PJSC Gazprom Annual Report 2016 The Power Within PJSC Gazprom Annual Report 2016 3 Note. This Annual Report has been formed on the basis of Similarly, “Gazprom Neft Group” and “Gazprom Neft” statements. At the same time, some results of PJSC Gazprom, Resolution No. 1 of PJSC Gazprom’s Management Committee refer to PAO Gazprom Neft and its subsidiaries, “Gazprom its subsidiaries, affiliates and joint ventures are stated in On Organisation of Work Related to Holding the Annual energoholding” refers to OOO Gazprom energoholding and compliance with the principles for preparing management General Shareholders Meeting dated 26 January 2017. its subsidiaries, “Gazprom neftekhim Salavat” refers to accounts. Figures calculated using these methods may differ The terms “PJSC Gazprom”, “the Company” used in OAO Gazprom neftekhim Salavat and its subsidiaries. due to differences in methodologies for preparing consoli- the Annual Report refer to the parent company of Gazprom Some operating and financial results in the Annual dated financial statements and management accounts. Group, i.e. to Public Joint Stock Company Gazprom (until Report are presented in accordance with IFRS and for The analysis of financial results should be considered 17 June 2015 — Open Joint Stock Company Gazprom, Gazpom Group companies as a whole, for the purposes of in the context of PJSC Gazprom’s audited IFRS consolidated JSC Gazprom). The terms “Gazprom Group”, “the Group” PJSC Gazprom’s IFRS consolidated financial statements for financial statements for the year ended 31 December 2016. or “Gazprom” imply PJSC Gazprom and its subsidiaries taken the year ended 31 December 2016 and may differ from The Annual Report also contains information related to as a whole. For the purposes of the Annual Report, the lists similar indicators in PJSC Gazprom’s reporting documents Gazprom Group’s business activities in the future, based on of Gazprom Group’s subsidiaries, companies classified as prepared under Russian Accounting Standards (RAS). the forecast and estimates of Gazprom’s management joint operations, affiliates and joint ventures were prepared In this Annual Report, a number of Gazprom’s operating derived from the current situation. Actual results may differ on the basis used in the preparation of PJSC Gazprom’s IFRS and financial results are stated in compliance with the princi- from the said forecast and estimates due to the effect of PJSCconsolidated Gazprom financial Annual Reportstatements. 2016 ples for preparing PJSC Gazprom’s IFRS consolidated financial various objective factors. Contents 4 I II III IV V VI PJSC Gazprom Annual Report 2016 Letter to Shareholders 65 by the Chairman of PJSC Gazprom’s Board of Directors and the Chairman of PJSC Gazprom’s Management Committee Company Information 8 Company Information Strategy 32 Strategy Performance Results 50 Performance Results Environmental and Social Responsibility 100 Responsibility Corporate Governance 122 Corporate Governance Corporate Appendices 162 Appendices PJSC Gazprom Annual Report 2016 Letter to Shareholders 6 by the Chairman of PJSC Gazprom’s Board of Directors and the Chairman of PJSC Gazprom’s Management Committee Dear Shareholders, 2016 was a challenging year for the global energy industry, as it had a number of macro- economic factors applying pressure, including low prices of oil. Nevertheless, Gazprom demonstrated significant results in production during the reporting year, having met all its obligations in providing gas to both domestic and foreign consumers, and continuing the implementation of all crucial strategic investment projects. Major efforts were undertaken in Russia’s East: Construction was continued at the Chayandinskoye field, as well as at the Amur gas processing plant. The gas from the former is scheduled to be the first transported through the Power of Siberia gas pipeline — 445 kilo- metres of which were completed by the end of 2016. The new powerful engineering complex will ensure reliable gas supplies to the Russian Far East and the growing Chinese market. In the North of Russia, production at the largest field in the Yamal peninsula, Bovanenkov- skoye, was increased to 264 mmcm of gas per day at peak rates. With its immense potential, the peninsula is fast becoming Russia’s key gas production centre for many decades to come. Running in parallel with the development of the Company’s gas production facilities in Yamal, construction of the most advanced trunk gas pipelines was continued in Gazprom’s active expansion of the high-tech northern gas transmission corridor — the leading and most vital gas artery of Russia’s national Unified Gas Supply System. In the reporting year, construction of the most advanced trunk gas pipelines was contin- ued in this region: Bovanenkovo — Ukhta 2, and Ukhta — Torzhok 2, the Bovanenkovo — Ukhta 2 gas pipeline having been commissioned in January 2017. The northern corridor, specifically via the Nord Stream 2 future gas pipeline, is the shortest and most efficient route to supply gas from Yamal to consumers within both the European region of Russia, and North-Western Europe. The Nord Stream 2 project is being implemented as per schedule, and pipe shipments were launched during the reporting year. In February 2017, a contract was signed for offshore installation of both strings of the gas pipeline. The Turkish Stream export project targeting Turkey, Southern Europe, and South-Eastern Europe was resumed. In late 2016 to early 2017, contracts were signed for the construction of the first and second strings of the offshore section of the gas pipeline. New export trunk gas pipelines will considerably improve the reliability of Russian gas sup- plies to foreign consumers, and, consequently, the energy security of respective countries. PJSC Gazprom Annual Report 2016 Letter to Shareholders by the Chairman of PJSC Gazprom’s Board of Directors 7 and the Chairman of PJSC Gazprom’s Management Committee Every year, declining domestic gas production in Europe increases the demand for additional import gas volumes. In 2016, the European market demonstrated the highest demand for Russian gas in the entire history of its commercial supply, with Gazprom’s exports to far- abroad countries hitting a record level of 179.3 bcm. In the domestic market, Gazprom yet again accomplished the imperative task of ensuring reliable gas supplies to domestic consumers during the winter peak load period. To satisfy the characteristically sporadic daily consumption at the cusp of the autumn/winter season, the potential capacity of the Company’s underground gas storage facilities in Russia was raised to a new level of 801.3 mmcm per day. Gazprom continued expansion of the Russian gas infrastructure, its key social project. In the reporting year, the Company arranged for the connection of 25,400 households, and 175 boiler houses, with the gas infrastructure coverage of Russia’s territory reaching 67.2%. Gazprom consistently hones its competitive edge in the electricity and capacity markets. In 2016, two new modern power units were commissioned at the Troitskaya GRES and Novo- cherkasskaya GRES, with an aggregate capacity of 1 GW. Signifi cant achievements were made in the oil business: The Arctic Gate (“Vorota Arktiki”), Gazprom’s Arctic offshore oil loading terminal, was launched in the Ob Bay, thereby ensuring year-round tanker loadings with Yamal oil for further shipments via the Northern Sea Route. In the reporting year, Messoyakhaneftegaz, 50% of which is owned by PAO Gazprom Neft, launched Russia’s northernmost fi eld under development, named Vostochno-Mes- soyakhskoye. Adhering to the principles of sustainable development, Gazprom consistently minimised both its environmental and carbon footprints in 2016, by reducing greenhouse gas emissions, and implementing new energy-saving technologies. The Year of Occupational Health proved a success, achieving the lowest workplace injury rate over the past 17 years. Gazprom con- tinues these efforts with vigour in its aim to reduce the injury rate to zero. Dear Shareholders, the well-designed development strategy and its effective imple- mentation enabled Gazprom to meet its targets and maintain fi nancial stability. It can be taken into confi dence that the Company’s performance will remain at a prime level in future years. Viktor Zubkov Alexey Miller Chairman of PJSC Gazprom’s Chairman of PJSC Gazprom’s Board of Directors Management Committee PJSC Gazprom Annual Report 2016 I Company Information 8 PJSC Gazprom Annual Report 2016 Key Financial Results 109 The Group’s Business Model 11 and Position in the Global and Russian Energy Industry The Company’s History and Background 16 Operations and Marketing Geography 18 PJSC Gazprom’s Board of Directors 24 and Management Committee PJSC Gazprom’s Board of Directors 24 PJSC Gazprom’s Management Committee 27 Company Information PJSC Gazprom Annual Report 2016 Key Financial Results 10 Stable dividend levels Positive free cash flow generated despite an unfavourable environment for the past 10 years PJSC Gazprom’s Dividends per dividend yield PJSC Gazprom’s share 5.2% RUB 8.0397* Net debt / adjusted EBITDA ratio Gazprom Group’s profit margin for the year for Gazprom Group attributable to owners of PJSC Gazprom 1. 5 16% Gazprom Group’s Gazprom Group’s profit for the year sales attributable to owners of PJSC Gazprom RUB 6,111.1 bn RUB 951.6 bn Gazprom Group’s Gazprom Group’s free cash flow capital investments RUB 202.2 bn RUB 1,344.2 bn For more details see the Financial Performance section. Pages 92–99. * The total recommended amount of dividends for 2016 payable in 2017 is RUB 190,327.4 mm. PJSC Gazprom Annual Report 2016 The Group’s Business Model 11 and Position in the Global and Russian Energy Industry Gazprom Group encompasses all types of activities required Mission and strategic goal to ensure uninterrupted supply of energy to consumers. Its comprehensive vertically integrated business model PJSC Gazprom views its mission in reliable, efficient and complies with Gazprom’s strategic goal by enhancing per- balanced supply of natural gas, other energy resources and formance, improving reliability of supplies, and using the their derivatives to consumers.