ANNUAL REPORT GROWTH EFFICIENCY INNOVATION RUSSIA’S LARGEST INDEPENDENT NATURAL GAS PRODUCER GROWTH EFFICIENCY INNOVATION OAO NOVATEK ANNUAL REPORT 2012 RUSSIA’S LARGEST INDEPENDENT NATURAL GAS PRODUCER ANNUAL REPORT OAO NOVATEK 2012 CONTENTS Letter to Shareholders .......................................................................................................................... 6 Strategy ............................................................................................................................................... 11 Growth. Efficiency. Innovation ............................................................................................................. 12 Key events ........................................................................................................................................... 19 Key indicators ...................................................................................................................................... 20 01 REVIEW OF OPERATING RESULTS ...................................................................................... 23 Licenses and Reserves ....................................................................................................................... 23 Geological Exploration ........................................................................................................................ 25 Field Development .............................................................................................................................. 26 Hydrocarbon Production ..................................................................................................................... 27 Processing .......................................................................................................................................... 37 Marketing ............................................................................................................................................ 39 02 ENVIRONMENTAL AND SOCIAL RESPONSIBILITY ....................................................... 47 Environmental Protection .................................................................................................................... 47 Health and Safety ................................................................................................................................49 Human Resources .............................................................................................................................. 50 Social Policy and Charity .................................................................................................................... 53 03 MANAGEMENT AND CORPORATE GOVERNANCE ......................................................... 57 Corporate Governance System .......................................................................................................... 57 General Meeting of Shareholders ....................................................................................................... 58 Board of Directors .............................................................................................................................. 58 Board Committees ............................................................................................................................. 62 Management Committee ................................................................................................................... 64 Remuneration to Members of the Board of Directors and Management Committee ....................... 65 Internal Control and Audit ................................................................................................................... 65 Share Capital ....................................................................................................................................... 67 Dividends ........................................................................................................................................... 68 Information Transparency ................................................................................................................... 69 ADDITIONAL INFORMATION .................................................................................................... 70 Major Risk Factors ............................................................................................................................. 70 Information on Members of the Board of Directors and Management Committee .......................... 74 Major Transactions and Interested Party Transactions ...................................................................... 82 IFRS Consolidated Financial Statements ............................................................................................ 85 Management’s Discussion and Analysis of Financial Condition and Results of Operations ..........160 Contact information .......................................................................................................................... 202 ANNUAL REPORT GROWTH 4 OAO NOVATEK EFFICIENCY 2012 INNOVATION Yamal-Nenets Autonomous Region Russia NOVATEK IS RUSSIA’S LARGEST INDEPENDENT NATURAL GAS PRODUCER AND THE SECOND-LARGEST NATURAL GAS PRODUCER IN RUSSIA NOVATEK’S MAIN BUSINESSES ARE EXPLORATION AND PRODUCTION, PROCESSING, TRANSPORTATION AND MARKETING OF NATURAL GAS AND LIQUID HYDROCARBONS. THE COMPANY’S PRIMARY PRODUCTION AND PROCESSING ASSETS ARE LOCATED IN THE YAMAL-NENETS AUTONOMOUS REGION (YNAO), ONE OF THE LARGEST GAS PRODUCING REGIONS IN THE WORLD. 12.4#4 #7 BLN BOE GLOBALLY AMONG GLOBALLY AMONG OF PROVED PUBLICLY TRADED PUBLICLY TRADED HYDROCARBON COMPANIES BY PROVED COMPANIES BY NATURAL RESERVES NATURAL GAS RESERVES GAS PRODUCTION VOLUMES UNDER SEC UNDER SEC 57.39% 16% BCM OF TOTAL RUSSIAN OF TOTAL NATURAL OF NATURAL NATURAL GAS GAS DELIVERIES GAS PRODUCED PRODUCTION TO THE DOMESTIC MARKET IN 2012 VIA THE UGSS ANNUAL REPORT GROWTH OAO NOVATEK EFFICIENCY 5 2012 INNOVATION LEGEND 32 34 – gas trunk pipeline – gas condensate pipeline of NOVATEK 3 – producing fields 5 of NOVATEK and JVs 33 30 24 – prospective fields and license areas of NOVATEK and JVs – Purovsky plant of NOVATEK 31 21 Yamburg 7 11 1 35 16 15 17 26 9 14 10 Nadym 28 13 27 29 19 24 18 23 22 25 6 20 4 8 12 2 3 FIELDS AND LICENSE AREAS 1. Yurkharovskoye field 19. Ukrainsko-Yubileynoye field 2. East-Tarkosalinskoye field 20. Pilyalkinskiy license area 3. Khancheyskoye field 21. Malo-Yamalskoye field 4. Olimpiyskiy license area (Sterkhovoye field) 22. West-Chaselskoye field 5. South-Tambeyskoye field 23. Beregovoy license area 6. Termokarstovoye field 24. Pyreinoye field 7. West-Yurkharovskoye field 25. Khadyryakhinskiy license area 8. North-Khancheyskoye field 26. Samburgskiy license area 9. Yarudeyskoye field 27. Yevo-Yakhinskoye field 10. Raduzhnoye field 28. Yaro-Yakhinskiy license area 11. New-Yurkharovskiy license area 29. North-Chaselskiy license area 12. Yumantilskiy license area 30. Salmanovskoye (Utrenneye) field 13. West-Urengoyskiy license area 31. Geofizicheskoye field 14. North-Yubileynoye field 32. North-Obskiy license area 15. North-Russkiy license area 33. East-Tambeyskiy license area 16. North-Russkoye field 34. North-Tasiyskiy license area 17. West-Tazovskiy license area 35. North-Urengoyskoye field 18. North-Yamsoveyskiy license area ANNUAL REPORT GROWTH 6 OAO NOVATEK EFFICIENCY 2012 INNOVATION LETTER TO SHAREHOLDERS Dear Shareholders, OUR Core Business continued to Our hydrocarbon reserve base is develop successfully throughout 2012 concentrated in the resource rich in full conformity with the Compa- Yamal Nenets Autonomous Region ny’s strategic objectives and priori- of Russia, which is the world's largest ties, with a focus toward a balanced natural gas region with well-devel- growth on all key performance indi- oped infrastructure, enabling us to cators and the strengthening of our consistently report one of the lowest competitive advantages. Achieve- cost levels in the oil and gas indus- ments in the reporting year, com- try. Our reserve replacement costs bined with our flexible and innova- in 2012 were RR 33.1 ($1.07) per boe tive approach to business, offer an and lifting costs were RR 17.8 ($0.57) excellent foundation for the efficient per boe. increase of production volumes, en- abling us to look into the future with A key strategic priority for the Com- confidence. pany is the steady and efficient growth of production volumes com- Our main competitive advantag- mensurate with our sustainable field es are an extensive resource base, development activities and resource which guarantees a steady increase base. At the end of 2012 more than in hydrocarbon production at indus- 60% of our proved reserves under try-leading low costs, and our inte- the SEC reserve standards were grated production chain, which helps classified as "undeveloped", and our to maximize risk-adjusted margins reserve life increased from 25 years and improve the sustainability of our to 31 years, providing an excellent business operations. base for sustainable production growth in the future. During the year, During 2012, we increased our prov- we increased our gas production by en hydrocarbon reserves under the 7% and the production of crude oil SEC reserve standards by one-third and unstable gas condensate by 4%, to approximately 12.4 billion boe and, which is consistent with our opera- as at the end of the current report- tional guidance for the year. ing year, we ranked among the top four public