ANNUAL REPORT JSC GAZPROM NEFT 2008 WorldReginfo - 199fef0f-4a8f-43f6-ae99-556d3ef690fc ANNUAL REPORT JSC GAZPROM NEFT 2008 WorldReginfo - 199fef0f-4a8f-43f6-ae99-556d3ef690fc 1 MESSAGE TO SHAREHOLDERS 7 REGIONS OF OPERATION 13 HIGHLIGHTS OF 2008 17 COMPANY PROFILE 18 ESTABLISHMENT DATA, LOCATION 19 AUTHORIZED CAPITAL, SHARE CAPITAL STRUCTURE 20 COMPANY’S STRUCTURE 23 GAZPROM NEFT TODAY 33 COMPANY’S GROWTH PROSPECTS 39 2008 KEY PERFORMANCE INDICATORS BY TYPE OF OPERATION 40 STATUS OF THE RESOURCE BASE 40 EXPLORATION 44 LICENSING 46 OIL PRODUCTION 49 OIL REFINING 52 DISTRIBUTION OF OIL PRODUCTS 58 OIL AND PETROLEUM PRODUCT EXPORTS 60 TRANSPORTATION OF OIL AND PETROLEUM PRODUCTS 63 INVESTMENT: TECHNICAL RE-EQUIPMENT AND DEVELOPMENT OF THE COMPANY 67 PERFORMANCE AND FINANCIAL INDICATORS 68 KEY PERFORMANCE INDICATORS 70 KEY FINANCIAL RESULTS 72 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 97 MAJOR RISK FACTORS 109 CORPORATE GOVERNANCE 111 MEMBERSHIP OF THE BOARD OF DIRECTORS 117 ACTIVITIES OF THE BOARD OF DIRECTORS IN 2008 118 MEMBERSHIP OF THE MANAGEMENT BOARD 121 TOTAL AMOUNT OF REMUNERATION TO MEMBERS OF THE BOARD OF DIRECTORS AND MANAGEMENT BOARD 123 ECOLOGY, ENERGY SAVING, INNOVATION 124 HEALTH, SAFETY AND ENVIRONMENT 130 ENERGY SAVING 130 INNOVATIVE ACTIVITIES 135 SOCIAL POLICY 136 PERSONNEL, OCCUPATIONAL SAFETY AND HEALTH 138 SOCIAL RESPONSIBILITY 143 TO SHAREHOLDERS AND INVESTORS 144 STOCK MARKET AND CAPITALIZATION 146 PARTICIPATION IN THE AMERICAN DEPOSITORY RECEIPT PROGRAM 148 DIVIDEND HISTORY 150 OBSERVING THE CORPORATE CODE OF CONDUCT 153 MAJOR AND INTERESTED-PARTY TRANSACTIONS 167 ASSET MANAGEMENT AND IMPROVEMENT OF THE CORPORATE STRUCTURE 173 CREDIT RATINGS AND DEBT PORTFOLIO MANAGEMENT 180 GLOSSARY OF KEY TERMS AND DEFINITIONS 183 ADDRESSES AND CONTACTS 184 SUPPLEMENT 1. US GAAP CONSOLIDATED FINANCIAL STATEMENTS. AUDITOR’S REPORT. 208 SUPPLEMENT 2. RAS FINANCIAL STATEMENTS. AUDITOR’S REPORT CONTENTS WorldReginfo - 199fef0f-4a8f-43f6-ae99-556d3ef690fc Dear Shareholders! Gazprom as a global energy company pays serious attention to the development of its oil business. A good case in point was the decision by Gazprom to exercise the purchase option for a 20% interest in Gazprom Neft in April 2009 with the result that our stake in this critical oil asset of Gazprom Group has increased to 95.68%. In 2008 Gazprom Neft methodically strengthened its positions in the traditional Russian oil and petroleum product markets. The Company began the implementation of new large-scale projects associated with the sales of lubricants as well as fuel for aviation, marine and river transport. Considerable attention was given to supporting research developments and improvement of oil exploration and production technologies. The reporting period saw a milestone event for Gazprom – in December 2008 Gazprom Neft and the Government of Serbia signed an agreement for the purchase of a 51% interest in Serbian oil company NIS – one of the largest in Central Europe. In February 2009 the deal was closed. Thus we laid a solid foundation for the development of Gazprom Neft at the international level. The stable position of JSC Gazprom Neft n the Russian oil industry, entry of the company into the world market, effective corporate governance measures – all this shows a powerful production potential of Gazprom Group in the oil sphere. MILLER A.B. Chairman of the Management Board, JSC Gazprom, Chairman of the Board of Directors, JSC Gazprom Neft ANNUAL REPORT JSC GAZPROM NEFT 2008 1 WorldReginfo - 199fef0f-4a8f-43f6-ae99-556d3ef690fc 2008 was very eventful and successful for the Company. Over the past year Gazprom Neft made a big step forward and continued its successful development as part of Gazprom Group. Today we are confident to say that Gazprom Neft is one of the leaders of the Russian oil industry. The Company has increased its reserves, the acquisition of a stake in Tomskneft has allowed production growth, the volume of oil refining and petroleum product sales has been up as well. Our subsidiaries – Gazpromneft-Aero, Gazpromneft-Lubricants, Gazprom Neft Marine Bunker and Gazpromneft-Nefterservice have been growing rapidly to become important players in the relevant markets. We have shown good financial results attributable not only to the market environment but also to the implementation of measures designed to enhance the Company’s efficiency. And I have no doubts that our successful results of 2008 will become a springboard for Gazprom Neft’s effective development in the following difficult period. We are moving steadily towards achievement of the ambitious goals set out in Gazprom Neft’s Development Strategy until 2020. In the future we see Gazprom Neft as a global player of the world fuel market. Already now we are laying the basis for our international business. Last year was a signature one in this respect: we successfully completed talks with the Serbian Government on the acquisition of a 51% interest in oil company NIS. Now it is the largest foreign asset not only of Gazprom Neft but of all Gazprom Group. However we will have to deal with the difficult challenges of improving the acquired asset management system and of new asset modernization. A young, vibrant, rapidly growing company in the oil industry market – such experts’ take on Gazprom Neft is without question something to be proud of. Our strongest advantages are – an effective governance system, a young management team capable of getting the right result. In the coming years we will receive invaluable experience of working in difficult economic conditions, however, I am confident we will overcome the crisis to become even stronger. Alexander DUKOV Chairman of the Management Board, JSC Gazprom Neft ANNUAL REPORT JSC GAZPROM NEFT 2008 3 WorldReginfo - 199fef0f-4a8f-43f6-ae99-556d3ef690fc KEY FINANCIAL INDICATORS KEY PERFORMANCE 2008 2007 2006 2008/2007 2007/2006 • Sales revenue, mln USD 33 075 21 767 20 176 51.95% 7.89% INDICATORS • EBITDA, mln USD 7 965 6 236 5 676 27.73% 9.87% • Operating income, mln USD 6 249 4 899 4 366 27.56% 12.21% OF THE COMPANY • Income before tax, mln USD 6 122 5 458 4 854 12.17% 12.44% • Net income, mln USD 4 658 4 143 3 661 12.43% 13.17% • Net cash from operating activities, mln USD 5 444 5 316 3 320 2.41% 60.12% • Capital investment, mln USD 3 327 2 212 1 525 50.41% 45.05% • Dividend paid, mln USD 792 2 071 602 -61.76% 244.02% • Net debt (avg.), mln USD 1 618 1 519 771 6.51% 96.97% • Average capital employed, mln USD 14 357 11 700 9 564 22.71% 22.33% • Average shareholders’ equity, mln USD 12 197 10 182 8 793 19.79% 15.79% • Price per share at year-end, USD RTS 2.05 6.35 4.56 -67.72% 39.25% • Price per share at year-end, USD MICEX 2.13 6.21 4.55 -65.70% 36.48% KEY FINANCIAL RATIOS 2008 2007 2006 2008/2007 2007/2006 • Basic and Diluted Earnings per Common Share, USD per share 0.98 0.87 0.77 12.64% 12.99% • Dividend per share, rub. 5.40 8.08 7.90 -33.17% 2.28% • Return on average capital employed, % 33.12% 31.78% 34.43% 3.13% -5.88% • EBITDA margin, % 24.08% 28.65% 28.13% -17.24% 3.57% • EBITDA per barrel, USD per barrel 34.84 25.64 23.33 35.88% 9.90% • Net income margin, % 14.08% 19.03% 18.15% -26.32% 5.56% • Net income per barrel, USD per barrel 20.38 17.04 15.05 19.60% 13.22% • Return on equity, % 38.19% 40.69% 41.63% -7.32% -2.38% • Gearing, % 10.39% 20.56% 3.27% -52.38% 600.00% • Current ratio 1.48 1.31 1.99 12.98% -34.17% KEY PRODUCTION INDICATORS 2008 2007 2006 2008/2007 2007/2006 • Oil reserves, mln bbl 4 488 4 823 4 476 -6.95% 7.75% • Gas reserves, bn ft3 2 154 728 1 041 195.68% -30.05% • Hydrocarbon reserves, mln BOE 4 847 4 945 4 650 -1.97% 6.34% • Oil production of consolidated subsidiaries, mln bbl 228.60 243.20 243.30 -6.00% -0.04% • Oil production with share in equity investees (Slavneft and Tomskneft), mln bbl 337.30 319.40 318.00 5.60% 0.44% • Oil refining at own refineries, mln t 18.40 16.50 16.30 11.52% 1.23% • Oil refining at equitiy investees’ refineries, mln t 10.10 9.70 8.10 4.12% 19.75% • Oil exports, mln t Non-CIS 16.30 15.10 18.20 7.95% -17.03% • Oil exports, mln t CIS 3.30 2.50 2.60 32.00% -3.85% • Oil sales, mln t Russian Federation 0.90 1.60 0.10 -43.75% 1500.00% • Petroleum product exports, mln t Non-CIS 11.40 11.40 12.20 0.00% -6.56% • Petroleum product exports, mln t CIS 1.90 1.90 1.30 0.00% 46.15% • Petroleum product sales, mln t Russian Federation 15.70 13.40 11.90 17.16% 12.61% • Petroleum product sales through filling stations, mln t 3.00 2.30 1.90 30.43% 21.05% • Number of filling stations (own, leased and franchise) 865 782 777 10.61% 0.64% ANNUAL REPORT JSC GAZPROM NEFT 2008 5 WorldReginfo - 199fef0f-4a8f-43f6-ae99-556d3ef690fc REGIONS OF OPERATION WorldReginfo - 199fef0f-4a8f-43f6-ae99-556d3ef690fc REGIONS OF OPERATION REGIONS OF OPERATION 11 1 6 REGIONAL LOCATION OF COMPANY’S OIL PRODUCTION AND LICENSE PLOTS 10 (including subsidiaries 2 and associates) 3 • PRODUCTION AND RESERVES 1 Nenets 12 Autonomous District 2 Yamal-Nenets Autonomous District 4 3 Khanty-Mansi Autonomous District 5 4 Tomsk Region 5 Omsk Region 6 Krasonyarsk Krai 7 Serbia* 8 Angola* 9 • RESERVES 9 Irkutsk Region 7 10 Republic of Sakha (Yakutia) 11 Chukotski Autonomous District 8 12 Sea of Okhotsk Offshore Area (Lopukhovsky Block) * – the regions extraction of group NIS ANNUAL REPORT ANNUAL REPORT 8 JSC GAZPROM NEFT 2008 JSC GAZPROM NEFT 2008 9 WorldReginfo - 199fef0f-4a8f-43f6-ae99-556d3ef690fc REGIONS REGIONS OF OPERATION OF OPERATION OIL REFINERIES AND REGIONS OF SALES 23 (including subsidiaries