Contents
01.
Overview
......................................................................................................................................................3
2010 Financial and Operating Highlights ............................................................................................................3
Letter to Shareholders ........................................................................................................................................6
Highlights in 2010 ...............................................................................................................................................9
02.
The Company
...........................................................................................................................................11
NOVATEK Today ...............................................................................................................................................11
Strategy ............................................................................................................................................................13
03.
Operations in Review
............................................................................................................................17
Exploration and Production ...............................................................................................................................17
Processing .......................................................................................................................................................27
Marketing .........................................................................................................................................................28
04.
Environmental and Social Responsibility
......................................................................................35
Human Resources ............................................................................................................................................35
Social Policy and Charity ..................................................................................................................................36
Environment, Health and Safety ........................................................................................................................39
05.
Management and Corporate Governance
..................................................................................43
Corporate Governance .....................................................................................................................................43
Board of Directors ............................................................................................................................................44
Management Committee ..................................................................................................................................49
NOVATEK Corporate Culture, Brand and Media Relations ................................................................................50
Securities ..........................................................................................................................................................52
Dividends .........................................................................................................................................................53
06.
Additional Information
............................................................................................................................54
Major Risk Factors Associated with the Company’s Operations ........................................................................54
Major Transactions and Interested Party Transactions .......................................................................................57
Information on Members of NOVATEK’s Board of Directors ..............................................................................59
Information on Members of NOVATEK’s Management Committee ...................................................................63
07. Management’s Discussion and Analysis
of Financial Condition and Results of Operations .....................................................................68
IFRS Consolidated Financial Statements and Independent Auditor’s Report
for years ended 31 December 2010 and 2009 ........................................................................104
Higher production volumes, combined
with increasing domestic natural gas
prices and favorable pricing for liquid
hydrocarbons, resulted in record high
revenues of RR 117 billion
01 Overview
3
2010 Financial and Operating Highlights
millions of Russian roubles except per share amounts and ratios
2010
2009
%
Year ended 31 December
Change
Financial results
Oil and gas revenues(1)
Total revenues
Operating expenses
Net income
EBITDA(2)
EBITDAX (3)
Earnings per share (EPS), Russian roubles
Operating results
Total proved reserves (SEC), mmboe
Natural gas sales volumes by consolidated subsidiaries, bcm
Liquid hydrocarbon sales volumes by consolidated subsidiaries, mt
Incl. stable gas condensate sales volumes, mt
Equity and liquidity
Net cash provided by operating activities
Capital expenditures
Net debt (4)
Total debt to total shareholders equity,%,
115,162
117,024
68,518
40,278
56,965
58,560
13.37
8,088
37.117
3,401
2,330
44,863
26,106
61,988
43.0%
86,903
89,954
56,130
25,722
39,566
40,132
8.59
6,853
32.937
3,128
2,170
34,847
17,872
32.5%
30.1%
22.1%
56.6%
44.0%
45.9%
55.6%
18.0%
12.7%
8.7%
7.4%
28.7%
46.1%
27,171
128.1%
28.3%
51.9%
(1)
(2)
(3)
(4)
Net of VAT, excise tax and
EBITDA represents profit
EBITDAX represents EBITDA
Net debt calculated as total
export duties.
(loss) attributable to
as adjusted for the addback
debt less cash and cash
shareholders of NOVATEK
of exploration expenses.
equivalents.
adjusted for the addback
of income tax expense and
finance income (expense)
from the statement of income,
and depreciation, depletion
and amortization and share-
based compensation from the
statement of cash flows.
NOVATEK
MOVING FORWARD
ANNUAL REPORT 2010
4
TOTAL REVENUES,
RR billion
NATURAL GAS RESERVES (SEC),
bcm
117.0
90.0
79.3
62.4
49.4
120
80
40
0
1,200
800
400
0
1,144
967
651
653
690
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
Proved developed
Proved undeveloped
OPERATING CASH FLOW,
RR billion
LIQUIDS RESERVES (SEC),
mmt
44.9
34.8
31.5
21.4
16.9
50
40
30
20
10
0
80
40
0
73
63
50
49
55
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
EBITDA,
RR billion
Proved developed
Proved undeveloped
TOTAL RESERVES (SEC),
mmboe
57.0
39.6
36.7
29.3
23.1
60
40
20
0
9,000
8,000
6,000
4,000
2,000
0
8,088
6,853
4,664 4,678 4,963
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
Proved developed
Proved undeveloped
01
OVERVIEW
5
NATURAL GAS PRODUCTION,
bcm
AVERAGE NATURAL GAS PRICES,
RR per mcm*
28.7
28.5
32.8
30.9
37.8
40
30
20
10
0
1,914
1,628
1,372
1,111
925
2,000
1,500
1,000
500
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
* Net of VAT
LIQUIDS PRODUCTION,
mmt
AVERAGE LIQUIDS PRICES,
RR per ton*
4
3
2
1
0
2.5
2.5
2.6
3.6
3.0
14,000
12,967
11,570
10,000
8,892
10,318
10,639
6,000
2,000
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
Gas condensate
Crude oil
TOTAL PRODUCTION,
mmboe
* Net of VAT, excise tax and export duties
TOTAL CAPITAL EXPENDITURES,
RR billion
208
207
223
240
278
300
200
100
0
31.8
26.1
19.5
17.9
40
30
20
10
0
4.7
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
Natural gas
Liquids
NOVATEK
NOVATEK
MOVING FORWARD
MOVING FORWARD
ANNUAL REPORT 2010
ANNUAL REPORT 2010
Letter to Shareholders
6
To our valued shareholders,
The time is right for natural gas! The environmental
costs and potential hazards of other energy sources so-
lidifies natural gas as the fuel of choice in the 21st century.
Throughout 2010, we invested capital to ensure that we
will be well prepared to capitalize on the many opportu-
nities that this clean burning fuel will provide. With the
continued stabilization of the world economy in 2010, we
witnessed a correction in the imbalance of supply and
demand for natural gas, due to the financial crisis, and
a return to traditional market dynamics. This confirmed
our views regarding the positive trends during the year in
both the international and domestic demand for natural
gas and the cyclical rather than structural changes, which
occurred during the financial crisis. Correspondingly,
we continued to invest in our production and process-
ing capacities and, as a result, we posted double digit
growth in our 2010 reserves, production and revenues
while maintaining our industry leading position as the low-
est cost producer. As we enter a new decade, the capital
investments we made this year will ensure our continued
growth both domestically and internationally and have
established NOVATEK as the global leader among inde-
pendent gas producers.
2010 was another record year for us operationally
and financially as the timely and prudent capital invest-
ments at our largest core asset, the Yurkharovskoye field,
drove production and reserve growth. In 2010, we com-
pleted the field’s second stage development activities in-
creasing total production capacity to 33 billion cubic me-
ters per annum, as well as completed a gas condensate
de-ethanization facility at the field and a pipeline from the
field to our Purovsky processing plant, providing us with
complete operational control over the gas condensate
production cycle and reducing third party expenses and
risks. Our investment focus at the Yurkharovskoye field
allowed us to organically increase natural gas and liquids
production by 15% and 19%, respectively, while at the
same time preserving our five-year average finding and
development (F&D) costs at an industry leading $1.8 per
barrel of oil equivalent (boe).
The higher production volumes we achieved in 2010
combined with increasing domestic natural gas prices and
favorable pricing for liquid hydrocarbons on international
markets, resulted in record high revenues of RR 117 bil-
lion or 30% higher than in 2009. We are pleased to report
that our continued focus on cost control has not waivered
and for the third consecutive year we have maintained
our lifting costs at RR 16 per boe. The combination of
strong commodity prices and our focus on cost controls
translated into EBITDA and net profit margins of 49% and
35%, respectively, in 2010. We also ended the period in
a positive free cash flow postion, supporting our Board’s
recommendation to raise dividends for the seventh con-
secutive year to RR 4.00 per share, a 45% increase over
the previous period.
MOVING FORWARD, our investment focus is shift-
ing from core producing assets, like the Yurkharovskoye
field, which are, or will soon be, reaching their mainte-
nance capital investment stage, to longer-term plans like
our Yamal LNG project. During 2010, we made significant
progress on this transformational project in three critical ar-
eas – engineering and design work, commercial and mar-
keting activities and definition of a Government sponsored
stimulus package. The pre-FEED (front end engineering
and design) work, which was conducted by CB&I (Chica-
go Bridge & Iron) Lummus, was completed and we have
signed an export agency agreement with GazpromExport
providing us with an export channel for LNG produced by
the facility. The export agency agreement was signed in
01
OVERVIEW
7
conjunction with a broader cooperation agreement with
Gazprom regarding the joint development of the Yamal
peninsula. The execution of the development program
underscores the importance of this project not only for
NOVATEK but also for the Russian Gas Industry and the
development of this hydrocarbon rich region. We currently
own 51% of Yamal LNG and have secured the options for
the remaining 49%. We plan to exercise these options to
attract strategic partners who have the requisite expertise
essential for the project’s success. In March 2011, we
announced that we have selected Total as the strategic
partner in the Yamal LNG project with a 20% equity stake,
and we expect to announce other partners for the remain-
ing equity stake in due course.
Our prudent and strategic allocation of capital
consistently ranks us in the top five oil and gas compa-
nies globally in F&D and reserve replacement (RR) costs
and 2010 was no exception. Throughout 2010, our capi-
tal investments targeted organic growth from our legacy
assets as well as value accretive acquisitions resulting in
a RR cost of $1.8 per boe, which, although was higher
than our industry low five-year RR cost of $1.2 per boe,
demonstrates our ability to replace reserves at attractive
industry multiples. Toward the end of 2010, we com-
pleted two strategic and value accretive acquisitions, one
having an immediate positive effect on our production
and cash generation profiles and the other supporting
our mid-term growth strategy. The acquisition of a 51%
stake in Sibneftegas will contribute over five billion cubic
meters of natural gas sales volumes per annum starting in
2011, while the acquisition of a 51% interest in SeverEn-
ergia by Yamal Development, our 50/50 joint venture with
Gazprom Neft, is expected to begin initial production in
winter 2011/2012. In developing the SeverEnergia as-
sets, we expect to capitalize on our gas condensate infra-
structure (pipeline and processing plant), thus achieving
synergies and optimizing our facilities through increased
plant and pipeline utilization. We are very excited by the
potential these assets hold and the positive contributions
they have on our resource base. In 2010, we increased
our SEC proved reserves by approximately 18% (net of
2010 production volumes) to 8.1 billion boe and replaced
551% of production volumes, resulting in a reserve to
production life of 30 years and a five-year reserve replace-
ment rate of 402%.
The optimization of our marketing channels has
been a key driver behind the success we achieved in
increasing our oil and gas revenues and monetizing our
growing production volumes. We continued to invest in
our Ust-Luga project for the fractionation and transship-
ment of stable gas condensate, which will eventually allow
us to move further down the hydrocarbon value chain and
diversify customer risk by increasing the number of po-
tential off-takers for the facilities product slate. We expect
to launch the first phase comprising three million tons per
annum in the fourth quarter of 2012. Another marketing
milestone in 2010 was the first successful navigation and
delivery of a large cargo of stable gas condensate via the
Arctic Ocean’s Northern Sea Route to the Asian-Pacific
region. This historic voyage was completed in approxi-
mately half the time required by the traditional navigational
route through the Suez Canal and has the potential to fa-
cilitate further development of hydrocarbon fields located
in the Yamal peninsula.
We are committed to growing our company and
delivering industry best metrics by focusing on cost con-
trol, investing wisely in capital projects and diversifying
our commercial activities. Our success in achieving our
objectives in 2010 was recognized by the equity markets
as our share price increased by 84% since the beginning
of the year as compared to 23% for the RTS index, a
NOVATEK
MOVING FORWARD
ANNUAL REPORT 2010
8
proxy of Russia’s domestic stock market. Our achieve-
ments in 2010 would not have been possible without
the commitment and perseverance from our trusted and
valued employees. The teamwork and collaboration be-
tween our experienced professionals, a corporate culture
of success and innovation as well as a coherent and well-
executed corporate strategy have been instrumental in
delivering the exceptional results we achieved in 2010.
On behalf of the Board of Directors and our Man-
agement Committee, we would like to sincerely thank
everyone for your continued support of NOVATEK. We
remain focused on achieving our Corporate Strategy and
are strongly committed to sustainable development prin-
ciples, the tenets of corporate governance and creating
shareholder value. Looking back, the past year represent-
ed a clear indication of NOVATEK’s ability to continue to
positively surprise the market as we found ways to capi-
talize on the many opportunities the Russian gas market
has to offer. As we continue MOVING FORWARD with our
operational plans we will provide periodic updates to our
shareholders on upcoming activities.
ALEXANDER NATALENKO
Chairman of NOVATEK’s Board of Directors
LEONID MIKHELSON
Chairman of NOVATEK’s Management Board
MARK GYETVAY
Chief Financial Officer
01
01 OVERVIEW
OVERVIEW
Highlights in 2010
Increased total proved reserves according to SEC
(cid:122)
Record financial and operational results including a
32.5% increase in natural gas and liquids sales revenue
and a 12.7% and 8.7% increase in sales volumes, re-
spectively.
(cid:122)
standards by 18.0% or 1,235 million boe.
Launch of the unstable gas condensate de-ethaniza-
(cid:122)
tion facility at our Yurkharovskoye field and the unstable
gas condensate pipeline from the Yurkharovskoye field to
the Purovsky Plant.
9
Launch of the third and final stage of the Yurkha-
(cid:122)
rovskoye field's second phase development increasing
the field's production capacity to 33 bcm per annum and
NOVATEK’s total production capacity to 54 bcm.
First successful shipment of stable gas condensate to
(cid:122)
the Asian Pacific Region via the Arctic Ocean's Northern
Sea Route.
Established a 50/50 joint venture, Yamal Development,
(cid:122)
with Gazprom Neft to jointly develop potential hydrocar-
bon assets in the YNAO.
Yamal Development’s acquisition of a 51% interest in
(cid:122)
SeverEnergia, which holds licenses for the development
of oil and gas condensate fields in the YNAO through its
wholly-owned subsidiaries.
Acquisition of a 51% interest in Sibneftegas, which
(cid:122)
holds subsoil exploration and production licenses for
fields and license areas located in the YNAO, by our whol-
ly-owned subsidiary NOVATEK Severo-Zapad.
Signing of a cooperation agreement with Gazprom for
(cid:122)
LNG production in the Yamal peninsula as well as a long-
term agency agreement between ООО GazpromExport
and Yamal LNG providing for the export of LNG produced
from the South-Tambeyskoye field.
(cid:122)
bonds.
Corporate rating upgraded to BBB-, (stable outlook) by
(cid:122)
Standard and Poor's, thus securing our third investment
grade corporate rating (along with Moody's and Fitch).
Placement of RR ten billion in three-year rouble
NOVATEK continued to grow its resource
base organically and through strategic
acquisitions resulting in a five-year
reserve replacement rate of 402%
02
The Company
11
NOVATEK Today
NOVATEK is the largest Russian independent nat-
ural gas producer and the second largest producer of
natural gas in Russia after OAO Gazprom. The Company
is ranked among the top five publicly traded companies
in terms of natural gas reserves (approximately 1,144
bcm) and is also recognized as one of the lowest cost
producers globally. In 2010, the Company accounted for
approximately six percent of total Russian natural gas
production and 26.5% of natural gas produced by Rus-
sian independent producers, as well as playing a signifi-
cant role in Russia’s energy balance providing more than
10% of total 2010 domestic natural gas deliveries through
the Unified Gas Supply System (UGSS), according to the
Central Dispatch Administration of the Fuel and Energy
Complex (CDU-TEK).
NOVATEK’s primary business activities include ex-
ploration 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)
in Western Siberia and their close proximity to each other
and transportation infrastructure has provided the basis
for their cost effective development.
Over the years, NOVATEK has successfully grown
its natural gas and liquid hydrocarbon production and
consistently replaced over 100% of its annual produc-
tion volumes. In 2010, the Company’s reserve replace-
ment rate was 551% and its three- and five-year reserve
replacement rates were 567% and 402%, respectively.
NOVATEK’s total net proved reserves (SEC) as of the
31 December 2010 totaled 8,088 million barrels of oil
equivalent (boe), of which approximately 93% was natural
gas, and its reserve to production life was 30 years.
invested Russian
In 2010, NOVATEK
rouble
(RR) 45,140 million, in exploration and development ac-
tivities at its fields and license areas (including unproved
acquisition costs incurred by NOVATEK’s equity investees
of RR 13,281 million) resulting in an industry leading find-
ing and development cost of RR 73.16 per boe ($ 2.41
per boe)* and a three- and five-year finding and devel-
opment cost of RR 48.61 per boe ($ 1.71 per boe) and
RR 48.99 per boe ($1.76 per boe), respectively.
In 2010, NOVATEK was able to increase gross natural
gas and liquid hydrocarbon production by 15.3% and
19.1%, respectively, compared to respective production
volumes in 2009. In 2010, the Company’s sales volumes
totaled 37.2 bcm of natural gas and 3.4 million tons of
liquid hydrocarbons, while total oil and gas revenues
reached RR 115.2 billion.
A large portion of NOVATEK’s reserve base is con-
centrated in deeper gas condensate bearing layers and
requires additional processing capacity to be successfully
developed. In order to realize its development strategy,
NOVATEK has built a gas condensate processing facil-
ity, the Purovsky Gas Condensate Stabilization Plant
(Purovsky Plant), near the Company’s production assets.
* Average exchange rate of RR 30.37/USD ($)
NOVATEK
NOVATEK
MOVING FORWARD
MOVING FORWARD
ANNUAL REPORT 2010
ANNUAL REPORT 2010
12
The plant has allowed NOVATEK to more effectively de-
velop its fields and improve the quality of hydrocarbons
produced.
impact on the Northern regions of the Russian Federation
by facilitating the development of new hydrocarbon fields
located in the Yamal peninsula and Arctic shelf.
The Purovsky Plant has the capacity to process up to
five million tons of unstable gas condensate per annum
and produces both stable gas condensate and liquid pe-
troleum gases (LPG), which meet the highest international
quality standards. The Purovsky Plant currently provides
NOVATEK with sufficient processing capacity to continue
developing its gas condensate fields without having to rely
on third party processing facilities.
NOVATEK has been able to effectively diversify its hydro-
carbon sales both geographically and by customer seg-
ment allowing the Company to adapt to changes in market
conditions and optimize its marketing channels for natural
gas and liquid hydrocarbon sales.
NOVATEK’s fields are located in close proximity to the
UGSS through which the Company delivers natural gas
to end-customers, including some of the country’s largest
energy and industrial companies. In 2010, NOVATEK deliv-
ered natural gas to over 33 regions of the Russian Federa-
tion, including the Perm territory, Chelyabinsk, Orenburg,
Sverdlovsk, Moscow, Kurgan, Kostroma, Kirov and Sama-
ra regions, the city of St-Petersburg as well as the YNAO
and Khanty-Mansyisk Autonomous Regions.
NOVATEK’s subsidiary, ООО NOVATEK-TRANSERV-
ICE, operates a fleet of leased and wholly-owned rail tank
cars for transporting stable gas condensate and LPG from
the Purovsky Plant to export and domestic markets. Sta-
ble gas condensate volumes bound for export markets are
transported to the Port of Vitino, an all season port, located
in the Murmansk Region on the White Sea.
In September 2010, we dispatched the first consign-
ment of our own stable gas condensate from the Murmansk
Port, which traveled to the Asian-Pacific region via the Arctic
Ocean’s Northern Sea Route. Transportation of goods via
the Northern Sea Route requires less time than traditional
routes due to the shorter distances between the North-
Western ports of the Russian Federation and the countries
of the Asian-Pacific region. The success of NOVATEK’s
shipment is strategically important and will have a beneficial
In 2010, the Company was able to continue increas-
ing sales volumes of natural gas and liquid hydrocarbons,
which grew by 12.7% and 8.7%, respectively, by taking
advantage of the increased production capacity for gas
and gas condensate at the Yurkharovskoye field as a result
of the launch of the second and third stages of the field’s
second phase of development in October 2009 and 2010,
respectively. The share of NOVATEK's liquid hydrocarbons
sold to the export market, as a percentage of total liquid
hydrocarbons sold in 2010, was approximately 83% or the
same level as in 2009.
During 2010, we continued the development or our Yamal
LNG project. In June 2010, a long-term agency agreement
was signed between Gazprom Export and Yamal LNG, in
conjunction with the cooperation agreement we signed in
June 2010 with Gazprom, pursuant to which GazpromEx-
port will act as an agent for export sales of LNG between
Yamal LNG and Yamal LNG's wholly-owned international
sales subsidiary. In October 2010, a Government decree
was signed outlining a special privileged taxation and cus-
toms incentives system for the Yamal LNG project.
The Company has employed a strategy to develop cer-
tain projects using joint ventures with strategic partners
to mitigate project risk and facilitate knowledge and tech-
nology transfers. In February 2010, NOVATEK and Total
Termokarstovoye B.V., an affiliate of Total SA, closed the
transaction for the establishment of a joint venture for ex-
ploration and development of the Termokarstovoye gas
condensate field in the YNAO.
In 2010, we entered into two significant transactions,
which we believe will enhance our position as a leading
independent natural gas producer in Russia. In November
2010, Yamal Development, our 50/50 joint venture with
Gazprom Neft, acquired a 51% interest in SeverEnergia
from Gazprom. SeverEnergia, which has not yet com-
menced commercial production, holds 100% of the shares
of Arcticgas, Urengoil Inc. and Neftegaztechnologia, which
hold licenses for the development of oil and gas conden-
sate fields in the YNAO.
02 THE COMPANY
THE COMPANY
13
In December 2010, we closed the transaction to ac-
quire a 51% interest in Sibneftegas, by our wholly-owned
subsidiary NOVATEK Severo-Zapad from Gazprombank.
Sibneftegas holds licenses for the development of hydro-
carbons at the following license areas and fields located
in the YNAO: Beregovoy license area, Khadyryakhinskiy li-
cense area, Pyreinoye gas condensate field and Zapadno-
Zapolyarnoye gas field. In 2010, Sibneftegas' gross natural
gas production totaled 9.88 bcm.
In September 2010, NOVATEK completed the disposal
of its 100% subsidiary NOVATEK-Polymer, which histori-
cally has accounted for less than 3% of NOVATEK’s total
revenues. The disposal is consistent with the Company’s
strategy to focus on its core natural gas and gas conden-
sate production and processing activities.
Strategy
The implementation of NOVATEK’s business strategy
has increased the Company’s core operating and financial
results and provided a platform for future growth. Through
the efficient development of its existing reserve base and
continued cost control NOVATEK has positioned itself as
a dynamically developing hydrocarbon producer.
NOVATEK’s long-term strategy is aimed at profitably
exploiting the hydrocarbon value chain – from exploration
and production to processing and marketing.
Effective geological exploration and development pro-
The Company’s success in realizing this strategy is
based on its competitive advantages, industry expertise
and favorable operating environment, including:
Structure of the existing and potential resource base;
(cid:122)
(cid:122)
Reserve base geography – proximity of the Company’s
core fields to the available infrastructure and trunk pipe-
lines;
(cid:122)
gram using state-of-the-art and advanced techniques;
Full development of the hydrocarbon value chain from
(cid:122)
production to the Company’s own condensate process-
ing facilities;
(cid:122)
drocarbon products to market; and
Longstanding and successful experience working on
(cid:122)
the domestic natural gas market, which has and will con-
tinue to benefit from the Russian Government’s policy to
increase domestic wholesale gas prices to achieve full
market liberalization by 2015.
Construction and operation of terminals to bring hy-
Our strategic objective is to leverage our competitive
strengths to increase our hydrocarbon production on a
sustainable and profitable basis, while efficiently increas-
ing our resource base and operating in a socially and en-
vironmentally responsible manner. Moreover, we intend to
continue to optimize our marketing channels and explore
complementary and value added projects. Specifically,
we intend to:
(cid:122)
drocarbons, Particularly Natural Gas
Despite the recent economic slowdown globally and in
Russia, industry experts, including the International En-
ergy Agency, estimate that long-term demand for natural
gas will be greater than current supply. We believe we
are well positioned to supply a significant portion of the
Substantially Increase Our Production of Hy-
NOVATEK
NOVATEK
MOVING FORWARD
MOVING FORWARD
ANNUAL REPORT 2010
ANNUAL REPORT 2010
14
Maintain Our Low Cost Structure
expected growth in incremental natural gas demand on
the Russian domestic market due to the proximity of our
core fields to pipeline infrastructure, the successful de-
velopment of our fields, and our commercial marketing
capabilities. We plan to continue making targeted capital
investments and prioritize our investment program to fo-
cus on expansion of our fields’ production capacity. At
the same time, we are carefully assessing potential ac-
quisition opportunities of producing assets or assets with
a short-and/or mid-term production start, provided that
these acquisitions will be value accretive for our business
and our security holders.
(cid:122)
We intend to maintain our low cost track record through
the prudent use of modern technology and production
techniques across our hydrocarbon resource base. In
the past few years, our three – year weighted average
lifting cost, finding and development costs and reserve
replacement costs remained among the lowest in the glo-
bal oil and gas industry based on industry peer reviews
and performance metrics. Furthermore, we expect that
the geographic concentration of the majority of our re-
source base, which is in close proximity to the UGSS,
the Purovsky Plant and our production infrastructure, and
the resulting economies of scale will continue to be a ma-
jor factor in helping us maintain our low cost structure.
Moreover, we currently strive to maintain consistently low
costs in all other areas of our business operations and
tightly control administrative overhead costs.
Maximize Risk-Adjusted Margins on Sales of
(cid:122)
Natural Gas and Liquids and Expand Our Cus-
tomer Base
Our marketing and sales teams continue to optimize
our sales of natural gas between end-customers and
wholesale traders and our sales of liquid products be-
tween export and domestic markets in order to realize
superior risk-adjusted margins. We intend to penetrate
new regional markets and increase the proportion of our
natural gas sales made under long-term contracts as well
as maintain our leading position among independent gas
producers. In addition, as we increase the production of
liquid hydrocarbons, we intend to continue to geographi-
cally diversify our stable gas condensate and LPG mar-
kets and expand our customer base, while at the same
time developing deeper refining capabilities. As a part of
this process, we plan on investing capital into the con-
struction of the Ust-Luga transshipment and fractionation
facility for processing of our stable gas condensate, al-
lowing us to further enhance refining depth and capture
additional margins on end products, as well as expand
our marketing capabilities and product offerings. In addi-
tion, we expect our participation in the Yamal LNG project
will allow us to diversify and expand our customer base
across different geographical markets.
(cid:122)
serves Effectively
We intend to manage our resource base in order to grow
our proved reserves as we develop and explore for hydro-
carbons on our fields and license areas. We believe our
established resource base in the Nadym-Pur-Taz region of
the YNAO, and its proximity to the Region’s existing gas
transportation and processing infrastructure, as well as
our newly acquired resources in the Yamal peninsula, in-
cluding, in particular the South-Tambeyskoye field we ac-
quired through our majority interest in Yamal LNG, will en-
Increase Our Resource Base and Manage Re-
02
02 THE COMPANY
THE COMPANY
15
able us to leverage our experience in developing complex
gas condensate reserves to further expand our resource
base both organically and through potential and recent
acquisitions. In November 2010, for instance, Yamal De-
velopment, our 50/50 joint venture with Gazprom Neft,
completed its acquisition of a 51% participation interest
in SeverEnergia, which holds licenses for the exploration
and development of oil and gas deposits in the YNAO. In
addition, in December 2010, we also closed the transac-
tion to acquire a 51% interest in Sibneftegas, which is
involved in the exploration and production of oil and gas
in the YNAO.
Develop Relationships with Strategic Partners
(cid:122)
In view of our strategic objectives to increase production
volumes and penetrate new markets we are working to
develop relationships with International Energy compa-
nies and other strategic partners on a mutually beneficial
basis. These relationships will allow NOVATEK to mitigate
risks associated with the development of certain projects
and provide for the exchange of knowledge and experi-
ence.
NOVATEK uses state-of-the-art
exploration and development technologies
to efficiently develop its reserve base and
increase the ultimate level of hydrocarbon
recovery from its fields
03
Operations
in Review
17
Exploration and Production
Exploration
NOVATEK’s fields and license areas are located in
the YNAO of the Russian Federation, which, according to
Government Statistics and BP’s 2009 Statistical Review,
is the world’s largest natural gas producing region and ac-
counts for approximately 16% of global natural gas pro-
duction and approximately 83% of Russian natural gas
production. The concentration of the Company’s produc-
ing and prospective fields, license areas and processing
facilities in this region combined with the regions overall
oil and gas infrastructure have allowed NOVATEK to mini-
mize the risks associated with developing its assets and
expanding its resource base. The Company has many
years of experience working in this region, which has ena-
bled it to effectively capitalize on the growth opportunities
resident there to increase shareholder value.
NOVATEK has been able to expand its resource base
through geological exploration at fields and license areas
in close proximity to existing transportation and produc-
tion infrastructure. The Company continues to efficiently
develop its reserve base and increase the ultimate level
of hydrocarbon recovery at its fields as a result of our op-
erational experience in the YNAO and by utilizing state-of-
the-art exploration and development technologies.
In 2010, NOVATEK achieved significant growth in its re-
serves due to a combination of exploration and develop-
ment work carried out at the Yurkharovskoye field and
the strategic acquisition of Sibneftegas and SeverEner-
gia, which hold licenses for the development of oil and
gas condensate fields located in the YNAO and in close
proximity to NOVATEK’s transportation and processing
infrastructure as well as the UGSS. The acquisitions in-
creased NOVATEK’s net total SEC proved reserves by
1,122 million boe, or 70% of the total increase in 2010
net proved reserves.
At 31 December 2010, NOVATEK’s net SEC proved
natural gas and liquid hydrocarbon reserves amounted
to 1,144 bcm and 73 mmt, respectively, while total net
proved reserves (natural gas and liquid hydrocarbons) on
a boe basis increased by 18% or by 1,235 mm boe, to
8,088 mm boe, excluding production.
The Company’s 2010 reserve to production ratio
was 30 years for all hydrocarbons and approximately 31
years for natural gas. NOVATEK’s total reserves under the
Russian reserve classification ABC1 + C2 totaled 2,698
mmcm of natural gas and 449.8 mmt of liquid hydrocar-
bons.
As of 31 December 2010, we and our subsidiaries and
equity investments held 31 licenses, of which 24 are classified
as either production or combined exploration and production
licenses and seven are classified as exploration licenses.
NOVATEK continued to deliver low cost reserve growth
in 2010 through strategically investing capital in acquisi-
tions and exploration and development activities which
enabled the Company to maintain its position as one of
the lowest cost producers in the industry. The Company’s
NOVATEK
NOVATEK
MOVING FORWARD
MOVING FORWARD
ANNUAL REPORT 2010
ANNUAL REPORT 2010
18
total 2010 consolidated investments in exploration, de-
velopment and acquisition activities totaled RR 101.15
billion which resulted in a reserve replacement cost of RR
55.02 per boe ($1.81 per boe) while our three- and five-
year reserve replacement costs amounted to RR 32.94
per boe ($ 1.11 per boe) and RR 34.37 per boe ($ 1.18
per boe), respectively.
In November 2010, Yamal Development, our 50/50
joint venture with Gazprom Neft, completed its acquisition
of SeverEnergia which, through its subsidiaries, holds li-
censes for the exploration and development of oil and gas
deposits in the YNAO at the following license areas: Sam-
burgskiy, Yaro-Yakhinskiy, Yevo-Yakhinskiy and Severo-
Chaselskiy. SeverEnergia’s fields and license areas are in
close proximity to the license areas of our subsidiaries
and our existing transportation and processing infrastruc-
ture and the infrastructure of the Purovsky Plant.
In December 2010, our wholly-owned subsidiary NO-
VATEK Severo-Zapad* acquired a 51% interest in Sib-
neftegas, which is involved in the exploration and produc-
tion of oil and gas in the YNAO. Sibneftegas holds subsoil
exploration and production licenses for the Beregovoy
and Khadyryakhinskiy license areas and the Pyreinoye
and Zapandno-Zapolyarnoye fields. Sibneftegas is cur-
rently engaged in commercial production at the Beregov-
oye and Pyreinoye fields, while the remaining fields and
license areas are in the early stages of geological explora-
tion. Sibneftegas fields are in close proximity to the fields
and license areas of our subsidiaries and our existing
transportation and processing infrastructure. Sibneftegas
is a producing asset and its acquisition will enable us to
immediately increase our sales volumes.
As part of the field development process, NOVATEK
relies on the experience and expertise of the special-
ists in its geology department, and the Company’s
Scientific and Technical Center, and uses the latest meth-
SEC PROVED RESERVES AS AT 31 DECEMBER 2010 AND 2009
Natural gas, bcm
Liquid hydrocarbons, mmt
Total proved reserves, mm boe
2010
1,144
73
8,088
2009
967
63
6,853
The Company’s 2010 net proved reserves are based on appraisal reports for the East-Tarkosalinskoye, Khancheyskoye, North Khancheyskoye, Severo-Russkoye,
Yurkharovskoye, West Yurkharovskoye and Olimpiyskiy fields and license areas based on NOVATEK’s 100% ownership interest, as well as the South-Tambeyskoye,
Termokarstovoye, Yarudeyskoye, Beregovoy, Khadyryakhinskiy, Pyreinoye, Severo-Chaselskoye, Yaro-Yakhinskiy and Samburgskiy fields and license areas, according
to NOVATEK’s shareholding in the respective fields and license areas. The appraisal reports were conducted under the reserves estimation, reporting and disclosures
rules promulgated by the U.S. Securities and Exchange (“SEC”) reserves reporting methodology provided that due to a lack of clear and definitive SEC guidance, D&M
has relied on management representations that we intend to (i) extend the term of our licenses to the end of the economic lives of the fields, where applicable, and (ii)
proceed accordingly with the development and operation of the fields, in order to include certain volumes of reserves estimated to be producible beyond the primary
terms of the licenses. The appraisal reports under the SEC reserves standards do not include estimates for probable and possible reserves.
Conversion ratio: 1000 m3 = 6.54 boe. To convert crude oil and gas condensate reserves from tons to barrels we used various coefficients depending on the liquid
density at each field according to D&M’s appraisal of our reserves as of 31 December 2010 and 2009.
GROSS HYDROCARBON PRODUCTION
Natural gas
Units
bcm
mm boe
Liquid hydrocarbons
mmt
Total production
mm boe
mm boe
2010
37.8
247.1
3,632
30.5
278
2009
32.8
214.4
3.049
25.5
240
Change, %
15.3%
19.1%
15.8%
Total gross production by OAO NOVATEK and its subsidiaries, excluding acquisitions of 2010
* As of February 2011, the 51% interest in Sibneftegas is directly held
by OAO NOVATEK
03
OPERATIONS IN REVIEW
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NOVATEK
NOVATEK
MOVING FORWARD
MOVING FORWARD
ANNUAL REPORT 2010
ANNUAL REPORT 2010
20
ods and technology to model and study the geological
structure of NOVATEK’s fields and license areas as well as
the physical processes of development, production and
processing of their hydrocarbons. The Company‘s geolo-
gists use a systematic approach to exploration and de-
velopment of new fields, beginning with the collection and
interpretation of seismic data to the creation of dynamic
field models for the placement of exploration and produc-
tion wells. We employ modern geological and hydrody-
namic modeling as well as new well drilling and comple-
tion techniques in an attempt to maximize the ultimate
recovery of hydrocarbons in a cost effective manner.
In 2010, NOVATEK invested approximately RR 2,042 mil-
lion in exploration activities at consolidated subsidiaries
which, included 15.2 thousand meters of exploration drill-
ing and the running and processing of 522 square kilom-
eters of 3D seismic and 322 kilometers of 2D seismic. The
exploration activities at our fields targeted gas condensate
and crude oil bearing Lower Cretaceous and Jurassic de-
posits at depths of between 2,000 to 4,400 meters.
Production
In 2010, NOVATEK’s gross production from all fields
amounted to 278 mm boe of which, approximately 89%
was natural gas.
In 2010, total gross production amounted to 37.8 bcm
of natural gas and 3,632 mt of liquid hydrocarbons. Natu-
ral gas production increased by 5.01 bcm, or 15.3 %,
while liquids production increased by 583 mt, or 19.1%,
compared to the respective production volumes in 2009.
In 2010, NOVATEK’s lifting costs increased by 0.6% to
RR 16.1 per boe on a Russian rouble basis and by 6% to
$0.53 per boe on a dollar basis. The Company’s total gas
production capacity as of 1 January 2011 aggregated to
approximately 167 mmcm per day (including our share
in Sibneftegas’ production capacity) or approximately 60
bcm per annum.
Core Producing Fields
Our three core producing fields — Yurkharovskoye,
East-Tarkosalinskoye and Khancheyskoye — accounted
for 99.7% of our natural gas and liquid hydrocarbons pro-
duction in 2010 and more than 64% of our total 2010
proved reserves, as appraised by D&M, under the SEC's
reserve methodology. Each of these important fields is
located in close proximity to the UGSS and production
and processing infrastructure and form the foundation for
our current production and mid-term production growth
targets.
The Yurkharovskoye Field
The field was discovered in 1970 and is located with-
in the polar circle on the southeast shore of the Tazov
peninsula. The Company's wholly-owned subsidiary
(Yurkharovnefte-
OOO NOVATEK-Yurkharovneftegas
gas) holds the license for exploration and production of
hydrocarbons at the field which is valid until 2034. The
field has been producing natural gas and gas conden-
sate since 2003 and, in 2009, became the largest of
NOVATEK’s fields in terms of reserves and production.
The successful development of this field is the main
driver for our near-term production growth as well as the
cornerstone of our current strategy to meet growing de-
mand for natural gas in the Russian domestic market.
The field is connected to the UGSS via our own pipe-
line infrastructure, which enables the transport of up to
34 bcm of natural gas per annum. We arrange for further
transportation to end-customers through transportation
contracts we enter into with Gazprom.
In April 2010, we launched a 40 mt per annum metha-
nol plant located on the territory of the Yurkharovskoye
field, thus eliminating the need to transport methanol to
the field and decreasing our operating costs and the po-
tential environmental risks related to its transportation.
We have used the experience gained from the launch in
September 2007 of the 12.5 mt per annum pilot methanol
03
03 OPERATIONS IN REVIEW
OPERATIONS IN REVIEW
21
YURKHAROVSKOYE FIELD
NATURAL GAS PRODUCTION,
bcm
YURKHAROVSKOYE FIELD
GAS CONDENSATE PRODUCTION,
mt
24.7
17.9
9.6
9.6
11.7
30
20
10
0
2,113
1,492
750
895
731
2,400
1,800
1,200
600
0
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
Total marketable (sales) production in 2010:
Natural gas:
Liquid hydrocarbons:
24.4 bcm
(861.1 bcf)
2,100 mt
(18.1 mm bbl)
Proved reserves (SEC) at 31 December 2010:
Natural gas:
Liquid hydrocarbons:
460.0 bcm
(16,244.1 billion cubic feet (bcf))
23.0 mmt
(197.8 mm bbl)
production plant to improve the design of our new plant.
Our new plant uses higher quality anti-corrosive steel as
well as a more efficient gas compressor unit.
In August 2010, we launched our unstable gas con-
densate de-ethanization unit at the field and a 326 kil-
ometer unstable gas condensate pipeline connecting
the field with our Purovsky Plant, both have capacities of
three mmt per annum. The construction and launching
of these new facilities enabled us to improve the quality
of our gas condensate and reduce third party expenses
for de-ethanized gas condensate processing and trans-
portation.
In October 2010, we completed the third stage of the
second phase of development at the field, increasing our
total productive capacity by seven bcm of natural gas and
600 mt of unstable gas condensate per annum thus in-
creasing total field production capacity to approximately
33 bcm of natural gas and approximately three mmt of
unstable gas condensate.
NOVATEK
NOVATEK
MOVING FORWARD
MOVING FORWARD
ANNUAL REPORT 2010
ANNUAL REPORT 2010
22
East-Tarkosalinskoye Field
The field's license for exploration and production of
hydrocarbons is held by NOVATEK’s wholly-owned sub-
sidiary OOO NOVATEK-Tarkosaleneftegas (Tarkosalen-
eftegas) and is valid until 2043. The field began producing
crude oil in 1994 and natural gas and gas condensate in
1998 and 2001, respectively.
The East-Tarkosalinskoye field, discovered in 1971
is located in the northern central area of the West Sibe-
rian lowlands, a territory known locally as the Purovsky
district of the Nadym-Pur-Taz region. Development drilling
in the Cenomanian horizon commenced in May 1998 and
commercial production of natural gas began in December
1998. Development drilling in the Valanginian horizon com-
menced in May 2000 and commercial production of gas
condensate began in February 2001.
The East-Tarkosalinskoye field is our most mature
field and has reached its respective plateau levels in terms
of natural gas and gas condensate production. We expect
the field's production profile to remain relatively flat in the
near-term.
The field is connected to the UGSS via our own pipe-
line, which enables the transport of up to 20 bcm of natural
gas from the East-Tarkosalinskoye and the Khancheyskoye
fields per annum. Unstable gas condensate is de-ethanized
at the field and is transported via our 2.4 mmt per annum
pipeline to our Purovsky Plant.
Crude oil is transported via our pipeline collection sys-
tem to our complex gathering station for further process-
ing. After processing the crude oil is transported via our
crude oil pipeline to the metering station of Transneft's oil
pumping station and injected into the pipeline system op-
erated by Transneft.
In April 2010, we commissioned the first stage compres-
sor booster station at the field's Valanginian layer, with a
capacity of eight MW, to maintain the field’s hydrocarbon
production levels as the reservoir pressure decreases.
Total marketable (sales) production in 2010:
Natural gas:
Liquid hydrocarbons:
9.7 bcm
(343.8 bcf)
852 mt
(6.9 mmbbl)
Proved reserves (SEC) at 31 December 2010:
Natural gas:
Liquid hydrocarbons:
236.1 bcm
(8,337.3 bcf)
18.6 mmt
(148.3 mm bbl)
EAST-TARKOSALINSKOYE FIELD
NATURAL GAS PRODUCTION,
bcm
EAST-TARKOSALINSKOYE FIELD
LIQUIDS PRODUCTION,
mt
897
906
938
898
853
15.8
14.6
14.9
11.7
10.0
18
12
6
0
900
600
300
0
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
Gas condensate
Crude oil
03
03 OPERATIONS IN REVIEW
OPERATIONS IN REVIEW
23
Khancheyskoye Field
Total marketable (sales) production in 2010:
Natural gas:
Liquid hydrocarbons:
3.0 bcm
(106.4 bcf)
635 mt
(5.2 mm bbl)
Proved reserves (SEC) at 31 December 2010:
Natural gas:
Liquid hydrocarbons:
37.1 bcm
(1,310.7 bcf)
4.6 mm tons
(37.4 mm bbl)
The Khancheyskoye field was discovered in 1990 and
is located 65 kilometers to the east of the East-Tarkosalink-
soye field. The license for exploration and production of
hydrocarbons at the Khancheyskoye field is held by Tarko-
saleneftegas and is valid until 2044. The field began pro-
ducing natural gas and gas condensate in 2001and crude
oil in 2007.
All of the field's natural gas production is trans-
ported via our pipeline to our East-Tarkosalinskoye field,
and then further transported to customers using the East-
Tarkosalinskoye field's connection to the UGSS. The pipe-
line's current capacity is 7.5 bcm per annum.
The field's unstable gas condensate production
is transported via our pipeline to our East-Tarkosalinskoye
field, where it is de-ethanized and further transported to
our Purovsky Plant using the East-Tarkosalinskoye field's
unstable gas condensate pipeline. The intra-field unstable
gas condensate pipeline's capacity is 1.1 mmt per an-
num.
Crude oil is loaded on to tanker trucks for further trans-
portation to the oil collection system of the East-Tarkosalin-
skoye field where it is processed and transported to Tran-
sneft's oil pumping station and injected into the pipeline
system operated by Transneft.
KHANCHEYSKOYE FIELD
NATURAL GAS PRODUCTION,
bcm
KHANCHEYSKOYE FIELD
LIQUIDS PRODUCTION,
mt
4.2
4.1
3.3
3.1
3.0
5
4
3
2
1
0
800
600
400
200
0
759
727
661
619
635
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
Crude oil
Gas condensate
NOVATEK
MOVING FORWARD
ANNUAL REPORT 2010
Other Producing Fields
24
Beregovoy License Area
Sterkhovoye Field
Sibneftegas holds the exploration and development
license for the Beregovoy license area. This license area
encompasses the Beregovoye field, Sibneftegas’ largest
field according to the Russian Federation’s State Bal-
ance of Reserves. The field is connected to the UGSS
by way of a 32.8 kilometer natural gas pipeline and com-
mercial production of natural gas began in 2007.
The Sterkhovoye field is located within the Olimpiyskiy
license area. The license for exploration and production of
hydrocarbons at the Olimpiyskiy license area is held by
Tarkosaleneftegas. We are currently interpreting seismic
data from the northern portion of the license area, where
the field is located, and plan to increase development
drilling over the next two years.
Currently, Sibneftegas is completing the interpretation of
3D seismic results to update the existing geological model in
order to determine the field's future development plans.
the
We commenced exploratory drilling at
Sterkhovoye field in 2000, and commercial production
began in April 2009.
The field is connected to the UGSS by a 14 kilometer
natural gas pipeline with transportation capacity of 3.1
bcm per annum. De-ethanized gas condensate from the
Sterkhovoye field is sent to the Purovsky Plant via a 12
kilometer portion of the gas condensate pipeline connect-
ing the Yurkharovskoye field with the Purovsky Plant.
We constructed and launched a complex gas prepa-
ration unit at the Sterkhovoye field in 2009 with annual
capacity of 0.7 bcm, which enabled commercial produc-
tion at the field to commence.
Total marketable (sales) production in 2010:
Natural gas:
Liquid hydrocarbons:
77.2 mmcm
(2.7 bcf)
31 mt
(0.3 mm bbl)
Proved reserves (SEC) at 31 December 2010:
Natural gas:
Liquid hydrocarbons:
10.5 bcm
(371.8 bcf)
3.5 mm tons
(28.6 mm bbl)
Total marketable (sales) production in 2010 *:
Natural gas:
9.0 bcm
(317 bcf)
Net proved reserves (SEC) at 31 December 2010:
Natural gas:
Liquid hydrocarbons:
Pyreinoye Field
86.4 bcm
(3,052.7 bcf)
0.4 mmt
(3.0 mm bbl)
Sibneftegas also holds a license for the development
of hydrocarbons and geological exploration at the Pyreinoye
gas condensate field. Commercial production of natural gas
began in 2009. The field is connected to the UGSS by way
of a 36 kilometer natural gas pipeline.
Currently, Sibneftegas is completing 3D seismic ex-
ploration work at the field to update the existing geologi-
cal model and the field's geological reserves.
Total marketable (sales) production in 2010*:
Natural gas:
0.9 bcm
(30.5 bcf)
Net proved reserves (SEC) at 31 December 2010:
Natural gas:
8.9 bcm
(312.8 bcf)
* NOVATEK's subsidiary acquired 51% of the shares of
OAO Sibneftegas in December 2010. The production volumes at the
Beregovoy license area and Pyreinoye field are given for reference
only and are excluded from the Company’s total production volumes
calculations. 100% of the field’s production volumes are shown.
03
OPERATIONS IN REVIEW
Development Projects
NOVATEK continued exploration work at its other
fields and license areas located within the territory of the
YNAO. Currently, the most prospective of these assets
are the South-Tambeyskoye field, the other fields and li-
cense areas of Sibneftegas and SeverEnergia as well as
the Termokarstovoye field and Olimipiyskiy license area.
South-Tambeyskoye Field
The license for exploration and production at the
field is held by NOVATEK’s subsidiary Yamal LNG.
In June 2010, we entered into a cooperation agree-
ment with Gazprom setting out the key parameters for
joint activity between our companies in implementing and
developing a pilot LNG project on the Yamal peninsula
based on the resources of the South-Tambeyskoye field.
The terms of our agreement with Gazprom set out the
scope of construction, development and subsequent
utilization of related infrastructure, including energy and
transportation systems and LNG production facilities.
Within the project's framework we are planning fur-
ther exploration and development activities at the South-
Tambeyskoye field including production drilling and infra-
structure development. Infrastructure plans are expected
to include the construction of a gas gathering system,
a gas complex processing facility, a gas condensate
processing unit, an LNG plant, pipelines which enable
gas transportation from the field to the plant, an offshore
shipping terminal and other transportation infrastructure
(including an airport, port terminal and highways).
In October 2010, the Russian Government officially
outlined its position on tax concessions for the develop-
ment of LNG projects in the Yamal peninsula. Following
this announcement and the completion of our feasibility
and engineering studies, we plan to finalize our total capi-
tal expenditure plans, including construction expenses for
the Yamal LNG plant.
Net proved reserves (SEC) at 31 December 2010:
Natural gas:
Liquid hydrocarbons:
213.0 bcm
(7,522.1 bcf)
7.6 mm tons
(65.5 mm bbl)
25
Samburgskiy License Area
The Samburgskiy license area comprises the reserves
of Samburgskoye, Severo-Yesetinskoye+Vostochno-Ure-
ngoiskoye and Severo-Purovskoye fields and part of the
Urengoiskoye field. The license for exploration and de-
velopment is owned by OAO Arcticgas, a wholly owned
subsidiary of SeverEnergia. We are currently reviewing
the development plans for the license area in order to op-
timize the recovery of hydrocarbons.
Net proved reserves (SEC) at 31 December 2010:
Natural gas:
Liquid hydrocarbons:
32.5 bcm
(1,146.5 bcf)
6.7 mm tons
(53.6 mm boe)
Termokarstovoye Field
The license for exploration and production of gas
and gas condensate at the Termokarstovoye field is held
by NOVATEK’s associated company ZAO Terneftegas, our
joint venture with TOTAL Termokarstovoye B.V. In June
2009, we signed a framework agreement with TOTAL
S.A. establishing the framework for joint cooperation in
exploring and developing the Termokarstovoye gas con-
densate field. In December 2009, we signed a subscrip-
tion agreement, a sales and purchase agreement and a
shareholders agreement with TOTAL Termokarstovoye
B.V., which reduced our share in Terneftegas to 51% in
2010. TOTAL Termokarstovoye B.V. holds the remaining
49% of shares.
In 2010, we drilled a horizontal well to assess the po-
tential reservoir productivity in the Jurassic layers. A final
investment decision will be taken in 2011.
Net proved reserves (SEC) at 31 December 2010:
Natural gas:
Liquid hydrocarbons:
12.6 bcm
(443.9 bcf)
2.4 mm tons
(20.2 mm bbl)
NOVATEK
NOVATEK
MOVING FORWARD
MOVING FORWARD
ANNUAL REPORT 2010
ANNUAL REPORT 2010
26
Urengoiskoye Field
The Urengoiskoye field is part of the Olimpiyskiy li-
cense area and is included in our 2010 annual independ-
ent reserve appraisals.
To date, we are reviewing 2D seismic data from the
field.
Proved reserves (SEC) at 31 December 2010:
Natural gas:
Liquid hydrocarbons:
3.3 bcm
(118.1 bcf)
0.9 mm tons
(7.1 mm bbl)
Other Fields and License Areas
At the end of 2010, NOVATEK held 15 licenses for ex-
ploration and production as well as seven licenses for ex-
ploration. The total reserves under the Russian reserve
classification ABC1 + C2 at these fields totaled 527 bcm of
natural gas and 130.7 mmt of liquid hydrocarbons as of 31
December 2010.
In 2010, the following other fields and license areas were
also included in our independent reserve appraisal; North
Khancheyskoye, Severo-Russkoye, West Yurkharovskoye,
Yarudeyskoye and Severo-Chaselskoye fields as well as
Khadyryakhinskiy and Yaro-Yakhinskiy license areas and
the total combined SEC proved reserves, according to
NOVATEK’s shareholding, amounted to 44.0 bcm of natural
gas and 5.2 mmt of liquid hydrocarbons.
In addition to the Samburgskiy license area, Se-
verEnergia, through its subsidiaries, holds licenses for
exploration and development at the following fields and
license areas:
The Yevo-Yakhinskiy license area consists of the Yevo-
(cid:122)
Yakhinskoye field, parts of the Urengoiskoye and Severo-Yes-
etinskoye + Vostochno-Urengoiskoye fields. The license for
exploration and development is owned by OAO Arcticgas.
Yaro-Yakhinskiy license area includes the Yaro-Yakhin-
(cid:122)
skoye field and its surrounding territories. The license for ex-
ploration and development is owned by ZAO Urengoil Inc.
The Severo-Chaselskiy license area, which includes the
(cid:122)
Severo-Chaselskoye field and its surrounding area. The li-
cense for exploration and development is owned by OAO
Neftegaztechnologia.
SeverEnergia's fields are in close proximity to the license
areas of our subsidiaries and our existing transportation
and processing infrastructure and the infrastructure of the
Purovsky Plant. We are currently working with the joint ven-
ture partners to refine the development plans for these fields
and license areas.
In addition to the licenses for the Beregovoy license area
and Pyreinoye field, Sibneftegas, holds geological exploration
and development licenses for the Khadyryakhinskiy license
area and Zapadno-Zapolyarnoye field which are in the early
stages of geological exploration. Sibneftegas is currently plan-
ning to conduct further drilling and 3D seismic exploration
works at the Khadyryakhinskiy license area in order to deter-
mine the geological structure of the deposits and identify any
potential additional reserves that may be ready for develop-
ment. Sibneftegas's fields are in close proximity to the license
areas of our subsidiaries and our existing transportation and
processing infrastructure.
In 2010, we increased our participation interest to 100%
in companies holding exploration licenses to the Sredniy-
Chaselskiy, Severo-Russkiy, Zapadno-Tazovskiy, Anoma-
lniy and Severo-Yamsoveyskiy license areas, as well as
the exploration and production license at the Zapadno-
Chaselskoye field.
In 2010, the license for the Severo-Russkiy license area
was reissued to Tarkosaleneftegas and at the end of 2010
the licenses for the Sredniy-Chaselskiy license area and the
Zapadno-Chaselskoye field were in the process of being
reissued to Tarkosaleneftegas as a result of the merger of
Oiltechproduct-Invest into Tarkosaleneftegas. In order to re-
duce costs and more effectively carry out development plans,
our wholly-owned subsidiaries, Tarkosaleneftegas and Yur-
kharovneftegas, act as operators for the exploration works at
these fields and license areas.
In 2010, we discovered one gas condensate field at the
Severo-Russkiy license area containing five productive forma-
tions. Four of these productive formations were discovered as
a result of drilling tests and one on the basis of geophysical
data. In 2010, we also discovered the Ukrainsko-Yubileinoye
field, which has three gas condensate layers, and is included
as part of the Severo-Yamsoveyskiy license area.
In 2010, we acquired a 100% interest in Tambeynefte-
gas, the holder of the exploration and production license
to the Malo-Yamalskoye natural gas and gas condensate
03
OPERATIONS IN REVIEW
27
field whose total reserves under the Russian reserve clas-
sification ABC1 + C2 amount to 161 bcm of natural gas
and 14.4 mmt of gas condensate, according to the Rus-
sian Federation's State Balance of Reserves at 31 De-
cember 2010.
Our ability to control the processing function allows us
to produce stabilized gas condensate and LPG that are
of higher-quality than the output that would result from a
third-party processor.
NOVATEK owns a 50% participation interest in the con-
cession agreement for exploration and production of hydro-
carbons at the El-Arish off-shore block. The off-shore block,
comprising an area of approximately 2,300 square kilometers,
is located along the Mediterranean Sea coast, adjacent to the
north coast of the Sinai Peninsula and close to developed
fields. The concession agreement provides for a minimum
exploration period of four years, which will include performing
geophysical studies of the block as well as drilling two explo-
ration wells.
In compliance with the respective license terms, we have
conducted 3D exploration works and drilled one exploration
well, which was subsequently expensed during the fourth
quarter. We are in the process of assessing the geological
and geophysical information with our partners, as well as the
current economic situation, and will make a decision regard-
ing our future plans in the first quarter of 2011.
We will continue to conduct exploration works at our re-
maining license areas in compliance with the respective li-
cense terms, with the strategic aim of furthering our reserves
growth as a result of the discovery of new deposits.
Processing
Gas condensate is produced from our fields in an un-
stable form and requires further processing before it can
be delivered to our customers. Our primary gas conden-
sate processing asset is the Purovsky Plant, which has
total processing capacity of five mmt of de-ethanized gas
condensate per annum, that allows us to produce approxi-
mately 3.7 mmt of stable gas condensate and approxi-
mately 1.3 mmt of LPG per annum. The Purovksy Plant
is located in the YNAO and in close proximity to the East-
Tarkosalinskoye field.
The Purovsky Plant is an important link in our mid-
stream value chain that provides us complete operational
control over our processing needs and access to higher-
yielding marketing channels for our stable gas condensate.
The Purovsky Plant receives feedstock from two
sources; through our unstable gas condensate pipelines
from the East-Tarkosalinskoye and Khancheyskoye fields,
and our unstable gas condensate pipeline from the Yur-
kharovskoye and Sterkhovoye fields. In August 2010, we
launched a 326 kilometer, three mmt per annum unstable
gas condensate pipeline from the Yurkharovskoye field to
the Purovsky Plant. The commissioning of this pipeline al-
lows us to increase the quality of our processed products
by eliminating the quality dilution, which occurred when
gas condensate from the Yurkharovskoye field was mixed
with other producers' gas condensate, during delivery to
the Purovsky Plant using Gazprom's trunk pipeline.
In 2010, the Purovsky Plant processed 3.4 mmt of de-
ethanized unstable gas condensate, or 19.5% more than
in 2009, resulting in the commercial production of 2.5 mmt
of stable gas condensate and 880 mt of LPG as well as 10
mt of methanol produced during the LPG scrubbing proc-
ess. In 2010, the Purovsky Plant operated at approximately
68% of full capacity, providing us with the ability to continue
developing our gas condensate fields.
PUROVSKY PLANT OUTPUT 2010,
mt
2,484
10
27
880
Stable gas
condensate
Losses
Regenerated
and own usage
methanol
LPG
NOVATEK
MOVING FORWARD
ANNUAL REPORT 2010
28
Substantially all of the stabilized gas condensate
produced at our Purovsky Plant is delivered by rail to the
Port of Vitino where it is loaded onto ocean tankers for fur-
ther transportation to international markets. In November
2010, we commissioned 9.6 mcm of raw material storage
facilities for our de-ethanized gas condensate at the plant.
In total, the Purovsky Plant has storage facilities for stable
condensate (90.0 mcm), LPG (15.6 mcm) and raw materi-
als (13.6 mcm). The Purovsky Plant also has facilities for
loading stable condensate and LPG into rail tank cars. Our
own railway line connects the plant to the Russian railway
network at the Limbey rail station.
the world consuming approximately 414 bcm. The largest
Russian consumer of natural gas is the power genera-
tion sector where over 50% of its primary energy supply
comes from natural gas. In 2010, NOVATEK accounted
for more than 10% of the total natural gas deliveries to the
domestic market through the UGSS.
In 2010, NOVATEK’s natural gas sales volumes amount-
ed to 37.1 bcm, an increase of 12.7% compared to 2009
sales volumes of 32.9 bcm, of which 23.7 bcm was sold
to the end-customer segment and 13.4 bcm was sold
ex-field to the wholesale trader segment.
As part of our goal to increase processing depth, we
continued the engineering design work for a new termi-
nal facility at Ust-Luga, located on the Baltic Sea, for the
transshipment and fractionation of stable gas condensate
produced at the Purovsky Plant. A portion of the stable gas
condensate supplied to the facility by rail transport will be
loaded onto tankers for delivery to export markets while the
remaining volumes will be used as feedstock to the frac-
tionation unit for further processing into naphtha, jet fuel
and diesel/gas oil which will be sold to both domestic and
international export markets. The estimated fractionation
capacity of the Ust-Luga terminal is up to six mmt per an-
num, and will be constructed in two phases.
The project is currently in the early infrastructure de-
velopment stage. Our subsidiary, NOVATEK-Ust-Luga, is
engaged in the engineering design works and has simul-
taneously started construction works at the site and, upon
completion will be the operator of the terminal.
In 2010, our customers were located primarily in the
Perm territory, Chelyabinsk, Orenburg, Sverdlovsk, Mos-
cow, Kurgan, Kirov, Samara and Kostroma regions, the
city of St-Petersburg as well as the YNAO and Khanty-
Mansyisk Autonomous Region. During the period,
NOVATEK acquired a gas trader, OOO Yamalgaz-
resurs-Chelyabinsk, and established OOO NOVATEK Perm
to support and expand current and future natural gas sales
opportunities in the respective region and territory.
In the beginning of 2010, we entered into new ar-
rangements with Gazprom whereby we sell 10.3 bcm of
natural gas per annum directly to Gazprom. In April 2010,
we entered into a new five-year sales contract with the
Itera Group providing for the sale of 24 bcm of natural gas
over the period from 2011 through 2015, at prices based
on the gas price set by the FTS for the Sverdlovsk region
less transportation costs. The Itera Group then sells this
gas to end-customers in the Sverdlovsk region.
Marketing
During 2010, NOVATEK supplied natural gas to 33 regions
of the Russian Federation, successfully navigated the North-
ern Sea Route to deliver stable gas condensate to China
and acquired a Polish LPG distribution company to support
export sales and distribution.
Natural Gas Sales
Total revenues from natural gas sales increased
to RR 71.1 billion or by 32.5%, in 2010 as compared to
2009.
In order to maintain production levels during peri-
ods of seasonality in demand NOVATEK has entered into
an agreement with OAO Gazprom for the use of the lat-
ter’s underground storage facilities on a space available
basis. Historically, natural gas is injected into underground
storage facilities during warmer periods when demand is
lower and later withdrawn during periods of colder weath-
er and increased demand.
According to the CDU-TEK, total Russian natural gas
production increased by 11.6% in 2010 and Russia re-
mained the second largest consumer of natural gas in
In 2010, NOVATEK withdrew 428 mmcm of natural gas
from underground storage facilities during periods of high
demand and injected 605 mmcm when space was avail-
03
03 OPERATIONS IN REVIEW
OPERATIONS IN REVIEW
29
2010 BREAKDOWN OF OIL&GAS SALES,
%
2010 BREAKDOWN OF NATURAL GAS
SALES VOLUMES, %
62%
48%
1%
11%
Natural gas
LPG
Oil products
Stable gas
condensate
Crude oil
26%
13%
3%
36%
Power
generation
companies
Large
industrial
customers
Regional
distributors
Wholesale traders
in remote regions
NATURAL GAS SALES VOLUMES,
bcm
NATURAL GAS SALES REVENUE,
RR billion*
32.1
33.3
32.9
30.3
37.1
40
30
20
10
0
71.1
53.6
45.7
35.6
28.0
80
60
40
20
0
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
Ex-field
End-customers
Electronic trading
* Net of VAT
NOVATEK
MOVING FORWARD
ANNUAL REPORT 2010
DOMESTIC GAS DELIVERIES
30
*
NO GAS
TRANSPORTATION
SYSTEM AVAILABLE
Saint Petersburg
Moscow Region
Kirov Region
Khanty-Mansiysk Autonomous Region
Yamal-Nenets Autonomous Region
Samara Region
Orenburg Region
Perm Territory
Chelyabinsk Region
Sverdlovsk Region
Kurgan Region
Yurkharovskoye Field
East-Tarkosalinskoye Field
Khancheyskoye Field
Main regions
Other regions
NOVATEK’s
core
producing fields
Capitals of the main regions
03
OPERATIONS IN REVIEW
31
able. At the end of 2010, the Company had 761 mmcm
of natural gas in storage and available for withdraw in fu-
ture periods.
LIQUIDS SALES VOLUMES,
mt
Liquid Hydrocarbon Sales
The Company’s primary liquid hydrocarbon sales
volumes are comprised of stable gas condensate and
liquefied petroleum gases (LPG). The stable gas condensate
is primarily used in the petrochemical and oil refining industries
as an alternative to naphtha and light crude oil, respectively.
Our LPG is sold to both the chemical processing industry, as
a feedstock, and the retail and wholesale fuel markets where
its high energy content, environmental safety and ease of
storage and transportation make it an attractive fuel source
for automobiles and residential usage.
The Company’s liquid hydrocarbon sales results
demonstrate our success in diversifying both the product
slate, to higher value added products, and geographic
markets. The initial launch and subsequent expansion of
the Purovsky Plant has enabled NOVATEK to optimize its
marketing strategy based on the reliable supply of high
quality processed hydrocarbons to both the domestic and
export markets.
Total sales volumes of liquid hydrocarbons in
2010 amounted to 3,401 mt, an 8.7% increase over 2009
3,401
3,128
2,249
2,404
2,630
4,000
3,000
2,000
1,000
0
2006
2007
2008
2009
2010
Stable gas condensate
Oil products
LPG
Crude oil
volumes, while total revenues from liquids sales increased
to RR 44.1 billion, or by 32.5%, in 2010 as compared to
2009.
During 2010, we dispatched 41 tankers of stable gas
condensate from the Port of Vitino and sold 39, of which
53% were sold to markets in the USA, 26% to countries in
the Asian-Pacific region, 13% to markets in Europe and 8%
to markets in other countries. We had two tankers in transit
at year-end. Over 99% of our 2010 stable gas condensate
sales volumes were sold to the export market.
LIQUIDS SALES REVENUE,
RR billion*
LIQUIDS SALES REVENUE MARKET
DISTRIBUTION, %
50
40
30
20
10
0
33.3
30.4
24.8
20.0
44.1
100%
80%
60%
40%
20%
0%
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
Stable gas condensate
Oil products
LPG
Crude oil
* Net of VAT, excise tax and export duties.
Export
Domestic
NOVATEK
MOVING FORWARD
ANNUAL REPORT 2010
32
I
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03
OPERATIONS IN REVIEW
33
BREAKDOWN OF LIQUIDS SALES VOLUMES,
%
69%
Stable gas
condensate (export)
LPG
(domestic)
Crude oil
(domestic)
Stable gas
condensate
(domestic))
LPG (export)
Crude oil
(export)
Oil products
13%
3%
2%
13%
The Company sells its LPG volumes to both the
export and domestic markets. In November 2009, we
established Novatek Polska, a wholly-owned LPG trading
company in Poland, to expand our LPG sales network
there and support our export sales. Novatek Polska began
commercial activities in January 2010. In 2010, export
sales volumes of LPG accounted for 50% of total LPG
sales volumes. NOVATEK’s LPG sales through its network
of retail and small wholesale stations in the Chelyabinsk
and Volgograd regions increased by more than three times
in 2010 compared to 2009. Sales of LPG and oil products
through NOVATEK’s owned and leased stations amounted
to 45 mt in 2010.
At the end of 2010 the Company's owned and leased
rolling stock, for transportation of liquid hydrocarbons from
the Purovsky Plant, totaled 5.6 thousand rail cisterns.
Stable gas condensate is transported by rail from the
Purovsky Plant to the loading and storage facilities we have
constructed, together with OAO Belomorskaya Neftebazа,
at the all season Port of Vitino. In 2010, we loaded 2,445
mt at the port or 19% more than in 2009.
NOVATEK considers its employees as the
Company’s most valuable resource
35
04
Environmental
and Social
Responsibility
Human Resources
In assessing its current activities and future develop-
ment plans, NOVATEK considers its employees as the
Company’s most valuable resource. The Company’s hu-
man resource management system is based on the prin-
ciples of fairness, respect, equal opportunity and provides
for an open dialogue between management and person-
nel. NOVATEK also provides continuous, comprehensive
training and professional development opportunities for
the Company’s employees at all levels.
As of the end of 2010, NOVATEK had 4,019 employ-
ees, 54% of whom work in exploration and production
and 33% in plant operations, processing, transportation
and sales.
Personnel Training and
Development
In an environment of rapidly developing technolo-
gies, our multilevel training and professional develop-
ment program enables NOVATEK’s workers to maintain
the Company’s high degree of competitiveness. In 2010,
the primary training and professional development goals
included the following:
(cid:122)
developing future managers;
Realization of the “Leadership Horizons” program for
Involvement of young specialists in NOVATEK’s “Re-
(cid:122)
search-to-Practice Conferences” and the “Fuel and En-
ergy Complex (FEC) Competitions”; and
Training and professional development for the Com-
(cid:122)
pany’s employees to specific requirements of Division
Heads.
NOVATEK continued its efforts to increase employee
training, improve working conditions and ensure a safe
environment at its production facilities. In 2010, 34.6%
of the Company’s engineers and technicians completed
employee certification and industrial safety courses and
40.2% of our specialists and line workers have upgraded
their respective qualifications.
NOVATEK continued the implementation of the “Lead-
ership Horizons” program for developing future managers
and 110 employees underwent training in the “Leader-
ship in Communications”, “Human Resource Manage-
ment” and “Business Case Decisions” modules and 55
employees, who entered the Program in 2010, under-
went training in two modules: “Task Management” and
“Leadership in Communication”.
Interregional Research-to-Practice
The “5th
Conference” for NOVATEK’s young specialists was
held in Moscow in September 2010, and 43 of the Com-
NOVATEK
NOVATEK
MOVING FORWARD
MOVING FORWARD
ANNUAL REPORT 2010
ANNUAL REPORT 2010
36
pany’s employees participated. Based on the results of
the competition, 11 winners were awarded a trip to an
oil and gas training center in the USA and the second-
and third-place winners were awarded cash prizes. The
top projects advanced to the “FEC 2010 Competition of
Youth Projects” sponsored by the Ministry of Energy of
the Russian Federation.
In 2010, two of NOVATEK’s young specialists who
were winners of the “FEC 2009 Competition of Youth
Projects” received commendations from the Ministry of
Energy of the Russian Federation.
In 2010, we hired an independent specialist to carry
out a research study to measure the level of employee
involvement in the Company’s operations. The study
involved 2,348 of the Company’s core subsidiaries’ em-
ployees, which is more than 72% of the total number of
employees and a statistically significant representation.
The result showed that 68% of our employees felt ac-
tively involved in our results and success, which is well
above the corresponding levels in a majority of Russian
and European companies which participated in similar
studies.
2010 BREAKDOWN OF PERSONNEL
AS AT 31 DECEMBER 2010
54%
Social Programs
Voluntary medical insurance for employees;
Therapeutic resort and spa treatment for employees
The central feature of NOVATEK’s social policy
is a systematic approach to solving social problems and
supporting workers and their families. According to the
Core Concept of the Company’s Social Policy which was
adopted in 2006, the social benefits package for employ-
ees includes the following programs:
(cid:122)
(cid:122)
and members of their families;
(cid:122)
(cid:122)
payments;
(cid:122)
chase housing; and
Pension program.
(cid:122)
Provision of special-purpose short-term loans;
Special-purpose compensation and social support
Provision of special-purpose interest-free loans to pur-
Social Policy and Charity
NOVATEK continued to implement its socio-economic de-
velopment strategy in the regions where it operates through-
out 2010. Special priority was given to the performance of our
long-term agreements with municipalities of the YNAO and
the Samara region for financing programs targeting educa-
tion and youths, development and modernization of social
infrastructure and preservation of the cultural heritage of the
indigenous peoples of the Far North and Russia as a whole.
In 2010, NOVATEK invested approximately RR 774 million on
projects and activities related to the support of indigenous
peoples, charitable contributions and educational programs.
Cooperation With Indigenous
Peoples of the Far North
15%
During 2010, NOVATEK financed projects aimed at
preserving the culture of indigenous peoples of the Far
North and developing community infrastructure, including
medical treatment facilities as well as the construction of
housing, social and cultural facilities.
Throughout the year the Company provided spon-
sorship assistance to the following organizations:
The Yamal for Descendants Association and its district
(cid:122)
branches to support an Adaptation Center for students from the
population centers of the indigenous peoples of the Far North;
13%
18%
Administrative
Processing
E&P
Marketing
04
04 ENVIRONMENTAL AND SOCIAL RESPONSIBILITY
ENVIRONMENTAL AND SOCIAL RESPONSIBILITY
37
TOTAL REVENUES PER EMPLOYEE,
RR million
NET CASH PROVIDED BY OPERATING
ACTIVITIES PER EMPLOYEE,
RR million
27.3
21.1
18.8
15.7
12.7
30
20
10
0
10.5
8.2
7.5
5.4
4.3
12
8
4
0
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
(cid:122)
The Ilebc Territorial Agricultural Community and Tam-
bey Territory (Yamal District) in order to develop local land,
purchase fuel and provide aviation services; and
The Kutopyugan Village (Nadym district) for the con-
(cid:122)
struction of roads, the installation of a boiler and other
infrastructure facilities.
Educational Programs
NOVATEK continues to develop the Company’s continu-
ing education program which provides opportunities to gifted
students from the regions where we operate to further their
education in top rated Universities, participate in NOVATEK
internships and, upon completion of their studies, possible
employment with the Company.
Under the “Gifted Children” program initiated by
NOVATEK in 1999, special classes are formed on a com-
petitive basis from the most talented students in the cities of
Tarko-Sale and Novokuybyshevsk. The program is designed
for students in grades 10 and 11 who have above-average
test scores.
The Company continued to operate the “Grants” program
for schoolchildren and teachers in the Novokuybyshevsk and
Purovsky Districts of the YNAO.
The “Grants” program for schoolchildren is an educational
support program which we have been administering since
2004. Under the program, students in grades 5 through 11
living in the districts are awarded grants from the Company
to support their academic and creative development and
to encourage a responsible attitude towards their studies.
Since the launch of the program, 1,186 grants have been
awarded.
The “Grants” program for the teachers of the districts
was launched in 2007 and awards grants to highly effective
teachers to raise the prestige of the teaching profession and
create favorable conditions for developing new and talented
teachers. Since the launch of the program 63 grants have
been awarded.
In an effort to create conditions for more effective use of
university and college resources in preparing students for
future professional activities, the Company has developed
and successfully implemented the NOVATEK-VUZ program
in cooperation with the St. Petersburg State Mining Insti-
tute, the Gubkin Russian State University of Oil and Gas
and the Tyumen Oil and Gas University. The NOVATEK-VUZ
program operates on the basis of mutually beneficial coop-
eration agreements that include support for pre-university
preparation of students, subject competitions and profes-
sional orientation. Students, who have passed their exams
with good and excellent results, receive additional monthly
payments together with the State sponsored grants and
compensation of travel expenses to internships. During their
studies, the students have the opportunity to participate in
industrial, technological and pre-degree paid internships with
the Company or its subsidiaries.
NOVATEK
NOVATEK
MOVING FORWARD
MOVING FORWARD
ANNUAL REPORT 2010
ANNUAL REPORT 2010
38
Support of Cultural Traditions
Charitable Activities
The strengthening of partnership relations between
the Company and Russia’s leading cultural and educa-
tional institutions, creative groups and charity funds has
continued during 2010.
The Company is expanding its cooperation with the
“Gift of Life” charity fund, founded by Chulpan Khama-
tova, which raises funds to purchase modern medical
equipment for children’s hospitals.
In 2010, NOVATEK also continued its active support of
the fund’s blood donor movement whereby twice a year
the Company’s Moscow office hosts blood donor ses-
sions to benefit patients of the Russian Children’s Clinical
Hospital. By the end of 2010, 250 participants donated
more than 100 liters of blood.
Volunteer Work
In 2010, the Company continued its support for the
volunteer movement “All Together” in which NOVATEK’s
employees take part in charitable events and projects.
The movement has been active in a number of causes
including; supporting orphans and children with various
illnesses as well as supporting the blood donor sessions
and the organization of various other charitable programs.
Since the beginning of 2008, the volunteer movement has
been a regular supporter of an orphanage in the Tver re-
gion and it has been a regular supporter of orphaned
animals and veteran’s programs since 2009 and 2010,
respectively.
NOVATEK remains a General Partner of the Moscow
Soloists Chamber Ensemble under the direction of soloist
and conductor Yuri Bashmet. The Company also contin-
ued its long-term cooperation with the Russian State Mu-
seum (St. Petersburg), the Samara Regional Art Museum,
the Moscow Kremlin Museum, the Tsaritsyno Estate Mu-
seum, the Moscow House of Photography Museum and
Exhibition Complex, the Moscow Museum of Modern Art
and the State Tretyakov Gallery.
In 2010, the Company organized and sponsored a
number of exhibitions jointly with the Moscow Krem-
lin Museum, the Russian State Museum, the Moscow
House of Photography and the Moscow Museum of
Modern Art and Samara Regional Art Musem. In 2010,
NOVATEK worked on the Company’s first project with the
State Tretyakov Gallery, an exhibition of Alexander Deine-
ka, which was organized in conjunction with the 110th
anniversary of the artist.
Sports Projects
NOVATEK has continued its support for semi-profes-
sional and high-level amateur sports programs. The
Company is the General Partner of the Dinamo Hockey
Club (Moscow), the Kryliya Sovetov Football Club (Sama-
ra), the Spartak Basketball Club (St. Petersburg) and the
NOVA Volleyball Team (Novokuybyshevsk).
04
ENVIRONMENTAL AND SOCIAL RESPONSIBILITY
39
Environment, Health and Safety (EHS)
The Company’s strategic approach to ensuring the
environmental safety of the Company and subsidiaries’
operations are defined in NOVATEK’s EHS Policy which
provides for the following:
Regular ecological monitoring in license areas, eco-
(cid:122)
logical supervision at production facilities and carrying out
environmental impact assessments before commencing
work;
Upgrading equipment and technologies to comply
(cid:122)
with environmental protection and industrial safety re-
quirements;
(cid:122)
islation;
(cid:122)
energy; and
(cid:122)
Rational use and conservation of natural resources and
Conformance with the requirements of Russian EHS leg-
Introduction of non-waste and low-waste technologies.
In August 2010, NOVATEK launched a 326 kilometer
unstable gas condensate pipeline connecting the Yurkha-
rovskoye field with the Purovsky Plant. The Company was
able to optimize the capital expenditures required to com-
plete the pipeline by incorporating solar and wind power
generation units to provide the necessary electricity to op-
erate the pipeline’s tele-mechanic system and valves, in-
stead of using a fixed electrical line. In the future, this proc-
ess solution will also be used at remote well clusters.
The Company uses hydrocarbon-based drilling
mud when drilling horizontal wells, providing for the
high-precision penetration of production horizons with
effectively no pollution. Furthermore, the drilling mud is
recovered from cuttings brought to the surface and sent
for recycling.
INJURY FREQUENCY RATE
(no. of injuries / million working hrs)
ACCIDENT SEVERITY RATE
(total no. of employee working hrs lost per accident /
no. of accidents)
2.00
1.50
1.00
0.50
0%
1.0
1.50
0.52
0.71
0.51
803
260
216
76
248
1,000
800
600
400
200
0%
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
SERIOUS INJURY FREQUENCY
(no. of serious injuries / million working hrs)
PERCENTAGE OF TIME LOST DUE TO INJURIES
(number of hrs lost / total working hrs)
0.25
0.20
0.15
0.10
0.05
0%
0.20
0.14
0.13
0.00
0.00
0.05%
0.04%
0.03%
0.02%
0.01%
0%
0.022
0.041
0.041
0.018
0.004
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
NOVATEK
NOVATEK
MOVING FORWARD
MOVING FORWARD
ANNUAL REPORT 2010
ANNUAL REPORT 2010
04
04 ENVIRONMENTAL AND SOCIAL RESPONSIBILITY
ENVIRONMENTAL AND SOCIAL RESPONSIBILITY
40
41
WATER CONSUMPTION OF NOVATEK
E&P COMPANIES
ENERGY RESOURCES CONSUMPTION IN 2010*
NOVATEK is concerned about the environmental and eco-
nomic issues related to the use of associated petroleum gas
and has made the necessary investments in order to achieve
a 95% level of associated gas usage.
In October 2010, we completed the construction of a
preliminary gas discharge unit and gas pipeline connecting
to the gas and gas condensate preparation unit of the East-
Tarkosalinskoe field, providing for the efficient recovery of as-
sociated petroleum gas (APG) in an amount of approximately
100 mcm/day.
In 2010, NOVATEK continued its participation in the Car-
bon Disclosure Project (CDP) which discloses information
on greenhouse gas emissions and the energy efficiency of
production. Despite a continuous increase in hydrocarbon
production, greenhouse gas emissions from NOVATEK’s
production facilities have increased only slightly compared
with the previous year.
mcm
1,000
800
600
400
200
0
668
543
521
521
397
mm boe
290
260
230
200
170
140
2006
2007
2008
2009
2010
Water consumtion, mcm
Production (all fields), mmboe
In 2010, NOVATEK and all our core subsidiaries passed
compliance and recertification audits of their environmental
management systems in accordance with ISO 14001-2004
and OHSAS 18001-2007 international standards.
trial Safety” competition (St. Petersburg) and was the winner
of the Sixth Russian National Competition “Russian Nature
Conservation Leader – 2010” (Kremlin, Moscow), where the
CEO of OAO NOVATEK was awarded the Medal of Honor for
Environmental Safety.
The Company’s activities with respect to environmentally
safe production have earned the community’s appreciation as
well as national recognition. In 2010, NOVATEK won an award
at the “100 Best Organizations in Russia. Ecology and Indus-
A key component of the Company’s health and safety policy
is implicit recognition that society, the State, our business part-
ners, shareholders and our other stakeholders have the right to
AIR POLLUTION OF NOVATEK
E&P COMPANIES
WASTE GENERATION OF NOVATEK
E&P COMPANIES
mt
18
15
12
9
6
3
11.6
10.8
9.5
9.5
16.4
mm boe
290
260
230
200
170
140
mt
30
24
18
12
6
3
24.8
16.2
12.7
19.6
15.5
mm boe
290
260
230
200
170
140
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
Atmosphere emission, mt
Production (all fields), mmboe
Waste, mt
Production (all fields), mmboe
Natural gas, mcm
Electricity, MWh
Heating energy, Gcal
Oil, tons
Motor gasoline, tons
Diesel fuel, tons
Other, tons
* Company data
Volume
229,432.56
189,608.00
236,963.66
—
544.56
18,679.81
10.90
Thousands of Russian roubles,
net of VAT
241,662.75
559,192.93
139,972.53
—
14,746.21
75,950.11
807.00
obtain full and reliable information on the state of “Health and
Safety” at the Company’s production sites.
In 2010, the Company developed and approved plans and
measures to improve working conditions and ensure safety
in the workplace. The plans provide for regulatory, procedur-
al and technical support of safe working conditions and for
the organization of an occupational health training system.
During the implementation of these plans in 2010, we
made a study of the working conditions and hazardous
production factors in the workplace. Based on this, we are
systematically certifying employees’ workplaces for con-
formance with international labor organization standards and
the requirements of Russian legislation.
Following a dialog between the Company’s managers,
unions and employees in 2010, a series of collective agree-
ments were signed ensuring that Company employees are
provided with personal and group protective equipment and
compensation for harm caused to an employee by an occu-
pational disease or other damage to health associated with
performance of his or her duties.
In 2010, the number of specialists undergoing industrial safety
training and certification doubled. Employees are trained in safe
work methods under specially developed programs, regard-
less of the nature of work, the employees’ work experience,
education or qualifications. Training is provided both within the
Company and at specialized educational institutions.
In order to identify shortcomings in managing health
and safety practices, and promptly eliminate them at
NOVATEK’s facilities, supervisory committees have been
set up at the facilities to carry out internal audits of working
conditions and to determine compliance with work safety
standards and regulations.
Despite all our efforts, we did record accidents in 2010. To
prevent similar incidents, unscheduled audits of the emergency
response and preparedness of facilities and operating person-
nel have been carried out. Our efforts to ensure industrial safety
are based on the results of an assessment and analysis of risks
caused by the multi-variable effect of process operations during
hydrocarbon production and processing. In 2010, we worked
to improve the quantitative assessment of risks associated
with our production activities, prepare declarations of industrial
safety, conduct expert examinations of hazardous production
facilities, create manufacturing risk identification systems, and
implement health and safety inspection methods.
recognizing
the Company’s
liabilities
In
associated with operating hazardous production facilities
in areas of extreme natural conditions and difficult access,
we are planning to increase efforts toward reducing the risks
of accidents and minimizing their consequences. Plans for
accident and emergency response and containment at gas
and gas condensate production, storage and transportation
facilities were analyzed and revised during the reporting pe-
riod. NOVATEK’s goal is to develop uniform approaches to
organizing emergency response and containment methods
and coordinate the actions of all departments and divisions.
The emergency response and containment plans call for
organizing and carrying out accident prevention measures
and developing an action algorithm for operating personnel
to eliminate potential accidents.
04
04 ENVIRONMENTAL AND SOCIAL RESPONSIBILITY
ENVIRONMENTAL AND SOCIAL RESPONSIBILITY
41
ENERGY RESOURCES CONSUMPTION IN 2010*
Natural gas, mcm
Electricity, MWh
Heating energy, Gcal
Oil, tons
Motor gasoline, tons
Diesel fuel, tons
Other, tons
* Company data
Volume
229,432.56
189,608.00
236,963.66
—
544.56
18,679.81
10.90
Thousands of Russian roubles,
net of VAT
241,662.75
559,192.93
139,972.53
—
14,746.21
75,950.11
807.00
obtain full and reliable information on the state of “Health and
Safety” at the Company’s production sites.
In 2010, the Company developed and approved plans and
measures to improve working conditions and ensure safety
in the workplace. The plans provide for regulatory, procedur-
al and technical support of safe working conditions and for
the organization of an occupational health training system.
During the implementation of these plans in 2010, we
made a study of the working conditions and hazardous
production factors in the workplace. Based on this, we are
systematically certifying employees’ workplaces for con-
formance with international labor organization standards and
the requirements of Russian legislation.
Following a dialog between the Company’s managers,
unions and employees in 2010, a series of collective agree-
ments were signed ensuring that Company employees are
provided with personal and group protective equipment and
compensation for harm caused to an employee by an occu-
pational disease or other damage to health associated with
performance of his or her duties.
In 2010, the number of specialists undergoing industrial safety
training and certification doubled. Employees are trained in safe
work methods under specially developed programs, regard-
less of the nature of work, the employees’ work experience,
education or qualifications. Training is provided both within the
Company and at specialized educational institutions.
In order to identify shortcomings in managing health
and safety practices, and promptly eliminate them at
NOVATEK’s facilities, supervisory committees have been
set up at the facilities to carry out internal audits of working
conditions and to determine compliance with work safety
standards and regulations.
Despite all our efforts, we did record accidents in 2010. To
prevent similar incidents, unscheduled audits of the emergency
response and preparedness of facilities and operating person-
nel have been carried out. Our efforts to ensure industrial safety
are based on the results of an assessment and analysis of risks
caused by the multi-variable effect of process operations during
hydrocarbon production and processing. In 2010, we worked
to improve the quantitative assessment of risks associated
with our production activities, prepare declarations of industrial
safety, conduct expert examinations of hazardous production
facilities, create manufacturing risk identification systems, and
implement health and safety inspection methods.
recognizing
the Company’s
liabilities
In
associated with operating hazardous production facilities
in areas of extreme natural conditions and difficult access,
we are planning to increase efforts toward reducing the risks
of accidents and minimizing their consequences. Plans for
accident and emergency response and containment at gas
and gas condensate production, storage and transportation
facilities were analyzed and revised during the reporting pe-
riod. NOVATEK’s goal is to develop uniform approaches to
organizing emergency response and containment methods
and coordinate the actions of all departments and divisions.
The emergency response and containment plans call for
organizing and carrying out accident prevention measures
and developing an action algorithm for operating personnel
to eliminate potential accidents.
NOVATEK’s dividend policy is aimed
at keeping the balance between
the Company’s business goals
and shareholders’ interests
43
05
Management
and Corporate
Governance
Corporate Governance
NOVATEK and its Board of Directors are commit-
ted to the highest standards of corporate governance.
We believe that such standards are essential to business
integrity and performance and provide a framework for
transparent and responsible management which in turn
enables us to create value for our shareholders. This sec-
tion sets out the policies and practices of the Company,
more information on our corporate governance practices
can be found on our website at www.novatek.ru/eng.
NOVATEK is committed to the principles and standards
of the Corporate Governance Code promulgated by the
Russian Federation’s Federal Commission for Securities
Markets.
The Board of Directors (Minutes No. 60 of 15 Decem-
ber 2005) has approved the Corporate Governance Code
of NOVATEK. The Code is in full compliance with the laws
of the Russian Federation and has been elaborated on
in accordance with international best practices, generally
accepted principles of corporate governance, the Corpo-
rate Governance Code promulgated by the Russian Fed-
eration’s Federal Commission for Securities Markets and
the Company’s Articles of Association.
In order to ensure that the highest standards of cor-
porate governance are observed we have adopted an
internal NOVATEK Corporate Governance Code which
provides a framework that governs the execution of our
business activities. We expect all of our employees to
conduct business in a socially responsible manner, ad-
here to our corporate governance and transparency com-
mitments, and strive to identify ways to improve the ef-
ficiency of our work in each of our respective roles. The
NOVATEK Code of Corporate Governance is also avail-
able on the Company’s website.
We are incorporated in the Russian Federation
and our shares are listed on the Russian Trading Sys-
tem and MICEX exchanges. As such, we are required to
comply with the laws and regulations promulgated under
the Russian Federation’s Corporate Governance Code,
approved 28 November 2001 (minutes No. 49). The NO-
VATEK Corporate Governance Code is in full compliance
with the provisions of the Russian Federation’s Corpo-
rate Governance Code. Our shares are also listed on the
London Stock Exchange (LSE) in the form of Global De-
pository Receipts (GDR’s) and we recognize the value of
the UK Financial Reporting Council’s Combined Code on
Corporate Governance and have applied the recommen-
dations in so far as it is practicable and appropriate, and
does not contradict those of the Russian Federation. We
support high standards of corporate governance and will
progressively adopt best practices in line with the Com-
bined Code on Corporate Governance.
44
NOVATEK
NOVATEK
MOVING FORWARD
MOVING FORWARD
ANNUAL REPORT 2010
ANNUAL REPORT 2010
Board of Directors
DIRECTOR
COMMITTEE MEMBERSHIP
Alexander Y. Natalenko 1,2
Strategy and Investments Committee,
Corporate Governance and Remuneration Committee
Leonid V. Mikhelson
Andrei I. Akimov 2
Audit Committee
Burckhard Bergmann 2
Corporate Governance and Remuneration
Committee, Strategy and Investments Committee,
Sub-committee for LNG projects (chairman)
Mark A. Gyetvay
Strategy and Investments Committee (chairman)
Sub-committee for LNG projects
Vladimir A. Dmitriev 1,2
Audit Committee (chairman)
Kirill G. Seleznev 2
Strategy and Investments Committee
Ruben Vardanian 1,2
Corporate Governance and Remuneration
Committee (chairman), Audit Committee
Gennady N. Timchenko 2
Strategy and Investments Committee
Sub-committee for LNG projects
1 Denotes independent Board Member according to the definition contained in the UKLA Combined Code
2 Denotes independent Board Member according to the definition contained in the Russian Federal “Law on Joint-Stock Companies”
NOVATEK’s Board of Directors (the Board) is respon-
sible for directing and managing the business activities of
the Company under the provisions stipulated by the Fed-
eral Law on Joint Stock Companies and NOVATEK’s char-
ter documents. The Board is accountable to NOVATEK’s
shareholders for creating and delivering sustainable share-
holder value by executing its managerial responsibilities in
an effective and efficient manner.
As well as oversight responsibility for financial per-
formance, internal controls and risk management, the
Board has a formal schedule of matter’s specifically re-
served to it for decision. These matters include, but are not
limited to; defining the Company’s strategy and ensuring
that capital and human resources are properly allocated in
order to execute it, optimization of corporate and capital
structure, review of significant contracts, approval of long-
term and yearly business plans and investment projects,
recommendations on dividends and the convening of An-
nual and Extraordinary General Meetings of Shareholders.
The full list of matters reserved to the Board for decision is
available on the Company’s website.
The Board consists of nine members. NOVATEK’s
Board is chaired by Mr. Alexander Natalenko. The Chair-
man is responsible for leading the Board and its effec-
tiveness. The Board has a strong independent element
and currently comprises, in addition to the Chairman, two
executive directors and six non-executive directors who
together with the Chairman are considered independent
according to the definition contained in the Corporate Gov-
ernance Code of the Russian Federation.
NOVATEK’s Directors have a wide range of expertise as
well as significant experience in strategic, financial, com-
mercial and oil and gas activities. Following appointment
to the Board, Directors receive a comprehensive induction
tailored to their individual needs. This includes meetings
with senior management to enable them to acquire a de-
tailed understanding of NOVATEK’s business activities and
strategy, and the key risks and issues that we face as a
business. In addition to these formal processes Directors
have access to the Company’s senior executives for both
formal and informal discussions to ensure regular exchange
of information between non-executive directors and man-
agement. Directors receive timely, regular and necessary
management and other information to enable them to fulfill
their duties and have access to the services and advice of
the Board’s secretary.
05
05 MANAGEMENT AND CORPORATE GOVERNANCE
MANAGEMENT AND CORPORATE GOVERNANCE
45
BOARD AND COMMITTEE MEETINGS ATTENDANCE
Member
Board of
Directors
Audit
Committee
Corporate Governance
and Remuneration
Committee
Strategy and
Investments Committee
Alexander Y. Natalenko
Leonid V. Mikhelson
Andrei I. Akimov
Burckhard Bergmann
Mark A. Gyetvay*
Vladimir A. Dmitriev
Kirill G. Seleznev
Ruben Vardanian
10/10
10/10
10/10
10/10
10/10
9/10
7/10
9/10
Gennady N. Timchenko
10/10
5/6
6/6
6/6
3/3
3/3
3/3
* Mr. Gyetvay was elected to the Chairman of the Strategy and Investments Committee on 28 April 2010
5/5
2/5
5/5
2/5
5/5
To ensure an efficient process the Board meets
regularly, but not less than once every two months, and
in 2010, held 10 meetings, eight of which were by proxy.
Board Activities During the Year
The Board met 10 times during 2010 where the
following key issues were discussed and respective deci-
sions made.
Operating and Financial Performance
The Board reviewed and approved the Company’s
2009 full year operating and financial results, and amended
the 2010 business plan accordingly. The Board also re-
viewed and approved NOVATEK’s business plan for 2011.
Transactions
The acquisition of 51% of the shares in OAO Sibneftegas,
(cid:122)
which holds the license for subsoil exploration and produc-
tion at the Beregovoye, Pyreinoye, and Zapadno-Zapolyar-
noye fields and the Khadyryakhinskiy license area;
The disposal of the Company’s 100% equity interest
(cid:122)
in OOO NOVATEK-Polymer. The disposal is consistent
with NOVATEK’s strategy to focus on its core natural gas
and gas condensate production and processing activi-
ties; and
(cid:122)
1,500 million US dollars for a period of up to ten years.
The issuance of a Eurobond for an amount of up to
Dividends
The Board recommended a full year dividend for 2009,
based on fully year financial results, and an interim dividend
for first half 2010, based on interim financial results for that
period.
The Board approved:
The acquisition of an additional 25.1% of the shares in
(cid:122)
OAO Yamal LNG, which holds the license for exploration
and production at the South Tambeyskoye field;
The acquisition of 100% of the shares in OAO Tam-
(cid:122)
beyneftegas, which holds the license for exploration and
production at the Malo-Yamalskoye natural gas and gas
condensate field;
Board Committees
On 25 March 2005, NOVATEK’s Board of Directors
approved the implementation and establishment of three
Board Committees: Audit; Strategy and Investment; and
Corporate Governance and Remuneration, in accordance
with corporate governance best practices and standards.
NOVATEK
NOVATEK
MOVING FORWARD
MOVING FORWARD
ANNUAL REPORT 2010
ANNUAL REPORT 2010
46
On 4 December 2009, the Board approved the es-
tablishment of a sub-committee within the Strategy and
Investments Committee to oversee the development of
LNG projects and natural gas markets.
The committees play a vital role in ensuring that the
high standards of corporate governance are maintained
throughout the Company and that specific decisions are
analyzed prior to general Board discussions. The specific
terms of reference for each of the Board Committees are
available on our website. The minutes of the committee
meetings are circulated to the Board and are accompa-
nied by oral reports.
Strategy and Investments Committee
The Strategy and Investments Committee is gov-
erned by a Charter which has been approved by the
Board. The Charter is available on the Company’s web-
site and is summarized below.
The primary function of the Strategy and
Investments Committee is to give recommendations
to the Board for determining priorities of the Company’s
operations and assessing the effectiveness of investment
projects proposed to the Board for consideration.
Determine strategic priorities for the Company’s op-
The main objectives of the Strategy and Investment
Committee are as follows:
(cid:122)
erations; and
Assess the effectiveness of prospective investment
(cid:122)
projects and consider how these investments increase
shareholder value of the Company
Strategy and Investment Committee is responsible for
but not limited to
Analyzing concepts, programs and plans of the Com-
(cid:122)
pany’s strategic development and giving recommenda-
tions to the Board;
Developing recommendations to the Board with re-
(cid:122)
spect to any transactions with assets the value of which
exceeds five percent of the Company’s assets’ book val-
ue, as calculated in accordance with the accounting data
as of the last reporting date;
Developing recommendations to the Board following
(cid:122)
the consideration of investment projects proposed by the
Company’s executive bodies for implementation; and
(cid:122)
tion of the Company’s reserves and provisions.
Developing recommendations to the Board for utiliza-
In order to carry out its duties the Strategy and Invest-
ment Committee may request information or documents
from members of the Company’s executive bodies, or heads
of the Company’s relevant departments, which it requires to
efficiently discharge their duties. For the purpose of consid-
ering any issues being within the Committee’s powers, the
Strategy and Investment Committee may engage experts or
other specialists having necessary professional knowledge
and skills. The manner and terms and conditions of engag-
ing such experts or specialists are to be stipulated in agree-
ments between the Company and such persons.
At year-end 2009 a LNG sub-committee was estab-
lished within the Strategy and Investments Committee.
The Board members on the sub-committee are Burck-
hard Bergmann (Chairman), Mark Gyetvay and Gennady
Timchenko.
In carrying out its responsibilities and assisting the
members of the Board in discharging their duties the
To ensure the Committee discharges its responsibili-
ties, it meets not less than four times per year and in 2010,
the Strategy and Investment Committee met five times.
COMMITTEE MEMBERSHIP AS OF 31 DECEMBER 2010
Audit Committee
Corporate Governance
and Remuneration
Committee
Strategy and Investment
Committee
Strategy and Investment
Sub-committee for LNG
projects
Chairman
Vladimir Dmitriev Ruben Vardanian
Mark Gyetvay
Burckhard Bergmann
Members
Ruben Vardanian Alexander Natalenko
Alexander Natalenko
Mark Gyetvay
Andrei Akimov
Burckhard Bergmann
Burckhard Bergmann
Gennady Timchenko
Gennady Timchenko
Kirill Seleznev
05
05 MANAGEMENT AND CORPORATE GOVERNANCE
MANAGEMENT AND CORPORATE GOVERNANCE
47
Corporate Governance
and Remuneration Committee
The primary function of the Corporate Governance
and Remuneration Committee is to review practices and
policies of the Company to ensure compliance with ap-
plicable standards of corporate governance and best
practices. The Corporate Governance and Remuneration
Committee is also responsible for determining the policy
for executive remuneration and for the remuneration and
benefits of individual executive directors and senior ex-
ecutives as well.
Develop recommendations with respect to our divi-
The main objectives of the Corporate Governance
and Remuneration Committee are as follows:
Develop and regularly review our corporate govern-
(cid:122)
ance documents and documents regulating corporate
conflicts;
(cid:122)
dend policy and distribution;
E (cid:122) valuate the Company’s Investor Relations and Share-
holder communications policies;
(cid:122)
tion of the work performed by the Board; and
(cid:122)
Revision Commission members.
Determine the annual compensation for the Board and
Develop procedures for and perform an annual evalua-
In the 2010 corporate year, the Corporate Govern-
ance and Remuneration Committee met four times.
Audit Committee
The Audit Committee is governed by a Charter which
has been approved by the Board. The Charter is available
on the Company’s website and is summarized below.
The primary function of the Audit Committee is to assist
the Board in exercising effective control by assessing:
The accuracy, transparency, and completeness of the
(cid:122)
Company’s financial statements prepared in accordance
with the Russian and International accounting standards;
The candidature of the Company’s external auditor;
(cid:122)
The independent auditor’s report which is presented at
(cid:122)
the Company’s Annual General Meeting of Shareholders
(AGM);
(cid:122)
dures and proposals for their improvement; and
(cid:122)
the Russian Federation.
The Company’s compliance with applicable laws of
The efficiency of the Company’s internal control proce-
In carrying out its responsibilities the Audit Committee
has full authority to investigate all matters that fall within
its Charter. Accordingly, the Audit Committee may:
O (cid:122) btain independent professional advice in the satis-
faction of its duties within the Committee’s budget;
(cid:122)
agers and senior executives; and
(cid:122)
pany’s external auditors.
Request and receive information from Company man-
Review reports and conduct meetings from the Com-
The Audit Committee develops recommendations to
the Board with respect to the candidature of the Com-
pany’s auditor and the cost of its services. On the basis of
the Committee’s recommendations, the Board proposes
the candidate auditor company to NOVATEK's AGM for
approval. In selecting proposed candidates, the Audit
Committee takes into account a prospective auditor’s
expertise and independence, the risk of conflicts of inter-
est, contract terms and conditions and remuneration. The
Audit Committee exercises control over the independ-
ence and objectiveness of the external auditor and the
efficiency and quality of the audit. The Audit Committee
annually informs the Board regarding its appraisal of the
independent auditor’s report.
The Audit Committee meets with representatives of
the external auditor no less than once a year.
To ensure the Audit Committee discharges its re-
sponsibilities, it meets not less than four times per year
and in 2010, the Audit Committee met six times. The
Company’s Chief Financial Officer and other senior finan-
cial management are available to attend the meetings.
The Audit Committee reviews the Company’s Annual
Report and develops recommendations to the Board with
respect to preliminary approval of the report by the Board.
NOVATEK’s management acknowledges and
recognizes the requirement to uphold the independ-
ence of the Company’s principal external auditors by lim-
iting their engagement to provide a wide range of non au-
dit services. The remuneration of the Company’s principal
auditors for audit services and other services has been
set out in disclosure note 23 to the Company’s 2010 IFRS
consolidated financial statements.
NOVATEK
NOVATEK
MOVING FORWARD
MOVING FORWARD
ANNUAL REPORT 2010
ANNUAL REPORT 2010
48
The Revision Commission consists of four persons
and is an internal control body responsible for oversight of
the Company’s financial and business activities, officers,
divisions, departments, branches, and representative of-
fices. The Revision Commission audits the Company’s fi-
nancial and business performance for the year, as well as
for any other period as may be decided by its members
or other persons authorized to do so in accordance with
Russian Federation law and the Revision Commission’s
Charter, and presents the review (revisions) results in the
form of an opinion.
The Revision Commission shall, no later than 40
days prior to the AGM, present to the Board its report
on the internal audit (review) of the Company’s financial
and business performance for the year, and its internal
audit opinion confirming or denying the reliability of data
contained in the Company’s Annual Report and Annual
Accounting Statement.
Internal Control Framework
The corporate governance section of the Com-
pany’s website contains a description of the main fea-
tures of NOVATEK’s internal control and risk management
systems in relation to the financial reporting process and
preparation of consolidated accounts.
Internal Audit
NOVATEK’s Internal Audit Division, in cooperation
with the Board of Directors and the Company’s manage-
ment, takes part in providing objective assurance on the
adequacy and effectiveness of the Company’s systems
for risk management and internal control and provides
recommendations to improve those systems. The Inter-
nal Audit Division has adopted the Company’s internal
Code of Ethics as well as international auditing standards
and international professional standards of internal audit.
In performing its functions, the Internal Audit Division
is guided by the principles of independence and objective-
ness. NOVATEK’s internal standards envisage full access
of the Internal Audit Division employees to all functions,
records, property and personnel of the Company in imple-
menting their audit tasks. The Division’s employees regularly
update their qualifications and professional development as
an integral part of the internal audit quality assurance.
A risk based approach is used to plan the internal au-
dits. In preparing reports on performance of audit tasks,
the principles of accuracy, objectiveness, completeness
and timeliness are observed.
The head of the Internal Audit Division annually provides
reports on the Company’s internal audit performance to
the Audit Committee members.
In August 2009, the Board approved the new Regula-
tions on NOVATEK’s Internal Control, which provides a
wider disclosure of the functions and procedure of the
Company’s internal control activities. According to the
new Regulations, the number and organizational struc-
ture of the Internal Audit Division is to be approved by
the Chairman of the Management Committee as agreed
upon with the Audit Committee.
Revision Commission
In compliance with the Russian Federation Law on Joint
Stock Companies N 208-FZ and the Company’s Charter,
the Company’s Revision Commission is elected at the
AGM. The Revision Commission is governed by a Charter
which has been approved by resolution of the sharehold-
ers at the Company’s AGM. The Charter is available on
the Company’s website and is summarized below.
49
ing the rest of the year. The Company also discloses all
material facts to shareholders through a Regulatory Infor-
mation Service, as well through press releases and on its
website, in compliance with both Russian and UK listing
requirements.
In addition to material facts and statutory
documents the Company provides in depth information
on the health, safety and environmental impact of its oper-
ations and activities on its website. The website also con-
tains general investor information, publications and Com-
pany policies as well as presentation material from major
Company events and investor seminars and conferences.
The Board recognizes the importance of commu-
nicating with its shareholders and, as well as giving a bal-
anced report of results and progress at each AGM, the
Company regularly meets with, and responds to ques-
tions and issues raised by shareholders and the analyst
community. Information for NOVATEK’s shareholders and
contact information is available on the Company web-
site.
05
05 MANAGEMENT AND CORPORATE GOVERNANCE
MANAGEMENT AND CORPORATE GOVERNANCE
Management Committee
NOVATEK’s Management Committee is responsi-
ble for the day-to-day management of the Company’s
operations within agreed limits set by the Board. More
information regarding the general policies governing the
Management Committee is available on the Company’s
website. The Management Committee is comprised of
the Executive Directors and the following senior manag-
ers of the Company.
In December 2009, NOVATEK increased the size of
its Management Committee to 15 members to better
reflect the current scale and diversity of NOVATEK’s op-
erating activities; previously the Committee consisted of
eleven members.
*
Management Committee Members
(cid:122)
(cid:122)
(cid:122)
(cid:122)
(cid:122)
(cid:122)
(cid:122)
(cid:122)
(cid:122)
(cid:122)
(cid:122)
(cid:122)
(cid:122)
(cid:122)
(cid:122)
Leonid Mikhelson (Chairman)
Vladimir Baskov
Victor Girya
Mark Gyetvay
Evgeny Kot
Tatyana Kuznetsova
Iosif Levinzon
*
Mikhail Popov
Sergei Protosenya
Valery Retivov
*
Vladimir Smirnov
Nikolai Titarenko
Lev Feodosiev
*
Alexander Fridman
Kirill Yanovskiy
Shareholder Communications
The Company maintains an active dialogue with its
key financial audiences, including institutional sharehold-
ers and sell- and buy-side analysts to ensure that trad-
ing in its securities takes place in an informed market.
The main channels of communication with the investment
community are through the Chairman of the Management
Committee and the Chief Financial Officer. The Investor
Relations and Corporate Affairs departments manage the
ongoing dialogue with these audiences.
Regular presentations and press releases take
place at the time of interim and final results as well as dur-
* Members of Management Committee were elected in December 2009
NOVATEK
MOVING FORWARD
ANNUAL REPORT 2010
50
NOVATEK Corporate Culture, Brand and Media
Relations
In 2010, NOVATEK continued improving internal cor-
porate communication channels to further develop the
Company’s corporate culture in order to give employees
a sense of involvement in the Company’s activities, and
promote a creative and proactive attitude to their work.
Corporate Media
Corporate Events: Sports, Culture
and Education
In 2010, NOVATEK continued to provide employees
with opportunities to participate in recreational and sport-
ing activities, including competitions and social events.
The number of employees who took part in corporate
events in 2010 increased by more than 15% compared
to 2009.
The main objectives of NOVATEK’s corporate
media in 2010 were to provide employees and their fam-
ily members with in-depth, reliable information about the
Company’s activities and involve NOVATEK employees in
corporate, cultural, sporting and charitable activities.
More than 3,500 employees and their family
members enjoyed exhibitions at Russia’s national muse-
ums, classical music and jazz concerts, and professional
hockey, basketball and soccer matches.
NOVATEK’s corporate newspaper, including its
new supplement “NOVATEK-Family”, became an effec-
tive means of disseminating this information in 2010. In
November 2010, the newspaper was recognized as the
“Best Corporate Newspaper in the Oil and Gas Industry”
in the “Best Corporate Media” competition sponsored by
the Energy Ministry of the Russian Federation.
In 2010, the Company initiated work on the design and
preparation of a corporate magazine, “NOVATEK+” to
increase the number of communication channels with
stakeholders.
Currently, NOVATEK is developing a social website
“NOVATEKPLUS.RU” to provide employees with online
information on social activities, Company achievements
and information on outstanding employees of NOVATEK
and its subsidiaries.
Employee Access to Senior
Management
During 2010, the Company continued to provide oppor-
tunities for employees to meet directly with NOVATEK’s
senior management. These meetings were attended by
the Chairman, Deputy Chairmen and members of the
Management Board.
NOVATEK Brand and Media
Relations
NOVATEK has positioned itself as a transparent Compa-
ny through the timely disclosure of information on socially
significant and relevant topics, as well as by providing
prompt answers to questions of interest to the media in
order to raise awareness of the NOVATEK brand.
Image and Publications
NOVATEK’s image is based on five key attributes that
characterize the Company and how it conducts its op-
erations, which include: confidence in its capabilities, use
of innovative and proprietary technologies, focused and
clear strategy, business integrity and respect for people
and the environment.
Company booklet;
Video clips “Ahead of the Times” and “We produce
During 2010, NOVATEK produced or updated the fol-
lowing promotional materials to highlight these attributes:
(cid:122)
(cid:122)
gas in Russia”;
(cid:122)
in Russian; and
(cid:122)
Company book “People who are ahead of their time”
Brochure on social support projects.
05
MANAGEMENT AND CORPORATE GOVERNANCE
51
Press tours have been organized for influential Russian
and foreign media to highlight the Company’s most im-
portant events. These events include:
Launch of commercial production from the third stage
(cid:122)
of the second phase development at the Yurkharovskoye
field which was attended by Russian Prime Minister
Vladimir Putin; and
Inaugural voyage of a supertanker of stable gas con-
(cid:122)
densate from Murmansk to China via the Arctic Ocean’s
Northern Sea Route.
Exhibitions and Conferences
During 2010, NOVATEK managers and employees rep-
resented the Company at more than 16 exhibitions, con-
ferences and round tables and gave eight presentations
on key industry issues. The most important event was
the 21st World Energy Conference held in September in
Montreal, Canada which was attended by a NOVATEK
delegation. The conference organizers nominated the
Company’s stand as the best in the “Most Original Con-
ceptualization” category. It harmoniously combined ele-
ments of advanced technologies and actual flora of the
Yamal tundra, which the Company treats with great care.
Media Relations
NOVATEK adheres to the principles of openness and
transparency in its relationship with media outlets, and
the Company maintains a regular dialog with the press in
keeping with NOVATEK’s approved information policy.
The information disclosed to the media covers all
aspects of NOVATEK’s activities including financial and
operating results, project implementation and social and
environmental information.
NOVATEK
MOVING FORWARD
ANNUAL REPORT 2010
Securities
52
Our share capital is RR 303,603,600 and consists of
3,036,306,000 ordinary shares, each with a nominal value
of RR 0.1. In July 2006, we executed a 1:1000 share split,
which considerably increased the trading transactions in-
volving the Company’s ordinary stock.
Our shares are traded in US dollars on the RTS Stock
Exchange (symbol: NVTK), and in Russian roubles on the
MICEX Stock Exchange (symbol: NOTK) and on the RTS
Stock Exchange (symbol: NVTKG).
NOVATEK SHARE PRICE AND RTS INDEX 2010
100%
80%
60%
40%
20%
0%
–20%
–40%
84 %
23 %
y
r
a
u
n
a
J
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r
a
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e
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a
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p
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s
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c
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r
e
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m
e
v
o
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r
e
b
m
e
c
e
D
NOVATEK (LSE)
RTS index
NOVATEK GDR PRICE SINCE IPO
(LSE, closing, US dollars)
613 %
140
120
100
80
60
40
20
0
5
0
l
u
j
5
0
p
e
s
5
0
v
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6
0
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6
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0
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6
0
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6
0
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7
0
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7
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7
0
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0
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0
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0
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8
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8
0
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8
0
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9
0
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9
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9
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9
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n
05
MANAGEMENT AND CORPORATE GOVERNANCE
53
The amount of dividends accrued and paid for the
years 2006 to 2009, and for the first six months of 2010,
is reported as of 31 December 2010. Partial payment of
the accrued dividends was made due to:
(cid:122)
rect postal and/or banking details; and
(cid:122)
tails of shareholders.
Provision by shareholders (nominee holders) of incor-
Insufficient information regarding banking or postal de-
On 24 March 2011, the Board of Directors of OAO NO-
VATEK recommended to the Annual General Meeting of
Shareholders to pay dividends for FY 2010 in the amount
of 2.5 Russian roubles per ordinary share, exclusive of 1.5
Russian roubles of interim dividends per ordinary share
for the first six months of 2010.
Thus, should the General Meeting of Shareholders
approve the above recommended dividend, the dividends
for 2010 will total 4.0 Russian roubles per ordinary share,
and the total amount of dividends payable for 2010 will be
12,145,224,000 Russian roubles.
IN 2005, we listed Global Depositary Receipts (GDR)
on the London Stock Exchange (symbol: NVTK). Each
GDR represents 10 ordinary shares. The GDRs are also
traded in the United States on NASDAQ PORTAL (sym-
bol: NVATY) under Rule 144A and on the Frankfurt Stock
Exchange (symbol: N 10).
Registrar CJSC “Computershare Registrar”
8 Ivana Franko Street, Moscow
Russia 121108
Tel:
Fax:
E-mail:
+7-495-926-81-60
+7-495-926-81-78
info@nrcreg.ru
GDR program Administration Deutsche Bank
Trust Company Americas
60 Wall Street, New York, New York
100056, United States
London
New York
Moscow
+44 20 7547 6500
+1 212 250 9100
+7 495 797 5209
Dividends
NOVATEK’s dividend policy is aimed at keeping the
balance between the Company’s business goals and
shareholder’s interests. A decision to pay dividends as well
as the size, payout time and form of the dividend is passed
by the General Meeting of Shareholders according to the
recommendation of the Board of Directors. Dividends are
paid twice a year, their size depends on market conditions,
cash flow and the Company’s capital structure.
ACCRUED AND PAID DIVIDENDS on NOVATEK Shares for the period 2005 to 2010
Dividend
Accrual Period
Amount of Dividends,
RR per Share
Total Amount
of Dividends Accrued, RR
Total Amount
of Dividends Paid, RR
2005
2006*
2007
2008
2009
First 6 months of 2010
900.00
1.65
2.35
2.52
2.75
1.50
* In July 2006 the Company executed a share split in proportion of 1:1000.
2,732,675,400
5,009,904,900
7,135,319,100
7,651,491,120
8,349,841,500
4,554,459,000
2,732,675,400
5,009,904,900
7,135,293,833
7,651,310,957
8,349,681,894
4,553,316,587
06
Additional
Information
Major Risk Factors Associated
with the Company’s Operations
The risks provided herein are by no means exhaus-
tive and only reflect the Company’s own opinions and
estimates.
pany is actively building productive partnerships with key
service suppliers, expanding its customer base, actively
searching for purchasers of natural gas at agreed prices
and entering into long-term contracts with them.
Industry Risks. The major risks associated with the Rus-
sian domestic gas market are largely attributable to the exten-
sive government regulation of prices for natural gas sold on
the domestic market as well as Gazprom’s dominant position
in the industry. The Russian Federation’s Gas Balance has
a large portion of natural gas supplied to the export market.
With the decrease of natural gas consumption in European
markets the companies of Gazprom Group could potentially
increase natural gas supplies to the domestic market.
Dependence on throughput capacity of trunk pipe-
Government regulation of natural gas sales prices on
Potential increases in government-regulated tariffs for
The following factors may adversely affect the Company’s
operations, or its financial and economic performance:
(cid:122)
the domestic market for Gazprom companies;
(cid:122)
lines;
(cid:122)
gas transportation;
Decline in world prices for liquid hydrocarbons;
(cid:122)
The Company’s dependence on OAO AK Transneft
(cid:122)
and OAO Russian Railways for the use of liquid hydrocar-
bons’ distribution networks; and
Increasing competition in the Russian natural gas in-
(cid:122)
dustry from independent natural gas producers and verti-
cally integrated companies.
NOVATEK implements specific measures to minimize the
potential impact of industry risks. In particular, the Com-
In addition, NOVATEK strives to diversify its marketed
product line to include gas condensate, crude oil and pe-
troleum derivatives, along with the marketing of natural
gas.
Country and Regional Risks. NOVATEK is a Russian
company operating in a number of Russian regions.
Country risk is defined by the fact that Russia is still an
emerging economy. Despite the positive trend in the Rus-
sian economy; strong GDP growth, political stability, im-
proving living standards, etc., the country’s economy is
still developing.
The Russian economy is commodity-based and oriented
towards export of raw materials which explains the de-
pendence of the country’s industrial output on the de-
mand for raw materials in world markets.
The Company produces and processes hydrocarbons
on the territory of Western Siberia, a region with a chal-
lenging climate. The Company’s vulnerability to region
specific impacts is insignificant and is completely ac-
counted for through the management of the Company’s
financial and economic operations. The Company has
built an efficient system of interaction between its pro-
duction and marketing units and its principal production
06
06 ADDITIONAL INFORMATION
ADDITIONAL INFORMATION
55
facilities are concentrated in close proximity to the trans-
portation networks in use.
Risks related to possible military conflicts, state of emer-
gency announcements, or strikes, are non-existent, as
the Company operates in economically and socially sta-
ble regions.
Financial Risks. NOVATEK’s financial performance is
subject to financial risks associated with the fluctuation
of foreign currency exchange rates, as the Company bor-
rows funds in foreign denominated currencies and mar-
kets a portion of its products internationally.
With respect to the fluctuation of the Russian rouble in re-
lation to other currencies, the marketing of products inter-
nationally substantially reduces this risk and balances out
the adverse effects of the national currency’s exchange
value fluctuations. The inflow of export profits will secure
payment of outstanding amounts due therefore, currency
risks will not substantially impact the Company’s opera-
tions.
In the case of an interest rate decline, repayment of out-
standing amounts on existing loans and credits may be-
come less attractive in comparison with current offers in
the loan market. In this event, the Company will under-
take to replace existing debt facilities with current market
offers on better terms and conditions, including borrow-
ing costs.
Overall interest rate growth may affect the Company’s
borrower liabilities, subject to change under specific
conditions. The resulting dynamic behavior in the bor-
rowed funds value restricts their use as a source of funds
throughout “expensive loan” periods.
Interest rate shifts in specific sectors of the debt market
will result in the Company diversifying its funding sources
and switching to market sectors with more attractive fi-
nancial resources.
Commodity Price Risks. NOVATEK’s overall commer-
cial trading strategy for natural gas, stable gas condensate,
crude oil and related oil products is centrally managed.
Changes in commodity prices could negatively or positively
affect the Company’s results of operations. The Company
manages the exposure to commodity price risk by optimiz-
ing its core activities to achieve stable price margins.
As an independent natural gas producer, the Group is
not subject to the government’s regulation of natural gas
prices. Nevertheless, the Group’s prices are strongly influ-
enced by the prices regulated by the Federal Tariffs Serv-
ice (FTS), a governmental agency. However, to effectively
manage the margins achieved through its natural gas
trading activities, management has established targets for
volumes sold to wholesale traders and end-customers.
The Company sells all of its crude oil and related oil prod-
ucts and gas condensate under spot contracts. Gas
condensate volumes sold to the US, European and Asian
Pacific markets are based on benchmark reference prices
plus a margin or discount, depending on the current mar-
ket situation. Crude oil sold internationally is priced based
on benchmark reference crude oil prices of Brent, plus
a margin or a discount and on a transaction-by-trans-
action basis for volumes sold domestically. As a result,
NOVATEK’s revenues from the sales of liquid hydrocar-
bons are subject to commodity price volatility based on
fluctuations or changes in benchmark reference prices.
Presently, the Company does not use commodity deriva-
tive instruments for trading purposes to mitigate price
volatility.
Credit Risk. Credit risk refers to the risk exposure of the
Company to a potential financial loss due to the default of
counterparties on their contractual obligations. NOVATEK
mitigates credit risk through the management of its cash
and cash equivalents, including short-term deposits with
banks, as well as credit exposure to customers, including
outstanding trade receivables and committed transac-
tions. Cash and cash equivalents are deposited only with
banks that are considered by the Company at the time of
deposit to have minimal risk of default.
The Company’s trade and other receivables consist of
a large number of customers, spread across diverse
industries and geographical areas. Most of NOVATEK’s
international liquid sales are made to customers with in-
dependent external ratings. All domestic sales of liquid
hydrocarbons are made on a 100 percent prepayment
basis. The Company also requires 100 percent prepay-
ments from small customers for natural gas deliveries
and partial advances from others. Although the Company
does not require collateral in respect of trade and other
receivables, it has developed standard credit payment
terms and constantly monitors the status of trade receiva-
bles and the creditworthiness of the customers.
NOVATEK
NOVATEK
MOVING FORWARD
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ANNUAL REPORT 2010
ANNUAL REPORT 2010
56
Liquidity Risk. Liquidity risk is the risk that the Com-
pany will not be able to meet its financial obligations as
they fall due. The Company’s approach to managing li-
quidity risk is to ensure that it will always have sufficient
liquidity to meet its liabilities when due, under both normal
and stressed conditions, without incurring unacceptable
losses or risking damage to the Company’s reputation. In
managing its liquidity risk, NOVATEK maintains adequate
cash reserves and debt facilities, continuously monitors
forecasted and actual cash flows and matches the matu-
rity profiles of financial assets and liabilities. The Company
prepares various financial plans (monthly, quarterly and
annually) which ensures that the Company has sufficient
cash on demand to meet expected operational expenses,
financial obligations and investing activities for a period of
30 days or more. The Company has also entered into a
number of short-term credit facilities, such as credit lines
and overdraft facilities, which can be drawn down to meet
short-term financing needs. To fund cash requirements
of a more permanent nature, the Company will normally
raise long-term debt in international and domestic mar-
kets.
Inflation Risks. The change in the consumer price in-
dex has an impact on NOVATEK’s profitability and as a
consequence, its financial standing and ability to pay on
liabilities and securities.
However, this factor is not of great significance due to the
fact, that the tariff policy of the Russian Federation con-
templates a gradual increase in the domestic gas prices
commensurate with the growth in inflation rates.
NOVATEK may not be able to predict the inflation level,
since apart from the consumer price level it is necessary
to take into account the change in real purchasing power
of the Russian rouble, the pricing conditions in liquid hy-
drocarbon export markets and the government policy in
relation to tariffs for natural gas.
NOVATEK monitors the consumer price index and takes
this factor into account when determining its selling pric-
es.
Risks related to the impact of the global financial
crisis. The main risks relating to the impact of the global
financial crisis are rouble devaluation and a decrease in
demand for natural gas as a result of a decline in Russian
industrial output.
A staged increase of the regulated domestic price for nat-
ural gas planned by the Russian government, combined
with foreign currency denominated revenue received from
export sales of liquids and cost reduction due to the de-
crease of domestic prices for materials and services, miti-
gate the consequences of potential rouble devaluation for
NOVATEK.
The search for new customers along with provision of
more flexible terms and conditions to existing contracts
and stable demand from our main end-customer seg-
ment, public utilities, enable the Company to compensate
for the slump in the domestic demand for natural gas from
industrial consumers. To increase the competitiveness of
its supplies the Company is developing a pricing strategy
allowing it to switch to buyers who are less dependent on
the external economic factors.
Currency laws (in areas concerning borrowings and
Legal Risks. The Company’s operations are susceptible
to risks resulting from changes in the statutory regulation
of the following spheres:
(cid:122)
export/import operations);
Tax laws (in areas regulating taxation systems and
(cid:122)
rates applicable to companies in general, and to com-
panies marketing natural gas and liquid hydrocarbons,
specifically);
(cid:122)
hydrocarbons and their derivatives); and
(cid:122)
tion.
Customs laws (in areas concerning the export of liquid
Licensing requirements for natural resource extrac-
Operational Risks. The Company is not involved in any
significant litigation and the risks pertaining to such litiga-
tion are minor.
The Company and its affiliates hold long-term field devel-
opment licenses.
Certain risks exist for the Company’s operations associ-
ated with field exploration and development. Exploration
drilling incorporates multiple risks, including the risk of
non-availability of commercial reserves. Information on
the Company’s fields’ reserves is provided as estimat-
ed, subject to certain factors and assumptions. Actual
production volumes across fields, along with the cost-
effectiveness of reserve exploitation may deviate from
estimated figures.
06
06 ADDITIONAL INFORMATION
ADDITIONAL INFORMATION
57
The Company’s operations require substantial investment
into field exploration and development, followed by the
production, transportation, and processing of natural gas,
oil, and gas condensate. Insufficient funding for these and
other expenditures may affect the Company’s financial
standing and performance results.
The transaction has been approved by NOVATEK’s
Board of Directors (Minutes № 129 of 08.11.2010).
Loan Agreement between ОАО NOVATEK (the “Bor-
rower”) and ОАО “Sberbank of Russia” (the “Lender”).
Major Transactions
and Interested Party
Transactions
In 2010, the Company has consummated the following
transactions where the scope of the issuer’s obligations
total 10 or more percent of the issuer’s assets’ book value
as of the end date of the accounting period (quarter) pre-
ceding the transaction date:
Loan Agreement between OAO NOVATEK (the “Bor-
rower”) and BNP PARIBAS S.A., CITIBANK, N.A., LON-
DON BRANCH and THE ROYAL BANK OF SCOTLAND,
NV, (the “Mandated Lead Arrangers”); BNP Paribas S.A.,
Citibank International plc, The Royal Bank Of Scotland,
NV (the “Lenders”); BNP PARIBAS (SUISSE) S.A. (the
“Agent”)».
The transaction’s material terms and conditions:
The term of performance of obligations under the
(cid:122)
transaction: 15.11.2011;
(cid:122)
(cid:122)
suer’s assets.
Transaction size in money terms: 600,000,000 USD;
The transaction amount comprises 13.18% of the is-
The transaction has been approved by NOVATEK’s Board
of Directors (Minutes № 129 of 08.11.2010).
Loan Agreement between ОАО NOVATEK (the “Lend-
er”) and ООО “Yamal Development” (the “Borrower”).
The transaction’s material terms and conditions:
(cid:122)
The term of performance of obligations under the
transaction: 29.11.2011;
(cid:122)
sand;
(cid:122)
suer’s assets.
The transaction amount comprises 19.67% of the is-
Transaction size in money terms: RR 28,123,305 thou-
The transaction’s material terms and conditions:
The term of performance of obligations under the
(cid:122)
transaction: 05.12.2013;
(cid:122)
sand;
(cid:122)
suer’s assets.
The transaction amount comprises 10.49% of the is-
Transaction size in money terms: RR 15 000 000 thou-
The transaction has been approved by NOVATEK’s
Board of Directors (Minutes № 130 of 10.12.2010).
In 2010, the Company consummated eight related party
transactions, the size of which does not exceed two percent
of the Company’s assets’ book value as of the end date of the
accounting period preceding the transaction date, and the
following transactions the size of which exceeds two percent
of the Company’s assets book value as of the end date of the
accounting period preceding the transaction date.
Gas Supply Contract between ОАО NOVATEK (the “Sup-
plier”) and ОАО “OGK-1’ (the “Buyer”).
The related party in the transaction: member of the Board
of Directors of ОАО NOVATEK, K.G. Seleznev, is simul-
taneously represented on the Board of Directors of ОАО
INTER RAO UES, which in its turn is the managing com-
pany of ОАО “OGK-1”.
The transaction’s material terms and conditions:
Natural gas delivery to the border line of the gas trans-
(cid:122)
portation system of ООО Gazprom Transgas Ekaterinburg
including the gas distribution station of ООО Gazprom
Transgas Ekaterinburg, with pipelines of the gas distribu-
tion organization ZAO GAZEKS;
(cid:122)
(cid:122)
sand including VAT;
(cid:122)
suer’s assets.
Supply volume: 9,600 mmcm;
Transaction size in money terms: RR 25,567,296 thou-
The transaction amount comprises 19.35% of the is-
The transaction has been approved by the decision of
the Extraordinary General Meeting of NOVATEK’s Share-
holders (Minutes № 109 of 25.11.2009).
NOVATEK
NOVATEK
MOVING FORWARD
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ANNUAL REPORT 2010
ANNUAL REPORT 2010
58
Gas Supply Contract between ОАО NOVATEK (the
“Supplier”) and ОАО “OGK-1” (the “Buyer”).
Gas Supply Contract between ОАО NOVATEK (the
“Supplier”) and ОАО “OGK-1” (the “Buyer”).
The related party in the transaction: member of the
Board of Directors of ОАО NOVATEK, K.G. Seleznev, is
simultaneously represented on the Board of Directors of
ОАО INTER RAO UES, which in its turn is the managing
company of ОАО “OGK-1”.
The related party in the transaction: member of the Board
of Directors of ОАО NOVATEK, K.G. Seleznev, is simul-
taneously represented on the Board of Directors of ОАО
INTER RAO UES, which in its turn is the managing com-
pany of ОАО “OGK-1”.
The transaction’s material terms and conditions:
Natural gas delivery to the border line of the gas trans-
(cid:122)
portation system of ООО Gazprom Transgas Ekaterinburg
including the gas distribution station of Dombarovskoye
LPUMG Gas Distribution Station №5 of Energetik resi-
dential camp with gas pipelines of the gas distribution
organization ООО “Orenburgoblgas”;
(cid:122)
(cid:122)
sand including VAT;
(cid:122)
suer’s assets.
Gas supply volume: 16,836 mmcm;
Transaction size in money terms: RR 44,322,122 thou-
The transaction amount comprises 33.54% of the is-
The transaction has been approved by the decision of
the Extraordinary General Meeting of NOVATEK’s Share-
holders (Minutes № 109 of 25.11.2009).
Gas Supply Contract between ОАО NOVATEK (the
“Supplier”) and ОАО “OGK-1” (the “Buyer”).
The related party in the transaction: member of the
Board of Directors of ОАО NOVATEK, K.G. Seleznev, is
simultaneously represented on the Board of Directors of
ОАО INTER RAO UES, which in its turn is the managing
company of ОАО “OGK-1”.
The transaction’s material terms and conditions:
Natural gas delivery to the border line of the gas trans-
(cid:122)
portation system of ООО Gazprom Transgas Moscow, in-
cluding the gas distribution station GRS Kashira (CS-19),
with gas pipelines of the of the gas distribution organiza-
tion GUP MO Mosoblgas;
(cid:122)
(cid:122)
sand including VAT;
(cid:122)
suer’s assets.
Gas supply volume: 8,400 mmcm;
Transaction size in money terms: RR 26,415,480 thou-
The transaction amount comprises 19.99% of the is-
The transaction has been approved by the decision of
the Extraordinary General Meeting of NOVATEK’s Share-
holders (Minutes № 109 of 25.11.2009).
The transaction’s material terms and conditions:
Natural gas supply to the point in which the title to the
(cid:122)
gas passes from the Supplier to the Buyer on the border
line of the gas transportation system of ООО Gazprom
Transgas Chaikovsky, including the gas distribution sta-
tion GRS Dobryanka-2;
(cid:122)
(cid:122)
sand subject to VAT;
(cid:122)
suer’s assets.
Gas supply volume: 22,150 mmcm;
Transaction size in money terms: RR 57,579,811 thou-
The transaction amount comprises 43.57% of the is-
The transaction has been approved by the decision of
extraordinary general meeting of NOVATEK’s sharehold-
ers (Minutes № 109 of 25.11.2009).
Gas Supply Contract between ОАО NOVATEK (the
“Supplier”) and ОАО INTER RAO EUS (the “Buyer”).
The related party in the transaction: member of the
Board of Directors of ОАО NOVATEK, K.G. Seleznev, is
simultaneously represented on the Board of Directors of
ОАО INTER RAO UES.
The transaction’s material terms and conditions:
Natural gas delivery to the point in which the title to
(cid:122)
the gas passes from the Supplier to the Buyer at the Gas
Distribution Station «North-West Heat Power Station»;
(cid:122)
(cid:122)
sand including VAT;
(cid:122)
suer’s assets.
Gas supply volume: 7,694.33 mmcm;
Transaction size in money terms: RR 23,324,741 thou-
The transaction amount comprises 17.65% of the is-
The transaction has been approved by the decision of
the Extraordinary General Meeting of NOVATEK’s Share-
holders (Minutes № 109 of 25.11.2009).
06
06 ADDITIONAL INFORMATION
ADDITIONAL INFORMATION
Information on Members of NOVATEK’s
Board of Directors
59
MR. ALEXANDER Y. NATALENKO
Born in 1946
Chairman of NOVATEK’s Board of Directors and Member
of its Strategy and Investments Committee
Mr. Natalenko completed his studies at the Irkutsk State
University in 1969 with a primary focus in Geological En-
gineering. Subsequently, he worked with the Yagodin-
skaya, Bagdarinskaya, Berelekhskaya, Anadirskaya and
East-Chukotskaya geological expeditions. In 1986, Mr.
Natalenko headed the North-East Industrial and Geologi-
cal Association and, in 1992, he was elected president
of АО «Magadan Gold & Silver Company». He subse-
quently held various executive positions in Russian and
foreign geological organizations. From 1996 to 2001, Mr.
Natalenko held the position of Deputy Minister of Natural
Resources of the Russian Federation. He is a member of
the Board of Directors of ZAO GC VERTEX.
Currently, Mr. Natalenko is Chairman of NOVATEK's Board
of Directors. He is also a member of the Strategy and In-
vestments Committee of NOVATEK’s Board of Directors.
Mr. Natalenko is the recipient of the State Prize of the
Russian Federation and an Honored Geologist of Russia.
MR. ANDREI I. AKIMOV
Born in 1953
Chairman of the Management Board of “Gazprombank”
(OAO), Member of NOVATEK’s Board of Directors and its
Audit Committee
Mr. Akimov graduated from the Moscow Financial Institute
in 1975 where he specialized in international econom-
ics. Between 1974 and 1987, Mr. Akimov held various
executive positions in the Bank of Foreign Trade (“Vnesh-
torgbank”) of the USSR. From 1985 to 1987, he served
as Deputy General Director of Vneshtorgbank’s branch in
Zurich (Switzerland) and between 1987 and 1990, Mr. Aki-
mov headed Donau Bank in Vienna (Austria). From January
1991 to November 2002, he was Managing Director of fi-
nancial company, IMAG GmbH Vienna (Austria) and, at the
same time, served as an Advisor to the Chairman of Vnesh-
torgbank. Since 2003, Mr. Akimov has been the Chairman
of the Management Committee of Gazprombank (OAO).
He is Chairman of the Supervisory Board of Gazprombank
(Switzerland) Ltd and a member of the Board of Directors
of ZAO Gerosgaz, Carbon Trade & Finance SICAR S.E.
Since December 2006, he has been a member of
NOVATEK’s Board of Directors and its Audit Committee.
DR. BURCKHARD BERGMANN
Born in 1943
Member of NOVATEK’s Board of Directors, its Corporate
Governance and Remuneration Committee and its Strat-
egy and Investments Committee, Member of the Coun-
cil Presidium of the German-Russian Chamber of Foreign
Trade, Member of the Advisory Board of the Union of Ger-
man Science Funds
Dr. Bergmann studied physics at the Freiburg and Aachen
Universities from 1962 to 1968 and was awarded a Doc-
torate in Engineering by Aachen University of Technology
in 1970. From 1968 to 1969, Dr. Bergmann worked at the
German Federal Ministry for Research and Technology
and from 1969 to 1972 – at the Jlich Nuclear Research
Center. In 1972, Dr. Bergmann joined Ruhrgas AG (from
1 July 2004 – E.ON Ruhrgas AG), heading the LNG Pur-
chasing Department. In 1978, he became Head of the
Gas Purchasing Division responsible for gas purchasing,
commercial aspects of gas transmission and storage, as
well as gas billing. In 1980, he was elected as a member
of the Management Board of E.ON Ruhrgas AG, serving
from June 1996 as its Vice-Chairman and from June 2001
to February 2008 as its Chairman. From March 2003 to
February 2008 he was also a member of the Management
Board of E.ON AG.
Dr. Bergmann is also a member of the Board of Directors
(Supervisory Board) of: Allianz Lebensversicherungs-AG,
OAO Gazprom, Commerzbank AG, E.ON Energie AG, ,
Contilia GmbH and Telenor ASA. In addition, he is a mem-
ber of the Advisory Boards for Dana Gas International, Ak-
kumulatorenwerke Hoppecke Carl Zoeellner& Sohn GmbH
and IVG Immobilien AG. He has been elected as Chairman
of the Advisory Board of Jaeger Beteiligungsgesellschaft-
mbH& Co KG and is represented on the Shareholders
Committee of Nord Stream AG.
Dr. Bergmann holds the following distinctions: Command-
er of the Royal Norwegian Order of Merit (1997); a Foreign
Member of the Academy of Technological Sciences of the
Russian Federation (2003); Order of Merit of the State of
North Rhine-Westphalia (2004) as well as a winner of Di-
rector of the Year, Moscow (2007).
NOVATEK
MOVING FORWARD
ANNUAL REPORT 2010
60
MR. RUBEN VARDANIAN
Born in 1968
Chairman of the Board of Directors of Troika Dialog Group,
Member of NOVATEK’s Board of Directors, Chairman of its
Corporate Governance and Remuneration Committee and
member of its Audit Committee
Ruben Vardanian is Troika Dialog’s Board Chairman. An
employee at Troika Dialog since the company’s estab-
lishment, Mr. Vardanian became head of the company in
1992. Mr. Vardanian is one of the leading figures on Rus-
sia’s capital markets, having played a key role in developing
almost all segments of the country’s stock market. He is a
member of the Russian Union of Industrialists and Entre-
preneurs, where he sits on the Management Committee.
He also serves as Chairman of the Corporate Governance
Committee of the Russian Union of Industrialists and En-
trepreneurs, as well as Arbitrator of its United Committee
on Corporate Ethics.
Mr. Vardanian is Board Chairman of AmeriaBank. He is
a Board member of AvtoVAZ, KAMAZ, AK BARS Bank,
OAO NOVATEK, Standard Bank Plc. and Joule Unlimited
Inc. Mr. Vardanian has been a Chairman of the Human Re-
sources and Compensations Committee of AvtoVAZ and
Chairman of the Corporate Governance and Remuneration
Committee of OAO NOVATEK. Between 2002 and 2004,
Mr. Vardanian served as General Director of Rosgosstrakh
and from April 2004 to July 2005, he was Chairman of its
Board of Directors. Mr. Vardanian is President of the Mos-
cow Skolkovo School of Management and is a member
of its Coordinating Council. He is also a member of the
President’s Council on Implementation of National Projects
and Demographic Policy, a member of the Government’s
Competition and Entrepreneurship Council of the Russian
Federation, a member of the South Korea President’s Ad-
visory Council on Education and a member of the Guardian
Council of the Specialized Endowment Fund at the Rus-
sian Economic School. Mr. Vardanian is also a member of
the Coordinating Council of Armenia 2020 project and a
member of Guardian Council of Armenia’s National Com-
petitiveness Fund, a member of the International Advisory
Council of Guanghua (China), a member of the Internation-
al Advisory Council of FDC Business School (Brazil) and a
member of the Supreme Religious Council of the Armenian
Apostolic Church.
The American Trade Chamber named Mr. Vardanian as
‘‘Businessperson of the Year’’ for ‘‘a considerable contribu-
tion to Russia’s business development and abiding by high
norms of professional ethics’’. He became a laureate of the
‘‘Person 2003’’ national award and in 2001, Mr. Vardanian
was included in the Fortune’s prestigious list ‘‘25 Rising
Stars of the New Generation’’.
The World Economic Forum (Davos) included Mr. Varda-
nian in a list of ‘‘100 future world leaders’’. He was also
included in the Top 22 Business Leaders of Russia (rating
by the ‘‘Commersant’’ newspaper and Managers Associa-
tion).
Mr. Vardanian was a winner of Ernst & Young Entrepre-
neur of the Year 2004 Award. He was recognized as the
Best Investment Banker of 2004 in a competition named
‘‘Stock Market Elite’’ conducted by NAUFOR (National As-
sociation of Stock Market Participants). Mr. Vardanian is
a laureate of the prestigious ‘‘ARISTOS’’ business award
by the Association of Russia’s Managers and Publishing
House Commersant in the nomination ‘‘For special merits
in the Russian business development 2006’’. In 2008, he
received the ‘‘Finance’’ magazine award ‘‘For reputation in
the financial market’’. Mr. Vardanian graduated with honors
from Moscow State University with a degree in Economics
and received post graduate training at BANCA CRT (1992,
Italy) and at Merrill Lynch (1992, New York, USA). In 2000,
he also completed executive management courses at IN-
SEAD (Fontainbleau, France) and, in 2001 and 2005, he
received training from Harvard Business School (USA).
MR. MARK A. GYETVAY
Born in 1957
Member of NOVATEK’s Board of Directors and Chairman
of its Strategy and Investments Committee, Member and
Deputy Chairman of NOVATEK’s Management Board
Mr. Gyetvay studied at Arizona State University (Bachelor
of Science, Accounting, 1981) and later at Pace University,
New York (Graduate Studies in Strategic Management,
1995). After graduation, Mr. Gyetvay worked in various ca-
pacities at a number of independent oil and gas companies
(Champlin Petroleum Co., Texas, Ensource Inc. and MAG
Enterprises, Colorado, and Amerada Hess Corporation,
New Jersey) where he specialized in financial and econom-
ic analysis for both upstream and downstream segments
of the petroleum industry.
In 1994, Mr. Gyetvay began his work at Coopers and
Lybrand, New York, as Director, Strategic Energy Advisory
Services working for oil and gas companies in the USA
and abroad. He subsequently moved to Moscow in 1995
with Coopers & Lybrand to lead the oil and gas practice.
He was admitted as a partner of PricewaterhouseCoopers
Global Energy where he assumed the role of client service
06
ADDITIONAL INFORMATION
61
Dmitriev was appointed Chairman of the State Corpora-
tion “Bank for Development and Foreign Economic Activi-
ties (Vnesheconombank)”. Mr. Dmitriev is a Candidate of
Economic Sciences and a correspondent member of the
Russian Academy of Natural Sciences.
Mr. Dmitriev is Chairman of the Board of Directors (Super-
visory Board) of: OOO VEB Capital, ZAO Globexbank, PAO
Joint-Stock Commercial Industrial and Investment Bank,
Ukraine, as well as a member of the Board of Directors
(Supervisory Board) of: OAO Aeroflot – Russian Airlines,
OAO KAMAZ, OAO United Ship Building Company, OAO
INTER RAO UES.
MR. LEONID V. MIKHELSON
Born in 1955
Member of NOVATEK’s Board of Directors, Chairman of
NOVATEK’s Management Board
Mr. Mikhelson received his primary degree from the Sa-
mara Institute of Civil Engineering in 1977, where he spe-
cialized in Industrial Civil Engineering. That same year, Mr.
Mikhelson began his career as foreman of a construc-
tion and assembling company in Surgut, Tyumen region,
where he worked on the construction of the first section of
Urengoi-Chelyabinsk gas pipeline. In 1985, Mr. Mikhelson
was appointed Chief Engineer of Ryazantruboprovodstroy.
In 1987, he became General Director of Kuibishevtrubo-
provodstroy, which in 1991, was the first company in the
region to sell its shares and became private company, AO
SNP NOVA. Mr. Mikhelson remained SNP NOVA’s Man-
aging Director from August 1987 through October 1994.
Subsequently, he became a General Director of the man-
agement company “Novafininvest”, the holding and finance
structure which included SNP NOVA as an asset, amongst
others, and is the predecessor to NOVATEK.
Since 2002, Mr. Mikhelson has served as a member of
the Board of Directors and Chairman of the Management
Board of NOVATEK. From March 2008 to December 2010,
he has been a member of the Board of Directors of OAO
Stroytransgas and since 2008 a member of the Board of
Directors of OOO Art Finance. Mr Mikhelson is the recipient
of the Russian Federation’s Order of the Badge of Honor.
engagement partner, Utilities and Mining practice, based
in Russia (Moscow office). Mr. Gyetvay was an engage-
ment partner on various energy and mining clients provid-
ing overall project management, financial and operational
expertise, maintaining and supporting client service rela-
tionships as well as serving as concurring partner on trans-
action services to the petroleum sector.
Mr. Gyetvay is a Certified Public Accountant, a member
of the American Institute of Certified Public Accountants
and an associate member of the Society of Petroleum En-
gineers.
In 2003, Mr. Gyetvay became a member of NOVATEK’s
Board of Directors and is also Chairman of the Strategy
and Investments Committee of NOVATEK’s Board of Direc-
tors. Between 2004 and 2008, he has been Chief Financial
Officer of NOVATEK. In 2005 Mr. Gyetvay was elected to
NOVATEK’s Management Board and in July 2010 he be-
came Deputy Director of NOVATEK’s Management Board.
MR. VLADIMIR A. DMITRIEV
Born in 1953
Chairman of the Board of Directors, Bank for Development
and Foreign Economic Activities (“Vnesheconombank”),
Member of NOVATEK’s Board of Directors and Chairman
of its Audit Committee
Mr. Dmitriev graduated from the Moscow Financial Institute
in 1975 where he specialized in International Economic
Relations. From 1975 to 1979, Mr. Dmitriev began his pro-
fessional career as an engineer at the State Committee
for Foreign Economic Relations. From 1979 to 1986, he
worked as an attache and Third Secretary of a department
at the Ministry of Foreign Affairs. From 1986 to 1987, he
was a research officer at the Institute of World Economy
and International Relations of the Russian Academy of Sci-
ences. From 1987 to 1993, Mr. Dmitriev was appointed
Second Secretary and subsequently First Secretary of the
USSR’s and Russian Federation’s (“RF”) Embassy in Swe-
den.
Between 1993 and 1995, Mr. Dmitriev served as the Dep-
uty Head of the Currency Department of the RF Finance
Ministry, and later from February 1995 through August
1997 as Deputy Head of Foreign Credits and External Debt
Department of the RF Finance Ministry. Between 1997 and
2002, Mr. Dmitriev was appointed as First Deputy CEO of
Vnesheconombank and between 2002 and 2004 he served
as Deputy Chairman of Vneshtorgbank. In May 2004, Mr.
Dmitriev was appointed Chairman of Vnesheconombank
and in June 2007, by a Presidential Decree of the RF, Mr.
NOVATEK
MOVING FORWARD
ANNUAL REPORT 2010
62
MR. KIRILL G. SELEZNEV
Born in 1974
Member of the Management Board, Director of Gas and
Liquid Hydrocarbons Marketing and Processing De-
partment of OAO “Gazprom”, General Director of OOO
Gazprom Mezhregiongaz, Member of NOVATEK’s Board
of Directors and its Strategy and Investments Committee
Mr. Seleznev, graduated from the D.F. Ustinov Baltic State
Institute of Technology in 1997 and, in 2002, received a
degree in Finance and Credit from the St. Petersburg State
University. Upon completion of his university studies, Mr.
Seleznev managed OOO «Baltic Finance Company», OAO
Investment and Financial Group «Management Investments
Development» and OAO «St. Petersburg Sea Port», all of
which are located in St. Petersburg, Russia. In 2000, Mr.
Seleznev was appointed as Chief of the Tax Group at ОАО
«Baltic Pipeline System», St. Petersburg, Russia. Between
2001 and 2002, Mr. Seleznev held the position of Deputy
Chief of Staff of the Management Board and Assistant to
Chief Executive Officer of OAO Gazprom, in Moscow, Rus-
sia. Since 2002, he has been the head of the Gas and Liq-
uid Hydrocarbons Marketing and Processing Department
of OAO Gazprom and a Member of the OAO Gazprom
Management Board. Since 2003, Mr. Seleznev has been
the General Director of OOO Gazprom Mezhregiongaz.
Mr. Seleznev is also a member of the Board of Directors
and Supervisory Board of several other entities. Since
2006, Mr. Seleznev has been a member of NOVATEK’s
Board of Directors.
MR. GENNADY TIMCHENKO
Born in 1952
Member of NOVATEK’s Board of Directors and its Strategy
and Investments Committee
In 1976, Mr. Timchenko graduated with a Masters of Sci-
ence from the Mechanical University in Leningrad. He
began his career at the Izjorskii Factory in Leningrad, an
industrial plant which made components for the energy in-
dustry. Between 1982 and 1988, he was a Senior Engineer
at the Ministry of Foreign Trade. Mr. Timchenko has more
than 20 years of experience in Russian and International
energy sectors and he has built interests in trading, logis-
tics and transportation related companies.
In 1988, Mr. Timchenko became a vice president of Ki-
rishineftekhimexport, the export and trading arm of the Ki-
rishi refinery in the Leningrad region. In 1991, he worked
for Urals Finland which specialized in oil and petrochemi-
cal trading. Between 1994 and 2001, Mr. Timchenko was
managing Director of IPP OY Finland and IPP AB Sweden.
In 1997, he co-founded Gunvor, a leading independent
oil-trading company. Mr. Timchenko has been a member
of the Board of Directors of OOO Transoil and OOO Balt-
transService. Since 2009, he has been a member of NO-
VATEK’s Board of Directors.
SHARES IN NOVATEK’S EQUITY CAPITAL HELD BY MEMBERS OF THE COMPANY’S BOARD OF DIRECTORS*
Share in equity capital as of 31 December 2010, %
Natalenko A.Y.
Akimov A.I.
Bergmann B.
Vardanian R.K.
Gyetvay M.
Dmitriev V.A.
Mikhelson L.V.
Seleznev K.G.
Timchenko G.N.
—
—
0,0007
—
—
—
0,4686
—
—
* Share information is based on NOVATEK’s shareholder register in compliance with Russian law.
63
06
ADDITIONAL INFORMATION
Information on Members of NOVATEK’s
Management Committee
MR. LEONID V. MIKHELSON
Born in 1955:
Chairman of NOVATEK’s Management Committee, Mem-
ber of NOVATEK’s Board of Directors
Details on Mr. Leonid V. Mikhelson are available in the “In-
formation on Members of NOVATEK’s Board of Directors”
section.
MR. VLADIMIR A. BASKOV
Born in: 1960
Deputy Chairman of NOVATEK’s Management Committee
In 1986, Mr. Baskov graduated from the Moscow Higher
Police School of the USSR. In 2000, he completed courses
at the Management Academy at the Russian Ministry for
Internal Affairs. From 1981 to 2003, he served in various
departments within the Russian Ministry for Internal Affairs.
From 2001 to 2003, Mr. Baskov held managerial positions
within the aforementioned Ministry's organizational struc-
tures. In August 2003, he accepted the position as Director
of NOVATEK’s Project Supervision Department, and was
elected as a Member of NOVATEK’s Management Com-
mittee. Since 2005, Mr. Baskov has been Deputy Chair-
man of NOVATEK’s Management Committee.
MR. VIKTOR I. GUIRIA
Born in: 1959
Director of NOVATEK Overseas Exploration & Production
GmbH in Cairo (Egypt) – NOVATEK subsidiary
Mr. Guiria graduated from the Tyumen Industrial Institute
and began his career in the oil and gas industry in 1978 as
an assistant-driller for the Karskaya geological expedition.
Subsequently he worked as a foreman in the Urengoy oil
and gas exploration expedition and was later promoted to
Head of the Regional Engineering and Technical Service.
From 1994 to 2006, Mr. Guiria has been General Director of
“NOVATEK-TARKOSALENEFTEGAS”. Since March 2006
to 2009, he has been Deputy Chairman of NOVATEK’s
Management Committee and Director for Resource Base
Development and Drilling Operations. In 2010, he was ap-
pointed a Director of NOVATEK subsidiary, Novatek Over-
seas Exploration & Production GmbH in Cairo (Egypt). Mr.
Guiria is the recipient of the Honorable Oilman of Russia
award and was elected as a deputy of the State Duma
representing the Yamal-Nenets Autonomous Region.
MR. MARK A. GYETVAY
Born in: 1957
Deputy Chairman of NOVATEK’s Management Committee,
Member of NOVATEK’s Board of Directors and its Strategy
and Investments Committee
Details on Mr. Mark A. Gyetvay are available in the “Infor-
mation on Members of NOVATEK’s Board of Directors”
section.
MR. EVGENY A. KOT
Born in: 1974
Deputy Chairman of NOVATEK’s Management Committee,
Director of NOVATEK’s LNG Project Department
Mr. Kot graduated from Tyumen State Academy of Archi-
tecture and Construction and St. Petersburg State Univer-
sity of Engineering and Economics and is a Candidate of
Economics Science. From 1997 to 2001, he worked at
the Tyumen branch of “GAZPROMBANK”, the commercial
bank for the Russian natural gas industry. From 2001 to
2002, he held the position of Deputy Head of the Finan-
cial Department at SNP Nova which subsequently became
OAO Pur-Land and later merged with OAO NGK ITERA.
Since 2002, Mr. Kot held various positions in NOVATEK in-
cluding, Chief Specialist, Chief of Division, Deputy Director
and Director of Corporate Finance Department. In August
2009, Mr. Kot was appointed to the position of Deputy
Chairman of the Management Board of NOVATEK and
became the Director of NOVATEK’s LNG Project Depart-
ment. Since December 2009, he has also been a Member
of NOVATEK’s Management Committee.
MS. TATYANA S. KUZNETSOVA
Born in: 1960
Deputy Chairman of NOVATEK’s Management Committee,
Director of NOVATEK’s Legal Department
Ms. Kuznetsova graduated from the Far East State Uni-
versity with a degree in Law. From 1986, she was Senior
Legal Advisor for a legal bureau. In 1993, Ms. Kuznetsova
became Deputy General Director for Legal Issues and from
1996, Marketing Director for OAO Purneftegasgeologiya.
In 1998, she was appointed Deputy General Director Gen-
eral of OAO Nordpipes. Since 2002, she has been Director
of the Legal Department for NOVATEK. Since 2003, Ms.
Kuznetsova has been а member of NOVATEK’s Manage-
ment Committee and since 2005 Deputy Chairman of
NOVATEK’s Management Committee.
NOVATEK
MOVING FORWARD
ANNUAL REPORT 2010
64
MR. IOSIF L. LEVINZON
Born in: 1956
Deputy Chairman of NOVATEK’s Management Committee
MR. SERGEI V. PROTOSENYA
Born in: 1966
Member and Deputy Chairman of NOVATEK’s Manage-
ment Committee, NOVATEK Chief Accountant
In 1991, Mr. Protosenya graduated from the Kuybyshev In-
stitute of Engineering and Construction in Moscow, with a
degree in Engineering and Economics. From 1995 to1997,
he was Deputy General Director General at SNP NOVA.
From 1997 to 2001, he was head of the Finance Depart-
ment at OAO NK Tarkosaleneftegas. In 2001, he became
Director of OAO Pur-Land’s Accounting Department. Since
2002, Mr. Protosenya has been NOVATEK’s Chief Account-
ant, and in 2005 he was elected to NOVATEK’s Manage-
ment Committee. In 2009, Mr. Protosenya became Deputy
Chairman of NOVATEK’s Management Committee.
MR. VALERY N. RETIVOV
Born in: 1962
Deputy Chairman of NOVATEK’s Management Committee
Mr. Retivov received his degree from the Moscow Institute
of Steel and Alloys in 1984. From 1984 to 1991, Mr. Retivov
worked as an engineer at the Almaty (Khazakhstan) Hydro-
mash experimental-mechanical plant. From 1991 to 1999,
he held the position of Director at the following industrial and
commercial companies: Suncar, TOO FIRMA VIN and AOOT
Taganrog motor-transport passenger enterprise. In 1999,
Mr. Retivov joined the NOVATEK Group. He worked as Gas
Sales Manager and Head of Foreign-Economic Activity and
Transportation for the Liquid Hydrocarbons Department in the
Commercial Division of ITERA. Since 2002, Mr. Retivov has
been head of Division, Deputy Commercial Director and Di-
rector of NOVATEK’s Liquid Hydrocarbons Sales and Market-
ing Department. In December 2009, Mr. Retivov was elected
Deputy Chairman of NOVATEK’s Management Committee.
Mr. Levinzon graduated from the Tyumen Industrial Institute
specializing in geology and is a Candidate of Geological and
Mineralogical Science. He continued postgraduate stud-
ies in Perm State Technical University. From 1978 to 1987,
he was the Head of the Urengoy oil expedition and from
1987 to 1996, he was the General Director of Purnefte-
gasgeologiya. From 1996 to 2005, Mr. Levinzon was the
Deputy Governor, 1st Deputy Governor and Vice-Governor
of the Yamal-Nenets Autonomous Region. From 2005 to
2006, Mr. Levinzon has been an Advisor to the Chairman
of the Federation Council of the Federal Assembly of the
Russian Federation. From 2006 to 2009, Mr. Levinzon has
been an Advisor on Corporate and Strategic Development
at ZAO OSTER and also at ZAO Investgeoservis. Since
August 2009, Mr. Levinzon has held the position of Deputy
Chairman of NOVATEK’s Management Committee and in
December 2009 he was elected a member of NOVATEK’s
Management Committee. Mr. Levinzon is a recipient of the
Honored Geologist of Russia, the Order of the Badge of
Honor and the Order of the Friendship of Peoples awards
and has been awarded the Certificate of Merit from the
Governor of the Yamal-Nenets Autonomous Region.
MR. MIKHAIL V. POPOV
Born in: 1969
First Deputy Chairman of NOVATEK’s Management Com-
mittee
Mr. Popov studied at the Gubkin State Academy of Oil
and Gas until 1992 and in 1994, graduated from the Kiev
Institute of National Economy. In 1992, he held the posi-
tion of Deputy Chairman of AO Bankomsvyaz’s Managing
Committee (Kiev). In 2002, he was appointed Director of
the Capital Construction Department and Deputy General
Director of OAO Novafininvest. Since 2003, he has been
Director of NOVATEK’s Oil and Oil Products Department
and in March 2003, Mr. Popov was elected to NOVATEK’s
Management Committee. In 2004, Mr. Popov became
First Deputy Chairman of NOVATEK’s Management Com-
mittee.
06
ADDITIONAL INFORMATION
65
MR. VLADIMIR A. SMIRNOV
Born in: 1967
Deputy Chairman of NOVATEK’s Management Committee
In 1991, Mr. Smirnov graduated from the Gubkin Institute
of Oil and Gas in Moscow with a degree in Offshore Oil
and Gas Structures. In 1994, he was employed as a Front
Office Engineer by OAO SNP NOVA. From 1995 to 2002,
he was Deputy General Director and later General Direc-
tor for OAO Novafininvest FIC and from 2002 to 2005 he
was General Director of OOO Novafininvest. In February
2004, Mr. Smirnov was elected to NOVATEK’s Manage-
ment Committee and since 2005 he has been a Deputy
Chairman of the Management Committee.
MR. NIKOLAI N. TITARENKO
Born in: 1958
Deputy Chairman of NOVATEK’s Management Committee,
NOVATEK Chief Commercial Officer
In 1981, Mr. Titarenko graduated from the Azizbekov Insti-
tute of Oil and Chemistry in Azerbaijan. He was a member
of the Krasnoselkupskaya Oil and Gas Prospecting Expedi-
tion in the Yamal-Nenets Autonomous Region. From 1991
to 1994, Mr. Titarenko was the First Deputy to the Adminis-
tration Head of Krasnoselkup District in the Tyumen Region.
From 1994 to 1998, he held various managerial positions
in different companies. From 1999 to 2002, Mr. Titarenko
was Deputy Director General with OAO ITERA-Rus TEC. In
2002, he became Deputy General Director with OAO No-
vafininvest FIC. In March 2003, Mr. Titarenko was elected
as Deputy Chairman of NOVATEK’s Management Commit-
tee and became NOVATEK’s Chief Commercial Officer.
MR. LEV V. FEODOSIEV
Born in: 1979
Member of NOVATEK’s Management Committee, Director
of Strategic Planning and Development
Mr. Feodosiev received his degree from the Moscow State
Technical University’s Bauman School. From 2002 to 2003,
he was a Senior Specialist at the Russian Federation’s Min-
istry of Energy. From 2003 to 2007, Mr. Feodosiev worked
as a Leading Specialist and Deputy Director of the De-
partment for Government Regulation of Tariffs and Infra-
structure Reforms of the Russian Federation’s Ministry of
Economic Development and Trade. Mr. Feodosiev joined
NOVATEK in 2007 as Director of Strategic Planning and
Development and in December 2009 he was elected to the
Management Committee.
MR. ALEXANDER M. FRIDMAN
Born in: 1951
Deputy Chairman of NOVATEK’s Management Committee
In 1973, Mr. Fridman graduated from the Gubkin Institute
of Oil and Gas in Moscow, with a degree in Oil and Gas
Fields Development and Exploitation. Since 1984, he was
employed by various Gazprom companies: as Chief Engi-
neer of Nadymgazprom, Head of the Production and Tech-
nical Department of the Industrial Association, and Chief
Engineer of Mostransgaz’s Kaluga Department for Gas
Transportation and Underground Storage. From 1992 to
2003, he was First Deputy General Director of a joint ven-
ture established by OAO Gazprom and DKG-EAST (Hun-
gary). Since 2003, Mr. Fridman was the Deputy General
Director of Novafininvest. In March 2003, Mr. Fridman was
elected to NOVATEK’s Management Committee and since
2004 he has been Deputy Chairman of the Management
Committee.
MR. KIRILL N. YANOVSKIY
Born in: 1967
Member of NOVATEK’s Management Committee, Deputy
Director for NOVATEK Finance and Development Strategy
Department
In 1991, Mr. Yanovskiy graduated from the Gubkin Institute
of Oil and Gas in Moscow. From 1992, he headed a de-
partment of the Yugorsky Joint-Stock Bank. From 1995,
he headed the Securities Department at the Neftek Joint-
Stock Commercial Bank. Since 2002, he has been Direc-
tor of NOVATEK’s Financial Planning, Analysis and Control
Department. In May 2004, Mr. Yanovskiy was elected to
NOVATEK’s Management Committee and in 2007 he was
appointed Deputy Director for Finance and Development
Strategy Department.
NOVATEK
MOVING FORWARD
ANNUAL REPORT 2010
66
SHARES IN NOVATEK’S EQUITY CAPITAL HELD BY MEMBERS
OF THE COMPANY’S MANAGEMENT COMMITTEE*
Mikhelson L.V.
Baskov V.A.
Guiria V.I.
Gyetvay M.
Kot E.A.
Kuznetsova T.S.
Levinzon I.L.
Popov M.V.
Protosenya S.V.
Retivov V.N.
Smirnov V.A.
Titarenko N.N.
Feodosiev L.V.
Fridman A.M.
Yanovskiy K.N.
Share in equity capital as of 31 December 2010, %
*information is given in the section on the Board of Directors
0,0288
0,1230
—
—
0,1944
—
0,1440
0,0765
—
0,5006
0,0408
—
0,0720
0,1051
* Share information is based on NOVATEK’s shareholder register in compliance with Russian law.
The procedure and criteria for determining fees pay-
able and expenses reimbursable to NOVATEK’s Chair-
man of the Management Committee and Members of the
Management Committee are set forth in the Company’s
Regulations on the Management Committee and employ-
ment agreements entered into between the Company
and the individual committee members.
The procedure and criteria for determining fees pay-
able and expenses reimbursable to NOVATEK’s Mem-
bers of the Board of Directors are set forth in NOVATEK’s
Articles of Association and the Regulations for Board of
Directors.
INFORMATION ON REMUNERATION OF MEMBERS
OF THE COMPANY’S BOARD OF DIRECTORS AND MANAGEMENT COMMITTEE IN 2010
Type of remuneration
Total paid, RR including:
Salaries, RR
Bonuses, RR
Fees, RR
Other property advancements, RR
Board of Directors**
Management Committee
93,114,354
93,000,000
114 354
1,049,185,356
369,567,259
677,210,007
—
2,408,090
** Some Members of OAO NOVATEK’s Board of Directors are also Members of the Company’s Management Committee. Payments made to such persons, as
compensation for their activities as Members of the Management Committee, are included in the total amount paid to the Management Committee’s members.
07
Management’s
Discussion
and Analysis of
Financial Condition
and Results of
Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations as of
31 December 2010 and for the year then ended in conjunction with our audited consolidated financial statements
as of and for the years ended 31 December 2010 and 2009. The consolidated financial statements and the related
notes thereto have been prepared in accordance with International Financial Reporting Standards (IFRS).
The financial and operating information contained in this “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” comprises information of OAO “NOVATEK” and its consolidated
subsidiaries (hereinafter jointly referred to as “we” or the “Group”).
OVERVIEW
We are Russia’s largest independent natural gas producer and the second-largest producer of natural gas in
Russia after Gazprom, in each case according to the Central Dispatch Administration of the Fuel and Energy
Complex (the “CDU-TEK”) for 2010. In terms of proved natural gas reserves, we are the second largest holder
of natural gas resources in Russia after Gazprom, under the Petroleum Resources Management System
(“PRMS”) reserve reporting methodology.
Our exploration, development, production and processing of natural gas, gas condensate, crude oil and related oil
products have been conducted primarily within the Russian Federation, and in accordance with Russian law, we
sell our natural gas volumes exclusively in the Russian domestic market. We export our stable gas condensate
directly to international markets while our liquefied petroleum gas (“LPG”) and crude oil are generally delivered
to both international (including CIS) and domestic markets. We generally sell oil products produced from our
unstable gas condensate on the domestic market.
In 2009, we have expanded our sales of stable gas condensate to the Asian-Pacific region, in particular to South
Korea, China and Singapore. Further diversification of our stable gas condensate sales is one of our strategic
goals as we continue to expand the production of wet gas at our fields and increase the processing of unstable gas
condensate at the Purovsky Gas Condensate Plant (“Purovsky Plant”).
RECENT DEVELOPMENTS
In March 2011, NOVATEK and TOTAL S.A. (“TOTAL”) have signed a Memorandum of Cooperation which
provides for TOTAL to acquire a 20% participation interest in the development of Yamal LNG project. The
memorandum stipulates that both parties have defined the parameters of the project’s strategic partnership and
shall take steps to close the deal by the end of the first half of 2011.
On 3 February 2011, the Group issued two tranches of Eurobonds in an aggregate amount of USD 1,250 million.
The bonds were issued at par and include a five-year tranche of USD 600 million bonds with a coupon rate of
5.326 percent per annum and a ten-year tranche of USD 650 million bonds with a coupon rate of 6.604 percent
per annum. The proceeds from the Eurobonds were used to repay a bridge facility and to finance the acquisition
of OAO “Sibneftegas” (“Sibneftegas”).
In December 2010, the Group acquired 51 percent of the outstanding ordinary shares of Sibneftegas, an oil and
gas company which holds exploration and production licenses for the development of oil and gas condensate at
the Beregovoye, Pyreinoye, Zapadno-Zapolyarnoye and Khadyryakhinskoye fields located in the Yamal Nenets
Autonomous Region (“YNAO”). Sibneftegas’s proved reserves, appraised by “DeGolyer and MacNaughton”
(“D&M”) under the PRMS and SEC reserves methodologies, as of 31 December 2010 totaled approximately
282 and 200 billion cubic meters of natural gas and 2.0 and 0.7 million tons of liquid hydrocarbons, respectively.
In December 2010,
the outstanding ordinary shares of
OOO “Yamalgasresource-Chelyabinsk”, a regional gas trader, to expand natural gas sales opportunities in the
Chelyabinsk Region.
the Group acquired 100 percent of
In July 2010, we created a joint venture, OOO “Yamal Development” (“Yamal Development”), with
OAO “Gazprom Neft” to jointly develop potential hydrocarbon assets in YNAO, with each entity holding a 50%
equity participation interest in Yamal Development. In November 2010, Yamal Development acquired a
51 percent participation interest in OOO “SeverEnergia” (“SeverEnergia”). SeverEnergia holds 100% of the
1
shares of OAO “Arctic Gas”, ZAO “Urengoil Inc.” and OAO “Neftegaztechnologia”, which hold licenses for the
development of oil and gas condensate fields in the YNAO. SeverEnergia’s proved reserves as appraised by
D&M under the PRMS and SEC reserves methodologies as of 31 December 2010 totaled approximately 245 and
224 billion cubic meters of natural gas and 42 and 39 million tons of liquid hydrocarbons, respectively.
In October 2010, we launched the third stage of the second phase development at our Yurkharovskoye field,
which includes two additional processing trains for separating natural gas, thus increasing the field’s annual
productive capacity to approximately 33 billion cubic meters of natural gas and approximately three million tons
of unstable gas condensate.
In September 2010, the Group disposed of its 100 percent participation interest in OOO “NOVATEK-Polymer”,
a non-core subsidiary representing the segment “polymer production and marketing”, to JSC SIBUR Holding.
In September 2010, we dispatched a consignment of stable gas condensate to China via the Arctic Ocean’s
Northern Sea Route, which significantly reduced the traditional delivery distance from approximately
12,900 nautical miles to approximately 7,700 nautical miles. The cargo was delivered in 22 days, approximately
half the time required by the traditional shipping route through the Suez Canal. We plan to continue using the
Northern Sea Route for deliveries of our stable gas condensate to the Asian-Pacific region subject to the routes
navigability.
In August 2010, we acquired 100 percent of the outstanding ordinary shares of “Intergaz-System Sp.z.o.o.”
(“Intergaz-System”), an LPG trader in the South-East of Poland. The company owns and operates a discharging
and transhipment facility at the wide track (Russian) and narrow track (European) rail road junction. The
acquisition of Intergaz-System enables us to continue developing our commercial activities within Poland and
other European countries.
In August 2010, we launched an unstable gas condensate de-ethanization facility at our Yurkharovskoye field
and completed the unstable gas condensate pipeline connecting the Yurkharovskoye field to the Purovsky Plant.
The launch of the facility and pipeline allows us to process and transport all of the unstable gas condensate
produced at the Yurkharovskoye field to the Purovsky Plant without utilizing third party facilities.
In July 2010, the Group acquired 100 percent of the outstanding ordinary shares of OAO “Tambeyneftegas”, an
oil and gas company in the early stages of geological exploration. The company holds the license for exploration
and development of the Malo-Yamalskoye field (license expiry date 2019) located in the southern part of the
Yamal peninsula, in the YNAO, with estimated natural gas and gas condensate reserves according to Russian
reserve classification categories C1 + C2 of 161 billion cubic meters and 14.4 million tons, respectively.
In May 2010, we established a wholly-owned subsidiary, OOO “NOVATEK Perm”, to support the Group’s
current natural gas deliveries to the Perm region, as well as to expand potential sales opportunities in the region.
Our ongoing exploration work at existing fields in 2010 resulted in the discovery of three new gas condensate
deposits at the Ukrainsko-Yubileyniy field, four gas condensate and one natural gas deposits at the Severo-
Russkiy license area, and one gas condensate deposit at the Yumantylskiy field. We also performed the appraisal
of reserves at the Severo-Russkiy and Ukrainsko-Yubileyniy fields in accordance with the Russian reserve
classification standards. In addition, our reserves at the Severo-Russkiy license area were appraised by D&M
under the US Securities and Exchange Commission (SEC) and PRMS reserves methodology at 31 December
2010. Natural gas and gas condensate SEC proved reserves at the Severo-Russkiy license area at 31 December
2010 were 9.3 billion cubic meters and 1.5 million tons, respectively.
In November 2009, we established a wholly-owned subsidiary in Poland named “Novatek Polska Sp.z.o.o.”
(“Novatek Polska”) to expand our LPG trading activities within this country. Novatek Polska commenced
commercial operations in January 2010.
In May 2009, we acquired 51% of the outstanding ordinary shares of OAO “Yamal LNG”, the license holder for
the exploration and development of the South-Tambeyskoye field, with natural gas and gas condensate proved
reserves of 418 billion cubic meters and 15 million tons, respectively, under the SEC reserve methodology as of
31 December 2010. The acquisition of the South-Tambeyskoye field significantly increases the Group’s resource
base consistent with our long-term business strategy as well as serving as a platform for future production
growth and diversification of our natural gas sales.
2
SELECTED DATA
millions of Russian roubles except as stated
Financial results
Total revenues (net of VAT and export duties)
Operating expenses
Profit attributable to NOVATEK shareholders
EBITDA (1)
Normalized EBITDA (2)
EBITDAX (3)
EBITDA margin (4)
Earnings per share (in Russian roubles)
Operating results
Natural gas sales volumes (million cubic meters)
Stable gas condensate sales volumes (thousand tons)
Liquefied petroleum gas sales volumes (thousand tons)
Crude oil sales volumes (thousand tons)
Oil product sales volumes (thousand tons)
Total hydrocarbons production (million barrels of oil equivalent)
Total daily production (thousand barrels of oil equivalent per day)
Cash flow results
Net cash provided by operating activities
Capital expenditures
Free cash flow (5)
Year ended 31 December:
2009
2010
Change
%
117,024
(68,518)
40,533
56,965
55,635
58,560
48.7
13.37
37,117
2,330
876
185
10
274
751
44,863
26,106
18,757
89,954
(56,130)
26,043
39,566
39,514
40,132
44.0
8.59
32,937
2,170
749
198
11
237
649
34,847
17,872
16,975
30.1%
22.1%
55.6%
44.0%
40.8%
45.9%
n/a
55.6%
12.7%
7.4%
17.0%
(6.6%)
(9.1%)
15.6%
15.7%
28.7%
46.1%
10.5%
(1) EBITDA represents profit (loss) attributable to shareholders of NOVATEK adjusted for the addback of income tax expense and finance
income (expense) from the statement of income, and depreciation, depletion and amortization and share-based compensation from the
statement of cash flows.
(2) Normalized EBITDA excludes one-time effect from disposal of investments.
(3) EBITDAX represents EBITDA as adjusted for the addback of exploration expenses.
(4) EBITDA margin is calculated as EBITDA divided by total revenues and is shown as a percentage of total revenues.
(5) Free cash flow represents the excess of Net cash provided by operating activities over Capital expenditures.
3
Reconciliation of EBITDA and EBITDAX to profit (loss) attributable to shareholders of OAO NOVATEK is as
follows for the years ended 31 December 2010 and 2009:
millions of Russian roubles
Profit (loss) attributable to shareholders of OAO NOVATEK
Depreciation, depletion and amortization
Total finance income (expense)
Total income tax expense
Share-based compensation
EBITDA
Exploration expenses
EBITDAX
SELECTED MACRO-ECONOMIC DATA
Year ended 31 December:
2009
2010
40,533
6,757
(1,197)
10,804
68
56,965
1,595
58,560
26,043
5,738
831
6,778
176
39,566
566
40,132
Exchange rate of Russian
rouble to US dollar
1 quarter
2 quarter
3 quarter
4 quarter
Year
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
Change
Y-o-Y, %
At the beginning of the period
At the end of the period
Average for the period
30.24
29.36
29.89
29.38
34.01
33.93
29.36
31.20
30.24
34.01
31.29
32.21
31.20
30.40
30.62
31.29
30.09
31.33
30.40
30.48
30.71
30.09
30.24
29.47
30.24
30.48
30.37
29.38
30.24
31.72
2.9%
0.8%
(4.3%)
Crude oil prices, USD / bbl
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
1 quarter
2 quarter
3 quarter
4 quarter
Year
Change
Y-o-Y, %
WTI (1)
At the end of the period
Average for the period
83.8
78.9
49.7
43.3
75.6
78.1
69.9
59.8
80.0
76.2
70.6
68.2
91.4
85.2
79.4
76.1
91.4
79.6
79.4
62.1
15.1%
28.2%
Brent (2)
At the end of the period
Average for the period
80.3
76.4
46.5
44.5
75.0
78.2
68.1
59.1
81.0
76.9
65.7
68.1
92.5
86.4
77.7
74.5
92.5
79.5
77.7
61.7
19.0%
28.8%
Urals (2)
At the end of the period
Average for the period
78.2
75.4
45.5
43.7
74.3
76.9
68.0
58.5
79.9
75.6
65.8
67.8
90.3
85.1
77.0
74.2
90.3
78.3
77.0
61.2
17.3%
27.9%
(1) Based on prices quoted by New York Mercantile Exchange (NYMEX).
(2) Based on prices quoted by Intercontinental Exchange (ICE).
Export duties, USD / ton (1)
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
1 quarter
2 quarter
3 quarter
4 quarter
Year
Change
Y-o-Y, %
Crude oil, stable gas condensate
253.6
263.8
At the end of the period
Average for the period
LPG
115.3
111.8
292.1
281.7
152.8
133.5
273.5
262.0
238.6
224.4
303.8
287.0
271.0
247.6
303.8
273.6
271.0
179.3
12.1%
52.6%
At the end of the period
Average for the period
80.0
63.7
0.0
0.0
27.3
48.4
0.0
0.0
45.2
34.3
0.0
0.0
118.1
98.5
105.0
35.0
118.1
61.2
105.0
8.8
12.5%
n/m
(1) Export duties are determined by the government of the Russian Federation in US dollars and are paid in Russian roubles.
4
CERTAIN FACTORS AFFECTING OUR RESULTS OF OPERATIONS
Current financial market conditions
The economic events that have negatively impacted the domestic and global capital markets over the past couple
of years have somewhat receded despite isolated economic uncertainties in Greece and several other European
countries. As a result, this uncertainty may continue to negatively affect all borrowers by limiting access to
capital markets, despite the financial markets willingness to price recent transactions.
The adverse financial situation in Greece and several European countries in April and May 2010, and the risk of
contagion to other regional economies resulted in a tight funding market and a potential prolongation of the
economic downturn in the euro area during the period. This led the governments of European countries to
continue injections of liquidity into the financial system and resulted in, among other things, the establishment of
a large emergency stabilization package by the euro area member states and the IMF, the European Financial
Stability Facility, that would be available to guarantee the sovereign debt of euro area member states. In
September 2010, the Irish Minister of Finance announced the planned restructuring of the Irish banking system
and the anticipated total costs of such restructuring. There can be no certainty regarding the success of those
plans and its impact on Ireland’s ability to service its external debt. Subsequently, in November 2010, the
European Union’s Central Bank finalized a bailout aid package to Ireland as part of the emergency stabilization
package mentioned above. As a result, Ireland as well as certain other euro area member states have experienced
significant yield pressure on their sovereign bonds, which may continue to negatively affect all borrowers by
limiting access to capital markets, despite increased new issuances of debt securities in 2010. Furthermore, there
appears to be heightened reluctance on the part of lenders to lend to borrowers which have high debt levels,
potential liquidity problems or weak balance sheets.
We have continued to monitor the credit situation very closely and have taken various measures to ensure the
integrity of our financial condition and mitigate counter-party credit exposure from our natural gas and liquid
hydrocarbon sales. In addition, we have taken proactive steps to ensure the safety of our excess funds deposited
with both domestic and international banks as well as limited our exposure from prepayments to various service
providers. Presently, our cash and deposits are diversified and maintained in banks that we believe are well
capitalized in accordance with international capital adequacy rules.
We have reviewed our capital expenditure program for the upcoming year and have concluded that we have
sufficient liquidity, through current internal cash flows and short-term borrowing facilities, to adequately fund
our core natural gas business operations and planned capital expenditure program.
Management will continue to closely monitor the economic environment in Russia as well as the domestic and
international capital markets to determine if any further corrective and/or preventive measures are required to
sustain and grow our business. In addition, we will continue to assess the trends in the capital markets for
opportunities to access long-term funding at a reasonable cost to the Company commensurate with our
investment grade credit ratings and our capital requirements.
Natural gas prices
As an independent natural gas producer, we are not subject to the Russian government’s regulation of natural gas
prices. Historically, we have sold most of our natural gas at prices higher than the regulated prices set by the
government for Gazprom’s domestic gas sales, although the prices we can achieve on the domestic market are
strongly influenced by the prices regulated by the Federal Tariffs Service (FTS), a governmental agency, and
present market conditions. In 2010, the weighted average FTS price for the primary regions where we delivered
our natural gas increased by RR 523 per mcm, or 29.4%, to RR 2,299 per mcm compared to RR 1,776 per mcm
in 2009.
The specific terms for delivery of natural gas affect our average realized prices. Natural gas sold “ex-field” is
sold primarily to wholesale gas traders, in which case the buyer is responsible for the payment of gas
transportation tariffs. Sales to wholesale gas traders allow us to diversify our natural gas sales without incurring
additional commercial expenses. Historically, we have realized higher prices and net margins for natural gas
volumes sold directly to end-customers, as the gas transportation tariff is included in the contract price and no
retail margin is lost to wholesale gas traders. However, the recent shift in our sales mix has demonstrated that the
historical norm may or may not prevail in the present or future market situations.
5
In 2009, we renegotiated the sales terms for natural gas volumes sold to one of our largest wholesale gas traders.
Under the new sales terms, natural gas sales volumes are purchased by the trader on a delivered basis to the
regions where the natural gas is to be consumed. These volumes were classified as end-customers’ sales under a
separate category, “traders in remote points”. The new terms contributed to an overall decrease in our total
average natural gas netback price (excluding transportation expense) in 2009 compared to 2008, and was
primarily due to additional transportation expense incurred for these volumes and distances delivered. In an
environment of economic uncertainty and its affect on the demand for natural gas, the change in the terms for
this classification of sales allowed us to continue growing our natural gas production volumes during 2009 over
the 2008 production levels, and also enabled us to correspondingly increase our stable gas condensate and LPG
sales volumes. The renegotiated terms were valid from April until December 2009.
In November 2006, the FTS approved and published a plan to liberalize the price of natural gas sold on the
Russian domestic market by the year 2011. As part of the liberalization plan, the FTS approved four quarterly
increases in the regulated price for natural gas in 2009, rising by 5% in the first quarter, 7% in the second
quarter, 7% in the third quarter and 6.2% in the fourth quarter. In December 2009, the FTS approved an increase
in the regulated price for natural gas by 15% compared to the fourth quarter 2009 regulated prices effective from
1 January 2010. In December 2010, the FTS approved a further increase in the regulated price for natural gas
sold on the domestic market by 15% effective from 1 January 2011.
In February 2011, the Government of the Russian Federation announced certain revisions to the domestic natural
gas market liberalization plan. According to the revised plan, the target date for full liberalization of the domestic
natural gas market is 1 January 2015. The regulation of the domestic natural gas price prior to 2015 will be based
on the net-back parity of natural gas prices on the domestic and export markets while taking into account the cost
of alternative fuels. We expect further increases in the regulated price for natural gas as part of the Russian
Federation government’s efforts to liberalize the price of natural gas on the Russian domestic market. We expect
that the FTS will continue to approve the effective increase on an annual basis and reserves the right to modify
the percentages published as well as potentially prolong the timetable toward market price liberalization based
on market conditions and other factors.
In 2010, our total natural gas sales volumes to end-customers increased by 5.9% due to the commencement of
deliveries to new end-customers, whereas our volumes sold to end-customers, excluding traders in remote
regions, increased by 61.0% (see “Natural gas sales volumes” below). Our average transportation expense for the
delivery of natural gas to end-customers increased by 38.3% primarily due to an increase in the average
transportation tariff set by FTS in 2010 by 22.9% compared to average tariffs in 2009 (see “Transportation
tariffs” below) as well as an increase in our average delivery distance. Our average natural gas price to end-
customers (excluding traders in remote points) and ex-field price increased by 19.5% and 15.4%, respectively,
whereas our average natural gas netback price on end-customer sales increased by 6.0%, compared to the
respective prices in 2009. Our pricing strategy for natural gas is consistent with our commercial marketing
strategy to enter new regions and markets to maintain and grow our share of natural gas deliveries to the
domestic market, as well as maintaining our production growth.
As a result of the factors discussed above, as well as the suspension of natural gas sales to traders in remote
points effective the 1 January 2010, our average netback price on end-customers sales (including traders in
remote points) increased by 18.3%, while our total average natural gas price excluding transportation expense
increased by 17.5% compared to respective prices in 2009.
6
The following table shows our average realized natural gas sales prices (net of VAT) for the years ended
31 December 2010 and 2009:
Russian roubles per mcm
Average natural gas price (1):
End-customers
Traders in remote points
Average natural gas price to end-customers
Average natural gas transportation expense:
End-customers
Traders in remote points
Average natural gas transportation expense
for sales to end-customers
Average natural gas netback price:
End-customers
Traders in remote points
Average natural gas netback price
on end-customer sales
Average natural gas price ex-field (wholesale traders)
Total average natural gas price excluding
transportation expense
(1) Includes cost of transportation.
Year ended 31 December:
2010
2009
Change
%
2,310
-
2,310
(1,119)
-
(1,119)
1,191
-
1,191
1,211
1,933
1,836
1,900
(809)
(1,054)
19.5%
n/a
21.6%
38.3%
n/a
(893)
25.3%
1,124
782
1,007
1,049
6.0%
n/a
18.3%
15.4%
1,199
1,020
17.5%
Crude oil, stable gas condensate, liquefied petroleum gas and oil products prices
Crude oil, stable gas condensate, LPG and oil products prices on international markets have historically been
volatile depending on, among other things, the balance between supply and demand fundamentals, the ability
and willingness of oil producing countries to sustain or change production levels to meet changes in global
demand and potential disruptions in global crude oil supplies due to war, geopolitical developments, terrorist
activities or natural disasters.
The actual prices we receive for our liquid hydrocarbons on both the domestic and international markets are
dependent on many external factors beyond the control of management, such as movements in international
benchmark crude oil prices. Crude oil that we sell bound for international markets is transported through the
Transneft pipeline system where it is blended with other crude oil of varying qualities to produce an export blend
commonly referred to as “Urals blend”, which normally (or historically) trades at a discount to the international
benchmark Brent crude oil.
Volatile movements in benchmark crude oil prices can have a positive and/or negative impact on the ultimate
prices we receive for our liquid volumes sold on both the domestic and international markets, among many other
factors. During 2010, the average benchmark crude oil prices were more than 25% higher than in 2009.
Our stable gas condensate, LPG (excluding obligatory domestic deliveries at regulated prices), crude oil and oil
products prices on both international and domestic markets include transportation expense in accordance with
the specific terms of delivery.
In 2010, as well as in 2009, our stable gas condensate export delivery terms were delivery to the port of
destination ex-ship (DES) or priced at cost, insurance and freight (CIF), or priced at cost and freight (CFR). Our
average export stable gas condensate contract price, including export duties, in 2010 was approximately
USD 692 per ton compared to approximately USD 530 per ton in 2009.
7
In 2010 our crude oil export delivery terms were delivery at frontier (DAF Feneshlitke, Hungary), while in 2009
our delivery terms were either DAF Adamova Zastava, Germany or DAF Feneshlitke, Hungary. Our average
crude oil export contract price, including export duties, was approximately USD 557 per ton compared to
USD 441 per ton in 2009.
The following table shows our average realized stable gas condensate and crude oil sales prices (net of VAT and
export duties, where applicable) for the years ended 31 December 2010 and 2009 (prices in US dollars were
translated from Russian roubles using the average exchange rate for the period):
Russian roubles (RR) or US dollars (USD) per ton
Year ended 31 December:
2009
2010
Change
%
Stable gas condensate
Net export price, RR per ton
Net export price, USD per ton
Domestic price, RR per ton
Crude oil
Net export price, RR per ton
Net export price, USD per ton
Domestic price, RR per ton
12,778
420.8
10,022
8,538
281.2
7,523
10,989
346.4
6,483
8,093
255.1
6,051
16.3%
21.5%
54.6%
5.5%
10.2%
24.3%
Our LPG export delivery terms during 2010 were delivery at frontier (DAF) at the border of the customer’s
country, carriage paid to (CPT) the Port of Temryuk (southern Russia) and the station Klyucharki (western
Ukraine), and priced free carrier (FCA) at the terminal points in Poland, compared to DAF and CPT in 2009. In
2010, our average export contract price for LPG produced at the Purovsky Plant, including export duties, was
approximately USD 619 per ton compared to USD 439 per ton in 2009. In 2010, as well as in 2009, our LPG
CIS delivery terms were DAF at the border of the customer’s country.
In 2010, as well as in 2009, we were obliged to sell a portion of our LPG sales volumes on the domestic market
at regulated prices while the remaining portion of our sales was sold under commercial terms. In 2010, we sold a
total of 53 thousand tons at the regulated price of RR 5,750 per ton in January and RR 6,613 per ton from
February until December. In 2009, we sold 20 thousand tons of LPG at the regulated price of RR 5,750 per ton
in the domestic market. In 2010, we sold 344 thousand tons at an average commercial price of RR 11,057 per ton
compared to 301 thousand tons at an average commercial price of RR 8,112 per ton in 2009. In addition, in
2010, we sold 45 thousand tons of LPG produced at the Purovsky Plant through our wholly-owned subsidiary
OOO “NOVATEK-Refuelling Complexes” at an average price of RR 12,006 per ton compared to sales of
14 thousand tons at an average price of RR 11,745 per ton in 2009.
Domestic sales of oil products produced from our unstable gas condensate were priced free carrier (FCA) at the
Surgut railroad station (located in the Khanty-Mansiysk Autonomous Region).
In 2010, our wholly-owned subsidiary, OOO “NOVATEK-Refuelling Complexes”, sold approximately
five thousand tons of diesel fuel and petrol, purchased for resale from third parties, through its retail stations
compared to sales of approximately two thousand tons in 2009.
8
The following table shows our average realized LPG and oil products sales prices excluding trading activities
(net of VAT and export duties, where applicable) for the years ended 31 December 2010 and 2009 (prices in US
dollars were translated from Russian roubles using the average exchange rate for the period):
Russian roubles (RR) or US dollars (USD) per ton
LPG
Net export price, RR per ton
Net export price, USD per ton
CIS price, RR per ton
Domestic commercial price, RR per ton
Domestic regulated price, RR per ton
Domestic price (retail and small wholesale stations),
RR per ton
Oil products
Net export price, RR per ton
Net export price, USD per ton
Domestic price, RR per ton
Transportation tariffs
Natural gas
Year ended 31 December:
2009
2010
Change
%
18,433
606.9
17,351
11,057
6,557
12,006
-
-
6,773
13,416
422.9
10,694
8,112
5,750
11,745
9,498
299.4
5,419
37.4%
43.5%
62.2%
36.3%
14.0%
2.2%
n/a
n/a
25.0%
We transport our natural gas through our pipelines into the Unified Gas Supply System (“UGSS”), which
transports substantially all of the natural gas sold in Russia and is owned and operated by Gazprom.
Transportation tariffs for the use of the UGSS by independent producers are set by the FTS.(cid:3)
The methodology of calculating transportation tariffs for natural gas produced in the Russian Federation for
shipments to consumers located within the customs territory of the Russian Federation and the member states of
the Customs Union Agreement (Belarus, Kazakhstan, Kyrgyzstan and Tajikistan) consists of two parts: a rate for
the utilization of the trunk pipeline and a transportation rate per mcm per 100 kilometers (km). The rate for
utilization of the trunk pipeline is based on an “input/output” function, which is determined by where natural gas
enters and exits the trunk pipeline and includes a constant rate for end-customers using Gazprom’s gas
distribution systems. The constant rate is deducted from the utilization rate for end-customers using non-
Gazprom gas distribution systems.
In December 2008, the FTS approved four quarterly increases in the transportation tariff for natural gas in 2009
for an average total increase of 15.7% for the year, in line with the increases in natural gas prices. As a result, the
rate for utilization of the trunk pipeline had a range of RR 29.21 to RR 1,630.97 (excluding VAT) per mcm and
the transportation rate per mcm per 100 km was RR 9.15 (excluding VAT) per mcm per 100 km, as at
31 December 2009.
In December 2009, the FTS approved a 12.3% average increase for the 2010 transportation tariff for natural gas
effective 1 January 2010 compared to the fourth quarter 2009 tariffs. Effective from 1 January 2010, the rate for
utilization of the trunk pipeline had a range of RR 32.92 to RR 1,818.37 (excluding VAT) per mcm and the
transportation rate was RR 10.27 (excluding VAT) per mcm per 100 km.
In December 2010, the FTS approved a 9.3% average increase for the 2011 transportation tariff for natural gas
effective 1 January 2011, which is 0.5% higher than the official inflation rate for 2010 in the Russian Federation,
compared to the 2010 tariffs. Effective from 1 January 2011, the rate for utilization of the trunk pipeline had a
range of RR 44.97
rate was
RR 11.23 (excluding VAT) per mcm per 100 km.
to RR 1,964.13 (excluding VAT) per mcm and
transportation
the
The increases in regulated transportation tariffs are passed on to our end-customers pursuant to delivery terms in
the majority of our contracts.
9
Crude oil
We transport most of our crude oil through the pipeline network owned and operated by Transneft, Russia’s
state-owned monopoly crude oil pipeline operator. Our transportation tariffs for the transport of crude oil
through Transneft’s pipeline network are also set by the FTS. The overall expense for the transport of crude oil
depends on the length of the transport route from the producing field to the ultimate destination.
Stable gas condensate, LPG and oil products
Our stable gas condensate (to the Port of Vitino on the White Sea), LPG and oil products are transported by rail
which is owned and operated by Russian Railways, Russia’s state-owned monopoly railway operator. Our
transportation tariffs for transport by rail are also set by the FTS and vary depending on product and length of
transport route. On 27 March 2009, the FTS announced specific discount co-efficients to be applied to the
existing rail road transportation tariffs related to export deliveries of LPG and stable gas condensate shipped
from the Limbey rail station, located in close proximity to our Purovsky Plant. We applied a co-efficient of
0.72 to the existing rail tariff for our stable gas condensate volumes shipped to export markets from 7 April 2009
and a co-efficient of 0.35 for our LPG export deliveries at the Russian Federation cross-border points for
volumes in excess of 90 thousand tons which we reached in the middle of April 2009. The specific discount co-
efficients remained in effect throughout 2009.
In January 2010, the FTS approved the discount co-efficients to existing rail road transportation tariffs related to
export deliveries of LPG and stable gas condensate shipped from the Limbey rail station. The discount co-
efficient for stable gas condensate was set at 0.89 for annual shipped volumes of more than 2,235 thousand tons
and the discount co-efficient for LPG was set at 0.35 for export volumes in excess of 105 thousand tons which
we reached in the middle of April 2010. The discount co-efficients remained in effect throughout 2010.
In December 2010, the FTS revised the discount co-efficients to existing rail road transportation tariffs related to
export deliveries of LPG and stable gas condensate shipped from the Limbey rail station in 2011. The discount
co-efficient for stable gas condensate is set at 0.89 for companies with annual shipped volumes of
2,600 thousand tons and more, and the discount co-efficient for LPG is set at 0.68 for delivered annual volumes
of 415 thousand tons and more. The revised discount co-efficients are expected to remain in effect throughout
2011.
We deliver our stable gas condensate to international markets using the loading and storage facilities at the Port
of Vitino on the White Sea and tankers for transportation to US, European, South American and countries of the
Asian-Pacific region. The costs associated with tanker transportation are determined by the distance to the final
destination, tanker availability, seasonality of deliveries and standard shipping terms.
Transportation transactions with related parties
All natural gas producers and wholesalers operating in Russia transport their commercial volumes of natural gas
through the UGSS, which is owned and operated by OAO Gazprom, a State monopoly and a shareholder of
OAO NOVATEK since October 2006. As an independent natural gas producer, we utilize the UGSS to transport
our natural gas to end-customers at the regulated tariffs established by the FTS.
Our tax burden
We are subject to a wide range of taxes imposed at the federal, regional, and local levels, many of which are
based on revenue or volumetric measures. In addition to income tax, significant taxes to which we are subject
include VAT, unified natural resources production tax (UPT), export duties, property tax, payments to non-
budget funds (formerly known as social taxes) and other contributions.
According to amendments to the Russian Tax Code the UPT rate for natural gas was increased from RR 147 to
RR 237 per mcm effective from 1 January 2011. In addition, effective from 1 January 2012 and 1 January 2013
the UPT rate for natural gas will be increased by 5.9% and by 5.6% respectively.
In practice, Russian tax authorities often have their own interpretation of tax laws that rarely favours taxpayers,
who have to resort to court proceedings to defend their position against the tax authorities. Differing
interpretations of tax regulations exist both among and within government ministries and organizations at the
federal, regional and local levels, creating uncertainties and inconsistent enforcement. Tax declarations, together
with related documentation such as customs declarations, are subject to review and investigation by a number of
authorities, each of which may impose fines, penalties and interest charges. Generally, taxpayers are subject to
10
an inspection of their activities for a period of three calendar years immediately preceding the year in which the
audit is conducted. Previous audits do not completely exclude subsequent claims relating to the audited period.
In addition, in some instances, new tax regulations have been given retroactive effect.
We have not employed any tax minimization schemes using offshore or domestic tax zones in the Russian
Federation.
OIL AND GAS RESERVES
In December 2008, the US Securities and Exchange Commission released the Final Rule for the Modernization
of Oil and Gas Reporting, which requires the disclosure of oil and gas proved reserves by significant geographic
area, using a 12 month average beginning-of-the-month price for the year, rather than year-end prices, and
allows the use of reliable technologies to estimate proved oil and gas reserves, if the technologies have
demonstrated reliable estimates about reserves. Furthermore, companies are required to report on the
independence and qualifications of its reserve preparer or auditor, and file reports when a third party is relied
upon to prepare reserve estimates or conduct an audit of the company’s reserves.
OAO NOVATEK does not file with the SEC nor is obliged to report its reserves in compliance with these
standards. However, we have consistently disclosed proved oil and gas reserves as unaudited supplemental
information in the Group’s IFRS audited consolidated financial statements. As part of management’s continued
efforts to improve investor confidence and provide transparency regarding the Group’s oil and gas reserves, we
have provided additional information about our hydrocarbon reserves based on the widely-industry accepted
PRMS reserves reporting classification, which in addition to total proved reserves discloses information on the
Group’s probable and possible reserves.
Our proved reserves estimates are appraised by the Group’s independent petroleum engineers, “DeGolyer and
MacNaughton”. The Group’s total proved reserves, comprised of proved developed and proved undeveloped
reserves as of 31 December 2010 and 2009, were appraised using both reporting and disclosure requirements
promulgated by the SEC and the PRMS reserves reporting classification. Proved reserves disclosed in the
Unaudited Supplemental Oil and Gas Disclosures in the Group’s IFRS consolidated financial statements are
presented under the SEC reserve reporting methodology, which requires that 100% of the reserves attributable to
all consolidated subsidiaries (whether or not wholly owned) shall be included for the reporting year as well as
our proportionate share of proved reserves accounted for by the equity method.
11
The tables below provide the comparison of the Group’s estimated reserves under SEC and PRMS classifications
attributable to all consolidated subsidiaries and associated companies based on the Group’s equity ownership
interest in the respective fields and do not reconcile to the proved reserves disclosed under the SEC reserve
reporting methodology as noted above.
Based on our equity ownership interest in the fields
Natural gas
SEC
PRMS
Billions of
cubic feet
Billions
of cubic
meters
Billions of
cubic feet
Billions
of cubic
meters
Total proved reserves at 31 December 2008 (1)
24,357
690
25,937
734
Changes attributable to:
Revisions of previous estimates, extensions and discoveries
Acquisitions
Production
4,091
6,844
(1,142)
115
194
(32)
2,778
10,551
(1,142)
79
299
(32)
Total proved reserves at 31 December 2009
34,150
967
38,124
1,080
Changes attributable to:
Revisions of previous estimates, extensions and discoveries
Disposals (2)
Production
2,392
(870)
(1,314)
68
(25)
(37)
2,579
(870)
(1,314)
73
(25)
(37)
Total proved reserves at 31 December 2010 (subsidiaries)
34,358
973
38,519
1,091
Total proved reserves at 31 December 2010
(associated companies)
6,057
171
7,726
219
Grand total proved reserves at 31 December 2010
40,415
1,144
46,245
1,310
(1) Proved reserves as 31 December 2008 were based on previous SEC reserve methodology.
(2) Disposals represent reserves attributable to the sale of an equity stake in a subsidiary and the loss of control.
12
Based on our equity ownership interest in the fields
Crude oil, gas condensate and natural gas liquids
SEC
Millions
of barrels
Millions
of metric
tons
PRMS
Millions
of barrels
Millions
of metric
tons
Total proved reserves at 31 December 2008 (1)
452
55
551
Changes attributable to:
Revisions of previous estimates, extensions and discoveries
Acquisitions
Production
42
60
(25)
4
7
(3)
33
91
(25)
Total proved reserves at 31 December 2009
529
63
650
Changes attributable to:
Revisions of previous estimates, extensions and discoveries
Disposals (2)
Production
43
(40)
(31)
6
(5)
(4)
66
(40)
(31)
Proved reserves at 31 December 2010 (subsidiaries)
501
60
645
Total proved reserves at 31 December 2010
(associated companies)
Grand total proved reserves at 31 December 2010
103
604
13
73
116
761
(1) Proved reserves as 31 December 2008 were based on previous SEC reserve methodology.
(2) Disposals represent reserves attributable to the sale of an equity stake in a subsidiary and the loss of control.
The following table provides for our combined SEC and PRMS proved reserves on a total boe basis.
67
4
11
(3)
79
9
(5)
(4)
79
14
93
Based on our equity ownership interest in the fields
Total proved reserves:
At 31 December 2008 (1)
At 31 December 2009
At 31 December 2010
including subsidiaries
including associated companies
Combined natural gas, crude oil,
gas condensate and natural gas liquids
in millions of barrels of oil equivalent
PRMS
SEC
4,963
6,853
8,088
6,863
1,225
5,354
7,711
9,325
7,779
1,546
(1) Proved reserves as 31 December 2008 were based on previous SEC reserve methodology.
13
The PRMS reserve classification standards allows for the reporting of reserves estimates for probable and
possible reserves as presented in the following table:
Under PRMS classification
(based on our equity ownership interest in the fields)
Probable reserves:
At 31 December 2008
At 31 December 2009
At 31 December 2010
including subsidiaries
including associated companies
Possible reserves:
At 31 December 2008
At 31 December 2009
At 31 December 2010
including subsidiaries
including associated companies
Natural gas
Billions of
cubic feet
Billions
of cubic
meters
Crude oil, gas
condensate and natural
gas liquids
Millions
of barrels
Millions
of metric
tons
9,969
13,520
18,748
13,152
5,596
8,958
9,416
14,867
7,995
6,872
282
383
531
372
159
254
267
421
226
195
298
375
587
343
244
612
696
915
674
241
36
46
73
42
31
78
89
117
86
31
The Group’s PRMS proved reserves attributable to the consolidated subsidiaries and associated companies based
on the Group’s equity ownership interest in the respective fields aggregated approximately 1.31 trillion cubic
meters (tcm) of natural gas and 93 million tons of gas condensate and crude oil as of 31 December 2010.
Combined, these proved reserves represent approximately 9.3 billion barrels of oil equivalent.
Our total PRMS proved reserves attributable to consolidated subsidiaries and associated companies based on the
Group’s equity ownership interest in their respective fields have increased by 20.9% during 2010 due to the
acquisition, by the Group’s joint venture Yamal Development, of a 51 percent participation interest in
SeverEnergia in November 2010, the acquisition of 51 percent of the outstanding ordinary shares of Sibneftegas
in December 2010, and organic growth at our core fields. As we continue to invest capital into the development
of our fields, we anticipate that we will increase our resource base as well as migrate reserves among the reserve
categories.
The increase in the Group’s PRMS probable and possible reserves during 2010 was also primarily due to
acquisitions of participation interests in SeverEnergia and Sibneftegas in November and December 2010,
respectively.
The Group’s reserves are all located in the Russian Federation, in the Yamal-Nenets Autonomous Region
(Western Siberia), thereby representing one geographical area.
The below table contains information about reserve/production ratios for the years ended 31 December 2010 and
2009 under both reserves reporting methodologies based on our equity ownership interest, rather than 100% of
the reserves attributable to all consolidated subsidiaries and associated companies:
Number of years (based on our equity ownership interest in the fields)
SEC
At 31 December:
PRMS
At 31 December:
2010
2009
2010
2009
Total proved reserves to production
Total proved and probable reserves to production
Total proved, probable and possible reserves to production
30
-
-
29
-
-
34
49
62
33
45
55
The Group’s oil and gas estimation and reporting process involves an annual independent third party appraisal as
well as internal technical appraisals of reserves. The Group maintains its own internal reserve estimates that are
calculated by qualified technical staff working directly with the oil and gas properties. The Group periodically
updates reserves estimates during the year based on evaluations of new wells, performance reviews, new
technical information and other studies.
14
The Group provides D&M annually with engineering, geological and geophysical data, actual production
histories and other information necessary for reserve determinations. The method or combination of methods
used in the analysis of each reservoir is tempered by experience with similar reservoirs, stages of development,
quality and completeness of basic data, and production history. Our reserves estimates were prepared using
standard geological and engineering methods generally accepted in the petroleum industry. The Group’s and
D&M’s technical staffs meet to review and discuss the information provided, and upon completion of the
process, senior management reviews and approves the final reserves estimates issued by D&M.
The Reserves Management and Assessment Group (RMAG) is comprised of qualified technical staff from
various departments – geological and geophysical, gas and liquids commercial operations, capital construction,
production, financial planning and analysis and includes technical and financial representatives from the Group’s
subsidiaries, which are the principal holders of the mineral licenses. The person responsible for overseeing the
work of the RMAG is a member of the Management Board.
The approval of the final reserves estimates is the sole responsibility of senior management.
15
OPERATIONAL HIGHLIGHTS
Oil and gas production costs
Our oil and gas production costs are derived from our results of operations for oil and gas producing activities as
reported in the Unaudited Supplemental Oil and Gas Disclosures in our consolidated financial statements for the
years ended 31 December 2010 and 2009. Oil and gas production costs do not include general corporate
overheads or their associated tax effects. The following tables set forth certain operating information with
respect to our oil and gas production costs during the years presented in millions of Russian roubles and on a
barrel of oil equivalent (boe) basis in Russian roubles and US dollars:
millions of Russian roubles
Production costs:
Lifting cost
Taxes other than income tax
Transportation expenses
Total production costs before DD&A
Depreciation, depletion and amortization (DD&A)
Year ended 31 December:
2009
2010
Change
%
4,401
9,363
37,187
50,951
6,384
3,797
7,840
28,482
40,119
5,139
15.9%
19.4%
30.6%
27.0%
24.2%
26.7%
Total production costs
57,335
45,258
RR per boe
Production costs:
Lifting cost
Taxes other than income tax
Transportation expenses
Total production costs before DD&A
Depreciation, depletion and amortization (DD&A)
Total production costs
USD per boe
Production costs:
Lifting cost
Taxes other than income tax
Transportation expenses
Total production costs before DD&A
Depreciation, depletion and amortization (DD&A)
Total production costs
Year ended 31 December:
2009
2010
Change
%
16.1
34.2
135.8
186.1
23.3
209.4
16.0
33.1
120.1
169.2
21.7
190.9
0.6%
3.3%
13.1%
10.0%
7.4%
9.7%
Year ended 31 December:
2009
2010
Change
%
0.53
1.12
4.46
6.11
0.76
6.87
0.50
1.04
3.78
5.32
0.68
6.00
6.0%
7.7%
18.0%
14.8%
11.8%
14.5%
Production costs consist of amounts directly related to the extraction of natural gas, gas condensate and crude oil
from the reservoir and other related costs; including production expenses, taxes other than income tax
(production taxes), insurance expenses and shipping/transportation/handling costs to end-customers. The average
production cost on a boe basis is calculated by dividing the applicable costs by the respective barrel of oil
equivalent of our hydrocarbons produced during the year. Natural gas, gas condensate and crude oil volumes
produced by our fields are converted to a barrel of oil equivalent based on the relative energy content of each
fields’ hydrocarbons.
16
Our lifting costs, as presented in the tables above, differ from lifting costs as reflected in the Unaudited
Supplemental Oil and Gas Disclosures in NOVATEK’s Financial Statements, in that the lifting costs as
presented in NOVATEK’s Financial Statements includes changes in balances of natural gas and hydrocarbon
liquids to more appropriately match costs incurred to revenues under the IFRS matching principles. A
reconciliation of lifting costs as reflected in the Unaudited Supplemental Oil and Gas Disclosures in
NOVATEK’s Financial Statements is set forth below:
millions of Russian roubles
Year ended 31 December:
2009
2010
Change
%
Lifting costs presented in “Oil and Gas Production Costs” above
4,401
3,797
15.9%
Change in balances of natural gas and hydrocarbon liquids stated at
cost in the consolidated statement of financial position
Lifting costs per “Unaudited Supplemental Oil and Gas
Disclosures”
385
(151)
n/a
4, 786
3,646
31.3%
17
Hydrocarbon sales volumes
Our natural gas sales volumes increased primarily due to an increase in our production. Liquids sales volumes
increased due to an increase in unstable gas condensate production that was partially offset by an increase in
liquids inventory balances.
Natural gas sales volumes
millions of cubic meters
Production from:
Yurkharovskoye field
East-Tarkosalinskoye field
Khancheyskoye field
Other fields
Year ended 31 December:
2009
2010
Change
%
24,383
9,735
3,013
77
17,731
11,509
3,043
70
37.5%
(15.4%)
(1.0%)
10.0%
Total natural gas production
37,208
32,353
15.0%
Purchases from:
Third parties
Total natural gas purchases
-
-
1,000
1,000
Total production and purchases
37,208
33,353
Purovsky Plant and own usage
Decrease (increase) in UGSF, UGSS and own pipeline infrastructure
Total natural gas sales volumes
Sold to end-customers
Sold to traders in remote points
Subtotal sold to end-customers
Sold ex-field
(45)
(46)
37,117
23,745
-
23,745
13,372
(44)
(372)
32,937
14,751
7,668
22,419
10,518
n/a
n/a
11.6%
2.3%
(87.6%)
12.7%
61.0%
n/a
5.9%
27.1%
In 2010, our total consolidated natural gas production increased by 4,855 mmcm, or 15.0%, compared to 2009
due to an increase in production at our Yurkharovskoye field resulting from the launches of the second and third
stages of the field’s second phase development in October 2009 and October 2010, respectively. The decrease in
natural gas production at our East-Tarkosalinskoye field in 2010 was the direct result of our decision to continue
optimizing unstable gas condensate production at the Yurkharovskoye field.
In 2010, we did not purchase natural gas from third parties due to our ability to meet domestic market demand
from our own production.
18
Liquids sales volumes
thousands of tons
Production from:
Yurkharovskoye field
East-Tarkosalinskoye field
Khancheyskoye field
Other fields
Total liquids production
Purchases from:
Third parties
Total liquids purchases
Total production and purchases
Losses and own usage (1)
Gas condensate pipeline line fill and de-ethanization
Decreases (increases) in liquids inventory balances
Total liquids sales volumes
Stable gas condensate export
Stable gas condensate domestic
Subtotal stable gas condensate
LPG export
LPG CIS
LPG domestic
LPG sold through domestic retail and small wholesale stations
Subtotal LPG
Crude oil export
Crude oil domestic
Subtotal crude oil
Oil products export
Oil products domestic
Subtotal oil products
Year ended 31 December:
2009
2010
Change
%
2,099
852
635
31
3,617
12
12
3,629
(39)
(36)
(153)
3,401
2,326
4
2,330
434
0
397
45
876
71
114
185
-
10
10
1,484
896
618
40
3,038
13
13
3,051
(26)
-
103
3,128
2,115
55
2,170
405
9
321
14
749
69
129
198
1
10
11
41.4%
(4.9%)
2.8%
(22.5%)
19.1%
(7.7%)
(7.7%)
18.9%
50.0%
n/a
n/a
8.7%
10.0%
(92.7%)
7.4%
7.2%
n/a
23.7%
221.4%
17.0%
2.9%
(11.6%)
(6.6%)
n/a
0.0%
(9.1%)
(1) Losses associated with processing at the Purovsky Plant and Surgutsky refinery as well as during rail road, trunk pipeline and tanker
transportation.
In 2010, our liquids production increased by 579 thousand tons, or 19.1%, to 3,617 thousand tons compared to
3,038 thousand tons in 2009, due primarily to the expansion of unstable gas condensate production capacity at
our Yurkharovskoye field resulting from the launch of the second and third stages of the field’s second phase
development in October 2009 and October 2010, respectively. The decrease in liquids production at the East-
Tarkosalinskoye field was the result of natural declines in the concentration of gas condensate in the extracted
gas due to decreasing reservoir pressure at the current gas condensate producing horizons.
19
RESULTS OF OPERATIONS FOR THE YEAR ENDED 31 DECEMBER 2010 COMPARED TO THE YEAR
ENDED 31 DECEMBER 2009
The following table and discussion is a summary of our consolidated results of operations for the years ended
31 December 2010 and 2009. Each line item is also shown as a percentage of our total revenues.
Year ended 31 December:
Millions of Russian roubles
2010
% of total
revenues
Total revenues (net of VAT and export duties)
117,024
100.0%
including:
natural gas sales
liquids sales
Operating expenses
Net gain on disposal of interest in subsidiaries
Other operating income (loss)
Profit from operations
Finance income (expense)
Share of income (loss) of associated companies
71,060
44,102
(68,518)
1,329
396
50,231
1,197
(346)
60.7%
37.7%
(58.6%)
1.1%
0.4%
42.9%
1.0%
(0.2%)
2009
89,954
53,623
33,280
(56,130)
52
(343)
33,533
(831)
(202)
Profit before income tax
Total income tax expense
Profit (loss)
Non-controlling interest
51,082
43.7%
32,500
(10,804)
40,278
255
(9.3%)
34.4 %
0.2%
(6,778)
25,722
321
% of total
revenues
100.0%
59.6%
37.0%
(62.4%)
0.1%
(0.4%)
37.3%
(0.9%)
(0.3%)
36.1%
(7.5%)
28.6%
0.4%
Profit attributable to shareholders of
OAO NOVATEK
40,533
34.6%
26,043
29.0%
20
Total revenues
The following table sets forth our sales (net of VAT and export duties, where applicable) for the years ended
31 December 2010 and 2009:
Millions of Russian roubles
Natural gas sales
End-customer
Traders in remote points
Subtotal of end-customers sales
Ex-field sales
Stable gas condensate sales
Export
Domestic
Liquefied petroleum gas sales
Export
CIS
Domestic
Crude oil sales
Export
Domestic
Oil products sales
Export
Domestic
Total oil and gas sales
Sales of polymer and insulation tape
Other revenues
Total revenues
Natural gas sales
Year ended 31 December:
2009
2010
Change
%
71,060
54,860
-
54,860
16,200
29,754
29,720
34
12,747
8,052
9
4,686
1,458
603
855
143
-
143
115,162
1,699
163
53,623
28,513
14,080
42,593
11,030
23,599
23,245
354
8,253
5,429
99
2,725
1,335
554
781
93
10
83
86,903
1,873
1,178
32.5%
92.4%
n/a
28.8%
46.9%
26.1%
27.9%
(90.4%)
54.5%
48.3%
(90.9%)
72.0%
9.2%
8.8%
9.5%
53.8%
(100.0%)
72.3%
32.5%
(9.3%)
(86.2%)
117,024
89,954
30.1%
In 2010, our revenues from sales of natural gas increased by RR 17,437 million, or 32.5%, compared to 2009
largely due to an increase in natural gas prices and, to a lesser extent, an increase in sales volumes. Revenues
from the sale of natural gas accounted for 60.7% and 59.6% of our total revenues in 2010 and 2009, respectively.
In 2010, our average realized natural gas price per mcm increased by RR 286 per mcm, or 17.6%, to
RR 1,914 per mcm from RR 1,628 per mcm in 2009. Our proportion of natural gas sold to end-customers to total
natural gas sales volumes decreased from 68.1% in 2009 (including traders in remote points) to 64.0% in 2010.
The average realized prices of our natural gas sold directly to end-customers and traders in remote points
(including transportation expense) and sold ex-field were higher by 21.6% and 15.4%, respectively, in 2010
compared to 2009. In 2010, our sales of natural gas to end-customers were primarily to energy utility companies
and large industrial companies, while in 2009 the majority of natural gas volumes sold to end-customers were
delivered to energy utility companies and traders in remote points, the latter of which we ceased deliveries to
effective 1 January 2010.
21
Stable gas condensate sales
In 2010, our revenues from sales of stable gas condensate increased by RR 6,155 million, or 26.1%, compared to
2009, primarily due to an increase in our average realized prices resulting from an increase in the underlying
benchmark crude oil prices used in the price formulation and, to a lesser extent, an increase in volumes sold.
In 2010, our total stable gas condensate sales volumes increased by 160 thousand tons, or 7.4%, due to an
increase in our unstable gas condensate production that was partially offset by an increase in stable gas
condensate inventory balance during the period. In 2010, we exported 2,326 thousand tons of stable gas
condensate, or 99.8% of our total sales volumes, to the United States, Asian-Pacific region, Europe and South
America, with the remaining four thousand tons sold domestically. In 2009, we exported 2,115 thousand tons of
stable gas condensate, or 97.5% of our total sales volumes, to markets in the United States, Asian-Pacific region
and Europe, and the remaining 55 thousand tons were sold domestically.
We delivered our stable gas condensate to international markets using the loading and storage facilities at the
Port of Vitino on the White Sea and via leased tankers.
In 2010, our average realized price, excluding export duties, for stable gas condensate sold on the export market
increased by USD 74.4 per ton, or 21.5%, to USD 420.8 per ton (DES, CFR and CIF) from USD 346.4 per ton
(DES, CFR and CIF) in 2009 due to a 30.6% increase in our average export contract price that was partially
offset by a 51.5% increase in our average export duty per ton. The increase in our average realized contract price
was due to an overall increase in crude oil and related commodity prices on international markets in 2010
compared to 2009.
Liquefied petroleum gas sales
In 2010, our revenues from the sales of LPG increased by RR 4,494 million, or 54.5%, compared to 2009, due to
an increase in both our average realized prices and volumes sold. In 2010, our total LPG sales volumes increased
by 127 thousand tons, or 17.0%, to 876 thousand tons from 749 thousand tons in 2009. The growth in LPG sales
volumes was mainly due to an increase in unstable gas condensate throughput at the Purovsky Plant and the
corresponding increase in LPG output.
In 2010, we sold 434 thousand tons of LPG, or 49.5% of our total LPG sales volumes, (including approximately
three thousand tons purchased and resold through our wholly-owned subsidiary Intergaz-System), to the export
markets for an average price of USD 611.0 per ton (DAF, CPT and FCA excluding export duties), representing
an increase of USD 188.1 per ton, or 44.5%, compared to 2009. The increase in our average realized export
prices (excluding export duties) was primarily due to a 41.0% increase in our average contract price that was
partially offset by an increase in our average export duty per ton as a result of the cancellation of the zero export
duty rate from 1 December 2009 (a zero export duty rate for LPG was effective from 1 January to 1 December
2009).
In 2010, we sold 442 thousand tons of LPG, or 50.5% of our total LPG sales volumes on the domestic market at
an average price of RR 10,609 per ton (FCA, excluding VAT) representing an increase of RR 2,484 per ton, or
30.6%, compared to 2009.
In 2009, we sold 54.1% of our LPG volumes to the export markets, 44.7% was sold to the domestic markets, and
1.2% was sold to the CIS markets.
Crude oil sales
In 2010, our revenues from the sales of crude oil increased by RR 123 million, or 9.2%, compared to 2009, due
to an increase in our average realized prices that was partially offset by a decrease in sales volumes.
In 2010, our crude oil sales volumes decreased by 13 thousand tons, or 6.6%, to 185 thousand tons from
198 thousand tons in 2009 due primarily to a decrease in crude oil purchases. In 2010, 61.6% of our crude oil
volumes were sold domestically at an average price of RR 7,523 per ton (excluding VAT) representing an
increase of RR 1,472 per ton, or 24.3%, compared to 2009. The remaining 38.4% of our crude oil volumes were
sold to the export markets at an average price of USD 281.2 per ton (DAF, excluding export duties) representing
an increase of USD 26.1 per ton, or 10.2%, compared to 2009. The increase in the average realized export price
(excluding export duties) was the result of a 26.3% increase in our average export contract price that was
partially offset by a 48.6% increase in our average export duty per ton. The increase in our average realized
22
contract price was due to an overall increase in crude oil and related commodity prices on international markets
in 2010 compared to 2009.
Oil products sales
In 2010, our revenue from the sales of oil products increased by RR 50 million, or 53.8%, to RR 143 million
from RR 93 million in 2009 due primarily to an increase in oil products trading operations through our retail
stations on the domestic market.
Our revenues from oil products trading operations through our retail stations on the domestic market increased
by RR 73 million to RR 110 million in 2010 compared to RR 37 million in 2009. In 2010, we sold
approximately five thousand tons of oil products (diesel fuel and petrol) for an average price of RR 22,951 per
ton compared to two thousand tons for an average price of RR 22,356 per ton in 2009.
In 2010, our revenues from oil products produced at the Surgutsky refinery and sold on the domestic market
decreased to RR 33 million from RR 46 million in 2009 due to a decrease in volumes sold. In 2010, we sold five
thousand tons of oil products produced from our unstable gas condensate at the Surgutsky Refinery at an average
price of RR 6,773 per ton compared to eight thousand tons at RR 5,419 per ton in 2009. The decrease in volumes
sold was due to the cessation of deliveries of our unstable gas condensate to the refinery starting in September
2010 as a result of the launch of our own gas condensate pipeline from the Yurkharovskoye field to the Purovsky
Plant in August 2010.
In 2009, we sold one thousand tons of oil products (light distillate) produced from our unstable gas condensate at
the Surgutsky Refinery to the international market through our foreign trading subsidiary at an average realized
price (excluding export duties, FOB Vitino) of USD 299.4 per ton.
Sales of polymer and insulation tape
Our revenues from the sales of polymer and insulation tape decreased by RR 174 million, or 9.3%, to
RR 1,699 million in 2010 compared to RR 1,873 million in 2009 due to the disposal of our polymer and
insulation tape production subsidiary OOO “NOVATEK–Polymer” in September 2010.
Other revenues
Other revenues include geological and geophysical research services, rent, transportation, handling, storage and
other services. In 2010, other revenues decreased by RR 1,015 million, or 86.2%, to RR 163 million from
RR 1,178 million in 2009. The decrease in other revenues was primarily related to a RR 779 million decrease in
revenues from geological and geophysical research services provided primarily to our associates. The decrease
was due to the acquisition in February 2010 of a controlling interest in our associated companies and the
subsequent consolidation of their activities and elimination of intercompany operations. In addition, rent services
sales decreased by RR 258 million, or 74.8%, to RR 87 million in 2010. The remaining increase of
RR 22 million in other revenues was composed of various immaterial items.
23
Operating expenses
In 2010, our total operating expenses increased by RR 12,388 million, or 22.1%, to RR 68,518 million compared
to RR 56,130 million in 2009, due primarily to an increase in transportation expenses and taxes other than
income tax. As a percentage of total operating expenses, our non-controllable expenses, such as transportation
and taxes other than income tax, increased to 69.0% in 2010 compared to 66.0% in 2009. Total operating
expenses decreased as a percentage of total revenues to 58.6% in 2010 compared to 62.4% in 2009, as shown in
the table below. The decrease in our operating expenses as a percentage of total revenues was primarily due to an
increase in our natural gas sales prices and volumes, as well as liquids sales prices.
millions of Russian roubles
Transportation expenses
Taxes other than income tax
Subtotal non-controllable expenses
General and administrative expenses
Depreciation, depletion and amortization
Materials, services and other
Exploration expenses
Net impairment expense
Purchases of natural gas and liquid hydrocarbons
Change in natural gas, liquid hydrocarbons, and
polymer products and work-in-progress
Year ended 31 December:
2010
37,200
10,077
47,277
6,733
6,616
6,072
1,595
541
154
(470)
% of total
revenues
31.8%
8.6 %
40.4%
5.8%
5.7%
5.2%
1.4%
0.5%
0.1%
n/m
2009
29,026
8,042
37,068
5,126
5,588
6,259
566
125
1,143
255
% of total
revenues
32.3%
8.9%
41.2%
5.7%
6.2%
7.0%
0.6%
0.1%
1.3%
n/m
Total operating expenses
68,518
58.6%
56,130
62.4%
Non-controllable expenses
A significant proportion of our operating expenses are characterized as non-controllable expenses since we are
unable to influence the increase in regulated tariffs for transportation of our hydrocarbons or the rates imposed
by federal, regional or local tax authorities. In 2010, non-controllable expenses of transportation and taxes other
than income tax increased by RR 10,209 million, or 27.5%, to RR 47,277 million from RR 37,068 million in
2009. The change in transportation expenses was primarily due to an increase in the natural gas transportation
tariff and sales volumes. Taxes other than income tax increased primarily due to higher liquids and natural gas
production volumes and the corresponding impact on unified natural resources production tax as well as excise
and fuel taxes incurred in 2010 with the commencement of commercial activities in Poland. As a percentage of
total revenues, our non-controllable expenses marginally decreased to 40.4% in 2010 compared to 41.2% in
2009.
24
Transportation expenses
In 2010, our total transportation expenses increased by RR 8,174 million, or 28.2%, compared to 2009.
millions of Russian roubles
Natural gas transportation to customers
Liquids transportation by rail
Liquids transportation by tankers
Unstable gas condensate transportation from the fields to the
processing facilities through third party pipelines
Crude oil transportation to customers
Other transportation costs
Year ended 31 December:
2009
2010
Change
%
26,569
7,350
2,771
307
190
13
20,019
5,820
2,675
340
160
12
32.7%
26.3%
3.6%
(9.7%)
18.8%
8.3%
Total transportation expenses
37,200
29,026
28.2%
In 2010, our transportation expenses for natural gas increased by RR 6,550 million, or 32.7%, to
RR 26,569 million from RR 20,019 million in 2009. The change was primarily due to an increase in the natural
gas transportation tariff (see “Transportation tariffs” above) and, to a lesser extent, by a 5.9% increase in our
sales volumes of natural gas delivered directly to end-customers, where the cost of transportation is included in
the sales price. Our average transportation distance for natural gas sold to end-customers fluctuates period-to-
period and depends on the location of end-customers and the specific routes of transportation.
Total expenses for liquids transportation by rail increased by RR 1,530 million, or 26.3%, from RR 5,820 million
in 2009 to RR 7,350 million in 2010 due primarily to an increase in liquids volumes sold and higher rail
transportation tariffs. In 2010, our combined liquids volumes sold and transported via rail increased by
251 thousand tons, or 8.6%, to 3,153 thousand tons from 2,902 thousand tons in 2009.
Our weighted average transportation tariff for liquids delivered by rail increased by 16.2% to RR 2,331 per ton
from RR 2,006 per ton in 2009 primarily due to an increase in rail tariffs by 9.4% effective 1 January 2010 and
an application of a higher co-efficient to the existing rail tariff for stable gas condensate deliveries to export
markets. In 2010, we applied a co-efficient of 0.89 to the existing rail tariff for stable gas condensate deliveries
to export markets compared to a co-efficient of 0.72 in 2009. In addition, we applied a co-efficient of 0.35 to the
existing rail tariff for LPG export deliveries at the cross-border points of the Russian Federation in both periods
(see “Transportation tariffs” above).
Total transportation expense for liquids delivered by tankers to international markets increased by
RR 96 million, or 3.6%, to RR 2,771 million in 2010 from RR 2,675 million in 2009. The change was due to a
10.0% increase in volumes sold that was partially offset by a slight decrease in average freight rates. In 2010, we
delivered 53.4% of our stable gas condensate export volumes to United States markets compared to 66.5% in
2009.
Starting from the middle of August 2010, we no longer incur expenses related to unstable gas condensate
transportation from the fields to the processing facilities through third party pipelines as we commenced
operation of our own unstable gas condensate pipeline from the Yurkharovskoye field to the Purovsky Plant (see
“Recent developments” above).
25
Taxes other than income tax
millions of Russian roubles
Unified natural resources production tax (UPT)
Property tax
Excise and fuel taxes
Other taxes
Total taxes other than income tax
Year ended 31 December:
2009
2010
Change
%
7,861
1,482
454
280
10,077
6,699
1,155
-
188
8,042
17.3%
28.3%
n/a
48.9%
25.3%
In 2010, taxes other than income tax increased by RR 2,035 million, or 25.3%, primarily due to an increase in
the unified natural resources production tax expense and excise and fuel taxes incurred at our trading subsidiaries
in Poland.
In 2010, our UPT for natural gas and gas condensate increased by RR 730 million and RR 275 million,
respectively, due to an increase in production volumes. The increase in our UPT for crude oil of RR 157 million
was due primarily to an increase in our average crude oil production tax rate, which is linked to the Urals
benchmark crude oil price. Our average UPT rate for crude oil increased from RR 2,255 per ton in 2009 to
RR 3,099 per ton in 2010. The natural gas production tax rate in 2010 and 2009 remained unchanged at
RR 147 per mcm.
In 2010, our property tax expense increased by RR 327 million, or 28.3%, to RR 1,482 million from
RR 1,155 million in 2009, primarily due to additions of property, plant and equipment (PPE) at our production
subsidiaries.
In 2010, we expensed RR 454 million of excise and fuel taxes in respect of LPG export sales through our
subsidiaries Novatek Polska and Intergaz-System. The excise and fuel taxes are payable when LPG enters the
territory of Poland.
General and administrative expenses
In 2010, our general and administrative expenses increased by RR 1,607 million, or 31.3%, to RR 6,733 million
compared to RR 5,126 million in 2009. The main components of these expenses were employee compensation
and charitable contributions, which, on aggregate, comprised 69.0% and 65.8% of total general and
administrative expenses in 2010 and 2009, respectively.
millions of Russian roubles
Employee compensation
Charitable contributions
Legal, audit, and consulting services
Rent expense
Business trip expenses
Fire safety and security expense
Depreciation – administrative buildings
Concession management services
Insurance expense
Other
Total general and administrative expenses
Year ended 31 December:
2009
2010
Change
%
3,874
774
504
270
265
149
141
125
73
558
6,733
2,840
533
301
245
207
143
150
225
90
392
5,126
36.4%
45.2%
67.4%
10.2%
28.0%
4.2%
(6.0%)
(44.4%)
(18.9%)
42.3%
31.3 %
Our employee compensation increased by RR 1,034 million, or 36.4%, to RR 3,874 million in 2010 as compared
to RR 2,840 million in 2009 primarily due to an increase in bonus accruals by RR 480 million related to the
performance achieved. In addition, we performed an indexation of basic salaries by 10% effective 1 July 2010
resulting in an additional RR 225 million in payroll expenses. Moreover, in 2010, we recognized RR 400 million
in employee compensation due to the initiation of NOVATEK’s share-based compensation program for a limited
number of the Group’s senior and key management, as well as high-potential managers, but excluding the
members of the Management Committee.
26
In 2010, our charitable contributions increased by RR 241 million, or 45.2%, to RR 774 million compared to
RR 533 million in 2009, and were primarily related to our donations to sport clubs and activities as well as
continued support for charities and social programs in the regions where we operate. Charitable contributions
will continue to fluctuate period-on-period depending on the funding needs and the implementation schedules of
specific programs we support.
Legal, audit, and consulting services expenses increased by RR 203 million, or 67.4%, to RR 504 million
compared to RR 301 million in 2009 due to an increase in consulting and legal services related to the Group’s
recent acquisitions as well as legal services connected with the development of the Yamal LNG project.
In 2010, our rent expense increased by RR 25 million, or 10.2%, to RR 270 million from RR 245 million in 2009
due to the rent of additional office space in Moscow.
Concession management services represent administrative expenses incurred by Tharwa Petroleum Company
S.A.E (the operator of the El Arish concession area located in Egypt). In 2010, our expenses related to
concession management services decreased by RR 100 million, or 44.4%, compared to 2009. The decrease in
costs associated with concession management services in 2010 is consistent with our approved business plan for
this project.
In 2010, other general and administrative expenses increased by RR 166 million, or 42.3%, compared to 2009, of
which RR 55 million related to the remuneration of the Board of Directors and payments to members of the
Company’s revision committee. In addition, our administrative staff training expenses increased by
RR 22 million. The remaining increase of RR 89 million was allocated amongst different expense categories
within other general and administrative expenses which, taken individually, changed immaterially.
Depreciation, depletion and amortization
In 2010, our depreciation, depletion and amortization (“DDA”) expense increased by RR 1,028 million, or
18.4%, compared to 2009 as a result of an increase in our depletable cost base, as well as a 15.5% increase in our
hydrocarbon production in barrels of oil equivalent (boe). The Company accrues depreciation and depletion
using the “units of production” method for producing assets and straight-line method for other facilities.
In 2010, our DDA per boe was RR 20.5 compared to RR 19.4 in 2009. The increase in our DDA charge
calculated on a boe basis was primarily due to an increase in our depletable cost base as a result of completing
the capital expansion program related to the second and third stages of the second phase development at the
Yurkharovskoye field in October 2009 and October 2010, respectively, as well as costs capitalized during 2010.
Our reserve base used as the denominator in the calculation of the DDA charge under the “units of production”
method is only appraised on an annual basis and does not fluctuate during the year, whereas our depletable cost
base does change each quarter due to the ongoing capitalization of our costs throughout the year.
27
Materials, services and other
In 2010, our materials, services and other expenses decreased by RR 187 million, or 3.0%, to RR 6,072 million
compared to RR 6,259 million in 2009. The main components of this expense category were employee
compensation and materials and supplies, which comprised 42.4% and 22.8%, respectively, of total materials,
services and other expenses in 2010.
millions of Russian roubles
Employee compensation
Materials and supplies
Repair and maintenance services
Tolling and processing fees
Electricity and fuel
Fire safety and security expense
Other
Subtotal materials, services and other
Operator services expense
Total materials, services and other
Year ended 31 December:
2009
2010
Change
%
2,572
1,386
640
566
388
179
340
6,071
1
6,072
2,457
1,455
396
556
331
186
254
5,635
624
6,259
4.7%
(4.7%)
61.6%
1.8%
17.2%
(3.8%)
33.9%
7.7%
(99.8%)
(3.0%)
In 2010, our materials, services and other expenses, excluding operator services expense, increased by
RR 436 million, or 7.7%, to RR 6,071 million compared to RR 5,635 million in 2009.
Our employee compensation increased by RR 115 million, or 4.7%, to RR 2,572 million compared to
RR 2,457 million in 2009 primarily due to an indexation of basic salaries by 10% effective 1 July 2010.
Materials and supplies expense decreased by RR 69 million, or 4.7%, mainly due to a decrease in purchases of
raw materials required for the production of polymers and insulation tape products as a result of the disposal of
OOO “NOVATEK-Polymer”, which accounted for RR 56 million, or 81.2%, of the total decrease in materials
and supplies expense.
Repair and maintenance services increased by RR 244 million, or 61.6%, to RR 640 million in 2010 compared to
RR 396 million in 2009. The increase was primarily related to the current repair works at our production assets
and was consistent with our on-going maintenance schedules.
Tolling and processing fees increased by RR 10 million, or 1.8%, to RR 566 million in 2010 from
RR 556 million in 2009. In 2010, our costs related to the preparation of crude oil produced at our East-
Tarkosalinskoye field for transportation increased by RR 84 million due to the initiation of such services starting
from the fourth quarter 2009. In addition, we launched our own unstable gas condensate de-ethanization facility
at the Yurkharovskoye field in August 2010, which resulted in a savings of RR 70 million on external processing
fees. Tolling and processing fees at the Surgutsky refinery decreased by RR 4 million.
Electricity and fuel expenses increased by RR 57 million, or 17.2%, from RR 331 million in 2009 to
RR 388 million in 2010 primarily due to an increase in energy consumption at the Yurkharovskoye field
resulting from the commencement in operation of new production assets.
Operator services expenses mainly refer to the geological and geophysical research provided to our associated
companies. In 2010, operator services expenses decreased by RR 623 million, or 99.8%, due to the acquisition in
February 2010 of a controlling interest in our associates OOO “Oiltechproduct-Invest”, OOO “Petra Invest-M”
and OOO “Tailiksneftegas” and the subsequent consolidation of these companies activities.
Exploration expenses
In 2010, our exploration expenses increased by RR 1,029 million, or 181.8%, to RR 1,595 million from
RR 566 million in 2009. In 2010, we wrote off the capitalized cost of two exploratory wells in accordance with
our accounting policy in the total amount of RR 821 million at the El Arish (Egypt) and Anomalny licence areas.
28
Purchases of natural gas and liquid hydrocarbons
Purchases of natural gas and liquid hydrocarbons decreased by RR 989 million, or 86.5%, to RR 154 million in
2010, from RR 1,143 million in 2009, primarily due to decreases in purchases of natural gas from third parties
by RR 1,021 million and crude oil by RR 61 million. The decrease was partially offset by an increase in oil
products and LPG purchases by RR 93 million.
Change in natural gas, liquid hydrocarbons, and polymer products and work-in-progress
In 2010, we recorded a reversal of RR 470 million to change in inventory expense as compared to a charge of
RR 255 million in 2009:
millions of Russian roubles
Natural gas
Stable gas condensate
Polymer and insulation tape
Other
Increase (decrease) in operating expenses due to
change in inventory balances and work-in-progress
Year ended 31 December:
2009
2010
2
(379)
(56)
(37)
(127)
281
82
19
(470)
255
In 2010, we recorded a reversal of RR 379 million to our operating expenses due to an increase in our inventory
balance of stable gas condensate in transit and storage by 153 thousand tons.
The following table highlights movements in our inventory balances:
Inventory balances in transit
or in storage
Natural gas (millions of cubic meters)
including Gazprom’s UGSF
Liquid hydrocarbons (thousand tons)
including stable gas condensate
At
31 December
2010
At
1 January
Increase /
(decrease)
At
31 December
2009
At
1 January
Increase /
(decrease)
790
761
356
264
744
584
167
111
46
177
189
153
744
584
167
111
372
300
270
220
372
284
(103)
(109)
Our volumes of natural gas injected into Gazprom’s underground gas storage facilities (UGSF) fluctuate period-
to-period depending on market conditions, storage capacity constraints and our development plans to sustain
and/or grow production during periods of seasonality.
Net gain on disposal of interest in subsidiaries
In 2010, we realized a net gain of RR 1,583 million on the disposal of a 49 percent participation interest in our
subsidiary ZAO “Terneftegas” to TOTAL Termokarstovoye B.V., which is comprised by a net income on
disposal of RR 776 million and a gain of RR 807 million due to revaluation to fair value of the remaining
51 percent participation interest. In 2010, we recognized a net loss on the disposal of our non-core, wholly-
owned subsidiary, OOO “NOVATEK-Polymer” in amount of RR 254 million largely due to the discounting of
future payments.
In 2009, we recognized other income of RR 52 million due to the disposal of our subsidiary OOO “Purneft” in
April 2009.
Other operating income (loss)
In 2010, we recognized other operating income of RR 396 million, of which RR 317 million resulted from the
contribution from the depositary under our GDR program.
In 2009, we realized other operating loss of RR 343 million, of which RR 190 million was related to commodity
derivative instruments that did not qualify as hedge transactions under IAS 39, Financial Instruments:
Recognition and Measurement (“IAS 39”) and RR 303 million was related to disposal of assets under
construction, primarily at our subsidiary JSC “Energy Northern Company”. The remaining other operating
29
income of RR 150 million was primarily related to penalties from our customers due to non-compliance of their
contractual obligations and other profit and loss items.
Profit from operations
As a result of the factors discussed above, our profit from operations increased by RR 16,698 million, or 49.8%,
to RR 50,231 million in 2010, compared to RR 33,533 million in 2009. In 2010, our profit from operations as a
percentage of total revenues increased to 42.9% compared to 37.3% in 2009 due primarily to higher prices for
natural gas and liquids and an increase in natural gas sales volumes.
Finance income (expense)
In 2010, we recorded net finance income of RR 1,197 million which was due primarily to foreign exchange
gains compared to net finance loss of RR 831 million in 2009 due to significant foreign exchange loss.
In 2010, our total accrued interest expense increased to RR 2,603 million compared to RR 2,099 million in 2009
as a result of an increase in our average borrowings. During 2010 and 2009, we capitalized RR 2,166 and
RR 1,280 million, respectively, of interest expense to cost of additions in our property, plant and equipment
account in accordance with the Group’s accounting policy.
Interest income increased by RR 71 million, or 13.5%, to RR 598 million in 2010 from RR 527 million 2009
primarily due to an increase in interest income on loans issued to our associated companies that was partially
offset by a decrease in interest income on bank deposits.
In 2010, we recorded a net foreign exchange gain of RR 1,036 million compared to a net foreign exchange loss
of RR 539 million in 2009 due to the revaluation of our foreign currency denominated borrowings. The Russian
rouble had depreciated by 0.8% and 2.9% during 2010 and 2009, respectively. We will continue to record
foreign exchange gains and losses each period based on the movements between exchange rates and the
composition of our debt position.
Share of income (loss) of associated companies
In 2010, our proportionate share in the loss of associated companies increased by RR 144 million, or 71.3%, to
RR 346 million compared to RR 202 million recorded in 2009 due to expensing in our associated companies of
finance costs on external debts as well as geological and geophysical research expenditures under the successful
efforts accounting policy.
Income tax expense
Our overall consolidated effective income tax rates (total income tax expense calculated as a percentage of our
reported IFRS profit before income tax) were 21.0% and 20.7% for 2010 and 2009, respectively. Our effective
income tax rate, after excluding the effect of foreign subsidiaries, was 21.3% in 2010 and 2009. The Russian
statutory income tax rate for both periods was 20%. The difference between our effective and statutory income
tax rates is primarily due to certain non-deductible expenses.
Profit attributable to shareholders and earnings per share
As a result of the factors discussed above, profit for the period increased by RR 14,556 million, or 56.6%, to
RR 40,278 million in 2010 from RR 25,722 million in 2009. The profit attributable to NOVATEK shareholders
increased by RR 14,490 million, or 55.6%, to RR 40,533 million in 2010 from RR 26,043 million in 2009.
Our weighted average basic and diluted earnings per share, calculated from the profit attributable to NOVATEK
shareholders, increased by approximately RR 4.78 per share, or 55.6%, to RR 13.37 per share in 2010 from
RR 8.59 per share in 2009.
30
LIQUIDITY AND CAPITAL RESOURCES
The following table shows our net cash flows from operating, investing and financing activities for 2010 and
2009:
millions of Russian roubles
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Year ended 31 December:
2009
2010
Change
%
44,863
(68,842)
23,782
34,847
(36,185)
761
28.7%
90.3%
n/m
Liquidity ratios
31 December 2010
31 December 2009
Change, %
Current ratio
Total debt to equity
Long-term debt to long-term debt and equity
Net debt to total capitalization (1)
0.51
0.49
0.24
0.25
1.14
0.33
0.17
0.15
(55.3%)
48.5%
41.2%
66.7%
(1) Net debt represents total debt less cash and cash equivalents. Total capitalization represents total debt, total equity and
deferred income tax liability.
Net cash provided by operating activities
In 2010, our net cash provided by operating activities increased by RR 10,016 million, or 28.7%, to
RR 44,863 million compared to RR 34,847 million in 2009. The increase in our net cash provided by operating
activities was due primarily to the increase in natural gas and liquids prices and natural gas sales volumes, which
was partially offset by an increase in income tax paid.
Net cash used in investing activities
In 2010, our net cash used in investing activities increased by RR 32,657 million, or 90.3%, to
RR 68,842 million as compared to RR 36,185 million in 2009 primarily due to significant increase in long-term
loans provided to our associated companies Yamal Development and Sibneftegas.
Net cash provided by financing activities
In 2010, our net cash provided by financing activities amounted to RR 23,782 million, of which the most
significant portion was related to a bridge loan facility which was used to finance the acquisition, by our joint
venture Yamal Development, of a 51 percent participation interest in SeverEnergia. In 2009, the net cash
provided by financing activities was related to our proceeds we received from long-term and short-term
borrowings, as well as contributions from minority shareholders, which, in aggregate, exceeded the repayments
of borrowings throughout the year as well as our payments of dividends.
Working capital
Our net working capital position (current assets less current liabilities) at 31 December 2010 was negative
RR 27,876 million compared to positive RR 3,274 million at 31 December 2009. The change in our net working
capital position was mainly due to a significant increase in our short-term debt, accounts payable resulted from
the acquisitions of oil and gas companies in the fourth quarter 2010.
joint venture, Yamal Development, of a 51 percent participation
At 31 December 2010, the Group had an outstanding bridge loan facility for the financing of the acquisition by
its
in SeverEnergia of
RR 18,201 million (USD 597 million). In February 2011, the bridge facility was fully repaid ahead of its
maturity schedule. In addition, at 31 December 2010, the Group had a balance of accounts payable to
OAO “Gazprombank” of RR 21,176 million due to the acquisition of a 51 percent stake in Sibneftegas, of which
RR 16,000 million was repaid in February 2011 and the remaining RR 5,176 million is planned to be repaid by
31 March 2011. We improved our net working capital position by the issuance of long-term Eurobonds in
February 2011 (see “Recent developments” above).
interest
The Group’s management believes that it presently has and will continue to have the ability to generate
sufficient cash flows (from operating and financing activities) to repay all current liabilities and finance the
Company’s capital construction programs.
31
Capital expenditures
Total capital expenditures on property, plant and equipment for the years ended 31 December 2010 and 2009
were as follows:
millions of Russian roubles
Exploration, production and marketing
Polymer production and marketing
Year ended 31 December:
2009
2010
Change
%
25,777
329
17,823
49
44.6%
n/m
Total
26,106
17,872
46.1%
Exploration, production and marketing expenditures represent our investments in exploring for and developing
our oil and gas properties. The majority of our capital expenditures related to ongoing development and
exploration activities at our three core fields and at the Purovsky Plant. The following table shows our
expenditure on our main fields for the years ended 31 December 2010 and 2009:
millions of Russian roubles
Yurkharovskoye field
East-Tarkosalinskoye field
Khancheyskoye field
South-Tambeyskoye field
Purovsky Plant
Other
Year ended 31 December:
2009
2010
15,375
1,058
87
1,678
1,292
6,287
11,401
2,024
432
-
1,168
2,798
Exploration, production and marketing
25,777
17,823
Debt obligations
We utilize a variety of financial instruments to ensure the flexibility of our financing strategy. This includes
maintaining a debt portfolio with a balance of short-term and long-term financing, a mix of fixed interest rate
and floating interest rate instruments and debt portfolio denominated in either Russian roubles of US dollars.
Recent developments
In February 2011, we fully repaid our bridge loan facility ahead of its maturity schedule.
In February 2011, the Group issued two tranches of Eurobonds in an aggregate amount of USD 1,250 million, a
portion of which was used to repay the bridge loan facility.
In January 2011, we repaid USD 114 million of our USD 800 million syndicated term loan facility as per the
maturity schedule of the facility.
Overview
Our total debt increased from RR 37,703 million at 31 December 2009 to RR 72,226 million at 31 December
2010, or by RR 34,523 million, to supplement our internally generated cash flows for the financing of capital
expenditures related to the development of our three core fields and investment in related assets such as the
Purovsky Plant, as well as acquisition of new oil and gas assets.
32
Our debt position (net of transaction costs) at 31 December 2010 and 2009 was as follows:
Facility
Amount
Maturity
Interest rate
Bridge loan facility (2)
Sberbank
Gazprombank
Bonds
BNP PARIBAS
Nordea Bank
UniCredit Bank
Sberbank (3)
Total debt
USD 600 million
RR 15 billion
RR 10 billion
RR 10 billion
USD 800 million
USD 200 million
USD 200 million
RR 5 billion
November 2011
December 2013
November 2012
June 2013
April 2011
November 2013
October 2012
February 2011
LIBOR+1%
7.5%
8.5% (1)
7.5%
LIBOR+1.5%
LIBOR+1.9% (1)
LIBOR+4.65% (1)
8.5% (1)
At 31 December:
2009
2010
18,200
14,948
10,000
9,949
6,952
6,095
6,082
-
-
-
6,106
-
20,646
-
6,027
4,924
72,226
37,703
(1) – interest rates were changed during the periods
(2) – Bridge loan repaid in February 2011 ahead of maturity schedule
(3) – Sberbank loan repaid in July 2010 ahead of maturity schedule
Maturities
Scheduled maturities of our long-term debt outstanding (net of transaction costs) as at the dates indicated were as
follows:
millions of Russian roubles
1 January 2011 to 31 December 2011
1 January 2012 to 31 December 2012
1 January 2013 to 31 December 2013
Total long-term debt
Available credit facilities
At 31 December:
2010
2009
-
16,082
30,992
11,726
12,150
-
47,074
23,876
At 31 December 2010, the Group had available funds under short-term credit lines in the form of bank overdrafts
with various international banks in the aggregate amount of RR 5,943 million (USD 195 million) on either fixed
or variable interest rates subject to the specific type of credit facility.
The Group also has funds available under credit facilities with ZAO “BNP PARIBAS Bank” in the amount of
USD 100 million until May 2012, Credit Agricole Corporate and Investment Bank in the amount of
USD 100 million until June 2011 and ZAO “UniCredit Bank” in the amount of USD 100 million until August
2012, with the interest rates under the credit facilities to be negotiated at the time of each withdrawal.
In addition, at 31 December 2010, we had funds available under a credit facility with Sumitomo Mitsui Banking
Corporation Europe Limited in the amount of USD 200 million until December 2013 with an annual interest rate
of LIBOR plus 1.45 percent. The availability period ends 90 days after 30 December 2010.
Management believes it has sufficient internally generated cash flows as well as access to available external
borrowings (both short- and long-term) to fund its capital expenditure program, service its existing debt and meet
its current obligations as they become due.
33
QUALITATIVE AND QUANTITATIVE DISCLOSURES AND MARKET RISKS
We are exposed to market risk from changes in commodity prices, foreign currency exchange rates and interest
rates. We are exposed to commodity price risk as our prices for crude oil and stable gas condensate destined for
export sales are linked to international crude oil prices. We are exposed to foreign exchange risk to the extent
that a portion of our sales revenues, costs, receivables, loans and debt are denominated in currencies other than
Russian roubles. We are subject to market risk from changes in interest rates that may affect the cost of our
financing. From time to time we may use derivative instruments, such as commodity forward contracts,
commodity price swaps, commodity options, foreign exchange forward contracts, foreign currency options,
interest rate swaps and forward rate agreements, to manage these market risks, and we may hold or issue
derivative or other financial instruments for trading purposes.
Foreign currency risk
Our principal exchange rate risk involves changes in the value of the Russian rouble relative to the US dollar. As
of 31 December 2010, RR 12,177 million, or 25.9%, of our long-term debt was denominated in US dollars (out
of RR 72,226 million of our total borrowings at that date). Changes in the value of the Russian rouble relative to
the US dollar will impact our foreign currency-denominated costs and expenses and our debt service obligations
for foreign currency-denominated borrowings in Russian rouble terms as well as receivables at our foreign
subsidiaries. We believe that the risks associated with our foreign currency exposure are mitigated by the fact
that a portion of our total revenues, approximately 31.0% in 2010, is denominated in US dollars. As of
31 December 2010, the Russian rouble had depreciated by approximately 0.8% against the US dollar since
31 December 2009.
A hypothetical and instantaneous 10% strengthening in the Russian rouble in relation to the US dollar as of
31 December 2010 would have resulted in an estimated foreign exchange gain of approximately
RR 3,733 million on foreign currency denominated borrowings held at that date.
Commodity risk
Substantially all of our crude oil, stable gas condensate and LPG export sales are sold under spot contracts. Our
export prices are linked to international crude oil prices. External factors such as geopolitical developments,
natural disasters and the actions of the Organization of Petroleum Exporting Countries affect crude oil prices and
thus our export prices.
The weather is another factor affecting demand for and, therefore, the price of natural gas. Changes in weather
conditions from year to year can influence demand for natural gas and to some extent gas condensate and oil
products.
From time to time we may employ derivative instruments to mitigate the price risk of our sales activities. In our
consolidated financial statements all derivative instruments are recorded at their fair values. Unrealized gains or
losses on derivative instruments are recognized within other operating income (loss), unless the underlying
arrangement qualifies as a hedge.
Pipeline access
We transport substantially all of our natural gas through the Gazprom owned UGSS. Gazprom is responsible for
gathering, transporting, dispatching and delivering substantially all natural gas supplies in Russia. Under existing
legislation, Gazprom must provide access to the UGSS to all independent suppliers on a non-discriminatory
basis provided there is capacity not being used by Gazprom. In practice, however, Gazprom exercises
considerable discretion over access to the UGSS because it is the sole owner of information relating to capacity.
There can be no assurance that Gazprom will continue to provide us with access to the UGSS, however, we have
not been denied access in prior periods.
Ability to reinvest
Our business requires significant ongoing capital expenditures in order to grow our production. An extended
period of reduced demand for our hydrocarbons available for sale and the corresponding revenues generated
from these sales would limit our ability to maintain an adequate level of capital expenditures, which in turn could
limit our ability to increase or maintain current levels of production and deliveries of natural gas, gas condensate,
crude oil and other associated products; thereby, adversely affecting our financial and operating results.
34
Off balance sheet activities
As of 31 December 2010, we did not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or special purpose entities, which are
typically established for the purpose of facilitating off-balance sheet arrangements.
35
IFRS Consolidated
Financial Statements
and Independent
Auditor’s Report
for years ended
31 December 2010
and 2009
CONTENTS
Independent Auditor’s Report
Consolidated Statement of Financial Position
Consolidated Statement of Income
Consolidated Statement of Cash Flows
Consolidated Statement of Comprehensive Income
Consolidated Statement of Changes in Equity
Notes to the Consolidated Financial Statements
Unaudited Supplemental Oil and Gas Disclosures
Contact Information
Page
3
4
5
6
7
8-9
10-70
71-75
76
OAO NOVATEK
Consolidated Statement of Income
(in millions of Russian roubles, except for share and per share amounts)
Revenues
Oil and gas sales
Sales of polymer and insulation tape
Other revenues
Total revenues
Operating expenses
Transportation expenses
Taxes other than income tax
General and administrative expenses
Depreciation, depletion and amortization
Materials, services and other
Exploration expenses
Net impairment expense
Purchases of natural gas and liquid hydrocarbons
Change in natural gas, liquid hydrocarbons, and
polymer products and work-in-progress
Total operating expenses
Net gain on disposal of interest in subsidiaries
Other operating income (loss)
Profit from operations
Finance income (expense)
Interest expense
Interest income
Foreign exchange gain (loss)
Total finance income (expense)
Share of profit (loss) of associates and joint ventures, net of
income tax
Profit before income tax
Income tax expense
Current income tax expense
Net deferred income tax (expense) benefit
Total income tax expense
Profit (loss)
Profit (loss) attributable to:
Non-controlling interest
Shareholders of OAO NOVATEK
Basic and diluted earnings per share (in Russian roubles)
Weighted average number of shares outstanding (in thousands)
Notes
20
Year ended 31 December:
2009
2010
115,162
1,699
163
86,903
1,873
1,178
117,024
89,954
21
22
23
6
24
25
25
26
(37,200)
(10,077)
(6,733)
(6,616)
(6,072)
(1,595)
(541)
(154)
470
(68,518)
1,329
396
(29,026)
(8,042)
(5,126)
(5,588)
(6,259)
(566)
(125)
(1,143)
(255)
(56,130)
52
(343)
50,231
33,533
(437)
598
1,036
1,197
(819)
527
(539)
(831)
(346)
(202)
51,082
32,500
(9,405)
(1,399)
(10,804)
(5,896)
(882)
(6,778)
40,278
25,722
(255)
40,533
13.37
3,032,218
(321)
26,043
8.59
3,032,114
The accompanying notes are an integral part of these consolidated financial statements.
5
OAO NOVATEK
Consolidated Statement of Cash Flows
(in millions of Russian roubles)
Profit before income tax
51,082
32,500
Notes
Year ended 31 December:
2009
2010
Adjustments to profit before income tax:
Depreciation, depletion and amortization
Net impairment expense
Net foreign exchange loss (gain)
Net loss (gain) on disposal of assets
Interest expense
Interest income
Share of loss (profit) in associates, net of income tax
Net change in other non-current assets and long-term receivables
Share-based compensation
Other adjustments
Working capital changes
Decrease (increase) in trade and other receivables, prepayments
and other current assets
Decrease (increase) in inventories
Increase (decrease) in trade payables and accrued liabilities,
excluding interest and dividends
Increase (decrease) in other taxes payable
Total effect of working capital changes
Income taxes paid
Net cash provided by operating activities
Cash flows from investing activities
Purchases of property, plant and equipment
Purchases of inventories intended for construction
Acquisition of subsidiaries net of cash acquired
Investments in associates and joint ventures
Proceeds from disposals of subsidiaries net of cash disposed
Interest paid and capitalized
Loans provided
Repayments of loans provided
Interest received
Net cash (used for) provided by investing activities
Cash flows from financing activities
Proceeds from long-term debt
Proceeds from short-term debt
Repayments of long-term debt
Repayments of short-term debt
Interest paid
Dividends paid
Acquisition of non-controlling interest
Additional capital contribution into subsidiaries
Proceeds from sale of treasury shares
Net cash (used for) provided by financing activities
18
18
5
5
18
6,757
541
(1,036)
(1,253)
437
(598)
346
1,063
68
241
(2,675)
(479)
(1,821)
765
(4,210)
(8,575)
44,863
(21,436)
(1,200)
(1,718)
(4,660)
1,173
(2,002)
(39,402)
219
184
(68,842)
35,018
20,331
(18,718)
(2,729)
(301)
(9,868)
(629)
337
341
23,782
5,738
125
539
233
819
(527)
202
399
176
(238)
(1,298)
334
(615)
724
(855)
(4,264)
34,847
(16,218)
(20)
(19,034)
-
419
(1,280)
(427)
80
295
(36,185)
16,926
5,385
(6,758)
(8,348)
(583)
(7,628)
-
1,767
-
761
6
OAO NOVATEK
Consolidated Statement of Cash Flows
(in millions of Russian roubles)
Notes
Year ended 31 December:
2009
2010
Net effect of exchange rate changes on cash, cash equivalents
and bank overdrafts
Net increase (decrease) in cash, cash equivalents and bank overdrafts
Cash and cash equivalents at beginning of the year
Cash and cash equivalents reclassified as assets classified as held for sale
Net decrease (increase) in cash and cash equivalents reclassified to assets
classified as held for sale
(45)
(242)
141
(436)
10,532
10,991
-
(52)
(52)
(23)
Cash, cash equivalents and bank overdrafts at end of the year
10,238
10,532
The accompanying notes are an integral part of these consolidated financial statements.
7
OAO NOVATEK
Consolidated Statement of Comprehensive Income
(in millions of Russian roubles)
Other comprehensive income (loss) after income tax:
Currency translation differences
Other comprehensive income (loss)
Profit (loss)
Total comprehensive income
Total comprehensive income (loss) attributable to:
Non-controlling interest
Shareholders of OAO NOVATEK
Notes
Year ended 31 December:
2009
2010
(8)
(8)
40,278
40,270
(21)
(21)
25,722
25,701
(255)
40,525
(321)
26,022
The accompanying notes are an integral part of these consolidated financial statements.
8
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1
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
1
ORGANISATION AND PRINCIPAL ACTIVITIES
OAO NOVATEK (hereinafter referred to as “NOVATEK”) and its subsidiaries (hereinafter jointly referred to as
the “Group”) is an independent oil and gas company engaged in the acquisition, exploration, development,
production and processing of hydrocarbons with its core oil and gas operations located and incorporated in the
Yamal-Nenets Autonomous Region (“YNAO”) of the Russian Federation.
The Group sells its natural gas on the Russian domestic market at unregulated market prices; however, the majority
of natural gas sold on the domestic market is sold at prices regulated by the Federal Tariff Service, a governmental
agency. The Group’s stable gas condensate and crude oil sales volumes are sold on both the Russian domestic and
international markets, and are subject to fluctuations in benchmark crude oil prices. Additionally, the Group’s
natural gas sales fluctuate on a seasonal basis due mostly to Russian weather conditions, with sales peaking in the
winter months of December and January and troughing in the summer months of July and August. The Group’s
liquids sales volumes comprising stable gas condensate, crude oil and oil products remain relatively stable from
period to period.
In December 2010, the Group acquired 100 percent participation interest in OOO Yamalgazresurs-Chelyabinsk, a
Russian regional natural gas trader, to support and expand natural gas sales opportunities in the Chelyabinsk
Region in Russian Federation (see Note 5).
(cid:3)
In December 2010, the Group acquired 51 percent ownership in OAO Sibneftegas, an oil and gas production
company, which owns four licenses for the fields located in YNAO, with total production in 2010 of 9.8 billion
cubic meters (see Note 5).
In November 2010, OOO Yamal Development, the Group’s joint venture, acquired a 51 percent participation
interest in OOO SeverEnergia. SeverEnergia through its three wholly owned subsidiaries holds four exploration
and production licenses for the fields located in the YNAO (see Note 5).
In September 2010, the Group disposed of its 100 percent participation interest in OOO NOVATEK-Polymer, its
non-core subsidiary to OAO SIBUR Holding (see Note 5).
In August 2010, the Group acquired 100 percent ownership in Intergaz-System Sp.z o.o., domiciled in Poland, to
support and extend the wholesale and retail trading of liquefied petroleum gas in Polish market (see Note 5).
In July 2010, NOVATEK and OAO Gazprom Neft, a subsidiary of OAO Gazprom, established a joint venture
OOO Yamal Development for the purpose of developing potential hydrocarbon assets in the YNAO (see Note 5).
In May 2010, the Group established OOO NOVATEK Perm, a wholly-owned subsidiary, to support the Group’s
current natural gas deliveries to the Perm region, one of the largest industrial centers in the Russian Federation, as
well as to expand potential sales opportunities in the territory.
In November 2009, the Group established Novatek Polska, a wholly-owned subsidiary, domiciled in Poland to
manage the administration, marketing and trading of liquefied petroleum gas to European markets. Beginning in
January 2010, the Group commenced export sales through this subsidiary.
2
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) under the historical cost convention. In the absence of specific IFRS guidance for oil
and gas producing companies, the Group has developed accounting policies in accordance with other generally
accepted accounting principles for oil and gas producing companies, mainly US GAAP, insofar as they do not
conflict with IFRS principles. The preparation of financial statements in conformity with IFRS requires the use of
certain critical accounting estimates. It also requires management to exercise judgment in the process of applying
the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where
assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.
11
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
2
BASIS OF PRESENTATION (CONTINUED)
Most of the Group entities prepare their statutory financial statements in accordance with the Regulations on
Accounting and Reporting of the Russian Federation (“RAR”). The Group’s consolidated financial statements are
based on the statutory records with adjustments and reclassifications recorded in the consolidated financial
statements for the fair presentation in accordance with IFRS. The principal adjustments primarily relate to
(1) depreciation, depletion and amortization, and valuation of property, plant and equipment, (2) consolidation of
subsidiaries, (3) business combinations, (4) accounting for income taxes, and (5) valuation of unrecoverable assets,
expense recognition and other provisions.
Functional and presentation currency. The consolidated financial statements are presented in Russian roubles, the
Group’s reporting (presentation) currency and the functional currency for the majority of entities. The assets and
liabilities (both monetary and non-monetary) of the Group entities whose functional currency is not the Russian
rouble are translated into Russian roubles at the closing exchange rate at each balance sheet date. All items
included in the shareholders’ equity, other than profit or loss, are translated at historical exchange rates. The
financial results of these entities are translated into Russian roubles using average exchange rates for each reporting
period. Exchange adjustments arising on the opening net assets and the profits for the reporting period are taken to
a separate component of equity until the disposal of the foreign operation and reported as currency translation
differences in the consolidated statement of changes in equity and the consolidated statement of comprehensive
income.
Exchange rates used in preparation of this consolidated financial statement for the entities whose functional
currency is not the Russian rouble were as follows:
For one currency unit to one Russian rouble
US dollar (“USD”)
Polish Zloty (“PLN”)
At 31 December:
2010
2009
Average annual rate
2009
2010
30.48
10.17
30.24
10.32
30.37
10.09
31.72
10.64
Exchange rates, restrictions and controls. Any re-measurement of Russian rouble amounts to US dollars or any
other currency should not be construed as a representation that such Russian rouble amounts have been, could be,
or will in the future be converted into other currencies at these exchange rates.
3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Adoption of IFRS 3. Effective 1 January 2010, the Group adopted IFRS 3, Business Combinations (revised
January 2008; effective for business combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after 1 July 2009). The revised IFRS 3 will allow entities to choose to
measure non-controlling interests using the existing IFRS 3 method (proportionate share of the acquirer’s
identifiable net assets) or at fair value. The revised IFRS 3 is more detailed in providing guidance on the
application of the purchase method to business combinations. The requirement to measure at fair value every asset
and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been
removed. Instead, goodwill will be measured as the difference at acquisition date between the fair value of any
investment in the business held before the acquisition, the consideration transferred and the net assets acquired.
Acquisition-related costs will be accounted for separately from the business combination and therefore recognized
as expenses rather than included in goodwill. An acquirer will have to recognize at the acquisition date a liability
for any contingent purchase consideration. Changes in the value of that liability after the acquisition date will be
recognized in accordance with other applicable IFRSs, as appropriate, rather than by adjusting goodwill. The
revised IFRS 3 brings into its scope business combinations involving only mutual entities and business
combinations achieved by contract alone;
12
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Adoption of IAS 27. Effective 1 January 2010, the Group adopted IAS 27, Consolidated and Separate Financial
Statements (revised January 2008; effective for annual periods beginning on or after 1 July 2009). The revised IAS
27 will require an entity to attribute total comprehensive income to the owners of the parent and to the non-
controlling interests (previously “minority interests”) even if this results in the non-controlling interests having a
deficit balance (the current standard requires the excess losses to be allocated to the owners of the parent in most
cases). The revised standard specifies that changes in a parent’s ownership interest in a subsidiary that do not result
in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure
any gain or loss arising on the loss of control of a subsidiary. At the date when control is lost, any investment
retained in the former subsidiary will have to be measured at its fair value. The Group has changed its accounting
policy for the accounting for loss of control or significant influence from 1 January 2010. Previously, when the
Group ceased to have control or significant influence over an entity, the carrying amount of the investment at the
date control or significant influence became its cost for the purposes of subsequently accounting for the retained
interests as associates, jointly controlled entity or financial assets. The Group has applied the new accounting
policies prospectively to transactions occurring on or after 1 January 2010.
Adoption of IAS 1. Effective 1 January 2009, the Group adopted IAS 1, Presentation of Financial Statements
(revised September 2007) (“IAS 1”). Following the adoption, the Group introduced the statement of financial
position instead of the balance sheet, and replaced the income statement by two statements: a separate income
statement and a statement of comprehensive income. Also, non-controlling shares in the Group’s subsidiaries’ net
assets and financial results are presented as non-controlling interests (previously “minority interests”). The
adoption of IAS 1 affects the formal presentation of the Group’s financial statements but has no impact on the
recognition or measurement of specific transactions and balances.
Adoption of IFRS 8. Effective 1 January 2009, the Group adopted IFRS 8, Operating Segments (“IFRS 8”), which
replaces IAS 14, Segment Reporting. IFRS 8 introduces new requirements and guidelines regarding the disclosures
of operating segments. For periods prior to 1 January 2010, a measure of total segment assets was required to be
disclosed for all segments regardless of whether those measures were reviewed by the chief operating decision
maker. In December 2007, however, the IASB concluded that IFRS 8 should be changed to state that a measure of
segment assets should only be disclosed when such information is provided to the chief operating decision maker.
This change was included as part of the IASB’s 2009 annual improvement project issued in April 2009 which has
been adopted by Group as of 1 January 2009.
Operating segments are defined as components of the Group where separate financial information is available and
reported regularly to the chief operating decision maker (hereinafter referred to as “CODM”, represented by the
Management Committee of NOVATEK), which decides how to allocate resources and assesses operational and
financial performance using the information provided.
The Group conducts its normal course of business through its principal business segment “exploration, production
and marketing”. Substantially all of the Group’s business activities are related to the natural gas and gas condensate
exploration, production and marketing segment, and includes all headquarter-related costs. To a significantly lesser
extent, the Group was engaged in polymer production and marketing activities, which was considered a separately
reportable operating segment until its disposal in September 2010.
The CODM assesses reporting segments performance based on income before income taxes, since income taxes are
not allocated. No business segment assets or liabilities (except for capital expenditures for the period) are provided
to the CODM for decision-making.
Principles of consolidation. Subsidiaries are those companies and other entities (including special purpose entities)
in which the Group, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has
power to govern the financial and operating policies so as to obtain benefits. The existence and effect of potential
voting rights that are presently exercisable or presently convertible are considered when assessing whether the
Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the
Group (acquisition date) and are deconsolidated from the date that control ceases.
The purchase method of accounting is used to account for the acquisition of subsidiaries. Identifiable assets
acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair
values at the acquisition date, irrespective of the extent of any non-controlling interest.
13
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Group measures non-controlling interest on a transaction by transaction basis, either at: (a) fair value, or (b) the
non-controlling interest’s proportionate share of net assets of the acquiree.
Goodwill is measured by deducting the 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 fair value of an interest in
the acquiree held immediately before the acquisition date. Any negative amount (“negative goodwill”) is
recognised in profit or loss, after management reassesses whether it identified all the assets acquired and all
liabilities and contingent liabilities assumed and reviews appropriateness of their measurement.
The consideration transferred for the acquiree is measured at the fair value of the assets given up, equity
instruments issued and liabilities incurred or assumed, including fair value of assets or liabilities from contingent
consideration arrangements but excludes acquisition related costs such as advisory, legal, valuation and similar
professional services. Transaction costs incurred for issuing equity instruments are deducted from equity;
transaction costs incurred for issuing debt are deducted from its carrying amount and all other transaction costs
associated with the acquisition are expensed.
Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated;
unrealised losses are also eliminated unless the cost cannot be recovered. The Group and all of its subsidiaries use
uniform accounting policies consistent with the Group’s policies.
Non-controlling interest is that part of the net results and of the equity of a subsidiary attributable to interests which
are not owned, directly or indirectly, by the Group. Non-controlling interest forms a separate component of the
Group’s equity.
Disposals of subsidiaries, associates or joint ventures. When the Group ceases to have control or significant
influence, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount
recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently
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 recycled to profit or loss.
If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share
of the amounts previously recognised in other comprehensive income are reclassified to profit or loss where
appropriate.
Acquisition of non-controlling interests. The difference between the purchase consideration and the carrying
amount of non-controlling interests acquired is recognized within equity to account for acquisitions of non-
controlling minority stakes.
Investments in associates and joint ventures. Associated companies and joint ventures are entities over which the
Group has significant influence, but which it does not control. Generally, significant influence exists when the
Group has between 20 and 50 percent of voting rights. Associated companies and joint ventures are accounted for
using the equity method and are initially recognized at cost. The difference between the cost of an acquisition and
the share of the fair value of the associate’s identifiable net assets represents goodwill upon acquiring the
associated company. Dividends received from associates and joint ventures reduce the carrying value of the
investment in associates. The carrying amount of associates and joint ventures includes goodwill identified on
acquisition less accumulated impairment losses, if any. The Group’s share of the associates’ post-acquisition profits
or losses is recorded in the consolidated statement of income, and its share of post-acquisition movements in
reserves is recognized in the consolidated statement of changes in equity. When the Group’s share of losses in an
associate or joint ventures equals or exceeds its interest in the associate, including any other unsecured receivables,
the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the
associate.
Unrealized gains on transactions between the Group and its associates and joint ventures are eliminated to the
extent of the Group’s interest in the associates and joint ventures; unrealized losses are also eliminated unless the
transaction provides evidence of an impairment of the asset transferred.
14
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting policies of associates and joint ventures have been changed where necessary to ensure consistency with
the policies adopted by the Group.
Non-current assets held for sale. Non-current assets classified as held for sale are measured at the lower of
carrying amount and fair value less selling costs. Non-current assets are classified as held for sale if their carrying
amounts will be recovered through a sale transaction rather than through continuing use. This condition is regarded
as met only when the sale is highly probable and the asset is available for immediate sale in its present condition.
Management must be committed to the sale, which should be expected to qualify for recognition as a completed
sale within one year from the date of classification.
Property, plant and equipment are not depreciated once classified as held for sale.
Property, plant and equipment. Property, plant and equipment are carried at historical cost of acquisition or
construction and adjusted for accumulated depreciation, depletion, amortization and impairment.
The Group follows the successful efforts method of accounting for its oil and gas properties and equipment
whereby property acquisitions, successful exploratory wells, all development costs and support equipment and
facilities are capitalized. Unsuccessful exploratory wells are charged to expense at the time the wells are
determined to be non-productive. Production costs, overheads and all exploration costs other than exploratory
drilling and license acquisition costs are charged to expense as incurred. Acquisition costs of unproved properties
are evaluated periodically and any impairment assessed is charged to expense.
The Group’s principal oil and gas reserves have been independently estimated by internationally recognized
petroleum engineers whereas other oil and gas reserves of the Group have been determined based on estimates of
mineral reserves prepared by management in accordance with internationally recognized definitions. The present
value of the estimated costs of dismantling oil and gas production facilities, including abandonment and site
restoration costs, are recognized when the obligation is incurred and are included within the carrying value of
property, plant and equipment, subject to depletion using the unit-of-production method.
Costs of minor repairs and maintenance are expensed when incurred. Cost of replacing major parts or components
that extend the life of property, plant and equipment items are capitalized and depreciated over the estimated
remaining life of the major part or component. All components that are replaced are written off.
The cost of self-constructed assets includes the cost of direct materials, direct employee related costs, a pro-rata
portion of depreciation of assets used for construction and an allocation of the Group’s overhead costs.
At each reporting date management assesses whether there is any indication of impairment in respect of property,
plant and equipment. If any such indication exists, management estimates the recoverable amount, which is
determined as the higher of an asset’s fair value less selling costs and its value in use. The carrying amount is
reduced to the recoverable amount and the impairment loss is recognized in the consolidated statement of income.
An impairment loss recognized for an asset in prior years is reversed if there has been a change in the estimates
used to determine the asset’s recoverable amount.
Gains and losses on disposals are determined by comparing proceeds with the carrying amount. Gains and losses
are recognized in the consolidated statement of income.
Exploration costs. Exploration costs (geological and geophysical expenditures, expenditures associated with the
maintenance of non-proven reserves and other expenditures relating to exploration activity), excluding exploratory
drilling expenditures and license acquisition costs, are charged to the consolidated statement of income as incurred.
License acquisition costs and exploratory drilling costs are recognized as assets until it is determined whether
proved reserves justifying their commercial development have been found. If no proved reserves are found, the
capitalized drilling costs are charged to the consolidated statement of income. License acquisition costs and
exploratory drilling costs recognized as assets are reviewed for impairment on an annual basis.
15
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation. Depreciation, depletion and amortization of oil and gas properties and equipment (except for
processing facilities) is calculated using the unit-of-production method for each field based upon proved developed
reserves for development costs, and total proved reserves for costs associated with acquisitions of proved
properties. A portion of the reserves used for depreciation, depletion and amortization calculations include reserves
expected to be produced beyond license expiry dates. Management believes that there is requisite legislation and
past results (or experience) to extend mineral licenses at the initiative of the Group and, as such, intends to extend
its licenses for properties expected to produce beyond the current license expiry dates.
Property, plant and equipment, other than oil and gas properties and equipment, are depreciated on a straight-line
basis over their estimated useful lives. Land and assets under construction are not depreciated.
The estimated useful lives of the Group’s property, plant and equipment, other than oil and gas properties and
equipment, are as follows:
Machinery and equipment
Processing facilities
Buildings
Years
5-15
20-30
25-50
Derivative instruments. Derivatives are initially recognized at fair value on the date a derivative contract is entered
into and are subsequently remeasured at their fair value. The method of recognizing the resulting gain or loss
depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being
hedged. The Group designates certain derivatives as either:
(i) hedges of the fair value of recognized assets or liabilities or a firm commitment (fair value hedge); or
(ii) hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast
transaction (cash flow hedge).
At inception, the Group documents the relationship between the hedging instruments and the items hedged, as well
as the Group’s risk management objectives and strategy for undertaking various hedging activities. The Group also
documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used
in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
The Group enters into commodity derivative instruments with the primary objective of reducing the Group’s
exposure to fluctuating of oil and gas prices. The Group has not entered into commodity derivative instruments for
trading purposes.
During the year ended 31 December 2009, the Group entered into commodity price swap contracts for total
notional volume of three million barrels of stable gas condensate. The contractual notional volumes are not
physically exchanged, rather they are cash settled on a net basis. None of the contracts executed during this period
qualified for hedge treatment under IAS 39, Financial Instruments: Recognition and Measurement. All contracts
were settled realizing net losses of RR 190 million. The results of the commodity price swap contracts were
recorded within other operating income (loss) in the consolidated statement of income.
(a)
Fair value hedge
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the
consolidated statement of income, together with any changes in the fair value of the hedged asset or liability that
are attributable to the hedged risk. The Group only applies fair value hedge accounting for hedging fixed interest
risk on borrowings. The gain or loss relating to the effective portion of interest rate swaps hedging fixed rate
borrowings is recognized in the consolidated statement of income within finance income (expenses). The gain or
loss relating to the ineffective portion is recognized in the consolidated statement of income within other operating
income (loss). Changes in the fair value of the hedge fixed rate borrowings attributable to interest rate risk are
recognized in the consolidated statement of income within finance income (expenses).
16
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged
item for which the effective interest method is used is amortized to profit or loss over the period to maturity. There
were no fair value hedges used throughout 2009 or 2010, or in place at 31 December 2010 and 2009.
(b)
Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges
is recognized in consolidated statement of changes in equity. The gain or loss relating to the ineffective portion is
recognized immediately in the consolidated statement of income within other operating income (loss).
Amounts accumulated in equity are recycled in the consolidated statement of income in the periods when the
hedged item affects profit or loss (for example, when the forecast sale that is hedged takes place). The gain or loss
relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognized in the
consolidated statement of income within finance income (expenses). The gain or loss relating to the ineffective
portion is recognized in the consolidated statement of income within other operating income (loss). However, when
the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory or
fixed assets), the gains and losses previously deferred in equity are transferred from equity and included in the
initial measurement of the cost of the asset. The deferred amounts are ultimately recognized in cost of goods sold in
case of inventory or in depreciation in the case of fixed assets.
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 and is recognized when the forecast
transaction is ultimately recognized in the consolidated statement of income. When a forecast transaction is no
longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the
consolidated statement of income within other operating income (loss). No cash flow hedges were used throughout
2009 or 2010, or in place at 31 December 2010 and 2009.
(c)
Derivatives at fair value through profit or loss and accounted for at fair value through profit or loss
Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any these
derivative instruments are recognized immediately in the consolidated statement of income within other operating
income (loss). No net derivative instruments were recorded at fair value through profit or loss throughout 2009 or
2010, or in place at 31 December 2010 and 2009.
Effective interest method. The effective interest method is a method of calculating the carrying value of a financial
asset or a financial liability held at amortized costs and of allocating the interest income or interest expense over the
relevant period.
The effective interest rate is the rate that exactly discounts future cash payments and receipts through the expected
life of the financial instrument or, when appropriate, a shorter period to the net carrying value of the financial asset
or financial liability.
Financial assets. The Group classifies its financial assets in the following categories: financial assets at fair value
through profit or loss, held-to-maturity, loans and receivables, and available-for-sale. The classification depends on
the purpose for which the financial assets were acquired. Management determines the classification of its financial
assets at initial recognition. Subsequent reclassification of financial assets is made only as a result of a change in
intention or ability of management to hold the financial assets. Financial assets are recognized initially at fair value,
normally being the transaction price plus, in the case of financial assets not at fair value through profit or loss,
directly attributable transaction costs. The subsequent measurement of financial assets depends on their
classification.
17
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(a)
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is
classified in this category if acquired principally for the purpose of selling in the short-term. Derivative instruments
are also categorized as held for trading unless they are designated as hedges. Financial assets carried at fair value
through profit or loss are initially recognized at fair value and transaction costs are expensed in the consolidated
statement of income. Gains or losses arising from changes in the fair value of the “financial assets at fair value
through profit or loss” category are presented in the consolidated statement of income within other operating
income (loss) in the period in which they arise. Dividend income from financial assets at fair value through profit
or loss is recognized in the consolidated statement of income as part of other operating income (loss) when the
Group’s right to receive payments is established.
Financial assets at fair value through profit or loss are classified as current assets. There were no financial assets
designated at fair value through profit or loss held by the Group at the reporting dates.
(b)
Held-to-maturity investments
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed
maturities and are classified as held-to-maturity when the Group has the positive intention and ability to hold these
investments to maturity. After initial measurement, the held-to-maturity investments are measured at amortized
cost using the effective interest method. Gains and losses are recognized in the consolidated statement of income
when the investments are derecognized or impaired, as well as through the amortization process.
Held-to-maturity investments are included in current assets, except for maturities greater than 12 months after the
balance sheet date. These are classified as non-current assets. There were no such investments held by the Group at
the reporting dates.
(c)
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted
in an active market. Financial assets classified as loans and receivables are carried at amortized cost using the
effective interest method. Gains and losses are recognized in the consolidated statement of income when the loans
and receivables are derecognized or impaired, as well as through the amortization process.
Loans and receivables are included in current assets, except for maturities greater than 12 months after the balance
sheet date which are classified as non-current assets.
(d)
Available-for-sale financial assets
Financial assets classified as available-for-sale are non-derivatives financial assets that are either specially
designated in this category or are not classified in any of the other categories. After initial recognition, financial
assets classified as available-for-sale are measured at fair value, with gains and losses recognized directly in the
consolidated statement of changes in equity until the investment is derecognized or determined to be impaired, at
which time the cumulative gain or loss previously recorded in equity is recognized in consolidated statement of
income as profit or loss.
Changes in the fair value of monetary securities denominated in a foreign currency and classified as
available-for-sale financial assets are analyzed between translation differences resulting from changes in amortized
cost of the security and other changes in the carrying amount of the security. The translation differences on
monetary securities are recognized in consolidated statement of income, while translation differences on non-
monetary securities are recognized in consolidated statement of changes in equity. Changes in the fair value of
monetary and non-monetary securities classified as available-for-sale are recognized in consolidated statement of
changes in equity. When securities classified as available-for-sale are sold or impaired, the accumulated fair value
adjustments recognized in equity are included in the consolidated statement of income as profit or loss on sales of
available-for-sale investments.
18
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group
of financial assets is impaired. Prolonged decline in the fair value of the security below its cost is considered as an
indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the
cumulative loss (measured as the difference between the acquisition cost and the current fair value, less any
impairment loss on that financial asset previously recognized in consolidated statement of income) is removed from
equity and recognized in the consolidated statement of income. Impairment losses recognized in the consolidated
statement of income on equity instruments are not reversed. There were no available-for-sale investments held by
the Group at the reporting dates.
Financial liabilities. Financial liabilities are classified at initial recognition as either financial liabilities at fair
value through profit or loss, derivative instruments designated as hedging instruments in an effective hedge or as
financial liabilities measured at amortized cost. There were no derivative instruments designated as hedging
instruments by the Group at the reporting dates. The measurement of financial liabilities depends on their
classification, as follows:
(a)
Financial liabilities at fair value through profit or loss
Derivative instruments, other than those designated as effective hedging instruments, are classified as held for
trading and are included in this category. These financial liabilities are carried on the consolidated statement of
financial position at fair value with gains or losses recognized in the consolidated statement of income. There were
no financial liabilities designated at fair value through profit or loss held by the Group at the reporting dates.
(b)
Financial liabilities measured at amortized cost
All other financial liabilities are included in this category and initially recognized at fair value. For interest-bearing
debt, the fair value of the liability is the fair value of the proceeds received net of associated issue costs. After
initial recognition, other financial liabilities are subsequently measured at amortized cost using the effective interest
method. This category of financial liabilities includes trade and other payables and debt in the consolidated
statement of financial position.
Income taxes. Russian legislation does not contain the concept of a “consolidated tax payer” and, accordingly, the
Group is not subject to Russian taxation on a consolidated basis but rather on an individual company basis. Current
tax is the amount expected to be paid to or recovered from the tax authorities in respect of taxable profits or losses
for the current and prior periods.
Income taxes have been provided for in the consolidated financial statements in accordance with Russian
legislation enacted or substantively enacted as of end of the reporting period. The income tax charge or benefit
comprises current tax and deferred tax and is recognized in the consolidated statement of income unless it relates to
transactions that are recognized, in the same or a different period, directly in equity.
Deferred tax assets and liabilities are recognized in full for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax base. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary
differences on initial recognition of an asset or a liability in a transaction other than a business combination if the
transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax balances are
measured at tax rates enacted or substantively enacted at the balance sheet date which are expected to apply to the
period when the temporary differences will reverse or when the tax loss carry forwards will be utilized. Deferred
tax assets and liabilities are netted only with respect to individual companies of the Group. Deferred tax assets for
deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that
future taxable profit will be available against which the deductions can be utilized.
Deferred income tax is provided on post acquisition retained earnings of subsidiaries, except where the Group
controls the subsidiary’s dividend policy and it is probable that the difference will not reverse through dividends or
otherwise in the foreseeable future.
19
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories. Natural gas, gas condensate, crude oil and related products inventories are valued at the lower of cost
or net realizable value. The cost of inventories includes applicable purchase costs of raw materials, direct operating
costs, and related production overhead expenses and is recorded on a first-in-first-out (FIFO) basis. Net realizable
value is the estimate of the selling price in the ordinary course of business, less selling expenses.
Materials and supplies inventories are carried at amounts which do not exceed their respective recoverable amounts
in the normal course of business.
Trade and other receivables. Trade receivables are represented by amounts due from regular customers in the
ordinary course of business (production and marketing of natural gas, gas condensate, crude oil and related
products; production and marketing of polymer and insulation tape products). Trade and other receivables are
recognized initially at fair value and subsequently measured at amortized cost using the effective interest method
and include value-added taxes. Trade receivables are analyzed for impairment on a debtor by debtor basis. A
provision for impairment of receivables is established when there is objective evidence that the Group will not be
able to collect all amounts due according to the original terms of receivables. The amount of the provision is the
difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at
the original effective interest rate. The amount of the provision is recognized in the consolidated statement of
income within operating expenses. Subsequent recoveries of amounts previously written off are credited against the
amount of the provision in the consolidated statement of income.
Cash and cash equivalents. Cash and cash equivalents comprises cash on hand, cash deposits held with banks,
investments which are readily convertible to known amounts of cash and which are not subject to significant risk of
change in value and have an original maturity of three months or less. For purposes of the presentation of the
statement of cash flows, bank overdrafts are deducted from cash and cash equivalents. Bank overdrafts are shown
within short-term debt in current liabilities on the consolidated statement of financial position.
Treasury shares. Where any Group company purchases NOVATEK’s equity share capital (treasury shares), the
consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from
equity attributable to OAO NOVATEK shareholders until the shares are cancelled or reissued. Where such shares
are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs
and the related income tax effects, is included in equity attributable to OAO NOVATEK shareholders. Treasury
shares are recorded at weighted average cost. Gains or losses resulting from subsequent sales of shares are recorded
in the consolidated statement of changes in equity, net of associated costs including taxation.
Dividends. Dividends are recognized as a liability and deducted from shareholders’ equity at the balance sheet date
only if they are declared before or on the balance sheet date. Dividends are disclosed when they are proposed
before the balance sheet date or proposed or declared after the balance sheet date but before the consolidated
financial statements are authorized for issue.
Value added tax (VAT). Output VAT related to sales is payable to the tax authorities on the earlier of (a) collection
of the receivables from customers or (b) delivery of the goods or services to customers. Input VAT related to
purchases is generally recoverable against output VAT upon receipt of the VAT invoice. The tax authorities permit
the settlement of VAT on a net basis. VAT related to sales and purchases which is not settled or recovered at the
balance sheet date (VAT payable and VAT recoverable) is recognized on a gross basis and disclosed separately
within current assets and current liabilities. Where a provision has been made for the impairment of receivables, the
impairment loss is recorded for the gross amount of the debtor, including VAT.
Borrowings. Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are
subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the
redemption value is recognized in the consolidated statement of income over the period of the borrowings using the
effective interest method.
Interest costs and foreign exchange losses on borrowings to finance the construction of property, plant and
equipment are capitalized during the period of time that is required to complete and prepare the asset for its
intended use. All other borrowing costs are expensed.
20
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Trade and other payables. Trade payables are accrued when the counterparty performed its obligations under the
contract. Trade payables are recognized initially at fair value and subsequently measured at amortized cost using
the effective interest method.
Provisions for liabilities and charges. Provisions are recognized when the Group has a present legal or
constructive obligation as a result of past events; when it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation; and a reliable estimate of the amount of the obligation
can be made.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is
determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of
an outflow with respect to any one item included in the same class of obligations may be low.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation
using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the
obligation. Provisions are reassessed at each reporting date and changes in the provisions resulting from the
passage of time are recognized in the consolidated statement of income as interest expense. Where the Group
expects a provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the
reimbursement is virtually certain.
Asset retirement obligations. An asset retirement obligation is recognized when the Group has a present legal or
constructive obligation to dismantle, remove and restore items of property, plant and equipment. The amount of the
obligation is the present value of the estimated expenditures expected to be required to settle the obligation,
determined using discount rates reflecting adjustments for risks specific to the obligation. Changes in the obligation
resulting from the passage of time are recognized in the consolidated statement of income as interest expense.
Changes in the obligation, reassessed at each balance sheet date, related to a change in the expected pattern of
settlement of the obligation, or in the estimated amount of the obligation or in the discount rates, are treated as a
change in an accounting estimate in the period. Such changes are reflected as adjustments to the carrying value of
property, plant and equipment and the corresponding liability.
The Group’s exploration, development and production activities involve the use of wells, related equipment and
operating sites, oil and gas gathering and treatment facilities and in-field pipelines. Generally, licenses and other
regulatory acts require that such assets be decommissioned upon the completion of production, i.e. the Group is
obliged to decommission wells, dismantle equipment, restore the sites and perform other related activities. The
Group’s estimates of these obligations are based on current regulatory or license requirements, as well as actual
dismantling and related costs.
The Group’s management believes that due to the limited history of gas condensate processing and polymer
production plants activities, the useful lives of these assets are indeterminable (while certain of the operating
components and equipment have definite useful lives). Because of these reasons, and the lack of clear legal
requirements as to the recognition of obligations, the fair value of an asset retirement obligation for such processing
facilities cannot be reasonably estimated and, therefore, legal or contractual asset retirement obligations related to
these assets are not recognized.
Due to continuous changes in the Russian regulatory and legal environment, there could be future changes to the
requirements and contingencies associated with the retirement of long-lived assets.
Foreign currency transactions. Transactions denominated in foreign currencies are converted into the functional
currency of each entity of the Group at the exchange rates prevailing on the date of transactions. Exchange gains
and losses resulting from foreign currency remeasurement into the functional currencies are included in the
determination of profit for the reporting period.
21
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Monetary assets and liabilities denominated in foreign currencies are converted into the functional currency of each
entity of the Group by applying the year end exchange rate and the effect is stated in the consolidated statement of
income. Non-monetary assets and liabilities denominated in foreign currencies valued at cost are converted into the
functional currency of each entity of the Group at the initial exchange rate. Non-monetary assets that are
remeasured to fair value, recoverable amount or realizable value, are translated at the exchange rate applicable to
the date of remeasurement.
Revenue recognition. Revenues represent the fair value of consideration received or receivable for the sale of
goods and services in the normal course of business, net of discounts, value-added tax and export duties.
Revenues from oil and gas sales and sales of polymer and insulation tape are recognized when such products are
shipped or delivered to customers in accordance with the contract terms, the price is fixed or determinable, and the
title has transferred. Services are recognized in the period in which the services are rendered.
Interest income is recognized as the interest accrues as related to the net carrying amount of the financial asset.
General and administrative expenses. General and administrative expenses represent overall corporate
management and other expenses related to the general management and administration of the business unit as a
whole. They include management and administrative compensation, certain legal and other advisory expenses,
insurance of properties, social expenses and other expenses necessary for the administration of the Group.
Employee benefits. Wages and salaries, bonuses, voluntary medical insurance, paid annual and sick leaves are
accrued in the period in which the associated services are rendered by the employees of the Group. Compensation
at dismissals, vocational support payments, and other allowances are expensed when incurred.
The Group contributes to the Russian Federation State social insurance fund and State pension plan on behalf of its
employees based on gross salary payments. Mandatory contributions to the State social insurance fund and the
State pension plan, which is a defined contribution plan, are expensed when incurred and are included in payroll
expenses in the consolidated statement of income.
The Group also incurs employee costs related to the provision of benefits such as health and social infrastructure
and services, employees meals, transportation, and other services. These amounts principally represent an implicit
cost of employing production workers and, accordingly, are charged to payroll expenses in the consolidated
statement of income.
Share based compensation. The Group accounts for share-based compensation in accordance with IFRS 2, Share-
based Payment (“IFRS 2”). The fair value of the employee services received in exchange for the grant of the equity
instruments is recognized as an expense. The total amount to be expensed over the vesting period is determined by
reference to the fair value of the instruments granted measured at the grant date. For share-based compensation
made to employees by shareholders, an increase to additional paid in capital is recorded equal to the associated
compensation expense each period.
Pension obligations. The Group operates a non-contributory post-employment defined benefit plan based on
employees’ years of service and average salary (Note 15).
The liability recognized in the consolidated statement of financial position in respect of the defined benefit pension
plan is the present value of the defined benefit obligations at the balance sheet date, together with adjustments for
unrecognized past service costs. The present value of the pension obligations are determined by discounting the
estimated future cash outflows. The defined benefit obligations are calculated annually by independent actuaries
using the projected unit credit method. The discount rate was determined by reference to Russian rouble
denominated bonds issued by the Government of the Russian Federation chosen to match the duration of the post-
employment benefit obligations.
22
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
4
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recorded
to the consolidated statement of income in the period in which they arise. Past-service costs are amortized on a
straight-line basis over the vesting period.
Earnings per share. Earnings per share are determined by dividing the profit or loss attributable to
OAO NOVATEK shareholders by the weighted average number of shares outstanding during the reporting period.
Consolidated financial statements prepared in accordance with IFRS requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses
during the reporting period.
Management reviews these estimates and assumptions on a continuous basis, by reference to past experiences and
other factors considered as reasonable which form the basis for assessing the book values of assets and liabilities.
Adjustments to accounting estimates are recognized 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.
Management also makes certain judgments, apart from those involving estimations, in the process of applying the
Group’s accounting policies. Actual results may differ from such estimates 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
within the next financial year are described below.
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.
Fair values of financial assets and liabilities. The fair value of financial assets and liabilities, other than financial
instruments that are traded in an active market, is determined by applying various valuation methodologies.
Management uses its judgment to make assumptions based on market conditions existing at each balance sheet
date. Discounted cash flow analysis is used for various loans and receivables as well as debt instruments that are
not traded in active markets. The effective interest rate is determined by reference to the interest rates of
instruments available to the Group in active markets. In the absence of such instruments, the effective interest rate
is determined by reference to the interest rates of active market instruments available adjusted for the Group’s
specific risk premium estimated by management.
Deferred income tax asset recognition. Management assesses deferred income tax assets at each balance sheet date
and determines the amount recorded to the extent that realization of the related tax benefit is probable. In
determining future taxable profits and the amount of tax benefits that are probable in the future management makes
judgments and applies estimations based on prior years taxable profits and expectations of future income that are
believed to be reasonable under the circumstances.
Estimation of oil and gas reserves. Engineering estimates of oil and gas reserves are inherently uncertain and are
subject to future revisions. The Group estimates its oil and gas reserves in accordance with rules promulgated by
the Securities and Exchange Commission (SEC) for proved reserves. Accounting measures such as depreciation,
depletion and amortization charges, impairment assessments and asset retirement obligations that are based on the
estimates of proved reserves are subject to change based on future changes to estimates of oil and gas reserves.
23
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
4
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (CONTINUED)
Proved reserves are estimated by reference to available reservoir and well information, including production and
pressure trends for producing reservoirs. Furthermore, estimates of proved reserves only include volumes for which
access to market is assured with reasonable certainty. All proved reserves estimates are subject to revision, either
upward or downward, based on new information, such as from development drilling and production activities or
from changes in economic factors, including product prices, contract terms or development plans.
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 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.
In general, estimates of reserves for undeveloped or partially developed fields are subject to greater uncertainty
over their future life than estimates of reserves for fields that are substantially developed and depleted. As those
fields are further developed, new information may lead to further revisions in reserve estimates.
Oil and gas reserves have a direct impact on certain amounts reported in the consolidated financial statements, most
notably depreciation, depletion and amortization 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. Assuming all
variables are held constant, an increase in proved developed reserves for each field decreases depreciation,
depletion and amortization expenses. Conversely, a decrease in the estimated proved developed reserves increases
depreciation, depletion and amortization expenses. 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.
Although the possibility exists for changes or revisions in estimated reserves to have a critical effect on
depreciation, depletion and amortization charges and, therefore, reported net profit for the year, it is expected that
in the normal course of business the diversity of the Group’s asset portfolio will mitigate the likelihood of this
occurring.
Impairment of non-financial assets. Management assesses whether there are any indicators of possible impairment
of all non-financial assets at each reporting date based on events or circumstances that indicate the carrying value
of assets may not be recoverable. Such indicators include changes in the Group’s business plans, changes in
commodity prices leading to unprofitable performances, changes in product mixes, and for oil and gas properties,
significant downward revisions of estimated proved reserves. Other non-financial assets are tested for impairment
when there are indicators that the carrying amounts may not be recoverable.
When value in use calculations are undertaken, management estimates the expected future cash flows from the
asset or cash generating unit and chooses a suitable discount rate in order to calculate the present value of those
cash flows.
Impairment provision for trade receivables. The impairment provision for trade receivables is based on
management’s assessment of the probability of collection of individual customer accounts receivable. Significant
financial difficulties of the customer, probability that the customer will enter bankruptcy or financial
reorganization, and default or delinquency in payments are considered indicators that the receivable is potentially
impaired. Actual results could differ from these estimates if there is deterioration in a major customer’s
creditworthiness or actual defaults are higher than the estimates.
When there is no expectation of recovering additional cash for an amount receivable, the expected amount
receivable is written off against the associated provision.
24
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
4
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (CONTINUED)
Future cash flows of trade receivables that are evaluated for impairment are estimated on the basis of the
contractual cash flows of the assets and the experience of management in respect of the extent to which amounts
will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience
is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past
periods and to remove the effects of past conditions that do not exist currently.
Pension obligations. The cost of defined benefit pension plans and related current service costs are determined
using actuarial valuations. The actuarial valuations involve making demographic assumptions (mortality rates, age
of retirement, employee turnover and disability) as well as financial assumptions (discount rates, expected rates of
return on assets, inflation forecasts, future salary and pension increases). Due to the long term nature of these plans,
such estimates are subject to significant uncertainty.
Asset retirement obligations. Management makes provision for the future costs of decommissioning oil and gas
production facilities, pipelines and related support equipment based on the best estimates of future cost and
economic lives of those 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.
Changes in the measurement of existing obligations can result from changes in estimated timing, future costs or
discount rates used in valuation.
The Group also assesses its liabilities for site restoration at each consolidated statement of financial position period
in accordance with the guidelines of IFRIC 1, Changes in Existing Decommissioning, Restoration and Similar
Liabilities. The amount recognized as a provision is the best estimate of the expenditures required to settle the
present obligation at the balance sheet date based on current legislation where the Group’s respective operating
assets are located, and is also subject to change because of modifications, revisions and changes in laws and
regulations and their interpretation thereof. As a result of the subjectivity of these provisions there is uncertainty
regarding both the amount and estimated timing of incurring such costs.
5
MERGERS, ACQUISITIONS AND DISPOSALS
Acquisition of OOO Yamalgazresurs-Chelyabinsk
In December 2010, the Group acquired a 100 percent participation inteterest in OOO Yamalgazresurs-Chelyabinsk,
a Russian regional natural gas trader, to support and expand natural gas sales opportunities in the Chelyabinsk
Region of the Russian Federation for RR 410 million. Management has assessed the fair value of identifiable assets
and liabilities and calculated that goodwill RR 82 million arose on the acquisition. The financial and operational
activities of Yamalgazresurs-Chelyabinsk would not have had a material impact on the Group’s revenues and
results if the acquisition occurred in January 2010.
Acquisition of Intergaz-System Sp.z o.o.
In August 2010, the Group acquired a 100 percent ownership in Intergaz-System Sp.z o.o., domiciled in Poland, for
RR 159 million (USD 5 million). Intergaz-System holds a discharging and transhipment facility and was purchased
to support and extend the wholesale and retail trading of liquefied petroleum gas in the Polish market. Management
has assessed the fair value of identifiable assets and liabilities and calculated that negative goodwill RR 10 million
arose on the acquisition which was recognized as other operating profit in the consolidated statement of income.
The financial and operational activities of Intergaz-System would not have had a material impact on the Group’s
revenues and results if the acquisition occurred in January 2010.
In December 2010, the Group merged Intergaz-System into its wholly-owned subsidiary Novatek Polska. The
aforementioned merger did not affect the Group’s consolidated financial and operational results.
25
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
5
MERGERS, ACQUISITIONS AND DISPOSALS (CONTINUED)
Acquisition of OAO Sibneftegas
On 17 December 2010, the Group acquired 51 percent of the outstanding ordinary shares of OAO Sibneftegas, an
oil and gas company located in the YNAO, for total cash consideration of RR 25,826, of which RR 4,650 million
was paid in December 2010 and the remaining RR 21,176 million is payable in February and March 2011.
Sibneftegas holds two production licenses: the Beregovoye and Pyreinoye gas condensate fields, which expire in
2023 and in 2021, respectively. Estimated aggregated proved reserves on these two fields as well as the
Khadyryahinskoye (expires in 2031) field appraised by DeGolyer and MacNaughton at 31 December 2010 under
the PRMS and SEC reserve methodologies totaled approximately 282 and 200 billion cubic meters of natural gas
and 2 and 0.7 million tons of hydrocarbon liquids, respectively.
As part of the acquisition, the Group granted a loan in the amount of RR 11,038 million to Sibneftegas, which was
used to fully repay its outstanding debt to Gazprombank ahead of its maturity schedule. Subsequent to the
acquisition the Group also entered into the purchase contract to buy natural gas from Sibneftegas in proportion to
its ownership interest in the company’s total production at pre-determined prices.
As described above, the Group acquired 51 percent of the outstanding ordinary shares of Sibneftegas; however, the
Charter agreement stipulates that key financial and operational decisions regarding its business activities are subject
to approval by nine out of the eleven members of the Board of Directors. As a result, the Group has determined that
it has significant influence over the business activities of Sibneftegas and will account for the investment under the
equity method.
In accordance with IAS 28 “Investments in Associates”, the Group assessed preliminary fair values of the
identified assets and liabilities of Sibneftegas. In the consolidated financial statements for the year ended
31 December 2010, the fair value of purchase consideration and the fair value of the identifiable acquired assets
and liabilities are preliminary as the Group is in the process of finalizing the fair value estimates for certain assets
and liabilities, primarily for property, plant and equipment. Management is required to finalize the fair value
determination within 12 months of the date of acquisition. Any revisions to the provisional values will be reflected
as of the acquisition date.
The following table represents the preliminary fair values comprising 100 percent of the assets and liabilities of
Sibneftegas:
Sibneftegas
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Total identifiable net assets
Purchase consideration
Preliminary fair value of the Group’s interest in
net assets (RR 37,581 million at 51% ownership)
Preliminary goodwill
Preliminary fair values
at the acquisition date
66,930
1,072
(28,199)
(2,222)
37,581
25,826
(19,166)
6,660
In accordance with Russian legislation, the Group issued (via AKB “Bank of Moscow”) a bank guarantee for
RR 25.8 billion in January 2011 in favor of the minority holders of the ordinary shares of Sibneftegas. The
guarantee is provided as financial support in case the minority shareholders tender to sell their stakes to the Group
at a pre-determined fixed price. This bank guarantee expires in April 2011. Management does not believe that any
of the minority shareholders will tender their shares as a result of this offer.
26
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
5
MERGERS, ACQUISITIONS AND DISPOSALS (CONTINUED)
Acquisition of OOO SeverEnergia
On July 2010, NOVATEK and OAO Gazprom Neft, a subsidiary of OAO Gazprom, established a joint venture
OOO Yamal Development. The Group owns a 50 percent participation interest in the new entity and accounts for
its share of the joint venture using the equity method.
On 30 November 2010, Yamal Development acquired a 51 percent participation interest in OOO SeverEnergia for
total cash consideration of RR 48,715 million paid upon acquisition. The acquisition was financed proportionally
by its founders through the provision of loans in the total amount of RR 56,247 million (see Note 8). As part of the
acquisition, Yamal Development also provided a loan in the amount of RR 7,532 million to SeverEnergia, which
was used to fully repay the outstanding debt of the company to its previous shareholder ahead of its maturity
schedule. NOVATEK financed its part of the loan to Yamal Development through the use of a bridge loan facility
(see Note 16).
SeverEnergia through its three wholly owned subsidiaries holds exploration and production licenses listed below:
Subsidiary of SeverEnergia
Field
Expiring date
OAO Arkticheskaya gazovaya kompaniya
ZAO Urengoil Inc.
OAO Neftegastehnologiya
Samburgskoye, Yevo-Yakhinskoye
Yaro-Yakhinskoye
North-Chaselskoye
2018
2018
upon full production
Estimated aggregated proved reserves on these fields appraised by DeGolyer and MacNaughton under the PRMS
and SEC reserve methodologies at 31 December 2010 totaled approximately 245 and 224 billion cubic meters of
natural gas and 42 and 39 million tons of hydrocarbon liquids, respectively.
The transaction provides the Group with an effective interest ownership of 25.5 percent in SeverEnergia. Since this
company is a subsidiary of Yamal Development, the Group’s joint venture, the assets and liabilities of
SeverEnergia and its financial results are included in the assets, liabilities and financial results of Yamal
Development and its subsidiaries in the disclosure of summarized financial information about the Group’s
investments in associates and joint ventures (see Note 7).
In accordance with IAS 28 “Investments in Associates”, the Group assessed preliminary fair values of the
identified assets and liabilities of SeverEnergia. In the consolidated financial statements for the year ended
31 December 2010, the fair value of purchase consideration and the fair value of the identifiable acquired assets
and liabilities are preliminary as the Group is in the process of finalizing the fair value estimates for certain assets
and liabilities, primarily for property, plant and equipment. Management is required to finalize the fair value
determination within 12 months of the date of acquisition. Any revisions to the provisional values will be reflected
as of the acquisition date.
The following table represents the preliminary fair values comprising 100 percent of the assets and liabilities of the
SeverEnergia and its subsidiaries.
SeverEnergia and its subsidiaries
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Total identifiable net assets
Preliminary fair values
at the acquisition date
137,228
3,810
(22,950)
(22,568)
95,520
As a result of the preliminary assessment of fair value of identifiable assets and liabilities management calculated
that no goodwill arose on the acquisition.
27
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
5
MERGERS, ACQUISITIONS AND DISPOSALS (CONTINUED)
Disposal of OOO NOVATEK-Polymer
In September 2010, the Group disposed of its 100 percent participation interest in OOO NOVATEK-Polymer, its
non-core subsidiary, to OAO SIBUR Holding for RR 2,400 million (undiscounted) payable throughout September
2013. The Group recognized a loss on the sale of RR 279 million, net of associated income tax of RR 25 million.
The Group has 100 percent participation interest in OOO NOVATEK-Polymer as collateral for the receivable until
full settlement.
Below is a breakdown of major classes of assets and liabilities disposed:
OOO NOVATEK-Polymer
Property, plant and equipment
Deferred tax assets
Inventories
Financial assets
Other non-financial assets
Deferred tax liability
Short-term debt
Other financial liabilities
Total net assets
The following table summarizes the consideration details from the sale of OOO NOVATEK-Polymer:
Cash
Receivable in respect of the deferred payments (RR 2,113 million
discounted at 8 percent per annum)
Total consideration
Less: carrying amount of net assets disposed
Loss on disposal
RR million
1,617
189
440
340
160
(294)
(113)
(66)
2,273
RR million
287
1,732
2,019
(2,273)
(254)
OOO NOVATEK-Polymer constituted the Group’s “polymer products production and marketing” segment (see
Note 31).
Acquisition of OAO Tambeyneftegas
On 1 July 2010, the Group acquired 100 percent of the outstanding ordinary shares of OAO Tambeyneftegas, an
exploration stage oil and gas company located in the southern portion of the Yamal peninsula (YNAO) for total
cash consideration of RR 312 million (USD 10 million), of which 75 percent was acquired from related parties for
RR 234 million (USD 7 million) (see Note 30). Tambeyneftegas holds the license for exploration and development
of the Malo-Yamalskoye field (expires in 2019) with estimated natural gas and gas condensate reserves in
accordance with the Russian reserve classification (categories C1 + C2) amounting to 161 bcm and 14.4 mmt,
respectively.
Tambeyneftegas had no notable operating activities up to and as at the purchase date, and is considered an entity in
the early exploration stage; consequently, this acquisition is outside the definition of business as defined in IFRS 3,
“Business Combinations”. The cost of the acquisition has been allocated based on the relative fair values of the
assets (largely comprised of the mineral license), and liabilities of the company acquired.
28
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
5
MERGERS, ACQUISITIONS AND DISPOSALS (CONTINUED)
Recognized amounts of identifiable assets acquired and liabilities assumed are presented below:
OAO Tambeyneftegas
Property, plant and equipment
Deferred tax assets
Other non-financial assets
Financial assets
Short-term debt
Interest on short-term debt
Assets retirement obligations
Other non-financial liabilities
Total identifiable net liabilities
The following table shows the total cost of the acquired mineral rights:
Total purchase consideration
Add: identifiable net liabilities
Cost of the acquired mineral rights
RR million
303
176
23
12
(641)
(229)
(165)
(4)
(525)
RR million
312
525
837
The property, plant and equipment in the amount of RR 303 million combined with the cost of the mineral rights in
the amount of RR 837 million are included in the line “acquisition of subsidiaries” as disclosed in Note 6. Short-
term debt in the amount of RR 641 million and interest on short-term debt in the amount of RR 229 million
represent balances with the Group companies, which are to be settled in the normal course of business.
The financial and operational activities of Tambeyneftegas were not material to the Group’s revenues and results of
operations for the year ended 31 December 2010.
Disposal of ownership interest in ZAO Terneftegas
On 24 June 2009, NOVATEK and TOTAL E&P ACTIVITIES PETROLIERES (“TOTAL”) signed a Heads of
Agreement (the “Agreement”) establishing the framework for joint cooperation in exploring and developing the
Group’s Termokarstovoye gas condensate field located in the YNAO.
The Agreement provides for the establishment of a joint venture through the acquisition, by TOTAL
of a 49 percent ownership
liability company,
in ZAO Terneftegas
OOO Terneftegas), a wholly-owned subsidiary of the Group and holder of the license for exploration and
production of natural gas and gas condensate at the Termokarstovoye field. Under the terms and conditions of the
Agreement, the joint venture has two years to complete exploration works and prepare a field development plan,
with a final investment decision to proceed further to be taken in 2011.
(formerly a
interest
limited
In December 2009, the Group signed a Sales and Purchase contract with Total Termokarstovoye B.V., an affiliate
of TOTAL, for:
(cid:120)
(cid:120)
the sale of a 28 percent interest in ZAO Terneftegas for total consideration of USD 24.1 million, of which
USD 16 million was paid at the date of title transfer and the remaining USD 8.1 million (deferred payment) to
be paid upon approval by TOTAL of the final investment decision; and
a further increase of TOTAL’s equity share in ZAO Terneftegas to 49 percent through a subscription to the
entity’s additional shares emission for total consideration of USD 18 million.
29
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
5
MERGERS, ACQUISITIONS AND DISPOSALS (CONTINUED)
The Group transferred legal ownership of a 28 percent interest in ZAO Terneftegas to Total Termokarstovoye B.V.
in February 2010 upon the execution of the first arrangement. In January 2010, ZAO Terneftegas registered with
the Federal Service for Financial Markets (FSFM) for an additional shares emission, the acquisition of which was
completed by TOTAL in June 2010. In September 2010, the legal implementation of the second arrangement of the
transaction was finished and the subscription for the additional shares issued was registered by Total
Termokarstovoye B.V. with the FSFM.
Based on the Agreement and the provisions of the Sales and Purchase contract, these two arrangements were
accounted as a single transaction and, in February 2010, the Group recorded a disposal of a 49 percent ownership
interest in ZAO Terneftegas for total consideration of RR 982 million realizing a gain of RR 1,466 million, net of
associated income tax of RR 117 million.
The following table summarizes the consideration details and shows the components of the gain from the sale of
the ownership interest in ZAO Terneftegas:
Cash
Receivable in respect of the deferred payment (USD 8.1 million at
exchange rate of RR 30.11 to USD 1.00 discounted at 5.1 percent per
annum)
The Group’s proportion in an additional shares emission proceeds
(51 percent of USD 18 million at exchange rate of RR 30.11 to USD 1.00)
Total consideration
Less: carrying amount of the Group’s interest in net assets
Revaluation of the retained investment in joint venture
Gain on the sale of ownership interest
RR million
483
222
277
982
(206)
807
1,583
As described above, the Group retained a 51 percent interest in ZAO Terneftegas; however, the Agreement
stipulates that key financial and operational decisions regarding its business shall be subject to unanimous approval
by both shareholders and none of the participants have a preferential voting right. In February 2010, all operating
bodies of the joint venture were established and the Group’s effective control over ZAO Terneftegas ceased. As a
result of these changes, the Group’s interest in ZAO Terneftegas is accounted for using the equity method.
In accordance with IAS 27 “Consolidated and Separate Financial Statements”, the Group remeasured its retained
investment in ZAO Terneftegas at fair value at the date of ceasing control, with the change in value of RR 807
million recognized as a part of the gain from disposal.
The following table reconciles the carrying value of ZAO Terneftegas prior to disposal and the carrying value of
the retained investment in the entity recorded under the equity method of accounting in these consolidated financial
statements:
ZAO Terneftegas
Carrying value of the net assets at disposal
The Group’s proportion in an additional shares emission proceeds
Less: carrying amount of the Group’s interest in net assets
Revaluation of the retained investment
The carrying value of investment in joint venture
RR million
420
277
(206)
807
1,298
Prior to the disposal, the Group included balances and results of the operations of the disposed subsidiary within
“exploration, production and marketing” in the Group’s segment information.
30
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
5
MERGERS, ACQUISITIONS AND DISPOSALS (CONTINUED)
Acquisition of controlling interests in the associates
On 15 February 2010, the Group increased its participation interests in OOO Oiltechproduct-Invest, OOO Petra
Invest-M and OOO Tailiksneftegas, entities recorded as associates to 51 percent through the acquisition of an
additional 26 percent participation interests in each company for the total cash consideration of RR 1,297 million.
These entities are all exploration stage oil and gas companies and hold exploration licenses for the Middle-
Chaselskiy, North-Russkiy, West-Tazovskiy, Anomalniy and North-Yamsoveskiy license areas. These licenses
expire between 2012 and 2014. The Group intends to receive production licenses for these fields based on the
exploration activities performed to date. Following the acquisition, in February 2010, OOO Oiltechproduct-Invest
obtained the production license for the West-Chaselskoe field, which expires in 2030.
All three entities had no notable operating activities up to and as at the purchase date and are all considered to be in
their early exploration stage; consequently, this acquisition is outside the definition of “business” as defined in
IFRS 3, “Business Combinations”. The acquisition cost has been allocated based on the relative fair values of the
assets acquired (largely comprised of their respective mineral licenses), and liabilities assumed.
Recognized amounts of identifiable assets acquired and liabilities assumed are presented below:
RR million
Property, plant and equipment
Other non-financial assets
Financial assets
Short-term debt
Other financial liabilities
Non-financial liabilities
Total identifiable
net assets (liabilities)
OOO
Oiltechproduct-
Invest
OOO Petra
Invest-M
OOO
Tailiksneftegas
547
531
190
(769)
(149)
(146)
204
370
199
9
(519)
(108)
(39)
(88)
959
314
18
(862)
(203)
(102)
124
The following table shows the total cost of the acquired mineral rights:
RR million
Carrying value of the 25 percent
participation interest
Purchase consideration for the
26 percent participation interest
Gross up for total value of the assets
acquired
Less: identifiable net assets
(liabilities)
Cost of the acquired mineral rights
OOO
Oiltechproduct-
Invest
OOO Petra
Invest-M
OOO
Tailiksneftegas
438
502
903
(204)
1,639
369
380
720
88
1,557
407
415
791
(124)
1,489
Total
1,876
1,044
217
(2,150)
(460)
(287)
240
Total
1,214
1,297
2,414
(240)
4,685
The aforementioned property, plant and equipment in the amount of RR 1,876 million combined with the cost of
mineral rights in the amount of RR 4,685 million are included in the line “acquisition of subsidiaries” as disclosed
in Note 6.
The financial and operational activities of Oiltechproduct-Invest, Petra Invest-M and Tailiksneftegas were not
material to the Group’s revenues and results of operations for the year ended 31 December 2010.
31
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
5
MERGERS, ACQUISITIONS AND DISPOSALS (CONTINUED)
Acquisition of additional participation interest in subsidiaries
In April 2010, the Group increased its participation interests in OOO Oiltechproduct-Invest, OOO Petra
Invest-M and OOO Tailiksneftegas to 82.4 percent, 92.6 percent and 94.2 percent, respectively, through an
additional capital contribution to the ordinary share capital of these entities. Furthermore, in May 2010, the Group
brought its participation interest in the share capital of each of the above mentioned companies to 100 percent
through the acquisition of the remaining ordinary share capital from non-controlling interests. As a consequence of
these two transactions the Group paid cash of RR 629 million, reduced non-controlling interests by RR 2,368
million and recorded a difference of RR 1,739 million directly to retained earnings.
In December 2010, the Group merged its wholly-owned subsidiary, OOO Oiltechproduct-Invest, which holds
exploration licenses for the Middle-Chaselskiy, West-Chaselskiy and North-Russkiy license areas into its wholly-
owned subsidiary OOO NOVATEK-Tarkosaleneftegas. The aforementioned merger did not affect the Group’s
consolidated financial and operational results.
Acquisition of OAO Yamal LNG
On 26 May 2009, the Group entered into the contract to acquire 51 percent of the outstanding ordinary shares of
OAO Yamal LNG, an exploration stage oil and gas company located in the north-eastern part of the Yamal
peninsula, YNAO. This company holds the license for exploration and development of the South-Tambeyskoye
field (initial license term expired in 2020 but was extended to 2045 in December 2009). The acquisition of the
South-Tambeyskoye field significantly increases the Group’s resource base ensuring future natural gas and gas
condensate production growth.
OAO Yamal LNG had no notable operating activities up to and as at the purchase date, and is considered an entity
in the early exploration stage; consequently, this acquisition is outside the definition of “business” as defined in
IFRS 3, “Business Combinations”. The cost of the acquisition has been allocated based on the relative fair values
of the assets (largely comprised of the mineral license), and liabilities of the company acquired.
The following table summarizes the total purchase consideration for the acquisition of Yamal LNG.
Cash
Promissory notes of NOVATEK
Deferred cash payment
Total purchase consideration
(*) – discounted at 7.5 percent per annum.
USD million
Exchange rate
RR million
250
300
100
650
30.51
30.73
30.51
7,628
9,219
2,546 (*)
19,393
The contingent consideration arrangement (referred to as the deferred cash payment) requires the Group to pay the
former owners of Yamal LNG USD 100 million (undiscounted) upon the conclusion of an agreement between
Yamal LNG and OAO Gazprom, defining the main sales terms of the LNG produced from the South-Tambeyskoye
field. On 18 September 2010, such Cooperation Agreement, setting out the key parameters for cooperation between
Gazprom and NOVATEK in implementing the pilot LNG project including the development and subsequent
utilization of related infrastructure facilities on the Yamal peninsula, was signed and in February 2011 the payment
was made.
Acquisition-related costs (legal and evaluation services) directly associated with the transaction in the amount of
RR 100 million were included in the cost of the asset acquired.
32
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
5
MERGERS, ACQUISITIONS AND DISPOSALS (CONTINUED)
Recognized amounts of identifiable assets acquired and liabilities assumed are presented below.
OAO Yamal LNG
Financial assets
Property, plant and equipment
Other non-financial assets
Long-term debt
Other financial liabilities
Asset retirement obligations
Other non-financial liabilities
Total identifiable net liabilities
RR million
886
818
807
(2,833)
(271)
(587)
(150)
(1,330)
In November 2009, the Group fully repaid the outstanding long-term debt of Yamal LNG ahead of its maturity
schedule.
The following table shows the total cost of the acquired mineral rights:
Total purchase consideration
Gross up for total value of the asset acquired
Legal and evaluation services
Add: identifiable net liabilities
Cost of the acquired mineral rights
RR million
19,393
18,704
100
1,330
39,527
The aforementioned property, plant and equipment in the amount of RR 818 million combined with the cost of
mineral rights in the amount of RR 39,527 million are included in the line “acquisition of subsidiaries” as disclosed
in Note 6.
In May 2009, the Group signed a call option agreement with one of the sellers, which provides the Group with the
right, but not the obligation, to purchase an additional 23.9 percent of OAO Yamal LNG for USD 450 million
within three years following the controlling acquisition. To enter into this call option agreement, the Group paid
RR 325 million (USD 10 million) in July 2009, which was recorded as a decrease in retained earnings in the
consolidated statement of changes in equity.
In accordance with the Russian legislation, in November 2009, the Group issued (via AKB “Bank of Moscow”) a
bank guarantee for RR 19.4 billion in favor of the minority holders of the ordinary shares of OAO Yamal LNG.
The guarantee was provided as financial support in the case the minority shareholders tender to sell their stakes to
the Group at the pre-determined fixed price. The guarantee expired in August 2010 and no payment was made.
In March 2010, the existing shareholders of Yamal LNG made cash contributions to the company’s ordinary share
capital proportionally to their respective ownership interests in the total amount of RR 3,607 million. The resulting
increase of RR 1,767 million in non-controlling interest was recorded within consolidated statement of changes in
equity.
The financial and operational activities of Yamal LNG were not material to the Group’s revenues and results of
operations for the year ended 31 December 2009.
33
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
5
MERGERS, ACQUISITIONS AND DISPOSALS (CONTINUED)
Acquisition of OOO EkropromStroy
On 19 June 2009, the Group acquired 100 percent of the participation interest in OOO EkropromStroy from several
members of key management personnel of the Group for total cash consideration of RR 1,999 million, all paid in
2009. The Group obtained an independent appraisal supporting the purchase price and considers that the amount
paid is substantially consistent with the terms that would be agreed in an arm’s length transaction. The company
manages the construction of the Group’s new office building located in Moscow and has no activities other than the
management of construction activities and ownership of the constructed building. Accordingly, the purchase is
outside the definition of business as defined in IFRS 3, “Business Combinations”. The cost of the acquisition has
been allocated based on the relative fair values of the assets (largely comprised of the office building), and
liabilities of the company acquired. The property, plant and equipment in the amount of RR 2,263 million was
included in the line “acquisition of subsidiaries” as disclosed in Note 6.
The financial and operational activities of EkropromStroy were not material to the Group’s revenues and results of
operations for the year ended 31 December 2009.
6
PROPERTY, PLANT AND EQUIPMENT
Movements in property, plant and equipment, for the years ended 31 December 2010 and 2009 are as follows:
Cost
Accumulated depreciation, depletion and
amortization
Net book value at 1 January 2009
Acquisition of subsidiaries
Additions
Transfers
Depreciation, depletion and amortization
Reclassified as assets held for sale
Disposals, net
Cost
Accumulated depreciation, depletion and
amortization
Net book value at 31 December 2009
Acquisition of subsidiaries
Additions
Transfers
Depreciation, depletion and amortization
Disposal of subsidiaries, net
Impairment
Disposals, net
Cost
Accumulated depreciation, depletion and
amortization
Net book value at 31 December 2010
Oil and gas
properties and
equipment
Assets under
construction
and advances
for construction
95,242
24,771
Other
4,787
Total
124,800
(15,166)
80,076
40,141
943
21,650
(5,221)
(65)
(5)
-
(920)
(16,086)
24,771
2,463
16,927
(23,431)
-
(323)
(522)
3,867
108,714
4
2
1,781
(578)
(2)
(1,030)
42,608
17,872
-
(5,799)
(390)
(1,557)
157,955
19,885
5,319
183,159
(20,436)
137,519
5,960
3,265
27,018
(6,461)
-
(321)
(495)
-
(1,275)
(21,711)
19,885
1,875
22,828
(27,722)
-
(319)
-
(525)
4,044
161,448
70
13
704
(367)
(1,298)
-
(100)
7,905
26,106
-
(6,828)
(1,617)
(321)
(1,120)
193,411
16,022
4,236
213,669
(26,926)
166,485
-
(1,170)
(28,096)
16,022
3,066
185,573
34
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
6
PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Included within the oil and gas properties and equipment balance at 31 December 2010 and 2009 are proved
properties of RR 62,509 million and RR 65,086 million, net of accumulated depreciation, depletion and
amortization of RR 8,915 million and RR 7,730 million, respectively.
Oil and gas properties and equipment balance at 31 December 2010 and 2009 include costs to acquire unproved
properties in the amount of RR 4,352 million and RR 99 million, respectively. The Group’s management believes
these costs are recoverable and has plans to explore and develop the respective properties.
Included within assets under construction are advances to suppliers of equipment of RR 2,676 million and
RR 1,217 million at 31 December 2010 and 2009, respectively.
Included in additions to property, plant and equipment for the years ending 31 December 2010 and 2009 are
capitalized interest and foreign exchange loss of RR 2,621 million and RR 1,481 million, respectively. The interest
capitalization rates for 2010 and 2009 used for additions were 5.4 percent and 6.0 percent, respectively.
During 2010, the transfers and additions to oil and gas property include the completion of the second phase of the
Purovsky Gas Condensate Plant for RR 1,718 million, completion of the second and third stages of the second
phase development at the Yurkharovskoye field in the amount of RR 22,784 million and the completion of the
second phase development at the Khancheyskoye field in the amount of the RR 180 million.
During 2009, the transfers and additions to oil and gas property include the completion of the second phase of the
Purovsky Gas Condensate Plant for RR 5,268 million, completion of the second stage of the second phase
development at the Yurkharovskoye field in the amount of RR 8,390 million and the completion of the second
phase development at the Khancheyskoye field in the amount of the RR 2,412 million.
Reconciliation of depreciation, depletion and amortization (DD&A):
DD&A included in operating expenses
DD&A included in general and administrative expenses (see Note 23)
DD&A capitalized in the in the course of intra-group construction services
Total depreciation, depletion and amortization
Year ended 31 December:
2009
2010
6,616
141
71
6,828
5,588
150
61
5,799
At 31 December 2010 and 2009, no property, plant and equipment were pledged as security for the Group’s
borrowings. Impairment of RR 321 million and nil was recognized in respect of oil and gas properties and
equipment for the years ended 31 December 2010 and 2009, respectively.
Capital commitments are disclosed in Note 28.
Asset retirement obligations. Estimated costs of dismantling oil and gas production facilities, pipelines and related
processing facilities, including abandonment and site restoration costs, amounting to RR 1,115 million and
RR 1,235 million at 31 December 2010 and 2009, respectively, are included in the cost of oil and gas properties
and equipment. The Group has estimated its liability based on current legislation using estimated costs and timing
of when the expenses are expected to be incurred between the end of the reporting period and 2051. Governmental
authorities are continually reviewing regulations and their enforcement. Consequently, the Group’s ultimate
liabilities may differ from the recorded amounts.
35
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
7
INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
Associates:
OAO Sibneftegas
OOO Oiltechproduct-Invest
OOO Tailiksneftegas
OOO Petra Invest-M
Joint ventures:
ZAO Terneftegaz
At 31 December:
2010
2009
25,758
-
-
-
1,268
-
438
407
369
-
Total investments in associates and joint ventures
27,026
1,214
The Group’s investment in OOO Yamal Development at 31 December 2010 is valued at nil due to the Group’s
proportionate share of accumulated losses exceeding the Group’s cost of investment. The excess of the
accumulated losses over the Group’s cost of investment in Yamal Development were allocated to decrease of long-
term loans provided by the Group to the joint venture (see Note 8).
The table below summarizes the movement in the carrying amounts of the Group’s investments in associates and
joint ventures.
At 1 January
Share of profit (loss) of associates and joint ventures before income tax
Share of income tax (expense) benefit
Share of profit (loss) of associates and joint ventures, net of income tax
Acquisition of associates and joint ventures
Preliminary goodwill recognized on acquisition of associates
Disposals of subsidiaries resulting in recognition of associates
and joint ventures
Acquisition of controlling stake resulting in derecognition
of associates
Losses recognized in excess of investment in joint ventures,
reclassified to long-term loans receivable
Year ended 31 December:
2009
2010
1,214
(412)
66
(346)
19,176
6,660
1,298
(1,214)
238
1,416
(216)
14
(202)
-
-
-
-
-
At 31 December
27,026
1,214
At 31 December 2010, the Group’s interests in its principal associates and joint ventures and their summarized
financial information, including total assets, liabilities, revenues and profit or loss relating to the Group’s interest,
were as follows:
Associate or joint
venture
Total non-
current
assets
Total
current
assets
Total non-
current
liabilities
Total
current
liabilities
Non-
controlling
interest
Revenues
Profit
(loss)
% interest
held
OOO Yamal
Development and
its subsidiaries
OAO Sibneftegas
ZAO Terneftegaz
68,567
34,053
1,543
1,931
703
170
39,599
14,381
442
7,782
1,277
3
23,355
-
-
-
157
2
(248)
(68)
(30)
50%
51%
51%
Total
104,163
2,804
54,422
9,062
23,355
159
(346)
36
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
8
LONG-TERM LOANS AND RECEIVABLES
Russian rouble denominated loans
Long-term receivables
Interest receivable (non-current)
Total long-term loans and receivables
At 31 December:
2010
2009
38,057
2,063
31
40,151
-
932
1
933
On 15 December 2010, the Group provided two loans to OAO Sibneftegas, the Group’s associate, for RR 7,429
million and RR 3,609 million. The first loan was issued at an annual interest rate of 10 percent and is repayable in
November 2014, whereas the second loan was issued at an annual interest rate of 9.5 percent and is repayable by
equal parts starting from March 2011 until November 2014. Included in the Russian rouble denominated loans is
the long-term parts of the loans in the total amount of RR 10,069 million.
On 29 November 2010, the Group provided a loan to OOO Yamal Development, the Group’s joint venture, in the
amount of RR 28,123 million. The loan was issued at an annual interest rate of 8 percent and, in accordance with
the signed terms and conditions is repayable by 29 November 2011. For the purpose of these financial statements,
the loan was treated as part of the Group’s net investment in its joint venture and classified as long-term. At
31 December 2010, the loan was recorded net of losses accumulated recognized by Yamal Development in excess
of the Group’s investment in the joint venture in the amount of RR 238 million (see Note 7).
No provisions for impairment of long-term loans and receivables were recognized in the consolidated statement of
financial position at 31 December 2010 and 2009.
9
OTHER NON-CURRENT ASSETS
Deferred tax assets
Materials for construction
Other
Total other non-current assets
10
INVENTORIES
Natural gas and hydrocarbon liquids at cost
Materials and supplies at cost
Materials and supplies at net realizable value (net of provisions of
RR 33 million and RR 29 million at 31 December 2010 and 2009, respectively)
Polymer and insulation tape products (net of provisions of
RR nil million at 31 December 2009)
Other inventories
Total inventories
At 31 December:
2010
2009
1,392
953
513
2,858
499
2,115
55
2,669
At 31 December:
2010
2009
1,090
575
192
-
11
705
614
236
174
61
1,868
1,790
The Group recorded an impairment expense of RR 8 million and RR 46 million during the years ended
31 December 2010 and 2009, respectively, to write-down the carrying value of inventory due to obsolescence. No
inventories were pledged as security for the Group’s borrowings or payables at both dates.
37
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
11
TRADE AND OTHER RECEIVABLES
Trade receivables (net of provision of RR nil million and
RR 7 million at 31 December 2010 and 2009, respectively)
Other receivables
Interest on loans receivable
Total trade and other receivables
At 31 December:
2010
2009
7,031
1,445
194
8,670
6,440
1,772
292
8,504
The carrying values of trade and other receivables approximate their respective fair values. The related exposure to
credit risk at the balance sheet date is the carrying value of each class of receivables mentioned above.
The Group holds letter of credit in banks with investment grade rating as security for trade receivables in amount
RR 1,667 million and RR 2,627 million at 31 December 2010 and 2009, respectively. Also the Group holds as a
collateral 100 percent participation interest in OOO NOVATEK-Polymer for other receivables from OAO SIBUR
Holding (see Note 5). The Group does not hold any other collateral as security for trade and other receivables (see
Note 27 for credit risk disclosures).
Trade and other receivables that are less than three months past due are generally not considered for impairment
unless other indicators of impairment exist. Trade and other receivables of RR 8 million and RR 188 million at
31 December 2010 and 2009, respectively were past due but not impaired. These relate to a number of independent
customers for whom there is no recent history of default. The ageing analysis of these past due but not impaired
trade and other receivables are as follows:
Up to 90 days past-due
91 to 360 days past-due
Over 360 days past-due
Total past due but not impaired
Not past due and not impaired
Total trade and other receivables
At 31 December:
2010
2009
-
-
8
8
8,662
8,670
77
103
8
188
8,316
8,504
Movements on the Group provision for impairment of trade and other receivables are as follows:
At 1 January
Additional provision recorded
Receivables written off as uncollectible
Provision amount reversed into income
At 31 December
Year ended 31 December:
2009
2010
7
184
(191)
-
-
34
51
(72)
(6)
7
The provision for impaired trade and other receivables has been included in the consolidated statement of income
in net impairment expense.
38
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
12
PREPAYMENTS AND OTHER CURRENT ASSETS
Financial assets
Russian rouble denominated loans
Short-term bank deposits
Non-financial assets
Recoverable value-added tax
Prepayments and advances to suppliers (net of provision of
RR 89 million and RR 77 million at 31 December 2010 and 2009)
Deferred export duties for stable gas condensate
Prepaid taxes other than income tax
Deferred transportation expense for natural gas
Deferred transportation expense for stable gas condensate
Other current assets
Total prepayments and other current assets
13
CASH AND CASH EQUIVALENTS
Cash at current bank accounts
Russian rouble denominated deposits (average interest rate 2.4% p.a. and
1.8% p.a. for 2010 and 2009, respectively)
US dollar denominated deposits (average interest rate 0.3% p.a. and
0.4% p.a. for 2010 and 2009, respectively)
Other currencies denominated deposits
At 31 December:
2010
2009
969
-
1,340
2,388
1,151
912
824
514
406
8,504
1,477
111
955
1,814
-
660
581
78
124
5,800
At 31 December:
2010
2009
4,509
4,105
1,584
40
2,944
5,479
2,107
2
Total cash and cash equivalents
10,238
10,532
All deposits have original maturities of less than three months (see Note 27 for credit risk disclosures).
14
LONG-TERM DEBT
Russian rouble denominated loans
US dollar denominated loans
Russian rouble denominated bonds
Total
Less: current portion of long-term debt
Total long-term debt
At 31 December:
2010
2009
24,948
19,129
9,949
54,026
(6,952)
11,030
26,673
-
37,703
(13,827)
47,074
23,876
39
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
14
LONG-TERM DEBT (CONTINUED)
At 31 December 2010 and 2009, the Group’s long-term debt by facility is as follows:
Sberbank
Gazprombank
Russian rouble denominated bonds
Syndicated term loan facility
Nordea Bank
UniCredit Bank
Total
At 31 December:
2010
2009
14,948
10,000
9,949
6,952
6,095
6,082
4,924
6,106
-
20,646
-
6,027
54,026
37,703
Sberbank. On 28 August 2009, the Group obtained a RR 5 billion loan from OAO Sberbank repayable in January
and February 2011. Throughout 2010, the Group gradually reduced the stated interest rate from the initial
12.37 percent to 8.5 percent per annum. In July 2010, the loan was fully repaid ahead of its maturity schedule.
On 6 December 2010, the Group obtained a RR 15 billion loan from Sberbank for general corporate purposes
including financing capital expenditures. The loan bears an interest rate of 7.5 percent per annum and is repayable
in December 2013. At 31 December 2010, the outstanding loan amount was RR 14,948 million, net of unamortized
part of the transaction cost of RR 52 million.
Gazprombank. On 3 November 2009, the Group signed a loan agreement with OAO Gazprombank, which
provided the Group with a loan facility of RR 10 billion until November 2012. At 31 December 2010, the full
amount had been drawn down under this loan agreement. Throughout 2010, the Group gradually reduced the stated
interest rate from the initial 13 percent to 8.5 percent per annum. Subsequent to the balance sheet date, in February
2011, the Group was able to further reduce the interest rate to 8 percent per annum.
Russian rouble denominated bonds. In June 2010, the Group issued ten million three-year non-convertible Russian
rouble denominated bonds, each with a nominal value RR 1,000 and an annual coupon rate of 7.5 percent, payable
semi-annually. At 31 December 2010, the outstanding amount was RR 9,949 million, net of unamortized part of the
transaction costs of RR 51 million.
Syndicated term loan facility. On 21 April 2008, the Group obtained a USD 800 million unsecured syndicated term
loan facility for general corporate purposes including funding capital expenditures. The facility has a three-year
tenure with payments to begin 18 months after 21 April 2008 and is to be repaid in quarterly installments thereafter.
The facility paid an initial interest of LIBOR plus 1.25 percent per annum for the first 18 months and subsequently
increased to LIBOR plus 1.5 percent per annum thereafter (1.79 percent and 1.78 percent at 31 December 2010 and
2009, respectively). The loan facility includes the maintenance of certain restrictive financial covenants. At
31 December 2010, the remaining amount of the loan facility was RR 6,952 million (USD 228 million), net of
unamortized part of the transaction costs of RR 15 million.
Nordea Bank. On 16 November 2010, the Group entered into a USD 200 million credit line facility with
OAO Nordea Bank. The facility has a three-year tenure with repayments to begin in the first quarter 2013 and is to
be repaid in quarterly installments thereafter until November 2013. The facility has an initial interest rate of LIBOR
plus 1.9 percent per annum (2.16 percent at 31 December 2010) and includes the maintenance of certain restrictive
financial covenants. At 31 December 2010, the full amount of RR 6,095 million (USD 200 million) had been
drawn under this agreement.
UniCredit Bank. On 5 October 2009, the Group obtained a USD 200 million loan until October 2012 under credit
line facilities with UniCredit Bank at an initial interest rate of LIBOR plus 6.5 percent, which was subsequently
reduced to LIBOR plus 4.65 percent effective from 25 February 2010 (4.92 percent and 6.73 percent at
31 December 2010 and 2009, respectively). The loan includes the maintenance of certain restrictive financial
covenants. At 31 December 2010, the amount of RR 6,082 million (USD 200 million), net of unamortized part of
the transaction costs of RR 13 million, had been drawn under this agreement. Subsequent to the balance sheet date,
in January 2011, the Group was able to further reduce the interest rate to LIBOR plus 3.25 percent per annum.
40
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
14
LONG-TERM DEBT (CONTINUED)
The fair values of long-term debt at 31 December 2010 were as follows:
Sberbank
Gazprombank
Russian rouble denominated bonds
Syndicated term loan facility
UniCredit Bank
Nordea Bank
Total
Scheduled maturities of long-term debt at 31 December 2010 were as follows:
Maturity period:
1 January 2012 to 31 December 2012
1 January 2013 to 31 December 2013
Total long-term debt
15
PENSION OBLIGATIONS
At 31 December 2010
15,000
10,122
10,061
6,885
6,139
5,814
54,021
RR million
16,082
30,992
47,074
In February 2007, the Group announced the implementation of a post-employment benefit program for its retired
employees. Under the pension program, employees who are employed by the Group for more than three years and
retire from the Group on or after the statutory retirement age will receive monthly payments from NOVATEK for
life unless they are actively employed. The amount of payments to be disbursed depends on the average salary,
duration and location of employment. The program is effective from 1 January 2007 and applies to employees who
retire after that date.
The program represents an unfunded defined benefit plan and is accounted for as such under provisions of IAS 19,
Employee Benefits. The impact of the program on the consolidated financial statements is disclosed below.
The amounts recognized in the consolidated statement of financial position and included in other non-current
liabilities are determined as follows:
Present value of the defined benefit obligations
Unrecognized past service cost
Defined benefit plan liability recognized in the consolidated
statement of financial position
At 31 December:
2010
2009
758
(200)
558
620
(228)
392
41
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
15
PENSION OBLIGATION (CONTINUED)
The movements in the present value of the defined benefit obligations are as follows:
At 1 January
Interest cost
Benefits paid
Current service cost
Past services cost
Disposal of obligation due to disposal of subsidiary
Actuarial (gain) loss
At 31 December
The amounts recognized in the consolidated statement of income are as follows:
Year ended 31 December:
2009
2010
620
31
(8)
66
51
(75)
73
758
Year ended 31 December:
2009
2010
Current service cost
Interest cost
Disposal of obligation due to disposal of subsidiary
Actuarial (gain) loss
Amortization of past service cost
Defined benefit plan (benefits) costs recognized in operating expenses
of which the following amounts were included as employee compensation in:
Materials, services and other
General and administrative expenses
66
31
(75)
73
79
174
73
101
468
30
(5)
60
-
-
67
620
60
30
-
67
28
185
85
100
The Group recognized a gain of RR 5 million and RR 2 million as a result of experience adjustments on plan
liabilities during the years ended 31 December 2010 and 2009, respectively, included in actuarial (gain) loss.
The principal actuarial assumptions used at 31 December 2010 and 2009 are as follows:
Weighted average discount rate
Projected annual increase in employee compensation
Expected increases to pension benefits
At 31 December:
2010
2009
7.6%
10%
5%
7.8%
10%
5%
The assumed average salary and pension payment increases for Group employees have been calculated on the basis
of inflation forecasts, analysis of increases of past salaries and the general salary policy of the Group. Inflation
forecasts have been estimated to reduce from 7.9 percent for 2010 to 5.8 percent in 2015 and on average equal to
5.6 percent thereafter.
Mortality assumptions are based on the Russian mortality tables published by the State Statistics Committee from
the years 1986 to 1987, which management believes are the most conservative and prudent Russian
whole-population mortality tables available.
Management has assessed that reasonable changes in the most significant actuarial assumptions will not have a
significant impact on the consolidated statement of income or the liability recognized in the consolidated statement
of financial position.
42
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
16
SHORT-TERM DEBT AND CURRENT PORTION OF LONG-TERM DEBT
US dollar denominated loans
Total
Add: current portion of long-term debt
At 31 December:
2010
2009
18,200
18,200
6,952
-
-
13,827
Total short-term debt and current portion of long-term debt
25,152
13,827
Bridge loan facility. On 29 November 2010, the Group obtained a USD 600 million bridge loan facility for
financing of the acquisition by its joint venture OOO Yamal Development of a 51 percent participation interest in
OOO SeverEnergia (see Note 5). The bridge loan facility has a one year tenure with a bullet repayment to be made
by 15 November 2011. The interest rate under the bridge facility is LIBOR plus 1 percent per annum for the first
six months from 16 November 2010, LIBOR plus 1.25 percent from May 2011 and LIBOR plus 1.5 percent from
August 2011 and includes the maintenance of certain restrictive financial covenants. At 31 December 2010, the
outstanding amount of the loan facility was RR 18,200 million (USD 597 million), net of unamortized part of the
transaction costs of RR 85 million. In February 2011, the bridge loan was fully repaid ahead of its maturity
schedule (see Note 33).
Available credit facilities. Available credit facilities at 31 December 2010 were as follows:
in millions of Russian roubles
Par value in
Credit Agricole Corporate and Investment Bank (a)
BNP PARIBAS Bank (a)
UniCredit Bank (a)
Sumitomo Mitsui Banking Corporation Europe Limited (b)
USD
USD
USD
USD
Total available credit facilities
(a) – interest rates negotiated at time of each withdrawal
(b) – interest rate LIBOR plus 1.45 percent
Expiring
Within
one year
Between
1 and 2 years
3,048
-
-
6,096
9,144
-
3,048
3,048
-
6,096
The Group also maintained available funds under short-term credit lines in the form of bank overdrafts with various
international banks for RR 5,943 million (USD 195 million) and RR 6,048 million (USD 200 million) at
31 December 2010 and 2009, respectively, on either fixed or variable interest rates subject to the specific type of
credit facility.
17
TRADE PAYABLES AND ACCRUED LIABILITIES
Financial liabilities
Trade payables
Other payables
Interest payable
Non-financial liabilities
Advances from customers
Salary payables
Other payables
Trade payables and accrued liabilities
43
At 31 December:
2010
2009
2,194
24,760
53
412
897
163
28,479
2,483
1,979
100
2,041
719
13
7,335
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
17
TRADE PAYABLES AND ACCRUED LIABILITIES (CONTINUED)
At 31 December 2010, other payable included RR 21,176 million relating to the acquisition of 51 percent
ownership in Sibneftegas (see Note 5).
18
SHAREHOLDERS’ EQUITY
Ordinary share capital. Share capital issued and paid in consisted of 3,036,306,000 ordinary shares at
31 December 2010 and 2009 with a par value of RR 0.1 each. The total authorized number of ordinary shares was
10,593,682,000 shares at both dates.
Treasury shares. In accordance with the share buyback program authorized by the Board of Directors on
11 February 2008, the Group’s wholly-owned subsidiary, Novatek Equity (Cyprus) Limited, has periodically
purchased ordinary shares of OAO NOVATEK in the form of Global Depository Receipts (GDRs) on the London
Stock Exchange through the use of independent brokers. At 31 December 2010 and 2009, the Group held
312,277 GDRs (3,123 thousand ordinary shares) and 419,233 GDRs (4,192 thousand ordinary shares) at total cost
of RR 446 million and RR 599 million, respectively. The Group has decided that these shares do not vote.
During the year ended 31 December 2010, the Group sold 106,956 GDRs (1,070 thousand ordinary shares) for
RR 341 million recognizing a gain of RR 188 million which was recorded within additional paid-in capital in the
consolidated statement of changes in equity.
Dividends. Dividends (including tax on dividends) declared and paid were as follows:
Dividends payable at 1 January
Total dividends declared (*)
Dividends paid (*)
Dividends payable at 31 December
Dividends per share declared during the year (in Russian roubles)
Dividends per GDR declared during the year (in Russian roubles)
(*) – excluding treasury shares
Year ended 31 December:
2009
2010
13
9,855
(9,868)
-
3.25
32.5
-
7,641
(7,628)
13
2.52
25.2
The Group declares and pays dividends in Russian roubles. Dividends declared in 2010 and 2009 were as follows:
Final for 2009: RR 1.75 per share or RR 17.5 per GDR declared in April 2010
Interim for 2010: RR 1.50 per share or RR 15.0 per GDR declared in October 2010
Total dividends declared in 2010
Final for 2008: RR 1.52 per share or RR 15.2 per GDR declared in May 2009
Interim for 2009: RR 1.00 per share or RR 10.0 per GDR declared in October 2009
Total dividends declared in 2009
5,314
4,554
9,868
4,615
3,036
7,651
Share-based compensation. In 2005, certain shareholders provided share-based compensation to key members of
the Group’s management team. The fair value of the awards of RR 879 million is being recognized as
compensation expense evenly over their five year vesting period beginning the second quarter of 2005. A
corresponding increase is recorded to additional paid in capital as expense is recognized to reflect the shareholders
contribution in providing the award. The fair value of the awards was determined by reference to the fair value of
the limited liability company’s net assets estimated by its owners.
44
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
18
SHAREHOLDERS’ EQUITY (CONTINUED)
Distributable retained earnings. In accordance with Russian legislation, NOVATEK distributes profits as
dividends or transfers them to reserves (fund accounts) on the basis of financial statements prepared in accordance
with Russian Accounting Rules. Russian legislation identifies the net profit as basis of distribution. Russian
legislation identifies the net profit as basis of distribution. As of the date of preparation of these consolidated
financial statements the statutory net profit of NOVATEK for 2010 as determined under Russian Accounting Rules
has not been finalized. For 2009, the net statutory profit of NOVATEK as reported in the published annual
statutory reporting forms was RR 11,835 million and the closing balance of the accumulated profit including the
current year net statutory profit totaled RR 59,853 million.
Accumulated profits legally distributable are based on the amounts available for distribution in accordance with the
applicable legislation and as reflected in the statutory financial statements of the individual entities of the Group.
These amounts may differ significantly from the amounts calculated on the basis of IFRS.
19
SHARE-BASED COMPENSATION PROGRAM
On 12 February 2010, NOVATEK’s Management Committee approved a share-based compensation program (the
“Program”) for a limited number of the Group’s senior and key management, as well as high-potential managers,
but excluding the members of the Management Committee, which aims to encourage participants to take an active
interest in the future development of the Group and to provide material incentive to create shareholders value in
OAO NOVATEK. The Program was established in accordance with the Concept of the Long-Term Incentive of
Senior Employees approved by the Board of Directors on 25 September 2006 and the Share Buyback Program.
The Program is established as a cash-settled payment program and references the Group’s GDRs, which are
publicly traded on the London Stock Exchange under the ticker symbol “NVTK”. At 31 December 2010, the
Program covered 164 employees amongst which 382,368 GDRs were allocated. Each participant is assigned a pre-
determined number of GDRs in accordance with their respective job classification grade and the entitlement for the
cash-settled share-based payment cannot be transferred to another person. The cash-settled payments will only be
awarded if the participant is employed with the Group at the date of payment.
Total amount of GDRs granted at 12 February 2010
Granted
Exercised
Forfeited
Total amount of GDRs granted at 31 December 2010
Number of GDRs
407,766
-
-
(25,398)
382,368
The Program has three one-year vesting periods ending 31 January 2011, 2012, and 2013. Each participant is
granted share appreciation rights, as part of their remuneration package, and may elect to get paid in cash at the end
of each vesting period or to defer payment to the subsequent vesting periods during the Program life. Each payment
is based on the sale of the allocated GDRs and is calculated as the difference between the GDRs market price at
time of sale and the Program’s pre-defined price set at USD 48.62 relating to the one-third of the total number of
GDRs assigned to each participant during the vesting period, including any deferrals from prior vesting periods.
The grant date is defined as 31 March 2010 and represents the date when all participants agreed to a share-based
payment arrangement. The closing prices per GDR on the LSE at 31 December 2010 and 2009 were USD 119.50
and USD 66.00, respectively.
In accordance with IFRS 2 “Share-based payment”, the Group re-measures the employees’ services rendered and
the liability incurred at the fair value of the liability. Until the liability is settled, the Group re-measures the fair
value of the liability at the end of each reporting period and at the date of settlement, with any changes in fair value
recognized in profit or loss for the period. The liability is measured, initially and at the end of each reporting period
until settled, at the fair value of the share appreciation rights, by applying an option pricing model based on Monte-
Carlo simulations, and to the extent to which the employees have rendered service to date.
45
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
19
SHARE-BASED COMPENSATION PROGRAM (CONTINUED)
The fair value of the Program is determined based on the following assumptions:
Expected volatility
Risk-free interest rate
Expected option life (years)
Exercise price per GDR (USD)
2010
2011
2012
57.7%
-
0.08
48.62
57.7%
0.32%
0.96
48.62
57.7%
0.69%
1.96
48.62
Expected volatility is calculated based on the historical volatility of the price per GDR for the historical period
equal to the expected life of the Program (2.1 years). Risk-free interest rate is based on a benchmark USD curve
including DEPO, FRA and IRS rates.
The fair value of the share-based payments is recognized as a payable to the employees over the vesting period and
any changes in the fair value of the liability recognized in the consolidated statement of income.
During the year ended 31 December 2010, the Group recorded RR 400 million, as expenses under this Program,
which is included in general and administrative expenses, and RR 164 million and RR 236 million was recognized
as trade payables and accrued liabilities and other non-current liabilities at 31 December 2010, respectively.
20
OIL AND GAS SALES
Natural gas
Stable gas condensate
Liquefied petroleum gas
Crude oil
Oil products
Total oil and gas sales
21
TRANSPORTATION EXPENSES
Natural gas transportation to customers
Liquids transportation by rail
Liquids transportation by tankers
Unstable gas condensate transportation from the fields to the
processing facilities through third party pipelines
Crude oil transportation to customers
Other
Year ended 31 December:
2009
2010
71,060
29,754
12,747
1,458
143
53,623
23,599
8,253
1,335
93
115,162
86,903
Year ended 31 December:
2009
2010
26,569
7,350
2,771
307
190
13
20,019
5,820
2,675
340
160
12
Total transportation expenses
37,200
29,026
46
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
22
TAXES OTHER THAN INCOME TAX
The Group is subject to a number of taxes other than income tax, which are detailed as follows:
Unified natural resources production tax
Property tax
Excise and fuel taxes
Other taxes
Total taxes other than income tax
Year ended 31 December:
2009
2010
7,861
1,482
454
280
10,077
6,699
1,155
-
188
8,042
In 2010 and 2009, the unified natural resources production tax for natural gas production was fixed at a rate of
RR 147 per thousand cubic meters.
The unified natural resources production tax rate for gas condensate is set at 17.5 percent of gas condensate
revenues recognized by the producing entities.
Under the Tax Code of the Russian Federation, the tax rate for the unified natural resources production tax for
crude oil is calculated by reference to an average price for Urals blend and an average exchange rate over the
relevant tax period.
23
GENERAL AND ADMINISTRATIVE EXPENSES
Employee compensation
Charitable contributions
Legal, audit, and consulting services
Rent expense
Business trips expense
Fire safety and security expenses
Depreciation – administrative buildings
Concession management services
Insurance expense
Other
Total general and administrative expenses
Year ended 31 December:
2009
2010
3,874
774
504
270
265
149
141
125
73
558
6,733
2,840
533
301
245
207
143
150
225
90
392
5,126
Auditors’ fees and services. ZAO PricewaterhouseCoopers Audit has served as the Group’s independent external
auditors for each of the reported financial years. The independent external auditor is subject to re-appointment at
the Annual General Meeting of shareholders based on the recommendations from the Board of Directors. The
following table presents the aggregate fees for professional services and other services rendered by
ZAO PricewaterhouseCoopers Audit to the Group included within legal, audit, and consulting services:
Audit services fee (audit of the Group’s consolidated financial statements and
the statutory audit of the parent company)
Non-audit services
Total auditors’ fees and services
Year ended 31 December:
2009
2010
36
4
40
37
1
38
47
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
24
MATERIALS, SERVICES AND OTHER
Employee compensation
Materials and supplies
Repair and maintenance services
Processing fees
Electricity and fuel
Fire safety and security expense
Third party services (under operator contracts)
Other
Total materials, services and other
25
FINANCE INCOME (EXPENSE)
Interest income
Interest income on cash and cash equivalents
Interest income on loans issued
Interest income (on historical cost basis)
IAS 32 and IAS 39 “Financial Instruments” – fair value
remeasurement
Total interest income
Interest expense
8.5% RR 10 billion Gazprombank November 2012 (a)
7.5% RR 10 billion Bonds June 2013
8.5% RR 5 billion Sberbank February 2011 (a)
LIBOR+4.65% USD 200 million UniCredit Bank October 2012 (a)
LIBOR+1.5% USD 800 million BNP PARIBAS April 2011
7.5% RR 15 billion Sberbank December 2013
Interest expense on short-term debt (b)
Other interest expense
Subtotal
Less: capitalised interest
Interest expense (on historical cost basis)
IAS 32 and IAS 39 “Financial Instruments” – fair value
remeasurement
Provisions for asset retirement obligations: unwinding of
the present value discount
Total interest expense
Year ended 31 December:
2009
2010
2,572
1,386
640
566
388
179
3
338
6,072
2,457
1,455
396
556
331
186
624
254
6,259
Year ended 31 December:
2009
2010
170
328
498
100
598
Year ended 31 December:
2009
2010
700
392
341
325
318
46
64
6
294
168
462
65
527
298
-
231
86
828
-
288
59
2,192
(2,166)
1,790
(1,280)
26
198
213
437
510
126
183
819
(a) – interest rates were changed during the periods (see Note 14)
(b) – including credit facility with interest rates negotiated at time of each withdrawal (see Note 16)
48
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
26
INCOME TAX
Reconciliation of income tax. The table below reconciles actual income tax expense and theoretical income tax,
determined by applying the statutory tax rate to profit before income tax and share of income in associates.
Profit before income tax (excluding share of profit (loss) of associates,
net of income tax)
Theoretical income tax expense at statutory rate of 20 percent
Increase (decrease) due to:
Non-deductible expenses
Foreign entities’ taxation at lower income tax rate
Other non-temporary differences
Year ended 31 December:
2009
2010
51,428
10,286
538
(112)
92
32,702
6,541
493
(161)
(95)
Total income tax expense
10,804
6,778
Domestic and foreign components of current income tax expense were:
Russian Federation income tax
Foreign income tax
Total current income tax expense
Year ended 31 December:
2009
2010
9,289
116
9,405
5,806
90
5,896
Effective income tax rate. The Group’s Russian statutory income tax rate for 2010 and 2009 was 20 percent. For
the years ended 31 December 2010 and 2009, the Group’s effective income tax rate was 21.0 percent and
20.7 percent, respectively.
The Group does not file a consolidated tax return according to Russian legislation. Instead, each legal entity files
separate tax returns with various authorities, primarily in the Russian Federation.
Deferred income tax. Differences between IFRS and Russian statutory tax regulations give rise to certain
temporary differences between the carrying value of certain assets and liabilities for financial reporting purposes
and for income tax purposes.
Deferred income tax balances are presented in the consolidated statement of financial position as follows:
Long-term deferred income tax asset (other non-current assets)
Long-term deferred income tax liability
Net deferred income tax liability
At 31 December:
2010
2009
1,392
(9,473)
499
(7,460)
(8,081)
(6,961)
Deferred income tax assets expected to be realized within twelve months of 31 December 2010 and 2009 were
RR 747 million and RR 26 million, respectively. Deferred tax liabilities expected to be reversed within twelve
months of 31 December 2010 and 2009 were RR 258 million and RR 82 million, respectively.
49
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
26
INCOME TAX (CONTINUED)
Movements in deferred income tax assets and liabilities during the years ended 31 December 2010 and 2009 are as
follows:
At
31 December
2010
Statement
of Income
effect
Acquisitions
Disposals
At
31 December
2009
Liabilities
Property, plant and equipment
Inventories
Other current assets
Trade payables and accrued liabilities
(11,100)
(75)
(63)
(91)
(2,050)
2
(61)
(8)
(70)
-
-
(82)
282
14
(2)
(1)
(9,262)
(91)
-
-
Total deferred income tax liabilities
(11,329)
(2,117)
(152)
293
(9,353)
Assets
Inventories
Trade and other receivables
Trade payables and accrued liabilities
Tax losses carried forward
Other
Total deferred income tax assets
1,344
116
948
835
5
3,248
426
(14)
331
47
(72)
718
Net deferred income tax liabilities
(8,081)
(1,399)
299
-
(11)
38
-
326
174
102
1
(106)
(181)
(4)
517
129
734
931
81
(188)
2,392
105
(6,961)
Reclassification
to the (assets)
liabilities
classified as
held for sale
At
31 December
2009
Statement
of Income
effect
Acquisitions
Disposals
At
31 December
2008
Liabilities
Property, plant and
equipment
Inventories
Other current assets
Trade payables and
accrued liabilities
Total deferred income tax
liabilities
Assets
Inventories
Trade and other
receivables
Trade payables and
accrued liabilities
Tax losses carried forward
Other
Total deferred income tax
assets
Net deferred income tax
liabilities
(9,262)
(91)
-
-
(26)
-
-
-
(1,672)
(43)
-
25
(126)
-
-
-
35
8
10
-
(7,473)
(56)
(10)
(25)
(9,353)
(26)
(1,690)
(126)
53
(7,564)
(191)
84
228
694
(7)
808
(882)
318
-
117
40
5
480
354
(70)
-
-
(58)
-
430
45
389
226
82
(128)
1,172
(75)
(6,392)
517
129
734
931
81
2,392
(6,961)
30
-
-
29
1
60
34
50
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
26
INCOME TAX (CONTINUED)
At 31 December 2010, the Group had recognized deferred income tax assets of RR 835 million (31 December
2009: RR 931 million) in respect of unused tax loss carry forwards of RR 4,175 million (31 December 2009:
RR 4,655 million). Tax losses can be carried forward for relief against taxable profits for 10 years after they are
incurred, subject to certain limitations. In determining future taxable profits and the amount of tax benefits that are
probable in the future management makes judgments including expectations regarding the Group’s ability to
generate sufficient future taxable income and the projected time period over which deferred tax benefits will be
realized.
27
FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS
The accounting policies for financial instruments have been applied to the line items below:
Financial assets
Non-current
Long-term loans receivable
Trade and other receivables
Long-term bank deposits
Current
Short-term loans receivable
Trade and other receivables
Short-term bank deposits
Cash and cash equivalents
Total carrying amount
Financial liabilities
Non-current
Long-term debt
Other non-current liabilities
Current
Current portion of long-term debt
Short-term debt
Trade and other payables
Total carrying amount
Loans and receivables
At 31 December:
2010
2009
38,057
2,094
-
969
8,670
-
10,238
60,028
-
933
20
1,477
8,504
111
10,532
21,577
Measured at amortized cost
At 31 December:
2010
2009
47,074
110
6,952
18,200
27,007
23,876
2,636
13,827
-
4,562
99,343
44,901
Financial risk management objectives and policies. In the ordinary course of business, the Group is exposed to
market risks from fluctuating prices on commodities purchased and sold, prices of other raw materials, currency
exchange rates and interest rates. Depending on the degree of price volatility, such fluctuations in market prices
may create volatility in the Group’s financial results. To effectively manage the variety of exposures that may
impact financial results, the Group’s overriding strategy is to maintain a strong financial position.
The Group’s principal risk management policies are established to identify and analyze the risks faced by the
Group, to set appropriate risk limits and controls, and to monitor risks and adherence to these limits. Risk
management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s
activities.
51
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
27
FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS (CONTINUED)
Market risk. Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates,
commodity prices and equity prices, will affect the Group’s financial results or the value of its holdings of financial
instruments. The primary objective of mitigating these market risks is to manage and control market risk exposures,
while optimizing the return on risk.
The Group is exposed to market price movements relating to changes in commodity prices such as crude oil, gas
condensate, liquefied petroleum products and natural gas (commodity price risk), foreign currency exchange rates,
interest rates, equity prices and other indices that could adversely affect the value of the Group’s financial assets,
liabilities or expected future cash flows.
(a)
Foreign exchange risk
The Group is exposed to foreign exchange risk arising from various exposures in the normal course of business,
primarily with respect to the US dollar. Foreign exchange risk arises primarily from future commercial
transactions, recognized assets and liabilities when assets and liabilities are denominated in a currency other than
the functional currency.
The Group’s overall strategy is to have no significant net exposure in currencies other than the Russian rouble or
the US dollar. Foreign currency derivative instruments may be utilized to manage the risk exposures associated
with fluctuations on certain firm commitments for sales and purchases, debt instruments and other transactions that
are denominated in currencies other than the Russian rouble, and certain non-Russian rouble assets and liabilities.
The carrying amounts of the Group’s financial instruments are denominated in the following currencies:
At 31 December 2010
Russian rouble
US dollar
Other
Total
Financial assets
Non-current
Long-term loans receivable
Trade and other receivables
Current
Short-term loans receivable
Trade and other receivables
Cash and cash equivalents
Financial liabilities
Non-current
Long-term debt
Other non-current liabilities
Current
Current portion of long-term debt
Short-term debt
Trade and other payables
37,955
2,072
969
4,759
6,085
(34,897)
-
-
-
(23,589)
102
-
-
3,582
3,169
(12,177)
(110)
(6,952)
(18,200)
(3,350)
-
22
-
329
984
-
-
-
-
(68)
38,057
2,094
969
8,670
10,238
(47,074)
(110)
(6,952)
(18,200)
(27,007)
Net exposure at 31 December 2010
(6,646)
(33,936)
1,267
(39,315)
52
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
27
FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS (CONTINUED)
At 31 December 2009
Russian rouble
US dollar
Other
Total
Financial assets
Non-current
Trade and other receivables
Long-term deposits
Current
Short-term loans receivable
Trade and other receivables
Short-term bank deposits
Cash and cash equivalents
Financial liabilities
Non-current
Long-term debt
Other non-current liabilities
Current
Current portion of long-term debt
Short-term debt
Trade and other payables
933
20
1,477
4,461
43
7,390
-
-
-
4,021
-
3,128
(11,030)
-
(12,846)
(2,636)
-
(13,827)
-
-
-
22
68
14
-
-
-
933
20
1,477
8,504
111
10,532
(23,876)
(2,636)
(13,827)
(4,312)
(222)
(28)
(4,562)
Net exposure at 31 December 2009
(1,018)
(22,382)
76
(23,324)
The Group has chosen to provide information about market risk and potential exposure to hypothetical loss from its
use of financial instruments through sensitivity analysis disclosures in accordance with IFRS requirements.
The sensitivity analysis depicted in the table below reflects the hypothetical loss that would occur assuming a
10 percent change in exchange rates and no changes in the portfolio of instruments and other variables at
31 December 2010 and 2009, respectively.
Effect on pre-tax profit
Increase in exchange rate
At 31 December:
2010
2009
RUR / USD
10%
(3,394)
(2,239)
The effect of a corresponding 10 percent decrease in exchange rate is approximately equal and opposite.
(b)
Commodity price risk
The Group’s overall commercial trading strategy in natural gas, stable gas condensate and crude oil and related
products is centrally managed. Changes in commodity prices could negatively or positively affect the Group’s
results of operations. The Group manages the exposure to commodity price risk by optimizing its core activities to
achieve stable price margins.
Natural gas. As an independent natural gas producer, the Group is not subject to the government’s regulation of
natural gas prices. Nevertheless, the Group’s prices for natural gas sold are strongly influenced by the prices
regulated by the Federal Tariffs Service (FTS), a governmental agency. In November 2006, the FTS approved and
published a plan to liberalize the price of natural gas sold on the Russian domestic market by the year 2011.
As part of the plan, the FTS increased the regulated price by 5 percent, 7 percent, 7 percent and 6.2 percent
effective 1 January 2009, 1 April 2009, 1 July 2009 and 1 October 2009, respectively. In December 2009, the FTS
approved an increase of 15 percent in the regulated price effective 1 January 2010 for the year 2010. In December
2010, the FTS approved a further increase of 15 percent in the regulated price effective 1 January 2011 for the year
2011.
53
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
27
FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS (CONTINUED)
In February 2011, the Government of the Russian Federation announced certain revisions to the domestic natural
gas market liberalization plan. According to the revised plan, the target date for full liberalization of the domestic
natural gas market is 1 January 2015. The regulation of the domestic natural gas price prior to 2015 will be based
on the net-back parity of natural gas prices on the domestic and export markets while taking into account the cost of
alternative fuels.
Management believes it has limited downside commodity price risk for natural gas and does not use commodity
derivative instruments for trading purposes. However, to effectively manage the margins achieved through its
natural gas trading activities, management has established targets for volumes sold to wholesale traders, end-
customers and the natural gas exchange.
Liquid hydrocarbons. The Group sells all its crude oil and related products and gas condensate under spot
contracts. Gas condensate volumes sold to the US, European and Asian-Pacific Region (hereinafter referred to as
“APR”) markets are based on benchmark reference crude oil prices of WTI, Brent IPE and Dubai or Naphtha
Japan, respectively, plus a margin or discount, depending on current market situation. Crude oil sold internationally
is based on benchmark reference crude oil prices of Brent dated, plus a discount and on a transaction-by-transaction
basis for volumes sold domestically. As a result, the Group’s revenues from the sales of liquid hydrocarbons are
subject to commodity price volatility based on fluctuations or changes in the crude oil benchmark reference prices.
(c)
Cash flow and fair value interest rate risk
The Group is subject to interest rate risk on financial liabilities with variable interest rates. To mitigate this risk, the
Group’s treasury function performs periodic analysis of the current interest rate environment and depending on that
analysis management makes decisions whether it would be more beneficial to obtain financing on a fixed-rate or
variable-rate basis. In cases where the change in the current market fixed or variable interest rates is considered
significant management may consider refinancing a particular debt on more favorable interest rate terms.
Changes in interest rates impact primarily debt by changing either their fair value (fixed rate debt) or their future
cash flows (variable rate debt). Management does not have a formal policy of determining how much of the
Group’s exposure should be to fixed or variable rates. However, at the time of raising new debts management uses
its judgment to decide whether it believes that a fixed or variable rate would be more favorable over the expected
period until maturity.
The interest rate profiles of the Group’s interest-bearing financial instruments at the reporting dates were as
follows:
At variable rate
At fixed rate
Total debt
At 31 December:
2010
2009
37,327
34,899
26,673
11,030
72,226
37,703
The Group centralizes the cash requirements and surpluses of controlled subsidiaries and the majority of their
external financing requirements, and applies, on its consolidated net debt position, a funding policy to optimize its
financing costs and manage the impact of interest rate changes on its financial results in line with market
conditions. In this way, the Group is able to ensure that the balance between the floating rate portion of its debt and
its cash surpluses has a low level of exposure to any change in interest rates over the short term. This policy makes
it possible to significantly limit the Group’s sensitivity to interest rate volatility.
The Group’s financial results are sensitive to changes in interest rates on the floating rate portion of the Group’s
debt portfolio. If the interest rates applicable to floating rate debt were to increase by 100 basis points at the
reporting dates, assuming all other variables remain constant, it is estimated that the Group’s profit before taxation
for 2010 would decrease by the amounts shown below.
54
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
27
FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS (CONTINUED)
Effect on pre-tax profit
Increase by 100 basis points
At 31 December:
2010
2009
373
267
The effect of a corresponding 100 basis points decrease in interest rate is approximately equal and opposite.
The Group is examining various ways to manage its cash flow interest rate risk by using a combination of floating
and fixed interest rates. No swaps or other similar instruments were in place as of 31 December 2010 and 2009, or
during 2010 and 2009.
Credit risk. Credit risk refers to the risk exposure that a potential financial loss to the Group may occur if a
counterparty defaults on its contractual obligations.
Credit risk is managed on a Group level and arises from cash and cash equivalents, including short-term deposits
with banks, as well as credit exposures to customers, including outstanding trade receivables and committed
transactions. Cash and cash equivalents are deposited only with banks that are considered by the Group at the time
of deposit to minimal risk of default.
The Group’s trade and other receivables consist of a large number of customers, spread across diverse industries
and geographical areas. Most of the Group’s international liquid sales are made to customers with independent
external ratings; however, if the customer has a credit rating below BBB-, the Group requires the collateral for the
trade receivable to be in the form of letters of credit from banks with an investment grade rating. All domestic sales
of liquid hydrocarbons are made on a 100 percent prepayment basis. The Group also requires 100 percent
prepayments from small customers for natural gas deliveries and partial advances from others. Although the Group
generally does not require collateral in respect of trade and other receivables, it has developed standard credit
payment terms and constantly monitors the status of trade receivables and the creditworthiness of the customers.
The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the
consolidated statement of financial position.
The table below highlights the Group’s trade and other receivables to published credit ratings of its counterparties.
Moody’s and/or Fitch
Investment grade rating
Non-investment grade rating
No external rating
Total trade and other receivables
At 31 December:
2010
2009
4,489
1,338
2,843
8,670
5,176
2,939
389
8,504
The table below highlights the Group’s cash and cash equivalents balances to published credit ratings of its banks.
Moody’s and/or Fitch
Investment grade rating
Non-investment grade rating
No external rating
Total cash and cash equivalents
At 31 December:
2010
2009
8,008
1,781
449
9,614
846
72
10,238
10,532
Investment grade ratings classification referred to as Aaa to Baa3 for Moody’s Investment Services and as AAA to
BBB- for Fitch Rating, respectively.
55
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
27
FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS (CONTINUED)
Liquidity risk. Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall
due. The Group’s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its
liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking
damage to the Group’s reputation. In managing its liquidity risk, the Group maintains adequate cash reserves and
debt facilities, continuously monitors forecast and actual cash flows and matches the maturity profiles of financial
assets and liabilities.
The Group prepares various financial plans (monthly, quarterly and annually) which ensures that the Group has
sufficient cash on demand to meet expected operational expenses, financial obligations and investing activities for a
period of 30 days or more. The Group has entered into a number of short-term credit facilities. Such credit lines and
overdraft facilities can be drawn down to meet short-term financing needs. To fund cash requirements of a more
permanent nature, the Group will normally raise long-term debt in available international and domestic markets.
All of the Group’s financial liabilities represent non-derivative financial instruments. The following tables
summarize the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments,
including interest payments:
At 31 December 2010
Debt at fixed rate
Principal (*)
Interest
Debt at variable rate
Principal (*)
Interest
Trade and other payables
Less than
1 year
Between
1 and 2 years
Between
2 and 5 years
-
2,725
25,252
656
27,007
10,000
2,372
6,095
413
-
25,000
1,411
6,095
78
-
Total
35,000
6,508
37,442
1,147
27,007
Total financial liabilities
55,640
18,880
32,584
107,104
At 31 December 2009
Debt at fixed rate
Principal (*)
Interest
Debt at variable rate
Principal (*)
Interest
Trade and other payables
Less than
1 year
Between
1 and 2 years
Between
2 and 5 years
-
619
13,827
570
4,562
4,924
77
6,819
385
2,636
6,106
-
6,027
209
-
Total
11,030
696
26,673
1,164
7,198
Total financial liabilities
19,578
14,841
12,342
46,761
(*) – differs from long-term debt (Note 14) for transaction costs
Capital management. The primary objectives of the Group’s capital management policy is to ensure a strong
capital base to fund and sustain its business operations through prudent investment decisions and to maintain
investor, market and creditor confidence to support its business activities.
At the reporting date, the Group had investment grade credit ratings of Baa3 (stable outlook) by Moody’s Investor
Services, BBB- (negative outlook) by Fitch Ratings, and a credit rating of BBB- (negative outlook) by Standard &
Poor’s. To maintain its credit ratings, the Group has established certain financial targets and coverage ratios that it
monitors on a quarterly and annual basis.
The Group manages its liquidity on a corporate-wide basis to ensure adequate funding to sufficiently meet group
operational requirements. All external debts are centralized at the parent level, and all financing to Group entities is
facilitated through inter-company loan arrangements.
56
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
28
CONTINGENCIES AND COMMITMENTS
The Group has a stated dividend policy that distributes at least 30 percent of its parent company’s non-consolidated
statutory net profit determined according to Russian accounting standards. However, the dividend for a specific
year is determined after taking into consideration future earnings, capital expenditure requirements, future business
opportunities and the Group current financial position. Dividends are recommended by the Board of Directors and
approved by the NOVATEK’s shareholders.
The Group defines the term “capital” as equity attributable to OAO NOVATEK shareholders minus net debt (total
debt less cash and cash equivalents). There were no changes to the Group’s approach to capital management during
the year.
Operating environment. The Russian Federation continues to display some characteristics of an emerging market.
These characteristics include, but are not limited to, the existence of a currency that is in practice not convertible in
most countries outside of the Russian Federation, and relatively high inflation. The tax, currency and customs
legislation is subject to varying interpretations, frequent changes and other legal and fiscal impediments contribute
to the challenges faced by entities currently operating in the Russian Federation. The future economic direction of
the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary measures
undertaken by the Government, together with tax, legal, regulatory, and political developments.
The Group’s business operations are primarily located in the Russian Federation and are thus exposed to the
economic and financial markets of the country.
Commitments. At 31 December 2010, the Group had contractual capital expenditures commitments aggregating
approximately RR 9,834 million (at 31 December 2009: RR 10,974 million) mainly for phase two development of
the Yurkharovskoye field (through 2012), development of the East-Tarkosalinskoye and Khancheyskoye fields
(through 2011), for continuation of phase two construction of the Purovsky Gas Condensate Plant (through 2011)
and development of the South-Tambeyskoye field (through 2012) all in accordance with duly signed agreements. In
addition, at 31 December 2010, the Group has capital commitments for exploration activities under the El Arish
Concession Agreement aggregating USD nil million (at 31 December 2009: USD 13 million). Furthermore the
Group’s share of capital commitments for investments in joint ventures aggregates approximately RR 4,581 million
development of the Samburgskoye field through 2012 (at 31 December 2009: nil).
Taxation. Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which
can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activities of
the Group may be challenged by the relevant regional and federal authorities. Furthermore, events within the
Russian Federation suggest that the tax authorities may be taking a more assertive position in its interpretation of
the legislation and assessments, and it is possible that transactions and activities that have not been challenged in
the past may be challenged. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal
periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of
review. Under certain circumstances reviews may cover longer periods.
As at 31 December 2010, management believes that its interpretation of the relevant legislation is appropriate and
that it is probable that the Group’s tax, currency and customs positions will be sustained. Where management
believes it is probable that a position cannot be sustained, an appropriate amount has been accrued.
Mineral licenses. The Group is subject to periodic reviews of its activities by governmental authorities with respect
to the requirements of its mineral licenses. Management cooperates with governmental authorities to agree on
remedial actions necessary to resolve any findings resulting from these reviews. Failure to comply with the terms of
a license could result in fines, penalties or license limitation, suspension or revocation. The Group’s management
believes any issues of non-compliance will be resolved through negotiations or corrective actions without any
material adverse effect on the Group’s financial position, statement of income or of cash flows.
57
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
28
CONTINGENCIES AND COMMITMENTS (CONTINUED)
The Group’s oil and gas fields and license areas are situated on land located in the Yamal-Nenets Autonomous
Region. Licenses are issued by the Federal Agency for the Use of Natural Resources under the Ministry of Natural
Resources and the Group pays unified natural resources production tax to produce oil and gas from these fields and
contributions for exploration of license areas. The principal licenses of the Group and its associates and joint
ventures and their expiry dates are:
Field
License holder
License expiry date
Yurkharovskoye
East-Tarkosalinskoye
Khancheyskoye
Sterkhovoye
(within the Olimpiyskiy license area)
South-Tambeyskoye
Termokarstovoye
Beregovoe
Pyreinoye
Samburgskoye
Yevo-Yakhinskoye
Yaro-Yakhinskoye
North-Chaselskoye
OOO NOVATEK-Yurkharovneftegas
OOO NOVATEK-Tarkosaleneftegas
OOO NOVATEK-Tarkosaleneftegas
OOO NOVATEK-Tarkosaleneftegas
OAO Yamal LNG
ZAO Terneftegas (joint venture)
OAO Sibneftegas (associate)
OAO Sibneftegas (associate)
OAO Arkticheskaya gazovaya kompaniya
(under control of joint venture Yamal Development)
OAO Arkticheskaya gazovaya kompaniya
(under control of joint venture Yamal Development)
ZAO Urengoil Inc.
(under control of joint venture Yamal Development)
OAO Neftegastehnologiya
(under control of joint venture Yamal Development)
2034
2043
2044
2026
2045
2021
2023
2021
2018
2018
2018
upon full production
Management believes the Group has the right to extend its licenses beyond the initial expiration date under the
existing legislation and intends to exercise this right on all of its fields.
Environmental liabilities. The Group and its predecessor entities have operated in the oil and gas industry in the
Russian Federation for many years. 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 obligations under environmental regulations and, as obligations are determined, they are
recognized as an expense immediately if no future benefit is discernible. Potential liabilities which might arise as a
result of a change in interpretation of existing regulations, civil litigation or changes in legislation cannot be
estimated. Under existing legislation, management believes that there are no probable liabilities which will have a
material adverse effect on the Group’s financial position, statement of income or of cash flows.
Legal contingencies. The Group is subject of, or party to a number of court proceedings (both as a plaintiff and a
defendant) arising in the ordinary course of business. In the opinion of management, there are no current legal
proceedings or other claims outstanding, which could have a material effect on the result of operations or financial
position of the Group and which have not been accrued or disclosed in the consolidated financial statements.
58
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
29
PRINCIPAL SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES
The principal subsidiaries and associates of the Group and respective ownership in the ordinary share capital at
31 December 2010 and 2009 are set out below.
Ownership percent at 31 December:
2010
2009
Country of
incorporation
Principal
activities
Subsidiaries
OOO NOVATEK-Yurkharovneftegas
OOO NOVATEK-Tarkosaleneftegas
OOO NOVATEK-Purovsky ZPK
OOO NOVATEK-Transervice
OOO NOVATEK-AZK
OOO NOVATEK Severo-Zapad
OOO NOVATEK-Polymer
OOO NOVATEK-Ust-Luga
OOO Yargeo
OAO Yamal LNG
OOO Oiltechproduct-Invest (merged into
OOO NOVATEK-Tarkosaleneftegas in
December 2010)
OOO Petra Invest-M
OOO Tailiksneftegas
OOO Tambeyneftegaz
OOO NOVATEK-Perm
OOO Yamalgazresurs-Chelyabinsk
OOO EkropromStroy
Novatek Overseas AG
Runitek GmbH
Novatek Overseas Exploration & Production
GmbH
Novatek Equity (Cyprus) Limited
Novatek Polska
Joint ventures
ZAO Terneftegas (until September 2009
OOO Terneftegas)
OOO Yamal Developmet
OOO SeverEnergia (through OOO Yamal
Developmet)
Associates
OAO Sibneftegas
100
100
100
100
100
100
100
100
51
51
25
25
25
-
-
-
100
100
100
100
100
100
100
-
-
-
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Switzerland
Switzerland
Switzerland
(branch in Egypt)
Cyprus
Poland
Russia
Russia
Russia
Russia
Exploration and
production
Exploration and
production
Gas Condensate Plant
Transportation services
Wholesale and retail
trading
Trading and marketing
Production of polymer
and insulation tape
Construction of sea
terminal
Exploration activities
Exploration activities
Exploration activities
Exploration activities
Exploration activities
Exploration activities
Trading and marketing
Trading and marketing
Construction of office
building
Holding company
Trading and marketing
Exploration activities
Purchase and sale of the
Group’s shares
Trading and marketing
Exploration and
production
Holding company
Exploration and
production
Exploration and
production
100
100
100
100
100
100
-
100
51
51
-
100
100
100
100
100
100
100
100
100
100
100
51
50
25.5
51
59
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
30
RELATED PARTY TRANSACTIONS
Transactions between NOVATEK and its subsidiaries, which are related parties of NOVATEK, have been
eliminated on consolidation and are not disclosed in this Note.
For the purposes of these consolidated financial statements, parties are generally considered to be related if one
party has the ability to control the other party, is under common control, or can exercise significant influence over
the other party in making financial and operational decisions. Management has used reasonable judgments in
considering each possible related party relationship with attention directed to the substance of the relationship, not
merely the legal form. Related parties may enter into transactions, which unrelated parties might not, and
transactions between related parties may not be affected 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.
All natural gas producers and wholesalers operating in Russia transport their natural gas volumes through the
Unified Gas Supply System (UGSS), which is owned and operated by OAO Gazprom, a State monopoly. As an
independent natural gas producer, the Group utilizes the UGSS to transport natural gas to end-consumers at the
tariff established by the Federal Tariff Service.
Transactions with OAO Gazprom, a shareholder of significant influence, from October 2006 until 20 December
2010, and its subsidiaries are presented below.
Related parties – (cid:584)(cid:570)(cid:584) Gazprom and its subsidiaries
Transactions
(cid:584)(cid:570)(cid:584) Gazprom:
Natural gas sales
Natural gas transportation to customers
Other expenses
OOO Gazprom mezhregiongaz (formerly OOO Mezhregiongaz):
Natural gas sales
Other Gazprom subsidiaries:
Sales of polymer and insulation tape
Unstable gas condensate transportation
Processing fees
Natural gas transportation
Other operating income (loss)
Other expenses
Balances
(cid:584)(cid:570)(cid:584) Gazprom:
Trade payables and accrued liabilities
OOO Gazprom mezhregiongaz (formerly OOO Mezhregiongaz):
Trade and other receivables
Other Gazprom subsidiaries:
Trade and other receivables
Trade payables and accrued liabilities
As at and for the year ended
31 December:
2010
2009
12,935
(26,550)
(25)
-
(19,930)
(3)
1,055
15,791
22
(307)
(458)
(4)
9
(34)
-
-
-
-
37
(340)
(532)
(3)
-
(33)
530
784
16
157
On 20 December 2010, OAO Gazprom sold 9.4 percent of its NOVATEK shares to a third party and consequently
ceased to be a related party of the Group from that date.
60
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
30
RELATED PARTY TRANSACTIONS (CONTINUED)
Related parties – associates and joint ventures
Transactions
(cid:584)(cid:570)(cid:584) Sibneftegas (from December 2010):
Interest income on loans issued
OOO Yamal Development and its subsidiaries (from November 2010):
Interest income on loans issued
OOO Oiltechproduct-Invest, OOO Petra Invest-M and OOO Tailiksneftegas
(until February 2010):
Other revenues
Interest income on loans issued
Balances
(cid:584)(cid:570)(cid:584) Sibneftegas (from December 2010):
Long-term loans receivable
Interest on long-term loans receivable
Short-term loans receivable
OOO Yamal Development and its subsidiaries (from November 2010):
Long-term loans receivable
Interest on long-term loans receivable
ZAO Terneftegas (from February 2010):
Long-term loans receivable
OOO Oiltechproduct-Invest, OOO Petra Invest-M and OOO Tailiksneftegas
(until February 2010):
Long-term loans and receivable
Trade and other receivables
Short-term loans receivable
As at and for the year ended
31 December:
2010
2009
45
191
-
-
10,070
33
967
27,886
191
102
-
-
-
-
-
773
76
-
-
-
-
-
-
108
80
837
As discussed in Note 5, in February 2010, the Group’s effective control over ZAO Terneftegas ceased; therefore,
subsequent to that event, the Group’s balances and transactions with this entity were disclosed as related parties –
joint ventures.
As discussed in Note 5, in February 2010, the Group increased its participation interests in OOO Oiltechproduct-
Invest, OOO Petra Invest-M and OOO Tailiksneftegas to 51 percent. These companies ceased to be associates
subsequent to the date that the Group effectively acquired a controlling stake in these companies and, from that
date forwards, are fully consolidated and are no longer accounted for as related parties.
61
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
30
RELATED PARTY TRANSACTIONS (CONTINUED)
Related parties – parties under significant influence
of key management personnel
Transactions
OOO Nova (formerly SNP NOVA):
Purchases of construction services (capitalized within property, plant and equipment)
Oil products sales
Other revenues
Other expenses
Other operating income (loss)
OAO Tambeyneftegas (until July 2010):
Other operating income (loss)
Other expenses
Interest income on loans issued
Aldi trading Limited, Orsel consultant Limited, Innecto ventures Limited:
Finance income (expense)
Balances
OOO Nova (formerly SNP NOVA):
Trade and other receivables
Advances for construction
Trade payables and accrued liabilities
OAO Tambeyneftegas (until July 2010):
Trade and other receivables
Short-term loans receivable
OAO SIBUR Holding (from December 2010):
Trade and other receivables
Long-term receivable
Trade payables and accrued liabilities
Aldi trading Limited, Orsel consultant Limited, Innecto ventures Limited:
Other non-current liabilities
Trade payables and accrued liabilities
As at and for the year ended
31 December:
2010
2009
3,825
17
7
(9)
17
(11)
(15)
44
(221)
20
278
312
-
-
218
1,548
11
-
2,836
2,245
28
20
(5)
-
-
(16)
79
(41)
11
137
188
184
636
-
-
-
2,636
-
In December 2010, Chairman of the Management Board of NOVATEK acquired an effective 25 percent stake in
OAO SIBUR Holding. As a result, the Group’s balances and transactions with this company and its subsidiaries are
disclosed from that date as related parties – parties under significant influence of key management personnel.
As discussed in Note 5, in July 2010, the Group acquired a 75 percent ownership interest in OAO Tambeyneftegas
from parties under significant influence of a member of the Group’s Board of Directors for RR 234 million (USD 7
million) and, as a result, this entity is fully consolidated and is no longer accounted for as a related party.
As discussed in Note 5, in May 2009, the Group purchased a 51 percent stake in OAO Yamal LNG. Following the
acquisition (but not as of the acquisition date), an individual who significantly influences the sellers of the stake
became a member of the Group’s Board of Directors. Consequently, the sellers are considered a related party at
31 December 2009 and thereafter. The Group included outstanding liabilities to these related parties (Aldi trading
Limited, Orsel consultant Limited, Innecto ventures Limited) in trade payables and accrued liabilities and other
non-current liabilities at 31 December 2010 and 2009, respectively.
62
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
30
RELATED PARTY TRANSACTIONS (CONTINUED)
In addition, in June 2010, the Group paid RR 30 million in transaction fees to Investment Company Troika Dialog,
the party under significant influence of a member of the Group’s Board of Directors, for services related to the
issuance of Russian rouble denominated bonds. This transaction cost was capitalized within long-term debt and will
be amortized over the bonds life time.
Related parties – party under control of key management personnel
Transactions
OAO Pervobank:
Finance income (expense)
Other expenses
Balances
OAO Pervobank:
Cash and cash equivalents
As at and for the year ended
31 December:
2010
2009
18
(12)
30
-
1,760
845
As discussed in Note 5, in June 2009, the Group purchased 100 percent participation interest of
OOO EkropromStroy from several members of the Group’s key management personnel. As part of this acquisition,
the Group consolidated a US dollar denominated long-term debt of RR 468 million (USD 15 million) of
OOO EkropromStroy to SWGI Growth Fund (Cyprus) Limited, a party under control of key management
personnel. The loan bore annual interest of 5.2 percent and was fully repaid in July 2009 ahead of its maturity
schedule.
Key management compensation. The Group paid to key management personnel (members of the Board of
Directors and the Management Committee, some of whom have also direct and indirect interests in the Group)
short-term compensation, including salary, bonuses, and excluding dividends the following amounts.
Related parties – members of the key management personnel
Board of Directors
Management Committee
Total compensation
Year ended 31 December:
2009
2010
93
1,049
1,142
38
624
662
Such amounts include personal income tax and are net of unified social tax. The Board of Directors consists of nine
members. The Management Committee consisted of 11 members until 4 December 2009 and was subsequently
increased to 15 members.
The remuneration for serving on the Board of Directors is subject to approval by the General Meeting of
Shareholders. Members of the Management Committee also receive certain short-term benefits related to
healthcare.
In addition, RR 68 million and RR 176 million was recognized during the years ended 31 December 2010 and
2009, respectively, as part of the share-based compensation scheme and included in general and administrative
expenses. At 30 June 2010, share-based compensation to the key members of the Group’s management team
provided in 2005 (see Note 18) was fully recognized in the consolidated statement of changes in equity.
63
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
31
SEGMENT INFORMATION
The Group’s activities are considered by the chief operating decision maker (hereinafter referred to as “CODM”,
represented by the Management Committee of NOVATEK) to comprise the following operating segments:
•
•
Exploration, production and marketing – acquisitions, exploration, development, production, processing,
marketing and transportation of natural gas, gas condensate and related products; and
Polymer products production and marketing – production and marketing of polymer insulation tape and other
polymer products (disposed in September 2010, see Note 5).
Segment information is provided to the CODM in accordance with management accounting based on Regulations
on Accounting and Reporting of the Russian Federation (“RAR”) with reconciling items largely representing
adjustments and reclassifications recorded in the consolidated financial statements for the fair presentation in
accordance with IFRS.
Segment information for the year ended 31 December 2010 is as follows:
For the year ended 31 December 2010
References
Exploration,
production
and
marketing
Polymer
products
production
and
marketing
Segment
information
as reported
to CODM
Total per
consolidated
financial
statements
Reconciling
items
External revenues
Operating expenses
Other operating income (loss)
Interest expense
Interest income
Foreign exchange gain (loss)
a, b, c, d
e, b
f, h
g
115,590
(67,879)
767
(2,010)
414
580
1,739
(1,545)
15
-
2
-
117,329
(69,424)
782
(2,010)
416
580
(305)
906
943
1,573
182
456
117,024
(68,518)
1,725
(437)
598
1,036
Segment result
47,462
211
47,673
3,755
51,428
Share of loss of associates, net
of income tax
Profit before income tax
Depreciation, depletion and
amortization
Capital expenditures
Reconciling items mainly related to:
(346)
51,082
a, b
g, h
9,031
22,259
50
57
9,081
22,316
(2,324)
3,790
6,757
26,106
a.
b.
c.
d.
different methodology in calculating depreciation, depletion and amortization for oil and gas properties
between IFRS (units of production method) and management accounting (straight-line method), which
resulted in reversal of RR 3,049 million in operating expenses under IFRS;
different methodology in the classification of depreciation, depletion and amortization for operating assets,
which have not completed their statutory registration, between IFRS and management accounting, which
resulted in the reclassification of RR 464 million from other operating income (loss) to depreciation, depletion
and amortization in operating expenses under IFRS;
different methodology in recognizing expenses relating to natural gas storage services and payroll (incl. share-
based payments, pension obligation, discounting loans to employee and bonus accruals) between IFRS and
management accounting, which resulted in additional transportation expenses of RR 149 million and
additional payroll expenses of RR 708 million recorded in operating expenses under IFRS;
different methodology in recognizing of impairment expenses in respect of different categories of assets
between IFRS and management accounting, which resulted in additional operating expense of RR 541 million
charged under IFRS;
64
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
31
e.
f.
g.
h.
SEGMENT INFORMATION (CONTINUED)
different methodology in recognizing the gain on disposal of ownership interest in ZAO Terneftegas and
OOO NOVATEK-Polymer between IFRS and management accounting, which resulted in additional gain of
RR 185 million recorded in other operating income (loss) under IFRS;
different methodology in valuating long-term payables and asset retirement obligations between IFRS and
management accounting, which resulted in additional interest expense of RR 411 million charged under IFRS;
different methodology in capitalization policy between IFRS and management accounting which resulted in
additional capitalization of foreign exchange loss of RR 455 million under IFRS; and
different methodology in interest capitalization policy and certain recognition policy differences in capital
expenditures between IFRS and management accounting, which resulted in additional interest capitalized and
additional capitalization of foreign exchange loss of RR 2,349 million and additional capital expenditures of
RR 1,441 million under IFRS.
Segment information for the year ended 31 December 2009 is as follows:
For the year ended 31 December 2009
References
Exploration,
production
and
marketing
Polymer
products
production
and
marketing
Segment
information
as reported
to CODM
Total per
consolidated
financial
statements
Reconciling
items
External revenues
Operating expenses
Other operating income (loss)
Interest expense
Interest income
Foreign exchange gain (loss)
a
b, c
c
d, e
87,588
(54,088)
(1,133)
(1,212)
347
(736)
1,925
(1,824)
3
-
1
(1)
89,513
(55,912)
(1,130)
(1,212)
348
(737)
441
(218)
839
393
179
198
89,954
(56,130)
(291)
(819)
527
(539)
Segment result
30,766
104
30,870
1,832
32,702
Share of loss of associates, net of
income tax
Profit before income tax
Depreciation, depletion and
amortization
Capital expenditures
Reconciling items mainly related to:
(202)
32,500
d
5,825
19,557
36
32
5,861
19,589
(123)
(1,717)
5,738
17,872
a.
b.
c.
d.
e.
different methodology in recognizing deferred natural gas revenue of RR 381 million recorded under IFRS in
external revenues as a result of acquisitions of Tarkosaleneftegas and Khancheyneftegas in 2004;
different methodology in calculating depreciation, depletion and amortization for oil and gas properties
between IFRS (units of production method) and management accounting (straight-line method), which
resulted in reversal of RR 951 million in operating expenses under IFRS;
different methodology in the classification of depreciation, depletion and amortization for operating assets,
which have not completed their statutory registration, between IFRS and management accounting, which
resulted in the reclassification of RR 966 million from other operating income (loss) to depreciation, depletion
and amortization in operating expenses under IFRS;
different methodology in interest capitalization policy and certain recognition policy differences in capital
expenditures between IFRS and management accounting, which resulted in additional interest capitalized of
RR 1,084 million and reversal of capital expenditures of RR 2,801 million under IFRS; and
different methodology in valuating long-term payables and asset retirement obligations between IFRS and
management accounting, which resulted in additional interest expense of RR 294 million charged under IFRS.
65
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
31
SEGMENT INFORMATION (CONTINUED)
Geographical information. The Group’s two segments operate in four major geographical areas of the world. In
the Russian Federation (considered the Group’s home country), the Group is mainly engaged in the exploration,
development, production and sales of natural gas, crude oil, gas condensate and related products and sales of
polymer and insulation tape (until September 2010). Activities outside the Russian Federation are conducted in the
United States (sales of stable gas condensate), in Europe (sales of stable gas condensate, liquefied petroleum gas
and crude oil), in Asian-Pacific region (sales of stable gas condensate) and other areas (sales of liquefied petroleum
gas and sales of polymer and insulation tape).
Geographical information for the year ended 31 December 2010 and 2009 is as follows:
For the year ended
31 December 2010
Russian
Federation
Europe
USA
APR
Other Export duty
Subtotal
Total
Outside Russian Federation
Natural gas
Stable gas condensate
Liquefied petroleum gas
Crude oil
Oil products
71,060
34
4,686
855
143
-
6,598
8,855
1,191
-
-
25,976
-
-
-
-
12,660
-
-
-
-
3,653
9
-
-
-
(19,167)
(803)
(588)
-
-
29,720
8,061
603
-
71,060
29,754
12,747
1,458
143
Oil and gas sales
76,778
16,644
25,976
12,660
3,662
(20,558)
38,384 115,162
Polymer products sales
Other revenues
1,390
157
-
6
-
-
-
-
309
-
-
-
309
6
1,699
163
Total external revenues
78,325
16,650
25,976
12,660
3,971
(20,558)
38,699 117,024
For the year ended
31 December 2009
Russian
Federation
Europe
USA
APR
Other Export duty
Subtotal
Total
Outside Russian Federation
Natural gas
Stable gas condensate
Liquefied petroleum gas
Crude oil
Oil products
53,623
354
2,724
781
83
-
3,303
5,533
945
14
-
21,415
-
-
-
-
10,324
-
-
-
-
-
100
-
-
-
(11,797)
(104)
(391)
(4)
-
23,245
5,529
554
10
53,623
23,599
8,253
1,335
93
Oil and gas sales
57,565
9,795
21,415
10,324
100
(12,296)
29,338
86,903
Polymer products sales
Other revenues
1,534
1,178
-
-
-
-
-
-
339
-
-
-
339
-
1,873
1,178
Total external revenues
60,277
9,795
21,415
10,324
439
(12,296)
29,677
89,954
Revenues from external customers are based on the geographical location of customers even though all revenues
are generated from assets located in the Russian Federation. Substantially all of the Group’s assets are located in
the Russian Federation.
Major customers. For the years ended 31 December 2010 and 2009, the Group has three and one major customer
to whom individual revenues represent 42 percent and 18 percent of total external revenues, respectively.
Sales to major customers are included in the results of the Exploration, production and marketing segment.
66
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
32
EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES
The amounts included within the consolidated financial statements associated with the exploration for and
evaluation of mineral resources for the years ended 31 December 2010 and 2009 is as follows:
Net book value of assets value at 1 January
Additions
Acquisition of subsidiaries
Disposals
Reclassification in proved properties
Net book value of assets at 31 December
Liabilities
Cash flows used for operating activities
Cash flows used for investing activities
33
SUBSEQUENT EVENTS
Year ended 31 December:
2009
2010
2,535
1,394
7,894
(821)
(4,630)
6,372
3,026
1,151
2,112
2,462
249
39,527
(176)
(39,527)
2,535
2,653
350
16,786
On 3 February 2011, the Group issued two tranches of Eurobonds, in the amount of USD 600 million with a
coupon rate of 5.326 percent per annum due in five years and USD 650 million with a coupon rate of 6.604 percent
per annum due in ten years. The proceeds from Eurobonds issues were used for repayment of a bridge loan.
As discussed in Note 16, in February 2011, the Group fully repaid a RR 18,285 (USD 600 million) bridge facility
ahead of its maturity schedule.
67
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
34
NEW ACCOUNTING PRONOUNCEMENTS
Beginning 1 January 2010, in addition to that which is disclosed in Note 3, the Group has adopted the following
new standards and interpretations:
•
•
•
•
Amendments to IFRS 2, Share-based Payment. Group Cash-settled Share-based Payment Transactions.
(effective for annual periods beginning on or after 1 January 2010). The amendments provide a clear basis to
determine the classification of share-based payment awards in both consolidated and separate financial
statements. The amendments incorporate into the standard the guidance in IFRIC 8 and IFRIC 11, which are
withdrawn. The amendments expand on the guidance given in IFRIC 11 to address plans that were previously
not considered in the interpretation. The amendments also clarify the defined terms in the Appendix to the
standard;
Amendment to IAS 39, Financial Instruments: Recognition and Measurement. Eligible Hedged Items.
(effective with retrospective application for annual periods beginning on or after 1 July 2009). The
amendment clarifies how the principles that determine whether a hedged risk or portion of cash flows is
eligible for designation should be applied in particular situations;
IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual periods beginning on or after
1 July 2009). IFRIC 17 clarifies when and how distribution of non-cash assets as dividends to the owners
should be recognized. An entity should measure a liability to distribute non-cash assets as a dividend to its
owners at the fair value of the assets to be distributed. A gain or loss on disposal of the distributed non-cash
assets will be recognized in profit or loss when the entity settles the dividend payable. IFRIC 17 is not
relevant to the Group’s operations because it does not distribute non-cash assets to owners;
Improvements to International Financial Reporting Standards (issued in April 2009; amendments to IFRS 2,
IAS 38, IFRIC 9 and IFRIC 16 are effective for annual periods beginning on or after 1 July 2009;
amendments to IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 36 and IAS 39 are effective for annual periods
beginning on or after 1 January 2010). The improvements consist of a mixture of substantive changes and
clarifications in the following standards and interpretations: clarification that contributions of businesses in
common control transactions and formation of joint ventures are not within the scope of IFRS 2; clarification
of disclosure requirements set by IFRS 5 and other standards for non-current assets (or disposal groups)
classified as held for sale or discontinued operations; requiring to report a measure of total assets and
liabilities for each reportable segment under IFRS 8 only if such amounts are regularly provided to the chief
operating decision maker; amending IAS 1 to allow classification of certain liabilities settled by entity’s own
equity instruments as non-current; changing IAS 7 such that only expenditures that result in a recognized asset
are eligible for classification as investing activities; allowing classification of certain long-term land leases as
finance leases under IAS 17 even without transfer of ownership of the land at the end of the lease; providing
additional guidance in IAS 18 for determining whether an entity acts as a principal or an agent; clarification in
IAS 36 that a cash generating unit shall not be larger than an operating segment before aggregation;
supplementing IAS 38 regarding measurement of fair value of intangible assets acquired in a business
combination; amending IAS 39 (i) to include in its scope option contracts that could result in business
combinations, (ii) to clarify the period of reclassifying gains or losses on cash flow hedging instruments from
equity to profit or loss and (iii) to state that a prepayment option is closely related to the host contract if upon
exercise the borrower reimburses economic loss of the lender; and amending IFRIC 9 to state that embedded
derivatives in contracts acquired in common control transactions and formation of joint ventures are not
within its scope; and removing the restriction in IFRIC 16 that hedging instruments may not be held by the
foreign operation that itself is being hedged. In addition, the amendments clarifying classification as held for
sale under IFRS 5 in case of a loss of control over a subsidiary published as part of the Annual Improvements
to International Financial Reporting Standards, which were issued in May 2008, are effective for annual
periods beginning on or after 1 July 2009; and
•
IFRIC 18, Transfers of Assets from Customers (effective for annual periods beginning on or after 1 July
2009). The interpretation clarifies the accounting for transfers of assets from customers, namely, the
circumstances in which the definition of an asset is met; the recognition of the asset and the measurement of
its cost on initial recognition; the identification of the separately identifiable services (one or more services in
exchange for the transferred asset); the recognition of revenue, and the accounting for transfers of cash from
customers.
68
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
34
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
The adoption of these new standards and interpretations, in case of such operations, had an insignificant effect on
the Group’s consolidated financial statement.
Recently, the International Accounting Standards Board published the following new standards and interpretations
which have not been early adopted by the Group.
•
•
•
•
•
IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments (effective for annual periods beginning
on or after 1 July 2010). This IFRIC clarifies the accounting when an entity settles its debt by issuing its own
equity instruments. A gain or loss is recognised in profit or loss based on the fair value of the equity
instruments compared to the carrying amount of the debt;
Amendment to IAS 32 (effective for annual periods beginning on or after 1 February 2010). The amendment
exempts certain rights issues of shares with proceeds denominated in foreign currencies from classification as
financial derivatives;
Amendment to IAS 24, Related Party Disclosures (effective for annual periods beginning on or after
1 January 2011). IAS 24 was revised in 2009 by: (a) simplifying the definition of a related party, clarifying its
intended meaning and eliminating inconsistencies; and by (b) providing a partial exemption from the
disclosure requirements for government-related entities;
Amendment to IFRIC 14, IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements
and their Interaction. Prepayments of a Minimum Funding Requirement (effective for annual periods
beginning on or after 1 January 2011). This amendment will have a limited impact as it applies only to
companies that are required to make minimum funding contributions to a defined benefit pension plan. It
removes an unintended consequence of IFRIC 14 related to voluntary pension prepayments when there is a
minimum funding requirement;
Improvements to International Financial Reporting Standards (issued in May 2010 and effective for the Group
from 1 January 2011). The improvements consist of a mixture of substantive changes and clarifications in the
following standards and interpretations: IFRS 1 was amended (i) to allow previous GAAP carrying value to
be used as deemed cost of an item of property, plant and equipment or an intangible asset if that item was
used in operations subject to rate regulation, (ii) to allow an event driven revaluation to be used as deemed
cost of property, plant and equipment even if the revaluation occurs during a period covered by the first IFRS
financial statements and (iii) to require a first-time adopter to explain changes in accounting policies or in the
IFRS 1 exemptions between its first IFRS interim report and its first IFRS financial statements; IFRS 3 was
amended (i) to require measurement at fair value (unless another measurement basis is required by other IFRS
standards) of non-controlling interests that are not present ownership interest or do not entitle the holder to a
proportionate share of net assets in the event of liquidation, (ii) to provide guidance on acquiree’s share-based
payment arrangements that were not replaced or were voluntarily replaced as a result of a business
combination and (iii) to clarify that the contingent considerations from business combinations that occurred
before the effective date of revised IFRS 3 (issued in January 2008) will be accounted for in accordance with
the guidance in the previous version of IFRS 3; IFRS 7 was amended to clarify certain disclosure
requirements, in particular (i) by adding an explicit emphasis on the interaction between qualitative and
quantitative disclosures about the nature and extent of financial risks, (ii) by removing the requirement to
disclose carrying amount of renegotiated financial assets that would otherwise be past due or impaired, (iii) by
replacing the requirement to disclose fair value of collateral by a more general requirement to disclose its
financial effect, and (iv) by clarifying that an entity should disclose the amount of foreclosed collateral held at
the reporting date and not the amount obtained during the reporting period; IAS 27 was amended by clarifying
the transition rules for amendments to IAS 21, 28 and 31 made by the revised IAS 27 (as amended in January
2008); IAS 34 was amended to add additional examples of significant events and transactions requiring
disclosure in a condensed interim financial report, including transfers between the levels of fair value
hierarchy, changes in classification of financial assets or changes in business or economic environment that
affect the fair values of the entity’s financial instruments; and IFRIC 13 was amended to clarify measurement
of fair value of award credits;
69
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
34
•
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
IFRS 9, Financial Instruments Part 1: Classification and Measurement (effective for annual periods
beginning on or after 1 January 2013). IFRS 9 replaces those parts of IAS 39 relating to the classification and
measurement of financial assets. IFRS 9 was further amended in October 2010 to address the classification
and measurement of financial liabilities. Key features of the standard are as follows:
•
•
•
Financial assets are required to be classified into two measurement categories: those to be measured
subsequently at fair value, and those to be measured subsequently at amortized cost. The decision is to
be made at initial recognition. The classification depends on the entity’s business model for managing its
financial instruments and the contractual cash flow characteristics of the instrument;
An instrument is subsequently measured at amortized cost only if it is a debt instrument and both (i) the
objective of the entity’s business model is to hold the asset to collect the contractual cash flows, and (ii)
the asset’s contractual cash flows represent only payments of principal and interest (that is, it has only
“basic loan features”). All other debt instruments are to be measured at fair value through profit or loss;
All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for
trading will be measured at fair value through profit or loss. For all other equity investments, an
irrevocable election can be made at initial recognition, to recognize unrealized and realized fair value
gains and losses through other comprehensive income rather than profit or loss. There is to be no
recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-by-
instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on
investment; and
• Most of the requirements in IAS 39 for classification and measurement of financial liabilities were
carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the
effects of changes in own credit risk of financial liabilities designated as at fair value through profit or
loss in other comprehensive income.
While adoption of IFRS 9 is mandatory from 1 January 2013, earlier adoption is permitted.
Unless otherwise described above, the new standards and interpretations are not expected to significantly affect the
Group’s consolidated financial statement.
70
OAO NOVATEK
Unaudited Supplemental Oil and Gas Disclosures
UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES
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 norms 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 but excludes disclosures regarding the standardized measures of discounted
cash flows related to oil and gas activities.
The Group’s exploration and production activities are mainly within the Russian Federation; therefore, all of the
information provided in this section pertains to this country. The Group operates through various oil and gas
production subsidiaries, and also has an interest in oil and gas companies that are accounted for under the equity
method.
Oil and Gas Exploration and Development Costs
The following tables set forth information regarding oil and gas acquisition, exploration and development activities.
The amounts reported as costs incurred include both capitalized costs and costs charged to expense during the years
ended 31 December 2010 and 2009 (amounts in millions of Russian roubles).
Costs incurred in exploration and development activities
Acquisition cost
Exploration costs
Development costs
Total costs incurred in exploration and development activities
The share of the Group in its equity investees
Capitalized costs relating to oil and gas producing activities
Wells and related equipment and facilities
Support equipment and facilities
Uncompleted wells, equipment and facilities
Total capitalized costs relating to oil and gas producing activities
Less: accumulated depreciation, depletion and amortization
Year ended 31 December:
2009
2010
7,694
2,042
22,123
31,859
69,286
39,897
770
15,977
56,644
178
At 31 December:
2010
2009
163,130
29,222
10,277
202,629
(26,698)
134,538
22,509
15,839
172,886
(20,211)
Net capitalized costs relating to oil and gas producing activities
175,931
152,675
The share of the Group in its equity investees
69,413
1,896
71
OAO NOVATEK
Unaudited Supplemental Oil and Gas Disclosures
UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES (CONTINUED)
Results of Operations for Oil and Gas Producing Activities
The Group’s results of operations for oil and gas producing activities are shown below. The results of operations
for oil and gas producing activities do not include general corporate overhead or its associated tax effects. Income
tax is based on statutory rates. In the following table both transportation and processing costs are included in
revenues from oil and gas sales (amounts in millions of Russian roubles).
Revenues from oil and gas sales
Lifting costs
Transportation expenses
Taxes other than income tax
Depreciation, depletion and amortization
Exploration expenses
Total production costs
Purchases of natural gas, gas condensate and crude oil
Transportation expenses related to purchases of natural gas,
gas condensate and crude oil
Results of operations for oil and gas producing activities before income tax
Less: related income tax expense
Year ended 31 December:
2009
2010
115,162
(4,786)
(37,187)
(9,363)
(6,384)
(1,595)
(59,315)
(154)
86,903
(3,646)
(28,482)
(7,840)
(5,139)
(566)
(45,673)
(1,143)
-
(533)
55,693
(11,139)
39,554
(7,911)
Results of operations for oil and gas producing activities
44,554
31,643
Proved Oil and Gas Reserves
The Group’s oil and gas reserves estimation and reporting process involves an annual independent third party
reserve appraisal as well as internal technical appraisals of reserves. The Group maintains its own internal reserve
estimates that are calculated by qualified technical staff working directly with the oil and gas properties. The
Group’s technical staff periodically updates reserve estimates during the year based on evaluations of new wells,
performance reviews, new technical information and other studies.
The Group estimates its oil and gas reserves in accordance with rules promulgated by the Securities and Exchange
Commission (SEC) for proved reserves.
The oil and gas reserve estimates reported below are determined by the Group’s independent petroleum reservoir
engineers, DeGolyer and MacNaughton (“D&M”), for the Group’s fields – Yurkharovskoye, East-Tarkosalinskoye,
Khancheyskoye, Sterkhovoye, Termokarstovoye (until February 2010), Urengoyskoe, South-Tambeyskoye, West-
Yurkharovskoye, Yarudeiskoye, North-Khancheyskoye and North-Russkoye fields. The Group provides D&M
annually with engineering, geological and geophysical data, actual production histories and other information
necessary for the reserve determination. The Group’s and D&M’s technical staffs meet to review and discuss the
information provided, and upon completion of this process, senior management reviews and approves the final
reserve estimates issued by D&M.
72
OAO NOVATEK
Unaudited Supplemental Oil and Gas Disclosures
UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES (CONTINUED)
The following reserve estimates were prepared using standard geological and engineering methods generally
accepted by the petroleum industry. The method or combination of methods used in the analysis of each reservoir is
tempered by experience with similar reservoirs, stages of development, quality and completeness of basic data, and
production history.
The following information presents the quantities of proved oil and gas reserves and changes thereto as at and for
the years ended 31 December 2010 and 2009.
Extensions of production licenses are assumed to be at the discretion of the Group. Management believes that
proved reserves should include quantities which are expected to be produced after the expiry dates of the Group’s
production licenses. The Group’s licenses expire between 2014 and 2045, with the most significant license,
Yurkharovskoye and East-Tarkosalinskoye fields, expiring in 2034 and 2043, respectively. Legislation of the
Russian Federation states that, upon expiration, a license is subject to renewal at the initiative of the license holder
provided that further exploration, appraisal, production or remediation activities are necessary and provided that the
license holder has not violated the terms of the license. Management intends to extend its licenses for properties
expected to produce beyond the license expiry dates.
The Group has disclosed information on proved oil and gas reserve quantities for periods up to and past the license
expiry dates separately.
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 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. Undeveloped reserves are those reserves which are expected to be
recovered as a result of future investments to drill new wells, to re-complete existing wells and/or install facilities
to collect and deliver the production.
Net reserves exclude quantities due to others when produced.
The reserve quantities below include 100 percent of the net proved reserve quantities attributable to the Group’s
consolidated subsidiaries. A portion of the Group’s total proved reserves are classified as either developed
non-producing or undeveloped. Of the non-producing reserves, a portion represents existing wells which are to be
returned to production at a future date.
For convenience, reserves estimates are provided both in English and Metric units.
73
OAO NOVATEK
Unaudited Supplemental Oil and Gas Disclosures
UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES (CONTINUED)
Net proved reserves of natural gas are presented below.
Year ended
31 December 2010:
31 December 2009:
Billions of
cubic feet
Billions of
cubic meters
Billions of
cubic feet
Billions of
cubic meters
Consolidated entities:
Net proved reserves at 1 January
Revisions of previous estimates
Extension and discoveries
Acquisitions
Disposals
Production
Net proved reserves at 31 December(*)
Net proved developed reserves (included above)
Net proved undeveloped reserves (included above)
40,726
(54)
3,097
-
(870)
(1,314)
41,585
22,515
19,070
Equity-accounted entities (based on the Group’s proportional interest):
Net proved reserves at 31 December
Net proved developed reserves (included above)
Net proved undeveloped reserves (included above)
6,057
2,536
3,521
1,153
(1)
88
-
(25)
(37)
1,178
638
540
171
71
100
24,357
(187)
4,278
13,420
-
(1,142)
40,726
20,612
20,114
-
-
-
690
(6)
121
380
-
(32)
1,153
584
569
-
-
-
(*) – The net proved reserves reported in the table above included reserves of natural gas attributable to non-controlling interest
of 7,227 billions of cubic feet and 205 billion of cubic meters and 6,576 billions of cubic feet and 186 billions of cubic
meters at 31 December 2010 and 2009, respectively.
74
OAO NOVATEK
Unaudited Supplemental Oil and Gas Disclosures
UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES (CONTINUED)
Net proved reserves of crude oil, gas condensate and natural gas liquids are presented below.
Year ended
31 December 2010:
31 December 2009:
Millions
of barrels
Millions
of metric tons
Millions
of barrels
Millions
of metric tons
Consolidated entities:
Net proved reserves at 1 January
Revisions of previous estimates
Extension and discoveries
Acquisitions
Disposals
Production
Net proved reserves at 31 December(*)
Net proved developed reserves (included above)
Net proved undeveloped reserves (included above)
589
(12)
60
-
(40)
(31)
566
304
262
Equity-accounted entities (based on the Group’s proportional interest):
Net proved reserves at 31 December
Net proved developed reserves (included above)
Net proved undeveloped reserves (included above)
103
-
103
70
(1)
8
-
(5)
(4)
68
36
32
13
-
13
452
(23)
67
118
-
(25)
589
272
317
-
-
-
55
(4)
8
14
-
(3)
70
33
37
-
-
-
(*) – The net proved reserves reported in the table above included reserves of crude oil, gas condensate and natural gas liquids
tons and
interest of 65 millions of barrels and eight million of metric
attributable
58 million of barrels and seven million of metric tons at 31 December 2010 and 2009, respectively.
to non-controlling
During 2010, the Group acquired a 51 percent of the outstanding ordinary shares of OAO Sibneftegas, which holds
licenses on Beregovoye, Pyreinoye and Khadyryahinskoye fields (see Note 5). During 2010, the Group’s joint
venture OOO Yamal Development acquired a 51 percent of the participation interest in OOO SeverEnergia.
OOO SeverEnergia and its subsidiaries hold licenses on Samburgskoye, Yevo-Yakhinskoye, Yaro-Yakhinskoye
and North-Chaselskoye fields (see Note 5).
During 2010, the Group disposed a 49 percent ownership in ZAO Terneftegas (see Note 5), the holder of the
Termokarstovoye field. As a result, the Group’s interest in ZAO Terneftegas is accounted for using the equity
method.
During 2009, the Group acquired a 51 percent equity stake in OAO Yamal LNG (see Note 5), the holder of the
South Tambeyskoye license area. Included in the reserves estimates noted above are reserves attributable to
100 percent of the equity in the acquired company as required by US GAAP SFAS 69, Disclosures about Oil and
Gas Producing Activities. The reserves estimates for proved reserves attributable to the non-controlling interest are
shown separately for natural gas and crude oil, gas condensate and natural gas liquids.
75
OAO NOVATEK
Contact Information
OAO NOVATEK was incorporated as a joint stock company in accordance with the Russian law and is
domiciled in the Russian Federation.
The Group’s registered office is:
Ulitsa Pobedy 22a
629850 Tarko-Sale
Yamal-Nenets Autonomous Region
Russian Federation
Telephone:
Fax:
7 (495) 730-60-00
7 (495) 721-22-53
www.novatek.ru
76
NOVATEK
MOVING FORWARD
ANNUAL REPORT 2010
180
Contact information
Legal address
22 A Pobedy Street, Tarko-Sale,
Yamal-Nenets Autonomous Region,
629850, Russia
Office in Moscow
12A, Nametkina Street, Moscow,
117420, Russia
Central informationService
Tel:
Fax:
E-mail:
+7 495 730-6000
+7 495 721-2253
novatek@novatek.ru
Website:
www.novatek.ru (Russian version)
and
www.novatek.ru/eng (English version)
Mentions in this Annual Report of “OAO NOVATEK”, “NO-
VATEK”, “the Company”, “we” and “our” refer to OAO
NOVATEK and/or its subsidiary enterprises, depending
upon the context, in which the terms are used.
Abbreviations
barrel
Press Service
Tel:
E-mail:
Investor Relations
Tel:
Fax:
E-mail:
+7 495 721-2207
press@novatek.ru
bcm
boe
+7 495 730-6013
+7 495 730-6000
ir@novatek.ru
Investor Information
Independent Auditor
ZAO PricewaterhouseCoopers Audit
White Square Office Center, Butyrsky Val 10,
125047 Moscow, Russia
Tel:
Fax:
+7 495 967-6000
+7 495 967-6001
Independent Reserves Auditor
DeGolyer and MacNaughton
5001 Spring Valley Road, Suite 800,
East Dallas
Texas 75244, USA
Tel:
Fax:
E-mail:
+1 214 368-6391
+1 214 369-4061
degolyer@demac.com
NOVATEK’s website contains a variety of corporate in-
formation including the following:
(cid:122)
(cid:122)
(cid:122)
(cid:122)
(cid:122)
(cid:122)
(cid:122)
Key business and production results
Press-releases
Current share prices
Annual reports
Information disclosures to regulators
Investor presentations
Social and environmental activities
km
mm
mboe
mcm
mt
mmboe
mmcm
mmt
bcf
tcf
ton
SEC
PRMS
YNAO
RR
LPG
LNG
one stock tank barrel, or 42 US gallons of
liquid volume
billion cubic meters
barrels of oil equivalent. For natural gas,
we use the conversion factor of one mcm
equals 6.54 barrels. Liquid tons are con-
verted to boe according to ratios found
in our reserves appraisal report, ranging
between 7.3 to 8.87 boe per ton, due to
the differing quality of hydrocarbons at
the fields, including differences in calorific
content
kilometer(s)
millimeter
thousand boe
thousand cubic meters
thousand metric tons
million boe
million cubic meters
million metric tons
billion cubic feet
trillion cubic feet
metric ton
United States Securities and Exchange
Commission
Petroleum Resources Management Sys-
tem
Yamal-Nenets Autonomous Region
Russian rouble
liquid petroleum gases
liquified natural gas
181
the effects of changes to our capital expenditure pro-
changes in political, social, legal or economic condi-
our success in identifying and managing risks to our
inherent uncertainties in interpreting geophysical data;
changes to project schedules and estimated comple-
the effects of technological changes;
the effects of changes in accounting standards or
(cid:122)
jections on the growth of our production;
potentially lower production levels in the future than
(cid:122)
currently estimated by our management and/or inde-
pendent petroleum reservoir engineers;
(cid:122)
(cid:122)
tion dates;
(cid:122)
businesses;
the effects of changes to the Russian legal framework
(cid:122)
concerning currently held and any newly acquired oil and
gas production licenses;
(cid:122)
tions in Russia and the CIS;
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practices
This list of important factors is not exhaustive. When re-
lying on forward-looking statements, one should carefully
consider the foregoing factors and other uncertainties and
events, especially in light of the political, economic, social
and legal environment in which we operate. Such forward-
looking statements speak only as of the date on which they
are made. Accordingly, we do not undertake any obliga-
tion to update or revise any of them, whether as a result
of new information, future events or otherwise. We do not
make any representation, warranty or prediction that the
results anticipated by such forward-looking statements will
be achieved, and such forward-looking statements repre-
sent, in each case, only one of many possible scenarios
and should not be viewed as the most likely or standard
scenario. The information and opinions contained in this
document are provided as at the date of this review and
are subject to change without notice.
Forward–looking statements
This Annual Review includes ‘forward-looking informa-
tion’ within the meaning of Section 27A of the US Se-
curities Act of 1933, as amended, and Section 21E of
the US Securities Exchange Act of 1934, as amended.
Certain statements included in this Annual Report and
Accounts, including, without limitation, statements con-
cerning plans, objectives, goals, strategies, future events
or performance, and underlying assumptions and other
statements, which are other than statements of histori-
cal facts. The words “believe,” “expect,” “anticipate,”
“intends,” “estimate,” “forecast,” “project,” “will,” “may,”
“should” and similar expressions identify forward-looking
statements. Forward-looking statements include state-
ments regarding: strategies, outlook and growth pros-
pects; future plans and potential for future growth; liquid-
ity, capital resources and capital expenditures; growth in
demand for our products; economic outlook and indus-
try trends; developments of our markets; the impact of
regulatory initiatives; and the strength of our competitors.
The forward-looking statements in this Annual Review
are based upon various assumptions, many of which
are based, in turn, upon further assumptions, including
without limitation, management’s examination of historical
operating trends, data contained in our records and other
data available from third parties. Although we believe that
these assumptions were reasonable when made, these
assumptions are inherently subject to significant uncer-
tainties and contingencies, which are difficult or impos-
sible to predict and are beyond our control. As a result,
we may not achieve or accomplish these expectations,
beliefs or projections. In addition, important factors that,
in our view, could cause actual results to differ materially
from those discussed in the forward-looking statements
include:
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mand in Russia and Europe;
the effects of domestic and international oil and gas
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price volatility and changes in regulatory conditions, in-
cluding prices and taxes;
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oil and gas markets;
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ness strategies;
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cost basis and margins;
our ability to produce target volumes in the event,
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among other factors, of restrictions on our access to
transportation infrastructure;
the impact of our expansion on our revenue potential,
the effects of competition in the domestic and export
our ability to successfully implement any of our busi-
changes in the balance of oil and gas supply and de-