to membership in the Board In accordance with the resolution of the remuneration paid to members of Directors in 2019. of the General Meeting of Shareholders, of the Board of Directors), a member the remuneration accrued of the Board of Directors committee and paid to the members of the Board (10% of the remuneration paid of Directors, who do not hold any to the members of the Board

Remuneration paid to the members of the Gazprom Neft PJSC Board of Directors for participation in the governance body in 2019

Full name Position Amount, ₽ Alexey Miller Chairman of the Board of Directors 59,962,950 Vladimir Alisov Member of the Board of Directors 39,975,300 Andrey Dmitriev Member of the Board of Directors 39,975,300 Valery Golubev Member of the Board of Directors, member of the Audit Committee 43,972,830 Member of the Board of Directors, chairman of the Human Resources Igor Fedorov 45,971,595 and Compensation Committee Member of the Board of Directors, member of the Human Resources Andrey Kruglov 43,972,830 and Compensation Committee Elena Mikhailova Member of the Board of Directors, member of the Audit Committee 43,972,830 Kirill Seleznev Member of the Board of Directors 39,975,300 Mikhail Sereda Member of the Board of Directors, chairman of the Audit Committee 45,971,595 Valery Serdyukov Member of the Board of Directors 39,975,300 Member of the Board of Directors, member of the Human Resources Sergey Fursenko 43,972,830 and Compensation Committee Member of the Board of Directors, member of the Human Resources Vsevolod Cherepanov 43,972,830 and Compensation Committee Alexander Dyukov Executive member of the Board of Directors Compensation is not paid TOTAL 531,671,490

164 ANNUAL REPORT 2019 Remuneration The main goals of the annual bonus the group, a division, an organisation, of the Management Board system: a subdivision, and individual – providing motivation performance and efficiency The Company has put in place a well- for achieving the annual targets, of employees, measured on the basis structured and fair remuneration and, consequently, the company’s of annual contribution assessment. scheme for the Management Board strategic goals; implementing and senior management that links the principle of performance- The company believes that bonuses to short-term targets. On top based payment, and improvement the success (efficiency) of its current of bonuses for achieving the said of employee efficiency; business, and implementation targets, the Company introduced – formalising general rules, of long-term strategic-development incentives hinging on its market and determining uniform corporate measures, which form the basis capitalisation in the three-year standards in the field of annual for high-quality development horizon. bonuses paid to the Gazprom Neft of the company in the medium Remuneration payable Group employees. and long term, are equally to the Management Board includes: important. Therefore, when goals – base remuneration; Annual Bonus Policy principles: for the reporting period are set, both – an annual bonus; – focusing on achievement of key financial and operating indicators, – the Long-Term Incentive strategic / priority goals; and business initiatives are taken Programme (LTIP) – taking into account employee into account: impact on performance; – the financial and operating The amount of the base – ensuring transparency and clarity. indicators (FOI) are indicators remuneration is specified individually, covering the most important and formalised in employment The main parameters of the annual aspects of current operations; contracts. bonus system: – business initiatives (BI) – a list of the annual bonus system are objectives aimed at improving The annual bonus is designed participants (for the Policy the company business, including to motivate key managers to achieve purposes, they include all full- future activity. annual targets and is calculated time employees of the company, following the review and approval excluding the Gazprom Neft Strategic target indicators (planned of their performance against a set PJSC CEO, employees of project and actual) are approved by the Board of KPIs and business initiatives. offices working under fixed- of Directors of Gazprom Neft PJSC. The KPIs cover metrics to assess term employment contracts, delivery on the Company’s strategic and workers at production goals, along with corporate, financial, facilities); project performance and HSE – target percentage of the annual compliance metrics. bonus (specified depending on an employee position); To boost the efficiency – factors having an impact of financial incentives offered on the annual bonus amount: to employees to meet annual targets achieving KPIs, and executing and, by extension, the Company’s business initiatives. strategic goals, the Board of Directors approved Annual Bonus These principles are being Policy, an underlying document that implemented through correlation links KPIs with annual bonuses between the bonus amount payable to the Company’s and its and the achievement of annual subsidiaries’ Employees. goals, that may be set at various levels, depending on the position:

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Strategic target performance indicators for 2019

Metric 2019 (plan) 2019 (adjusted plan) 2019 (actual) Normalised consolidated earnings before interest, tax, 757.3 777.7 795.1 depreciation and amortisation (EBITDA), ₽ billion Economic value added (EVA), ₽ billion 66.4 120.4 137.7 Return on average capital employed (ROACE)1, % 14.6 16.8 17.4 Net Debt-to-EBITDA ratio 0.85 0.74 0.70 Total proved reserves, including a share 3,656 3,644 3,709 in subsidiaries 2,mt of oil equivalent Reserve-replacement ratio (RRR), % 100 83 102 Hydrocarbon production, mt of oil equivalent 96.5 96.3 96.1 Refining volume, mt 41.8 41.3 41.5 Premium sales of petroleum products, mt 26.4 26.3 26.5 Conversion rate, % 82.8 82.8 82.7 Labour productivity, ₽ million per person 36.67 38.09 39.79 Equity-to-debt ratio, % 32.2 33.3 32.3 Oil production3, mt 64.9 63.7 63.3 Sales of crude oil and petroleum products, mt 74.4 72.3 72.1 Net profit4, ₽ billion 333.8 380.5 400.2 Net working capital, ₽ billion 45.3 20.9 71.5 Inventory turnover, days 28.3 28.4 29.0 Ratio of accounts-receivable growth rate to revenue 0.98 1.00 1.59 growth rate (without the group turnover) Operating expenses, ₽ billion 2,092.3 2,052.0 2,038.7 Limit on capital-investment financing sources, ₽ billion 507.8 486.2 486.2

/ 1 / Under the IFRS. Based on adjusted EBIT and income tax rate including share in JVs. / 2 / In the budget of 2017 and onwards, hydrocarbon reserves in accordance with the Russian classification are categorised into АВ1 + С1 based on the new classification (Order of the Russian Ministry of Natural Resources and Environment No. 477 of 2013). / 3 / Including production of condensate and natural gas liquids. / 4 / Profit attributable to shareholders in Gazprom Neft PJSC.

166 ANNUAL REPORT 2019 Total compensation for 2019, with a breakdown by payment type, ₽ thousand

Metric Board of Directors Management Board Total Compensation for serving on governance bodies 531,671 – 531,671 Salary – 726,837 726,837 Bonuses – 674,028 674,028 Other – 37,562 37,562 TOTAL 531,671 1,438,427 1,970,098

The Long-Term Incentive Programme are the Company’s senior managers for the reporting period, and medical based on share price growth, provided they meet certain criteria. treatment and assistance. is an integral part of the long-term The remuneration is based Growth Strategy of the Gazprom on fair value at the end of each In 2019, the Management Board Neft Group, and provides for paying reporting period and is payable received no additional remuneration compensation to management at the end of a three-year spell. for membership in the Company’s for increasing the group value The compensation depends on certain or its subsidiaries’ governance for shareholders for a particular market conditions and duties, bodies. period. which are taken into account, when the amount to be paid to particular The company did not give loans The Programme seeks to: employees is determined. Expenses to members of the Board of Directors – boost the Company’s long-term are recognised throughout the entire and the Management Board. performance; period of implementing the plan. – harmonise the interests In 2019, provisions amounting of the Company’s shareholders to ₽1,526.8 million were accrued and senior management; under the Long-Term Incentive – balance short-term results Programme (LTIP) for 2018-2020. and long-term sustainability; – attract and retain senior managers Remuneration accrued in line with best domestic to the Management Board in 2019 and international practices. amounted to ₽1,438.4 million. The payments included salaries The Programme rewards for the reporting period, applicable are conditional on positive changes taxes, and other statutory payments to the Company’s market cap in each to budgets and non-budget funds, of the programme’s three-year bonuses, paid annual leave periods. Eligible for participation

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Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices INTERNAL CONTROL AND RISK MANAGEMENT

Internal Control

The Internal Control Policy – inform the relevant governance – timely settle conflicts of Gazprom Neft PJSC, approved bodies of material control of interest emerging in the course by the Board of Directors in 2017, weaknesses and suggest remedial of business. is the principal document specifying actions; goals, objectives, components, – ensure business continuity and principles of organisation and maximum efficiency, along Internal control units and functioning of the company with sustainability and evolution, composition, and allocation internal-control system. Efficient including timely adaptation of functions operation of the internal control to changes in the internal system is based on the involvement and external environment; The composition of internal control of top managers, heads of structural – provide high-quality informational, units in the company, and allocation units, and all employees methodological and analytical of functions related to organising of the company. support for the management and maintaining the efficient work decision-making; of the internal control system among The internal control system aims to: – ensure proper allocation them, are described below. – identify and assess risks that of responsibility, authority, may prevent the company and functions among internal from achieving its goals; control units, with no overlapping – develop, adopt, properly execute, of functions; monitor and improve control – continuously improve procedures at all levels of business the control framework operation and the company with respect to information management; technology;

168 ANNUAL REPORT 2019 The Board of Directors The Audit Committee Executive bodies of Gazprom Neft PJSC implements functions and senior management implements the following aimed at: of the company functions, as part • preparing recommendations are implementing of the general governance for the Board of Directors functions aimed at: of the company business: of Gazprom Neft PJSC • organising development regarding organisation, and efficient operation • establishing a proper control operation, performance environment, adopting the internal of the internal control assessment and improvement system, through approval control culture, maintaining high of the company internal ethical standards at all levels of local regulations control system, and other regarding the content of the company activity; issues within the competency • specifying principles and rules for implementing of the Audit Committee internal control procedures and approaches to organisation (including preparation and operation of the company by the company structural of recommendations after subdivisions within their lines internal control system; considering the Internal Control • analysing and assessing of business; Policy); • establishing the proper the efficiency of organisation • ensuring preliminary and operation of the company control environment, adopting consideration of internal control the internal control culture, internal control system, including issues; annual consideration of respective maintaining high ethical • ensuring preliminary standards at all levels issues, and preparing consideration of the Internal recommendations to improve it (if of the company activity, which Control Policy (before approval ensures efficient organisation needed). Information on efficiency by the Gazprom Neft PJSC Board of the internal control system and operation of the internal of Directors); control system; is disclosed to shareholders • analysing and assessing as part of the company Annual • allocating authority, duties the efficiency of the internal and responsibility among heads Report , and as part of the report control system operation; of the Gazprom Neft PJSC Internal of structural subdivisions, • analysing compliance related to establishing, adopting, Audit Department on the company of the company statements performance; maintaining, monitoring and external audit results and improving the efficient • monitoring of implementation with the Russian laws, of orders and resolutions organisation and operation international financial of the company internal control of the Gazprom Neft PJSC Board reporting standards, Russian of Directors and shareholders system; accounting standards, and other • conducting regular assessment by the company executive bodies; regulations; • controlling the company of the company employees • considering detected performance and personnel compliance with laws or assumed facts of fraud of the Russian Federation, training, in the field of internal on the part of the company control due to changes corporate governance, employees. and disclosure of complete in internal and external and correct information conditions of the company on the company to stakeholders; operation. • approving the Internal Control Policy.

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Heads of structural units The Internal Audit The company Audit Commission and the company employees Department, part is controlling preparation of accurate are implementing of the Internal Audit financial statements, and other functions aimed at: and Risk Management information on the company financial • developing, documenting, Directorate, and business operations, and its adopting, executing, is performing financial position. monitoring (conducting self- the following functions: assessment) and improving control procedures, as part • doing independent and objective of respective competencies assessment of the efficiency Audit Committee within their responsibility; of the company internal control system organisation • reporting to immediate The Audit Committee is a permanent supervisors in a timely manner and operation, based on the risk- about the cases when it was focused approach; body controlling the Gazprom Neft impossible to carry out control • developing and monitoring financial and business operations. It procedures, and/or when adoption of recommendations acts for the benefit of shareholders, organisation of the control for eliminating drawbacks revealed during audits; and is accountable to the General procedures needs to be changed, Meeting of Shareholders. due to changes in internal • providing advice for stakeholders or external conditions within the company, in relation of the company operation. to organisation and operation In accordance with the Charter of the company internal control system; and the Regulation on the Audit • reporting about the results Committee, the Committee inspects of the internal control system the company financial and business assessment, and of proposals operations, and forms an independent for its improvement to the Audit opinion regarding the company Committee, the company executive bodies, and (if needed) position. It presents its conclusions the Gazprom PJSC structural to shareholders at the General Membership of the Audit subdivision responsible Meeting of Shareholders, in the form Committee for internal audit. of an opinion attached to the Annual From 9 June 2018 Report of Gazprom Neft. through 13 June 2019: • Vadim Bikulov; Remuneration • Mikhail Veigel; • Galina Delvig; to members of the Audit • Margarita Mironova; Committee is paid on the basis • Sergey Rubanov. of a resolution of the General Meeting From 14 June 2019 through 31 of Shareholders. December 2019: • Vadim Bikulov; • Mikhail Veigel; • Galina Delvig; • Margarita Mironova; • Sergey Rubanov. ₽4,520,000 annual remuneration paid to the Audit Committee members in 2019

170 ANNUAL REPORT 2019 The Internal Audit Department To deliver on its objectives, – ensure completeness within the Internal Audit the Internal Audit Department has and timeliness of improvement and Risk Management been given the remit to: measures with respect to internal Directorate – draw up an the Internal Audit control, corporate governance Department’s plan, including and risk management processes annual and projected audit suggested based on audit results; To conduct systematic independent schedules, and submit them – gather, consolidate assessment of reliability to the Audit Committee and analyse information and efficiency of the corporate- for approval; required for the Internal Audit governance, risk-management – organise and perform due internal Department to deliver on its and internal-control system, audits and consultations across functions and certain instructions the company performs internal audit. the company and its entities based of the company management; on Russian and international – establish and improve the Internal The Internal Audit and Risk internal audit best practices; Audit Department’s operations Management Directorate of Gazprom – independently and objectively based on standards; Neft PJSC is functionally accountable assess the reliability and efficiency – contribute to the development, to the Audit Committee of the Board of the company risk management, launch and operation of Directors, and has a direct internal control and corporate of automated internal audit administrative reporting line governance frameworks based management systems to the company CEO. on the risk-oriented approach; in the Company and coordinate – inform the company Audit relevant development efforts The internal audit function is held Committee and executive in the Company entities; by the Internal Audit Department, bodies of internal control, risk – draw up and implement which is part of the Internal Audit management and corporate the Programme to Warrant and Risk Management Directorate, governance frameworks the Performance and Boost with its head being appointed subject assessment results the Quality of Internal Audit to approval by the Board of Directors . and improvement suggestions; approved by the Audit Committee; – come up with suggestions – following audits, ad hoc The key objective of the Internal Audit to eliminate gaps and violations, inspections, investigations Department within the Internal Audit identify their causes, produce and consultations, produce and Risk Management Directorate recommendations to improve recommendations to improve is to provide the Board of Directors the company performance the Company performance (through the Audit Committee) and provide this information and eliminate gaps, bringing and the company management to the company management; them to the attention of relevant (the CEO and the Management – provide advisory decision makers; Board) with independent, unbiased, support to stakeholders – assess the effectiveness reasonable and substantiated within the company of the company anti-fraud guarantees and consultations aiming with respect to the establishment and anti-corruption efforts; to improve the company performance and maintenance of internal – ensure gathering and processing and achieve the company goals control, risk management of information on cases and signs by advocating a systematic and corporate governance of fraud and corruption via and consistent approach to assessing frameworks; the Hotline to Report Fraud, and enhancing the efficiency – where necessary, duly engage Corruption and Other Violations of corporate governance, risk independent external advisors of Gazprom Neft’s Corporate Code management and internal control and experts (within the Internal of Conduct; processes. Audit Department’s approved – ensure completeness budget) to provide internal audit and timeliness of measures taken related services;

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as per instructions of the company The Internal Audit and Risk Management Directorate is headed by management following audits. G. Delvig.

The head of the Internal Audit GALINA and Risk Management Directorate reports to the Audit Committee DELVIG and the Board of Directors about the Directorate performance Interest in the authorised for a reporting period at least once capital (as at 31 December 2019) in six months, and regularly provides information on other issues within None the Audit Committee competency at current meetings, in-person and in absentia.

In 2019, the Internal Audit BIOGRAPHICAL DETAILS Department completed all audit Born in 1960. projects scheduled for the reporting Education: Plekhanov Moscow Institute of National Economy period, in the fields of corporate Since 2008, she has headed the internal audit function of Gazprom Neft PJSC. governance, IT and investing activities, Ms. Delvig is a member of audit commissions of Gazprom Neft PJSC, Oil and Gas Company SLAVNEFT, Tomskneft VNK JSC, and FC Zenit JSC and in the main production lines of the company business. As part of those projects, the Internal Audit In 2019, the Internal Audit Department Based on the Internal Audit Department paid special attention also completed the audits of cross- Department’s recommendations, to analysing, detecting and assessing functional lines of the company the management has developed a set systemic high-level areas for various business, including those related of measures to enhance internal lines of the company business. to assessing performance controls effectiveness as regards of the internal control system used business processes and has been For instance, the internal audit was for processes in finance, IT, HSE working on their implementation focused on production processes, and investment activities of Gazprom along with the amendment of internal including geological exploration Neft PJSC. regulations and procedures. and resource base development, On top of audits, the Internal Audit well intervention, oil and APG In addition, the Internal Audit Department also focused on extending metering, and energy efficiency Department conducted the audit consultancy services to improve management. Moreover, the auditors of financial (accounting) statements the Company’s performance. assessed the internal control system as part of activity of audit used for processing and selling commissions. crude oil and petroleum products, and qualitative and quantitative control of petroleum products.

172 ANNUAL REPORT 2019 The Board of Directors determined the amount of payment for the audit of financial (accounting) ₽27,300,000 statements of Gazprom Neft PJSC for 2019 (excluding VAT) at the level of

External auditor The company auditor with the auditor representatives (if is approved by the General needed). Throughout 2019, the Audit To validate and confirm its Meeting of Shareholders based Committee considered the following annual financial statements, on the proposal from the Board issues related to external audit: the сompany annually engages of Directors. Candidates for becoming – on assessing candidates a professional audit firm, selected an audit organisation for the company for becoming the Gazprom Neft from the largest international audit undergo preliminary assessment PJSC auditors, and providing companies, which has no property by the Audit Committee. recommendations for the Gazprom interest in the company or its Neft PJSC Board of Directors; shareholders. The main principles In June 2019, the annual General – on the results of the external audit of organising and conducting Meeting of Shareholders selected for 2018; external audit, the procedure Financial and Accounting Consultants – on a candidate for the Gazprom and criteria for selecting Limited Liability Company (FBK LLC) Neft PJSC auditor for 2019; auditors, and approaches as an auditor of financial statements – on assessing the Auditor’s opinion to ensuring that the auditors comply (RAS and IFRS) for 2019. about financial (accounting) with the principles of independence statements of Gazprom Neft and absence of conflicts of interest, In over 28 years of cooperation PJSC for 2018 prepared are formalised in the External Audit between FBK and Russian business by PricewaterhouseCoopers Audit Policy of Gazprom Neft PJSC. leaders in all key sectors of economy, JSC; the company has accumulated – on the results of assessing Auditors are selected on the basis unique practical experience the Gazprom Neft PJSC external of a tender, based on assessment of implementing major projects, such auditor work for 2018; in accordance with the following as the projects for the fuel and energy – on considering the External criteria: sector. Ongoing collaboration Audit Policy of Gazprom Neft – participant qualification with representatives of the oil and gas PJSC and its subsidiaries and expertise in the selection industry provides the company and organisations; area, including the experience specialists with deep understanding – on determining the amount of auditing oil and gas companies; of current industry problems of payment for the auditor services – ensuring data protection and challenges. FBK has been for 2019; and compliance with requirements cooperating with Gazprom PJSC – on preparing proposals of loan agreements (including since 1996. As part of consulting for a competition commission rating agencies); services provided to the Gazprom to select an audit organisation – financial parameters (cost Group organisations, FBK specialists to carry out the mandatory annual of services, payment conditions); have completed over 250 major audit of Gazprom Neft PJSC; – independence (in accordance projects and provided numerous – on the results of the action plan with the requirement consultations. It has implemented to eliminate drawbacks detected of the Ministry of Finance more than 85 projects on preparing in the course of Gazprom Neft of the Russian Federation feasibility studies, cost-effectiveness PJSC external audit for 2018. – Clause 2.112 of the Rules analysis of investment projects, for Independence of Auditors developing financial models The Board of Directors determined and Audit Organisations, for enterprises, business plans the amount to be paid for the audit and with the international and development strategies. of the Gazprom Neft PJSC financial requirements – Clause 290.219 (accounting) statements for 2019 of the IESBA Code of Ethics, To assess the quality at the level of ₽27,300,000 (excluding the independence of an auditor of an external auditor work, VAT). is not violated, if the revenue per the Audit Committee considers customer does not exceed 15% the external auditor reports, of the auditor›s total revenue). management representations, and holds in-person meetings

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Management of potential conflict Key conflict prevention measures in accordance with the Regulation of interest at a shareholder level: on Procurement approved – following the procedure by the Board of Directors, which The company is committed for decision-making on the most is mandatory for all Gazprom Neft to balancing the interests of its significant issues; subsidiaries. shareholders and management – following voting procedures interacting with a high level for related-party transactions; Gazprom Neft approved by-laws (the of trust, business culture and ethics. – engaging independent Corporate Code and the Corporate The company majority shareholder and well-recognised appraisers Governance Code) formalising values has enough votes to resolve to determine the value of non- and principles, which are the basis on many matters falling within cash property under related-party for forming and developing corporate the remit of the General Meeting transactions; culture in the company. of Shareholders and to appoint – ensuring maximum transparency The Corporate Code regulates the Board of Directors. Nonetheless, and information disclosure when situations when conflicts of interests the company makes efforts arranging and holding General may arise: accepting gifts, using to decrease risks related Meetings of Shareholders, the company assets and resources, to governance, where most and timely disclosing the Board interaction with stakeholders, of the share capital is held by a single of Directors’ resolutions; and handling of confidential shareholder. – disclosing information and insider information. on related-party transactions. To implement individual Code The ownership structure As per the Company’s financial principles, the company approved is transparent. Rights statements for 2019, related-party the required by-laws, for instance, and obligations of shareholders transactions were entered into inrelation to access to confidential along with the procedure to exercise in the ordinary course of business information, trade secrets, HR policy ownership rights are clearly specified and had clear economic rationales. and succession pool development. in the company Charter and by-laws, Most frequent transactions with the information being publicly included sale and purchase The Gazprom Neft Corporate accessible. The company ensures of crude oil, gas and petroleum Governance Code requires that equality of shareholder voting rights products; members of the Board of Directors and provides relevant protection – organising mechanisms must refrain from actions that cause, mechanisms specified in the by-laws. to prevent dilution of the company or may cause, conflicts of interests, value. Thus, contractors from voting on issues related for purchasing products, works to their personal interest, and must and services are selected not disclose the confidential and (or)

174 ANNUAL REPORT 2019 insider information on the company Executives and managers Neft PJSC. The Regulation was and use it in their personal interests of structural units, who are engaged supplemented with the section or the interests of third parties. in external relations and contacts «Detection and Prevention on behalf of the company, are most of Conflicts of Interests for Members The Corporate Code defines likely to get involved in conflict of the Board of Directors», specifying a conflict of interests, control zones of interest. the procedures for preventing in managing conflicts of interests, conflicts of interest in the Board positions of personnel that are most The Code states that of Directors: sensitive to conflicts of interests, the company employees are to inform – in case of a potential conflict and contains examples of situations their immediate supervisors of interest for a member when conflicts of interests may arise. and the Corporate Protection of the Board of Directors, including Directorate about all cases the interest in a transaction made Gazprom Neft also has of corruption, fraud, theft, and conflict by the company, that member the Ethics Committee, of interest (including suspected of the Board of Directors must which controls compliance ones). The company has a hotline, send a notification to the Chairman with the Company Code provisions. an email address and special letter or Secretary of the Board The Ethics Committee includes boxes for employees to report of Directors; members of the Management on violations anonymously. Messages – information on the conflict Board under the supervision to the company hotline may also of interest, including the interest of the Chairman of the Management be sent by third parties who in a particular transaction, Board. are not the company employees, are to be included in materials for instance, its contractors. submitted to the members The main control zones in managing The Board of Directors considers of Board of Directors at a meeting; conflict of interest are the following: the hotline performance twice a year, – The Chairman of the Board – selecting contractors, relations including statistics on received of Directors may offer the member with contractors; (processed) messages and detected of the Board of Directors, who – a settlement and payment system, violations. In 2019, the company has the respective conflict especially involving agents/ hotline received 243 messages. of interest, not to attend mediators; the discussion of the relevant issue – recruiting the company personnel; In December 2018, the extraordinary at the meeting, when the nature – participation of employees General Meeting of Shareholders of the issue discussed or specifics in politics and state activities; approved the new version of the conflict of interest require – charity and sponsorship; of the Regulation Governing that; – gifts and entertaiment expenses. the Board of Directors of Gazprom

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– members of the Board of Directors Anti-fraud and anti-corruption D&O insurance and their related parties must policies and procedures not accept gifts from parties Since 2011, Gazprom Neft has interested in decision-making, The basic anti-corruption by-law provided the Directors And Officers and use any other direct or indirect of the company and its subsidiaries Liability Insurance (D&O). It protects benefits provided by such parties is the Anti-Fraud and Anti-Corruption the company directors and executives (except for symbolic sings Policy adopted in 2014. from possible claims of third parties, of appreciation, which are common that may be made as a result courtesy, or souvenirs presented The Policy defines fraud and other of unintended and/or erroneous during official events). terms related to fraud prevention. actions of the company officers. Based on this Policy, the Company’s The D&O policy covers expenses Moreover, the company inspects senior management sets a single related to legal defence of directors, members of the Management ethical standard of unacceptability and the expenses incurred Board and their relatives to identify of corruption of any type and form. in connection with any claims conflicts of interest, when they The Policy outlines methods brought against them, in relation are employed by the company. and procedures employed to performance of their duties. In accordance with the Regulation by the Company to combat fraud on the Management Board, members and corruption. These include The total limit for all insurance of the Management Board may a hotline, official investigations covers and extensions: €47.6 participate in governance bodies and prosecution with respect million. Additional liability limit of other organisations, or combine to identified cases of fraud. for independent directors: €1.9 jobs only with the consent million. The insurance cover is valid of the Board of Directors. Special attention is paid in all countries of the world. to corruption risks inherent to the oil The company checks the information industry. The Policy has a section The company selects an insurer on participation of members on the Company’s business processes on the basis of accepted tendering of the Management Board most exposed to fraud: interacting procedures. In 2019, the insurer was and the Board of Directors in other with officials, accepting and making Sogaz JSC, based on the corporate companies on a quarterly basis. gifts, entertainment expenses, charity insurance policy. and sponsorship, and financial The company collects and processes arrangements with third parties. information on beneficial owners The Policy also provides for training of contractors under all contracts of the company employees in zero concluded by Gazprom Neft PJSC tolerance to fraud and the basics and its subsidiaries. of applicable legislation.

In 2019, no conflicts of interest The Deputy CEO for Security were detected among the members and the head of the Internal Audit of the Gazprom Neft Board and Risk Management Directorate of Directors and the Management report regularly to the company Board. executives on anti-fraud and anti- corruption issues.

176 ANNUAL REPORT 2019 Information for investors and shareholders

Information policy The company official website provides Transparency is one of the most and information disclosure the following: important corporate governance – the Charter and by-laws; principles of Gazprom Neft PJSC. The company seeks to report – information on the shareholding The company is a stable leader on its activities to all stakeholders structure; in information disclosure at Russian in a timely manner and regularly, – information on the governance and international competitions. within the scope required to make bodies; informed decisions regarding – information on the independent participation in the company auditor and registrar; or other actions that may have – other information to be disclosed an impact on the company financial pursuant to the applicable laws and business operations. and the Company’s by-laws, including Gazprom Neft’s annual The Company’s information reports . policy is implemented by the executive bodies. The company has a special page on its Compliance with the information website with answers to common policy is monitored by the Board questions from shareholders of Directors. The Gazprom Neft and investors, a regularly updated executive bodies are responsible investor calendar, the dividend history for implementing the information for the last five years, key performance policy. In 2019, the Audit Committee indicators, contact details, and other of the Board of Directors considered useful information. implementation of the company information policy, for instance, Pursuant to the Regulation the information disclosed by Gazprom on Information Disclosure, Neft PJSC to third parties, including the Company’s disclosures analytical and rating agencies. on the Internet include releases on the website of a security market information provider (Interfax-CIDC).

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in accordance with the Company’s The risk-management objectives Risk management linear and functional management are as follows: system, with individual managers – developing risk-management assigned to oversee specific culture to achieve a common Risk management system risk areas At the level of each understanding of the main principles function and key business process, and approaches to risk management Gazprom Neft PJSC has coordinators for risks were among executives and employees; the Risk Management determined among executives who – developing and implementing Policy that determines risk- disseminate and support corporate an integrated approach to identifying management goals and principles risk-management principles. and assessing company-wide to improve the guaranteed The timing and objectives for risk and specific-area risks; reliability of the Сompany’s analysis depend on the particular – promoting exchange operations in the short and long circumstances and requirements of information on risks between term. The Gazprom Neft risk- of each business process, the Company’s structural units, management targets are to improve with respect to which risk and joint development of measures the efficiency of management management is implemented. for managing those risks; decisions by analysing the related – regularly presenting information risks, and to maximise the efficiency Such an approach allows creating on risks to the Company’s of risk-management measures, when areas of responsibility for risk governance bodies. implementing the decisions made. management, and monitoring risks at all management levels To achieve those goals, the Company The Company’s risk management of the Company. It also helps develop developed and is using a single system is based on the integration target plans to ensure response approach to the risk-management of the risk analysis and management to significant risks, both in each process. Together with standardised tools into all key corporate processes. subsidiary and in Gazprom Neft risk-analysis tools and methods, that Responsibility for risk management as a whole. approach forms the Integrated Risk and reporting on risks is determined Management Framework (IRMF).

FINANCIAL IMPACT LEVELS OF RISKS AND DISTRIBUTION OF AUTHORITY WITHIN IRMF

Subsidiary Audit Committee Division Subsidiary Board of Directors Subsidiary Management Division Board Subsidiary

Key risks Risks Risks of subsidiaries Making key decisions and assessing of divisions Management management results at the Management Management and monitoring at the level Board meetings. Divisions carry out direct and monitoring of subsidiaries management of this category of risks. at the division level

178 ANNUAL REPORT 2019 The IRMF regulatory – ensuring that all employees In 2020, Gazprom Neft plans and methodological framework understand the basic to continue developing regulatory includes the following documents: principles and approaches and methodological documents – Risk Management Policy; to risk management adopted regarding analysis of particular – Integrated Risk Management by the Company; material risks, and integrating risk Framework Company’s standard; – providing proper regulatory analysis into the decision-making – Guidelines for Risk Management and methodological support; processes. The Company also plans Process; – distribution to expand the training programme – additional guidelines for certain of powers and responsibilities for executives and employees regarding types of risks and application for risk management among application of risk-management tools of individual risk-analysis tools. the Company’s structural units and methods.

Risk management forms an integral part of the Gazprom Neft internal Developing the Integrated Risk environment, and includes Management Framework the following: – introducing a risk-focused The Company is continuously approach in all aspects expanding the IRMF methodological of production and management framework that includes general operations; recommendations for quantitative risk – performing systematic analysis assessment and detailed techniques of identified risks; for assessing the most significant risks. – building a system to control risks and monitor the efficiency of risk Aa at the end of 2019, IRMF covered management; all significant assets of Gazprom Neft with all new projects or acquisitions included in the framework.

PRINCIPAL IRMF PROCESS SCHEME IN THE GAZPROM NEFT GROUP

Detecting Quantitative Developing Monitoring of (revising) risks and qualitative risk management initiatives at least once a year assessment initiatives at least once a quarter at least once a year at least once a year

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Description of key risks

1. Operational risks 1.1. RISKS ASSOCIATED WITH GEOLOGICAL EXPLORATION The Company’s key strategic objective is to increase its Gazprom Neft has significant experience in geological hydrocarbon resource base both in quantitative and qualitative exploration using cutting-edge geological and geophysical terms to ensure a sufficient production level, which to a large methods of hydrocarbons exploration and employing advanced extent depends on successful geological exploration. drilling and field development technology, including in harsh The main risks associated with geological exploration have to do weather conditions to reduce the likelihood of such risks. with failure to confirm the anticipated hydrocarbon reserves The Company has engaged DeGolyer and MacNaughton and the objective decline in resource base quality. A major for an independent audit of its reserves based on the estimates priority for the Company is geological exploration in a variety by Gazprom Neft subsidiaries. Gazprom Neft closely cooperates of geographic regions, including areas with adverse climatic with the federal and regional authorities on sustainable use conditions and environmental restrictions, which often involves of natural resources. the risk of extra costs. The assessment is based on a number of variables and assumptions, including the following: – comparison of the region’s historical production rates with the productivity of similar regions; – geological data interpretation; – government regulations and legal framework.

1.2. LICENCE RISKS As a company engaged in the exploration and mining of mineral The Company has deployed an automated Subsoil Use resources, Gazprom Neft operates based on government subsoil Monitoring System, a key risk management tool featuring licences. These licences specify the purpose of the work (type a risk matrix to track compliance with the main (material) of subsoil use), geographic boundaries of the area, timeframe terms and conditions of subsoil use. The System makes and terms and conditions of resource use. Under the Russian it possible to assess the current risk status based on the matrix law, using subsoil resources without a licence is subject to civil indicators and plan for an acceptable risk level in the future. and in some cases criminal liability. The status of the current and potential licence risks In case of early withdrawal of the subsoil licence, the Company as well as implementation of the regular risk mitigation may face reputational risks and material losses related activities are reviewed on a quarterly basis at the meetings to the costs incurred to acquire the licence and develop of the permanent regional commissions for subsidiary licensing. the subsoil area, as well as lower capitalisation due to reduced Subsidiary CEOs are responsible for maintaining subsoil resource base. licences.

1.3. PROJECT RISKS The Company works continuously to initiate and implement To address these risks, the Company makes every effort investment projects aimed at achieving its strategic goals, to ensure thorough planning and coordination of its including increased hydrocarbon production and improved investment projects. In 2014, a risk management framework product quality. While implementing these projects the Company to handle potential risks associated with the preparation faces various risks that can potentially result in missed and implementation of major projects was rolled out. This deadlines and higher costs. The project risks are mainly related framework is based on the stage-gate approach to project to inadequate planning, failure to comply with the project management that is widely used globally and provides terms and safety requirements by contractors, as well as new for risk assessment at each stage of the project. Contractor circumstances, including higher cost of materials and supplies, requirements are determined based on risk assessment infrastructure assessment errors, and new equipment suppliers. and the regulatory environment of the country, where the project is run. In addition, the Company has deployed a project monitoring system.

180 ANNUAL REPORT 2019 1.4. HR RISKS Highly qualified personnel is key to effective operation The Company offers a safe work environment, opportunity of the Company’s business. A lack of qualified employees, to take part in major projects and exciting challenges, especially engineering and technology experts, can result competitive salaries, and professional training programmes in risks associated with personnel shortages. The Company’s to its personnel. success largely depends on the efforts and expertise of key Gazprom Neft is working continuously to improve employees, including qualified engineering staff, and on its the recruitment procedures, limit staff turnover, and provide ability to attract and retain such personnel. Competition self-development opportunities for its employees. for the best talent in Russia and worldwide may intensify due to the shortage of qualified specialists in the labour market. Failure to attract qualified employees and/ or retain the existing talent pool could have an adverse effect on the Company’s reputation as an employer. Demand for qualified personnel and the associated costs are expected to grow further given the significant need for such employees in other industries.

1.5. HSE RISKS Risks associated with environmental, health and safety In the field of industrial safety, the Company strives (including fire safety) legislation that may entail a temporary to achieve the strategic ‘Target Zero’ – zero harm to people, shutdown of facilities and licence revocation, along with the risks the environment, or property in our operations. of accidents (fatalities and workplace injuries, fires/explosions/ The main focus areas reflected in the corporate HSE Policy accidents, accidents with environmental consequences Statement include: of nationwide scale). – safe production based on risk analysis, mitigation and management; – reduction of workplace injury and occupational disease rates, accident hazards and environmental impact; – consistent implementation of best global HSE practices. The risk-based approach and the principle of integrating HSE risks into all key business processes of the Company underlie the occupational risk management ideology. As part of the implementation of a risk-based approach, the Company focuses on the following parameters: – fundamental barrier setting obstacles for priority risks across the Company’s assets and ensuring their reliability; – competency barrier ensuring that only competent employees have access to work; – digital barrier management eliminating human impact where applicable. The company is fully aware of its responsibility to preserve the environment. Gazprom Neft keeps monitoring its activities for compliance with relevant environmental requirements and runs environmental protection programmes. The Company’s policy seeks to ensure compliance with Russia’s environmental regulations by investing in environmental protection, including technologies to minimise environmental footprint. The outcome of these efforts is a considerably lower probability of environmental risks.

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1.6. IT, AUTOMATION, AND RISKS The Company is increasingly faced with the growing dependence As a high-tech campany, Gazprom Neft recognises the existence of its main business processes on the quality of IT, automation, of ITAT risks and seeks to manage them on a consistent basis. and (ITAT). In managing ITAT risks, the Company is striving to increase Along with positive effects, the growing reliance on ITAT entails business efficiency by anticipating the impact of ITAT risk factors elements of uncertainty and related risks (ITAT risk). and to boost the effectiveness of its ITAT risk management As a high-tech company, Gazprom Neft places special activities. emphasis on managing ITAT related risks. ITAT risks have The Company constantly monitors and carefully analyses to do with with ITAT management, operation of IT systems the existing and potential ITAT threats. The IT, Automation (primarily in the areas of production and quantitative analysis), and Telecommunications Department at Gazprom Neft ITAT development projects, and the risk arising from the ban is responsible for developing regulations and procedures on purchasing and using foreign software and ITAT equipment for ITAT risk management activities and implements a number due to sanctions and other restrictions. of measures to mitigate the impact of these risks, including: – identifying events and developments that may adversely affect the Company’s objectives; – analysing, assessing, and setting priorities for addressing ITAT risks; – designing optimal response strategy for ITAT risk management; – providing ongoing monitoring of ITAT risks and oversees implementation of ITAT risk management activities. 1.7. RISKS OF DECLINE IN DEMAND FOR OIL AND PETROLEUM PRODUCTS A strategy to managing this risk involves reducing its impact Cost optimisation on financial stability of the Company and comprises the following As part of the response to the decline in business activity measures: in Russia and the world, due to the impact of epidemiological factors, the company is implementing cost optimisation Optimisation of production programs and material flows programme, including cancellation of financing mass cultural A high level of modernisation and technological flexibility and sports events, reducing advertising and sponsorship, as well of the company’s refineries and the use of modern digital as administrative, managerial and educational costs. integrated planning systems across the entire value chain allow the company to respond in predictive mode to the turbulence A balanced approach to cost optimisation allows to increase of the external environment and changes in market demand, the concentration of human and material resources ensuring at the same time maximum efficiency of the product for the implementation of priority tasks to improve range, timely allocation of crude oil and petroleum products the company’s financial resilience. supply and storage volumes, as well as optimum redistribution of commodity flows. Long-term fixed volume and price contracting Based on the company’s historically achieved “Trusted Partner” status, agreements on fixed volumes and price are negotiated with key contractors, which allows to share risks of macroeconomic volatility, and at the same time to guarantee the counterparty a long-term cooperation and stable financing of works / services.

182 ANNUAL REPORT 2019 2. Market risks

2.1. RISKS ASSOCIATED WITH POTENTIAL CHANGES IN PRICES FOR FEEDSTOCK AND SERVICES In the course of business, Gazprom Neft uses the infrastructure To reduce the impact of such risks, the Company implements of natural monopolies and other dominant market players in oil a number of activities, including: and petroleum products transportation and electricity supply. – long-term commodity flow planning and timely reservation The Company also purchases feedstock and services from a wide of throughput for oil and petroleum products and the rolling range of companies. stock required; Gazprom Neft has no control over the infrastructure of these – optimal redistribution of commodity flows by transport mode; natural monopolies and other dominant market players, – use of alternative and own power generation sources; their tariffs, as well as prices charged by feedstock and service – long-term contracts with fixed volumes and prices suppliers. for the term of the contract; – use of transparent cost review formulas in long-term service contracts directly linked to market fluctuations. These measures help reduce to an acceptable level the risks associated with procuring products and services from monopoly suppliers, and ensure the Company’s seamless operation.

2.2. RISKS ASSOCIATED WITH POTENTIAL PRICE CHANGES FOR OIL AND PETROLEUM PRODUCTS, GAS, AND GAS PROCESSING PRODUCTS Gazprom Neft’s financial results are directly linked to prices The Group has implemented a business planning system in line for oil and petroleum products. The Company does not have with the scenario approach based on which the Company’s key a full control over its product prices as they are subject to supply performance indicators are linked to global oil prices. It helps and demand fluctuations in the global and domestic oil markets cut costs, including by reducing or rolling forward investment and steps taken by regulators. programmes and using other mechanisms. These measures reduce the risk to an acceptable level.

2.3. INDUSTRY COMPETITION RISKS Russia’s leading oil and gas companies compete in all main By implementing its strategic project portfolio aimed at boosting areas of business activity, including: performance in key business areas, Gazprom Neft is consistently – government auctions for subsoil use licences for hydrocarbon strengthening its positions in Russia’s oil and gas industry production; and mitigating the risks related to industry competition. – acquisition of companies holding hydrocarbon production licences or owning hydrocarbon assets; – engagement of independent service companies; – procurement of high-tech equipment; – recruitment of the most experienced and highly qualified professionals; – access to transportation infrastructure; – acquisition of existing and construction of new assets to increase sales to end consumers. Industry competition also includes suppliers of energy sources other than oil and gas such as coal, nuclear power, and renewable energy.

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2.4. RISKS ASSOCIATED WITH POTENTIAL CHANGES IN ECONOMIC ENVIRONMENT The Russian economy remains sensitive to global price The Company takes every effort to mitigate the impact fluctuations for crude oil, natural gas, and other commodities. of this risk on its performance by maintaining proper balance The negative trend in global prices for oil and petroleum between domestic sales and exports, oil production and refining, products, as well as the slowdown of the world and Russian as well as a continued focus on expanding markets for premium economies could adversely affect the Company’s business distribution channels and increasing sales in foreign markets. by reducing its revenue and sales and increasing the cost Gazprom Neft subsidiaries support the national economy of financial and other resources. as major tax payers and by contributing to large-scale infrastructure and social projects. The Company is constantly upgrading its production facilities and improving performance efficiency by implementing major investment projects and renewing and modernising its fixed assets.

3. Financial risks

3.1. COUNTERPARTY CREDIT RISK Credit risk is the risk of the Group incurring financial losses due Trade and other receivables include a large number to failure of buyers or counterparties to fulfil their contractual of counterparties operating across different industries obligations. This risk is primarily related to the Group’s and geographical areas. To manage the credit risk, Gazprom receivables from buyers and the investment securities. Neft implements a number of activities, including: – assessment of counterparty credit capacity; – setting individual credit limits and payment terms depending on the counterparty’s financial position; – advance payment monitoring; – measures to control receivables focused on specific business areas, and other initiatives.

3.2. BORROWING RISK Sanctions against Gazprom Neft imposed by the US, EU The Company effectively manages the risk associated and other countries have substantially limited the range with borrowings. Despite the sanctions from the US, EU and other of available financing instruments for the Company. countries imposed against Gazprom Neft in 2014, the Company has successfully completed its borrowing programme in 2019. Also, loan agreements with long-term availability, including revolving credit facilities were signed, which will improve flexibility of the Company’s financial policy and effectiveness of liquidity management. On top of that, the Company keeps looking for alternative funding sources.

3.3. FX RISK The foreign exchange risk primarily arises from the availability The Group’s FX risk is substantially mitigated by its of borrowed funds denominated in currencies other than FX-denominated assets and liabilities as the current mix the functional currencies of the respective Group companies, of revenues and liabilities acts as a hedging mechanism which mainly include their local currencies. For example, rouble with opposite cash flows offsetting each other. The Group applies is the functional currency of the companies operating in Russia. a hedging policy to manage volatility in profit and loss with its The aforementioned borrowed funds are largely denominated FX-denominated cash flows. in US dollar and euro.

3.4. INTEREST RISK

184 ANNUAL REPORT 2019 The Group’s borrowings were partly raised at a floating interest In an environment of lower borrowing rates, fixed interest rates rate (linked to LIBOR, EURIBOR or the Bank of Russia’s key rate), may become more expensive than floating interest rates, and vice and partly at a fixed interest rate. versa. The Group maintains a balanced portfolio structure, which minimises the risk of negative consequences arising from adverse changes in interest rates. In addition, the Group Treasury from time to time reviews current interest rates in the capital market, based on which hedging instruments are used, if necessary.

4. Risks associated with government regulation

4.1. RISKS OF INCREASED EU AND US SANCTIONS Sanctions against the Russian energy sector have been imposed The sanctions have had a negligible impact on the business by the US (with amendments to sanctions regime introduced and financial condition of Gazprom Neft. As a response, in 2017 and 2018), EU, and a number of other countries since the Company runs a targeted import substitution programme 2014. Tougher sanctions may adversely affect the overall for services and equipment. The Company has no reason situation in the industry have impact on the Company’s specific to believe that the new sanctions will target it specifically, prospective projects and the ability of its counterparties to meet but they can have a affect certain prospective projects. Following their obligations. the assessment of the impact of sanctions, the Company’s management thinks that sanctions do not affect its consolidated financial statements.

4.2. POLITICAL RISKS Today, the political situation in Russia is stable, which In general, the Company assesses the political situation is characterised by the stability of the federal and regional in the country as stable and believes that there are no risks governments. Gazprom Neft is registered as a taxpayer of negative developments at the moment. in St Petersburg, the second largest city in Russia and the administrative centre of the North-Western Federal District, with a significant potential of natural resources, mature industry and extensive transport network. Subsidiaries of Gazprom Neft operate in the Central, North- Western, Ural, Volga, Siberian and Far Eastern federal districts.

4.3. CORRUPTION RISKS As the Company actively enters into new international markets, Gazprom Neft implements the Corruption Risk Management the risks of the US and UK anti-corruption laws being applicable Strategy on a permanent basis. The Company has approved to it aggravate. the Anti-Fraud and Anti-Corruption Policy. In addition, recommendations were made to all subsidiaries of the Gazprom Neft Group for approving local policies. Knowing the key principles of and compliance with the requirements of this policy are mandatory for all Gazprom Neft employees. To control corruption risks when cooperating with external counterparties, Gazprom Neft CEO has developed and approved standard anti- corruption clauses to be included in agreements with third parties (both Russian and foreign ones). The Company also has an anti-fraud and anti-corruption hotline. When hotline operators receive messages, it triggers a mandatory internal investigation.

4.4. RISKS ASSOCIATED WITH CHANGES IN JUDICIAL PRACTICE CONCERNING MATTERS OF THE COMPANY OPERATIONS

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In Russia’s law enforcement system, the legal positions The Company continuously monitors the decisions taken of the highest judicial bodies such as the Constitutional Court by the high courts and analyses the current trends in the law and the Supreme Court are of utmost importance and can affect enforcement practice of arbitration courts in federal districts. the environment, in which the Company operates. This helps defend the Company’s rights and legitimate interests in court and resolve legal issues arising from our business. In this context, it is believed that the risks associated with changes in the judicial practice are negligible. It should be noted, however, that court rulings with respect to oil and gas companies have often been inconsistent, and it would be difficult to predict what direction they will take in the future. Potentially, the Supreme Court might take decisions that would adversely affect the Company’s current and future legal proceedings.

4.5. RISKS ASSOCIATED WITH CHANGES IN RUSSIAN TAX LAWS The Group’s major companies are among Russia’s largest To reduce the risks associated with changes in Russia’s tax laws, taxpayers, paying federal, regional and local taxes, including Gazprom Neft thoroughly examines draft laws and approved the mineral extraction tax (MET), excise tax, value added taxation-related regulations. tax (VAT), corporate income tax, compulsory social security The most significant recent changes in Russia’s tax laws contributions, corporate property tax, and land tax. affecting the Company include: Russia’s tax system is constantly evolving and improving. – changes in MET rates, export duties and excise taxes A potential rise in taxes paid by the Company could increase resulting from the so-called tax maneuvre; costs and reduce the funds available to finance current – introduction of a formula-based calculation of MET for gas activities, capital expenditures and obligations, including those and gas condensate from 2014; relating to bonds issued. Virtually any company in Russia could – introduction of a tax on additional income from the extraction potentially suffer losses resulting from claims by tax authorities of hydrocarbons, effective from 2019; with respect to the past or current activities. However, such risks – increase in the VAT rate from 18% to 20%, effective are considered to be moderate by the Company. from 2019; Gazprom Neft believes that the impact of the obligations arising – introduction of a negative excise tax on crude oil, accounting from such potential events on the Company will not be more for the damping coefficient, which reflects the difference significant than the impact of similar obligations on other between domestic motor fuel prices and export netbacks Russian oil companies with government ownership. from 2019. The Company assesses and forecasts the level of potential adverse effect of changes in Russia’s tax laws, taking every effort to mitigate the risks arising from these changes. In 2019, Gazprom Neft expanded the list of companies included in the new tax control mechanism, known as tax monitoring. In 2019, three of the Group’s subsidiaries – major tax payers – joined it: – Gazpromneft-Noyabrskneftegaz; – Gazpromneft-Yamal; – Gazprom Neft Shelf. This tax control mechanism allows the Company to obtain a reasoned opinion of the tax authority helping. It is particularly helpful for the above companies, as they are covered by the new tax regimes in the oil industry, including the additional income tax, and the tax regime for new offshore fields.

186 ANNUAL REPORT 2019 4.6. RISKS ASSOCIATED WITH CHANGES IN CUSTOMS DUTIES AND REGULATIONS Gazprom Neft is a company engaged in foreign trade, hence The Company meets the requirements of the customs it is exposed to risks associated with changes in the nation’s legislation of Russia and the Eurasian Economic Union, legislation in the field of foreign trade regulation, as well draws up all the documentation necessary for both exports as the customs legislation of the Eurasian Economic Union, and imports in a timely manner, and has sufficient financial which regulates the establishment of procedures and human resources to comply with the customs-related for moving commodities and goods across the customs rules and regulations and to respond to changes in customs border of the Eurasian Economic Union, the establishment legislation and law enforcement practice in a timely fashion. and application of customs regimes, the establishment, introduction and charging of customs duties. As a risk, the Russian Government may change customs duty rates (both for imports and exports) on certain commodities and goods in respect of which the Company makes foreign trade transactions, and change in law enforcement practice in the area of customs regulation. The key negative consequences, if these risks materialise, are growing costs and lower efficiency of exports.

5. Strategic risks

5.1. RISK OF FAILURE TO ACHIEVE STRATEGIC GOALS The market of oil and petroleum products has been undergoing The Company conducts regular monitoring of market trends significant changes along with the geopolitical environment. accounting for the threats and opportunities created by the unstable The Company believes that the high likelihood of volatility external environment while managing its project portfolio. It in the market persists. successfully allocates resources between major strategic projects In the long run, the state of the global energy sector will depend and those ensuring a quick return on investment and supporting on a wide range of factors that are hard to predict, including the ongoing sustainability of the Company. economic growth rates, international cooperation, innovation To deliver on the goals outlined in the Strategy, Gazprom Neft plans rate, and decarbonisation efforts. These factors determine to overhaul its management framework, to effect digital, cultural, the following key characteristics of the environment in which and organisational transformation of the Company. The reform the Company, and the oil and gas industry as a whole, operate: will make the Company’s management framework more flexible oil price and and consumption volumes, tax regime, access and will facilitate the decision-making process. to technology, and international development opportunities. One of the key objectives set forth by the Strategy Major changes in the external environment may affect is the development of a partnership ecosystem helping the Company’s ability to deliver on its strategic goals. the Company to enhance key competencies by engaging partners in joint development of scientific, human, and intellectual potential at all levels of interaction with the business, government, and society. By focusing on flexible decision-making, technology development, operating efficiency, and safety the Company is able to produce high performance results and deliver steady growth of its financial and economic indicators. Gazprom Neft views its existing and soon-to-be launched assets as the key contributors to the Company’s production growth in 2020 to 2030. The remaining upstream portfolio is expected to come from new exploration areas we tap into and putting on stream non- traditional and hard-to-recover reserves, including in the Bazhenov, Domanic and Paleozoic formations, and the Achimov deposits. The liquid hydrocarbon reserves in the Nadym-Pur-Taz region and offshore projects will also be a major driver. The Company is also planning to take advantage of potential new market niches by creating innovative products, to continue growing in the mature petroleum product markets, and remain a leader in Russia in terms of distribution network efficiency.

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6. Risks of partner engagement

6.1. RISKS OF PARTNER ENGAGEMENT In an unstable macroeconomic environment, engaging The Company keeps working to engage new partners, including partners in joint projects is becoming an increasingly important companies in Russia and the Asia-Pacific countries that and difficult task. As they drastically cut their investment have not imposed sanctions on offshore, Arctic, deep-water budgets, potential business partners scale back their activities and shale projects. To this end, we hold regular meetings and put off any potential join projects. and talks with potential partners, including with the involvement The sanctions against the Russian energy sector that have been of Russian government agencies such the Ministry of Energy, imposed since 2014 by the United States (with amendments the Ministry of Foreign Affairs, and the Ministry of Economic to sanctions regime introduced in 2017 and 2018), the European Development of Russia. Union, and a number of other countries create additional hurdles for any potential partnership.

7. Country risks

7.1. RISKS ASSOCIATED WITH FOREIGN ASSETS Gazprom Neft implements a number of foreign projects aimed The vast majority of Gazprom Neft upstream and downstream at expanding production geography. Coming onto markets assets is located in the Russian Federation, therefore, the impact in new regions is connected both with the possibility of gaining of that risk is limited. However, the Company seeks to diversify of additional competitive advantage, and with the risks its international operations. of underestimating the economic and political situation in those When implementing projects in high-risk countries, countries where the company’s assets are located, which may the Company applies stricter requirements for the rate subsequently cause a failure to achieve planned performance of return of such projects. In addition, in case of deterioration indicators. Gazprom Neft PJSC is operating in a number in the political or social and economic situation in the Company’s of countries with a high-risk level (such as Iraq and Angola), regions of operation, Gazprom Neft PJSC may implement and realisation of those risks may pose considerable a number of anti-crisis measures, such as cost reduction, challenges to the Company’s operations and even stop them. optimising the investment programme, reducing interest The key factors which may have a negative impact on Gazprom in the project, and engaging partners. Neft PJSC operations in those countries include: At present, Gazprom Neft assesses the risks related to foreign – destabilised political situation; assets as acceptable, but it cannot guarantee that there – escalation of military conflicts; will be no adverse changes, since the specified risks are beyond – macroeconomic instability; the Company’s control. – expropriation of the Company’s assets; – inefficiency of legal framework and judicial system.

8. Pandemic

8.1. RISKS ASSOCIATED WITH THE POSSIBLE SPREAD OF COVID-19 AMONG COMPANY EMPLOYEES OR CONTRACTORS, WHICH MAY LEAD TO FURTHER INFECTION OF EMPLOYEES The company has put in place a Response Centre headed Risk management is carried out at the enterprise-wide level, by the Gazprom Neft CEO, which serves as the company’s by selecting, implementing and monitoring barriers aimed central coordination body in managing the “Pandemic” risk. at preventing and minimizing the consequences of possible The Response Centre, together with divisional and subsidiary- unfavorable events associated with the spread of the pandemic level response centres carries out general coordination among the company employees and contractors. in the following areas: “Antivirus”, “Operational reliability” and “Financial stability”.

188 ANNUAL REPORT 2019 Insurance

The group insures risks to: of risk distribution. When terms from an accident at the hazardous – protect the assets of the company and conditions of insurance contracts facility; shareholders; are determined, the group actively – mandatory vehicle insurance – comply with legal requirements; applies self-retention, which means (basic and additional insurance); – secure financing to cover independent (without involving – liability for damage resulting and manage losses; the insurance market) compensation from a terrorist act at a facility – obtain supplementary consulting for losses. The self-retention level of the fuel and energy complex; services to assess insurable risks, means the amount of potential – liability of fuel tankers, and recommendations on risk losses during one year in all with the indemnity limits of up reduction; the group subsidiaries, which will to $250 million per insured event; – provide incentive worsen ROACE by 5%, as calculated – liability of a charterer; and social support programmes on the basis of the group consolidated – liability of a carrier; for personnel as part business plan. The risks are subject – liability of a shipowner (P&I), of the benefits package. to compulsory or voluntary insurance, with the limit of at most $3 billion; if their realisation may result in a loss – liability for defects affecting To maximise efficiency in terms exceeding the self-retention level. the safety of capital construction of the number of risks insured, The group main risks to be insured, facilities . the Group takes a centralised and examples of insurance coverage approach to risk insurance conditions for these risks in 2020 to develop and deliver a unified are given below: risk insurance strategy across Various types of liabilitiy related the Group. To this end, mandatory to damage to property, life and health insurance practices are implemented of third parties, including (but in all subsidiaries, with the latter not limited to) the following types: having the opportunity to propose – comprehensive liability (to improvements to the Group existing third parties, manufacturers, insurance framework. The Company for pollution, to terminal develops, adopts, and maintains owners, etc.), with an extension up-to-date rules and procedures to compensation for losses with respect to different types related to legal requirements of insurance that reflect specific for environmental damage, nature of the insured risks. and the limit of €500 million per insured event; The group risks – liability of directors and officers, are only insured and reinsured with the indemnity limit of $50 with those insurance companies million per insured event; that meet the requirements – liability of a hazardous facility in terms of reliability and quality owner for damage resulting

The group strictly complies Insurance companies are selected The insurer of the majority with the legal requirements in accordance with regulated of the group risks is SOGAZ JSC, of the Russian Federation contractor selection procedures which is number one on the Russian and other countries where adopted by the group. insurance market. Some group the group enterprises operate, risks are insured by Rosgosstrakh in terms of insurance coverage, PJSC. and acquires all types of insurance stipulated by the laws of Russia and the countries of operation.

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Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices INVESTOR AND SHAREHOLDER RELATIONS

Share capital

The Gazprom Neft PJSC authorised ₽1,992 billion, which was equivalent capital consists of 4,741,299,639 billion ($888 million), which was two to $32 billion. ordinary shares traded in Russia and a half times higher than trading on the main market of the Moscow volumes in 2018. In 2019, the maximum share price Exchange PJSC. Outside Russia, increased to ₽436, which was company’s shares are mainly OTC- On the last trading day of 2019, 30 the highest figure in the history traded in the form of American December, the Gazprom Neft share of Gazprom Neft PJSC. The company’s depositary receipts (ADRs), via price on the Moscow Exchange value increased as a result the LSE IOB service in the UK reached ₽420.2 per ordinary share. of the growth in hydrocarbon and the OTCQX system in the . That was a growth of 21%, compared production, improvement in refining to the start of the year, which was efficiency thanks to innovative On all trading platforms one of the most significant figures technology, the launch of key projects, of the Moscow Exchange, trading in the industry on the Russian and expanding sales in premium volumes in the Gazprom Neft PJSC market. At the end of 2019, Gazprom segments. shares in 2019 amounted to ₽57 Neft PJSC capitalisation reached

Changes in Gazprom Neft PJSC share prices, the Moscow Exchange Index, and Urals oil prices (against the start of 2019), %

Gazprom Neft MICEX Urals

150

140

130

120

110

100

90

80

70 January February March April May June July August September October November December

190 ANNUAL REPORT 2019 Key information on Gazprom Neft PJSC shares and ADRs as at 31 December 2019

SHARE PRICE ON THE MOSCOW EXCHANGE Closing price (₽) 420.2 Closing price ($) 6.79 52-week high price (₽) 436.0 52-week low price (₽) 313.8 PRICE PER ADR ON THE LONDON STOCK EXCHANGE Closing price ($) 33.5 52-week high price ($) 34.4 52-week low price ($) 23.8 Trading volumes per year Moscow Exchange (₽ billion) 57.3 London Stock Exchange (IOB) ($ million) 195.5 MARKET CAPITALISATION ON THE MOSCOW EXCHANGE ₽ billion 1,992 057 $ million 32 ,178.9 MICEX-RTS code / ISIN code SIBN / RU000 906 2467 Number of ordinary shares 4,741,299,639 Par value per ordinary share (₽) 0.0016 Authorised capital (₽) 7,586,079,42 Free-float (%) 4.32 ADRs issued 14,532,290 ADRs share in free float, % 35 Average monthly trading volumes (IOB) ($ million) 16.3 Average monthly trading volumes (MICEX) (₽ million) 4,772.1

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Participation depositary receipts programme

In addition to trading on the Moscow million on the London Stock volumes were $16.3 million on LSE Exchange, American and global Exchange IOB, and $0.5 million IOB, and $0.04 million on OTCQx. depositary receipts for the company on OTCQx. Average monthly trading shares are traded on the OTC markets in the USA, the UK, Germany, and other countries. The Bank of New York Mellon is a depositary Gazprom Neft PJSC share trading volumes on the Moscow bank for the depository receipt Exchange and the London Stock Exchange in 2019, $ million programmes of Gazprom Neft PJSC. Sources: MOEX, LSE One ADR is equivalent to five Gazprom Neft PJSC ordinary shares. 120 LSE MOEX At the end of 2019, ADRs issued for the ordinary shares were 100 equivalent to 73 million shares (1.5% of the company authorised capital). 80 The total number of outstanding 60 ADRs went down as ADRs were being redeemed throughout the year amidst 40 restrictions on new ADR issuances. 20 In 2019, trading volumes in Gazprom Neft PJSC ADRs totalled $195.5 January February March April May June July August September October November December

192 ANNUAL REPORT 2019 Gazprom Neft PJSC Dividend Policy Regulation

Dividend policy

The dividend policy is a critical The core principles of the Gazprom by the General Meeting component of corporate governance Neft PJSC dividend policy of Shareholders, at which and the key indicator of how are as follows: the resolution to pay dividends was the company observes the rights – Maximum transparency adopted, is entitled to dividends. of its shareholders. The Dividend of the dividend calculation That date must be set no earlier Policy Regulation of Gazprom and payment procedure. than 10 days and no later than Neft PJSC is designed to ensure The Dividend Policy Regulation 20 days from the date when maximum transparency of dividend sets out the minimum annual the resolution to pay dividends was calculation and payment procedure dividends on the company’s adopted; for all stakeholders, including shares, which must not be less – Commitment to the highest shareholders. It also determines how than the greater of: corporate governance standards. the company’s Board of Directors – 15% of the Gazprom Neft Group The company introduced develops its recommendations consolidated results (IFRS); or the principle of ensuring to the General Meeting of Shareholders – 25% of the company net profit positive dynamics of dividend with regard to calculating the dividends (RAS). payments in line with the growth on the company’s shares, to the date – Compliance with the applicable of the net profit of the company; of identifying the persons entitled laws of the Russian Federation, the approved Gazprom Neft to the dividends, and to the payment the company Charter and by-laws. PJSC Dividend Policy Regulation procedure. Each shareholder included and the company dividend history in the shareholder register are available on the official as at the date established company website.

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Dividend history

Company dividend history

Indicator 2015 2016 2017 2018 6 months 2019 Dividends accrued per share (₽) 6.47 10.68 15.0 30.0 18.14 Total dividends accrued 30,676,208,664 50,637,080,144.52 71,119,494,585 142,238,989,170 86,007,175,451.46 on shares of this class (₽)

Total dividends paid on shares 30,673,891,577 50,636,890,886 71,118,331,325 142,236,616,411 86,005,202,291.10 of this class (₽) (99.99%) (99.99%) (99.99%) (99.99%) (99,99%)

Share of net profit (IFRS), % 28 25 28 38 40 Date of the list of persons 27/06/2016 26/06/2017 26/06/2018 01/07/2019 18/10/2019 entitled to dividends

14/06/2019 30/09/2019 Date of the meeting Minutes Minutes 10/06/2016 09/06/2017 09/06/2018 of the issuer's governing body, of the annual of the extraordinary Minutes Minutes Minutes at which the resolution to pay General Meeting General Meeting no 0101/01 no 0101/01 no 0101/01 dividends was adopted, date of Shareholders of Shareholders on 14/06/2016 on 14/06/2017 on 13/06/2018 and number of the minutes № 0101/02 № 0101/05 on 18/06/2019 on 02/10/2019

Dividend yield in 2019, %1

Indicator Gazprom Neft PJSC Company 2 Company 3 Company 4 Company 5 Company 6 Company 7

Dividend yield 11 16 8 7 6 3 2

/ 1 / Calculated on the basis of dividends declared in 2019, and the price of shares as at 3 January 2019. In order to ensure equivalence, the dividends paid by Gazprom Neft were calculated on the basis of dividends for the fourth quarter of 2018 and for the first six months of 2019 and also taking into account the dividends for the third quarter of 2019 (the estimated figure, the dividend payout ratio is 50%). Companies for comparison: Rosneft Oil Company, LUKOIL PJSC, TATNEFT PJSC, NOVATEK, ANK Bashneft PJSC, and Surgutneftegas PJSC.

194 ANNUAL REPORT 2019 Debt management and credit ratings

Debt portfolio period (and during the five-year period the features of operations being preceding the reporting date), that funded, and the situation on debt- Gazprom Neft uses both internal ratio was below the threshold. The net capital markets. The diversified sources (generated from operations) debt/EBITDA ratio decreased by 4.1% structure of the Gazprom Neft Group and borrowings to finance its in 2019. debt portfolio makes it possible operations. When determining debt to maintain a flexible debt policy amid and equity share within the capital The company had a comfortable volatility on debt-capital markets. structure, the company seeks headroom under all applicable to maintain the optimal balance covenants on loan agreements In 2019, the Gazprom Neft Group between the total cost of capital, and Eurobonds. raised loans and borrowings totaling on the one hand, and long-term ₽259.3 billion (taking into account financial sustainability, on the other Information transparency of the debt short-term borrowings), including: hand. policy is ensured by disclosing – bond offering for the total amount the performance of the Gazprom Neft of ₽1.2 billion; Group debt-portfolio management – placement of local bonds worth Core debt portfolio management on the official company website. ₽45.0 billion; principles In the reporting year, the company – drawdown of ₽213.1 billion regularly updated the relevant section (including short-term borrowings) The company adheres to a fairly of the website. under loan agreements. conservative debt financing policy. The key debt-policy principles In 2019, the Gazprom Neft Group include a high level of financial Key debt instruments repaid the loans and borrowings sustainability, with such critical totalling ₽292.4 billion. indicators as the net debt/EBITDA At the end of 2019, the Gazprom ratio and the consolidated financial Neft Group debt portfolio consisted The Gazprom Neft Group regularly debt/EBITDA ratio, calculated of such debt instruments as bilateral implements measures designed for the Gazprom Neft Group. credit facilities (including revolving to optimise its debt portfolio In accordance with the terms facilities), syndicated credit facilities, structure and profile. As part of those and conditions of the company loan local bonds, Eurobonds, and a credit measures in 2019, the company agreements, the consolidated financial facility guaranteed by the Export agreed on better conditions debt/EBITDA ratio must not exceed Credit Agency (ECA). In addition, for existing credit facilities, three. At the end of the reporting the company made a number and carried out unscheduled long- of project-financing transactions. term refinancing of borrowings for ₽148.5 billion in advance. When raising debt financing, the company takes into account Debt-to-EBITDA ratio As at 31/12/2019 =0.7

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Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

As a result of borrowings Debt portfolio structure, ₽ million Debt portfolio structure and repayments during the year, by currency, % changes in the debt of other Gazprom Neft Group companies (Naftna Source: company data Source: company data Industrija Srbije А.D., the Gazprom Neft Moscow Refinery, Gazpromneft 0.03 0.03 0.03 0.03 0.02 15,96 31.03 39.62 54.47 60.61 715,228 818,098 680,414 676,408 Shipping), and ruble revaluation 775,453 of FX-denominated borrowings, the debt portfolio of the Gazprom 147,319 73.15 90,923 Neft Group for the reporting 30,198 period declined from ₽775 billion 670,779 80,187 131,760 684,530 685,030 56.18 as at 31 December 2018 to ₽715 596,221 44.93 billion as at 31 December 2019. 548,654

Thanks to a significant growth 35.56 in operating profit, the Gazprom 26.13 Neft Group reduced its debt leverage as defined by the net debt/EBITDA ratio. 15.42 12.76 13.24 10.86 9.94

Key features of the debt portfolio 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 Long-term loans and borrowings € ₽ Long-term borrowings dominate Short-term loans and borrowings $ Other the structure of the Gazprom Neft Group debt portfolio in terms of maturity; however, in different currencies offsetting in 2019 the share of long-term debt each other. The group applies increased by nine percentage points, hedge accounting to its cash flows which minimised the refinancing denominated in foreign currency, risks in 2020. to prevent profit and loss volatility. The FX risks of the group debt Assets and liabilities denominated portfolio were substantially mitigated, in foreign currency significantly as the proportion of ruble borrowings reduces the FX risk: current structure grew to 61%. of revenues and liabilities acts as a natural hedge with cash flows

196 ANNUAL REPORT 2019 Gazprom Neft Group maturity instruments, subject to the current market in terms of placement schedule, ₽ million market conditions but not limited and circulation of bonds. to, bonds, bank loans, and project Source: company data financing.

450 198 Credit ratings 185,124 49,931 Within the multi-currency Exchange-Traded Bond Programme As at the end of February 2019, all registered in 2018, the company of the company credit ratings were may at short notice, arrange in investment grade category: 96,178 the issue of exchange-traded bonds – In February 2019, Moody’s upgraded with maturity of up to 15 years, the company rating to Baa2, 320,755 and with a total volume of up to ₽115 and revised the outlook to Stable; 6,775 billion in equivalent, inclusive. – in August 2019, Fitch upgraded 1,048 The Programme remains in effect the rating of Gazprom Neft to BBB, 19 969 1,651 2,840 for 15 years. In February 2020, and revised the outlook to Stable. 16,932 exchange-traded bonds were 9,083 placed for the amount of ₽10 billion. In addition, the available limit 2,294 393 1,607 under the programme registered >5 years 2-5 years 1-2 years 6–12 <6 months in 2015 amounts to ₽5 billion (with months bond maturity of up to 30 years Bank loans Loan participation notes inclusive). Local bonds Other loans The company also actively cooperates with the Moscow Exchange Bond Debt maturity schedule Issuers Committee to improve Russian laws on the securities According to the 2020-2021 debt repayment schedule, Gazprom Neft Gazprom Neft PJSC credit ratings Group expects to reduce its debt refinancing burden. S&P Moody's Fitch АКРА AAA (RU)

Potential debt sources in 2020

The Gazprom Neft Group not only successfully implemented a financial BBB debt programme using the most efficient instruments in 2019, but also took a number of major steps to raise BBB- funds in 2020 with several bank loan agreements signed. BB+ In 2020, the company intends to continue to improve the efficiency of its debt-portfolio management 2014 2015 2016 2017 2018 2019 2020 by selecting the best debt

05 GOVERNANCE SYSTEM 197 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

Investor and shareholder Analyst assessment of the company events in 2019 relations Positive factors Negative or neutral factors The company holds FINANCE regular conference calls for investors, involving its – Substantial generation of free cash flow – Increased capital investment executives. In addition, Gazprom – Lower debt burden forecast for 2020-2021 Neft publishes the Management’s – Continued payment of interim dividends, – Seasonal increase and an increase in the payout ratio to 50% in H2 in operating, selling Discussion and Analysis of Financial 2019 and administrative expenses Condition and Results of Operations on a quarterly basis, as an appendix PRODUCTION to the Gazprom Neft PJSC financial – Increase in the resource base – Restriction of liquid statements (IFRS). The company also – Control over OpEx in the upstream segment hydrocarbon production publishes the Databook and Datafeed – Developing partnerships and new forms under the OPEC+ statistical reference guides to enable of cooperation as part of managing the project agreement detailed analysis of its operations. portfolio DOWNSTREAM To ensure comprehensive communication, the company holds – Continued modernisation of refineries and implementation of environmental initiatives – Reduction in refining regular meetings with investors – Development of catalyst production volume in 2019 due and shareholders, and takes part – Continued development of premium distribution to scheduled repairs in all major investment and broker channels conferences. Every year, Gazprom Neft PJSC holds an Investor Day attended by its top management and company representatives, who directly answer questions Consensus forecast for the Gazprom Neft PJSC target share price from analysts and investors from investment companies. Broker Analyst Date Recommendation TP, ₽ BrokerCreditService Kirill Tachennikov 21/02/2020 Buy 663.4 Gazprom Neft organises regular site visits to its production and upstream VTB Capital Dmitry Lukashov 26/02/2020 Hold 473.9 facilities to keep investors Gazprombank Evgeniya Dyshlyuk 27/02/2020 Buy 517.6 and analysts informed about its production assets. Sberbank Andrey Gromadin 26/02/2020 Hold 480.4 Bank of America ML Karen Kostanyan 28/02/2020 Buy 549.3 Information about the company is included in all industry reports. Sova Capital Mitch Jennigs 26/02/2020 Buy 490.0 About 10 reports are published each Aton Anna Butko 26/02/2020 Buy 506.4 quarter, following the publication Raiffeisen Andrey Polishuk 25/02/2020 Buy 495.0 of the company results. In general, analysts assess the information Renaissance Capital Alexander Burgansky 25/02/2020 Hold 470.0 disclosed during conference calls Goldman Sachs Heydar Mamedov 28/02/2020 Buy 669.9 as positive or neutral for the market. Any irregular or unpredictable events MEAN 531.6 affecting the company performance are discussed with analysts.

198 ANNUAL REPORT 2019 Investors’ FAQ

? What are your capital investment plans for 2020? control over the production process, and includes measures for preventing infection. Gazprom Neft’s comprehensive and complex portfolio About 60% of employees at the company headquarters in St includes projects at early stages of development that require Petersburg have started working remotely, primarily pregnant the adjustment of capital investment plans, so it is difficult women, employees aged 60 and older, disabled people, and all to state a definite figure. Prior to the COVID- 19 pandemic, those who have chronic cardiovascular and lung diseases. we were planning on capital expenditure of up to $7.3 billion. Overall, the Gazprom Neft Group has organised remote However, if the situation deteriorates, the company may consider working for about 15% of its staff, and this figure is increasing. a 20% reduction of the programme. It is difficult to predict The company has introduced additional digital services for remote what will happen next; but, importantly, the Gazprom Neft work that were not available before. In addition, the company has position is strong, and the company is ready for any scenario. made it easier for its employees to use its devices and software By the time of this crisis, the company had already achieved at home. strong financial performance, with low leverage. There has not yet been any substantial investment in new major projects; however, the company has mostly finished spending on key current upstream and refining projects, which allows more flexibility in decision-making. The company will have to be ? Is it likely that dividend payments will amount to 50% more conservative now, and it will have to review all its plans, of the net profit? and extend the deadlines for some projects. However, Gazprom Neft focuses on long-term plans, rather than on the current The resolution regarding the dividend payout ratio situation on the market. of 50% of the net profit was made at one of the last meetings of the Board of Directors in 2019. This means that all resolutions on dividend payment in 2020 will correspond to a 50% benchmark. ? What is the main driver of capital expenditure for you in the short term, in order of priority? The company prioritises key major projects in terms of investment. Those key projects include the Novoportovskoye ? What growth or reduction in production can be field, where drilling-out is continuing, and the gas infrastructure expected from the company? is being built. They also include oil rims, which the company has begun to develop on the Yamal Peninsula (the Tazovskoye The balanced project portfolio provides significant opportunities and Severo-Samburgskoye fields). There are also projects to increase production; however, the production growth depends to develop the Neocomian and Jurassic deposits of large on how the situation on the market develops. In its previous Gazprom gas fields, the Bovanenkovskoye and Kharasaveyskoe, conservative scenario, as part of continuing the OPEC+ deal which will be developed under long-term risk operator without changes, the company expected hydrocarbon production agreements. These projects are priorities for Gazprom Neft that to increase by 1%. Given the pandemic, it is extremely difficult require large amounts of capital investment. They are, however, to predict changes on the market. I would like to emphasise that expected to contribute significantly to future production. the company is strong and it is working on several scenarios for further development, and is able to respond to the changes both flexibly and quickly. ? What measures is the company taking in relation to COVID-19? Given the spread of COVID-19, the company’s strategy of focusing ? On which fields was the excess-profits tax (EPT) on digital technologies proved to be wise, as it allows many imposed in 2019? processes to be managed remotely, and increases their safety. To ensure business continuity, the company has a multi-level In 2019, EPT was imposed on blocks at the following mature crisis management action plan. It has created a corporate system fields: Vyngayakhinskoye, Vostochno-Vyngayakhinskoye, of barriers to prevent the spread of infection. Kraynee, Romanovskoye, and Novogodneye. EPT was The company has modelled basic scenarios in relation to the risk also levied on some blocks at greenfield sites, such of COVID-19 spreading among employees and contractors. as Tazovsky, Ignyalinsky, Zapadno-Yubileyny, Severo- It has conducted drills to ensure its smooth operation, if Samburgsky, Novoportovsky, Kuyumbinsky, Tersko-Kamovsky, COVID-19 is found among employees at fields and refineries, and Zapadno-Zimny. including increasing rotation periods at remote fields to 45−90 days, and paying advances to those employees who are on rotational leave. Gazprom Neft refineries are ensuring manufacture of petroleum products in accordance with this plan. Automation at refineries in Omsk and Moscow allows remote

05 GOVERNANCE SYSTEM 199 INTERNATIONAL EXPERTS NAME GAZPROM NEFT’S NOVY PORT PROJECT AS THE BEST IN THE OIL AND GAS INDUSTRY

Marina Keyvabu, Chemistry Lab Technician ANNUAL REPORT 2019

Sustainable development

Health, safety and environment Environmental safety Human Resources development Social policy GAZPROM NEFT

2019 p. 204 A solar power plant has been built and commissioned At Gazprom Neft HIGHLIGHTS at the Omsk Refinery within a record-breaking time frame we are guided by the principles This will enable the Omsk Refinery to reduce CO2 emissions by more than 6,300 tonnes per year. By introducing renewable of sustainable energy technologies, the refinery will improve its energy development efficiency and environmental performance. in everything we do. We don’t measure the company’s success simply in terms of productivity and financial SUSTAINABLE DEVELOPMENT performance. The key priorities for us are care for the environment and meticulously Key priorities careful usage of natural resources; safety; appropriate use of technology; to Gazprom Neft and consistently improving quality of life in those regions are to in which we operate.

Alexander Dyukov, protect Chairman of the Management Board, CEO, Gazprom Neft PJSC the environment, ensure safety,enable technological advancement, Key stakeholder groups and consistently • Shareholders and investors • Employees improve the standard • Consumers • Government of the Russian Federation of living in the company and governments of Gazprom Neft regions of operation • Suppliers and partners regions of operation • Local communities in Gazprom Neft regions of operation Gazprom Neft is consistently integrating • Industry peers in Russia and worldwide the principles of sustainable development into • Non-profit its strategy and operations. The key priorities and non-governmental organisations for the company are safe production, occupational safety, and protecting the health of its employees.

202 ANNUAL REPORT 2019 p. 203 'Narwhal: Legend p. 206 Gazprom Neft has topped of the Arctic' project the Randstad employer rankings In the summer of 2019, Gazprom Neft successfully In 2019, Gazprom Neft topped the Randstad employer completed the first exploratory expedition as part rankings for the third year in a row. The company was ranked of the 'Narwhal: Legend of the Arctic' project. This project first in the fuel and energy sector. Gazprom Neft is creating will make it possible to assess the status of the narwhal an engaging environment aligned with company values. population in the western sector of the Russian Arctic.

Reduction in FAR to Investment in personnel a five-year training and develop- average ment, ₽ billion -34%

1.95 Accidents Training programmes for 0 employees

>156,000 APG flaring PERSONNEL HEALTH, % DEVELOPMENT SAFETY AND -42 protect ENVIRONMENT the environment, Energy savings achieved under energy conserva- tion programmes, ensure safety,enable million GJ 2019 5.4 technological HIGHLIGHTS advancement, 96% of waste being safely and consistently recycled

Gazprom Neft seeks to minimise negative improve the standard environmental impacts from oil production and refining, make its products more environmentally of living in the company friendly, and use natural resources carefully. SOCIAL The company contributes to addressing climate change POLICY by implementing projects to increase associated regions of operation petroleum gas (APG) utilisation, developing energy- Social projects imple- saving technologies and renewable energy projects. mented as part of the 'Home Towns' Gazprom Neft social responsibility initiatives also Programme include incentive and social support programmes Social investment, for employees, as well as projects aimed at developing ₽ billion >350 the potential of those regions in which the company operates. .5

06 SUSTAINABLE DEVELOPMENT 203 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices HEALTH, SAFETY AND ENVIRONMENT (HSE)1

Safety invariably remains Protection, Fire and Transport Safety, As part of comprehensive the key priority for Gazprom Neft. and Civil Defence is a framework HSE business transformation, The Gazprom Neft HSE strategy is aimed regulatory document. the company has set itself at achieving 'Target Zero': zero harm a strategic goal of becoming to people, the environment, or property Gazprom Neft has in place one of the safest oil and gas in our operations. a comprehensive system of collegial companies by 2030. bodies responsible for making Gazprom Neft judges itself alongside decisions on key HSE matters. The HSE the world’s safest Top 10 producers Professional Board is responsible of liquid hydrocarbons. If, by 2030, for consolidated decision-making To achieve its the company achieves a Fatal supporting the development stated HSE safety Accident Rate and Process Safety of a company-wide HSE management goals, Gazprom Event (PSE) Tier 1 values ​​lower system, and for submitting strategic Neft is implementing than those industry leaders against initiatives for review to the Supervisory a risk-oriented which it measures itself, this will Board and the Gazprom Neft approach. Today, demonstrate the effectiveness of its Management Board. the company focuses policy. on the making sure that The HSE Supervisory Board is a collegial it puts in place defences The company is consistently improving body comprised of senior executives against key risks HSE management by building risk of operational units. It is tasked in all assets. Digital management processes and developing with reviewing strategic matters related technology is essential safety culture among employees to safety improvements in the company, to the effective and contractors. drawing on the expertise of operational management functions. Key decisions are reviewed of this process. Another The Gazprom Neft Policy on Industrial by the Management Board at its strategic objective and Occupational Safety, Environmental meetings. is to ensure that only those people who Fatal Accident Rate (FAR)2 Lost Time Injury Frequency are qualified to do so Rate (LTIF)3 will be able to work at our facilities. 3.5 1.2 3.0 1.0 2.5 0.8 Anton Gladchenko, 2.0 0.6 1.5 0.4 Head of HSE Directorate, 1.0 0.2 Gazprom Neft PJSC 0.5 0.0 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019

/ 1 / HSE requirements include, but are not limited to, industrial, fire and environmental safety, occupational safety and health, electrical safety, and emergency prevention and response standards. / 2 / The Fatal Accident Rate is calculated as the number of fatalities / total hours worked × 100 million. / 3 / The Lost Time Injury Frequency is calculated as the number of lost time injuries (including fatalities) in the workplace / total hours worked x 1 million man-hours. In addition to Gazprom Neft assets in Russia, the injury rate is also calculated for joint ventures whose operations are managed by Gazprom Neft, as well as Gazprom Neft assets overseas (in Serbia, Iraq, Italy, Eastern Europe and Central Asia).

204 ANNUAL REPORT 2019 In 2018, the company initiated Reliability management a transformation of its HSE system, is underpinned by risk assessment Responsible contractor underpinned by a risk-focused at all stages of the life cycle management approach. of a production facility, from design The company is taking active steps to dismantling and reclamation. to incorporate its contractors In 2019, the company completed At the operation stage, the company in the HSE system. Gazprom Neft informs contractors of the rules, the first round of practical seeks to ensure the uninterrupted codes and procedures that implementation of this approach. operation of equipment and reduce it applies, and holds joint meetings To manage key HSE risks, the number of repairs. which are aimed at developing at the corporate level, Gazprom Neft the best solutions to improve identified 31 scenarios of events In addition, Gazprom Neft workplace safety. All standard forms of contract include that may lead to catastrophic is implementing a number requirements for compliance consequences. In order to develop of transport safety programmes, with the codes and rules applicable and implement effective preventative which include introducing a vehicle in the regions in which the company measures to mitigate these tracking system, training in defensive operates, as well as with corporate HSE requirements. risks, Gazprom Neft launched driving, on-site training and briefings the Safety Framework Project. on transport safety, etc. An independent inspection team assesses the efficiency of measures taken by Gazprom Neft enterprises to determine whether these Occupational protective barriers are robust. health The company is aware that employees play a key role in maintaining a safe Gazprom Neft is implementing working environment. Accordingly, a corporate programme to develop it places a special emphasis an occupational health system. on communications with personnel. Every year, the company holds As a preventative measure, Safety Days, which are attended employees, including those by Gazprom Neft top managers. in contractor organisations, are only During these events, Gazprom Neft authorised to work on Gazprom employees and contractors express Neft sites if no contraindications their opinions on workplace hazards. or restrictions on health grounds This enables the company to receive have been identified during the initial high-quality feedback, and promptly or regular health examination address any issues arising carried out by a healthcare provider in the workplace. accredited by the company.

To assess technology-related risks A major focus of the corporate in the course of design, construction, occupational-risk management operation and decommissioning strategy is on providing modern of facilities, the company and affordable medical aid uses advanced international at production sites: providing first-aid methodologies, such as HAZID/ENVID posts with diagnostic and emergency (hazard identification), HAZOP (hazard medical equipment, ambulances, and operability study) and PHSER and robust telecommunication (analysis of HSE risks). services, including telemedicine.

06 SUSTAINABLE DEVELOPMENT 205 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices ENVIRONMENTAL SAFETY

The company is committed GHG emissions, mt of CO₂ to using natural resources Climate impact equivalent1 sustainably, consistently reducing its environmental footprint, management Source: company data preventing environmental damage from its operations, introducing best Gazprom Neft supports 26.22 13.23 22.78 global practices and technologies the implementation 23.73 30.96 for environmental protection of the Paris Agreement, which is aimed and sustainable use of resources, at combating climate change. 9.02 and developing an environmental safety culture. Assessment of greenhouse gas (GHG) 6.24 8.36 emissions is a key tool forming part 6.60 The Gazprom Neft approach of the climate risk management 21.94 to environmental safety management system used by the company. 19.98 is based on the understanding For this purpose, Gazprom Neft has 16.18 15.37 of its potential environmental adopted a corporate standard on GHG 2.83 impact. The company analyses emission monitoring and accounting, the environmental impact which is aligned with the applicable 10.40 of its operations at all stages; Russian legislation and international this is a necessary requirement recommendations. for management and investment decision-making. The company An increase in direct and indirect GHG 2015 2016 2017 2018 2019 has in place an environmental emissions in 2019 was due to the fact management system compliant that the company is continuously Direct emissions Indirect emissions with the international ISO 14001:2015 expanding its geographical footprint, standard. prospecting for and assessing hydrocarbon reserves, and developing Gazprom Neft is implementing a range upstream and transport infrastructure. of key environmental measures, As a result, the number of facilities Memorandum as well as individual programmes that are a source of additional of understanding or projects aimed at achieving greenhouse gas emissions with WWF Russia the relevant environmental objectives, is increasing. In 2019, Gazprom Neft and continues to support national and the World Wildlife Fund and international environmental However, the company is implementing (WWF) signed a Memorandum initiatives. projects to increase associated of Understanding. It expands cooperation in the field petroleum gas (APG) utilisation, of environmental conservation, develop energy-saving technologies including efficient and safe and renewable energy projects. These development in the Arctic, and joint activities help it to avoid a much bigger communications. The parties intend increase in GHG emissions. to maintain a dialogue on environmental conservation, discuss projects relevant In 2019, the APG utilisation rate across to environmental conservation the company assets in Russia reached and sustainable development, 89% (up 11 percentage points year and share information on best international standards and practices on year). Moreover, at mature fields for minimising environmental with well-developed gas infrastructure, impacts. the gas utilisation rate has ranged between 92% and 99% since 2016.

/ 1 / GHG are presented using the operational management method.

206 ANNUAL REPORT 2019 Air a multi-stage wastewater treatment system, which includes mechanical, Federal 'Clean Air' protection physical and chemical, biological, project filtration and ultrafiltration stages, Gazprom Neft is participating Measures taken by Gazprom as well as a reverse osmosis unit. in the 'Ecology' project initiated Neft while actively exploring by the Russian Government in 2018, in accordance with the May Decrees and developing new fields enabled After the reverse osmosis unit forming of the President of the Russian it to avoid a year-on-year increase part of the Biosphere facilities was Federation. This national project in air pollutant emissions. put into operation and reached includes the federal 'Clean Air' Emissions are caused mainly by APG full capacity, the Moscow Refinery project, which is aimed at reducing flaring. Therefore, an increase reduced water withdrawal three- emissions by 20% in 12 large industrial cities with low air quality, in the APG utilisation rate is a key fold, with 75% of treated wastewater including Omsk, by the end of 2024. driver of emission reduction. now being reused in the production cycle. The Omsk Refinery is expected In order to implement the federal 'Clean Air' project, the Russian In order to reduce pollutant to demonstrate a similar performance Government has approved integrated emissions, Gazprom Neft after the Biosphere treatment facilities action plans aimed at reducing air is also implementing a large-scale are commissioned at the site, where pollutant emissions. These plans programme to upgrade and overhaul the first stage of construction was include nine upgrade projects launched at the Omsk Refinery, which its refining assets, and other completed in 2019. involve introducing environmental environmental initiatives covering technologies and state-of-the- all of its operations. Gazprom art treatment facilities, building Neft is participating in the federal new units, and decommissioning 'Clean Air' project, which is aimed previous-generation facilities. Gazprom Neft plans to invest at reducing emissions in large over ₽100 billion in these projects. industrial cities, including Omsk, where company assets are located. Water consumption for company needs, million m³

Water resources 428.9 management 370.0 Key priorities for Gazprom Neft in the field of water resources 316.4 314.2 management include sustainable 278.9 use of water resources, effective wastewater treatment, and preventing contamination of natural water bodies with oil or petroleum products. × Key water resources management 3 projects being implemented by the company include building Biosphere wastewater treatment decrease in water withdrawal facilities at the Moscow and Omsk at the Moscow Refinery, after Refineries. These facilities feature commissioning the Biosphere 2015 2016 2017 2018 2019 treatment facilities

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Waste Clean Territory Project Gazprom Neft continues to implement Territory Project also involves management a targeted programme aimed remediating disturbed lands. at improving pipeline reliability, and land use including the Clean Territory Project. This programme is centred around This programme involves assessing, preventative measures enabling monitoring, forecasting and extending timely detection of pipeline defects the life of pipeline systems, and potential vulnerabilities likely as well as replacing pipeline sections to result in pipeline failure, and thus To minimise in advance, based on the findings helping to prevent emergencies. the risk of oil and petroleum products of diagnostic assessments. The Clean As a result, potential risks of pipeline contaminating the soil, Gazprom Neft incidents were reduced. continuously monitors equipment reliability and introduces new technologies. The company continues to develop infrastructure for using waste in the production process, and to search for technological solutions that will help to reduce Pipelines renovated Pipelines covered waste generation. and replaced by diagnostic assessment

Green Seismic Project km km Green Seismic is a seismic 110 3,939 survey technology that helps to prevent deforestation. It enables the company to reduce the number of trees to be cut down, the use of heavy tracked all- terrain vehicles, fuel consumption, Corrosion monitoring Pipelines protected and atmospheric emissions, and to improve safety. Between covered with corrosion inhibitors 2016 and 2019, this technology was introduced at Gazpromneft- Noyabrskneftegaz, Gazpromneft- km km Khantos, Slavneft-Megionneftegaz, 6,325 4,238 and Gazpromneft-Vostok. It has helped to preserve more than 3.5 million trees.

Public recognition Messoyakhaneftegaz—a Gazprom in the drilling process. These units in the Reliable Partner—Ecology Neft subsidiary—is using flocculation enable the company to reduce liquid annual national competition for best and sedimentation units. This Russian- drilling waste. environmental practices. designed resource-saving equipment is used in well construction to clean In July 2019, this project was recognised drilling mud and reuse process water as the Best Project to Recycle Materials

208 ANNUAL REPORT 2019 Biodiversity Monitoring 'Narwhal of the Sea Legend of the Arctic' preservation of Okhotsk ecosystem expedition In 2019, Gazprom Neft conducted Being a leader in the development Gazprom Neft is implementing environmental monitoring of the Russian Arctic entails biodiversity preservation programmes of the grey whale population a high degree of responsibility at the Ayashsky licence block, for preserving the region’s unique and conducting environmental offshore from Sakhalin Island. ecosystem and biodiversity. monitoring to assess its impact Environmental monitoring of grey whales in the Sea In the summer of 2019, Gazprom on ecosystems in the regions in which Neft successfully completed it operates. of Okhotsk forms part of a joint programme being implemented the first exploratory expedition by oil and gas companies operating as part of the 'Narwhal: Legend The company is implementing on Sakhalin. The programme of the Arctic' project. The narwhal a corporate programme to preserve is being implemented with support is a rare species of cetaceans from and in close cooperation (whales), which lives in the waters biodiversity based on a list of the Russian Arctic and is included of plant and animal species that with environmental organisations, including WWF. The findings in the IUCN Red List of Threatened serve as indicators of the stable of the 2019 expedition confirmed Species. condition of marine ecosystems that the grey whale population During a four-week research in the Russian Arctic. This in the Sea of Okhotsk had increased. expedition to the Franz Joseph programme includes measures Land archipelago, researchers implemented by the company around succeeded in obtaining unique data on narwhal habitats in the Russian the Prirazlomnaya offshore ice- Rivers. In 2019, company enterprises Arctic, which will be used resistant oil-producing stationary released a total of over 71 million as a basis for a comprehensive platform and Gazpromneft-Yamal juvenile fish of commercially valuable programme of research into assets; it also involves wildlife species into water bodies. In 2019, this species until 2022. This monitoring along oil transportation the company and the government project will make it possible to assess the status of the narwhal routes. of the Khanty-Mansi Autonomous population in the western sector Okrug-Yugra signed an agreement, of the Russian Arctic, and determine Gazprom Neft is implementing under which Gazprom Neft will the size of the population the Aquatic Bioresources consider potential compensatory and its distribution. The 'Narwhal: Legend of the Arctic' project Reproduction Programme as part (remedial) measures, namely is an environmental project of its field development projects. releasing juvenile Siberian sturgeon, forming part of a large-scale 'Time Gazprom Neft subsidiaries operating sterlet, whitefish and broad whitefish of the Arctic' programme launched in the Arctic breed rare fish species bred at enterprises in the Okrug, by Gazprom Neft. in northern rivers and seas. Millions as a priority. of juvenile whitefish are released into the Ob, Konda and Severnaya

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million Energy efficiency GJ 1.2 Efficient utilisation of energy resources makes it possible to improve First Gazprom Neft energy savings performance, optimise production solar power plant in the Upstream Division processes, and reduce The company has successfully in 2019 the environmental footprint. implemented a project to build a solar power plant. The pilot solar power plant has been built The company has incorporated at the Omsk Refinery, as there million an energy efficiency strategy set out are, on average, 308 sunny days per in the Gazprom Neft Energy Policy year in this region. To implement GJ into its business model. This Policy this project, Gazprom Neft has partnered with Hevel Group, 4.1 provides a foundation for an energy a Russian solar energy company that management system (EnMS) compliant has built Russia's first integrated energy savings with the international ISO 50001 plant producing solar (photovoltaic) standard. modules. Gazprom Neft signed in the Downstream Division a cooperation agreement in 2019 with Hevel Group in June 2019, Gazprom Neft annually develops at the St Petersburg International and approves an energy management Economic Forum. system development plan. This year, The capacity of the first Gazprom the plan involves expanding the scope Neft solar power plant totals 1 MW, In order of the energy management system, which can provide up to 1% of total to maximise adopting new and updating outdated energy consumption at the Omsk performance, regulatory documents, providing Refinery. Gazprom Neft personnel training, and adopting a new is introducing version of the ISO 50001:2018 standard. innovations in all areas of operations In 2019, the energy efficiency and energy as part of the Omsk conservation initiatives undertaken Refinery development by the company were focused programme. These on improving the performance of power- include production generation and process equipment, automation, reliable and optimising the utilisation of energy treatment systems, resources and process conditions. and renewable energy. There can be no doubt that modern industrial enterprises Energy consumption, million GJ 1 need to be not only Energy consumption by the Gazprom efficient, but also Neft Group, million GJ 2015 2016 2017 2018 2019 environmentally friendly. The Omsk Refinery TOTAL 198.1 199.3 251.8 242.8 229.2 solar power project is a perfect example of this approach. / 1 / Detailed energy consumption indicators will be presented in the Sustainability Report for 2019.

Oleg Belyavsky, CEO, Gazprom Neft Omsk Refinery

210 ANNUAL REPORT 2019 EMPLOYEE DEVELOPMENT

Gazprom Neft employees Average headcount by age group Average headcount by gender2, are its strategic partners helping in 2019, % people the company to achieve sustainable development goals. In order to meet company needs for skilled specialists, 61,862 62,998 66,500 73,251 15 63,897 Gazprom Neft is developing incentive 19 and social support programmes 27,046 for personnel, providing training 26,103 and development for employees, 24,288 24,349 26,006 and creating a talent pool. 46,204 The company is focusing its efforts 40,397 37,574 38,649 37,891 on recruiting, engaging and retaining the best employees. Gazprom Neft 66 has formed an employer value proposition aligned with demands and expectations of target audiences, Under 30 Over 50 company strategic plans and its 30–50 2015 2016 2017 2018 2019 competitive position in the industry. Men Women This value proposition is integrated into recruitment, executive onboarding and training processes.

In the reporting year, Gazprom Neft employed 78,800 people.1 A total of 21,367 employees joined Gazprom Neft in 2019, while 17,817 left the company. The increase in headcount was due to the company implementing its strategy, which involved production growth, business development, including joint ventures, as well as further implementation of digital programmes. 21,367 employees joined the company in 2019

/ 1 / Average headcount as at 31 December 2019. / 2 / Detailed data on HR management, including personnel costs, the number of employees trained by category, etc., will be provided in the Sustainability Report for 2019.

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Incentive system and social support for employees

№ The company has in place Gazprom Neft strives to make 1 an integrated incentive system which sure that all the components of its Gazprom Neft is aimed at recruiting, retaining remuneration system are competitive. has topped and developing talented specialists, The company regularly revises the Randstad and supporting career advancement salaries in line with labour market employer rankings and professional development trends in the oil and gas sector. In 2019, Gazprom Neft of employees. The objectives In 2019, the average monthly salary topped the Randstad and principles of financial and non- in Gazprom Neft totalled ₽134,000. employer rankings financial incentives for employees for the third year in a row. The company ranked first are set out in a consistent corporate in the fuel and energy remuneration policy. sector, with respondents citing the oil, gas and energy Remuneration and social support sector as the most attractive industry. The Randstad programmes in the company employer rankings are based on a cumulative are based on an independent compensation model, which includes survey among 14,000 a compensation package, benefits, Average monthly salary representatives and opportunities for career of the working-age in the company, ₽ '000 population across all regions advancement and professional of Russia, undertaken development of employees. This 134.0 in December 2019 model enables the company by an international market to align its goals and individual 122.6 research company TNS 112.9 Global. skills and needs of employees, 104.9 and determines infrastructure 100.2 for flexible implementation of HR and business strategies.

In 2019, Gazprom Neft introduced a bonus system based on integrated performance assessment of divisions and employees at three pilot assets. Starting from 2020, this new bonus system will be rolled out across the company. 2015 2016 2017 2018 2019

Personnel costs, ₽ million

2015 2016 2017 2018 2019 Payroll 74,400 79,316 86,600 97,865 117,776

Employment benefits 2,432 3,260 3,177 3,596 3,743

212 ANNUAL REPORT 2019 Employee training The Gazprom Neft training and development system covers The Gazprom Neft and development all categories of employees Corporate University in the company and in contractor has won the Effective organisations. In addition, Education Award the company attaches special The Gazprom Neft Partnership importance to the training Management Programme won The prestigious of prospective employees from target an award at the 3rd Annual Effective Education Conference. This project won award received groups: school and university in the 'Best Educational Programme by the company students. of a Corporate University' category. demonstrates This award is presented annually that Partnership Gazprom Neft has created for the most effective and creative Management an integrated company-wide educational initiatives in business is an innovative educational environment—the development and professional methodological Corporate University—which education in Russia. Leading Russian approach, that meets combines all corporate training specialists in practical implementation of educational and corporate projects the current needs and development practices. participate in the conference. of Russian businesses. At the Corporate University, Gazprom Neft employees gain up-to-date According to the panel, Gazprom This programme offers Neft has created a sophisticated a range of benefits: innovative knowledge, and each technological educational project, employees gain employee can be both a student, which is unique in Russia. It enables knowledge and develop and a coach or expert. One of the key students to study the best Russian the necessary objectives of the Corporate University and international partnership management practices, form competencies, while is to engage experts and executives a shared conceptual framework for all the company is creating in personnel training, create a strong employees involved in this process, and developing unique community of in-house coaches, and share the relevant experience. management tools that and generate state-of-the-art give it a competitive knowledge within the company. edge. The Corporate University consists Average training hours per of faculties and departments. employee Ilya Dementiev, A department is a professional President of the Gazprom expertise centre, which helps Neft Corporate University to make Gazprom Neft an industry 46 45 leader by developing professional communities and engaging the best 36 33 experts in order to accumulate 31 and share knowledge and successful practices. In 2019, the Corporate University updated its concept and the methodology of working with departments, compiled a list of key performance indicators, analysed performance, and outlined 2015 2016 2017 2018 2019 performance improvement plans.

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Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices SOCIAL POLICY

Gazprom Neft makes The principles governing an important contribution interactions between Gazprom Neft Establishing a Research to the development of those and local communities are set out and Education Centre regions where it operates, in the following documents: in Tyumen as an investor, a supplier of high- – The Regional Policy Concept; Established jointly quality petroleum products, – The Policy on Interactions by the company, the Tyumen Oblast a customer for Russian-made with Indigenous Northern, Siberian and the University of Tyumen, high-technology products that and Far Eastern Minorities; the Research and Education Centre replace imported analogues, – The Charity Policy. will be one of 15 world-class and an initiator and participant research and education centres to be established under the federal of environmental activities. For Gazprom Neft, social policy, which national 'Science' project. This is aimed at supporting the development initiative will combine Gazprom Neft of those regions in which the company research capabilities with those Social investments operates, is an integral tool of universities and research centres in the Tyumen Oblast by Gazprom Neft for achieving sustainable development and the Khanty-Mansi and Yamalo- under social goals. When interacting with local Nenets Autonomous Okrugs. communities, the company seeks The centre will provide a platform and economic agreements to make a step change in the way social for joint R&D projects, technological in 2019 and economic issues are addressed. development, and personnel training for the oil and gas industry. billion The Gazprom Neft efforts in this area are focused on: – Ensuring environmental safety, ₽2.6 and minimising environmental impacts; and reached a mutual understanding – Cooperating with the governments on outstanding issues, with the regional of the federal subjects of Russia governments agreeing to assist and municipal administrations Gazprom Neft in addressing these to promote the sustainable issues. The company concluded 18 development of the regions social and economic cooperation and improve the standard of living; agreements with the federal subjects – Creating a competitive of Russia and municipalities. environment on regional labour markets; Gazprom Neft operates in areas – Creating a favourable financial, where indigenous minorities live, economic and legal environment in the Khanty-Mansi and Yamalo- for the company operations; Nenets Autonomous Okrugs. – Expanding cooperation The company respects the rights with stakeholders and ensuring of indigenous minorities, supports information transparency. local communities, promotes their integration into the modern In 2019, Gazprom Neft continued social and economic landscape, to expand its cooperation and at the same time takes steps with the governments of the federal to preserve their traditional culture subjects of Russia and municipal and way of life. administrations. The company conducted an annual audit of relations with regional governments,

214 ANNUAL REPORT 2019 In 2019, the 'Home Towns' Programme won the top prize in Russia's most prestigious social investment contest, the Leaders in Corporate Philanthropy.

'Home Towns' Social Investment Programme

Modern sports centres Gazprom Neft has built two sports centres in the Yamalo- are an integral Nenets Autonomous Okrug part of development The Polyarny Sports Facility sessions and competitions, while on Yamal. Sports and the Avangard Ice Centre, built at the Polyarny Sports Facility, local facilities such by Gazprom Neft as part of its 'Home residents will now be able to swim, do as Polyarny Towns' Social Investment Programme, dancing and aerobics, and play futsal, are becoming have been opened in the town , and all the centre of attraction of Labytnangi in the Yamalo-Nenets year round. The 7,000 square-metre Autonomous Okrug. facility includes a multifunctional gym for local people and a workout room, an aerobics studio and opening up The area of the Ice Centre totals and a pool. new opportunities 5,400 square metres. The Centre will host ice-hockey, figure-skating for talented and other winter-sports training children. Together with the Avangard Ice Centre, the opening of Polyarny marks The 'Home Towns' Programme is one the completion of the most successful and best- Key outcomes of the development known regional development initiatives of the 'Home Towns' of sports infrastructure launched by Russian businesses. It Programme in 2019 in this Arctic town. covers all Gazprom Neft social projects, The new sports from small-scale volunteer campaigns facilities offer and town celebrations to major every opportunity international festivals, and construction to Labytnangi of apartment blocks and sports residents to be able centres. to play sports and take billion part in competitions all This programme is centred ₽7.5 year round. around a partnership-based model of cooperation with regional social investment governments, non-profit organisations, Alexander Dybal, local residents, and company Member of the Management employees. Gazprom Neft forms its Board, Deputy social projects portfolio taking into CEO for Corporate account stakeholder expectations, Communications, allocates resources for addressing >350 Gazprom Neft PJSC outstanding issues facing the regions, and seeks to provide long-term social social initiatives benefits. implemented

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'Home Towns' Social Investment Forum In 2019, Gazprom Neft held the sixth international 'Home Towns' Social Investment Forum. This is the key annual event held by Gazprom Neft in the field of regional development and social projects. Over 300 Russian and foreign experts, volunteers and winners of the Gazprom Neft grant competition participated in the Forum For Gazprom Neft, and discussed the preservation of local identity in the regions. it is important to preserve the local identity of those regions in which it operates. Volunteering Grant contest Every city, every town and every Gazprom Neft employees participate The grant competition is the key tool has its own unique in volunteering initiatives. A total for supporting initiatives by local history, traditions, of 5,756 company employees have activists, non-governmental and non- and culture. But in order put forward their ideas, joined profit organisations, and state-funded to strengthen local the large Gazprom Neft team, institutions in those regions in which identity, it is important or implemented their own volunteer Gazprom Neft operates. The company to promote social projects, including as part of a special not only assists in implementing development corporate contest. a project, but also seeks to make sure in the regions, that most initiatives could continue and improve the standard to develop and produce results after of living. This the grants have been used. is precisely what the 'Home Towns' Social Investment Programme being implemented million by Gazprom Neft 53 ₽37 is aimed at: supporting educational, sports, volunteer projects grant fund in 2019 scientific and cultural implemented initiatives, which in 2019 with support make people's lives from the company in the regions more comfortable, eventful and interesting. As a result, people have more reasons 143 to be proud of and identify projects of local residents themselves with those implemented places where they live.

Alexander Dyukov, Chairman of the Management Board, CEO, Gazprom Neft PJSC

216 ANNUAL REPORT 2019 The VII Kustendorf CLASSIC Festival

Key projects forming part of the 'Home Towns' Programme in 2019

Gazprom Neft Cup Bashmet became a guest of honour at the festival, and 25 young Russian Established in 2007, the Gazprom musicians took part in the contest. Neft Cupinternational kids hockey tournamenis the key company project aimed at promoting children's Makers of Russia Stenographia X sports. This is the world's biggest Gazprom Neft supports non-profit ice-hockey tournament Together with the Creative Practices the Stenographia Festival, Russia's for children aged under 11. Foundation, Gazprom Neft biggest street art event. As part of this event, artists turn ordinary The Gazprom Neft Cup boasts a level is implementing the Makers of Russia urban buildings into works of art. of organisation unparalleled by any programme aimed at supporting other children’s competitions: youth entrepreneurship. This project 2019 marked the tenth anniversary of the Stenographia Festival. This the games are played in world- includes a series of studies, forums year, artists drew 35 large pieces class ice arenas, and the opening and crash courses, and is centred of graffiti in Gazprom Neft 'home ceremony and the super final can around the Mastera.academy online towns': , Khanty- rival the best international ice- media platform. This resource gives Mansiysk, Omsk, Tomsk, Kargasok, Parabel, Noyabrsk, Muravlenko, hockey shows. In 2019, 31 teams young entrepreneurs an opportunity and Orenburg, as well as in Arctic from 10 countries competed to share experience, develop towns: Novy Port, Mys Kamenny in this tournament, with teams their professional competencies, and Tazovsky. from Russia, Belarus, Germany, and present their products to a wide In addition, a multimedia exhibition Latvia, Kazakhstan and Finland audience, free of charge. In 2019, titled Stenographia X was held joined for the first time by players over 20,000 users completed online at the Lumiere Hall creative space from Austria, China, Slovakia courses on the Mastera.academy in St Petersburg. It showcased the most spectacular works of art and the Czech Republic. platform. and records of the festival over its 10-year history.

Kustendorf Classic 'Mathematical Progression'

The Kustendorf Classic Festival Gazprom Neft is a partner of Russian Music, founded of the Chebyshev Laboratory and managed by a world-famous at St Petersburg State University, film director Emir Kusturica, is held headed by a Fields Medal winner annually in Serbia. This festival Stanislav Smirnov. The joint project was launched in 2013 and has been titled 'Mathematical Progression' supported by Gazprom Neft since is aimed at supporting talented its inception. The key idea behind mathematicians at all stages the festival is to support talented of training. young musicians and strengthen cultural ties between Serbia In 2019, the company awarded and Russia. The festival includes personal scholarships and prizes a young musicians' contest, as well to 73 students and four young as masterclasses and performances researchers. This project has become by world-renowned classical music international, as a Department stars, such as conductor Valery Gergiev and pianist Denis Matsuev. In 2019, a world-famous violist Yuri

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of Mathematics and Computer over 1,000 people attended In the City, Science has been established a conference on technologies shaping in the Chebyshev Laboratory. the future of cities, In addition, the Modern Mathematics as well as lectures and workshops MSc programme has been launched by entrepreneurs, researchers for students from Russia, Eastern and specialists in urban studies Europe and Asia, with support from the USA, the Netherlands, from Gazprom Neft. Indonesia and Russia, with 25,000 viewers watching online broadcasts.

'Multiplying Talent' Social initiatives abroad Since 2015, Gazprom Neft has been holding the 'Multiplying Talent' Social initiatives undertaken Case Tournament for gifted school by Gazprom Neft abroad students every year. High school contribute to building constructive students from the company regions relationships with local communities of operation compete in solving and implementing company projects business cases related to the oil successfully. and gas sector. In 2019, the Sirius Educational Centre, Russia's leading In Serbia, Gazprom Neft campus for gifted children, partnered is implementing large-scale social the tournament. The tournament projects aimed at supporting was held in a new format— culture and preserving the country's participants solved not only problems historical heritage. NIS, a Gazprom from the oil and gas sector, but also Neft subsidiary, has been one digital business cases prepared of the leading social investors by Gazprom Neft. 2,800 applications in education, healthcare, social were submitted for the competition, support, culture and sports in Serbia with 71 high school students reaching for years, acting under the motto the final. 'Future in Action'.

Social projects in the Kurdistan In The City Region of Iraq and Wasit Governorate in Iraq are being implemented Since 2015, Gazprom Neft has been in close cooperation with the local cooperating with the Strelka Institute governments. The Gazprom Neft for Media, Architecture and Design social policy in this region is focused on educational programmes on developing the education for representatives involved and healthcare systems, and power in regional development initiatives supply. in Omsk and St Petersburg. In 2019,

218 ANNUAL REPORT 2019 APPENDIX 1. CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2019 WITH INDEPENDENT AUDITOR’S REPORT

Independent Auditor’s Report

To the Shareholders and the Board of Directors of Public Joint Stock Company Gazprom Neft

Opinion

We have audited the accompanying consolidated financial statements of Public Joint Stock Company Gazprom Neft (“PJSC Gazprom Neft”) and its subsidiaries (“the Group”), which comprise the consolidated statement of financial position as at 31 December 2019, and the consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year ended 31 December 2019, and notes to the consolidated financial statements, including a summary of significant accounting policies and other explanatory information.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2019, and its consolidated financial performance and consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRSs”).

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the Rules of Independence of the Auditors and Audit Organizations and the Code of Professional Ethics of the Auditors, which are in accordance with International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

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Revenue recognition

During the audit we specially focused on revenue recognition as the amount of revenue is material and revenue streams are formed in different geographical and operating segments. In addition, revenue streams differ in such terms of recognition as the identification of performance obligations, determination of transaction prices and the pattern of transfer of risks and rewards.

Despite the high level of automation, a large number of contracts and a significant number of transactions pose a risk of misstatement of this item.

Our audit procedures in respect of the risk of material misstatement of revenue included: – assessing the consistency of the application of the revenue recognition accounting policy in relation to a variety of performance obligations; – testing controls and assessing the risk of fraud or error; – verifying the timeliness of revenue recognition and the right to recognised revenue based on the terms of contracts and other documents; – receiving confirmation letters from counterparties as of the end of the reporting period.

Based on the results of our audit procedures, we considered the position of the Group’s management on the revenue recognition to be acceptable.

Information about the approaches to revenue recognition is provided in Note 2 “Summary of significant accounting policies” to the consolidated financial statements, information about revenue figures, including information by geographic segments, is disclosed in Note 40 “Segment information” to the consolidated financial statements.

Assessment of the recoverable amount of non-current assets

Due to the material carrying amount of the Group’s non-current assets, continuing volatility of macroeconomics parameters supplemented by political instability in some regions where the Group operates, sensitivity of impairment models to the assumptions applied by the Group’s management as well as the high level of subjectivity of the applied judgements and estimates of the Group’s management we consider this matter to be one of most significance in the audit.

The risk of the non-recoverability of the carrying amount of non-current assets primarily relates to production and oil refining assets located in the Russian Federation, oil and gas production and exploration assets located in Iraq, and assets located mostly in Serbia. As at the reporting date, the Group’s management measured the recoverable amount of non-current assets for cash-generating units by means of value in use.

Our audit procedures in respect of this area included: – testing the principles applied to prepare future cash flow forecasts; – involvement of our valuation experts who: – analysed the methodology used by the Group when performing impairment testing of non-current assets and the consistency of its application by the Group; – compared the data used by the Group with the information available from independent sources (inflation and income tax rates) as well as with our own assessments in relation to key inputs used in impairment testing (future oil prices and exchange rates, determined discount rates, estimation of oil and gas reserves and its future production and sales volumes); – analysed the sensitivity of the models applied for testing purposes to changes in key assumptions. Based on the results of the audit procedures, we believe that the information and key assumptions applied by the Group’s management to calculate the recoverable amount of non-current assets are acceptable and are well in line with current economic environment.

214 ANNUAL REPORT 2019 Information about the approaches applied to measure and recognise impairment of non-current assets is provided in Note 2 “Summary of significant accounting policies” and Note 3 “Critical accounting estimates, assumptions and judgements” to the consolidated financial statements, information about the conducted impairment testing is disclosed in Note 11 “Property, plant and equipment” and Note 13 “Goodwill and other intangible assets” to the consolidated financial statements.

Classification and recognition of financial instruments as cash equivalents

Due to the economic importance of cash and cash equivalents, the significance of the cash equivalent balances, and the professional judgement and assumptions applied by the Group's management in classifying and recognising financial instruments as cash equivalents, we consider this matter to be one of the key audit matters.

The classification and recognition of financial instruments as cash equivalents applied by the Group are based on the significant professional judgement applied by the Group's management, which is supported by the intention of the Group’s management to use such financial instruments to settle the Group's short-term cash liabilities. In addition, the Group analyses various factors, including the assessment of liquidity and credit risks, records on cash returns at any point of time without significant loss of interest and penalties.

During our audit procedures regarding the classification and recognition of financial instruments as cash equivalents, we performed the following procedures: – assessing the appropriateness and consistency of the professional judgements applied by the Group's management regarding the classification and recognition of financial instruments as cash equivalents; – reviewing intentions of the Group's management regarding the use of financial instruments classified as cash equivalents for the purposes of managing the Group's liquidity; – assessing liquidity and credit risks related to the solvency of counterparties, including transactions under repurchase agreements and cash pooling agreement with the Group's parent company; – analysing agreements and other documents confirming the availability of cash at any point of time without significant loss of interest and penalties because of early redemption.

Based on the results of our procedures, we believe that the key assumptions and professional judgements of the Group's management regarding the classification and recognition of financial instruments as cash equivalents are reasonable and do not contradict the available audit evidence.

Information about the main accounting policies applied to account for cash and cash equivalents is provided in Note 2 "Summary of significant accounting policies" to the consolidated financial statements, and information about the amount of cash and cash equivalents is disclosed in Note 6 "Cash and cash equivalents" to the consolidated financial statements.

Other Matter

The consolidated financial statements of the Group for the year ended 31 December 2018 presented in accordance with IFRSs were audited by another auditor (AO PricewaterhouseCoopers Audit) who expressed an unmodified opinion on those statements on 20 February 2019.

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Other Information

Management is responsible for the other information. The other information comprises the information included in Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three months ended December 31 and September 30, 2019 and years ended December 31, 2019 and 2018 (but does not include the consolidated financial statements and our auditor’s report thereon), which we obtained prior to the date of this auditor’s report, the Annual Report of PJSC Gazprom Neft for 2019 and the Quarterly issuer’s report of PJSC Gazprom Neft for the first quarter of 2020, which are expected to be made available to us after the date of this auditor’s report.

Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

When we read the Annual report of PJSC Gazprom Neft for 2019 and the Quarterly issuer's report of PJSC Gazprom Neft for the first quarter of 2020, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

216 ANNUAL REPORT 2019 Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: a. identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; b. obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control; c. evaluate the appropriateness of accounting policies used, the reasonableness of accounting estimates and related disclosures made by management; d. conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern; e. evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation; f. obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

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From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

President of FBK, LLC S.M. Shapiguzov

(by virtue of the Charter, audit qualification certificate 01-001230)

Engagement partner on the audit resulting К.S. Shirikova, FССA in this independent auditor’s report (audit qualification certificate 01-000712)

Date of the independent auditor’s report: 21 February 2020

AUDITED ENTITY AUDITOR Name: Name: Public Joint Stock Company Gazprom Neft (Gazprom Neft PJSC). FBK, LLC. Address of the legal entity within its location: Address of the legal entity within its location: 3-5 Pochtamtskaya St, St. Petersburg, 190000, Russian 44/1 Myasnitskaya St, Bldg 2AB, Moscow, 101990, Russian Federation. Federation. State registration: State registration: Registered on 6 October 1995 by the Omsk Registration Registered by the Moscow Registration Chamber on 15 Chamber. Statutory registration certificate No. 38606450. November 1993, registration number 484.58З. Primary state registration number 1025501701686. The registration entry was made in the Unified State Register of Legal Entities on 24 July 2002 under primary state registration number 1027700058286. Membership in a self-regulatory organization of auditors: Member of the Self-regulatory organization of auditors Association "Sodruzhestvo". Primary number of registration entry in the register of auditors and audit organizations of the self-regulatory organization of auditors 11506030481.

218 ANNUAL REPORT 2019 Consolidated Statement of Financial Position

Currency – RUB millions

31 December 31 December Notes 2019 2018 ASSETS CURRENT ASSETS Cash and cash equivalents 6 202,404 247,585 Short-term financial assets 19,906 847 Trade and other receivables 7 205,272 129,150 Inventories 8 173,674 149,956 Current income tax prepayments 6,622 3,179 Other taxes receivable 9 104,918 91,929 Other current assets 10 55,052 40,483 Total current assets 767,848 663,129 NON-CURRENT ASSETS Property, plant and equipment 11 2,469,338 2,366,069 Right-of-use assets 12 79,073 - Goodwill and other intangible assets 13 88,620 80,139 Investments in associates and joint ventures 14 341,115 328,937 Long-term trade and other receivables 829 980 Long-term financial assets 16 11,037 10,345 Deferred income tax assets 17 18,492 19,127 Other non-current assets 18 49,131 52,200 Total non-current assets 3,057,635 2,857,797 TOTAL ASSETS 3,825,483 3,520,926 LIABILITIES AND EQUITY Current liabilities Short-term debt and current portion of long-term debt 19 30,198 90,923 Current lease liabilities 25 9,927 - Current finance lease liabilities 25 - 1,829 Trade and other payables 20 307,439 307,604 Other current liabilities 21 40,741 39,510 Current income tax payable 2,247 3,328 Other taxes payable 22 96,401 99,085 Provisions and other accrued liabilities 23 23,741 20,043 Total current liabilities 510,694 562,322 NON-CURRENT LIABILITIES Long-term debt 24 685,030 684,530 Non-current lease liabilities 25 77,868 -

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31 December 31 December Notes 2019 2018 Non-current finance lease liabilities 25 - 23,654 Other non-current financial liabilities 26 21,504 44,857 Deferred income tax liabilities 17 148,253 127,448 Provisions and other accrued liabilities 23 119,004 67,192 Other non-current liabilities 27 49,933 19,104 Total non-current liabilities 1,101,592 966,785 EQUITY Share capital 28 98 98 Treasury shares 28 (1,170) (1,170) Additional paid-in capital 36,044 60,397 Retained earnings 1,943,523 1,680,978 Other reserves 78,711 99,874 Equity attributable to Gazprom Neft shareholders 2,057,206 1,840,177 Non-controlling interest 38 155,991 151,642 Total equity 2,213,197 1,991,819 TOTAL LIABILITIES AND EQUITY 3,825,483 3,520,926

A. V. Dyukov A. V. Yankevich

Chief Executive Officer Chief Financial Officer PJSC Gazprom Neft PJSC Gazprom Neft

220 ANNUAL REPORT 2019 Consolidated Statement of Profit or Loss and Other Comprehensive Income

Currency – RUB millions (except per share data)

Year ended Year ended 31 December 31 December Notes 2019 2018 REVENUE Crude oil, gas and petroleum products sales 2,393,444 2,418,717 Other revenue 91,864 70,575 TOTAL REVENUE FROM SALES 40 2,485,308 2,489,292

COSTS AND OTHER DEDUCTIONS Purchases of oil, gas and petroleum products (663,068) (617,306) Production and manufacturing expenses (260,688) (228,618) Selling, general and administrative expenses (125,592) (114,882) Transportation expenses (143,474) (147,182) Depreciation, depletion and amortisation 11,12,13 (181,372) (175,451) Taxes other than income tax 22 (591,193) (652,784) Export duties (71,601) (94,916) Exploration expenses (1,752) (1,411) TOTAL OPERATING EXPENSES (2,038,740) (2,032,550) OPERATING PROFIT 446,568 456,742 Share of profit of associates and joint ventures 14 83,906 90,704 Net foreign exchange gain / (loss) 31 10,518 (33,558) Finance income 32 22,906 7,506 Finance expense 33 (32,772) (21,476) Other loss, net 30 (23,292) (19,796) TOTAL OTHER INCOME 61,266 23,38 PROFIT BEFORE INCOME TAX 507,834 480,122 Current income tax expense (52,502) (59,585) Deferred income tax expense (33,244) (19,544) TOTAL INCOME TAX EXPENSE 34 (85,746) (79,129) PROFIT FOR THE PERIOD 422,088 400,993 Other comprehensive (loss) / income - may be reclassified to profit or loss Currency translation differences (29,674) 36,937 Cash flow hedge, net of tax 35 319 14,63 Other comprehensive (loss) / income (319) 95 TOTAL OTHER COMPREHENSIVE (LOSS) / INCOME - MAY BE RECLASSIFIED TO PROFIT (29,674) 51,662 OR LOSS

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Year ended Year ended 31 December 31 December Notes 2019 2018 OTHER COMPREHENSIVE LOSS - WILL NOT BE RECLASSIFIED TO PROFIT OR LOSS Remeasurement of provision for post-employment benefits (2,411) TOTAL OTHER COMPREHENSIVE LOSS - WILL NOT BE RECLASSIFIED TO PROFIT (2,411) OR LOSS OTHER COMPREHENSIVE (LOSS) / INCOME (32,085) 51,662 TOTAL COMPREHENSIVE INCOME FOR THE PERIOD 390,003 452,655 PROFIT ATTRIBUTABLE TO: Gazprom Neft shareholders 400,201 376,667 Non-controlling interest 21,887 24,326 Profit for the period 422,088 400,993 TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO: Gazprom Neft shareholders 379,038 416,399 Non-controlling interest 10,965 36,256 TOTAL COMPREHENSIVE INCOME FOR THE PERIOD 390,003 452,655 Earnings per share attributable to Gazprom Neft shareholders Basic earnings (RUB per share) 84.82 79.84 Diluted earnings (RUB per share) 84.82 79.84 Weighted-average number of common shares outstanding (millions) 4,718 4,718

Consolidated Statement of Changes in Shareholders' Equity

Currency – RUB millions

Attributable to Gazprom Neft shareholders Additional Non- Share Treasury paid-in Retained Other controlling Total capital shares capital earnings reserves Total interest equity Balance as of 31 December 2018 98 (1,170) 60,397 1,680,978 99,874 1,840,177 151,642 1,991,819 Effect of changes in accounting policies - - - (14,565) - (14,565) - (14,565) (Note 4) Balance as of 1 January 2019 98 (1,170) 60,397 1,666,413 99,874 1,825,612 151,642 1,977,254 Profit for the period - - - 400,201 - 400,201 21,887 422,088 OTHER COMPREHENSIVE (LOSS) / INCOME Currency translation differences - - - - (18,752) (18,752) (10,922) (29,674) Cash flow hedge, net of tax - - - - 319 319 - 319 Remeasurement of provision for post- - - - - (2,411) (2,411) - (2,411) employment benefits Other comprehensive loss - - - - (319) (319) - (319) TOTAL COMPREHENSIVE INCOME / - - - 400,201 (21,163) 379,038 10,965 390,003 (LOSS) FOR THE PERIOD

222 ANNUAL REPORT 2019 Attributable to Gazprom Neft shareholders Additional Non- Share Treasury paid-in Retained Other controlling Total capital shares capital earnings reserves Total interest equity Transactions with shareholders, recorded in equity Dividends to equity holders - - - (123,091) - (123,091) (6,616) (129,707) Transactions with shareholder (Note 11) - - (24,353) - - (24,353) - (24,353) TOTAL TRANSACTIONS - - (24,353) (123,091) - (147,444) (6,616) (154,060) WITH SHAREHOLDERS Balance as of 31 December 2019 98 (1,170) 36,044 1,943,523 78,711 2,057,206 155,991 2,213,197 Balance as of 1 January 2018 98 (1,170) 62,256 1,431,931 60,142 1,553,257 105,876 1,659,133 Profit for the period - - - 376,667 - 376,667 24,326 400,993 Other comprehensive income Currency translation differences - - - - 25,007 25,007 11,930 36,937 Cash flow hedge, net of tax - - - - 14,630 14,630 - 14,630 Other comprehensive income - - - - 95 95 - 95 TOTAL COMPREHENSIVE INCOME - - - 376,667 39,732 416,399 36,256 452,655 FOR THE PERIOD Transactions with shareholders, recorded in equity Dividends to equity holders - - - (127,620) - (127,620) (11,769) (139,389) Transaction under common control - - (2,819) - - (2,819) - (2,819) Change of non-controlling interest - - 960 - - 960 21,279 22,239 in subsidiaries (Note 38) TOTAL TRANSACTIONS - - (1,859) (127,620) - (129,479) 9,510 (119,969) WITH SHAREHOLDERS Balance as of 31 December 2018 98 (1,170) 60,397 1,680,978 99,874 1,840,177 151,642 1,991,819

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Consolidated Statement of Cash Flows

Currency – RUB millions

Year ended Year ended 31 December 31 December Notes 2019 2018 Cash flows from operating activities Profit before income tax 507,834 480,122 Adjustments for: Share of profit of associates and joint ventures 14 (83,906) (90,704) Net foreign exchange (gain) / loss 31 (10,518) 33,558 Finance income 32 (22,906) (7,506) Finance expense 33 32,772 21,476 Depreciation, depletion and amortisation 11,12,13 181,372 175,451 Other non-cash items 10,804 12,386 Operating cash flow before changes in working capital 615,452 624,783 Changes in working capital: Accounts receivable (41,927) (10,661) Inventories (23,453) (27,688) Taxes receivable (13,531) (33,855) Other assets (8,165) (4,339) Accounts payable 83,185 51,826 Taxes payable (1,974) 13,175 Other liabilities 45,370 11,868

Total effect of working capital changes 39,505 326 Income tax paid (53,087) (61,157) Interest paid (59,057) (46,492)

224 ANNUAL REPORT 2019 Year ended Year ended 31 December 31 December Notes 2019 2018 Dividends received 65,404 20,063 Other cash flows from operating activities 859 - Net cash provided by operating activities 609,076 537,523 Cash flows from investing activities Increase in cash due to subsidiary acquisition - (920) Acquisition of investments in joint ventures (210) (440) Bank deposits placement (97,090) (640) Repayment of bank deposits 82,000 7,350 Acquisition of other investments (474) (70) Proceeds from sales of other investments 1,425 - Short-term loans issued (532) (143) Repayment of short-term loans issued 661 218 Long-term loans issued (7,148) (984) Repayment of long-term loans issued 1,313 12,490 Purchases of property, plant and equipment and intangible assets (453,011) (370,067) Purchases of oil and gas licences (9,623) (5,130) Proceeds from sale of property, plant and equipment, net of tax 115,710 4,413 Interest received 17,155 18,885 Other cash flows from investing activities (13,765) - Net cash used in investing activities (363,589) (335,038) Cash flows from financing activities Proceeds from short-term borrowings 15,592 442 Repayment of short-term borrowings (343) (220) Proceeds from long-term borrowings 243,371 366,102 Repayment of long-term borrowings (292,036) (360,840) Transaction costs directly attributable to the borrowings received (375) (158) Dividends paid to Gazprom Neft shareholders (227,120) (70,774) Dividends paid to non-controlling shareholders (6,609) (11,864) Proceeds from sale of non-controlling interest in subsidiaries 38 - 22,348 Repayment of principal portion of lease liabilities (9,200) - Repayment of principal portion of finance lease liabilities - (1,579) Net cash used in financing activities (276,720) (56,543) (Decrease) / increase in cash and cash equivalents (31,233) 145,942 Effect of foreign exchange on cash and cash equivalents (13,948) 11,035 Cash and cash equivalents as of the beginning of the period 247,585 90,608 Cash and cash equivalents as of the end of the period 202,404 247,585

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Notes to the Consolidated Financial Statements

1. General

Description of business

PJSC Gazprom Neft (the “Company”) and its subsidiaries (together referred to as the “Group”) is a vertically integrated oil company operating in the Russian Federation, CIS and internationally. The Group’s principal activities include exploration, production and development of crude oil and gas, production of refined petroleum products and distribution and marketing operations through its retail outlets.

The Company was incorporated in 1995 and is domiciled in the Russian Federation. The Company is a public joint stock company and was set up in accordance with Russian regulations. PJSC Gazprom (“Gazprom”, a state controlled entity), the Group’s ultimate parent company, owns 95.7% of the shares in the Company.

2. Summary of significant accounting policies

Basis of preparation

The Group maintains its books and records in accordance with accounting and taxation principles and practices mandated by legislation in the countries in which it operates (primarily the Russian Federation). The accompanying Consolidated Financial Statements were primarily derived from the Group’s statutory books and records with adjustments and reclassifications made to present them in accordance with International Financial Reporting Standards (“IFRS”).

Subsequent events occurring after 31 December 2019 were evaluated through 21 February 2020, the date these Consolidated Financial Statements were authorised for issue.

The principal accounting policies are set out below. Apart from the accounting policies changes and additions resulting from adoption of IFRS 16 and Tax Code changes effective from 1 January 2019, these policies have been consistently applied to all periods presented, unless otherwise stated.

Basis of measurement

The Consolidated Financial Statements are prepared on the historical cost basis except that derivative financial instruments, equity investments at fair value through other comprehensive income (OCI) and obligations under the Stock Appreciation Rights plan (SAR) are stated at fair value.

226 ANNUAL REPORT 2019 Foreign currency translation

The functional currency of each of the Group’s consolidated entities is the currency of the primary economic environment in which the entity operates. In accordance with IAS 21 the Group has analysed several factors that influence the choice of functional currency and, based on this analysis, has determined the functional currency for each entity of the Group. For the majority of the entities the functional currency is the local currency of the entity.

Monetary assets and liabilities have been translated into the functional currency at the exchange rate as of the reporting date. Non-monetary assets and liabilities have been translated at historical rates. Revenues, expenses and cash flows are translated into functional currency at average rates for the period or exchange rates prevailing on the transaction dates where practicable. Gains and losses resulting from the re-measurement into functional currency are included in profit or loss, except when deferred in other comprehensive income as qualifying cash flow hedges.

The presentation currency for the Group is the Russian Rouble. Gains and losses resulting from the re-measurement into presentation currency are included in Other Reserves line of equity in the Consolidated Statement of Financial Position.

The translation of local currency denominated assets and liabilities into functional currency for the purpose of these Consolidated Financial Statements does not indicate that the Group could realise or settle, in functional currency, the reported values of these assets and liabilities. Likewise, it does not indicate that the Group could return or distribute the reported functional currency value of capital to its shareholders.

Principles of consolidation

The Consolidated Financial Statements include the accounts of subsidiaries in which the Group has control. Control implies rights or exposure to variable returns from the involvement with the investee and the ability to affect those returns through the power over the investee. An investor has power over an investee when the investor has existing rights that give it the current ability to direct the relevant activities, i.e. the activities that significantly affect the investee’s returns. An investor is exposed, or has the rights to variable returns from its involvement with investee when the investor’s return from its involvement has the potential to vary as a result of the investee’s performance. The financial statements of subsidiaries are included in the Consolidated Financial Statements of the Group from the date when control commences until the date when control ceases.

In assessing control, the Group takes into consideration potential voting rights that are substantive. Investments in entities that the Group does not control, but where it has the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method except for investments that meet criteria of joint operations, which are accounted for on the basis of the Group’s interest in the assets, liabilities, expenses and revenues of the joint operation. All other investments are classified as financial assets measured at fair value through other comprehensive income or through profit or loss.

Business combinations

The Group accounts for its business combinations according to IFRS 3 Business Combinations. The Group applies the acquisition method of accounting and recognises identifiable assets acquired and liabilities and contingent liabilities

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assumed in the acquiree at the acquisition date, measured at their fair values as of that date. Determining the fair value of assets acquired and liabilities assumed requires Management’s judgment and often involves the use of significant estimates and assumptions. Non-controlling interest is measured at fair value (if shares of acquired company have public market price) or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets (if shares of acquired company do not have public market price).

Goodwill

Goodwill is measured by deducting the fair value net assets of the acquiree from the aggregate of the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree and the fair value of an interest in the acquiree held immediately before the acquisition date. Any negative amount (“bargain purchase”) is recognised in profit or loss, after Management identified all assets acquired and all liabilities and contingent liabilities assumed and reviewed the appropriateness of their measurement.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination, are expensed as incurred.

Non-controlling interest

Ownership interests in the Group’s subsidiaries held by parties other than the Group entities are presented separately in equity in the Consolidated Statement of Financial Position. The amount of consolidated net income attributable to the parent and the non-controlling interest are both presented on the face of the Consolidated Statement of Profit or Loss and Other Comprehensive Income.

Changes in ownership interests in subsidiaries without change of control

Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions – that is, as transactions with the owners in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

Disposals of subsidiaries

When the Group ceases to have control any retained interest in the entity is remeasured to its fair value at the date when control is lost, with the change in carrying amount of the investment to the entity recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequent accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss.

Acquisitions from entities under common control

Business combinations involving entities under common control are accounted for by the Group using the predecessor accounting approach from the acquisition date. The Group uses predecessor carrying values for assets and liabilities, which are generally the carrying amounts of the assets and liabilities of the acquired entity from the Consolidated Financial Statements of the highest entity that has common control for which Consolidated Financial Statements are prepared. These amounts include any goodwill recorded at the consolidated level in respect of the acquired

228 ANNUAL REPORT 2019 entity. When these transactions represent transactions with owners in their capacity as owners, the effect on such transactions is included in Additional paid-in capital in Equity.

Investments in associates

An associate is an entity over which the investor has significant influence. Investments in associates are accounted for using the equity method and are recognised initially at cost. The Consolidated Financial Statements include the Group’s share of the profit or loss and other comprehensive income of equity accounted investees, after adjustments to align accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases.

Joint operations and joint ventures

A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement.

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

Where the Group acts as a joint operator, the Group recognises in relation to its interest in a joint operation:

– Its assets, including its share of any assets held jointly; – Its liabilities, including its share of any liabilities incurred jointly; – Its revenue from the sale of its share of the output arising from the joint operation; – Its share of the revenue from the sale of the output by the joint operation; and – Its expenses, including its share of any expenses incurred jointly.

With regards to joint arrangements, where the Group acts as a joint venturer, the Group recognises its interest in a joint venture as an investment and accounts for that investment using the equity method.

Transactions eliminated on consolidation

Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the Consolidated Financial Statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

Cash and cash equivalents

Cash represents cash on hand and in bank accounts, that can be effectively withdrawn at any time without prior notice.

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Cash equivalents include all highly liquid short-term investments with initial maturity within three months that can be converted to a certain cash amount and are subject to an insignificant risk of changes in value. They are initially recognised based on the cost of acquisition which approximates fair value and carried at amortised cost as are readily convertible to known amounts of cash.

The Group uses the additional highly liquid instruments for cash management that are recognised as cash equivalents:

– deposits with initial maturity more than three months if the Group has the right to early withdraw it without significant interest loss and penalties; – cash transferred under the repurchase agreements with the maturity within one months if the risks and rewards do not transferred to the Group, cash returns at the fixed interest rate and do not linked to the securities market value; – short-term loans issued to the parent company (“cash pooling”) if the Group has the right for early redemption of loans without significant interest loss and penalties.

Non-derivative financial assets

The Group classifies its financial assets in the following measurement categories:

– those to be measured subsequently at fair value (either through OCI or through profit or loss), and – those to be measured at amortised cost.

At initial recognition, the Group measures a financial asset at its fair value plus transaction costs that are directly attributable to the acquisition of the financial asset (in the case of the financial asset not at fair value through profit or loss (FVPL)). Transaction costs of financial assets carried at FVPL are expensed in profit or loss.

The Group initially recognises financial assets on trade-date (the date on which the Group commits to purchase or sell the asset). Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership.

For assets measured at fair value gains and losses will either be recorded in profit or loss or OCI. The classification of financial assets depends on:

– the entity’s business model for managing the financial assets and – the contractual cash flow characteristics of the financial asset.

In particular, debt financial assets in the Group are usually held to obtain contractual cash flows that are solely payments of principal and interest. In rare cases, debt financial assets are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.

The Group reclassifies debt investments when and only when its business model for managing those assets changes. Business model is determined for a group of assets (on a portfolio level) based on all relevant evidence about the activities that the Group undertakes to achieve the objective set out for the portfolio available at the date of the assessment. Factors considered by the Group in determining the business model include the purpose and composition of a portfolio, past experience on how the cash flows for the respective assets were collected, how risks are assessed and managed, how the assets’ performance is assessed.

Equity securities at initial recognition are usually accounted at fair value through other comprehensive income (FVOCI). These are strategic investments and the Group considers this classification to be more relevant.

Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest (“SPPI”).

230 ANNUAL REPORT 2019 The SPPI assessment is performed on initial recognition of an asset and it is not subsequently reassessed.

Debt instruments

Subsequent measurement of debt instruments depends on the Group’s business model for managing the asset and the cash flow characteristics of the asset. The Group classifies its debt instruments into three measurement categories:

– Amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognised directly in profit or loss and presented in other gains / (losses) together with foreign exchange gains and losses. Impairment losses are presented as separate line item in the statement of profit or loss if material. Financial assets at amortised cost comprise trade receivables, other financial assets, cash and cash equivalents. – FVOCI: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest income and foreign exchange gains and losses which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in other gains / (losses). Interest income from these financial assets is included in finance income using the effective interest rate method. Foreign exchange gains and losses are presented in other gains / (losses) and impairment expenses are presented as separate line item in the statement of profit or loss if material. The changes in fair value will no longer be reclassified to profit or loss when they are impaired or disposed. These assets are non-material for the Group. – FVPL: Assets that do not meet the criteria for amortised cost or FVOCI are measured at FVPL. A gain or loss on a debt investment that is subsequently measured at FVPL is recognised in profit or loss and presented net within other gains / (losses) in the period in which it arises. These assets are non-material for the Group.

Equity instruments

The Group subsequently measures all equity investments at fair value. Where the group’s management has elected to present fair value gains and losses on equity investments in OCI, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividends from such investments continue to be recognised in profit or loss as other income when the Group’s right to receive payments is established. Impairment losses (and reversal of impairment losses) on equity investments measured at FVOCI are not reported separately from other changes in fair value.

Other equity instruments are recognised at FVPL. Changes in the fair value of financial assets at FVPL are recognised in other gains/(losses) in the statement of profit or loss as applicable. The assets are not significant for the Group.

Non-derivative financial liabilities

The Group initially recognises debt securities issued, loans and borrowings on the date that they are originated (in particular, date of bond issue or receiving of cash). Financial liabilities also include bank overdrafts, trade and other payables. These financial liabilities recognised initially on the trade date on which the Group becomes a party to the contractual provisions of the instrument. The financial liabilities are recognised initially at fair value minus (in the case of a financial liability that is not at fair value through profit or loss (FVTPL)) transaction costs that are directly attributable to issuing the financial liability. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expired.

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Derivative financial instruments

Derivative instruments are recorded at fair value in the Consolidated Statement of Financial Position in either financial assets or liabilities. Realised and unrealised gains and losses are presented in profit or loss on a net basis, except for those derivatives, where hedge accounting is applied.

The estimated fair values of derivative financial instruments are determined with reference to various market information and other valuation methodologies as considered appropriate, however significant judgment is required in interpreting market data to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts that the Group could realise in a current market situation.

Hedge accounting

The Group applies hedge accounting policy for those derivatives that are designated as a hedging instrument (currency exchange forwards and interest-rate swaps).

The Group has designated only cash flow hedges – hedges against the exposure to the variability of cash flow currency exchange rates on a highly probable forecast transaction.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. Changes in the fair value of certain derivative instruments that do not qualify for hedge accounting are recognised immediately in profit or loss.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity until the forecast transaction occurs. Any ineffective portion is directly recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss on any associated hedging instrument that was reported in equity is immediately transferred to profit or loss.

The fair value of the hedge instrument is determined at the end of each reporting period with reference to the market value, which is typically determined by the credit institutions.

Inventories

Inventories, consisting primarily of crude oil, refined oil products and materials and supplies are stated at the lower of cost and net realisable value. The cost of inventories is assigned on a weighted average basis, and includes expenditure incurred in acquiring the inventories, production or conversion costs, and other costs incurred in bringing them to their existing location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

Intangible assets

Goodwill that arises on the acquisition of subsidiaries is included in intangible assets (IA). Subsequently goodwill is measured at cost less accumulated impairment losses.

Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortisation and accumulated impairment loss. Amortisation has been included within depreciation, depletion and amortisation line in the Consolidated Statement of Profit or Loss and Other Comprehensive Income.

232 ANNUAL REPORT 2019 Intangible assets that have limited useful lives are amortised on a straight-line basis over their useful lives. Useful lives with respect to intangible assets are determined as follows:

Intangible asset group Average useful life

Licences and software 1-5 years Land rights 25 years

Property, plant and equipment

Property, plant and equipment is stated at cost, net of accumulated depreciation and any impairment. The cost of maintenance, repairs and replacement of minor items of property, plant and equipment are expensed when incurred; renewals and improvements of assets are capitalised. Costs of turnarounds and preventive maintenance performed with respect to oil refining assets are expensed when incurred if turnaround does not involve replacement of assets or installation of new assets. Upon sale or retirement of property, plant and equipment the cost and related accumulated depreciation and impairment losses are eliminated from the accounts. Any resulting gains or losses are recorded in profit or loss.

Oil and gas properties

Exploration and evaluation assets

Acquisition costs include amounts paid for the acquisition of exploration and development licences.

Exploration and evaluation assets include:

– Costs of topographical, geological and geophysical studies and rights of access to properties to conduct those studies that are directly attributable to exploration activity; – Costs of carrying and retaining undeveloped properties; – Bottom hole contribution; – Dry hole contribution; – Costs of drilling and equipping exploratory wells.

The costs incurred in finding, acquiring, and developing reserves are capitalised on a ‘field by field’ basis.

Costs of topographical, geological, and geophysical studies, rights of access to properties to conduct those studies are considered as part of oil and gas assets until it is determined that the reserves are proved and are commercially viable. On discovery of a commercially-viable mineral reserve, the capitalised costs are allocated to the discovery.

If no reserves are found, the exploration asset is tested for impairment. If extractable hydrocarbons are found then it should be subject to further appraisal activity, which may include drilling of further wells. If they are likely to be developed commercially (including dry holes), the costs continue to be carried as oil and gas asset as long as some sufficient/continued progress is being made in assessing the commerciality of the hydrocarbons. All such carried costs are subject to technical, commercial and Management review as well as review for impairment at least once a year to confirm the continued intent to develop or otherwise extract value from the discovery. When this is no longer the case, the costs are written off.

Other exploration costs are charged to expense when incurred.

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An exploration and evaluation asset is reclassified to property, plant and equipment and intangible assets when the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Exploration and evaluation assets are assessed for impairment, and any impairment loss is recognised, before reclassification. Exploration and development licences are classified as property, plant and equipment after transfer from exploration and evaluation assets.

Development costs

Development costs are incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing oil and gas. They include the costs of development wells to produce proved reserves as well as costs of production facilities such as lease flow lines, separators, treaters, heaters, storage tanks, improved recovery systems, and nearby gas processing facilities.

Expenditures for the construction, installation, or completion of infrastructure facilities such as platforms, pipelines and the drilling of development wells are capitalised within oil and gas assets.

Depreciation, depletion and amortisation

Depletion of acquisition and development costs of proved oil and gas properties is calculated using the unit-of- production method based on proved reserves and proved developed reserves. Acquisition costs of unproved properties are not amortised.

Depreciation and amortisation with respect to operations other than oil and gas producing activities is calculated using the straight-line method based on estimated economic lives. Depreciation rates are applied to similar types of buildings and equipment having similar economic characteristics, as shown below:

Asset group Average useful life Buildings and constructions 8-35 years Machinery and equipment 8-20 years

3-10 years Vehicles and other equipment

Catalysts and reagents mainly used in the refining operations are treated as other fixed assets.

Capitalisation of borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of assets (including oil and gas properties) that necessarily take a substantial time to get ready for intended use or sale (qualifying assets) are capitalised as part of the costs of those assets. Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs are included in the borrowing costs eligible for capitalisation.

Impairment of non-current assets

The carrying amounts of the Group’s non-current assets, other than assets arising from goodwill, inventories, long- term financial assets and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment.

234 ANNUAL REPORT 2019 Goodwill is tested for impairment annually or more frequently if impairment indicators arise. An impairment loss recognised for goodwill is not reversed in a subsequent period.

If any indication of impairment exists, the Group makes an estimate of the asset’s recoverable amount. Individual assets are grouped for impairment assessment purposes at the lowest level at which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets (cash-generating units - CGUs). The carrying amount of the CGUs (including goodwill) is compared with their recoverable amount. The recoverable amount of CGUs to which goodwill is allocated is the higher of value in use and fair value less costs of disposal. Where the recoverable amount of the CGUs to which goodwill has been allocated is less than the carrying amount, an impairment loss is recognised.

An impairment loss is recognised in profit or loss. Prior impairments of non-financial assets (other than goodwill) are reviewed for possible reversal at each reporting date.

Impairment of non-derivative financial assets

The Group assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk till the initial recognition.

For all trade receivables the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables, in respect of credit risk see note 36 for further details.

To measure the expected credit losses, trade receivables are grouped based on shared credit risk characteristics, type of products or services and the days past due. The Group calculates expected loss rates for trade receivables based on historical data which are a reasonable approximation of current loss rates.

The Group has the following types of financial assets that are subject to the expected credit loss model: trade receivables, debt investments carried at amortised cost and cash and cash equivalents.

The Group recognises any impairment loss including impairment loss reversal in the selling, general and administrative expenses in the costs and other deductions line.

Decommissioning obligations

The Group has decommissioning obligations associated with its core activities. The nature of the assets and potential obligations is as follows:

Exploration and production

The Group’s activities in exploration, development and production of oil and gas in the deposits are related to the use of such assets as wells, well equipment, oil gathering and processing equipment, oil storage tanks and infield pipelines. Generally, licences and other permissions for mineral resources extraction require certain actions to be taken by the Group in respect of liquidation of these assets after oil field closure. Such actions include well plugging and abandonment, dismantling equipment, soil recultivation, and other remediation measures. When an oil field is fully depleted, the Group will incur costs related to well retirement and associated environmental protection measures.

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Refining, marketing and distribution

The Group’s oil refining operations are carried out at large manufacturing facilities that have been operated for several decades. The nature of these operations is such that the ultimate date of decommissioning of any sites or facilities is unclear. Current regulatory and licensing rules do not provide for liabilities related to the liquidation of such manufacturing facilities or of retail fuel outlets. Management therefore believes that there are no legal or contractual obligations related to decommissioning or other disposal of these assets.

Management makes provision for the future costs of decommissioning oil and gas production facilities, wells, pipelines, and related support equipment and for site restoration based on the best estimates of future costs and economic lives of the oil and gas assets. Estimating future asset retirement obligations is complex and requires Management to make estimates and judgments with respect to removal obligations that will occur many years in the future. The Group applies risk-free rate adjusted for specific risks of the liability for the purpose of estimating asset retirement obligations.

Changes in the measurement of existing obligations can result from changes in estimated timing, future costs or discount rates used in valuation.

The amount recognised as a provision is the best estimate of the expenditures required to settle the present obligation at the reporting date based on current legislation in each jurisdiction where the Group’s operating assets are located, and is also subject to change because of revisions and changes in laws and regulations and their interpretation. As a result of the subjectivity of these provisions there is uncertainty regarding both the amount and estimated timing of such costs.

The estimated costs of dismantling and removing an item of property, plant and equipment are added to the cost of the item either when an item is acquired or as the item is used during a particular period. Changes in the measurement of an existing decommissioning obligation that result from changes in the estimated timing or amount of any cash outflows, or from changes in the discount rate are reflected in the cost of the related asset in the current period.

Income taxes

Currently some Group companies including PJSC Gazprom Neft exercise the option to pay taxes as a consolidated tax- payer and are subject to taxation on a consolidated basis. The majority of the Group companies do not exercise such an option and current income taxes are provided on the taxable profit of each subsidiary. Most subsidiaries are subject to the Russian Federation Tax Code, under which income taxes are payable at a rate of 20% after adjustments for certain items, that are either not deductible or not taxable for tax purposes. In some cases income tax rate could be set at lower level as a tax concession stipulated by regional legislation. Subsidiaries operating in countries other than the Russian Federation are subject to income tax at the applicable statutory rate in the country in which these entities operate.

Deferred income tax assets and liabilities are recognised in the accompanying Consolidated Financial Statements in the amounts determined by the Group using the balance sheet liability method in accordance with IAS 12 Income Taxes. This method takes into account future tax consequences attributable to temporary differences between the carrying amounts of existing assets and liabilities for the purpose of the Consolidated Financial Statements and their respective tax bases and in respect of operating loss and tax credit carry-forwards. Deferred income tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to reverse and the assets recovered and liabilities settled. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that sufficient future taxable profit will be available against which the deductions can be utilised.

236 ANNUAL REPORT 2019 Mineral extraction tax and excise duties

Mineral extraction tax and excise duties, which are charged by the government on the volumes of oil and gas extracted or refined by the Group, are included in operating expenses. Taxes charged on volumes of goods sold are recognised as a deduction from sales.

Government grants and excise duties on crude oil materials, with appropriate increased deductions

From 1 January 2019 due to changes in the Tax Code the new excise duties on crude oil materials with appropriate double deductions and dempfer part are introduced. The Group applies separate accounting policy for excise deductions and dempfer part that bring economic benefit to the Group by analogy to the government grants and other assistance, i.e. by deducting them from related expenses.

Additional income tax for hydrocarbon producers

From 1 January 2019 the new tax treatment is implemented in the oil business – additional income tax for hydrocarbon producers (AIT). AIT is classified as operating expense in line with the mineral extraction tax and included in the Taxes other than income tax line in the Consolidated Statement of Profit or Loss and Other Comprehensive Income.

Export duties

Export duties, which are charged by the government on the volumes of crude oil and petroleum products transferred abroad by the Group, are included in operating expenses.

Share capital

Share capital represents the authorised capital of the Company, as stated in its charter document. The common shareholders are allowed one vote per share. Dividends paid to shareholders are determined by the Board of Directors and approved at the annual shareholders’ meeting.

Treasury stock

Common shares of the Company owned by the Group as of the reporting date are designated as treasury shares and are recorded at cost using the weighted-average method. Gains on resale of treasury shares are credited to additional paid-in capital whereas losses are charged to additional paid-in capital to the extent that previous net gains from resale are included therein or otherwise to retained earnings.

Dividends

Dividends are recorded as a liability and deducted from equity in the period in which they are declared and approved. Any dividends declared after the reporting period and before the Consolidated Financial Statements are authorised for issue are disclosed in the subsequent events note.

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Earnings per share

Basic and diluted earnings per common share are determined by dividing the available income to common shareholders by the weighted average number of shares outstanding during the period. There are no potentially dilutive securities.

Stock-based compensation

The Group accounts for its best estimate of the obligation under cash-settled stock-appreciation rights (“SAR”) granted to employees at fair value on the date of grant. The estimate of the final liability is re-measured to fair value at each reporting date and the compensation charge recognised in respect of SAR in profit or loss is adjusted accordingly. Expenses are recognised over the vesting period.

Retirement and other benefit obligations

In the normal course of business the Group contributes to the Russian Federation State pension scheme on behalf of its employees, and contributions by the employer are calculated as a percentage of current gross salary payments; such contributions are charged to expense as incurred.

The Group has also recognised defined benefit plans, which cover the majority of employees of the Group. The cost of providing post-employment benefits is accrued and charged to other employee costs and compensation included in the Consolidated Statement of Profit or Loss and other comprehensive income reflecting the cost of benefits as they are earned over the service lives of employees. Actuarial gains and losses on liabilities arising from experience adjustments and changes in actuarial assumptions are recognized in other comprehensive income in the period in which they arise and are included in Other reserves line of equity in the Consolidated Statement of Financial Position.

Leases

Accounting policies for leases applied starting 1 January 2019

For any new contracts entered into on or after 1 January 2019 the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To apply this definition, the Group assessed whether: – The contract involves the use of an identified asset – this may be specified explicitly or implicitly, and should be physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified; – The Group has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use; and – The Group has the right to direct the use of the asset.

The Group has the right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used. In rare cases where the decision about how and for what purposes the asset is used is predetermined, the Group has the right to direct the use of the asset if either: – The Group has the right to operate the asset; or – The Group designed the asset in a way that predetermines how and for what purpose it will be used.

The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received.

238 ANNUAL REPORT 2019 The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property, plant and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate.

Lease payments included in the measurement of the lease liability comprise the following:

– fixed payments, including in-substance fixed payments; – variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date; – amounts expected to be payable under a residual value guarantee; and – the exercise price under a purchase option that the Group is reasonably certain to exercise, lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Group is reasonably certain not to terminate early.

Variable payments are not included in the calculation of lease liability:

– payments under land lease agreements, the calculation of which depends on the cadastral value of the land plot and other coefficients established by government decrees; – payments for utilities (including well drills) and other services, determined upon the fact of consumption; – payments that depend on the use of the asset (per unit of volume or revenue received using the asset).

The Group applies a practical expedient and takes into account additional payments not related to the lease, but provided for by the lease agreement along with payments for right to use an asset, for all contracts except for time- charter contracts. Under time-charter contracts, the Group identifies service component not related to the right to use the asset as part of the expenses of the period if the share of such payments can be reliably determined.

The term used to measure a liability and an asset in the form of a right of use is defined as the number of days during which the Group has sufficient confidence that it will lease the asset. Any option for renewal or termination is taken into account when estimating the term. The Group considers monetary and non-monetary aspects to determine the lease term of the contract, such as business plans, past practices and economic incentives to extend or terminate the contract (the presence of inseparable improvements, etc.) and other factors that may affect management’s judgment on the lease term.

The lease liability is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a residual value guarantee, or if the Group changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

The Group has elected not to recognise right-of-use assets and lease liabilities for short-term leases of machinery that have a lease term of 12 months or less and leases of low-value assets.

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In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard: – the use of a single discount rate to a portfolio of leases with reasonably similar characteristics; – the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application; – the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease; – not revising the approach to the classification of the contract to which IFRIC 4 was previously applied and continuing to take into account such contracts as service contracts.

The Group presents right-of-use assets and lease liabilities in the separate lines in the Consolidated Statement of Financial Position.

Accounting policies for leases applied until 31 December 2018

Leases under the terms of which the Group assumed substantially all the risks and rewards of ownership were classified as finance leases. Upon initial recognition the leased asset was measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset was accounted for in accordance with the accounting policy applicable to that asset.

Other leases were operating leases and the leased assets were not recognised in the Group’s Consolidated Statement of Financial Position. The total lease payments were charged to profit or loss for the year on a straight-line basis over the lease term.

Recognition of revenues

Revenue is an income arising in the course of the Group’s ordinary activities. Revenue is recognised in the amount of transaction price. Transaction price is the amount of consideration to which the Group expects to be entitled in exchange for transferring control over promised goods or services to a customer, excluding the amounts collected on behalf of third parties.

The Group recognizes Revenue from sales of crude oil, petroleum products, gas and other products and services when it satisfies a performance obligation and control over goods and services is passed. For the most contracts control over goods or services passes to a customer at point of time and consideration is unconditional because only the passage of time is required before the payment is due. Specifically: – For export contracts control generally passes to buyer on the border of the Russian Federation, the Group is not responsible for transportation, – For domestic contracts control generally passes when products are dispatched or delivered to customer. When control passes on delivery to customer transportation is not considered as a distinct performance obligation. In most contracts when control passes on dispatch the Group is not responsible for transportation or transportation is a distinct service provided to customer within a separate contract. In case of sales of petroleum products and transportation by railway performance obligation for transportation is considered to be distinct and excluded from contract price. The Group recognizes this type of revenue within Other revenue line.

The transaction price excludes amounts collected on behalf of third parties such as value added tax and sales related tax. The Group doesn’t consider export duties as a part of transaction price and includes expenses with regard to export duties within operating expenses.

Revenue is recognised net of value added tax (VAT), excise taxes calculated on revenues based on the volumes of goods sold, customs duties and other similar compulsory payments.

The contract liability balance presented as advances received at the beginning of the reporting period was short-term by nature and was recognized as revenue during the period.

240 ANNUAL REPORT 2019 The Group applies a practical expedient which allows entity not to disclose the information of its remaining performance obligations at the end of the reporting period as the performance obligation is part of a contract that has an original expected duration of less than one year.

Buy / sell transactions

Purchases and sales under the same contract with a specific counterparty (buy / sell transaction) are eliminated under IFRS. The purpose of the buy-sell operation, i.e. purchase and sale of same type of products in different locations during the same reporting period from / to the same counterparty, is to optimise production capacities of the Group rather than generate profit. After elimination, any positive difference is treated as a decrease in transportation costs and any negative difference is treated as an increase in transportation costs.

Transportation costs

Transportation expenses recognised in profit or loss represent expenses incurred to transport crude oil and oil products through the PJSC “AK “Transneft” pipeline network, costs incurred to transport crude oil and oil products by maritime vessel and railway and all other shipping and handling costs.

Other comprehensive income / loss

All other comprehensive income / loss is presented by the items that are or may be reclassified subsequently to profit or loss, net of related income tax.

3. Critical accounting estimates, assumptions and judgments

Preparing these Consolidated Financial Statements in accordance with IFRS requires Management to make judgements on the basis of estimates and assumptions. These judgements affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the reporting date, and the reported amounts of revenues and expenses during the reporting period.

Management reviews the estimates and assumptions on a continuous basis, by reference to past experiences and other factors that can reasonably be used to assess the book values of assets and liabilities. Adjustments to accounting estimates are recognised in the period in which the estimate is revised if the change affects only that period or in the period of the revision and subsequent periods, if both periods are affected.

Actual results may differ from the judgements, estimates made by the Management if different assumptions or circumstances apply.

Judgments and estimates that have the most significant effect on the amounts reported in these Consolidated Financial Statements and have a risk of causing a material adjustment to the carrying amount of assets and liabilities are described below.

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Impairment of non-current assets

The following are examples of impairment indicators, which are reviewed by the Management: changes in the Group’s business plans, changes in oil and commodity prices leading to sustained unprofitable performance, low plant utilisation, evidence of physical damage or, for oil and gas assets, significant downward revisions of estimated reserves or increases in estimated future development expenditure or decommissioning costs. In case any of such indicators exist the Group makes an assessment of recoverable amount.

The long-term business plans (models), which are approved by the Management, are the primary source of information for the determination of value in use. They contain forecasts for oil and gas production, refinery throughputs, sales volumes for various types of refined products, revenues, costs and capital expenditure.

As an initial step in the preparation of these plans, various market assumptions, such as oil prices, refining margins, refined product margins and inflation rates, are set by the Management. These market assumptions take into account long-term oil price forecasts by the research institutions, macroeconomic factors such as inflation rate and historical trends.

In assessing value in use, the estimated future cash flows are adjusted for the risks specific to the asset group or CGU and are discounted to their present value using a discount rate that reflects current market assessments of the time value of money.

Estimation of oil and gas reserves

Engineering estimates of oil and gas reserves are inherently uncertain and are subject to future revisions on annual basis. The Group estimates its oil and gas reserves in accordance with rules promulgated by the US Securities and Exchange Commission (SEC) for proved reserves. Oil and gas reserves are determined with use of certain assumptions made by the Group, for future capital and operational expenditure, estimates of oil in place, recovery factors, number of wells and cost of drilling. Accounting measures such as depreciation, depletion and amortisation charges that are based on the estimates of proved reserves are subject to change based on future changes to estimates of oil and gas reserves.

Proved reserves are defined as the estimated quantities of oil and gas which geological and engineering data demonstrate recoverability in future years from known reservoirs under existing economic conditions with reasonable certainty. In some cases, substantial new investment in additional wells and related support facilities and equipment will be required to recover such proved reserves. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of underground reserves are subject to change over time as additional information becomes available.

Oil and gas reserves have a direct impact on certain amounts reported in the consolidated financial statements, most notably depreciation, depletion and amortisation as well as impairment expenses. Depreciation rates on oil and gas assets using the units-of-production method for each field are based on proved developed reserves for development costs, and total proved reserves for costs associated with the acquisition of proved properties. Moreover, estimated proved reserves are used to calculate future cash flows from oil and gas properties, which serve as an indicator in determining whether or not property impairment is present.

Useful lives of property, plant and equipment

Management assesses the useful life of an asset by considering the expected usage, estimated technical obsolescence, residual value, physical wear and tear and the operating environment in which the asset is located. Differences between such estimates and actual results may have a material impact on the amount of the carrying values of the property, plant and equipment and may result in adjustments to future depreciation rates and expenses for the period.

242 ANNUAL REPORT 2019 Contingencies

Certain conditions may exist as of the date of these Consolidated Financial Statements are issued that may result in a loss to the Group, but one that will only be realised when one or more future events occur or fail to occur. Management makes an assessment of such contingent liabilities that is based on assumptions and is a matter of judgement. In assessing loss contingencies relating to legal or tax proceedings that involve the Group or unasserted claims that may result in such proceedings, the Group, after consultation with legal and tax advisors, evaluates the perceived merits of any legal or tax proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a loss will be incurred and the amount of the liability can be estimated, then the estimated liability is accrued in the Group’s Consolidated Financial Statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed. If loss contingencies can not be reasonably estimated, Management recognises the loss when information becomes available that allows a reasonable estimation to be made. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee is disclosed. However, in some instances in which disclosure is not otherwise required, the Group may disclose contingent liabilities of an unusual nature which, in the judgment of Management and its legal counsel, may be of interest to shareholders or others.

Accounting for liabilities of the defined benefit pension plan

The assessment of the obligations of the defined benefit plan is based on the use of actuarial techniques and assumptions. Actual results may differ from estimates, and the Group’s estimates may be adjusted in the future based on changes in the economic and financial situation. Management uses judgments on selected models, cash flows and their distribution over time, as well as other indicators, including the discount rate. The cost of future benefits is determined on the basis of actuarial techniques and assumptions.

Joint arrangements

Upon adopting of IFRS 11 the Group applied judgement when assessing whether its joint arrangements represent a joint operation or a joint venture. The Group determined the type of joint arrangement in which it is involved by considering its rights and obligations arising from the arrangement including the assessment of the structure and legal form of the arrangement, the terms agreed by the parties in the contractual arrangement and, when relevant, other facts and circumstances.

Acquisition of Gazprom Resource Northgas LLC

Gazprom Resource Northgas LLC is a subsidiary of the Group in which the Group holds an 18.2% share. Starting 2015 the Group has obtained control over Gazprom Resource Northgas LLC based on signed management agreement and charter documents which provided the Group with a majority of voting rights which differ from the Group’s share in equity.

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4. Application of new IFRS

The following standards or amended standards became effective for the Group from 1 January 2019:

– IFRS 16 – Leases (issued on 13 January 2016 and effective for annual periods beginning on or after 1 January 2019); – IFRIC 23 – Uncertainty over Income Tax Treatments (issued on 7 June 2017 and effective for annual periods beginning on or after 1 January 2019); – Prepayment Features with Negative Compensation – Amendments to IFRS 9 (issued on 12 October 2017 and effective for annual periods beginning on or after 1 January 2019); – Long-term Interests in Associates and Joint Ventures – Amendments to IAS 28 (issued on 12 October 2017 and effective for annual periods beginning on or after 1 January 2019); – Annual improvements 2015-2017 Cycle (issued on 12 December 2017 and effective for annual periods beginning on or after 1 January 2019); – Plan amendment, Curtailment or Settlement – Amendments to IAS 19 (issued on 7 February 2018 and effective for annual periods beginning on or after 1 January 2019).

Impact of adoption

The Group has adopted IFRS 16 – Leases from 1 January 2019. The new standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. All leases result in the lessee obtaining the right to use an asset at the start of the lease and, if lease payments are made over time, also obtaining financing. Accordingly, IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. Lessees are required to recognise: (a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and (b) depreciation of lease assets separately from interest on lease liabilities in the income statement. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.

The Group has adopted IFRS 16 retrospectively from 1 January 2019, but has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The Group elected to measure right-to-use assets at an amount equal to the lease liability adjusted for any lease payments made at or before the commencement date, except for time-charter contracts, for which the associated right-of-use asset is retrospectively adjusted. The difference between asset and liability is recognised as retained earnings.

On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as operating leases under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the Group’s incremental borrowing rate as of 1 January 2019. The lessee’s incremental borrowing rate applied to the lease liabilities on 1 January 2019 was ranged from 4.2 % to 9.3%.

2019 Operating lease commitments as of 31 December 2018 123,600 Less service component (32,786) Less effect of discounting (26,462) Less other adjustments (2,513) Add: finance lease liabilities recognised as of 31 December 2018 25,483 Balance of lease liability as of 1 January 2019 87,322 Current lease liability as of 1 January 2019 8,859 Non-current lease liability as of 1 January 2019 78,463

244 ANNUAL REPORT 2019 The associated right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease and effect of retrospective adjustment recognized in the balance sheet as of 1 January 2019. Balance value of assets leased under finance lease contracts was reclassified from property, plant and equipment to right-of-use assets:

Balance as of 31 December Effect of changes Balance 2018 in accounting policies as of 1 January 2019 Property, plant and equipment 25,483 (25,483) - (under finance lease) Right-of-use asset - 69,023 69,023 Short-term / long-term lease liabilities - (87,322) (87,322) Finance lease liabilities (25,483) 25,483 - Deferred tax asset recognised - 3,734 3,734 Effect on retained earnings - 14,565 14,565

5. New accounting standards

The following other new standards and amendments to the existing standards do not have any material impact on the Group when adopted:

– IFRS 17 – Insurance Contracts (issued on 18 May 2017 and effective for annual periods beginning on or after 1 January 2021); – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments to IFRS 10 and IAS 28 (issued on 11 September 2014 and effective for annual periods beginning on or after a date to be determined by the IASB); – Amendments to the Conceptual Framework for Financial Reporting (issued in March 2018 and effectivefor annual periods beginning on or after 1 January 2020); – Definition of a Business – Amendments to IFRS 3 (issued in October 2018 and effective for annual periods beginning on or after 1 January 2020); – Definition of Material – Amendments to IAS 1 and IAS 8 (issued in October 2018 and effective for annual periods beginning on or after 1 January 2020); – Interest Rate Benchmark Reform – Amendments to IFRS 9, IAS 39 and IFRS 7 (issued in September 2019 and effective for annual periods on or after January 2020); – Classification of Liabilities as Current or Non-Current – Amendments to IAS 1 (issued in January 2020 and effective for annual periods on or after January 2022).

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6. Cash and cash equivalents

Cash and cash equivalents as of 31 December 2019 and 31 December 2018 comprise the following:

31 December 2019 31 December 2018 Cash on hand 587 753 Cash in bank 79,669 50,897 Bank deposits 51,485 185,589 Cash pooling to the parent entity 43,912 - Cash transferred under repurchase agreements 24,709 6,238 Other cash equivalents 2,042 4,108 TOTAL CASH AND CASH EQUIVALENTS 202,404 247,585

7. Trade and other receivables

Trade and other receivables as as of 31 December 2019 and 31 December 2018 comprise the following:

31 December 2019 31 December 2018 Trade receivables 153,738 129,520 Other receivables 53,637 2,060 Less credit loss allowance (2,103) (2,430) TOTAL TRADE AND OTHER RECEIVABLES 205,272 129,150

8. Inventories

Inventories as of as of 31 December 2019 and 31 December 2018 consist of the following:

31 December 2019 31 December 2018 Petroleum products and petrochemicals 62,891 70,385 Crude oil and gas 36,341 34,601 Materials and supplies 34,274 27,416 Other 40,168 17,554 TOTAL INVENTORY 173,674 149,956

246 ANNUAL REPORT 2019 9. Other taxes receivable

Other taxes receivable as of 31 December 2019 and 31 December 2018 comprise the following

31 December 2019 31 December 2018 Value added tax receivable 73,387 79,921 Prepaid custom duties 21,045 7,232 Other taxes prepaid 10,486 4,776 TOTAL OTHER TAXES RECEIVABLE 104,918 91,929

10. Other current assets

Other current assets as of 31 December 2019 and 31 December 2018 comprise the following:

31 December 2019 31 December 2018 Advances paid 40,413 25,191 Prepaid expenses 1,481 1,662 Other current assets 13,158 13,630 TOTAL OTHER CURRENT ASSETS, NET 55,052 40,483

11. Property, plant and equipment

Movements in property, plant and equipment for the year ended 31 December 2019 and 2018 are as follows:

Assets Oil and Gas Refining Marketing under constru- Cost properties assets and distribution Other assets ction Total As of 31 December 2018 2,084,208 387,099 237,386 27,658 655,772 3,392,123 Effect of changes in accounting policies (124) - (27,145) - - (27,269) (Note 4) As of 1 January 2019 2,084,084 387,099 210,241 27,658 655,772 3,364,854 Additions 9,014 5,225 - - 433,655 447,894 Acquisitions through business 221 - - - - 221 combinations Changes in decommissioning obligations 37,259 - - - - 37,259 Capitalised borrowing costs - - - - 30,230 30,230 Transfers 266,344 24,166 18,575 5,144 (314,229) - Internal movement (5,891) (323) 249 (2,533) 8,498 - Disposals (15,049) (4,481) (2,904) (960) (161,266) (184,660)

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Assets Oil and Gas Refining Marketing under constru- Cost properties assets and distribution Other assets ction Total Translation differences (54,029) (9,121) (9,551) (325) (7,696) (80,722) As of 31 December 2019 2,321,953 402,565 216,610 28,984 644,964 3,615,076 Depreciation, depletion and impairment As of 31 December 2018 (815,875) (125,189) (75,809) (9,181) - (1,026,054) Effect of changes in accounting policies 14 - 1,772 - - 1,786 (Note 4) As of 1 January 2019 (815,861) (125,189) (74,037) (9,181) - (1,024,268) Depreciation and depletion charge (130,316) (18,309) (14,811) (3,026) - (166,462) Internal movement 90 13 (717) 614 - - Disposals 3,132 2,943 1,925 960 - 8,960 Translation differences 28,969 3,219 3,656 188 - 36,032 AS OF 31 DECEMBER 2019 (913,986) (137,323) (83,984) (10,445) - (1,145,738) Net book value AS OF 1 JANUARY 2019 1,268,223 261,910 136,204 18,477 655,772 2,340,586 AS OF 31 DECEMBER 2019 1,407,967 265,242 132,626 18,539 644,964 2,469,338

Capitalised borrowing costs for the year ended 31 December 2019 include interest expense in the amount of RUB 29.0 billion and exchange losses arising from currency borrowing in the amount of RUB 1.2 billion (RUB 31.6 billion and RUB 6.1 billion for the year ended 31 December 2018 accordingly). In the first quarter of 2019 the object of capital construction MFK “Lahta” was transferred to the shareholder, the transaction was recorded in the Consolidated Financial Statements as the transaction with shareholders in accordance with IAS 1 (p.106 d (iii)).

Assets Oil and Gas Refining Marketing under constru- Cost properties assets and distribution Other assets ction Total As of 1 January 2018 1,772,103 347,738 189,603 26,638 538,965 2,875,047 Additions 9,029 1,699 - - 395,112 405,840 Acquisitions through business - - 1,108 - - 1,108 combinations Changes in decommissioning obligations (8,885) - - - - (8,885) Capitalised borrowing costs - - - - 37,670 37,670 Transfers 251,966 25,450 35,969 3,447 (316,832) - Internal movement 137 (1,028) 1,167 98 (374) - Reclassification from other non-current 1,003 5,160 602 13 (2,040) 4,738 assets Disposals (13,841) (1,987) (1,865) (2,879) (9,623) (30,195) Translation differences 72,696 10,067 10,802 341 12,894 106,800 As of 31 December 2018 2,084,208 387,099 237,386 27,658 655,772 3,392,123 Depreciation, depletion and impairment As of 1 January 2018 (649,937) (105,090) (60,290) (7,455) - (822,772)

248 ANNUAL REPORT 2019 Assets Oil and Gas Refining Marketing under constru- Cost properties assets and distribution Other assets ction Total Depreciation and depletion charge (131,293) (16,930) (12,801) (2,600) - (163,624) Impairment (4,340) - - - - (4,340) Acquisitions through business - - (110) - - (110) combinations Internal movement 229 102 (546) 215 - - Reclassification from other non-current (175) (1,600) - - - (1,775) assets Disposals 7,891 1,569 1,511 849 - 11,820 Translation differences (38,250) (3,240) (3,573) (190) - (45,253) AS OF 31 DECEMBER 2018 (815,875) (125,189) (75,809) (9,181) - (1,026,054) Net book value AS OF 1 JANUARY 2018 1,122,166 242,648 129,313 19,183 538,965 2,052,275 AS OF 31 DECEMBER 2018 1,268,333 261,910 161,577 18,477 655,772 2,366,069

Capitalisation rate for the borrowing costs related to the acquisition of property, plant and equipment equals to 7% for the year ended 31 December 2019 (6% for the year ended 31 December 2018).

The information regarding Group’s exploration and evaluation assets (part of oil and gas properties) is presented below:

2019 2018 NET BOOK VALUE AS OF 1 JANUARY 114,286 94,027 Additions 49,969 26,363 Unsuccessful exploration expenditures derecognised (4,969) (9,532) Transfer to proved property (4,240) (2,886) Disposals (4,857) (407) Translation differences (4,723) 6,721 NET BOOK VALUE AS OF 31 DECEMBER 145,466 114,286

During 2019 the Group performed impairment testing. For impairment testing the cash flow forecast are in line with the usual period for budgeting and covered the period of expected useful life for analysed assets.

During 2019 there were no indicators of impairment in relation to upstream oil and gas assets (for the year ended 31 December 2018 the Group recognised impairment in relation to upstream oil and gas assets in the amount of RUB 4.3 billion). The impairment loss was included in Depreciation, depletion and amortisation line item in the Consolidated Statement of Profit or Loss and Other Comprehensive Income.

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12. Right-of-use assets comprise the following:

As of 31 December 2019 right-of-use assets comprise the following:

Land, buildings Vessels and premises Total As of 1 January 2019 62,455 6,568 69,023 Additions 16,189 2,047 18,236 Modification and remeasurement (127) 434 307 Depreciation of right-of-use assets (6,371) (2,030) (8,401) Currency translation effect - (92) (92) As of 31 December 2019 72,146 6,927 79,073

13. Goodwill and other intangible assets

The information regarding movements in Group’s intangible assets is presented below:

Cost Goodwill Software Land rights Other IA Total As of 1 January 2019 37,027 40,679 16,794 21,583 116,083 Additions - 1,729 - 17,483 19,212 Internal movement - (570) (23) 593 - Disposals - (792) (92) (3,401) (4,285) Translation differences (2,639) (982) (62) (206) (3,889) As of 31 December 2019 34,388 40,064 16,617 36,052 127,121 Amortisation and impairment As of 1 January 2019 (234) (22,098) (6,256) (7,356) (35,944) Amortisation charge - (5,235) (663) (1,051) (6,949) Internal movement - (18) 21 (3) - Disposals - 742 - 2,662 3,404 Translation differences 37 827 2 122 988 As of 31 December 2019 (197) (25,782) (6,896) (5,626) (38,501) Net book value As of 1 January 2019 36,793 18,581 10,538 14,227 80,139 As of 31 December 2019 34,191 14,282 9,721 30,426 88,620

250 ANNUAL REPORT 2019 Cost Goodwill Software Land rights Other IA Total As of 1 January 2018 34,100 33,376 17,611 17,012 102,099 Additions - 5,781 824 5,307 11,912 Acquisitions through business combinations - - - 99 99 Internal movement - 788 11 (799) - Disposals - (373) (1,727) (261) (2,361) Translation differences 2,927 1,107 75 225 4,334 As of 31 December 2018 37,027 40,679 16,794 21,583 116,083 Amortisation and impairment As of 1 January 2018 (201) (16,708) (5,916) (5,087) (27,912) Amortisation charge - (5,228) (696) (1,563) (7,487) Internal movement - 328 - (328) - Disposals - 369 359 (246) 482 Translation differences (33) (859) (3) (132) (1,027) As of 31 December 2018 (234) (22,098) (6,256) (7,356) (35,944) Net book value As of 1 January 2018 33,899 16,668 11,695 11,925 74,187 As of 31 December 2018 36,793 18,581 10,538 14,227 80,139

Goodwill acquired through business combinations has been allocated to Upstream and Downstream in the amounts of RUB 27.3 billion and RUB 6.9 billion as of 31 December 2019 (RUB 29.7 billion and RUB 7.1 billion as of 31 December 2018).

The Group has performed impairment test for CGUs to which goodwill related. In assessing whether goodwill has been impaired, the carrying amount is compared with the estimated value in use.

The value in use is determined as the discounted net cash flows based on the forecasts of oil prices and production quantities based on reserve report and confirmed long-term strategic plans. The forecasting period for determining the value in use is in line with the management assumptions for long-term planning and does not exceed the useful life of assets different from goodwill and included in the CGUs.

Key assumptions applied to the calculation of value in use:

– The discount rate calculation is based on the Company’s weighted average cost of capital adjusted to reflect after-tax discount rate ranged from 7.88%-8.68% per annum in 2019 (for the 2018: 8.54%-9.86% per annum in real terms); – Oil prices are based on the available forecasts from globally recognized research institutions such as Wood Mackenzie, Platts/PIRA, Energy Group and others; – The estimated annual RSD / USD exchange rate was forecasted as RSD 104.35 and the estimated average annual RUB / USD exchange rate was forecasted as follows:

2020 2021 2022 2023 2024 Average for 2025-2039 2040 onwards 61.50 61.50 61.50 61.00 60.00 58.97 60.00 – Estimated production volumes were based on detailed data for the fields and refineries and the field development plans and refineries utilization rates approved by management through the long-term planning process were taken into account.

Goodwill was tested for impairment and no impairment was identified.

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14. Investments in associates and joint ventures

The carrying values of the investments in associates and joint ventures as of 31 December 2019 and 31 December 2018 are summarised below:

Ownership percentage 31 December 2019 31 December 2018 Slavneft Joint venture 49.9 136,792 126,835 Arcticgas Joint venture 50.0 136,262 146,246 Messoyakha Joint venture 50.0 45,350 36,837 Northgas Joint venture 50.0 10,307 7,767 Others 12,404 11,252 TOTAL INVESTMENTS 341,115 328,937

The principal place of business of the most significant joint ventures and associates disclosed above is the Russian Federation.

Slavneft

PJSC NGK Slavneft and it’s subsidiaries (Slavneft) are engaged in exploration, production and development of crude oil and gas and production of refined petroleum products in the Russian Federation. The control over Slavneft is divided equally between the Group and PJSC NK Rosneft.

Arcticgas

JSC Arctic Gas Company (Arcticgas) is developing oil and gas condensate fields located in the Yamalo-Nenetskiy autonomous region of the Russian Federation. The control over Arcticgas is divided equally between the Group and PJSC NOVATEK.

In 2019 Arcticgas declared and paid dividends in the amount of RUB 92.0 billion, of which RUB 46.0 billion is attributable to the Group.

Northgas

CJSC Northgas (Northgas) is engaged in development of Severo-Urengoiskoe natural gas field. The Group’s investment in Northgas is held through Gazprom Resource Northgas LLC which is controlled by the Group and owns a 50% share in Northgas. The control over Northgas is divided equally between the Group and PJSC NOVATEK.

In 2019 Northgas declared and paid dividends in the total amount of RUB 1.1 billion, of which RUB 0.6 billion is attributable to the Group.

Messoyakha

JSC Messoyakhaneftegas (Messoyakha) is developing the Vostochno-Messoyakhskoe and Zapadno-Messoyakhskoe oil and gas condensate fields. The control over Messoyakha is divided equally between the Group and PJSC NK Rosneft.

252 ANNUAL REPORT 2019 In 2019 Messoyakha declared and paid dividends in the total amount of RUB 34.6 billion, of which RUB 17.3 billion is attributable to the Group.

The summarised financial information for the significant associates and joint ventures as of 31 December 2019 and 31 December 2018 and for the year ended 31 December 2019 and 2018 is presented in the tables below.

31 December 2019 Slavneft Arcticgas Messoyakha Northgas Cash and cash equivalents 2,771 2,978 2 1,267 Other current assets 97,774 34,148 26,122 3,358 Non-current assets 428,919 382,236 195,568 41,368 Current financial liabilities (48,343) (42,499) (103,883) (6,243) Other current liabilities (40,050) (12,080) (10,958) (1,892) Non-current financial liabilities (122,010) (66,197) - (9,701) Other non-current liabilities (53,648) (50,394) (16,576) (6,170) NET ASSETS 265,413 248,192 90,275 21,987 31 December 2018 Slavneft Arcticgas Messoyakha Northgas Cash and cash equivalents 3,448 38,132 1 1,151 Other current assets 89,057 18,430 23,977 3,560 Non-current assets 379,881 382,586 178,452 41,785 Current financial liabilities (31,609) (40,645) (10,063) (8,002) Other current liabilities (30,902) (11,055) (8,810) (83) Non-current financial liabilities (126,151) (65,160) (99,000) (15,522) Other non-current liabilities (42,469) (51,637) (11,302) (5,982) NET ASSETS 241,255 270,651 73,255 16,907 Year ended 31 December 2019 Slavneft Arcticgas Messoyakha Northgas Revenue 316,084 196,395 141,449 21,136 Depreciation, deplition and amortisation (39,084) (22,428) (27,920) (2,202) Finance income 545 1,214 5 161 Finance expense (12,562) (8,520) (12,278) (1,600) Total income tax expense (8,644) (15,866) (10,878) (1,559) Profit for the period 24,732 79,696 51,632 6,179 TOTAL COMPREHENSIVE INCOME FOR THE PERIOD 24,212 79,696 51,632 6,179 Year ended 31 December 2018 Slavneft Arcticgas Messoyakha Northgas Revenue 314,332 195,581 125,521 23,337 Depreciation, deplition and amortisation (38,713) (21,100) (19,692) (2,554) Finance income 371 1,243 - 679 Finance expense (9,246) (10,215) (7,531) (2,113) Total income tax expense (7,682) (16,926) (11,656) (1,951) Profit for the period 31,235 81,823 56,344 7,399 TOTAL COMPREHENSIVE INCOME FOR THE PERIOD 31,372 81,823 56,344 7,399

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Others

The aggregate carrying amount of all individually immaterial associates and joint ventures as well as the Group’s share of those associates’ and joint ventures’ profit or loss and other comprehensive income are not significant for both reporting dates and periods.

15. Joint operations

Under IFRS 11 Joint Arrangements the Group assessed the nature of its 50% share in joint arrangements and determined investments in JSC “Tomskneft” VNС (Tomskneft) and Salym Petroleum Development N.V. (SPD) as Joint operations. Tomskneft and SPD are engaged in production of oil and gas in the Russian Federation and all of the production is required to be sold to the parties of the joint arrangement (that is, the Group and its partners).

16. Long-term financial assets

Long-term financial assets as of 31 December 2019 and 31 December 2018 comprise the following:

31 December 2019 31 December 2018 Long-term loans issued 9,919 7,846 Equity investments measured at fair value through OCI 1,562 3,083 Deposits with original maturity more than 1 year 93 - Less expected credit loss allowance (537) (584) TOTAL LONG-TERM FINANCIAL ASSETS 11,037 10,345

17. Deferred income tax assets and liabilities

Recognised deferred tax assets and liabilities are attributable to the following:

As of 31 December 2019 Assets Liabilities Net Property, plant and equipment 3,097 (169,189) (166,092) Intangible assets 1 (3,783) (3,782) Investments 1,512 (23) 1,489 Inventories 595 (2,877) (2,282) Trade and other receivables 1,777 (1) 1,776 Long-term and short-term debt 19 (189) (170) Provisions 16,180 (47) 16,133 Tax loss carry-forwards 18,880 (1) 18,879

254 ANNUAL REPORT 2019 Lease 2,107 - 2,107 Other 8,127 (5,946) 2,181 Net-off (33,803) 33,803 - TOTAL DEFERRED INCOME TAX ASSETS / 18,492 (148,253) (129,761) (LIABILITIES) As of 31 December 2018 Property, plant and equipment 3,869 (149,449) (145,580) Intangible assets - (3,875) (3,875) Investments 515 (9) 506 Inventories 1,047 (1,902) (855) Trade and other receivables 2,595 (15) 2,580 Long-term and short-term debt - (286) (286) Provisions 6,063 (251) 5,812 Tax loss carry-forwards 24,387 - 24,387 Finance lease 5,264 - 5,264 Other 5,002 (1,276) 3,726 Net-off (29,615) 29,615 - TOTAL DEFERRED INCOME TAX ASSETS / 19,127 (127,448) (108,321) (LIABILITIES)

Movement in temporary differences during the period:

Recognised in other Recognised comprehensive As of 31 December As of 1 January 2019 in profit or loss income Other 2019 Property, plant and equipment (145,580) (33,770) 8,409 4,849 (166,092) Intangible assets (3,875) 93 - - (3,782) Investments 506 1,063 (80) - 1,489 Inventories (855) (1,427) - - (2,282) Trade and other receivables 2,580 (746) (58) - 1,776 Loans and borrowings (286) 116 - - (170) Provisions 5,812 10,401 (80) - 16,133 Tax loss carry-forwards 24,387 (5,499) (9) - 18,879 Lease - (2,042) - 4,149 2,107 Finance lease 5,264 - - (5,264) - Other 3,726 (1,433) (112) - 2,181 TOTAL DEFERRED INCOME TAX (108,321) (33,244) 8,070 3,734 (129,761) ASSETS / (LIABILITIES)

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Recognised in other Recognised comprehensive Acquired/ As of 1 January 2018 in profit or loss income disposed of As of 31 Decembe2018 Property, plant and equipment (121,877) (21,073) (2,479) (151) (145,580) Intangible assets (3,535) (340) - - (3,875) Investments 18 2,293 (1,805) - 506 Inventories (541) (314) - - (855) Trade and other receivables 2,810 (316) 86 - 2,580 Loans and borrowings (276) (10) - - (286) Provisions 6,574 (853) 91 - 5,812 Tax loss carry-forwards 23,255 1,098 34 - 24,387 Finance lease 4,866 398 - - 5,264 Other 3,990 (427) 162 1 3,726 TOTAL DEFERRED INCOME TAX (84,716) (19,544) (3,911) (150) (108,321) ASSETS / (LIABILITIES)

18. Other non-current assets

Other non-current assets are primarily comprised of advances provided on capital expenditures (RUB 44.9 billion and RUB 42.8 billion as of 31 December 2019 and 31 December 2018, respectively).

19. Short-term debt and current portion of long-term debt

As of 31 December 2019 and 31 December 2018 the Group has short-term debt and current portion of long-term debt outstanding as follows:

31 December 2019 31 December 2018 Current portion of long-term debt 14,317 90,263 Bank loans 14,981 - Other borrowings 900 660 TOTAL SHORT-TERM DEBT AND CURRENT PORTION OF LONG-TERM DEBT 30,198 90,923

256 ANNUAL REPORT 2019 20. Trade and other payables

Accounts payable as of 31 December 2019 and 31 December 2018 comprise the following:

31 December 2019 31 December 2018 Trade accounts payable 279,985 185,269 Dividends payable 2,362 106,713 Other accounts payable 25,092 15,622 TOTAL TRADE AND OTHER PAYABLES 307,439 307,604

Other accounts payable are partly represented by short-term part of liability to PJSC Gazprom for assets related to Prirazlomnoye project.

21. Other current liabilities

Other current liabilities as of 31 December 2019 and 31 December 2018 comprise the following:

31 December 2019 31 December 2018 Advances received 26,219 25,599 Payables to employees 3,896 3,878 Other non-financial payables 10,626 10,033 TOTAL OTHER CURRENT LIABILITIES 40,741 39,510

22. Other taxes payable

Other taxes payable as of 31 December 2019 and 31 December 2018 comprise the following:

31 December 2019 31 December 2018 VAT 32,098 42,580 Mineral extraction tax 32,849 33,782 Excise tax 14,558 11,001 Social security contributions (social taxes) 7,868 6,051 Property tax 2,591 3,180 Additional income tax for hydrocarbon producers 3,954 - Other taxes 2,483 2,491 TOTAL OTHER TAXES PAYABLE 96,401 99,085

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Taxes expense other than income tax expense for the year ended 31 December 2019 and 2018 comprise the following:

Year ended Year ended 31 December 31 December 2019 2018 Mineral extraction tax 464,773 487,492 Excise tax 70,125 126,779 Social security contributions (social taxes) 25,707 22,113 Property tax 12,580 13,098 Additional income tax for hydrocarbon producers 14,348 - Other taxes 3,660 3,302 TOTAL TAXES OTHER THAN INCOME TAX 591,193 652,784

23. Provisions and other accrued liabilities

Movement in provisions and other accrued liabilities for the years ended 31 December 2019 and 2018 is below:

Decommissioning provision Other Total Carrying amount as of 1 January 2018 58,601 33,846 92,447 Short-term part 151 29,722 29,873 Long-term part 58,450 4,124 62,574 New obligation incurred 9,323 9,917 19,240 Utilisation of provision / accrual (2,422) (16,972) (19,394) Change in estimates (11,857) - (11,857) Unwind of discount 3,809 - 3,809 Translation differences 2,176 814 2,990 Carrying amount as of 31 December 2018 59,630 27,605 87,235 Short-term part 1,771 18,272 20,043 Long-term part 57,859 9,333 67,192 New obligation incurred 10,074 19,122 29,196 Utilisation of provision / accrual (2,444) (2,082) (4,526) Change in estimates 28,856 - 28,856 Unwind of discount 4,083 - 4,083 Translation differences (1,146) (953) (2,099) Carrying amount as of 31 December 2019 99,053 43,692 142,745 Short-term part 2,550 21,191 23,741 Long-term part 96,503 22,501 119,004

Change in estimates was mainly caused by revision of discount and inflation rates.

258 ANNUAL REPORT 2019 24. Long-term debt

As of 31 December 2019 and 31 December 2018 the Group has long-term outstanding debt as follows:

31 December 2019 31 December 2018 Bank loans 335,690 424,447 Loan participation notes 186,775 209,426 Bonds 168,918 132,719 Other borrowings 7,964 8,201 Less current portion of long-term debt (14,317) (90,263) TOTAL LONG-TERM DEBT 685,030 684,530

Bank loans

In February 2019 the Group performed pre-scheduled final principal repayment in the total amount of USD 249.1 million (RUB 16.4 billion) under the Club term loan facility with the syndicate of international banks (facility agent – Mizuho).

In July 2012 the Group signed an ECA-covered term loan facility with the group of international banks (facility agent HSBC) with a final maturity date in December 2022. In June 2019 and December 2019 the Group performed a partial principal repayment in the total amount of EUR 25.8 million (RUB 1.8 billion) according to the payment schedule.

In the first half 2015 the Group signed several long-term facility agreements with one of the Russian banks with maturity date in August 2019. In February and April 2019 the Group performed pre-scheduled principal repayment in the total amount of USD 202.4 million (RUB 13.3 billion) and USD 496.0 million (RUB 31.9 billion) respectively. The loan is fully repaid as of 31 December 2019.

In December 2018 the Group borrowed RUB 30.0 billion and in January 2019 RUB 20.0 billion under a long-term facility agreement with one of the Russian banks. In December 2019 the Group performed a pre-scheduled final repayment in the total amount.

In February 2019 the Group borrowed EUR 400.0 million (RUB 29.9 billion) under a long-term facility agreement due payable in February 2024. In July 2019 the Group performed pre-scheduled final repayment in to total amount.

In July 2019 the Group borrowed EUR 200.0 million (RUB 14.4 billion) under a long-term facility agreement due payable in July 2022.

In September 2019 the Group borrowed RUB 5.0 billion under a long-term facility agreement due payable in September 2024.

In December 2019 the Group borrowed RUB 10.0 billion under a long-term facility agreement due payable in December 2022.

In December 2019 the Group borrowed RUB 15.0 billion under long-term facility agreement due payable in December 2024.

In December 2019 the Group borrowed RUB 30.0 billion under a long-term facility agreement with one of the Russian banks due payable in December 2022.

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In June-July 2018 the Group signed several long-term facility agreements with final maturity date in July 2022 – December 2023. In September, November and December 2019 the Group performed pre-scheduled partial principal repayment in the total amount of RUB 70.0 billion.

The loan agreements contain financial covenant that limits the Group’s ratio of “Consolidated financial indebtedness to Consolidated EBITDA”. The Group is in compliance with all covenants as of 31 December 2019 and 31 December 2018 and during the year ended 31 December 2019.

Bonds

In June 2016 the Group placed Ruble bonds (series BO-03) with the total par value of RUB 10.0 billion. In June 2019 the bond holders exercised the put option on Rouble bonds (series BO-03) with the 100% par value in amount of RUB 8.8 billion.

In November 2019 the Group placed five-year Rouble bonds (003P-01R series) with the total par value of RUB 25.0 billion. The bonds bear interest of 6.85% per annum. The issue has a two-year call option, allowing the early redemption of the bonds at the Group’s decision.

In December 2019 the Group placed ten-year Rouble bonds (003P-02R series) with the total par value of RUB 20.0 billion. The bonds bear interest of 7.15% per annum.

25. Lease liabilities

The reconciliation between undiscounted lease liabilities and their present value as of 31 December 2019 is presented in the table below:

Lease liabilities As of 31 December 2019 Less than one year 15,599 Between one and five years 49,941 More than five years 53,791 Total undiscounted lease liabilities 119,331 Lease liabilities as of 31 December 2019 87,795 Current lease liabilities 9,927 Non-current lease liabilities 77,868

From lease liabilities the Group has excluded expenses related to variable lease payments and payments under short- term lease contracts in amount RUB 15,310 million for the year ended 31 December 2019.

Total cash outflow for leases equals RUB 14,768 million for the year ended 31 December 2019 and does not include payments for non-lease component.

260 ANNUAL REPORT 2019 For 2018 the Group has finance lease agreements regarding vessels. As of 31 December 2018 net book value of the leased assets which are pledged for finance lease is RUB 24.2 billion. At the end of lease term ownership title to the vessels transfers to the Group. The lease contract also contains an option for early purchase of the assets by the Group. Net book value of other items of property, plant and equipment under finance lease contracts is non significant.

The reconciliation between future minimum lease payments and their present value as of 31 December 2018 is presented in the table below:

Present value of minimum Minimum lease payments lease payments 31 December 2018 Less than one year 3,392 3,282 Between one and five years 13,792 11,462 More than five years 17,627 10,739 TOTAL MINIMUM LEASE PAYMENTS 34,811 25,483

26. Other non-current financial liabilities

Other non-current financial liabilities as of 31 December 2019 and 2018 comprise the following:

31 December 2019 31 December 2018 Deferred consideration 20,269 43,407 Forward contracts - cash flow hedge 1,230 1,623 Other liabilities 5 (173) TOTAL OTHER NON-CURRENT FINANCIAL LIABILITIES 21,504 44,857

Deferred consideration represents liability to PJSC Gazprom for assets relating to Prirazlomnoye project. Payments of the principal amount of the liability are presented as financing activities at line “Repayment of long-term borrowings” in Consolidated Statement of Cash Flows.

27. Other non-current liabilities

Other non-current liabilities are primarily comprised of advances received (RUB 48.0 billion and RUB 17.2 billion as of 31 December 2019 and 31 December 2018, respectively).

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28. Share capital and treasury shares

Share capital as of 31 December 2019 and 2018 comprise the following:

Ordinary shares Treasury shares 31 December 2019 31 December 2018 31 December 2019 31 December 2018 Number of shares (million) 4,741 4,741 23 23 Authorised shares (million) 4,741 4,741 23 23 Par value (RUB per share) 0.0016 0.0016 0.0016 0.0016 ON ISSUE AS OF 31 DECEMBER, FULLY PAID 8 8 (1,170) (1,170) (RUB MILLION)

The nominal value of share capital differs from its carrying value due to the effect of inflation.

On 2 October 2019 the general shareholders’ meeting of PJSC Gazprom Neft approved an interim dividend on the ordinary shares for the six months ended 30 June 2019 in the amount of RUB 18.14 per share.

On 14 June 2019 the general shareholders’ meeting of PJSC Gazprom Neft approved a dividend on the ordinary shares for 2018 in the amount of RUB 30.00 per share including an interim dividend on the ordinary shares in the amount of RUB 22.05 per share.

On 9 June 2018 the annual general shareholders’ meeting of PJSC Gazprom Neft approved a dividend on the ordinary shares for 2017 in the amount of RUB 15.00 per share including an interim dividend on the ordinary shares in the amount of RUB 10.00 per share.

29. Employee costs

Employee costs for the years ended 31 December 2019 and 2018 comprise the following:

Year ended 31 December Year ended 31 December 2019 2018 Wages and salaries 92,475 84,902 Other costs and compensations 18,130 12,269 TOTAL EMPLOYEE COSTS 110,605 97,171 Social security contributions (social taxes) 25,707 22,113 TOTAL EMPLOYEE COSTS (WITH SOCIAL TAXES) 136,312 119,284

262 ANNUAL REPORT 2019 30. Other loss, net

Other loss, net for the years ended 31 December 2019 and 2018 comprise the following:

Year ended 31 December Year ended 31 December 2019 2018 Disposal of intangible assets, property, plant and equipment (11,679) (13,330) Other losses, net (11,613) (6,466) TOTAL OTHER LOSS, NET (23,292) (19,796)

31. Net foreign exchange gain / (loss)

Net foreign exchange gain / (loss) for the year ended 31 December 2019 and 2018 comprise the following:

Year ended 31 December Year ended 31 December 2019 2018 Net foreign exchange gain / (loss) on financing activities, including: 32,846 (72,735) foreign exchange gain 43,499 5,506 foreign exchange loss (10,653) (78,241) Net foreign exchange (loss) / gain on operating activities (22,328) 39,177 Net foreign exchange gain / (loss) 10,518 (33,558)

32. Finance income

Finance income for the year ended 31 December 2019 and 2018 comprise the following:

Year ended 31 December Year ended 31 December 2019 2018 Interest income on loans issued 728 1,137 Interest on bank deposits 2,286 806 Interest income on cash and cash equivalents 14,798 5,118 Other financial income 5,094 445 TOTAL FINANCE INCOME 22,906 7,506

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33. Finance expense

Finance expense for the year ended 31 December 2019 and 2018 comprises the following:

Year ended 31 December Year ended 31 December 2019 2018 Interest expense 57,689 49,250 Decommissioning provision: unwinding of discount 4,083 3,809 Less: capitalised interest (29,000) (31,583) TOTAL FINANCE EXPENSE 32,772 21,476

Interest expense includes expenses on the lease liabilities in the amount RUB 5,761 million for the year ended 31 December 2019.

34. Income tax expense

The Group’s applicable income tax rate for the companies located in the Russian Federation is 20%.

Year ended 31 December 2019 Year ended 31 December 2018 RUB million % RUB million % Total income tax expense including share of tax of associates and joint 104,652 20 98,701 20 ventures Profit before income tax excluding share of profit before tax 423,928 389,418 of associates and joint ventures Profit before income tax of associates and joint ventures 102,808 109,676 Profit before income tax 526,736 499,094 - Tax at applicable domestic tax rate (20%) 105,347 20 99,819 20 Effect of tax rates in foreign jurisdictions 538 - 1,133 - Difference in statutory tax rate in domestic entities (9,335) (2) (9,423) (2) Non-deductible and deductible items (including Intragroup) 7,837 1 7,882 2 Adjustment for prior years (1,137) 1 360 1 Change in tax rate 1,341 - (1,167) - Foreign exchange loss of foreign non-operating units 61 - 97 - Total income tax expense including share of tax of associates and joint 104,652 20 98,701 21 ventures

264 ANNUAL REPORT 2019 Reconciliation of effective tax rate:

Year ended 31 December Year ended 31 December 2019 2018 Current income tax expense Current year 54,020 60,177 Adjustment for prior years (1,518) (592) 52,502 59,585 Deferred income tax expense Origination and reversal of temporary differences 31,903 20,711 Change in tax rate 1,341 (1,167) 33,244 19,544 Total income tax expense 85,746 79,129 Share of tax of associates and joint ventures 18,906 19,572 Total income tax expense including share of tax of associates and joint 104,652 98,701 ventures

35. Cash flow hedges

The following table indicates the periods in which the cash flows associated with cash flow hedges are expected to occur and the fair value of the related hedging instrument:

Less than From 6 From 1 Fair value 6 month to 12 months to 3 years Over 3 years As of 31 December 2019 Forward exchange contracts and interest rate swaps Liabilities (1,094) - - (1,094) - TOTAL (1,094) - - (1,094) - As of 31 December 2018 Forward exchange contracts and interest rate swaps Liabilities (1,493) - - - (1,493) TOTAL (1,493) - - - (1,493)

As of 31 December 2019 and 2018 the Group has outstanding forward currency exchange contracts and interest rate swaps for a total notional value of USD 105 million and USD 140 million respectively. During the year ended 31 December 2019 loss in the amount of RUB 576 million was reclassified from equity to net foreign exchange (loss) / gain in the Consolidated Statement of Profit or Loss and Other Comprehensive Income (RUB 16,758 million for the year ended 31 December 2018).

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The impact of foreign exchange cash flow hedges recognized in other comprehensive income is set out below:

2019 2018 Before Before income tax Income tax Net of tax income tax Income tax Net of tax Total recognised in other comprehensive (loss) / income as of the beginning (1,493) 298 (1,195) (17,928) 2,103 (15,825) of the period Foreign exchange effects recognised during (177) 35 (142) (323) 65 (258) the period Recycled to Net foreign exchange gain / (loss) 576 (115) 461 16,758 (1,870) 14,888 on operating activities Total recognised in other comprehensive 399 (80) 319 16,435 (1,805) 14,630 income / (loss) for the period Total recognised in other comprehensive (1,094) 218 (876) (1,493) 298 (1,195) (loss) / income as of the closing of the period

The accumulated foreign exchange loss will be reclassified from other comprehensive income / (loss) to profit and loss in 2022.

The Group uses an estimation of the fair value of forward currency exchange contracts prepared by independent financial institutes. Valuation results are regularly reviewed by the Management. No significant ineffectiveness occurred during the reporting period.

36. Financial risk management

Risk Management Framework

Gazprom Neft Group has a risk management policy that defines the goals and principles of risk management in order to make the Group’s business more secure in both the short and the long term.

The Group’s goal in risk management is to increase effectiveness of Management decisions through detailed analysis of related risks.

The Group’s Integrated Risk Management System (IRMS) is a systematic continuous process that identifies, assesses and manages risks. Its key principle is that responsibility to manage different risks is assigned to different management levels depending on the expected financial impact of those risks. The Group is working continuously to improve its approach to basic IRMS processes, with special focus on efforts to assess risks and integrate the risk management process into such key corporate processes as business planning, project management and mergers and acquisitions.

Financial Risk Management

Management of the Group’s financial risks is the responsibility of employees acting within their respective professional spheres. The Group’s Financial Risk Management Panel defines a uniform approach to financial risk management

266 ANNUAL REPORT 2019 at the Company and its subsidiaries. Activities performed by the Group’s employees and the Financial Risk Management Panel minimise potential financial losses and help to achieve corporate targets.

In the normal course of its operations the Group has exposure to the following financial risks:

– market risk (including currency risk, interest rate risk and commodity price risk); – credit risk; and – liquidity risk

Market risk

Currency Risk

The Group is exposed to currency risk primarily on borrowings that are denominated in currencies other than the respective functional currencies of Group entities, which are primarily the local currencies of the Group companies, for instance the Russian Rouble for companies operating in Russia. The currencies in which these borrowings are denominated in are mainly USD and EUR.

The Group’s currency exchange risk is considerably mitigated by its foreign currency assets and liabilities: the current structure of revenues and liabilities acts as a hedging mechanism with opposite cash flows offsetting each other. The Group applies hedge accounting to manage volatility in profit or loss with its cash flows in foreign currency.

The carrying amounts of the Group’s financial instruments by currencies they are denominated in are as follows:

As of 31 December 2019 Russian Other Rouble USD EURO Serbian dinar currencies FINANCIAL ASSETS Current Cash and cash equivalents 135,688 51,483 6,393 4,153 4,687 Bank deposits 15,076 - - - - Loans issued 4,829 - - 1 - Trade and other financial receivables 114,570 74,023 1,276 13,486 1,917 Non-current Trade and other financial receivables 696 - 133 - - Bank deposits 13 - 78 2 - Loans issued 9,919 - - - - Equity investments at fair value through OCI 978 - - 47 - FINANCIAL LIABILITIES Current Short-term debt (26,031) (1,673) (2,467) - (27) Trade and other financial payables (264,299) (19,830) (4,506) (16,765) (2,039) Forward exchange contracts - - - - - Current lease liabilities (1,795) (7,919) (112) - (101) Non-current

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As of 31 December 2019 Russian Other Rouble USD EURO Serbian dinar currencies Long-term debt (406,858) (185,819) (92,223) - (130) Forward exchange contracts (136) (1,094) - - - Non-current lease liabilities (3,555) (73,465) (466) - (382) Other non-current financial liabilities (20,271) - - - (3) NET EXPOSURE (441,176) (164,294) (91,894) 924 3,922

As of 31 December 2018 Russian Other Rouble USD EURO Serbian dinar currencies FINANCIAL ASSETS Current Cash and cash equivalents 144,352 88,487 6,304 4,896 3,546 Bank deposits - - - - - Loans issued 838 - 17 - - Trade and other financial receivables 33,389 76,676 1,503 15,624 1,958 Non-current Trade and other financial receivables 980 - - - - Loans issued 7,846 - - - - Equity investments at fair value through OCI 2,433 - - 66 - FINANCIAL LIABILITIES Current Short-term debt (21,077) (67,171) (2,683) - 8 Trade and other financial payables (269,489) (20,452) (4,944) (10,387) (2,332) Finance lease liability (38) (1,742) (48) - (1) Non-current Long-term debt (401,315) (208,617) (74,433) - (165) Forward exchange contracts (130) (1,493) - - - Finance lease liability (65) (23,082) (385) - (122) Other non-current financial liabilities (41,818) (1,413) - - (3) NET EXPOSURE (544,094) (158,807) (74,669) 10,199 2,889

The following exchange rates applied during the period:

Reporting date spot rate 31 December 2019 31 December 2018 USD 1 61.91 69.47 EUR 1 69.34 79.46 RSD 1 0.59 0.67

268 ANNUAL REPORT 2019 Sensitivity analysis

The Group has chosen to provide information about market and potential exposure to hypothetical gain / (loss) from its use of financial instruments through sensitivity analysis disclosures.

The sensitivity analysis shown in the table below reflects the hypothetical effect on the Group’s financial instruments and the resulting hypothetical changes in the Group’s profit or loss and equity that would occur assuming change in closing exchange rates and no changes in the portfolio of investments and other variables at the reporting dates.

Changes in the Group’s profit or loss and equity 31 DECEMBER 2019 USD/RUB (20% increase) (40,655) EUR/RUB (20% increase) (18,581) RSD/RUB (20% increase) (454) 31 DECEMBER 2018 USD/RUB (20% increase) (37,950) EUR/RUB (20% increase) (15,008) RSD/RUB (20% increase) -

Decrease in the exchange rates will have the same effect in the amount, but the opposite effect on Equity and Profit or loss of the Group.

Interest Rate Risk

Part of the Group’s borrowings is at variable interest rates (linked to the Libor, Euribor or key rate of the Bank of Russia). To mitigate the risk of unfavourable changes in the Libor or Euribor rates, the Group’s treasury function monitors interest rates in debt markets and based on it decides whether it is necessary to hedge interest rates or to obtain financing on a fixed-rate or variable-rate basis.

Changes in interest rates primarily affect debt by changing either its fair value (fixed rate debt) or its future cash flows (variable rate debt). However, at the time of any new debts Management uses its judgment and information about current/expected interest rates on the debt markets to decide whether it believes fixed or variable rate (in aggregate with other conditions) would be more favourable.

The interest rate profiles of the Group are presented below:

Carrying amount 31 December 2019 31 December 2018 FIXED RATE INSTRUMENTS Financial assets 232,322 256,286 Financial liabilities (678,476) (681,008) (446,154) (424,722) VARIABLE RATE INSTRUMENTS Financial liabilities (124,547) (119,928) (124,547) (119,928)

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Cash flow sensitivity analysis for variable rate instruments

The Group’s financial results and equity are sensitive to changes in interest rates. If the interest rates applicable to floating debt increase by 100 basis points (bp) at the reporting dates, assuming all other variables remain constant, it is estimated that the Group’s profit before taxation will change by the amounts shown below:

Profit / (loss) 31 December 2019 Increase by 100 bp (1,245) 31 December 2018 Increase by 100 bp (1,199)

A decrease by 100 bp in the interest rates will have the same effect in the amount, but the opposite effect on Profit or loss of the Group.

Commodity Price Risk

The Group’s financial performance relates directly to prices for crude oil and petroleum products. The Group is unable to fully control the prices of its products, which depend on the balance of supply and demand on global and domestic markets for crude oil and petroleum products, and on the actions of supervisory agencies.

The Group’s business planning system calculates different scenarios for key performance factors depending on global oil prices. This approach enables Management to adjust cost by reducing or rescheduling investment programs and other mechanisms. Such activities help to decrease risks to an acceptable level.

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers and in connection with investment securities.

Credit risk arises from cash and cash equivalents, contractual cash flows of debt investments carried at amortised cost, at FVOCI, favourable derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables.

The Group is exposed to credit risk due to sales with deferred payment terms which are usual and customary in the market. There is risk of non-timely receipt of payments for crude oil and petroleum products (risk of tiding up of working capital) and risk of default of counterparty.

Sales to retail customers are required to be settled in cash or using major credit cards, mitigating credit risk. There are no significant concentrations of credit risk, whether through exposure to individual customers, specific industry sectors and/or regions. The Group’s trade and other receivables relate to a large number of customers, spread across diverse industries and geographical areas. The Group has taken a number of steps to manage credit risk, including: counterparty solvency evaluation; individual credit limits and payment conditions depending on each counterparty’s financial situation; controlling advance payments; controlling accounts receivable by lines of business, etc.

The carrying amount of financial assets represents the maximum credit exposure.

270 ANNUAL REPORT 2019 Trade and Other Receivables

The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each counterparty.

Credit limit is established for each customer individually as maximum amount of credit risk taking into account a number of characteristics, such as:

– financial statements of the counterparty; – history of relationships with the Group; – credit profile of the customer; – duration of relationships with the Group, including ageing profile.

The compliance with credit limits by wholesale customers is automatically controlled.

As a rule, an excess of receivables over approved credit limit is secured by either bank guarantee, letter of credit from a bank, pledge or third party guarantee.

The Group regularly assesses the credit quality of trade and other receivables taking into account analysis of ageing profile of receivables and duration of relationships with the Group. To assess whether there is a significant increase in credit risk the Group compares the solvency data occurring as at the reporting date with the same data as at the date of initial recognition. The Group considers available reasonable and supportable forwarding-looking information.

The Management believes that not impaired trade and other receivables are fully recoverable.

The Group recognises an allowance for impairment that represents its best estimate of incurred losses in respect of trade and other receivables.

Trade receivables representing due from customers in the ordinary course of business are short-term by nature and do not contain the significant financial component. Lifetime expected credit loss estimation is equal 12-months measure. The Group makes forward looking information adjustment, if changes between prior year macroparameters’ level and its forecast for next 12 months are significant.

Estimated provision matrixes have been prepared for separate portfolios of receivables, homogeneous in terms of credit risk. Types of products sold, geographical specificity of distributional channels, ageing period of receivables and other factors were taken into account to separate individual portfolios.

As of and 2018, the ageing analysis of financial receivables is as follows:

Gross Impairment Gross Impairment 31 December 2019 31 December 2019 31 December 2018 31 December 2018 Not past due 196,040 (101) 122,674 (65) Past due 0 - 30 days 4,280 (1) 2,282 (3) Past due 31 - 90 days 3,021 (5) 3,775 (31) Past due 91 - 180 days 1,667 (10) 944 (70) Past due 181 - 365 days 127 (23) 533 (124) Past due more than 1 year 3,069 (1,963) 2,352 (2,137) 208,204 (2,103) 132,560 (2,430)

The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for trade and other receivables.

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The movement in the credit loss allowance for impairment in respect of trade and other receivables during the period was as follows:

2019 2018 BALANCE AT THE BEGINNING OF THE PERIOD 2,430 7,567 Increase during the year 201 461 Amounts written off against receivables (40) (5,766) Decrease due to reversal (182) (236) Reclassification to other lines (79) 191 Other movements (30) 9 Translation differences (197) 204 BALANCE AT THE END OF THE PERIOD 2,103 2,430

Other current assets

The movement in the allowance for impairment in respect of other current assets during the period was as follows:

2019 2018 Balance at the beginning of the period 11,727 12,288 Increase during the year 827 172 Amounts written off against receivables (10,499) (532) Decrease due to reversal (227) (92) Reclassification to other lines 83 (199) Other movements (7) (7) Translation differences (54) 97 Balance at the end of the period 1,850 11,727

Investments

The Group limits its exposure to credit risk mainly by investing in liquid securities. Management actively monitors credit ratings and does not expect any counterparty to fail to meet its obligations.

The Group does not have any loans issued measured at amortized cost that were past due but not impaired as of.

Credit quality of financial assets

The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates:

272 ANNUAL REPORT 2019 BBB Less than BBB Without rating Total As of 31 December 2019 Cash and cash equivalents 82,848 87,992 31,564 202,404 Short-term loans issued - - 4,830 4,830 Deposits with original maturity more than 3 months less than 1 year - 15,039 37 15,076 Deposits with original maturity more than 1 year - - 93 93 Long-terms loans issued - - 9,919 9,919 As of 31 December 2018 Cash and cash equivalents 11,671 190,856 45,058 247,585 Short-term loans issued - - 855 855 Long-terms loans issued - - 7,846 7,846

The Group uses lifetime expected credit loss approach to measure expected credit losses for most of its financial assets.

As of 31 December 2019 and 2018 no significant credit loss allowance for impairment in respect of these assets was recognized.

Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset.

The Group’s approach to managing liquidity and monitoring liquidity risks is to ensure that sufficient financial resources (including cash position and available unused credit facilities) are maintained and available to meet upcoming liabilities under normal and stressed conditions without incurring unacceptable losses or risking damage to the Group’s reputation.

The following are the contractual maturities of financial liabilities, including estimated interest payments:

Carrying Contractual Less than 6 6 – 12 amount cash flows months months 1 - 2 years 2 - 5 years Over 5 years As of 31 December 2019 Bank loans 350,671 416,818 25,975 10,945 27,395 350,166 2,338 Bonds 168,918 222,472 6,414 6,414 62,450 120,061 27,132 Loan Participation Notes 186,775 220,194 4,818 4,818 9,635 200,924 - Other borrowings 8,864 9,328 6,538 485 265 650 1,390 Other non-current financial 20,274 32,724 - - 3 30,175 2,547 liabilities Lease liabilities 87,795 118,841 7,724 7,586 14,017 36,030 53,483 Trade and other payables 307,439 307,439 282,108 14,785 10,513 10 22 1,130,736 1,327,816 333,577 45,033 124,278 738,016 86,912 As of 31 December 2018 Bank loans 424,447 526,423 32,310 63,181 27,733 398,655 4,544 Bonds 132,719 173,579 15,548 4,915 9,627 85,206 58,283 Loan Participation Notes 209,426 257,913 5,406 5,406 10,812 236,289 -

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Carrying Contractual Less than 6 6 – 12 amount cash flows months months 1 - 2 years 2 - 5 years Over 5 years Other borrowings 8,861 13,249 9,487 981 333 710 1,738 Other non-current financial 43,234 62,643 5 - 11,057 34,779 16,802 liabilities Finance lease liabilities 25,483 34,809 1,694 1,697 3,414 10,080 17,924 Trade and other payables 307,604 307,604 296,839 10,552 28 163 22 1,151,774 1,376,220 361,289 86,732 63,004 765,882 99,313

Reconciliation of liabilities arising from financing activities

The table below sets out the movements in the Group’s liabilities from financing activities for each of the years presented. The items of these liabilities are those that are reported as financing in the Consolidated Statement of Cash Flows:

Short-term Other liabilities and long-term Financial lease / from financing debt Lease activities Total AS OF 1 JANUARY 2019 775,453 25,483 163,571 964,507 Cash flows, including: (67,643) (14,961) (253,173) (335,777) Proceeds from borrowings 258,963 - - 258,963 Repayment of borrowings (280,878) - (11,501) (292,379) Repayment of lease liabilities - (9,200) - (9,200) Interest paid (45,353) (5,761) (7,943) (59,057) Transaction costs directly attributable to the borrowings (375) - - (375) received Dividends paid - - (233,729) (233,729) Finance expense 45,827 5,761 4,679 56,267 Dividends declared - - 129,707 129,707 Changes in fair values, cash flow hedge - - (177) (177) Gain on foreign exchange differences (33,279) (8,945) - (42,224) Currency translation differences (5,591) (122) (329) (6,042) Implementation of IFRS 16 - 62,223 - 62,223 Additions under IFRS 16 - 18,369 - 18,369 Other non-cash movements 461 (13) 1,747 2,195 AS OF 31 DECEMBER 2019 715,228 87,795 46,025 849,048 AS OF 1 JANUARY 2018 680,414 22,223 122,332 824,969 Cash flows, including: (16,432) (3,129) (105,822) (125,383) Proceeds from borrowings 366,544 - - 366,544 Repayment of borrowings (340,459) - (20,601) (361,060) Repayment of finance lease liabilities - (1,579) - (1,579) Interest paid (42,359) (1,550) (2,583) (46,492) Transaction costs directly attributable to the borrowings (158) - - (158) received

274 ANNUAL REPORT 2019 Dividends paid - - (82,638) (82,638) Finance expense 41,302 1,550 5,269 48,121 Dividends declared - - 139,389 139,389 Changes in fair values, cash flow hedge - - (323) (323) Gain on foreign exchange differences 63,651 4,361 - 68,012 Currency translation differences 6,073 61 442 6,576 Change in contract terms - - 2,819 2,819 Other non-cash movements 445 417 (535) 327 AS OF 31 DECEMBER 2018 775,453 25,483 163,571 964,507

Capital management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, to provide sufficient return for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure the Group may revise its investment program, attract new or repay existing loans or sell certain non-core assets.

On the Group level capital is monitored on the basis of the net debt to EBITDA ratio and return on the capital on the basis of return on average capital employed ratio (ROACE). Net debt to EBITDA ratio is calculated as net debt divided by EBITDA. Net debt is calculated as total debt, which includes long and short term loans, less cash and cash equivalents and short term deposits. EBITDA is defined as earnings before interest, income tax expense, depreciation, depletion and amortisation, foreign exchange gain (loss), other non-operating expenses and includes the Group’s share of profit of equity accounted investments. ROACE is calculated in general as Operating profit adjusted for income tax expense divided by the average for the period figure of Capital Employed. Capital Employed is defined as total equity plus net debt.

The Group’s net debt to EBITDA ratios at of and and return on average capital employed for years ended and were as follows:

Year ended 31 December Year ended 31 December 2019 2018 Long-term debt 685,030 684,530 Short-term debt and current portion of long-term debt 30,198 90,923 Less: cash, cash equivalents and deposits (217,480) (247,585) NET DEBT 497,748 527,868 Total EBITDA 711,846 722,897 NET DEBT TO EBITDA RATIO AT THE END OF THE REPORTING PERIOD 0.7 0.7 Operating profit 446,568 456,742 Operating profit adjusted for income tax expense 356,243 363,933 less share of profit of associates and joint ventures 83,906 90,704 Average capital employed 2,615,316 2,381,424 ROACE 16.8% 19.1%

There were no changes in the Group’s approach to capital management during the period.

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Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an ordinary transaction between market participants at the measurement date.

The different levels of fair value hierarchy have been defined as follows:

– Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities – Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices) – Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The following assets and liabilities are measured at fair value in the Group’s Consolidated Financial Statements: derivative financial instruments, equity investments and Stock Appreciation Rights plan (SARs).

Derivative financial instruments and SARs refer to Level 2 of the fair value measurement hierarchy, i.e. their fair value is determined on the basis of inputs that are observable for the asset or liability either directly (as prices) or indirectly (derived from prices). Equity investments represented by unlisted equity securities and refer to Level 3 of the fair value measurement hierarchy. The Group determines fair value for unlisted equity securities considering different scenarios of future capital distributions for such investments. There were no significant changes in fair values for the reporting period. There were no transfers between the levels of the fair value hierarchy during the years ended and. There are no significant assets or liabilities measured at fair value categorised within Level 1 or Level 3 of the fair value hierarchy. The fair value of the foreign exchange contracts is determined by using forward exchange rates at the reporting date with the resulting value discounted back to present value.

As of 31 December 2019 the fair value of bonds and loan participation notes is RUB 371,410 million (RUB 338,324 million as of). The fair value is derived from quotations in active market from external source of financial information and related to Level 1 of the fair value hierarchy. The carrying value of other financial assets and liabilities measured at amortised cost approximates their fair value. The fair values were calculated based on cash flows discounted using a current lending rate. They are classified as level 3 fair values in the fair value hierarchy due to the inclusion of unobservable inputs including counterparty credit risk.

The table below analyses financial instruments carried at fair value, which refer to Level 2 of the fair value hierarchy.

Level 2 As of 31 December 2019 Forward exchange contracts (1,094) TOTAL LIABILITIES (1,094) As of 31 December 2018 Forward exchange contracts (1,493) Other financial liabilities (4,652) TOTAL LIABILITIES (6,145)

The Company implements a cash-settled stock appreciation rights (SAR) compensation plan. The plan forms part of the long term growth strategy of the Group and is designed to reward Management for increasing shareholder value over a specified period. Shareholder value is measured by reference to the Group’s market capitalisation. The plan is open to selected Management provided certain service conditions are met. The awards are fair valued at each

276 ANNUAL REPORT 2019 reporting date. The awards are subject to certain market and service conditions that determine the amount that may ultimately be accrued to eligible employees. The expense recognised is based on the vesting period.

The fair value of the liability under the plan is estimated using the Black-Scholes-Merton option-pricing model by reference primarily to the Group’s share price, historic volatility in the share price, dividend yield and interest rates for periods comparable to the remaining life of the award. Any changes in the estimated fair value of the liability award will be recognised in the period the change occurs subject to the vesting period. During the reporting period there were no changes in conditions for SAR compensation plan.

The following assumptions are used in the Black-Scholes-Merton model as of 31 December 2019 and 2018:

31 December 2019 31 December 2018 Volatility 3.9% 3.2% Risk-free interest rate 5.6% 8.1% Dividend yield 11.9% 7.3%

In the Consolidated Statement of Profit or Loss and Other Comprehensive Income for the years ended 31 December 2019 and 2018 the Group accrued expenses related to SAR provision due to the growth in the value of Company’s shares in the amount of RUB 8,111 million and RUB 4,652 million, respectively. This expense is presented within selling, general and administrative expenses. In the Consolidated Statement of Financial Position as of 31 December 2019 and 31 December 2018 the Group recognised accrued liability in amount of RUB 12,764 million and RUB 4,652 million, respectively.

37. Commitments and contingencies

Taxes

Russian tax and customs legislation is subject to frequent changes and varying interpretations. Management’s treatment of such legislation as applied to the transactions and activity of the Group, including calculation of taxes payable to federal, regional and municipal budgets, may be challenged by the relevant authorities. The Russian tax authorities may take a more assertive position in their treatment of legislation and assessments, and there is a risk that transactions and activities that have not been challenged in the past may be challenged later. As a result, additional taxes, penalties and interest may be accrued. Generally, taxpayers are subject to tax audits for a period of three calendar years immediately preceding the year in which the decision to carry out a tax audit has been taken. Under certain circumstances tax audits may cover longer periods. For the individual entities of the Group the field tax audit with regard to the years 2015-2017 is performing now, the years 2018-2019 are currently open for tax audit. Management believes it has adequately provided for any probable additional tax accruals that might arise from these tax audits.

The Russian transfer pricing legislation is generally aligned with the international transfer pricing principles developed by the Organisation for Economic Cooperation and Development (OECD), although it has specific features. This

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legislation provides for the possibility of additional tax assessments for controlled transactions (transactions between related parties and certain transactions between unrelated parties) if such transactions are not on an arm’s-length basis.

The compliance of the prices of the Group’s controllable transactions with related parties with the transfer pricing rules is subject to regular internal control. Management believes that the transfer pricing documentation that the Group has prepared to confirm its compliance with the transfer pricing rules provides sufficient evidence to support the Group’s tax positions and related tax returns. In addition in order to mitigate potential risks, the Group regularly negotiates approaches to defining prices used for tax purposes for major controllable transactions with tax authorities in advance. Twenty-two pricing agreements between the Group and tax authorities regarding major intercompany transactions have been concluded in 2012-2019.

As Russian tax legislation does not provide definitive guidance in certain areas, the Group adopts, from time to time, interpretations of such uncertain areas that reduce the overall tax rate of the Group. While Management currently estimates that the tax positions and interpretations that it has taken can probably be sustained, there is a possible risk that an outflow of resources will be required should such tax positions and interpretations be challenged by the tax authorities. The impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the Group.

Economic environment in the Russian Federation

The Russian Federation displays certain characteristics of an emerging market. Its economy is particularly sensitive to oil and gas prices. The legal, tax and regulatory frameworks continue to develop and are subject to frequent changes and varying interpretations. The Russian economy was growing in 2017-2019, after overcoming the economic recession of 2015 and 2016. The economy is negatively impacted by volatility of oil prices, ongoing political tension in the region and international sanctions against certain Russian companies and individuals. The financial markets continue to be volatile. This operating environment has a significant impact on the Group’s operations and financial position. Management is taking necessary measures to ensure sustainability of the Group’s operations. However, the future effects of the current economic situation are difficult to predict and management’s current expectations and estimates could differ from actual results.

In 2014 the U.S., the EU and certain other countries imposed sanctions on the Russian energy sector that partially apply to the Group. The information on the main restrictions related to sanctions was disclosed in the Consolidated Financial Statements as of and for the year ended 31 December 2014. In August 2018 the U.S. signed an act to impose further sanctions against the Russian Federation. The Group assessed that the new sanctions don’t have significant impact on its activity.

Environmental matters

The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its potential obligations under environmental regulation. Management is of the opinion that the Group has met the government’s requirements concerning environmental matters, and therefore the Group does not have any material environmental liabilities.

Capital commitments

As of 31 December 2019 the Group has entered into contracts to purchase property, plant and equipment for RUB 523,364 million (RUB 363,690 million as of 31 December 2018).

278 ANNUAL REPORT 2019 38. Group entities

The most significant subsidiaries of the Group and the ownership interest are presented below:

Ownership interest Subsidiary Country of incorporation 31 December 2019 31 December 2018 EXPLORATION AND PRODUCTION JSC Gazpromneft-NNG Russian Federation 100% 100% Gazpromneft-Orenburg LLC Russian Federation 100% 100% Gazprom Neft Shelf LLC Russian Federation 100% 100% Gazpromneft-Khantos LLC Russian Federation 100% 100% Gazpromneft-Yamal LLC Russian Federation 90% 90% JSC Uzhuralneftegaz Russian Federation 87.5% 87.5% Gazpromneft-Vostok LLC Russian Federation 51% 51% Gazprom Resource Northgas LLC Russian Federation 18.2% 18.2% REFINING JSC Gazpromneft Omsk Refinery Russian Federation 100% 100% JSC Gazpromneft Moscow Refinery Russian Federation 100% 100% MARKETING Gazpromneft-Centre LLC Russian Federation 100% 100% Gazpromneft Regional Sales LLC Russian Federation 100% 100% JSC Gazpromneft-Aero Russian Federation 100% 100% Gazpromneft Marin Bunker LLC Russian Federation 100% 100% Gazpromneft Corporate Sales LLC Russian Federation 100% 100% OTHER OPERATIONS Gazpromneft-Lubricants LLC Russian Federation 100% 100% Gazpromneft-Bitumen Materials LLC Russian Federation 100% 100% Gazpromneft NTC LLC Russian Federation 100% 100% GPN-Finance LLC Russian Federation 100% 100% GPN-Invest LLC Russian Federation 100% 100% Gazpromneft Shipping LLC Russian Federation 100% 100% MULTIBUSINESS COMPANIES Naftna industrija Srbije A.D. (NIS) Serbia 56.2% 56.2%

In September 2018 the Group completed deal on disposal of non-controlling interest equal to 49% of share capital of Gazpromneft-Vostok LLC to third parties. The Group maintained control over the Company. In result non-controlling interest in the amount of RUB 21.3 billion was recognized. Excess of the payment over non-controlling interest was recognized at additional paid-in capital attributable to Gazprom Neft shareholders

The following table summarises the information relating to the non-controlling interest of Naftna industrija Srbije A.D. and its subsidiaries, Gazpromneft-Vostok LLC, Gazpromneft-Yamal LLC and Gazprom Resource Northgas LLC. The carrying amount of non-controlling interests of all other subsidiaries is not significant individually.

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Carrying amount of non-controlling Profit for the period attributable to non- interest controlling interest Year ended Year ended 31 December 2019 31 December 2018 31 December 2019 31 December 2018 Naftna industrija Srbije A.D. and its subsidiaries 79,636 87,815 4,144 6,641 Gazpromneft-Vostok LLC 24,938 24,176 2,232 909 Gazpromneft-Yamal LLC 28,300 19,506 11,820 12,450 Gazprom Resource Northgas LLC 21,493 18,374 3,119 3,806

The table below summarises financial information for Naftna industrija Srbije A.D. and its subsidiaries, Gazpromneft- Vostok LLC, Gazpromneft-Yamal LLC and Gazprom Resource Northgas LLC as of 31 December 2019 and 2018 and for the years ended 31 December 2019 and 2018:

Naftna industrija Srbije A.D. and its Gazpromneft-Vostok Gazpromneft-Yamal Gazprom Resource 31 December 2019 subsidiaries LLC LLC Northgas LLC Current assets 57,323 10,718 111,923 15,981 Non-current assets 241,009 64,206 363,111 10,307 Current liabilities (38,463) (5,565) (26,991) (13) Non-current liabilities (59,218) (18,465) (165,043) - Naftna industrija Gazpromneft-Vostok Gazpromneft-Yamal Gazprom Resource 31 December 2018 Srbije A.D. and its LLC LLC Northgas LLC subsidiaries Current assets 66,310 9,631 85,475 14,715 Non-current assets 262,190 56,454 296,249 7,767 Current liabilities (37,010) (4,657) (93,068) (21) Non-current liabilities (69,569) (12,091) (93,597) -

Naftna industrija Srbije A.D. and its Gazpromneft-Vostok Gazpromneft-Yamal Gazprom Resource Year ended 31 December 2019 subsidiaries LLC LLC Northgas LLC Revenue 258,908 34,851 240,878 - Profit 9,460 4,556 118,198 3,813 Total comprehensive (loss) / income (14,617) 4,556 118,198 3,813 Year ended 31 December 2018 Revenue 270,427 34,268 236,008 - Profit 15,166 5,922 124,501 4,652 Total comprehensive (loss) / income (11,051) 5,922 124,501 4,652

The table below summarises net cash flows information for Naftna industrija Srbije A.D. and its subsidiaries, Gazpromneft-Vostok LLC, Gazpromneft-Yamal LLC and Gazprom Resource Northgas LLC for the years ended and:

Naftna industrija Srbije A.D. and its Gazpromneft-Vostok Gazpromneft-Yamal Gazprom Resource subsidiaries LLC LLC Northgas LLC Net Cash Flows Year ended 31 December 2019 (1,771) (416) 6,791 1,265 Year ended 31 December 2018 (3,893) 6,163 (29,226) 867

280 ANNUAL REPORT 2019 Dividends paid in 2019 by Gazpromneft-Yamal LLC to the non-controlling share comprised RUB 3.0 billion (RUB 1.5 billion in 2018).

Dividends paid in 2019 by Gazpromneft-Vostok LLC to the non-controlling share comprised RUB 1.5 billion.

Dividends paid in 2018 by Gazprom Resource Northgas LLC to the non-controlling share comprised RUB 8.1 billion.

Dividends paid in 2019 by Naftna industrija Srbije A.D. to the non-controlling share comprised RUB 1.8 billion (RUB 1.9 billion in 2018).

39. Related party transactions

For the purpose of these Consolidated Financial Statements parties are considered to be related if one party has the ability to control or jointly control the other party or exercise significant influence over the other party in making financial and operational decisions as defined by IAS 24 Related Party Disclosures. Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties.

The Group enters into transactions with related parties based on market or regulated prices. Short-term and long-term loans provided as well as debt are based on market conditions available for not related entities.

The Group has applied the exemption as allowed by IAS 24 not to disclose all government related transactions, as the parent of the Company is effectively being controlled by the Russian Government. In the course of its ordinary business the Group enters into transactions with natural monopolies, transportation companies and other government- related entities. Such purchases and sales are individually insignificant and are generally entered into on market or regulated prices. Transactions with the state also include taxes which are detailed in Notes 9, 22 and 34.

The tables below summarise transactions in the ordinary course of business with either the parent company or parent’s subsidiaries and associates or associates and joint ventures of the Group.

As of 31 December 2019 and 31 December 2018 the outstanding balances with related parties were as follows:

Parent’s subsidiaries Associates and joint 31 December 2019 Parent company and associates ventures Cash and cash equivalents 43,912 67,811 - Short-term financial assets - - 4,455 Trade and other receivables 67,564 12,381 11,456 Other current assets 120 4,476 1,737 Long-term financial assets - 443 9,897 Other non-current assets - 595 - Short-term debt and other current financial - - 278 liability Other current liabilities 2 360 265 Long-term debt and other non-current financial 20,269 20,000 - liability Other non-current liabilities 35,007 - -

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Parent’s subsidiaries Associates and joint 31 December 2018 Parent company and associates ventures Cash and cash equivalents - 82,184 - Short-term financial assets - 3 - Trade and other receivables 12 10,254 9,188 Other current assets 63 2,669 1,319 Long-term financial assets - - 7,827 Other non-current assets - 498 - Short-term debt and other current financial - 48,519 627 liability Other current liabilities 10 398 250 Long-term debt and other non-current financial 43,618 20,000 - liability Other non-current liabilities 17,055 - -

For the year ended 31 December 2019 and 2018 the following transactions occurred with related parties:

Parent’s subsidiaries Associates and joint Year ended 31 December 2019 Parent company and associates ventures Crude oil, gas and petroleum products sales 90 92,950 57,741 Other revenue 19,790 2,702 6,886 Purchases of crude oil, gas and petroleum products - 34,379 228,711 Unsettled operations as of the reporting date 22,346 3,683 146,493 Production related services 215 30,867 24,954 Transportation costs 2,146 2,460 11,614 Interest expense 4,679 2,069 35 Interest income 6,571 5,098 694

Parent’s subsidiaries Associates and joint Year ended 31 December 2018 Parent company and associates ventures Crude oil, gas and petroleum products sales 24,338 77,292 65,527 Other revenue 142 5,182 7,039 Purchases of crude oil, gas and petroleum products - 48,579 211,626 Unsettled operations as of the reporting date 111,862 2,605 88,278 Production related services 49 26,795 23,341 Transportation costs 9,009 1,922 9,243 Interest expense 5,269 2,550 168 Interest income - 619 1,063

During 2019 the Group has accrued dividends in the total amount of RUB 123.0 billion to the parent company (during 2018: RUB 127.6 billion).

282 ANNUAL REPORT 2019 Transactions with Key Management Personnel

For the year ended 31 December 2019 and 2018 remuneration of key management personnel (members of the Board of Directors and Management Committee) such as salary and other contributions amounted RUB 3,599 million and RUB 2,681 million, respectively. Key management remuneration includes salaries, bonuses, quarterly accruals of SAR and other contributions.

40. Segment information

Operating segments are components that engage in business activities that may earn revenues or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker (CODM), and for which discrete financial information is available.

The Group manages its operations in two operating segments: Upstream and Downstream.

Upstream segment (exploration and production) includes the following Group operations: exploration, development, production and sale of crude oil and natural gas (including joint ventures results), oil field services. Downstream segment (refining and marketing) processes crude into refined products and purchases, sells and transports crude oil and refined petroleum products.

The information about the Group’s operating segments for the and is presented below:

Year ended 31 December 2019 Upstream Downstream Eliminations Total Revenue from sales: External customers 148,883 2,336,425 - 2,485,308 Inter-segment 1,027,079 31,796 (1,058,875) - TOTAL REVENUE FROM SALES 1,175,962 2,368,221 (1,058,875) 2,485,308 Adjusted EBITDA 640,931 154,198 - 795,129 Depreciation, depletion and amortisation 134,033 47,339 - 181,372 Capital expenditure 283,696 192,703 - 476,399

Year ended 31 December 2018 Upstream Downstream Eliminations Total Revenue from sales: External customers 57,575 2,431,717 - 2,489,292 Inter-segment 1,135,245 20,630 (1,155,875) - TOTAL REVENUE FROM SALES 1,192,820 2,452,347 (1,155,875) 2,489,292 Adjusted EBITDA 686,174 113,332 - 799,506 Depreciation, depletion and amortisation 137,076 38,375 - 175,451 Impairment of assets 4,340 - - 4,340 Capital expenditure 209,788 165,409 - 375,197

Intersegment revenues are based upon prices effective for local markets and linked to market prices.

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Eliminations and other adjustments section encompasses elimination of inter-segment sales and related unrealised profits, mainly from the sale of crude oil and petroleum products, and other adjustments.

Adjusted EBITDA represents the Group’s EBITDA and its share in associates’ and joint ventures’ EBITDA. Management believes that adjusted EBITDA represents useful means of assessing the performance of the Group’s ongoing operating activities, as it reflects the Group’s earnings trends without showing the impact of certain charges. EBITDA is defined as earnings before interest, income tax expense, depreciation, depletion and amortisation, net foreign exchange gain (loss), other non-operating expenses and includes the Group’s share of profit of associates and joint ventures. EBITDA is a supplemental non-IFRS financial measure used by Management to evaluate operations.

The geographical segmentation of the Group’s revenue and capital expenditures for the and is presented below:

Export Russian and international Year ended 31 December 2019 Federation CIS operations Total Sales of crude oil 88,797 41,067 614,696 744,560 Sales of petroleum products 1,046,521 86,752 484,857 1,618,130 Sales of gas 29,891 - 863 30,754 Other sales 79,076 2,749 10,039 91,864 REVENUES FROM EXTERNAL CUSTOMERS, NET 1,244,285 130,568 1,110,455 2,485,308

Export Russian and international Year ended 31 December 2018 Federation CIS operations Total Sales of crude oil 88,848 38,993 590,630 718,471 Sales of petroleum products 1,075,927 91,334 496,170 1,663,431 Sales of gas 35,805 - 1,010 36,815 Other sales 54,801 2,498 13,276 70,575 REVENUES FROM EXTERNAL CUSTOMERS, NET 1,255,381 132,825 1,101,086 2,489,292

For the year ended 31 December 2019 and 2018 export sales of crude oil include sales from upstream segment in the amount of RUB 128,840 million and RUB 36,981 million, respectively. The remaining amount of RUB 485,856 million for year ended 31 December 2019 (RUB 553,649 million for the year ended 31 December 2018) represents sales from downstream segment.

The geographical segmentation of the Group’s non-current assets as of 31 December 2018 was adjusted for the amount of RUB 24.6 billion that was reclassified from Export and international operations to Russian Federation segment retrospectively. Investments in associates and joint ventures and other long-term financial assets are presented separately by geographical segmentation from non-current assets.

Export Russian and international Federation CIS operations Total Non-current assets as of 31 December 2019 2,397,649 10,596 277,917 2,686,162 Investments in associates and joint ventures as of 31 339,905 - 1,210 341,115 December 2019 Other long-term financial assets as of 11,593 - 273 11,866 31 December 2019

284 ANNUAL REPORT 2019 Export Russian and international Federation CIS operations Total Capital expenditures for the year ended 448,512 846 27,041 476,399 31 December 2019 Non-current assets as of 31 December 2018 2,164,360 12,228 321,820 2,498,408 Investments in associates and joint ventures as of 31 327,562 - 1,375 328,937 December 2018 Other long-term financial assets as of 11,230 - 95 11,325 31 December 2018 Capital expenditures for the year ended 340,919 1,448 32,830 375,197 31 December 2018

Adjusted EBITDA for the year ended 31 December 2019 and 2018 is reconciled below:

Year ended 31 December Year ended 31 December 2019 2018 Profit for the period 422,088 400,993 Total income tax expense 85,746 79,129 Finance expense 32,772 21,476 Finance income (22,906) (7,506) Depreciation, depletion and amortisation 181,372 175,451 Net foreign exchange (gain) / loss (10,518) 33,558 Other loss, net 23,292 19,796 EBITDA 711,846 722,897 less share of profit of associates and joint ventures (83,906) (90,704) add share of EBITDA of associates and joint ventures 167,189 167,313 TOTAL ADJUSTED EBITDA 795,129 799,506

Supplementary information on oil and gas activities (unaudited)

The accompanying Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). In the absence of specific IFRS guidance, the Group has reverted to other relevant disclosure standards, mainly US GAAP, that are consistent with practices established for the oil and gas industry. While not required under IFRS, this section provides unaudited supplemental information on oil and gas exploration and production activities.

The Group makes certain supplemental disclosures about its oil and gas exploration and production that are consistent with practices. While this information was developed with reasonable care and disclosed in good faith, it is emphasised that some of the data is necessarily imprecise and represents only approximate amounts because of the subjective judgments involved in developing such information. Accordingly, this information may not necessarily represent the current financial condition of the Group or its expected future results.

The Group voluntarily uses the SEC definition of proved reserves to report proved oil and gas reserves and disclose certain unaudited supplementary information associated with the Group’s consolidated subsidiaries, share in joint operations, associates and joint ventures.

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The proved oil and gas reserve quantities and related information regarding standardised measure of discounted future net cash flows do not include reserve quantities or standardised measure information related to the Group’s Serbian subsidiary, NIS, as disclosure of such information is prohibited by the Government of the Republic of Serbia. The disclosures regarding capitalised costs relating to and results of operations from oil and gas activities do not include the relevant information related to NIS.

Presented below are capitalised costs relating to oil and gas producing activities:

31 December 2019 31 December 2018 CONSOLIDATED SUBSIDIARIES AND SHARE IN JOINT OPERATIONS Unproved oil and gas properties 136,620 103,983 Proved oil and gas properties 2,062,056 1,852,270 Less: Accumulated depreciation, depletion and amortisation (878,357) (783,343) NET CAPITALISED COSTS OF OIL AND GAS PROPERTIES 1,320,319 1,172,910 GROUP’S SHARE OF ASSOCIATES AND JOINT VENTURES Proved oil and gas properties 706,622 623,845 Less: Accumulated depreciation, depletion and amortisation (257,726) (203,268) Net capitalised costs of oil and gas properties 448,896 420,577 TOTAL CAPITALISED COSTS CONSOLIDATED AND EQUITY INTERESTS 1,769,215 1,593,487

Presented below are costs incurred in acquisition, exploration and development of oil and gas reserves for the years ended 31 December:

2019 2018 CONSOLIDATED SUBSIDIARIES AND SHARE IN JOINT OPERATIONS Exploration costs 46,862 22,301 Development costs 203,584 191,420 COSTS INCURRED 250,446 213,721 GROUP’S SHARE OF ASSOCIATES AND JOINT VENTURES Exploration costs - 459 Development costs 82,777 69,833 TOTAL COSTS INCURRED CONSOLIDATED AND EQUITY INTERESTS 333,223 284,013

Results of operations from oil and gas producing activities for the years ended 31 December:

2019 2018 CONSOLIDATED SUBSIDIARIES AND SHARE IN JOINT OPERATIONS Revenues: Sales 354,624 339,424 Transfers 587,996 629,183 TOTAL REVENUES 942,620 968,607 Production costs (111,268) (104,072) Exploration expenses (1,752) (1,411) Depreciation, depletion and amortisation (130,316) (131,293) Taxes other than income tax (500,630) (507,190) PRETAX INCOME FROM PRODUCING ACTIVITIES 198,654 224,641 Income tax expenses (59,501) (65,969)

286 ANNUAL REPORT 2019 RESULTS OF OIL AND GAS PRODUCING ACTIVITIES 139,153 158,672 GROUP’S SHARE OF ASSOCIATES AND JOINT VENTURES Total revenues 319,371 296,568 Production costs (31,621) (25,567) Exploration expenses (348) (533) Depreciation, depletion and amortisation (54,162) (36,237) Taxes other than income tax (131,358) (122,260) PRETAX INCOME FROM PRODUCING ACTIVITIES 101,882 111,971 Income tax expenses (15,591) (16,758) RESULTS OF OIL AND GAS PRODUCING ACTIVITIES 86,291 95,213 TOTAL CONSOLIDATED AND EQUITY INTERESTS IN RESULTS OF OIL AND GAS 225,444 253,885 PRODUCING ACTIVITIES

Proved oil and gas reserve quantities

Proved reserves are defined as the estimated quantities of oil and gas, which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. In some cases, substantial new investment in additional wells and related support facilities and equipment will be required to recover such proved reserves. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of underground reserves are subject to change over time as additional information becomes available.

Proved developed reserves are those reserves, which are expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are those reserves which are expected to be recovered as a result of future investments to drill new wells, to recomplete existing wells and/or install facilities to collect and deliver the production from existing and future wells.

As determined by the Group’s independent reservoir engineers, DeGolyer and MacNaughton, the following information presents the balances of proved oil and gas reserve quantities (in millions of barrels and billions of cubic feet respectively):

Proved Oil Reserves Quantities - in MMBbl 31 December 2019 31 December 2018 CONSOLIDATED SUBSIDIARIES AND SHARE IN JOINT OPERATIONS Beginning of year 4,840 4,849 Production (359) (356) Change of assets 21 - Revision of previous estimates 307 347 End of year 4,809 4,840 Minority’s share included in the above proved reserves (92) (42) Proved reserves, adjusted for minority interest 4,717 4,798 Proved developed reserves 2,588 2,630 Proved undeveloped reserves 2,221 2,210 GROUP’S SHARE OF ASSOCIATES AND JOINT VENTURES* Beginning of year 1,562 1,445 Production (107) (103) Change of assets (37) -

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Purchases of minerals in place - 31 Revision of previous estimates 126 189 End of year 1,544 1,562 Proved developed reserves 778 735 Proved undeveloped reserves 766 826 TOTAL CONSOLIDATED AND EQUITY INTERESTS IN RESERVES - END OF YEAR 6,353 6,402

Proved Gas Reserves Quantities - in Bcf 31 December 2019 31 December 2018 CONSOLIDATED SUBSIDIARIES AND SHARE IN JOINT OPERATIONS Beginning of year 10,218 8,785 Production (794) (665) Change of assets 2,091 - Revision of previous estimates 1,625 2,098 End of year 13,140 10,218 Minority’s share included in the above proved reserves (441) (489) Proved reserves, adjusted for minority interest 12,699 9,729 Proved developed reserves 4,304 4,006 Proved undeveloped reserves 8,836 6,212 Group’s share of associates and joint ventures* Beginning of year 13,930 12,972 Production (633) (624) Change of assets (1,560) - Purchases of minerals in place - 705 Revision of previous estimates 1,845 877 End of year 13,582 13,930 Proved developed reserves 9,311 8,435 Proved undeveloped reserves 4,271 5,495 TOTAL CONSOLIDATED AND EQUITY INTERESTS IN RESERVES - END OF YEAR 26,722 24,148

Standardised measure of discounted future net cash flows relating to proved oil and gas reserves

Estimated future cash inflows from production are computed by applying average first-day-of-the-month price for oil and gas for each month within the 12 month period before the balance sheet date to year-end quantities of estimated proved reserves. Adjustment in this calculation for future price changes is limited to those required by contractual arrangements in existence at the end of each reporting period. Future development and production costs are those estimated future expenditures necessary to develop and produce year-end proved reserves based on year-end cost indices, assuming continuation of year-end economic conditions. Estimated future income taxes are calculated by applying appropriate year-end statutory tax rates. These rates reflect allowable deductions and tax credits and are applied to estimated future pre-tax cash flows, less the tax bases of related assets. Discounted future net cash flows have been calculated using a 10% discount factor. Discounting requires a year-by-year estimate of when future expenditures will be incurred and when reserves will be produced.

288 ANNUAL REPORT 2019 The information provided in tables set out below does not represent Management’s estimate of the Group’s expected future cash flows or of the value Group’s proved oil and gas reserves. Estimates of proved reserves quantities are imprecise and change over time, as new information becomes available. Moreover, probable and possible reserves, which may become proved in the future, are excluded from the calculations. The calculations should not be relied upon as an indication of the Group’s future cash flows or of the value of its oil and gas reserves.

31 December 2019 31 December 2018 Consolidated subsidiaries and share in joint operations Future cash inflows 17,144,989 18,695,537 Future production costs (11,199,812) (11,427,272) Future development costs (1,056,587) (892,476) Future income tax expenses (1,209,796) (2,057,005) Future net cash flow 3,678,794 4,318,784 10% annual discount for estimated timing of cash flow (1,939,797) (2,188,299) Standardised measure of discounted future net cash flow 1,738,997 2,130,485 Group’s share of associates and joint ventures Future cash inflows 4,279,241 4,660,776 Future production costs (2,795,981) (2,867,502) Future development costs (249,513) (251,088) Future income tax expenses (210,212) (265,892) Future net cash flow 1,023,535 1,276,294 10% annual discount for estimated timing of cash flow (328,248) (501,792) Standardised measure of discounted future net cash flow 695,287 774,502 TOTAL CONSOLIDATED AND EQUITY INTERESTS IN THE STANDARDISED MEASURE 2,434,284 2,904,987 OF DISCOUNTED FUTURE NET CASH FLOW

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Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices APPENDIX 2. COMPANY HISTORY 1995

Siberian Oil Company (‘Sibneft’)

Siberian Oil Company (‘Sibneft’) was formed by the decree of the President of the Russian Federation. The company was established by the government, which transferred its interest in the country’s oil majors, including Noyabrskneftegaz, Noyabrskneftegazgeophysika, the Omsk Refinery and Omsknefteprodukt, to the holding company’s authorised capital.

1996–1997

Sibneft was privatised

To develop market economy, the Government of the Russian Federation implemented the Sibneft privatisation plan. In 1996, private investors acquired 49% of the company share capital through auctions. In 1997, Financial Oil Company won the auction to sell the government interest in Sibneft as part of the Shares for Loans government programme.

1998–2004

Asset build-up

By implementing an aggressive growth strategy, Sibneft significantly expanded the geography of its production (the Tomsk Oblast and the Omsk Oblast) and sales network (the Sverdlovsk Oblast and the Tyumen Oblast, the Krasnoyarsk Krai, St Petersburg and Moscow). The company’s major acquisitions during that period include the purchase of a 49.9% holding in Slavneft, which produces oil and gas in Western Siberia and the Krasnoyarsk Krai.

Strong growth

A strong resource base, efficient refining assets and highly professional executives are the core drivers of the company strong growth. Sibneft executives significantly upgraded production facilities, introduced cutting-edge technologies and streamlined business processes.

296 ANNUAL REPORT 2019 2005

Gazprom acquires controlling interest in Sibneft

The controlling interest (75.68%) in Sibneft was acquired by the Gazprom Group. On 13 May 2006, the company was renamed Gazprom Neft. The company priorities in development included strategic goals to become a global player with a regionally diversified portfolio of assets across the entire value chain.

2006

Coming onto the market in Central Asia

Gazprom Neft came onto the market in Central Asia and established a subsidiary, Gazprom Neft Asia, selling the company’s petroleum products in Kyrgyzstan, Tajikistan and Kazakhstan.

2007

Acquisition of Tomskneft JSC

In December 2007, the company acquired 50% of shares in Tomskneft VNK, which produces oil and gas in the Tomsk Oblast and the Khanty-Mansi Autonomous Okrug-Yugra, to continue expanding its resource base.

Splitting business lines

Separate business units were set up by line of business, including Gazpromneft Marine Bunker, Gazpromneft- Lubricants, and Gazpromneft-Aero.

2008

Projects in Venezuela

In 2008, Gazprom Neft, Rosneft, Lukoil, TNK-BP and Surgutneftegas signed a memorandum of understanding on cooperation and joint participation in projects in Venezuela as part of the National Oil Consortium.

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2009

Expanding the resource base

Gazprom Neft expands its resource base and refining capacities by acquiring Naftna Industrija Srbije А.D., Novi Sad (NIS), and controlling interest in Sibir Energy, while also increasing its share in the Moscow Refinery and getting access to the Salym oil fields. In April 2009, Gazprom Neft completed a transaction with Chevron Global Energy to purchase Chevron Italia s.p.a., an oils and lubricants production plant located in Bari (Italy), Launch of a major rebranding programme for the Gazprom Neft retail network was a milestone for the company.

2010

Global oil and gas market

Gazprom Neft continued rapid expansion on the global oil and gas market, signing a contract to develop the Badra field in Iraq, and being appointed to lead the Junin-6 project in Venezuela. The company continued to come onto new fuel markets outside Russia.

For instance, it acquired a retail network of 20 filling stations and nine land plots in Kazakhstan.

It also expanded its presence on the Russian market by joining a project to develop promising fields in the north of the Yamalo-Nenets Autonomous Okrug covered by SeverEnergia development licences. In February, Gazprom Neft completed a transaction to buy STS-Service, a subdivision of the Swedish company Malka Oil, which develops fields in the Tomsk Oblast.

2011

Production growth

Gazprom Neft gave a major boost to its production by ensuring more efficient development of the existing fields and acquiring new assets. The company bought 5.15% of shares in the Serbian company NIS, having increased its total interest to 56.15%, became the sole shareholder of Sibir Energy and acquired its first assets in the Orenburg Oblast – the Tsarichanskoye and Kapitonovskoye fields, as well as the Eastern block of the Orenburgskoye field. Drilling started at the Badra field in Iraq.

298 ANNUAL REPORT 2019 Premium-class fuels

The company started producing Euro 4 fuels at its refineries, and launched sales of the new G-Drive premium-class motor fuel via its own retail network. The company expanded the geography of its filling stations operation by coming onto the market in the Southern Federal District of the Russian Federation.

High-quality bitumen materials

The company implemented a project on preparing feedstock for bitumen production at the Omsk Refinery, ensuring stable quality of feedstock for bitumen production, and the high quality of products manufactured by a processing facility. In 2011, a manufacturing unit for polymer-bitumen binders and bitumen emulsions supplied by the Italian company MASSENZA was launched.

2012

Leadership in efficiency

Gazprom Neft is the Russian leader in terms of hydrocarbon-production and refining growth rates, along with a range of efficiency indicators. The company started pilot oil production at two new major fields in the north of the Yamalo- Nenets Autonomous Okrug (the Vostochno-Messoyakhskoye and Novoportovskoye fields). The first stage of commercial production started at the Samburgskoye oil and gas condensate field owned by the Russian-Italian company SeverEnergia, in which Gazprom Neft has a 25% holding.

The formation and development of a new production cluster continued in the Orenburg Oblast. The company entered into new upstream projects in Iraq. The Moscow Refinery started producing Euro 4 gasolines, while the Omsk Refinery launched production of Euro 4 and Euro 5 gasolines, and the Euro 5 diesel fuel. Gazprom Neft started developing a sales network in Europe (in Serbia and Romania) under the GAZPROM brand.

Opening the GeoNavigator Drilling Control Centre

To enhance the efficiency of advanced well construction, Gazprom Neft set up the GeoNavigator Drilling Control Centre. Its work is mainly based on the geo-steering technology, which involves quickly obtaining information on the geological model of a field, with adjustments made to the well trajectory in accordance with that. The use of cutting-edge technologies allows transferring data to the Drilling Support Centre during drilling without delay. New information is shown as part of the existing geological model of the field.

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2013

Strategy

The Gazprom Neft Board of Directors approved the company Development Strategy extended through 2025. The document provided for developing the Strategy to 2020, determining the ways of achieving the previously set targets in the key business segments – hydrocarbon production, refining, and petroleum product sales – taking into account changes in conditions in the industry and global economic environment. Until 2025, the company will continue to increase shareholder value. The strategies for the developing the company’s bunkering, aviation-fuel and lubricants businesses were also updated until 2025.

Start of production on the Arctic Shelf

In December 2013, Gazprom Neft produced the first oil on the Arctic Shelf at the Prirazlomnoye field in the Pechora Sea. The company was an operator at that field.

Euro 5 fuels

The catalytic-cracking gasoline hydrotreatment units and light naphtha isomerisation facilities were commissioned at the Gazprom Neft Moscow Refinery. That allowed the plant to fully switch to the production of Euro 5 gasolines. Thus, all Gazprom Neft refineries switched to Euro 5 fuels, ahead of the deadlines set by the Technical Regulations of the Russian Federation.

Bitumen business development

The company acquired assets in Russia (Ryazan) and Kazakhstan to develop its bitumen business. In 2013, Gazprom Neft and the French oil company Total established a joint venture to produce and sell polymer-modified bitumen for road construction under the G-Way Styrelf brand, and bitumen emulsions at the Moscow Refinery.

2014

Developing production projects

Gazprom Neft got the first oil at the Badra field in Iraq, and started commercial supply of oil into the Iraqi pipeline system. The company also shipped oil from the Novoportovskoye field in summer, which was the first time when feedstock was transported from the field to European consumers by sea.

Arctic Shelf production

The company produced the millionth barrel of the new Arctic crude blend (ARCO) at the Prirazlomnoye field. Drilling of a new exploration well started at the Dolginskoye oil field on the Pechora Sea shelf.

300 ANNUAL REPORT 2019 New licences acquired

Gazprom Neft obtained licences for the Kuvaysky and Yagodny licence blocks in the Orenburg Oblast. The resources of those blocks can help maintain and increase the company oil production.

2015

New capacities commissioned

Gazprom Neft and SIBUR launched Yuzhno-Priobsky Gas Processing Plant (GPP)

Russia’s best employer

Gazprom Neft became Russia’s Best Employer in the 2015 Russia’s Best Employers ranking released by HeadHunter, up two places from last year.

New licences acquired

Gazprom Neft acquired the licence to develop the Zapadno-Yubileynoye field in the Yamalo-Nenets Autonomous Okrug, and several new licences – for the Yuilsky-3, Lyaminsky-6, Severo-Ityakhsky-1, Maloyugansky and Zapadno-Zimny licence blocks – in the Khanty-Mansi Autonomous Okrug-Yugra.

Oil production

Gazprom Neft produced the millionth tonne of ARCO oil at the Prirazlomnoye field, with the one-million tonne/barrel milestones also reached at the Badra field in Iraq and the Sarqala field in the Kurdistan Region of Iraq.

2016

Arctic assets

Gazprom Neft completed commissioning of all its Arctic assets, including the Prirazlomnoye and Novoportovskoye fields, the Messoyakha group of fields, and the Arctic Gates terminal in the Gulf of Ob.

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Catalyst production

Gazpromneft Catalytic Systems was set up as part of the Gazprom Neft Group to implement a project on building cat- cracking catalyst and hydroprocessing-catalyst production facilities. That project was given a status of the national project by decision of the working group of the Ministry of Energy of the Russian Federation.

Rospolychem acquisition

In June 2016, Gazpromneft—Lubricants Ltd. acquired 100% of Rospolychem Group shares, and got an asset with a full production cycle for complex esters.

NOVA-BRIT acquisition

Gazpromneft Bitumen Materials acquired a 75% holding in the charter capital of NOVA-BRIT, a company specialising in the production of bituminous sealants under the BRIT® brand for construction, repair and maintenance of motorways, airfields, etc.

Opening an R&D centre

Gazprom Neft opened the largest and the most high-technology specialist bitumens research and development facility (R&D Centre) in Russia.

2017

New fields discovered

The new promising Neptune field with 415 mt of oil reserves in place was discovered on the shelf of the Sea of Okhotsk near Sakhalin Island. Another new field was discovered in the Khanty-Mansi Autonomous Okrug. Its proved and probable reserves amounted to 2.74 mtoe. The field was named after the company former head of production Alexander Zhagrin.

The Bazhenov Technology Centre national project

The Ministry of Energy of the Russian Federation gave the ’Developing Domestic Technologies and High-technology Equipment to Develop Reserves at the Bazhenov Formation’ project the status of a national project. Creation of the Bazhen Technology Centre in the Khanty-Mansi Autonomous Okrug-Yugra started.

Digital Upstream Control Centre

Gazpromneft-Khantos launched the Upstream Control Centre as part of the Digital Field programme. The centre combined solutions for improving production efficiency and created the single integrated environment.

302 ANNUAL REPORT 2019 Deep conversion at the Pančevo Refinery

Naftna Industrija Srbije (NIS, with 56.15% of shares owned by Gazprom Neft) started the construction of a new deep- conversion facility based on delayed coking technology at the Pančevo Refinery (Serbia).

Biological treatment facilities at the Moscow Refinery

Gazprom Neft completed the construction of the cutting-edge Biosphere biological treatment facilities at its Moscow Refinery. Overall, the company invested ₽9 billion in that project.

2018

New strategy to set a global industry benchmark

The Gazprom Neft Board of Directors approved the new Strategy-2030 for the company to become a global industry benchmark in terms of performance, technology and safety.

To implement the Strategy, the company needs to adapt to new approaches and external challenges. To achieve that, the company launched a major operational, organisational, cultural and digital transformation covering all aspects of its operations.

Advanced icebreakers

Gazprom Neft completed its Arctic fleet of support vessels, including the Alexander Sannikov and Andrey Vilkitsky icebreaker vessels,both being the most high-technology and powerful vessels in their class. and featuring zero emissions just like all other Gazprom Neft’s facilities. The icebreakers support the company tankers en route along the Gulf of Ob from the Arctic Gate terminal to the floating storage tanker in the Kola Bay.

New fields discovered

The Triton field with 137 mtoe of hydrocarbons in place was discovered in the Sea of Okhotsk near Sakhalin Island. It became the second field found in that area, which shows that the company new strategic production cluster was formed in the Russian Far East.

A total four new fields, and 27 hydrocarbon deposits, were discovered at Gazprom Neft licence blocks and recorded in the Russian State Register of Mineral Reserves in 2018.

New approach to geological exploration

Gazprom Neft established Gazpromneft-GEO, a competency centre for managing large-scale geological-exploration projects. It is aimed at integrating the company financial and management resources in relation to geological exploration, ensuring turn-key project management and stable replenishment of the company resource base with new cost-effective reserves.

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Efficiency Control Centre

The Gazprom Neft Downstream Efficiency Control Centre (DECC) became fully operational. It was designed to manage performance throughout the value chain, from oil delivery to refineries to petroleum-product sales to consumers, as part of a single digital platform. That involves using predictive analytic tools, neural networks, artificial intelligence, and digital twins of production facilities. The automated integrated-planning system, a unique one in the Russian oil and gas industry, streamlines refining volumes, feedstock delivery and the petroleum product mix 60 days ahead.

Digital transformation

The Gazprom Neft Digital Transformation Directorate was set up. The new subdivision is to develop and implement the company long-term digital strategy. Currently, the company has created the Digital Technology Vision Strategy and road maps for developing digital technologies.

Besides, two innovation platforms were set up. The Gazprom Neft Digital Innovation Centre integrated the efforts of the company, start-ups, developers and the academic community. It is to design disruptive digital solutions for the Gazprom Neft integrated downstream platform.

The House of Innovations based in St Petersburg drew together the company experts in neural networks, digital platforms, the industrial Internet of Things, blockchain technology, augmented and virtual reality, machine learning, and other Industry 4.0 technologies. The platform is used by the company subdivisions for joint work on relevant business challenges.

New HSE system

The company set a goal of becoming a global industry leader in HSE by 2030 in accordance with its updated Development Strategy. A risk-based approach became the basis for HSE transformation. The company experts prepared several projects to be implemented, including the Goals, Safety Measures, and Certification, Examination, and Investigation projects focused on priority risks identification, risk mitigants development and implementation, and control over the mitigants roll-out across the company, respectively.

Setting up JVs

Gazprom Neft, Mubadala Petroleum and the Russian Direct Investment Fund (RDIF) set up a joint venture to develop fields in the Tomsk Oblast and the Omsk Oblast in Russia’s Western Siberia, using Gazpromneft-Vostok capacities. The JV key opportunities are related to developing technologies for prospecting and production from hard-to-recover pre- Jurassic (Palaeozoic) hydrocarbon deposits.

A joint venture was also established by Gazprom Neft and the Spanish company Repsol to carry out geological exploration at the Karabashsky 10 licence block in the Khanty-Mansi Autonomous Okrug-Yugra. The block adjoins the Karabashsky licence blocks owned by Eurotek Yugra, another joint venture of Gazprom Neft and Repsol.

Acquiring new assets

In 2018, Gazprom Neft acquired 100% of shares of Enercom LLC, which holds a licence for the Solnechny licence block in the Orenburg Oblast. The new asset will form part of the Orenburg production cluster.

304 ANNUAL REPORT 2019 In 2018, reorganisation of Arcticgas was also completed, which provided for equal participation (50/50) of Gazprom Neft PJSC and NOVATEK. That will allow implementing the synergy of shared use of competencies in hydrocarbon production, regional experience and infrastructure.

Gazprom Neft acquired a production and logistics terminal in Salsk in the Rostov Oblast. That asset is to form an important part of the logistics system, which will ensure the supply of modern bitumen products to southern regions of Russia.

2019

Operational transformation

Gazprom Neft started the roll-out of the Etalon Operations Management System (OMS) at all its assets. Pilot projects to implement the OMS have shown that the system is highly efficient. The Etalon OMS Development Code (OMS Code) was approved. It sets out standard OMS implementation principles to maximise operational efficiency.

Digital transformation

In September 2019 the Board of Directors approved the Gazprom Neft Digital Transformation Strategy. By the end of 2019, Gazprom Neft approved 30 digital transformation programmes. To form communities of technology experts in the company, and to interact with business units, Gazprom Neft created competency centres on machine learning and artificial intelligence, virtual and augmented reality, video content analysis, blockchain technology, robotics and additive technologies, unmanned technologies, industrial Internet of Things, and wearable technology.

New prospecting areas

Gazprom Neft entered two new prospecting areas: the Taymyr Peninsula (in the Dolgano-Nenetsky District in the Krasnoyarsk Krai) and the north of the Tazovsky Peninsula. The company was granted a subsoil licence for geological exploration at 12 licence blocks in the western part of the Taymyr Peninsula based on applications, and won the auction for the Severo-Yamburgsky licence block. In June 2019, Gazprom Neft and Royal Dutch Shell signed an agreement of intent to establish a joint venture to develop the Leskinsky and Pukhutsyayakhsky licence blocks on the Gydan Peninsula.

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The Achimov Formation development

Gazprom Neft and the Government of the Yamalo-Nenets Autonomous Okrug started to create a technology centre for developing the Achimov Formation. A pilot testing site will be created based on Achimovsky strata at the Yamburgskoye field. The company also plans to create an integrated information platform and a data centre to facilitate experience sharing. Gazprom Neft had previously built the Digital Model for the Achimov Formation covering the entire Western Siberia. That is the first model of that kind in the industry.

The Chayandinskoye field development

Gazprom Neft is creating a new production cluster. An oil deposit at the Chayandinskoye oil and gas-condensate field in the Sakha Republic (Yakutia) will be one of its important parts. This field is unique due to its oil reserves in place (263 mt). The company is developing its oil rim under the operating agreement with Gazprom Neft Dobycha Noyabrsk LLC, which is developing gas deposits at the asset. In late 2019, Gazprom Neft initiated pilot development of the field, and shipped the first batch of marketable oil. Full-scale development of the oil rim will start in 2020.

Alternative energy at the Omsk Refinery

Gazprom Neft commissioned a 1MW solar power plant with 2,500 solar panels at the Omsk Refinery. It is supplying electricity to all administrative buildings at the Omsk Refinery. The estimated annual electricity output at the power plant will amount to 1.2 million kWh, which will allow avoiding over 6,300 tonnes of CO2 emissions every year.

High-technology fuel terminal

Gazprom Neft commissioned the Gladkoye fuel terminal in the Leningrad Oblast. Gladkoye is the only terminal in Russia equipped with metering units that enable automated monitoring of the volume and characteristics of petroleum products. A digital twin of the fuel terminal contains all project information since the start of construction. The terminal infrastructure enables transshipment of up to 1 million tonnes of petroleum products every year, and the tank farm allows simultaneously storing 40,000 cubic metres of products.

Environmentally-friendly bunker fuel

The company started producing and selling bunker fuel with sulphur content of less than 0.1%. It meets the requirements of the International Convention for the Prevention of Pollution from Ships (MARPOL), in accordance with which the use of fuels with sulphur content exceeding 0.5% has been banned for all international shipping operations starting from 1 January 2020. The composition of the RMG-180 (type M) hybrid fuel has been developed by Gazprom Neft specialists. The company also introduced new marine oil for engines which use ultra-low sulphur fuel oil with sulphur content not exceeding 0.1%.

306 ANNUAL REPORT 2019 Supplying bitumen materials to Latin America

Gazprom Neft supplied polymer-bitumen binders (PBB) for construction of the largest infrastructure facility in Latin America: the Bi-Oceanic Road Corridor, which is to connect the eastern and western coast of the continent to form a single transportation network. Innovative bitumen produced by the Gazprom Neft Ryazan Bitumen Binders Plant is being used to pave a 277-kilometre-long section of the highway on the border between Brazil and Paraguay. A special PBB formula for the Bi-Oceanic Road Corridor has been developed at the Gazprom Neft research centre.

Consolidation of a 100% holding in Poliom

Launched in 2013, Poliom is one of the largest polypropylene producers in Russia, with the capacity of 218,400 tonnes per year. In 2019, Gazprom Neft and SIBUR purchased a 50% holding in Poliom from a partner on a parity basis. Due to that Gazprom Neft and SIBUR got 100% of the plant shares.

Construction of a catalyst plant in Omsk

Gazprom Neft started an active phase of building a high-tech oil-refining catalyst production facility in Omsk. The new plant with a capacity of 21,000 tonnes per year will produce catalysts for the key Euro 5 fuel-production processes, and deep conversion. The Ministry of Energy of the Russian Federation has granted this initiative the status of a national project. The project is expected to be completed in 2021.

The federal ‘Clean Air’ project

Gazprom Neft is implementing the federal ‘Clean Air’ project, part of the Russian Government’s ‘Ecology’ project, which is aimed at reducing emissions by 20% in industrial cities with low air quality by the end of 2024. The programme includes nine projects to upgrade the Omsk Refinery. Gazprom Neft plans to invest over ₽100 billion in those projects.

Expedition under the ‘Narwhal: Legend of the Arctic’ project

Gazprom Neft successfully completed the first exploratory expedition as part of the 'Narwhal: Legend of the Arctic’ project. Explorers got unique data on the life of narwhals in the Russian part of the Arctic, which will form the basis for the comprehensive programme to study this species through 2022. The ‘Narwhal: Legend of the Arctic’ project is an environmental project forming part of the large-scale ‘Time of the Arctic’ programme launched by Gazprom Neft.

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Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices APPENDIX 3. STRUCTURE OF THE GAZPROM NEFT GROUP1

Production Service companies

Gazpromneft-Salym LLC Gazpromneft-Noyabrskneftegazgeofizika LLC Savitsky LLC Gazpromneft-Nefteservis LLC Gazpromneft-Palyan LLC Gazpromneft-Automation LLC Salymsky 2 LLC Noyabrskteploneft LLC New Oil Production Technologies LLC (JV) Noyabrskenergoneft LLC NOVATEK-YARSALENEFTEGAZ LLC Noyabrskneftegazsvyaz LLC Slavneft-Megionneftegaz PJSC (JV) Gazpromneft Energoservis LLC Slavneft-Krasnoyarskneftegaz LLC (JV) Neftekhimremont LLC Gazpromneft-Noyabrskneftegaz JSC Machinery and Repair Plant Gazpromneft – Omsk Refinery LLC Gazpromneft-Khantos LLC Avtomatika-Servis LLC Gazpromneft-Vostok LLC Garant Service LLC (JV) Meretoyakhaneftegaz LLC Gazpromneft-Angara LLC Gazpromneft-Sakhalin LLC Refining Gazprom Neft Orenburg LLC Gazpromneft-GEO LLC Gazprom Neft Moscow Refinery JSC Yuzhuralneftegaz JSC Gazprom Neft Omsk Refinery JSC Morneftegazproekt JSC Slavneft-YANOS PJSC (JV) Mosnefteprodukt LLC Yuzhno-Priobsky GPP LLC (JV) Gazpromneft-Yamal LLC Gazprom Neft Shelf LLC Gazpromneft-Zapolyarye LLC Oil and petroleum-products sales Gazprom Neft Development LLC Khanty-Mansiysk Petroleum Alliance JSC (JV) Gazprom Neft Trading GmbH Tomskneft VNK JSC (JV) Gazpromneft-Centre LLC Messoyakhaneftegaz JSC (JV) Munai-Myrza CJSC ARCTICGAS JSC (JV) Gazprom Neft Asia LLC Salym Petroleum Development N.V.(JV) Gazprom Neft Krasnoyarsk LLC Gazprom Neft Badra B.V Gazprom Neft-Ural JSC Gazprom Neft Middle East B.V. Gazprom Neft – North-West JSC Bazhenov Technology Centre LLC Gazprom Neft-Yaroslavl JSC Enercom LLC Gazprom Neft-Transport JSC Karabashsky 6 LLC Gazprom Neft- JSC Gazpromneft-Prirazlomnoye LLC Gazprom Neft-Belnefteprodukt FLLC Eurotek-Yugra JSC (JV) Gazprom Neft – Tajikistan LLC Northgas CJSC (JV) Gazprom Neft – Kazakhstan LLC ASB Geo LLC (JV) Alliance-Oil-Asia LLC Gazpromneft Orenburg Soyuz LLC Gazprom Neft Corporate Sales LLC Gazpromneft-Aero Bryansk LLC Gazprom Neft-Mobilnaya Karta JSC Gazprom Neft-Alternative Fuel LLC Gazpromneft-Terminal JSC Gazpromneft Laboratory LLC Gazpromneft-Trade Orenburg LLC Gazprom Neft Regional Sales LLC

/ 1 / The group includes JVs and key operating companies

308 ANNUAL REPORT 2019 Research and IT Bunkering

Gazprom Neft STC LLC Gazpromneft Marine Bunker LLC GX Tech LLC (JV) Gazpromneft Shipping LLC ITSC LLC Gazpromneft Terminal SPb LLC AS Baltic Marine Bunker Novorossiysk Oil Transhipment Complex LLC Lubricants, bitumen and petrochemicals Novorosnefteservis LLC

Gazpromneft-Lubricants LLC Gazprom Neft Moscow Lubricants Plant JSC Multibusiness companies Gazprom Neft Lubricants Italia S.p.A. GAZPROMNEFT LUBRICANTS LLC Naftna Industrija Srbije А.D., Novi Sad Gazpromneft Bitumen Materials LLC Oil and Gas Company Slavneft PJSC (JV) Gazpromneft Catalytic Systems LLC Gazprom Neft Ryazan Bitumen Binders Plant LLC NOVA-BRIT LLC Other operations Polyefir LLC BSV-CHEM LLC Altaiskoye Podvorye LLC Sovkhimtekh JSC Gazpromneft Eastern European Projects LLC Gazprom Neft-Bitumen Kazakhstan LLP GPN-Finance LLC Bitumen Terminals LLC GPN-Energo LLC GPN-BT South LLC GPN-ZS LLC Poliom LLC (JV) GPN Middle Eastern Projects LLC NPP Neftekhimiya LLC (JV) GPN Salym Projects LLC Gazpromneft-Total PMB LLC (JV) GPN-Invest LLC GAZPROMNEFT MARINE BUNKER BALKAN S.A. Gazprom Neft Business Service LLC GAZPROMNEFT MARINE LUBRICANTS PTE. LTD. Gazprom Neft Logistics LLC Paradnaya Complex LLC Gazprom Neft Procurement LLC Aircraft refuelling Arctica Media JSC Gazprom Neft International S.A. Gazpromneft-Aero JSC Gazprom Neft Finance B.V. Gazpromneft-Aero Murmansk LLC Gazprom Neft Downstream B.V. Gazpromneft-Aero Kemerovo LLC Gazprom Neft Business Service B.V. Gazpromneft-Aero Sheremetyevo LLC PC-BA LLC (JV) TZK Severo-Zapad LLC (JV) NNK LLC (JV) Sovex JSC (JV) GPN-project LLC Gazpromneft-Aero Tomsk LLC (JV) Zarechye Club LLC Gazpromneft-Aero Kyrgyzstan LLC (JV) Unifel LLC TZK Yenisey LLC (JV) Sibgazpolimer JSC (JV) Aero TO LLC Gazpromneft-Aero Novosibirsk JSC (JV) TZK Slavneft-Tunoshna JSC (JV) TZK Omsk (Tsentralny) LLC (JV) Chukotaerosbyt LLC

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Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices APPENDIX 4. INFORMATION ON ENERGY CONSUMPTION BY GAZPROM NEFT

In 2019, Gazprom Neft electricity costs were accounted for as part of lease costs under lease agreements and totalled₽16,478,326.29, including VAT totalling ₽2,731,117.42.

Gazprom Neft does not keep records of the amount of energy consumed.

310 ANNUAL REPORT 2019 APPENDIX 5. TAXATION IN OIL INDUSTRY

Average tax rates effective in the reporting periods for the taxation of oil and gas companies in Russia

12 months Indicator 2019 2018 ∆, % EXPORT DUTY $/TONNE Crude oil 93.70 128.48 (27.1) Light petroleum products 28.07 38.52 (27.1) Diesel fuel 28.07 38.52 (27.1) Gasoline 28.07 38.52 (27.1) Naphtha 51.48 70.62 (27.1) Heavy petroleum products 93.70 128.48 (27.1) MINERAL EXTRACTION TAX Crude oil, ₽ /tonne 13,039 12,455 4.7

Export duties on oil and petroleum products

Export duty rates for crude oil and petroleum products are calculated by the Ministry of Economic Development of the Russian Federation in accordance with the Methodology for Calculating Export Duties on Crude Oil and Certain Categories of Petroleum Products approved by Resolution of the Government of the Russian Federation No. 276 of 29 March 2013.

Export duty on crude oil

The export duty rate for crude oil is determined under one of the following procedures: a) in accordance with Clause 4 of Article 3.1 of Federal Law of the Russian Federation No. 5003-1 of 21 May 1993 'On the Customs Tariff', export duty rates for crude oil must not exceed the marginal duty rate calculated as follows:

Urals price quote (P), $/tonne Maximum export duty rate ≤109.50 0% 109.50 < P ≤ 146.00 35% × (P – 109.50) 146.00 < P ≤ 182.50 12.78 + 45% × (P – 146.00) >182.50 29.20 + 30% × (P – 182.50) as at 2018

1 Coil × (29.20 + 30 % × (P – 182.50)) as from 2019

Oil exported to Kazakhstan is exempt from export duty on oil. Crude oil exports to Kyrgyzstan and Belarus within indicative limits are exempt from export duties;1 b) in accordance with Clause 6.2 of Article 3.1 of Federal Law of the Russian Federation No. 5003-1 of 21 May 1993 'On the Customs Tariff', the Government of the Russian Federation may set a protective export duty rate for crude oil calculated as follows:

/ 1 / Coil = 0.833 in 2019, 0.667 in 2020, 0.5 in 2021, 0.333 in 2022, 0.167 in 2023, and 0 as from 2024

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Urals price quote (P), $/tonne Maximum export duty rate

≤182.50 0%

P > 182.50 29.20 + 45% × (P – 182.50)

This procedure shall be applied for six months starting from the month following changes in crude oil prices by more than 15% over three consecutive months;

c) in accordance with Subclause 4 of Clause 5 of Article 3.1 of Federal Law of the Russian Federation No. 5003-1 of 21 May 1993 'On the Customs Tariff', starting from 1 January 2019, a procedure shall be established for applying special formulas for calculating the export duty on oil with special physical and chemical properties produced within specified geographical areas. This reduced duty rate shall be applied until stipulated volumes of oil exported using the special formula for calculating export duty rates are achieved for each such geographical area:

Rt= (Р – 182.5) × 30% – 56.57 – 0.14 × Р, where Р is the Urals oil price, $/tonne;

d) in accordance with Clause 1.1 of Article 35 of Federal Law of the Russian Federation No. 5003-1 of 21 May 1993 'On the Customs Tariff', oil produced at a new offshore field shall be exempt from export duty: – until 31 March 2032, for fields located entirely in the Sea of Azov or with at least 50% of their area in the Baltic Sea, the Black Sea (up to 100 metres deep), the Pechora Sea or the White Sea, the Sea of Okhotsk (south of 55° N), or the Russian sector of the Caspian seabed; – until 31 March 2042, for fields with at least 50% of their area in the Black Sea (over 100 metres deep), the Sea of Okhotsk (north of 55° N), or the Barents Sea (south of 72° N); – indefinitely, for fields with at least 50% of their area in the , the Barents Sea (north of 72° N), or the Eastern Arctic (the Laptev Sea, the East Siberian Sea, the Chukchi Sea, and the Bering Sea).

In accordance with Clause 5 of Article 11.1 of the Tax Code of the Russian Federation, a new offshore field is defined as an offshore field where commercial hydrocarbon production commenced on or after 1 January 2016;

d) in accordance with Clause 7 of Article 35 of Federal Law of the Russian Federation No. 5003-1 of 21 May 1993 'On the Customs Tariff', starting from 1 January 2019, oil produced at subsurface sites subject to EPT shall be exempt from export duty for a period when the Cy coefficient applied to the MET rate for oil is less than 1.

Export duty on petroleum products

In accordance with Article 3.1 of Federal Law of the Russian Federation No. 5003-1 of 21 May 1993 'On the Customs Tariff', the export duty rate for certain categories of petroleum products shall be set by the Government of the Russian Federation. At the same time, petroleum products exported to Tajikistan, Belarus, Armenia and Kyrgyzstan within indicative limits shall be exempt from export duties.

Resolution of the Government of the Russian Federation No. 276 of 29 March 2013 establishes the following procedure for determining export duty rates for petroleum products:

Rpp = С × Rco, where Rco is the export duty rate for crude oil and С is the estimated coefficient for individual categories of petroleum products.

312 ANNUAL REPORT 2019 The following coefficients have been established for calculating export duty rates for petroleum products:

Light and middle distillates Diesel fuel 0.3 Lubricants Naphtha 0.55 Gasoline 0.3

In accordance with Clause 6.2 of Article 3.1 of Federal Law of the Russian Federation No. 5003-1 of 21 May 1993 'On the Customs Tariff', the Government of the Russian Federation may set a protective export duty rate on certain categories of petroleum products equal to 60% of the export duty on crude oil. This procedure shall be applied for six months starting from the month following changes in crude oil prices by more than 15% over three consecutive months.

Excise tax on petroleum products

The excise tax on petroleum products in the Russian Federation is paid by petroleum-product producers. In addition, the tax is paid by legal entities importing excisable goods into the Russian Federation.

In accordance with Article 193 of the Tax Code of the Russian Federation, the following excise tax rates have been established for petroleum products (₽ /tonne):

Indicator 2018 2019 2020 2021 1 January – 31 1 June – 31 May December GASOLINE below Euro 5 13,100 13,100 13,100 13,100 13,624 Euro 5 11,213 8,213 12,314 12,752 13,262 straight-run 13,100 13,100 13,912 14,720 15,533 DIESEL FUEL 7,665 5,665 8,541 8,835 9,188 ENGINE OILS 5,400 5,400 5,400 5,616 5,841 MIDDLE DISTILLATES 8,662 6,665 9,241 9,5351

In accordance with Clause 13.1 of Article 181 of the Tax Code of the Russian Federation, starting from 1 January 2019, a new excisable product is introduced: crude oil feedstock. The excise tax shall be paid by crude oil feedstock owners having a registration certificate for oil feedstock processing operations at their own production facilities or at production facilities owned by third-party providers of processing services. The excise tax rate for crude oil feedstock is calculated as follows:

ECOF = ((Poil × 7.3 – 182.5) × 0.3 + 29.2) × R × Fpc × Ccorr × Creg

Poil – is the average Urals oil price on global markets, $/tonne.

R – is the average US dollar/Russian rouble exchange rate.

Fpc – is a specific coefficient that reflects the petrochemical-products mix. / 1 / For the period from 1 January through 31 March; starting from 1 April, the excise tax rate for middle distillates shall be calculated using the following formula: Emd = (Edf + 750) - Ddf x Cdf_comp, where Edf is the excise tax rate set for the fiscal period for diesel fuel; Ddf and Cdf_comp are values determinedunder the procedure set in Clause 27 of Article 200 of the Tax Code of the Russian Federation. If the Ddf value determined under the procedure set in Clause 27 of Article 200 of the Tax Code of the Russian Federation is more than 0, the Ddf value shall be assumed to be equal 0.

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Ccorr – equals to 0.167 for 2019, 0.333 for 2020, 0.5 for 2021, 0.667 for 2022, 0.833 for 2023, 1 as from 2024.

Creg – is a coefficient that reflects regional characteristics of petrochemical-products markets. For production facilities located in the Omsk Oblast, Creg equals to 1.05.

When calculating the tax on crude oil feedstock, tax deductions may be applied. Tax deductions shall be applied

to excise amounts multiplied by 2 and increased by CDAMP..

CDAMP = ((DMG + FMG) × VMG + (DDF + FDF) × VDF) × CCOMP for the period from January through June 2019.

CDAMP = DMG × VMG × CMG_COMP + DDF × VDF × CDF_COMP + DFE_MG × VFE_MG + DFE_DF × VFE_DF as from July 2019.

VMG/VDF – is the volume of Euro 5 motor gasoline with an octane number of 92 or higher (Euro 5 diesel fuel) sold or used for own needs in the Russian Federation.

CCOMP – equals to 0.6 for the period from January through June 2019.

CMG_COMP – equals to 0.75 for the period from July through December 2019 and 0.68 starting from 1 January 2020.

CDF_COMP – equals to 0.7 for the period from July through December 2019 and 0.65 starting from 1 January 2020.

DMG/DDF – is the difference between the average export alternative price and the nominal average wholesale price for Euro 5 gasoline with an octane number of 92 (Euro 5 diesel fuel) in the Russian Federation.

VFE_MG/VFE_DF – is the volume of Euro 5 motor gasoline with an octane number of 92 or higher (Euro 5 diesel fuel) sold at delivery locations in the Far Eastern Federal District.

DFE_MG, DFE_DF – are Far Eastern allowances calculated as the sum of ₽2,000 and DMG or DDF. If DFE_MG or DFE_DF is greater than 2,000

or less than 0, DFE_MG or DFE_DT shall be assumed to be equal to 2,000 or 0 respectively.

FMG, FDF – is a compensatory allowance for motor gasoline (diesel fuel) equal to:

– 0, if DMG (DDF) is less than or equal to 0 or

– FMG = 5,600 and FDF = 5,000, if DMG (DDF) is greater than 0. In accordance with Federal Law No. 326-FZ of 29 September 2019, starting from 1 April 2019, the tax rate for middle distillates shall be calculated using the following formula:

EMD = (EDF + 750) – DDF × CDF_COMP,

EDF – is the excise tax rate set for diesel fuel.

If DDF is greater than 0, it shall be assumed to be equal to 0 for the purposes of the excise tax rate calculation for middle distillates.

Mineral extraction tax (MET)

MET on crude oil

a) In accordance with Article 342 of the Tax Code of the Russian Federation, the following formulas shall be used to calculate the MET rate for crude oil:

MET on crude oil 919 × Cp – Dm

314 ANNUAL REPORT 2019 Dm = CMET × Cp × (1 – Cd × Cr × Ce × Cdp × Ccan) – Cc for 2018.

Dm = CMET × Cp × (1 – Cd × Cr × Ce × Cdp × Ccan) – Cc – CMAN × Sov – CMGDF as from 2019.

CMET = 559.

Cp is a coefficient that reflects global oil price changes and is calculated using the following formula: Cp = (P – 15) × R / 261, where P is the average monthly Urals price on the Rotterdam and Mediterranean markets ($/ bbl) and R is the average monthly US dollar/Russian rouble exchange rate.

Cd is a coefficient that reflects the degree of depletion of a specific subsurface site. This coefficient reduces the MET rate for oil from highly depleted subsurface sites. The degree of reserve depletion is determined as N/V, where N is cumulative oil production from a specific subsurface site, and V is initial extractable oil reserves of all categories at a specific subsurface site as at 1 January 2006. If the degree of depletion of a specific subsurface site is greater than or equal to 0.8 and less than or equal to 1, Cd shall be calculated using the following formula: Cd = 3.8 – 3.5 x N/V. If the degree of depletion of a specific subsurface site exceeds 1, Cd shall be assumed to be equal to 0.3. In other cases, Cd shall be assumed to be equal to 1. If a subsurface site contains an oil deposit(s) with Ce lower than 1, the Cd coefficient shall be assumed to be equal to 1.

Cr is a coefficient that reflects the size of reserves of a specific subsurface site. This coefficient reduces the MET rate for smaller subsurface sites. If initial extractable oil reserves (Vr – initial extractable oil reserves of all categories at a specific subsurface site as at 1 January of the year preceding the tax year) are less than 5 mt, and depletion is less than or equal to 0.05 as at 1 January 2012 (or as at 1 January of the year when the relevant licence was issued, if the licence was issued after 1 January 2012), Cr shall be calculated using the following formula: Cr = 0.125 х Vr + 0.375.

Ce is a coefficient that reflects the level of complexity of oil extraction. It ranges from 0.2 to 1, depending on the level of complexity of oil extraction from a specific deposit: – 0.2, when oil is extracted from a specific deposit with confirmed permeability of no more than 2 × 10–3 μm2 and the net pay thickness of no more than 10 m; – 0.4, when oil is extracted from a specific deposit with confirmed permeability of no more than 2 × 10–3 μm2 and the net pay thickness of more than 10 m; – 0.8, when oil is extracted from a specific deposit classified in the State Mineral Reserves register as forming part of the Tyumen Formation pay zone; – 1, when oil is extracted from other hydrocarbon deposits.

Cdp is a coefficient that reflects the degree of depletion of a specific hydrocarbon deposit. Cdp applies to subsurface sites that contain deposits where Ce < 1. This coefficient reduces the MET rate for oil from highly depleted deposits. The degree of depletion of a deposit with Ce < 1 is calculated as Ndp/Vdp, where Ndp is cumulative oil production from a specific deposit, and Vdp is initial extractable oil reserves of all the categories at a specific deposit as at 1 January of the year preceding the tax year. If the degree of depletion of a specific deposit is greater than or equal to 0.8 and lower than or equal to 1, the Cdp coefficient shall be calculated using the following formula: Cdp = 3.8 – 3.5 x Ndp/ Vdp. If the degree of depletion of a specific deposit exceeds 1, Cdp shall be assumed to be equal to 0.3. In other cases, Cdp shall be assumed to be equal to 1. For other deposits at the site in question (with Ce equal to 1), the Cdp coefficient shall be assumed to be equal to the Cd value calculated for the entire site.

Ccan is a coefficient that characterises the region of production and the properties of oil. This coefficient reduces the MET rate for oil for subsurface sites located entirely or partially in regions with challenging climatic and geological conditions (including the Yamal Peninsula in the Yamalo-Nenets Autonomous Okrug, the Irkutsk Oblast, and the Republic of Sakha (Yakutia)). Ccan shall be assumed to be equal to 0 until the first day of the month following the month when at least one of the following conditions is met: (1) the limit on cumulative oil production from the subsurface site is reached, or (2) the stipulated period expires. After the tax incentive period expires, Сcan shall be assumed to be equal to 1.

Cc is set at ₽357 for 2018 and ₽428 as from 2019.

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CMAN = ED × R × Ccorr – FM. ED is a coefficient calculated as follows:

Urals price quote (P), $/tonne ED, $/tonne ≤109.50 0% 109.50 < P ≤ 146.00 35% × (P – 109.50) 146.00 < P ≤ 182.50 12.78 + 45% × (P – 146.00) >182.50 29.20 + 30% × (P – 182.50)

R is the average US dollar/Russian rouble exchange rate.

Ccorr – equals to 0.167 in 2019, 0.333 in 2020, 0.5 in 2021, 0.667 in 2022, 0.833 in 2023, and 1 as from 2024. Fm is a coefficient that reflects the introduction of a protective export duty rate for crude oil (for details, see paragraph b) of the Export Duty on Crude Oil section) by the Government of the Russian Federation

Sov – equals to 0.1 for oil with viscosity of at least 10,000 mPa•s (in situ). In other cases, Sov equals to 1.

CMGDF = AMG × IMG + ADF × IDF.

AMG/ADF is a coefficient that reflects an allowance for motor gasoline (125 for the period from January through September 2019, 200 for the period from October through December 2019, and 105 as from 2020) or diesel fuel (110 for the period from January through September 2019, 185 for the period from October through December 2019, and 92 as from 2020).

IMG and IDF –is a binary coefficient for motor gasoline (diesel fuel) equal to 0 if DMG (DDF) does not exceed 0. If DMG (DDF)

exceeds 0, IMG (IDT) is set at 1. b) In accordance with Clause 2.1 of Article 342 and Clause 6 of Article 338 of the Tax Code of the Russian Federation, the following ad valorem MET rates have been set for oil produced at new offshore fields (as a percentage of its value): – 30% for a five-year period from the start of commercial hydrocarbon production, for fields located entirely in the Sea of Azov or with at least 50% of their area in the Baltic Sea; – 15% for a seven-year period from the start of commercial hydrocarbon production, for fields with at least 50% of their area in the Black Sea (up to 100 metres deep), the Sea of Japan, the Pechora Sea or the White Sea, the Sea of Okhotsk (south of 55° N), or the Russian sector of the Caspian seabed; – 10% for a 10-year period from the start of commercial hydrocarbon production, for fields with at least 50% of their area in the Sea of Okhotsk (north of 55° N), the Black Sea (over 100 metres deep), or the Barents Sea (south of 72° N); – 5% for a 15-year period from the start of commercial hydrocarbon production, for fields with at least 50% of their area in the Kara Sea, the Barents Sea (north of 72° N), or the Eastern Arctic (the Laptev Sea, the East Siberian Sea, the Chukchi Sea, and the Bering Sea). In addition, the tax legislation stipulates a reduced tax rate for oil extracted from deposits classified as forming part of the Bazhenov Formation pay zone, provided that the requirements of the Russian Tax Code are met. In accordance with Clause 3.2 of Article 343.2 of the Tax Code of the Russian Federation, as from 1 January 2019, a tax deduction may be applied for subsurface sites listed in Subclause 4 of Clause 5 of Article 3.1 of Federal Law No. 5003-1 of 21 May 1993 'On the Customs Tariff', which is calculated as Cman × Veo, where Veo is the amount of crude oil extracted at a subsurface site and exported from Russia under preferential crude oil export duty rates.

c) In accordance with Article 342.6 of the Tax Code of the Russian Federation, the following formula shall be used to calculate the MET rate for crude oil produced at subsurface sites subject to excess-profits tax (EPT):

MET on crude oil = (50% × (P – 15) × 7.3 × Cy – ED) × R

P is the average monthly Urals price on the Rotterdam and Mediterranean markets, $/bbl.

316 ANNUAL REPORT 2019 R is the average monthly US dollar/Russian rouble exchange rate.

ED is the export duty rate for crude oil, $/tonne.

Cy–is a coefficient that reflects the time period from the date when commercial oil production commenced at the subsurface site. This coefficient reduces the MET rate for oil from new subsurface sites located entirely or partially in Western (including the Khanty-Mansi Autonomous Okrug-Yugra and the Yamalo-Nenets Autonomous Okrug) and Eastern Siberia (including the Irkutsk Oblast and the Republic of Sakha (Yakutia)). The Cy coefficient is applied until the end of the stipulated time period starting from the year following the year when the degree of depletion for a subsurface site exceeded 1%. The Cy coefficient for active sites is set at 1.

Effective MET rate for crude oil across the group

12 months Indicator 2019 2018 ∆, % Standard MET rate for crude oil 13,039 12,455 4.7 Effective MET rate for oil (after Cd, Cr, Ce, Cdp and Ccan are applied) 9,873 10,301 (4.2) Difference between the standard and effective MET rates for crude oil, ₽ /tonne 3,166 2,154 Difference between the standard and effective MET rates for crude oil, % 24.3 17.3

For the 12 months of 2019, the effective MET rate for crude oil was ₽9,873 per tonne, which is ₽3,166 per tonne lower than the average standard rate set in accordance with the tax legislation. This deviation was due to reductions in the MET rate for crude oil in accordance with the tax legislation, including the application of the Cd, Cr, Ce, Cdp and Cy coefficients.

MET on natural gas and gas condensate

In accordance with Article 342 of the Tax Code of the Russian Federation, MET on natural gas and gas condensate is the following:

Indicator 2018 As from 2019 Natural gas, ₽ /'000 m3 35 × Ufe × Ccom + Tg 35 × Ufe × Ccom + Tg 42 × Ufe × Ccom × Cadj + 0.75 × Gas condensate, ₽ /tonne 42 × Ufe × Ccom × Cadj Cman

Ufe – is the base value of a unit of fuel equivalent calculated by the taxpayer based on natural gas and gas condensate prices, as well as the ratio of their respective production volumes.

Ccom is a coefficient that reflects the complexity of mineral extraction from a deposit. This coefficient reduces the MET rate and is assumed to be equal to the lowest of the following five reduction coefficients: Creg (reduction based on location), Cdep (reduction for depleted sites), Cd (reduction for deposits located at a depth of more than 1.7 km), Cs (reduction for subsurface sites that are part of a regional gas supply system) and Ctur (reduction for deposits classified as forming part of the Turonian pay zones).

Тg is an indicator reflecting the cost of natural gas transportation (assumed to be equal to 0 in 2017–2019, according to the Federal Anti-Monopoly Service of the Russian Federation).

Cadj is an adjustment coefficient equal to 6.5/Cg, where Cg is a coefficient reflecting the export margin per unit of fuel equivalent.

For the 12 months of 2019, the effective MET rate for natural gas was ₽620 / 1,000 m3, which is ₽38 lower than the average standard rate set in accordance with the tax legislation. This deviation was due to reductions in the MET rate for natural gas in accordance with the tax legislation, including the application of the Cc coefficient.

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Excess-profits tax (EPT)

Federal Law No. 199-FZ of 19 July 2018 introduced a tax on excess profits from hydrocarbon production, effective as from 1 January 2019. The EPT shall be levied on income from hydrocarbon production at a rate of 50% minus an estimated export duty and transportation costs, as well as actual capital and operating expenses associated with developing a subsurface site.

The new tax regime involves reducing the total amount of fiscal payments that depend on gross values (MET and export duty for crude oil) by changing the MET calculation formula and implementing a system of tax concessions on MET and the export duty for certain categories of pilot projects.

An exhaustive list of pilot sites in Western and Eastern Siberia potentially subject to EPT was drawn up for the trial period of the new fiscal regime. The Gazprom Neft portfolio includes pilot sites of all categories.

Tax benefits

The applicable tax legislation stipulates the following types of tax benefits, which are applied by the group subsidiaries (including reduced tax rates, and reduction coefficients applied to the MET rate for crude oil and natural gas):

Tax benefits applied in 2019 Eligible entities in the Group MET ON NATURAL GAS Gazpromneft-Noyabrskneftegaz JSC

Ccom coefficient applied to the MET rate Gazpromneft-Yamal LLC Gazprom Neft Orenburg LLC MET ON CRUDE OIL Gazpromneft-Noyabrskneftegaz JSC C coefficient applied to the MET rate r Gazprom Neft Orenburg LLC Gazpromneft-Noyabrskneftegaz JSC Gazpromneft-Vostok LLC C coefficient applied to the MET rate d Yuzhuralneftegaz JSC Gazpromneft-Khantos LLC Gazpromneft-Noyabrskneftegaz JSC Gazpromneft-Vostok LLC C coefficient applied to the MET rate e Gazpromneft-Khantos LLC Gazprom Neft Orenburg LLC

Cdp coefficient applied to the MET rate Gazpromneft-Noyabrskneftegaz JSC Gazprom Neft PJSC Gazpromneft-Angara LLC Cy coefficient applied to the MET rate Gazpromneft-Yamal LLC Gazpromneft-Khantos LLC Meretoyakhaneftegaz LLC Reduced rate for oil produced from the Bazhenov Formation pay zone Bazhenov Technology Centre LLC Reduced MET rate for production at a new offshore field in the Pechora Sea Gazprom Neft Shelf LLC PROFIT TAX Reduced rate of 16% (a 4% tax rate reduction in accordance with the local legislation Gazpromneft-Noyabrskneftegaz JSC of the Khanty-Mansi Autonomous Okrug-Yugra) Reduced rate of 17% (a 3% tax rate reduction in accordance with the local legislation Gazpromneft-Khantos LLC of the Khanty-Mansi Autonomous Okrug-Yugra) Reduced rate of 16.5% (a 3.5% tax rate reduction in accordance with the local legislation Gazpromneft-Noyabrskneftegaz JSC of the Yamalo-Nenets Autonomous Okrug) Gazpromneft-Yamal LLC

318 ANNUAL REPORT 2019 Tax benefits applied in 2019 Eligible entities in the Group PROPERTY TAX Exemption from property tax for fields where development commenced after 1 January Gazpromneft-Khantos LLC 2011 (in accordance with the local legislation of the Khanty-Mansi Autonomous Gazpromneft-Noyabrskneftegaz JSC Okrug-Yugra) Exemption from property tax for a national project to create domestically-developed technology and high-technology equipment for developing the Bazhenov Formation (in Bazhenov Technology Centre LLC accordance with the local legislation of the Khanty-Mansi Autonomous Okrug-Yugra) Reduced rate of 1.1% for property that was built/purchased during the implementation of investment projects in the Yamalo-Nenets Autonomous Okrug (in accordance Gazpromneft-Noyabrskneftegaz JSC with the local legislation of the Yamalo-Nenets Autonomous Okrug) Exemption from property tax for property that was built/purchased during the implementation of investment projects in the Orenburg Oblast (in accordance Gazprom Neft Orenburg LLC with the local legislation of the Orenburg Oblast) Exemption from property tax for property that was built/purchased and put into operation during the implementation of investment projects, totalling 50% of the tax payable Gazpromneft-Vostok LLC to the Tomsk Oblast budget (in accordance with the local legislation of the Tomsk Oblast) Exemption from property tax for property that was built/purchased and put into operation during the development of technology for prospecting and exploration of pre-Jurassic Gazpromneft-Vostok LLC deposits in the Tomsk Oblast (in accordance with the local legislation of the Tomsk Oblast)

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Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices APPENDIX 6. REPORT ON COMPLIANCE WITH THE PRINCIPLES AND RECOMMENDATIONS SET OUT IN THE CORPORATE GOVERNANCE CODE IN 2019

Status of compliance Explanations concerning failure to meet the criteria Criteria for assessing compliance with the corporate with the corporate for assessing compliance with the corporate governance № governance principle governance principle principle An internal company document approved by the General Meeting of Shareholders and establishing the procedures for holding a general meeting is publicly available. The company provides easily available means of communication with the company, 1.1.1 such as a hotline, email or an Internet Compliance forum, enabling shareholders to express their opinions and send questions concerning the agenda in the course of preparation for a general meeting. These actions were taken by the company before each general meeting held during the reporting period. The notice of a general meeting is published (posted) on the company website not later than 30 days before the general meeting. The notice of a general meeting specifies the meeting venue and documents required 1.1.2 for admission to the premises. Compliance Shareholders have been granted access to information about persons who had proposed agenda items and nominated candidates to the Board of Directors and the Audit Committee. During the reporting period, shareholders had an opportunity to address questions to members of executive bodies and members of the Board of Directors before and during the annual general meeting. The Board of Directors position (including dissenting opinions reflected in the minutes) on each agenda item of general meetings 1.1.3 held during the reporting period was included Compliance in the materials for the general meeting of shareholders. Eligible shareholders were granted access to the list of persons eligible to participate in the general meeting, starting from the date when this list was received by the company, whenever general meetings were held during the reporting period.

320 ANNUAL REPORT 2019 Status of compliance Explanations concerning failure to meet the criteria Criteria for assessing compliance with the corporate with the corporate for assessing compliance with the corporate governance № governance principle governance principle principle During the reporting period, shareholders had an opportunity to propose agenda items for the annual general meeting for at least 60 days after the end of the relevant calendar year. 1.1.4 During the reporting period, the company did Compliance not refuse to accept proposals for the agenda or candidates nominated to its bodies due to misprints or other minor defects in shareholders' proposals. An internal company document (internal policy) contains provisions stipulating that each participant of a general meeting may request 1.1.5 Compliance a copy of the voting ballot filled in by them and certified by the tellers committee before the end of the relevant meeting.

When holding general meetings of shareholders With regard to item 2: not all candidates nominated during the reporting period in the form to governance and control bodies were present of an in-person meeting (joint attendance at the meeting where their nominations were put of shareholders), enough time was provided to the vote. to make reports on agenda items and discuss At the same time, in order to enable shareholders 1.1.6 these items. to communicate with candidates nominated Candidates nominated to the company to governance and control bodies, the company governance and control bodies were offers easily available means of communication, available to answer shareholders' questions such as a hotline and email, enabling shareholders Partial compliance at the meeting where their nominations were to express their opinions and send their questions put to the vote. to the candidates. When making decisions related The Board of Directors considers matters related to preparing for and holding general meetings to preparing for general meetings of shareholders of shareholders, the Board of Directors and attendance of candidates nominated considered using telecommunications to provide to governance bodies at the same meetings. If, shareholders with remote access enabling for example, the chairman of the Board of Directors them to participate in general meetings during cannot attend, the Board of Directors appoints one the reporting period. of its members to chair the meeting. The company has developed and disclosed a dividend policy approved by the Board of Directors. If the company dividend policy stipulates 1.2.1 the use of figures from the company financial Compliance statements for determining the amount of dividends, the relevant provisions of the dividend policy also apply consolidated results recorded in financial statements.

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Status of compliance Explanations concerning failure to meet the criteria Criteria for assessing compliance with the corporate with the corporate for assessing compliance with the corporate governance № governance principle governance principle principle The Gazprom Neft Dividend Policy Regulation does not clearly stipulate financial/economic circumstances when the company must not pay dividends. The Regulation sets forth the following principles: improving the investment potential and enabling dividend payout growth, provided that the company net profit is growing. In practice, the Gazprom The company dividend policy clearly stipulates Neft operations are profitable, and the company 1.2.2 financial/economic circumstances when Partial compliance adheres to the policy of regular dividend payouts. the company must not pay dividends. Throughout its history, the company has been paying dividends, and in recent years it has been taking steps to increase dividends per share. The company does not rule out the possibility of revising the dividend policy principles and criteria in the future, including stipulating financial/economic circumstances when the Company must not pay dividends. During the reporting period, the company did 1.2.3 not take any actions infringing on the dividend Compliance rights of existing shareholders To make sure that shareholders do not use any other means of earning profit (income) from the company, except for dividends and disposal value, the company internal documents stipulate controls ensuring timely 1.2.4 Compliance detection and establishing the procedure for approving transactions with persons affiliated (connected) with substantial shareholders (persons entitled to vote with voting shares). During the reporting period, procedures for managing potential conflicts of interest 1.3.1 of substantial shareholders were efficient, while Compliance conflicts between shareholders, if any, were properly addressed by the Board of Directors. There were no quasi-treasury shares, or they 1.3.2 were not used for voting during the reporting Compliance period. The quality and reliability of activities performed by the company registrar to maintain the share 1.4 Compliance register meet the needs of the company and its shareholders. The Board of Directors has the authority to appoint and dismiss members of executive bodies, and to set the terms and conditions of contracts with them; this authority 2.1.1 is stipulated in the company charter. Compliance The Board of Directors has considered a report (reports) by the chief executive officer and members of the collegial executive body on the implementation of the company strategy.

322 ANNUAL REPORT 2019 Status of compliance Explanations concerning failure to meet the criteria Criteria for assessing compliance with the corporate with the corporate for assessing compliance with the corporate governance № governance principle governance principle principle During the reporting period, the Board of Directors considered matters related to implementing and updating the strategy, 2.1.2 approving the company business plan (budget), Compliance and reviewing criteria and indicators (including interim ones) related to the implementation of the company strategy and business plans. The board of directors has determined the principles of and approaches to creating a risk-management and internal-control system 2.1.3 in the company. Compliance The Board of Directors assessed the company risk-management and internal-control system during the reporting period. The company has developed and adopted a policy (policies) approved by the Board of Directors on remuneration and reimbursement for expenses of members 2.1.4 of the Board of Directors, executive bodies Compliance and other key executives of the company. During the reporting period, the Board of Directors considered matters related to the said policy (policies). The Board of Directors plays the key role in preventing, detecting and resolving internal conflicts. 2.1.5 The company has created a system to identify Compliance transactions involving a conflict of interest, and a system of measures for resolving such conflicts. The Board of Directors has approved the Information Policy Regulation. 2.1.6 Compliance The company has appointed persons responsible for implementing the information policy. During the reporting period, the Board of Directors did not consider the corporate governance practice in the company. During the reporting period, the Board A report on the Gazprom Neft corporate 2.1.7 of Directors considered the corporate Non-compliance governance practice is submitted for review governance practice in the company. to the Board of Directors based on the approved work plan. It is planned to review the report in the second half of the year.

The annual report of the company for the reporting period includes information about directors' attendance at meetings of the Board of Directors and its committees. 2.2.1 Compliance The annual report contains information about the key findings of performance assessment of the Board of Directors carried out in the reporting period.

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Status of compliance Explanations concerning failure to meet the criteria Criteria for assessing compliance with the corporate with the corporate for assessing compliance with the corporate governance № governance principle governance principle principle The company has in place a transparent procedure enabling shareholders to send 2.2.2 Compliance their questions and the relevant opinions to the chairman of the Board of Directors. The procedure for assessing the Board of Directors performance adopted

by the company includes assessing professional qualifications of the Board members.

2.3.1 During the reporting period, the Board of Directors Compliance (or its Nominations Committee) assessed candidates nominated to the Board of Directors

in terms of required experience, knowledge, business reputation, absence of conflict of interest, etc. Whenever the agenda of a general meeting of shareholders held during the reporting period included matters related to electing the Board of Directors, the company provided shareholders with biographical details of all candidates nominated to the Board of Directors, findings 2.3.2 of assessment of such candidates by the Board Compliance of Directors (or its Nominations Committee), as well as information on whether the candidate met independence criteria in accordance with Recommendations 102–107 of the Code, and the written consent of the candidates for election to the Board of Directors. As part of performance assessment of the Board of Directors carried out in the reporting period, 2.3.3 the Board of Directors analysed its needs Compliance for professional qualifications, experience and business skills. As part of performance assessment of the Board of Directors carried out in the reporting period, the Board of Directors considered whether 2.3.4 Compliance the number of its members was consistent with the company needs and shareholder interests. As at the end of the reporting period, the Board of Directors did not include independent directors: On 14 June 2019, under the resolution of the General Meeting of Shareholders, Sergey Fursenko was removed from the Board During the reporting period, all independent of Directors; members of the Board of Directors met On 25 December 2019, Valery Serdyukov lost all the independence criteria established his status as an independent director pursuant 2.4.1 Non-compliance in Recommendations 102–107 to Clause 104 of the Corporate Governance of the Code, or were recognised as independent Code: he was recognised as a person connected under the resolution of the Board of Directors. with the company, as he had been a member of the Board of Directors for more than seven years in total. All other members of the Board of Directors are persons connected with a substantial shareholder of the company.

324 ANNUAL REPORT 2019 Status of compliance Explanations concerning failure to meet the criteria Criteria for assessing compliance with the corporate with the corporate for assessing compliance with the corporate governance № governance principle governance principle principle During the reporting period, the Board With regard to item 3: procedures stipulating of Directors (or its Nominations Committee) the actions that the Board members must take formed an opinion as to the independence if they cease to be independent are not set out Partial compliance of each candidate nominated to the Board in the company internal documents. of Directors, and presented the relevant At the same time, in practice, the company verifies statement to shareholders. information about the participation of the Board members in other organisations and ownership of shares (interests) in other organisations on a quarterly basis, and assesses the independence During the reporting period, the Board of candidates nominated to the Board of Directors. of Directors (or its Nominations Committee) This information enables the company to form 2.4.2 at least once assessed the independence an opinion about the independence of directors of the current members of the Board in a timely manner. of Directors listed in the company annual report Given the absence of independent directors as independent directors. on the Board of Directors, the company will initiate the development of the required procedures if they are elected to the Board of Directors. The company has developed procedures stipulating the actions that the Board members must take if they cease to be independent, including the obligation to promptly notify the Board members of that fact. As at the end of the reporting year, the Board of Directors did not include independent directors: On 14 June 2019, under the resolution of the General Meeting of Shareholders, Sergey Fursenko was removed from the Board of Directors; On 25 December 2019, Valery Serdyukov lost his status as an independent director pursuant to Clause 104 of the Corporate Governance Code: he was recognised as a person connected with the company, as he had been a member of the Board of Directors for more than seven years in total. All other members of the Board of Directors are persons connected with a substantial shareholder of the company. Due to the fact that the company has no other Independent directors comprise at least shareholders (except for Gazprom) having an interest 2.4.3 one third of the membership of the Board Non-compliance of more than 2%, which would enable them of Directors. to nominate candidates to the Board of Directors, full compliance with this recommendation largely depends on the willingness of the majority shareholder (Gazprom) to nominate and elect independent directors to the company Board of Directors. The company conducts an annual performance assessment of the Board of Directors; as part of the assessment, the company considers whether it is necessary to elect independent directors. Most members of the Board of Directors see no need to elect independent directors due to the fact that the composition of the Board of Directors is sufficiently well-balanced in terms of professional competencies, experience and business skills, which is considered to be sufficient for the Board of Directors to perform its functions.

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Status of compliance Explanations concerning failure to meet the criteria Criteria for assessing compliance with the corporate with the corporate for assessing compliance with the corporate governance № governance principle governance principle principle As at the end of the reporting year, the Board of Directors did not include independent directors. On 14 June 2019, under the resolution of the General Meeting of Shareholders, Sergey Fursenko was removed from the Board of Directors; on 25 December 2019, Valery Serdyukov lost his status as an independent director pursuant to Clause 104 of the Corporate Governance Code: he was Independent directors (who have no conflict recognised as a person connected with the company, of interest) carry out a preliminary assessment as he had been a member of the Board of Directors of significant corporate actions involving 2.4.4 Non-compliance for more than seven years in total. All other members a potential conflict of interest, and the findings of the Board of Directors are persons connected of these assessments are presented with a substantial shareholder of the company. to the Board of Directors. The company has no other shareholders (except for Gazprom) having an interest of more than 2%, which would enable them to nominate candidates to the Board of Directors. Full compliance with this recommendation largely depends on the willingness of the majority shareholder (Gazprom) to nominate and elect independent directors to the company Board of Directors.. The chairman of the Board of Directors With regard to item 1: the Chairman is an independent director, or a senior elected by the Board of Directors does independent director has been appointed not meet the independence criteria established from among independent directors. in the Corporate Governance Code. Based on the performance assessment of the Board of Directors, the activities of its Chairman have been deemed to meet the company needs. The absence of the senior independent director 2.5.1 Partial compliance The roles, rights and duties of the Chairman does not entail additional risks for the company of the Board of Directors (and, if applicable, or its shareholders. The Chairman of the Board the senior independent director) are properly of Directors has a flawless personal and business specified in the company internal documents. reputation, and extensive experience in executive positions. The functions of the Chairman of the Board of Directors are stipulated in the Charter and the Regulation Governing the Board of Directors. The performance of the Board chairman was 2.5.2 assessed as part of performance assessment Compliance of the Board of Directors in the reporting period. The Board chairman's duty to take measures to ensure the timely provision of the Board 2.5.3 members with materials regarding agenda Compliance items of the Board meeting is stipulated in the company internal documents.

326 ANNUAL REPORT 2019 Status of compliance Explanations concerning failure to meet the criteria Criteria for assessing compliance with the corporate with the corporate for assessing compliance with the corporate governance № governance principle governance principle principle The company internal documents stipulate that members of the Board of Directors must notify the Board of Directors if they have a conflict of interest in relation to any agenda item at a meeting of the Board of Directors or a Board committee, before they start discussing the relevant agenda item. 2.6.1 The company internal documents stipulate that Compliance members of the Board of Directors must refrain from voting on any matters in relation to which they have a conflict of interest. The company has established a procedure allowing the Board of Directors to obtain professional advice on matters within their competency, at the company expense. The company has adopted and published 2.6.2 an internal document clearly specifying Compliance the rights and duties of the Board members. Individual attendance at the Board The provisions of item 2 are complied with only and committee meetings, as well as the amount partially: the company internal documents do of time allocated for preparing for the meetings, not stipulate the Board members' duty to notify were taken into account in the course the Board of Directors of their intentions to join of performance assessment of the Board governance bodies of any other organisations of Directors in the reporting period. (except for Gazprom Neft controlled entities and affiliates). In accordance with the Gazprom Neft Regulation Governing the Board of Directors, members of the Board of Directors must notify the company of their election to governance bodies of other 2.6.3 In accordance with the company internal Partial compliance documents, members of the Board organisations. of Directors must notify the Board of Directors At the same time, in practice, members of their intentions to join governance of the Board of Directors notify bodies of any other organisations (except the Chairman of the Board of Directors in advance for the company controlled entities of their intentions to join governance bodies and affiliates), and of their appointment to such of other organisations and obtain his/her consent. bodies. The company does not rule out the possibility of stipulating the Board members' duty to notify the company of their intentions to join governance bodies of other organisations in the Regulation Governing the Board of Directors in the future. In accordance with the company internal documents, members of the Board of Directors have the right to gain access to documents and make enquiries regarding the company and its controlled entities, and the company 2.6.4 executive bodies must provide the relevant Compliance information and documents. The company has a formalised induction programme for newly elected members of the Board of Directors. The Board of Directors held at least six meetings 2.7.1 Compliance in the reporting year.

327 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

Status of compliance Explanations concerning failure to meet the criteria Criteria for assessing compliance with the corporate with the corporate for assessing compliance with the corporate governance № governance principle governance principle principle The company has approved an internal document establishing the procedure for preparing and holding the Board meetings, 2.7.2 Compliance and stipulating that notification of the meetings must be generally given at least 5 days before the meeting date. The company charter or an internal document stipulates that the most important 2.7.3 matters (according to the list provided Compliance in Recommendation 168 of the Code) must be considered at in-person meetings of the Board. The company charter stipulates that resolutions on the most important matters specified in Recommendation 170 of the Code must be 2.7.4 adopted at the Board meetings by a qualified Compliance majority comprising at least three quarters of votes, or by the majority of votes cast by all elected members of the Board of Directors. The Board of Directors has formed the Audit With regard to items 1 and 3: the Audit Committee Committee consisting only of independent does not include independent directors. The Audit directors. Committee has been formed of representatives The company internal documents stipulate of the principal shareholder (Gazprom) who the responsibilities of the Audit Committee, have special professional expertise in the field including those specified in Recommendation of preparation, analysis, assessment and audit 172 of the Code. of financial statements (accounts).

At least one member of the Audit Committee The company conducts an annual performance who is an independent director has expertise assessment of the Audit Committee 2.8.1 Partial compliance in the field of preparation, analysis, assessment of the Board of Directors; as part of the assessment, and audit of financial statements (accounts). the company considers whether it is necessary to elect independent directors. Most members of the Board of Directors see no need to elect independent directors due to the fact Meetings of the Audit Committee were held that the composition of the Audit Committee at least once a quarter during the reporting is sufficiently well-balanced in terms of professional period. competencies, experience and business skills, which is considered to be sufficient for the Committee to perform its functions effectively.

328 ANNUAL REPORT 2019 Status of compliance Explanations concerning failure to meet the criteria Criteria for assessing compliance with the corporate with the corporate for assessing compliance with the corporate governance № governance principle governance principle principle The Board of Directors has formed With regard to items 1 and 2: the Human the Remuneration Committee consisting only Resources and Compensation Committee does of independent directors. not include independent directors. The Committee The Remuneration Committee has been formed of representatives of the principal is chaired by an independent director who shareholder (Gazprom) who have special is not the Chairman of the Board of Directors. professional expertise in the field of preparation, analysis, assessment and audit of financial statements (accounts).

The company conducts an annual performance assessment of the Human 2.8.2 Partial compliance Resources and Compensation Committee of the Board of Directors; as part The company internal documents stipulate of the assessment, the company considers whether the responsibilities of the Remuneration it is necessary to elect independent directors. Committee, including those specified Most members of the Board of Directors see no in Recommendation 180 of the Code. need to elect independent directors due to the fact that the composition of the Human Resources and Compensation Committee is sufficiently well- balanced in terms of professional competencies, experience and business skills, which is considered to be sufficient for the Committee to perform its functions effectively. The Board of Directors has established With regard to item 1: the Human Resources the Nominations Committee (or its and Compensation Committee does not include responsibilities specified in Recommendation independent directors. The Committee has 186 of the Code are carried out by another been formed of representatives of the principal committee) with most members being shareholder (Gazprom) who have special independent directors. professional expertise in the field of preparation, analysis, assessment and audit of financial statements (accounts).

The company conducts an annual performance assessment of the Human Resources 2.8.3 Partial compliance and Compensation Committee of the Board The company internal documents stipulate of Directors; as part of the assessment, the company the responsibilities of the Nominations considers whether it is necessary to elect Committee (or the relevant committee independent directors. Most members of the Board performing its functions), including those of Directors see no need to elect independent specified in Recommendation 186 of the Code. directors due to the fact that the composition of the Human Resources and Compensation Committee is sufficiently well-balanced in terms of professional competencies, experience and business skills, which is considered to be sufficient for the Committee to perform its functions effectively. During the reporting period, the Board of Directors considered whether the composition of its committees was consistent with the Board 2.8.4 Compliance objectives and the company goals. Additional committees were either formed or considered unnecessary.

329 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

Status of compliance Explanations concerning failure to meet the criteria Criteria for assessing compliance with the corporate with the corporate for assessing compliance with the corporate governance № governance principle governance principle principle The Board committees are headed With regard to item 1: Committee Chairmen by independent directors. elected by the Board of Directors do not meet the independence criteria established in the Corporate Governance Code. Based The company internal documents (policies) on the performance assessment of the Board stipulate that persons who are not members of Directors, the activities of the Committee 2.8.5 Partial compliance of the Audit Committee, the Nominations Chairmen have been deemed to meet the company Committee or the Remuneration Committee needs. The Chairmen of the Board Committees may attend Committee meetings only if they have a flawless personal and business reputation, are invited by the Chairman of the relevant and extensive experience in executive positions. Committee. The functions of the Committee Chairmen are stipulated in the Regulation on Committees. During the reporting period, Committee Chairmen regularly reported 2.8.6 Compliance to the Board of Directors on the performance of their Committees. Self-assessment or external assessment of the Board performance carried out With regard to item 2: the findings in the reporting period included the assessment of the Board performance assessment carried of performance of the Board Committees, out in the reporting period were reviewed individual members of the Board of Directors at the meeting of the Human Resources and Compensation Committee held by absentee 2.9.1 and the Board of Directors as a whole. Partial compliance voting. The findings of self-assessment or external In the future, the company plans to initiate a review assessment of the Board of Directors of the findings of performance assessment/self- carried out during the reporting period were assessment of the Board of Directors at in-person reviewed at an in-person meeting of the Board meetings of the Board of Directors. of Directors. The company engaged an external organisation (consultant) to carry out an independent 2.9.2 performance assessment of the Board Compliance of Directors at least once during the last three reporting periods. The company has adopted and disclosed an internal document titled the Regulation on the Corporate Secretary.

3.1.1 Biographical information of the corporate Compliance secretary is published on the company website and in the annual report with the same level of detail as for the members of the Board of Directors and the company executives. The Board of Directors approves 3.1.2 the appointment, dismissal and additional Compliance remuneration of the corporate secretary. The company has adopted an internal document (documents): a policy (policies) on remuneration of the members of the Board of Directors, 4.1.1 Compliance executive bodies and other key executives, which clearly stipulates approaches to remuneration of these persons.

330 ANNUAL REPORT 2019 Status of compliance Explanations concerning failure to meet the criteria Criteria for assessing compliance with the corporate with the corporate for assessing compliance with the corporate governance № governance principle governance principle principle During the reporting period, the Remuneration Committee considered the remuneration policy (policies) and the practice of its (their) 4.1.2 Compliance implementation and, if required, submitted the relevant recommendations to the Board of Directors. The company remuneration policy (policies) contains (contain) transparent mechanisms for determining the amount of remuneration for the members of the Board of Directors, 4.1.3 Compliance executive bodies and other key executives of the company, and regulates (regulate) all types of payments, benefits and privileges granted to them. The remuneration policy (policies) or other internal documents of the company establish rules for reimbursing expenses incurred 4.1.4 Compliance by the members of the Board of Directors, executive bodies and other key executives of the company. Fixed annual remuneration was not the only form of financial remuneration paid to the members of the Board of Directors for serving on the Board of Directors during the reporting period. The amount and the procedure for paying remuneration and compensation to the members of the Board of Directors are governed by the relevant Regulation. In accordance with the Regulation, the members Fixed annual remuneration was the only form of the Board of Directors receive the following of financial remuneration paid to the members forms of remuneration: basic remuneration, 4.2.1 of the Board of Directors for serving Non-compliance and remuneration for additional duties (serving on the Board of Directors during the reporting on Committees). The annual remuneration paid period. by the company to the members of the Board of Directors is calculated based on profit. The rules set forth in the Regulation are designed to ensure that the forms of remuneration used by the company are consistent with its goals. The company does not rule out the possibility of revising the structure of remuneration paid to the members of the Board of Directors in the future to ensure that it is consistent with the best practices. If an internal document (documents), namely the remuneration policy (policies), provides (provide) for share-based compensation for the members of the Board of Directors, 4.2.2 Not applicable. clear rules must be introduced and disclosed regarding share ownership by the members of the Board of Directors in order to encourage long-term ownership of such shares.

331 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

Status of compliance Explanations concerning failure to meet the criteria Criteria for assessing compliance with the corporate with the corporate for assessing compliance with the corporate governance № governance principle governance principle principle The company does not provide for any additional payments or compensation in case 4.2.3 of early resignation of the Board members Compliance due to a change of control or any other circumstances. During the reporting period, annual performance indicators approved by the Board of Directors were used to determine the amount of variable remuneration paid to the members of executive bodies and other key executives of the company. During the latest assessment of the system of remuneration for the members of executive bodies and other key executives of the company, 4.3.1 Compliance the Board of Directors (the Remuneration Committee) made sure that the company was using an effective balance between the fixed and variable components of remuneration. The company has established a procedure ensuring that any bonus payments wrongfully received by the members of executive bodies and other key executives of the company are returned to the company. The company has adopted a long-term incentive programme for the members of executive bodies and other key executives of the company, which involves using the company shares (financial instruments based on the company shares). The long-term incentive programme 4.3.2 for the members of executive bodies and other Compliance key executives of the company stipulates that the right to sell shares and other financial instruments used in this programme can be exercised not earlier than three years after the date when they were provided. At the same time, this right is conditional upon the company achieving certain performance targets. In the reporting period, the amount of compensation (the golden parachute) paid by the company to the members of executive bodies or key executives in case of early 4.3.3 Compliance resignation on the company initiative, provided that they had committed no wrongdoings, did not exceed twice the amount of the fixed component of annual remuneration. The functions of various governance bodies and divisions of the company within the risk management and internal control system 5.1.1 Compliance are clearly specified in internal documents / in the relevant company policy approved by the Board of Directors.

332 ANNUAL REPORT 2019 Status of compliance Explanations concerning failure to meet the criteria Criteria for assessing compliance with the corporate with the corporate for assessing compliance with the corporate governance № governance principle governance principle principle The company executive bodies have ensured that risk management and internal control 5.1.2 functions and powers have been distributed Compliance among the heads of divisions and departments accountable to them. The company has approved an anti-corruption policy. The company has provided easily available 5.1.3 means for reporting breaches of legislation, Compliance the company internal procedures, or the corporate code of ethics to the Board of Directors or the Audit Committee. During the reporting period, the Board of Directors or the Audit Committee assessed the performance of the company risk 5.1.4 Compliance management and internal control system. The key findings of this assessment have been included in the company annual report. In order to conduct internal audit, the company has created a separate internal audit unit accountable to the Board of Directors 5.2.1 Compliance or the Audit Committee, or has engaged an independent external organisation following the same accountability principle. During the reporting period, the performance of the risk management and internal control system was assessed as part of internal audit. 5.2.2 Compliance The company uses generally accepted approaches to internal control and risk management. The Board of Directors has approved the company information policy developed taking into account the recommendations provided in the Code. 6.1.1 Compliance The Board of Directors (or one of its Committees) considered matters related to the company compliance with the information policy at least once during the reporting period.

333 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

Status of compliance Explanations concerning failure to meet the criteria Criteria for assessing compliance with the corporate with the corporate for assessing compliance with the corporate governance № governance principle governance principle principle The company discloses information about its corporate governance system and general corporate governance principles applied in the company, including disclosure on the company website. With regard to item 3: the Company did not receive The company discloses information a memorandum from the controlling person about the composition of its executive bodies about this person's plans regarding corporate 6.1.2 and the Board of Directors, independence Partial compliance governance in the company. of the Board members and their membership Full compliance with this recommendation largely in the Board Committees (as defined depends on the willingness of the controlling in the Code). shareholder to submit the memorandum. If there is a person controlling the company, the company shall publish a memorandum from the controlling person outlining its plans regarding corporate governance in the company. The company information policy stipulates approaches to and criteria for identifying information that may have a significant impact on the company valuation and the value of its securities, as well as procedures ensuring timely disclosure of such information. If the company securities are traded on foreign organised markets, the disclosure of material 6.2.1 Compliance information in Russia and on such markets during the reporting year shall be synchronised and equivalent. If foreign shareholders hold a considerable number of the company shares, information was disclosed during the reporting year not only in Russian, but also in one of the most widely used foreign languages. During the reporting period, the company disclosed its annual and semi-annual financial statements prepared in accordance with International Financial Reporting Standards (IFRS). The company annual report for the reporting period included annual 6.2.2 financial statements prepared in accordance Compliance with IFRS, together with an auditor's report. The company discloses full information on the structure of its capital in accordance with Recommendation 290 of the Code in its annual report and on its website. The company annual report contains information on the key aspects of its operations and its financial results. 6.2.3 Compliance The company annual report contains information on environmental and social aspects of the company operations.

334 ANNUAL REPORT 2019 Status of compliance Explanations concerning failure to meet the criteria Criteria for assessing compliance with the corporate with the corporate for assessing compliance with the corporate governance № governance principle governance principle principle The company information policy stipulates that shareholders must be granted easy 6.3.1 access to information, including information Compliance about legal entities controlled by the company, at the shareholders' request. During the reporting period, the company did not refuse shareholders' requests for information, or provided a rationale for such refusals. 6.3.2 Compliance In cases specified in the company information policy, shareholders are notified that the information in question is confidential, and assume an obligation to keep it confidential. The company Charter contains a list of transactions or other actions that qualify as significant corporate actions, and establishes criteria for identifying them. Making decisions regarding significant corporate actions is the prerogative of the Board of Directors. 7.1.1 Compliance In those cases when the applicable legislation specifically stipulates that such significant corporate actions fall within the competence of the General Meeting of Shareholders, the Board of Directors provides the shareholders with the relevant recommendations. As at the end of the reporting year, the Board of Directors did not include independent directors. On 14 June 2019, under the resolution of the General Meeting of Shareholders, Sergey Fursenko was removed from the Board of Directors; on 25 December 2019, Valery Serdyukov lost his status as an independent director pursuant to Clause 104 of the Corporate Governance Code: he was recognised as a person The company has established a procedure connected with the company, as he had been whereby independent directors express a member of the Board of Directors for more 7.1.2 Non-compliance their opinions with regard to significant than seven years in total. All other members corporate actions before their approval. of the Board of Directors are persons connected with a substantial shareholder of the company. The company has no other shareholders (except for Gazprom) having an interest of more than 2%, which would enable them to nominate candidates to the Board of Directors. Full compliance with this recommendation largely depends on the willingness of the majority shareholder (Gazprom) to nominate and elect independent directors to the company Board of Directors.

335 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices

Status of compliance Explanations concerning failure to meet the criteria Criteria for assessing compliance with the corporate with the corporate for assessing compliance with the corporate governance № governance principle governance principle principle Given the nature of the company operations, the minimum criteria established in its Charter for classifying the company transactions as significant corporate actions are lower than 7.1.3 those established by law. Compliance During the reporting period, all significant corporate actions underwent the approval procedure before they were performed. During the reporting period, the company disclosed detailed information 7.2.1 about its significant corporate actions, including Compliance the rationale for and the timing of such actions, in a timely manner. The company internal documents establish With regard to item 3: the company internal a procedure for engaging an independent documents do not contain an expanded list appraiser to carry out a valuation of the property of grounds for recognising the members to be disposed of or purchased in a major of the Board of Directors and other persons transaction or related-party transaction. stipulated by law as having interest in the company The company internal documents establish transactions. a procedure for engaging an independent The company internal documents provide appraiser to carry out a valuation of the company for a list of grounds for recognising the members shares for the purpose of purchase or buyback. of the Board of Directors and other persons stipulated by law as having interest in the company transactions only under Russian legislation. 7.2.2 Partial compliance After the adoption of the Corporate Governance Code, significant amendments have been made The company internal documents contain to the Law 'On Joint-Stock Companies' (Chapter an expanded list of grounds for recognising XI 'Interest in the Execution of a Transaction the members of the Board of Directors and other by the Company') with regard to compiling a list persons stipulated by law as having interest of interested parties and establishing a procedure in the company transactions. for approving transactions. Accordingly, the company has made the relevant amendments to its internal documents: the Charter, the Regulation Governing the Board of Directors, and the Regulation on the Management Board.

336 ANNUAL REPORT 2019 APPENDIX 7. LIST OF MAJOR TRANSACTIONS AND RELATED-PARTY TRANSACTIONS

List For more details on related-party of major transactions transactions made by Gazprom Neft and related-party in 2019, see transactions ir.gazprom-neft.com/?id=9

Interfax – Corporate Disclosure Center

337 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices APPENDIX 8. EXCERPTS FROM MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Revenue

Revenue from sales, ₽ million

∆ Item 2015 2016 2017 2018 2019 2019/2018, %

CRUDE OIL

Net export (excluding CIS) 115,905 225,137 – – – – Export 180,240 266,661 413,662 552,692 586,357 6.1 Less: export duties (64,335) (41,524) – – – – International markets 9,146 12,683 22,480 37,938 28,339 (25.3) Net export to CIS 27,581 23,528 – – – – Export sales and sales in CIS 28,416 23,657 30,117 38,993 41,067 5.3 Less: export duties (835) (129) – – – – Domestic market 81,187 94,809 83,393 88,848 88,797 (0.1) TOTAL CRUDE OIL REVENUE 233,819 356,157 549,652 718,471 744,560 3.6

GAS

International markets 3,411 1,853 1,237 1,010 863 (14.6) Domestic market 28,243 30,116 36,351 35,805 29,891 (16.5) TOTAL GAS REVENUE 31,654 31,969 37,588 36,815 30,754 (16.5)

PETROLEUM PRODUCTS

Net export (excluding CIS) 202,477 184,272 – – – – Export 260,731 215,837 228,346 330,290 328,434 (0.6) Less: export duties (58,254) (31,565) – – – – International markets 107,405 99,440 112,912 165,880 156,423 (5.7) Sales on international markets 171,749 175,247 180,803 257 803 249,131 (3.4) Less: sales-related excise tax (64,344) (75,807) (67,891) (91,923) (92,708) 0.9 CIS 78,070 71,838 76,058 91,334 86,752 (5.0) Export sales and sales in CIS 78,134 72,969 77,154 92,245 87,623 (5.0) Less: export duties (64) (1,131) – – – – Less: sales-related excise tax – – (1,096) (911) (871) (4.4) Domestic market 740,520 743,721 866,234 1,075,927 1,046,521 (2.7) Total petroleum products revenue 1,128,472 1,099,271 1,283,550 1,663,431 1,618,130 (2.7) Other revenue1 73,998 58,211 63,799 70,575 91,864 30.2 TOTAL 1,467,943 1,545,608 1,934,589 2,489,292 2,485,308 (0.2)

/ 1 / Mainly comprises revenue from the sale of transportation, construction and utility services.

338 ANNUAL REPORT 2019 Production and manufacturing expenses

Production and manufacturing expenses, ₽ million

Item 2015 2016 2017 2018 2019 ∆ 2019/2018, % Upstream expenses 1 98,095 106,765 111,837 109,090 121,167 11.1 ₽ per toe n/a 1,782 1,767 1,669 1,793 7.4 $2 per boe n/a 3.63 4.13 3.63 3.78 4.1 Consolidated subsidiaries in Russia 72,854 80,392 85,898 81,385 91,984 13.0 ₽ per toe n/a 1,647 1,653 1,510 1,634 8.2 $ per boe n/a 3.35 3.86 3.29 3.44 4.6 including: 61,225 65,960 67,923 65,870 72,414 9.9 brownfields 1,582 1,692 1,812 1,660 1,876 13.0 ₽ per toe 3.54 3.44 4.24 3.61 3.95 9.4 $ per boe 11,629 14,432 17,975 15,515 19,570 26.1 greenfields n/a 1,470 1,242 1,104 1,120 1.4 ₽ per toe n/a 2.99 2.90 2.40 2.36 (1.7)

$ per boe 9,426 9,655 8,381 9,311 9,899 6.3

Consolidated subsidiaries outside Russia (including PSC)3 n/a 4,144 3,059 2,975 3,322 11.7 ₽ per toe n/a 8.43 7.15 6.47 7.00 8.2 $ per boe 15,815 16,718 17,558 18,394 19,284 4.8 Joint operations 1,787 1,924 2,061 2,232 2,396 7.3 ₽ per toe 4.00 3.92 4.82 4.86 5.05 3.9 $ per boe 53,549 53,132 55,318 58,919 66,104 12.2 Refining expenses at own refineries4 30,724 30,619 31,191 32,251 35,637 10.5 ₽ per tonne 882 893 966 920 1,050 14.1 $ per barrel 1.97 1.82 2.26 2.00 2.21 10.5

Refining expenses at refineries of joint ventures5 14,648 12,453 12,259 12,496 13,450 7.6

₽ per tonne 1,778 1,639 1,568 1,590 1,786 12.3 $ per barrel 3.98 3.34 3.67 3.46 3.76 8.7 Lubricants and packaged-products manufacturing expenses 8,177 10,060 11,868 14,172 17,017 20.1 Transportation to refineries 27,541 29,561 29,265 32,950 32,910 (0.1) Other operating expenses 35,082 12,404 20,110 27,659 40,507 46.5 Total 214,267 201,862 216,530 228,618 260,688 14.0

/ 1 / Expenditure on raw materials and supplies, equipment maintenance and repairs, labour costs, fuel and electricity costs,enhanced oil recovery activities and other similar costs at the group upstream subsidiaries. / 2 / Translated into US dollars at the average exchange rate for the period. / 3 / PSC stands for a production sharing contract. / 4 / Expenditure on raw materials and supplies, equipment maintenance and repairs, labour costs, electricity costs and other similar costsat the group refineries. / 5 / Refining expenses of joint ventures are based on processing agreement.

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Upstream expenses per toe at consolidated subsidiaries in Russia increased by 8.2% year on year, mainly due to production decline at brownfields.

Upstream expenses per toe at consolidated subsidiaries at brownfields increased by 13% year on year due to: – Comparison with a low base in 2018 due to shutdowns of high water-cut wells in 1H 2018 under the OPEC+ agreement; – Inflationary pressure.

Upstream expenses per toe at joint operations increased by 7.3% year on year, mainly due to growth of electricity tariffs, higher liquid production volume and water injection.

Refining expenses per tonne at own refineries increased by 14.1% year on year due to: – Increase in maintenance expenses; – Increase in MTBE purchases1; – Throughput decline; – Increase in expenses related to environmental programmes.

Refining expenses per toe at joint ventures increased by 12.3% year on year due to higher processing expenses (launch of new refining units, electricity and repairs).

Lubricants and bitumen production expenses increased by 20.1% year on year, mainly due to a rise in high-technology additives and packaging prices.

Other operating expenses increased mainly due to an increase in other revenue, which was related to growth of services rendered and development of oil rims.

Selling, general and administrative expenses

Selling, general and administrative expenses2 increased by 9.3% year on year, driven mainly by: – Increased estimated liabilities due to share price growth; – Increased advertising and marketing expenses as part of selling expenses.

Transportation expenses

Transportation expenses 3 decreased by 2.5% year on year, mainly due to a change in terms of gas supply contracts with consumers and the application of IFRS 16 since January 2019. The decrease was offset by higher crude oil and petroleum-products transportation expenses due to crude oil sales volume growth and higher transportation tariffs.

/ 1 / MTBE stands for methyl tert-butyl ether. It is utilised as a motor-fuel additive to increase the gasoline octane number. / 2 / Distribution costs, retail business expenses, remunerations, wages and salaries (excluding remunerations, wages and salariesat upstream subsidiaries and own refineries), social benefits, insurance, legal, consulting and auditservices, and other expenses. / 3 / Costs to transport crude oil and petroleum products to final customers. These costs consist of pipeline transportation, sea freight,rail, shipping, handling, and other transportation costs.

340 ANNUAL REPORT 2019 Depreciation, depletion and amortisation

Depreciation, depletion and amortisation expenses1 increased by 3.4% year on year due to an increase in the cost of depreciable assets driven by the implementation of the investment programme, and the application of IFRS 16 since 1 January 2019.

Taxes

Taxes other than income tax, ₽ million

Tax 2015 2016 2017 2018 2019 ∆ 2019/2018, % Mineral extraction tax (MET) 256,477 237,300 329,579 487,492 464,773 (4.7) Excess-profits tax – – – – 14,348 – Excise tax 68,358 112,102 128,229 126,779 70,125 (44.7) Social security contributions 15,599 18,530 20,433 22,113 25,707 16.3 Other taxes 12,711 13,199 14,028 16,400 16,240 (1.0) Total 353,145 381,131 492,269 652,784 591,193 (9.4)

MET expenses decreased by 4.7% year on year, mainly due to a lower effective MET rate as a result of lower crude oil prices. In addition, excess-profits tax (EPT) was imposed on 1 January 2019. The group introduced EPT for several fields in Western and Eastern Siberia.

Excise tax decreased by 44.7% year on year, mainly due to the introduction of crude oil materials excise tax deduction and the damper component since 1 January 2019, which was partially offset by an increase in motor fuel excise tax rates (by 28%).

Share of profit of associates and joint ventures

Share of profit/(loss) of associates and joint ventures, ₽ million

Company 2015 2016 2017 2018 2019 ∆ 2019/2018, % Slavneft 9,265 13,916 10,347 15,025 11,944 (20.5) Messoyakhaneftegaz – (947) 9,976 28,172 25,814 (8.4) SeverEnergia (Arcticgas) 11 913 14,472 19,861 40,451 39,849 (1.5) Northgas 3,466 3,009 3,433 3,699 3,090 (16.5) Other companies 312 3,666 1,887 3,357 3,209 (4.4) Total 24,956 34,116 45,504 90,704 83,906 (7.5)

/ 1 / Depreciation, depletion and amortisation expenses include depletion of oil and gas properties, depreciation of other property, plant and equipment, and impairment of oil and gas properties.

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The group share of Slavneft profit decreased year on year, mainly due to higher MET expenses caused by the standard tax rate increase, and higher finance expense as a result of debt portfolio growth. The decrease in the share of profit was partially offset by revenue growth due to production increase.

The group share of Messoyakhaneftegaz and Arcticgas profit decreased mainly due to higher finance expense. The group share of Northgas profit decreased mainly due to lower production.

Other income and expenses

Other expenses, which included mainly disposal of non-current assets in 2019, increased by 17.7% year on year.

Other financial items

Foreign exchange gains (losses) are mainly influenced by revaluation of the foreign currency-denominated part of the Group's loan portfolio.

Liquidity and sources of capital

Cash, ₽ million

Item 2015 2016 2017 2018 2019 ∆ 2019/2018, % Net cash provided by operating activities 285,175 321,297 421,700 537,523 609,076 13.3 Net cash used in investing activities (314,511) (323,854) (312,889) (335,038) (363,589) 8.5 Net cash provided by / (used in) financing activities 82,193 (68,430) (50,521) (56,543) (276,720) >200 Net increase / (decrease) in cash and cash equivalents 52,857 (70,987) 58,290 145,942 (31,233) –

342 ANNUAL REPORT 2019 Net cash provided by operating activities, ₽ million

Item 2015 2016 2017 2018 2019 ∆ 2019/2018, % Net cash provided by operating activities 1 312,169 361,567 439,319 624,783 616,311 (1.4) Changes in working capital 18,342 15,216 52,809 326 39,505 >200 Income tax paid (19,522) (22,158) (36,530) (61,157) (53,087) (13.2) Interest paid (28,229) (36,476) (39,449) (46,492) (59,057) 27.0 Dividends received 2,415 3,148 5,551 20,063 65,404 >200 Total 285,175 321,297 421,700 537,523 609,076 13.3

Net cash provided by operating activities increased by 13.3% year on year, primarily due to higher dividends received from joint ventures, and the positive effect of changes in working capital.

Net cash used in investing activities, ₽ million

Item 2015 2016 2017 2018 2019 ∆ 2019/2018, % Capital expenditures (349,036) (384,817) (357,090) (370,067) (453,011) 22.4 (Acquisition)/disposal of subsidiaries, shares in joint 197 (2,028) (8,345) (1,360) (210) (84.5) operations and equity-accounted investments Purchase of oil and gas licences – – – (5,130) (9,623) 87.6 Net changes in deposits 45,745 48,517 (5,933) 6,710 (15,090) – Proceeds from sale of property, plant and equipment, 982 1,008 2,210 4,413 115,710 >200 net of tax Net changes in loans issued and other investments (22,603) (2,104) 44,938 11,511 (4,755) – Interest received 7,984 4,384 9,149 18,885 17,155 (9.2) Other cash flows from investing activities 2,220 11,186 2,182 – (13,765) –

Total (314,511) (323,854) (312,889) (335,038) (363,589) 8.5

Net cash used in investing activities increased by 8.5% year on year. Cash outflow in investing activities resulting from capital expenditure, changes in deposits, loans issued and other investments was partially offset by an inflow from the transfer of a capital facility to the parent company in 1Q 2019.

/ 1 / Before changes in working capital, income tax, interest and dividends.

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Net cash used in financing activities, ₽ million

∆ Item 2015 2016 2017 2018 2019 2019/2018, % Net changes in debt 121,565 (63,929) 3,556 5,484 (33,416) – Payment of dividends to shareholders (36,346) (2,598) (50,382) (70,774) (227,120) >200 Other transactions (3,026) (1,903) (3,695) 8,747 (16,184) – Total 82,193 (68,430) (50,521) (56,543) (276,720) >200

Net cash used in financing activities increased year on year, mainly due to higher dividends paid to shareholders and a decrease in debt load.

Capital expenditures, ₽ million

Item 2015 2016 2017 2018 2019 ∆ 2019/2018, % Exploration and production 255,235 245,256 223,916 224,852 266,386 18.5 consolidated subsidiaries 239,199 228,084 207,900 208,138 247,754 19.0 joint operations 16,036 17,172 16,016 16,714 18,633 11.5 Refining 31,552 50,095 81,370 95,202 118,210 24.2 Marketing and distribution 13,547 9,728 12,466 15,585 16,204 4.0 Other 13,317 14,724 16,227 18,296 21,469 17.3 Capital expenditures (subtotal) 313,651 319,803 333,979 353,935 422,269 19.3 Change in advances issued and materials used in capital 35,385 65,014 23,111 16,132 30,742 90.6 expenditures Total 349,036 384,817 357,090 370,067 453,011 22.4

Upstream capital expenditure increased by 18.5% year on year (mainly for consolidated subsidiaries) due to: – Increase in production drilling and workover operations at new fields in traditional production regions; – Increase in production drilling, construction of multi-well pads and infrastructure facilities at greenfields and at offshore projects; – Seismic surveys at newly acquired licence blocks.

Downstream capital expenditure increased by 24.2%, mainly due to increased costs at the Omsk Refinery resulting from deep conversion projects and construction of a catalyst production plant.

344 ANNUAL REPORT 2019 Debt and liquidity, ₽ million

As at 31 As at 31 As at 31 As at 31 As at 31 December December December December December Item 2015 2016 2017 2018 2019 Short-term loans and borrowings 147,319 80,187 131,760 90,923 30,198 Long-term loans and borrowings 670,779 596,221 548,654 684,530 685,030 Cash and cash equivalents (114,198) (33,621) (90,608) (247,585) (202,404) Short-term deposits (49,206) (886) (5,779) – (15,076) Net debt 654,694 641,901 584,027 527,868 497,748 Short-term debt / total debt, % 18.0 11.9 19.4 11.7 4.2 Net debt / EBITDA (LTM) 1.90 1.60 1.19 0.73 0.70

The group’s diversified debt portfolio includes syndicated and bilateral loans, bonds and other instruments. The average debt maturity decreased from 3.84 years as at 31 December 2018 to 3.18 years as at 31 December 2019. The average interest rate decreased from 6.29% as at 31 December 2018 to 6.18% as at 31 December 2019.

For reference

EBITDA reconciliation, ₽ million

∆ 2019/2018, Item 2015 2016 2017 2018 2019 % Profit for the period 116,198 209,725 269,678 400,993 422,088 5.3 Total income tax expense 29,252 49,814 55,522 79,129 85,746 8.4 Finance expense 33,943 34,282 25,127 21,476 32,772 52.6 Finance income (14,732) (11,071) (10,098) (7,506) (22,906) >200 Depreciation, depletion and amortisation 114,083 129,845 140,998 175,451 181,372 3.4 Net foreign exchange gain/(loss) 67,910 (28,300) 241 33,558 (10,518) – Other income/(expenses), net (1,494) 17,982 7,557 19,796 23,292 17.7 EBITDA 345,160 402,277 489,025 722,897 711,846 (1.5)

Less: share of profit of associates and joint ventures (24,956) (34,116) (45,504) (90,704) (83,906) (7.5)

Add: share of EBITDA of associates and joint ventures 84,607 88,037 107,446 167,313 167,189 (0.1)

Total adjusted EBITDA 404,811 456,198 550,967 799,506 795,129 (0.5)

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Profitability, %

As at 31 As at 31 As at 31 As at 31 As at 31 ∆ 2019/2018, December December December December December percentage Item 2015 2016 2017 2018 2019 points Adjusted EBITDA margin 27.58 29.52 28.48 32.12 31.99 (0.1) Net profit margin 7.92 13.57 13.94 16.11 16.98 0.9 Return on assets (ROA) 5.07 8.33 9.84 12.43 11.49 (0.9) Return on equity (ROE) 9.77 15.58 17.38 21.97 20.08 (1.9) Adjusted return on average capital employed (ROACE) 12.15 11.77 13.90 19.66 17.42 (2.2)

Adjusted ROACE calculation1, %

As at 31 As at 31 As at 31 As at 31 As at 31 December December December December December Item 2015 2016 2017 2018 2019 Adjusted EBITDA 404,811 456,198 550,967 799,506 795,129 Depreciation, depletion and amortisation (140,659) (158,919) (178,449) (216,480) (227,150) Effective income tax charge on EBIT (53,501) (62,429) (71,605) (114,725) (112,464) Adjusted EBIT2 210,651 234,850 300,913 468,301 455,515 Average capital employed 1,733,285 1,994,626 2,164,614 2,381,424 2,615,316 Adjusted ROACE 12.15 11.77 13.90 19.66 17.42

Liquidity

As at 31 As at 31 As at 31 As at 31 As at 31 December December December December December ∆ 2019/2018, Item 2015 2016 2017 2018 2019 % Current ratio 1.46 1.37 0.88 1.18 1.51 28.0 Quick ratio 0.79 0.66 0.42 0.67 0.84 25.4 Cash ratio 0.51 0.26 0.21 0.44 0.44 –

/ 1 / Return on average capital employed. / 2 / Adjusted EBIT represents the group EBIT and its share in EBIT of associates and joint ventures.

346 ANNUAL REPORT 2019 Changes in the group net debt, ₽ Changes in adjusted ROACE, billion, and the net debt/EBITDA % ratio

654.7 641.9 584.0 527.9 497.7 19.66 800 700 600 17.42 500 400 13.90 1.9 300 1.6 12.15 11.77 200 1.19 100 0.73 0.7 0 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019

For more details on the company P. 189 debt, see the Debt Portfolio and Credit Ratings subsection.

Leverage

As at 31 As at 31 As at 31 As at 31 As at 31 ∆ 2019/2018, December December December December December percentage Item 2015 2016 2017 2018 2019 points Net debt / total assets, % 26.34 25.18 19.93 14.99 13.01 (2.0) Net debt / equity, % 52.44 44.45 35.20 26.50 22.49 (4.0) Gearing, % 36.05 30.80 25.97 20.74 18.23 (2.5) Net debt / market capitalisation 0.90 0.64 0.51 0.32 0.25 (21.9) Net debt / EBITDA 1.90 1.60 1.19 0.73 0.70 (4.1) Total debt / EBITDA 2.37 1.68 1.39 1.07 1.00 (6.5)

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Key macroeconomic factors

Key factors affecting the group performance include the following: – Changes in market prices for crude oil and petroleum products; – Changes in the US dollar/Russian rouble exchange rate and inflation; – Taxation; – Changes in crude oil and petroleum-products transportation tariffs.

Changes in market prices for crude oil and petroleum products

Prices for crude oil and petroleum products on the international and Russian markets are the primary factor affecting the group performance. They are primarily determined by global prices for crude oil, petroleum-product supply and demand, and competition on different markets. In turn, price trends on the international market determine domestic prices. Price trends differ for different types of petroleum products.

The decrease in crude oil and petroleum-product prices on the international market in 2019 had a negative impact on the group results.

Changes in crude oil and petroleum-product prices

Fuels 2015 2016 2017 2018 2019 ∆ 2019/2018, % INTERNATIONAL MARKET ($/BBL) Brent 52.46 43.73 54.09 71.16 64.25 (9.7) Urals Spot (average Med + NWE) 51.49 42.02 52.94 69.86 63.39 (9.3) INTERNATIONAL MARKET ($/TONNE) Premium gasoline (average NWE) 569.96 467.05 557.58 674.67 613.20 (9.1) Naphtha (average Med + NWE) 450.05 377.85 477.10 595.99 495.23 (16.9) Diesel fuel (average NWE) 500.70 398.58 493.65 641.23 590.95 (7.8) Gasoil 0.1% (average Med) 486.26 391.21 483.49 632.07 580.92 (8.1) Fuel oil 3.5% (average NWE) 247.49 199.93 290.96 387.07 320.46 (17.2) DOMESTIC MARKET (₽ /TONNE) High-octane gasoline 32,488 34,574 36,820 41,724 39,438 (5.5) Low-octane gasoline 28,435 29,858 31,931 37,249 8,515 (77.1) Diesel fuel 28,944 27,965 32,619 41,070 40,530 (1.3) Fuel oil 7,202 6,051 9,594 14,319 12,666 (11.5)

Sources: Platts (international market); Thomson Reuters Kortes (domestic market).

348 ANNUAL REPORT 2019 Changes in the US dollar/Russian rouble exchange rate and inflation

The group management has determined that the group presentation currency is the Russian rouble. The functional currency of each of the group’s consolidated subsidiaries is the currency of the primary economic environment in which the entity operates. For most entities, this is the Russian rouble.

Item 2015 2016 2017 2018 2019 Change in the Consumer Price Index (CPI), % 12.9 5.4 2.5 4.30 3.02 Average US dollar/rouble exchange rate for the period, ₽ 60.96 67.03 58.35 62.71 64.72 US dollar/rouble exchange rate as at the beginning 56.26 72.88 60.66 57.60 69.47 of the period, ₽ US dollar/rouble exchange rate as at the end of the period, ₽ 72.88 60.66 57.60 69.47 61.91 Depreciation (appreciation) of the Russian rouble against 30 (17) (5) 21 (11) the US dollar, %

Taxation

Average tax rates effective in the reporting periods for the taxation of oil and gas companies in Russia

Item 2015 2016 2017 2018 2019 ∆ 2019/2018, % EXPORT DUTY ($/TONNE) Crude oil 120.25 75.61 86.74 128.48 93.70 (27.1) Light petroleum products 57.67 30.21 25.99 38.52 28.07 (27.1) Diesel fuel 57.67 30.21 25.99 38.52 28.07 (27.1) Gasoline 93.75 46.07 25.99 38.52 28.07 (27.1) Naphtha 102.17 53.63 47.67 70.62 51.48 (27.1) Heavy petroleum products 91.34 61.96 86.74 128.48 93.70 (27.1) MINERAL EXTRACTION TAX (₽ /TONNE) Crude oil 6,326 5,770 8,134 12,455 13,039 4.7

For more details on taxation and its application to Gazprom Neft, see Appendix 5, Oil Industry Taxation,

p. 306

03 PERFORMANCE 349 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices GLOSSARY

ADR Cased borehole DCU American depositary receipt A portion of the borehole lined Delayed coking unit with casing pipes, which are screwed Alkaline-surfactant-polymer (ASP) or welded together to form a casing EAD flooding string Electronic asset development A chemical enhanced oil recovery technique for mature fields where CGF EBIT a mixture of alkali, surfactant Central gathering facility Earnings before interest and taxes. and polymers is injected into This measure of company financial a formation CGU performance is in between gross Cash-generating units and net profit APG Associated petroleum gas CIS EBITDA Commonwealth of Independent Earnings before interest, taxes, Augmented reality States (former Soviet republics, depreciation and amortisation Superimposing digital information except for Latvia, Lithuania, (images, videos, text, graphics) and Estonia) ECA on content displayed by an electronic Export credit agency device, be it a smartphone or AR CNG glasses. In production, it is leveraged Compressed natural gas Engaging environment to promptly receive information A set of principles and processes about equipment and its condition, Corporate culture that help employees reach their full simulate work processes, report A system of values, attitudes, goals potential, continuously develop failures, conduct employee training, and principles underlying teamwork and improve their performance, etc. This significantly reduces and workplace dispute settlement, actively collaborate to address the number of errors and helps which are shared by all company issues, and feel a sense of personal to improve performance employees. Corporate culture responsibility for their share of work is based on corporate values and their contribution to the company B2B achievements Business-to-business: the exchange Corporate culture workshops of products and services between Employee workshops attended EnMS businesses, rather than between by company and enterprise Energy management system businesses and consumers executives to discuss the current and target corporate culture model Etalon B2C in the company and initiatives that An operational transformation Business-to-consumer: the process may help to build an engaging programme based on an exemplary of selling products and services environment business model. The commitment directly to consumers, who to delivering exemplary performance are the end-users of these products CPI is typical of a mature company that and services Consumer price index has successfully navigated through development challenges Bps D&O Basis point Directors and officers liability EURIBOR insurance Euro Interbank Offered Rate

350 ANNUAL REPORT 2019 FAR sensors to enable data collection MFWKO Fatal accident rate and exchange. This enables remote Mobile free-water knockout unit equipment control and industrial Fracking automation, with no human MSHF Hydraulic fracturing intervention Multi-stage hydraulic fracturing

GDP IRMF Mud pit Gross domestic product Integrated risk-management A facility designed for centralised framework collection, treatment and disposal GRI of drilling waste An internationally recognised KMAO sustainability reporting framework Khanty-Mansi Autonomous Okrug Network-based management developed by the Global Reporting A modern management model based Initiative KPI on flexible cross-functional teams Key performance indicator capable of setting their own goals Hierarchical management and making independent decisions. It A classical organisational model LB relies on horizontal hierarchy, lifelong integrating top-down management Licence block learning and personal responsibility guidance with bottom-up flow for the outcomes It is best suited of information from personnel Lean production for addressing complex challenges on the ground. It is based on strict A management concept based in a rapidly changing environment supervision, clear delineation on continuous improvement of responsibilities, red tape and commitment to eliminating all NGL and a vertical hierarchy, types of losses, with all employees Natural gas liquids and is regarded as inefficient being involved in the improvement in today's world process NIS Naftna Industrija Srbije А.D., Novi Sad HRR LIBOR Hard-to-recover reserves London Interbank Offered Rate NPP Non-profit partnership HSE LPG Health, safety and environment Liquefied petroleum gas NPS Net Promoter Score IEA LTIFR International Energy Agency Lost time injury frequency rate OC Oil company IFRS Management by objectives International Financial Reporting A collective approach to formulating Oe Standards goals, setting the direction, Oil equivalent and decision-making in the company. Indigenous minorities It ensures that company executives OECD Indigenous minorities of the Russian and employees share the same Organisation for Economic Far North goals, understand their importance, Cooperation and Development and are able to assess Industrial Internet of Things (IIoT) their performance and make A system of interconnected computer improvements networks and connected physical assets (equipment) with embedded MET Mineral extraction tax

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OGCF over oil and gas discovery, but also Underbalanced drilling Oil and gas condensate field the economic feasibility of extracting A drilling technique where formation hydrocarbons. Reserves to be pressure is higher than the pressure OIRSP measured are divided into three in the wellbore. The pressure Prirazlomnaya offshore ice-resistant categories: proved, probable difference minimises formation stationary platform and possible (3P) contamination and helps to increase the drilling rate and the oil recovery OMS Proppant / propping agent factor Operations management system Granular material designed to keep an induced hydraulic fracture open US GAAP OPEC under ground pressure and thus Generally Accepted Accounting Organisation of the Petroleum enhance oil recovery Principles approved in the US Exporting Countries R&D USA ORF Research and development Untied States of America Oil recovery factor RAS VAT PMAC Russian Accounting Standards Value-added tax Polymer-modified asphalt cement Refinery VIOC PMB Oil refinery Vertically integrated oil company Polymer-modified bitumen used for road construction Regular management practices YNAO Tools used by managers to improve Yamalo-Nenets Autonomous Okrug Pp operating performance and safety. Percentage point They rely on clearly defined algorithms and implementation Predictive analytics principles and are applied at all A class of data analysis techniques levels of company management. focused on predicting the future Regular management practices behaviour of objects and entities help implement the company values in order to optimise decision-making and create a cultural environment that contributes to achieving its Predictive incident management strategic goals A fundamentally new approach to equipment maintenance ROACE and repairs based on the analysis Return on average capital employed, of digital data gathered from sensors calculated as net profit (less dividend to accurately predict wear and tear. on shares) divided by the average This helps to maximise maintenance number of ordinary shares efficiency and prevent accidents SEC PRMS US Securities and Exchange Petroleum Resources Management Commission System. This is the world's most widely used system for estimating Seismic hydrocarbon resources, defining Seismic survey not only the degree of uncertainty

352 ANNUAL REPORT 2019 DISCLAIMER

This Annual Report is based on the information available to Public Joint Stock Company Gazprom Neft and its subsidiaries (Gazprom Neft) as at the reporting date.

The Annual Report contains forward- to risks and uncertainties both in any forward-looking statements looking statements that represent expected and unforeseeable contained herein or elsewhere. the expectations of the company by the company. Therefore, future Gazprom Neft shall bear no management. These forward-looking performance may differ from current responsibility for any losses that statements are not based on actual expectations, and the recipients may be incurred by any person due circumstances and include all of the information contained herein to the fact that the person in question statements pertaining to the company should not use it as a sole basis relied on forward-looking statements. intentions, opinions or current for their assumptions. Except as expressly required expectations with regard to company by applicable law, the company performance, financial position, In addition to official information assumes no obligation to distribute liquidity, growth prospects, on Gazprom Neft operations, or publish any updates or revisions strategy and the industry this Annual Report contains to the forward-looking statements in which Gazprom Neft operates. information obtained from third to reflect any changes in expectations By their nature, such forward- parties and sources which Gazprom or new information, as well looking statements are subject Neft deems to be reliable. as subsequent events, conditions to inherent risks and uncertainties, Nevertheless, the company does or circumstances. as they refer to events and depend not guarantee the accuracy on circumstances that may or may of this information as it may be not occur in the future. condensed or incomplete. Gazprom Neft does not provide any Such words as 'assume', 'believe', guarantees that the actual 'expect', 'forecast', 'intend', results, the scope of the company 'plan', 'project', 'consider', 'might' operations and its performance and other similar or equivalent indicators or those of the industry words and phrases, as well in which the company operates as negations thereof generally will be consistent with the results, indicate a forward-looking statement. scope and performance indicators These assumptions are subject expressly stated or implied

353 GAZPROM NEFT

Company profile Strategic report Performance Technological development Governance system Sustainable development Appendices ADDRESSES AND CONTACTS

Full company name Public Joint Stock Company Gazprom Neft

Short company name Gazprom Neft PJSC

Location St Petersburg, Russian Federation

Registration date The company was registered on 6 October 1995 by the Omsk Registration Chamber. Statutory Registration Certificate No. 38606450. Primary State Registration Number (OGRN) 1025501701686.

Postal address 3–5 Pochtamtskaya St., St Petersburg, Russia, 190000

Website gazprom-neft.com

Information service Phone: +7 (812) 363-31-52 Phone: +7 (800) 700-31-52 (toll-free in Russia) Fax: +7 (812) 363-31-51 Email: [email protected]

PRESS SERVICE Phone: +7 (495) 777-31-43 (Moscow) Media enquiries Phone: +7 (812) 648-31-43 (St Petersburg) Email: [email protected]

SHAREHOLDER RELATIONS Phone: +7 (812) 363-31-52 Corporate and Fax: +7 (812) 363-31-51 Project Support Department Email: [email protected]

INVESTOR RELATIONS Phone: +7 (812) 358-95-48 Investor Relations Department Email: [email protected]

Auditor Limited Liability Company Financial and Accounting Consultants (FBK) Address: 44/1 Myasnitskaya St., building 2AB, Moscow, Russia, 101990 Phone: +7 (495) 737-53-53 Website fbk.ru/ Email: [email protected]

Registrar Joint Stock Company Specialised Registrar – Holder of the Gas Industry Shareholders Register (DRAGA JSC) Address: 71/32 Novocheremushkinskaya St., Moscow, Russia, 117420 Phone: +7 (495) 719-40-44 Fax: +7 (495) 719-45-85 Website draga.ru Email: [email protected]

354 ANNUAL REPORT 2019