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ANNUAL REPORT
2011
Contents
01 Overview
Highlights in 2011
2011 Financial and Operating Highlights
Letter to Shareholders
02 The Company
NOVATEK Today
Strategy
03 Operations in Review
Exploration and Production
Processing
Marketing
04 Environmental and Social Responsibility
Environmental, Health and Safety
Human Resources
Social Policy and Charity
05 Management and Corporate Governance
Corporate Governance
Board of Directors
Management Committee
NOVATEK Corporate Culture, Brand and Media Relations
Securities
Dividends
06 Additional Information
Major Risk Factors Associated with the Company’s Operations
Major Transactions and Interested Party Transactions
Information on Members of NOVATEK’s Board of Directors
Information on Members of NOVATEK’s Management Committee
3
4
6
11
13
17
29
31
37
40
42
45
46
52
52
54
55
56
60
62
66
3
01
Overview
Highlights in 2011
Record financial and operational results including a 52.5% increase in
revenues from oil and gas sales and a 44.6% and 20.9% increase in natu-
ral gas and liquid hydrocarbon sales volumes, respectively.
Increased total proved reserves according to SEC standards by 16% or
1,305 million barrels of oil equivalent (mmboe).
Delivered our Corporate Strategy Day Presentation in London, where
NOVATEK’s senior management provided operational guidance for pro-
duction and capital expenditures through 2020, an update on the Yamal
LNG project as well as a review of the Company’s performance and strat-
egy implementation to date.
Acquired four new license areas for exploration and production in the
Yamal-Nenets Autonomous region (YNAO) significantly increasing our
resource base; two in the Gydan peninsula and two offshore in the north-
ern portion of the Gulf of Ob.
Opened the Northern Sea Route’s navigational period for high-tonnage
tankers in June and closed the period in November establishing a new re-
cord for the longest use of the route during a single year.
Acquired a 100% participation interest in the share capital of the regional
gas distributor OOO Gazprom Mezhregiongas Chelyabinsk, which will allow
the Company to supply 100% of the Chelyabinsk region’s gas demand.
Increased our equity interest in Yamal LNG from 51% to 100% in Sep-
tember and subsequently, in October, we disposed of a 20% stake in the
company to TOTAL S.A., our strategic partner in the Yamal LNG project.
Successfully closed our debut Eurobond issue in an aggregate amount
of US$ 1.25 billion. The Eurobond was approximately eight times over-
subscribed and issued at par in two tranches, a five-year US$ 600 million
bond with a coupon rate of 5.326% and a ten-year US$ 650 million bond
with a coupon rate of 6.604%.
NOVATEK / ANNUAL REPORT / 2011 4
2011 Financial and Operating Highlights
millions of Russian roubles except per share amounts and ratios
Year ended 31 December
2011
2010
Financial results
Oil and gas revenues 1
Total revenues
Operating expenses
Net income
EBITDA2
Normalized EBITDA3
Normalized EBITDAX4
Earnings per share (EPS), Russian roubles
Normalized EPS, Russian roubles 5
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 6
Net debt 7
Total debt to total shareholders equity
175,602
176,064
97,665
119,291
148,349
85,401
87,220
39.45
18.69
9,393
53.667
4,111
2,984
71,907
38,031
71,647
0.40
115,162
117,024
68,518
40,278
57,506
56,177
57,772
13.37
12.93
8,088
37.117
3,401
2,330
44,863
26,106
61,988
0.43
Change
%
52.5%
50.5%
42.5%
196.2%
158.0%
52.0%
51.0%
195.1%
44.6%
16.1%
44.6%
20.9%
28.1%
60.3%
45.7%
15.6%
(7.0%)
1 Net of VAT, excise tax and export duties
2 EBITDA represents profit (loss) attributable to shareholders of OAO NOVATEK
adjusted for the addback of net impairment expense, income tax expense and
finance income (expense) from the Consolidated Statement of Income, and
depreciation, depletion and amortization and share-based compensation from
the Consolidated Statement of Cash Flows
3 Normalized EBITDA excludes net gain on disposal of interest in subsidiaries
4 Normalized EBITDAX represents EBITDA as adjusted for the addback of explora-
tion expenses and excludes net gain on disposal of interest in subsidiaries
5 Normalized Earnings per share represents Earnings per share adjusted for net
gain on disposal of interest in subsidiaries
6 Including asquisition of mineral licenses
7 Net debt calculated as long-term debt plus short-term debt less cash and cash
equivalents
TOTAL REVENUES,
RR billion
OPERATING CASH FLOW,
RR billion
NORMALIZED EBITDA, RR billion
200
150
100
50
0
117.0
79.3
90.0
62.4
176.1
80
60
40
20
0
44.9
31.5
34.8
21.4
85.4
56.2
36.8
39.6
29.3
71.9
100
80
60
40
20
0
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011 01 Overview
5
NATURAL GAS RESERVES (SEC),
bcm
LIQUIDS RESERVES (SEC),
mmt
TOTAL RESERVES (SEC),
mmboe
Proved undeveloped
Proved developed
Proved undeveloped
Proved developed
Proved undeveloped
Proved developed
1,144
967
653
690
1,321
100
91
10,000
73
49
55
63
80
60
40
20
0
8,000
6,000
4,000
2,000
0
9,393
8,088
6,853
4,678
4,963
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011
NATURAL GAS PRODUCTION,
bcm
LIQUIDS PRODUCTION,
mmt
53.5
28.5
30.9
32.8
37.8
Gas condensate
Crude oil
4.1
3.6
2.5
2.6
3.0
5
4
3
2
1
0
TOTAL PRODUCTION,
mmboe
Natural gas
Liquids
385
278
240
207
223
400
300
200
100
0
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011
1500
1000
500
0
60
50
40
30
20
10
0
AVERAGE NATURAL GAS PRICES,
RR per mcm*
AVERAGE LIQUIDS PRICES,
RR per ton*
TOTAL CAPITAL EXPENDITURES,**
RR billion
1,372
1,111
2,500
2,000
1,500
1,000
500
0
1,914
2,067
1,628
17,000
15,000
13,000
15,716
12,794
11,570
10,640
10,297
11,000
9,000
7,000
38.0
31.8
26.1
19.5
17.9
40
30
20
10
0
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011
* Net of VAT, excise tax and export duties
** Including asquisition of mineral licenses
NOVATEK / ANNUAL REPORT / 2011
6
Letter to Shareholders
To our valued shareholders,
HARNESSING THE ENERGY OF THE FAR NORTH is the
theme of our 2011 Annual Report as we begin an ag-
gressive expansion of exploration and developments ac-
tivities in the resource-rich Yamal and Gydan peninsulas.
Russia’s Far North, comprising the Yamal Nenets Au-
tonomous Region, is home to one of the world’s largest
concentration of natural resources, especially natural gas,
and is the centerpiece of our future exploration and de-
velopment activities in the Yamal and Gydan peninsulas
as well as the cornerstone of our core operations. More-
over, Russia’s Far North is a special, magical place and
is home to vast array of wildlife and pristine landscapes.
NOVATEK recognizes the critical importance of operating
and developing our future hydrocarbons in this environ-
mentally sensitive area and works closely with all stake-
holders to ensure that our developments practices meets
the highest standards of environmental and operational
safety. We have worked very closely with the Regional
Administration of the Yamal Nenets Autonomous Region
to ensure a mutually beneficial working relationship and to
outline a social investment program consistent with our
development commitments.
The natural gas markets are undergoing profound struc-
tural changes as a result of the conflux of many different
factors, including but not limited to, the shale gas revolu-
tion in the US, the growing emergence of LNG in global
trade, the negative sentiments on nuclear energy from
the aftershocks of the Fukushima nuclear plant disaster in
Japan, and the regulatory mandate to “decarbonize” the
world’s energy footprint to name a few. To address these
profound changes, we raised the bar to another level
this past year by outlining our new strategic plans to the
year 2020, essentially doubling our natural gas produc-
tion and tripling our liquids hydrocarbons over the cor-
responding time period. Our new strategic plan envisages
us diversifying our future production platform to the Far
North and deeper into the Arctic Circle, thus embarking
on new transformational projects such as Yamal LNG as
well as pioneering the hydrocarbon activities on the Gydan
peninsula with future exploration and development work
slated for the Geofizicheskiy and Utrenniy license areas.
The development of hydrocarbon resources in the Far
North undoubtedly brings a set of new challenges, yet
the opportunities are immense to harness and deliver new
sources of energy to both the Russian domestic market
via traditional pipeline deliveries and eventually to the in-
ternational markets via liquefied natural gas. Although the
natural gas markets have experienced prolonged turmoil
due to the lingering effects of the financial and economic
crisis in the EU zone, we believe the future looks extremely
bright for those companies producing natural gas as this
clean burning fuel inevitably increases its overall propor-
tion in the global total energy mix, and NOVATEK is well
positioned to capitalize on these emerging trends.
Two thousand and eleven was another exceptional year
for us operationally and financially. Our natural gas sales
production increased by 42% to 52.9 billion cubic meters.
Two thirds of the production growth was attributable to
organic growth from our Yurkharovskoye and East-Tar-
kosalinskoye fields and one third – to our pro-rata share
of equity production from Sibneftegas acquired in De-
cember 2010. We also increased our liquids production
by 14%, led by our continuing development of “wet gas”
production from the Yurkharovskoye field.
Our Yurkharovskoye field continues to play a crucial role in
our near-term production growth and represents the cor-
nerstone of the Company’s “wet gas” field development
program. Over the past year, we ramped up our produc-
tion outflows from this important field, increasing year-
on-year natural gas production by 31% to 32 billion cubic
meters and our liquids production, consisting of unstable
gas condensate, by 30% to 2.7 million tons. Last year,
our Yurkharovskoye field was named “Best Gas Project,
Eastern Europe 2011” by World Finance as part of its
annual Oil and Gas awards program, and, based on the
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011 01 Overview
7
field’s 2011 production, is now the fourth largest natural
gas producing field in Russia. We are extremely proud of
the operational accomplishments and industry recognition
we have achieved at this important field.
In 2011, our core oil and gas revenues increased by RR
60 billion to RR 176 billion, representing a 53% increase
over the corresponding reporting period, but equally im-
portant, we continued our disciplined approach to man-
aging our operating expenses, by optimizing our control-
lable expenses and reducing our per unit lifting costs. As
a result, our EBITDA, excluding the net gain on disposals,
increased by 52% in 2011 to RR 85 billion, and was con-
sistent with our overall margin guidance and past year ex-
perience. We also ended 2011 in a positive free cash flow
position achieving a record level of RR 41 billion, support-
ing our Board’s recommendation to raise dividends for the
seventh consecutive year to RR 6.00 per share, an in-
crease of 50% over the prior year’s dividend distribution.
Over the past year, we invested approximately RR 38
billion in capital related projects and mineral license ac-
quisitions in support of our growth initiatives as well as
securing new and exciting areas for future hydrocarbon
exploration and development activities. The largest share
of our capital spend went to ongoing development drill-
ing at the Yurkharovskoye field, but we also began to di-
versify our capital program by investing funds into early
stage development activities at the South Tambeyskoye
field and the West Urengoiskiy license area, initial drilling
of the East Tarkosalinskoye field’s crude oil layers, and, by
moving further down the value chain, we invested capital
into the construction phase of the Ust Luga Gas Conden-
sate Fractionation and Transshipment Complex.
One of our main strategic objectives is to increase our
resource base as part of our prudent allocation of capi-
tal. Last year, we acquired four new licenses areas in the
Yamal and Gydan peninsulas – Salmanovskiy (Utrenniy),
Geofizicheskiy, North-Obskiy and East Tambeyskiy – to
complement our long-term exploration and development
plans. These license areas will serve as a future platform
for natural gas and gas condensate production in this im-
portant hydrocarbon-rich geographical zone. Our explo-
ration team is already onsite at the Geofizicheskiy license
area and we will send another geological and geophysical
expedition team to the Utrenniy license area during the
summer months to begin exploratory work activities at
these new license areas. The reserves and resources at-
tributable to these four license areas were not appraised
in our recent year-end reserve report, but offer tremen-
dous future upside potential to continue our industry en-
viable track record of increasing our hydrocarbon resource
base.
It is important to highlight that over the past year we
continued to grow our reserve base through the prudent
allocation of capital combined with the overall success
achieved in our exploration and development activities.
Our SEC proved reserves increased by 1.3 billion barrels
of oil equivalent (“boe”), or by 16%, to approximately
9.4 billion boe at year-end 2011 (net of 2011 produc-
tion volumes), resulting in a reserve to production life of
25 years and a three-year reserve replacement rate of
597%. On a single year basis, we successfully replaced
444% of our total 2011 production and 435% of our
natural gas production, both according to the SEC reserve
case. NOVATEK has slowly risen in the global reserve
rankings amongst publically traded oil and gas companies,
and at the end of 2011, now ranks in the Top 5 for total
proved reserves for natural gas, and in the Top 15 for to-
tal combined reserves, both according to the SEC reserves
reporting methodology.
During 2011, we made notable progress on our Yamal
LNG project by successfully farming out a 20% equity
stake in the project to a subsidiary of the French oil and
gas company, Total SA, and continuing with the engi-
neering and design work as well as achieving various early
stage milestones consistent with our project plans, such
as validating the conceptual design work for a new 170
thousand tons Yamal Arc 7 class LNG tanker, completing
NOVATEK / ANNUAL REPORT / 2011 8
three exploratory wells, optimizing the field development
program and finalizing the corporate governance struc-
ture of Yamal LNG. In addition, the Russian Federation
government fully endorsed our Yamal LNG project by
formalizing the package of tax concessions originally an-
nounced in December 2010. We will continue to keep all
of our stakeholders appraised with periodic progress re-
ports for this crucial project.
We built on the success we achieved in 2010 by signifi-
cantly increasing the number of voyages utilizing the Arc-
tic Ocean’s Northern Sea Route to target markets in the
important Asian-Pacific region. Last year, we dispatched
nine tankers carrying approximately 600 thousand tons
of stable gas condensate to customers in China, South
Korea and Thailand during the seasonal navigational pe-
riod, thus again demonstrating the viability of this impor-
tant logistical route and confirming our commercial abilities
to penetrate new market areas for our hydrocarbon prod-
ucts. The voyages completed in 2011 took approximately
half the time and distance required by the traditional navi-
gational route through the Suez Canal and the Strait of
Malacca (potential choke points) and will facilitate addi-
tional logistical options to transport products supporting
future development of hydrocarbon fields located in the
Yamal and Gydan peninsulas.
our Purovsky processing plant from five million tons per
annum to eleven million tons by 2014, including the an-
nouncement of a new strategic partnership with Sibur,
Russia’s largest petrochemical company, for the off-take
of liquefied petroleum gas, or LPG.
We remain committed to growing our company and de-
livering industry best metrics by focusing on cost control,
investing wisely in capital projects and diversifying our
commercial activities. The success we achieved in deliv-
ering exceptional results was recognized by the equity
markets in 2011 although there was considerable market
volatility in Russian traded equities in the end of the year.
Our achievements in 2011 would not have been possible
without the dedication, commitment and professionalism
from our trusted and valued employees. We highly value
the teamwork and collaboration demonstrated through-
out the year by our experienced professionals, and we
offer our sincere gratitude for the collective efforts of
our people throughout our organization. With the formal
opening of our new, state-of-the-art corporate office in
Moscow to a comprehensive program of supporting the
regions where we operate, NOVATEK has created a cul-
ture of success and innovation, and a workplace of choice
in Russia.
Our strategic goal of optimizing our marketing channels
has been a key driver behind the success we achieved in
increasing our oil and gas revenues and the monetizing
our growing production volumes. We continued to make
capital investments in the first phase of the Ust-Luga
project for the fractionation and transshipment 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 potential 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. During the year, we an-
nounced our plans to expand the processing capacity of
In December 2011, we outlined our ambitious corporate
strategy to the year 2020 as well as looking back in time
to what we have achieved since going public in 2005. It
is quite clear that the choices we have made over the past
years laid the foundation for a coherent and well-execut-
ed corporate strategy, which no doubt has been instru-
mental in delivering the exceptional results we achieved
in 2011.
On behalf of the Board of Directors and our Management
Committee, we would like to sincerely thank our valued
shareholders, and, our new bondholders, for your contin-
ued support of NOVATEK. Looking to 2012 and beyond,
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011 01 Overview
9
we are well positioned with our large resource base and a
balanced mix of exploration and development projects to
play an increasing role in the natural gas markets, both
domestically and internationally. We remain committed to
sustainable development principles, the tenets of corpo-
rate governance and creating shareholder value, and as
we move forward with our operational plans to HARNESS
THE ENERGY OF THE FAR NORTH, we are very excited
about the future prospects of NOVATEK.
Sincerely,
Alexander Natalenko
Chairman of NOVATEK’s Board of Directors
Leonid Mikhelson
Chairman of NOVATEK’s Management Board
Mark Gyetvay
Chief Financial Officer
NOVATEK / ANNUAL REPORT / 2011
11
02
The Company
NOVATEK Today
NOVATEK is the largest Russian independent natural 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 and is also recognized as one of the lowest
cost producers globally. In 2011, the Company accounted for approxi-
mately eight percent of total Russian natural gas production and about
34% of natural gas produced by Russian independent producers, as well
as playing a significant role in Russia’s energy balance providing approxi-
mately 15% of total 2011 domestic natural gas deliveries through the
Unified Gas Supply System (UGSS), according to the Central Dispatch Ad-
ministration of the Fuel and Energy Complex (CDU-TEK).
NOVATEK’s primary business activities include exploration and produc-
tion, 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 infra-
structure 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 production volumes. In 2011, the Company’s reserve replace-
ment rate was 444% and its three- and five-year reserve replacement
rates were 597% and 492%, respectively. NOVATEK’s total net proved
reserves, conducted under the reserves estimation, reporting and disclo-
sures rules promulgated by the U.S. Securities and Exchange Commission
(SEC), as of the 31 December 2011 totaled 9,393 million barrels of oil
equivalent (boe), of which approximately 92% was natural gas, and its
reserve to production life was 25 years.
NOVATEK / ANNUAL REPORT / 2011 12
In 2011, NOVATEK invested Russian rouble (RR) 35,044
million, in exploration and development activities at its fields
and license areas (including unproved acquisition costs of
7,448 million) resulting in an industry leading finding and
development cost of RR 35.80 per boe ($1.22 per boe)1
and a three- and five-year finding and development cost of
RR 44.16 per boe ($1.46 per boe) and RR 50.56 per boe
($1.78 per boe), respectively.
We increased our gross natural gas and liquid hydrocar-
bon production by 41.7% and 13.5%, respectively, com-
pared to respective production volumes in 2010 while 2011
sales production (including share of production from joint
ventures) of natural gas and liquid hydrocarbons increased
by 42.0% and 13.7%, respectively, compared to 2010
production. In 2011, the Company’s sales volumes totaled
53.7 billion cubic meters (bcm) of natural gas and 4.1 million
tons (mmt) of liquid hydrocarbons, while total oil and gas
revenues reached RR 175.6 billion.
NOVATEK’s fields are located in close proximity to the UGSS
through which the Company delivers natural gas to end-cus-
tomers, including some of the country’s largest energy and
industrial companies. In 2011, NOVATEK delivered natural
gas to over 33 regions of the Russian Federation, includ-
ing the Perm territory, Chelyabinsk, Orenburg, Sverdlovsk,
Moscow, Kostroma, Kirov and Tyumen regions, the city of
St-Petersburg as well as the YNAO and Khanty-Mansyisk
Autonomous regions.
In November 2011, NOVATEK through its subsidiaries
acquired a 100% participation interest in the share capital
of OOO Gazprom Mezhregiongas Chelyabinsk, the largest
natural gas supplier to the Chelyabinsk region, which is one
of the top ten Russian regions in terms of natural gas con-
sumption. The Chelyabinsk region consumes up to 15 bcm
of natural gas per annum and as a result of the acquisition,
NOVATEK will now supply 100% of the region’s natural gas
demand compared to 30% in 2011.
NOVATEK’s subsidiary, OOO NOVATEK-Transervice, op-
erates 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. Stable gas
condensate volumes bound for export markets are trans-
ported to the Port of Vitino, an all season port, located in the
Murmansk Region on the White Sea.
In 2011, we dispatched nine consignments 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 (“NSR”). Transportation of goods via
the NSR 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 shipments via the NSR
is strategically important and will have a beneficial impact on
the Northern regions of the Russian Federation by facilitat-
ing the development of new hydrocarbon fields located in
the Yamal peninsula and Arctic shelf.
A large portion of NOVATEK’s reserve base, over 70% of
SEC proved reserves, is concentrated in deeper gas con-
densate bearing layers and requires additional processing
capacity to be successfully developed. In order to realize its
development strategy, NOVATEK has built a gas conden-
sate processing facility, the Purovsky Gas Condensate Stabi-
lization Plant (Purovsky Plant), in close proximity to the Com-
pany’s production assets. The plant has allowed NOVATEK
to more effectively develop its fields and improve the quality
of hydrocarbons produced.
The Purovsky Plant has the capacity to process up to five
million tons of unstable gas condensate per annum and pro-
duces both stable gas condensate, liquid petroleum gases
(LPG), which meet the highest international quality stan-
dards, and regenerated methanol. The Purovsky Plant cur-
rently provides NOVATEK with sufficient processing capac-
ity to continue developing its gas condensate fields without
having to rely on third party processing facilities.
As a result of the Company’s production scale, processing
capacity and marketing strategy, NOVATEK has been able to
effectively diversify its hydrocarbon sales both geographical-
ly and by customer segment allowing the Company to adapt
to changes in market conditions and optimize its marketing
channels for natural gas and liquid hydrocarbon sales.
1
Average exchange rate of RR 29.39/USD($)
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011 02 The Company
13
The Company was able to continue increasing sales vol-
umes of natural gas and liquid hydrocarbons, which grew
by 44.6% and 20.9%, respectively, due to an increase in
production from the Yurkharovskoye and East-Tarkosalin-
skoye fields and the addition of our share in the production
of the Pyreinoye and Beregovoye fields acquired at the end
of 2010. The share of NOVATEK’s liquid hydrocarbons sold
to the export market, as a percentage of total liquid hydro-
carbon volumes sold in 2011, was approximately 85.8%.
During 2011, we continued the development on our Ya-
mal LNG project through investments in infrastructure at the
South-Tambeyskoye field and adjacent areas as well as the
validation of the design concept for the Arc 7, 170 thou-
sand cubic meter capacity, Yamal class LNG carrier. In Octo-
ber 2011, NOVATEK closed the transaction for the sale of
a 20% equity stake in OAO Yamal LNG to TOTAL S.A., the
Company’s strategic partner in the Yamal LNG project.
Strategy
The implementation of NOVATEK’s business strategy has
increased the Company’s core operating and financial re-
sults and provided a platform for future growth. Through
the efficient development of its existing reserve base, stra-
tegic acquisitions and continued cost control, NOVATEK has
positioned itself as a dynamically developing hydrocarbon
producer.
NOVATEK’s long-term strategy is aimed at profitably ex-
ploiting the hydrocarbon value chain – from exploration and
production to processing and marketing.
The Company’s success in realizing this strategy is based
on its competitive advantages, industry expertise and favor-
able operating environment, including:
• Structure of the existing and potential resource base;
• Reserve base geography – proximity of the Company’s
core fields to the available infrastructure and trunk pipe-
lines;
• Effective geological exploration and development program
employing state-of-the-art and advanced techniques;
• Full development of the hydrocarbon value chain from pro-
duction at the producing fields to the Company’s own gas
condensate processing and infrastructure facilities;
• Construction and operation of terminals to bring hydro-
carbon products to market; and
• Successful experience working in the domestic natural gas
market, which will benefit from the Russian Government’s
policy to increase domestic wholesale gas prices to achieve
full market liberalization.
NOVATEK / ANNUAL REPORT / 2011
14
Our strategic objective is to leverage our competitive
strengths to increase our hydrocarbon production on a sus-
tainable and profitable basis, while efficiently increasing our
resource base and operating in a socially and environmen-
tally responsible manner. Moreover, we intend to continue to
optimize our marketing channels and explore complementary
and value added projects. Specifically, we intend to:
• Substantially Increase Our Production of Hydrocar-
bons, Particularly Natural Gas.
Industry experts, including the International Energy Agen-
cy, estimate that long-term demand for natural gas will be
greater than current supply. We believe we are well posi-
tioned to supply a significant portion of the expected growth
in incremental natural gas demand on the Russian domestic
market due to the proximity of our core fields to pipeline in-
frastructure, the successful development of our fields, and
our commercial marketing capabilities. We plan to continue
making targeted capital investments and prioritize our in-
vestment program to focus on expansion of our fields’ pro-
duction capacity. At the same time, we are carefully assess-
ing potential acquisition 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.
• Maintain Our Low Cost Structure.
We intend to maintain our low cost track record through the
prudent use of modern technology and production tech-
niques 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 global oil and gas
industry based on industry peer reviews and performance
metrics. Furthermore, we expect that the geographic con-
centration of the majority of our resource base, which is in
close proximity to the UGSS, the Purovsky Plant and our pro-
duction infrastructure, and the resulting economies of scale
will continue to be a major 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 op-
erations and tightly control administrative overhead costs.
• Maximize Risk-Adjusted Margins on Sales of Natural
Gas and Liquids and Expand Our Customer 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 between 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 in-
crease the production of liquid hydrocarbons, we intend to
continue to geographically diversify our stable gas conden-
sate and LPG markets and expand our customer base, while
at the same time developing deeper refining capabilities. As
a part of this process, we continue to invest capital into the
construction of the Ust-Luga transshipment and gas frac-
tionation facility for processing of our stable gas conden-
sate, allowing us to further enhance refining depth and cap-
ture additional margins on end products, as well as expand
our marketing capabilities and product offerings.
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011 02 The Company
15
• Increase Our Resource Base and Manage Reserves
• Develop Relationships with Strategic Partners.
Effectively.
We intend to manage our resource base in order to grow our
proved reserves as we develop and explore for hydrocarbons
at 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 and Gydan peninsulas, including the
South-Tambeyskoye, Salmanovskoye (Utrenneye), Geofiz-
icheskoye and other fields, will enable us to leverage our
experience in developing complex gas condensate reserves
to further expand our resource base both organically and
geographically.
In view of our strategic objectives to increase production
volumes and penetrate new markets, we are working to
develop relationships with international energy companies
and other strategic partners, such as SIBUR, 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
experience.
NOVATEK / ANNUAL REPORT / 2011 17
03
Operations
in Review
Exploration and Production
NOVATEK’s fields and license areas are located in the YNAO of the Rus-
sian Federation, which is the world’s largest natural gas producing region
and accounts for approximately 17% of global natural gas production and
approximately 84% of Russian natural gas production1. The concentration
of the Company’s producing and prospective fields, license areas and pro-
cessing facilities in this region combined with the Region’s overall oil and
gas infrastructure have allowed NOVATEK to minimize the risks associated
with developing its assets and expanding its resource base. The Company
has many years of experience working in the YNAO, which has enabled
it to effectively capitalize on the growth opportunities resident there to
increase shareholder value.
NOVATEK aims to expand its resource base through geological explora-
tion at fields and license areas not only in close proximity to existing trans-
portation and production infrastructure, but also in new prospective areas.
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
operational experience in the YNAO and by utilizing state-of-the-art ex-
ploration and development technologies.
As of 31 December 2011, we and our subsidiaries and equity invest-
ments held 38 licenses, of which 30 are classified as either production or
combined exploration and production licenses and eight are classified as
exploration licenses. The table below presents NOVATEK’s reserves under
the Russian reserve categories ABC1+C2.
ABC1+C2 Reserves as at 31 December
2011
2010
2009
Natural gas, bcm
Liquid hydrocarbons, mmt
Total proved reserves, mm boe2
4,056
498
1,987
235
30,566 21,264 14,894
2,698
450
1
According to Russian Governmental statistics and BP’s 2010 Statistical Review.
2 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 2011, 2010 and 2009.
NOVATEK / ANNUAL REPORT / 2011
18
SEC Proved Reserves1 as at 31 December
Natural gas, bcm
Liquid hydrocarbons, mmt
Total proved reserves, mm boe2
2011
1,321
91
9,393
2010
1,144
73
8,088
2009
967
63
6,853
1
The Company’s 2011 net proved reserves are based on appraisal reports for the East-Tarkosalinskoye, Khancheyskoye, North Khancheyskoye, Severo-Russkoye, Yur-
kharovskoye, West Yurkharovskoye and Olimpiyskiy fields and license areas based on NOVATEK’s 100% ownership interest, as well as the South-Tambeyskoye, Termokarsto-
voye, Yarudeyskoye, Khadyryakhinskiy, Pyreinoye, Severo-Chaselskoye, Yaro-Yakhinskiy, Beregovoy, Yevo-Yakhinskiy, and Samburgskiy fields and license areas, according to
NOVATEK’s shareholding in the respective fields and license areas. The 2011 reserve appraisal does not include Salmanovskoye and Geofizicheskoye fields which are located
in the Gydan peninsula and were acquired in 2011. The appraisal reports were conducted under the reserves estimation, reporting and disclosures rules promulgated by the
U.S. Securities and Exchange Commission (“SEC”) reserves reporting methodology and do not include estimates for probable and possible reserves.
2
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 2009, 2010 and 2011.
NOVATEK’s total reserves under the Russian reserve clas-
sification ABC1 + C2 totaled 4,056 bcm of natural gas and
498 mmt of liquid hydrocarbons, based on our equity own-
ership interest in the respective fields.
The increase in NOVATEK’s total ABC1+C2 reserves for
the ending 31 December 2011 was due in part to the recent
acquisition of the Geofizicheskiy and Salmanovskiy (Utrnen-
niy) license areas in the hydrocarbon-rich Gydan peninsula,
which was acquired via a license tender, and a 29% increase
in our equity stake in OAO “Yamal LNG”, which holds the li-
cense to the South-Tambeyskoye field, as well successful
exploration activities at our existing fields and license areas.
The Company’s reserves are also appraised on an annual
basis by independent petroleum engineers, “DeGolyer and
MacNaughton” (“D&M”) under the SEC reserves disclosure
requirements and as of 31 December 2011, NOVATEK’s
total SEC proved reserves totaled 1,321 bcm of natural gas
and 91 mmt of liquid hydrocarbons, based on our equity
ownership interest in the respective fields.
In 2011, NOVATEK achieved significant growth in its SEC
proved gas and gas condensate reserves due to ongoing
production drilling at the Yurkharovskoye field, exploration
work at the South-Tambeyskoye, North Russkoye, Sam-
burgskoye and Yaro-Yakhinskiy fields and license areas, as
well as an increase in the Company’s equity interest in OAO
“Yamal LNG”. The increase in NOVATEK’s SEC crude oil re-
serves was due to positive exploration results at the Yar-
udeyskoye field and ongoing production drilling at the East-
Tarkosalinskoye field.
NOVATEK’s total net SEC proved natural gas and liquid
hydrocarbon reserves, on a boe basis, increased by 16.1%
or, 1,305 million boe, to 9,393 million boe, while the Com-
pany’s 2011 reserve to production ratio was approximately
25 years for both total hydrocarbons and natural gas.
NOVATEK continued to deliver low cost reserve growth in
2011 through strategically investing capital in development
and exploration activities as well as strategic acquisitions,
which enabled the Company to maintain its position as one
of the lowest cost producers in the industry.
The Company’s total 2011 consolidated investments in
exploration, development and acquisition activities totaled RR
35.04 billion, which resulted in a reserve replacement cost of
RR 35.80 per boe ($1.22 per boe)3 while our three- and
five-year reserve replacement costs amounted to RR 32.50
per boe ($1.06 per boe) and RR 36.58 per boe ($1.25 per
boe), respectively.
As part of our field development process, NOVATEK
relies on the experience and expertise of the specialists in
its geology department, and the Company’s scientific and
technical center located in Tyumen, and uses the latest
methods and technology to model and study the geologi-
cal structure of NOVATEK’s fields and license areas as well
as the physical processes of development, production and
processing of their hydrocarbons. The Company‘s geologists
use a systematic approach to exploration and development
of new fields, beginning with the collection and interpreta-
tion of seismic data to the creation of dynamic field models
for the placement of exploration and production wells. We
employ modern geological and hydrodynamic modeling as
well as new well drilling and completion techniques in an at-
tempt to maximize the ultimate recovery of hydrocarbons in
a cost effective manner.
In 2011, NOVATEK completed 41.3 thousand meters of
exploration drilling and 1,738 square kilometers of Three-
Dimensional (“3D”) seismic and 376 linear kilometers of
Two-Dimensional (“2D”) seismic. The exploration activities
at our fields targeted gas condensate and crude oil bearing
Lower Cretaceous deposits at depths of between 2,000 to
4,400 meters. The table below shows figures for explora-
3 Average exchange rate of RR 29.39/USD ($)
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011 19
Change
17%
(72%)
-
233%
82%
-
173%
38%
-
Change, %
41.5%
13.5%
38.5%
2011
376
91
285
1,738
949
789
41,287
20,798
20,489
2011
53.5
349.9
4.124
34.6
384.5
2010
322
322
0
522
522
0
15,116
15,116
0
2010
37.8
247.2
3.632
30.5
277.7
The primary reason for the 15.7 bcm increase in natural
gas production was organic growth at the Yurkharovskoye
field, which accounted for approximately 48% of the total
increase while an increase in the utilization of dry gas pro-
duction capacity at the East-Tarkosalinskoye field accounted
for 16%. The remaining 33% of the increase was related
to the addition of our equity share in the production from
Sibneftegas in which the Company acquired a 51% stake in
December 2010.
03 Operations in Review
Exploration activities
2D seismic
Consolidated companies
Associated companies
3D seismic
Consolidated companies
Associated companies
Exploration wells drilled
Consolidated companies
Associated companies
Units
linear km
linear km
sq. km
sq. km
meters
meters
Gross hydrocarbon production1
Natural gas
Liquid hydrocarbons
Total production
Units
bcm
mm boe
mmt
mm boe
mm boe
1
Equity share in natural gas production from joint ventures
tion activities both for the consolidated and associated com-
panies.
NOVATEK’s 2011 gross production from all fields
amounted to 384.8 million boe (380.6 million boe of sales
production), representing an increase of over 38% year on
year, of which approximately 91% was natural gas produc-
tion.
In 2011, total gross production amounted to 53.5 bcm of
natural gas (sales production – 52.9 bcm) and 4.1 mmt of
liquid hydrocarbons (sales production – 4.1 mmt). Natural
gas production increased by 15.7 bcm or 41.5 %, while liq-
uids production increased by 492 mt, or 13.5%, compared
to the respective production volumes in 2010.
The Company’s total gas production capacity as at 31
December 2011 amounted to 172.5 mmcm per day (in-
cluding our share in the production capacity of Sibneftegas’
fields) or approximately 62.5 bcm per annum.
In 2011, NOVATEK’s lifting costs, or expenses directly
related to the extraction and processing of natural gas, gas
condensate and crude oil from the reservoir, decreased by
8.0% to RR 15.0 per boe on a Russian rouble basis and by
5.6% to $0.51 per boe on a U.S. dollar basis.
NOVATEK / ANNUAL REPORT / 2011
20
36
38
5
37
34
35
24
9
20
NOVATEK’S FIELDS
AND LICENSE AREAS
01. Yurkharovskoye field
02. East-Tarkosalinskoye field
03. Khancheyskoye field
04. Olimpiyskiy license area
05. South-Tambeyskoye field
06. Termokarstovoye field
07. West-Yurkharovskoye field
08. North Khancheyskoye field
09. Yarudeyskoye field
10. Raduzhnoye field
11. New Yurkharovskiy license
area
12. Yumantilskiy license area
13. Zapadno-Urengoiskiy license
area
14. Severo-Yubileynoye field
15. Severo-Termokarstoviy license
area
16. Severo-Russkiy license area
17. Severo-Russkoye field
18. Sredniy-Chaselskiy license
area
19. Zapadno-Tazovskiy license
area
20. Anomalniy license area
21. Severo-Yamsoveyskiy license
area
22. Ukrainsko-Yubileynoye field
23. Pilyalkinskiy license area
24. Malo-Yamalskoye field
25. Zapadno-Chaselskoye field
26. Beregovoy lisence area
27. Pyreinoye field
28. Khadyryakhinskiy license area
29. Zapadno-Zapolyarnoye field
30. Samburgskiy license area
31. Yevo-Yakhinskiy license area
32. Yaro-Yakhinskiy license area
33. Severo-Chaselskiy license area
34. Salmanovskiy ( Utrenniy)
license area
35. Geofizicheskiy license area
36. North-Obskiy license area
37. East-Tambeyskiy license area
38. Severo-Tasiyskiy license area
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011 03 Operations in Review
21
1
7
11
30
14
22
13
21
4
19
17
16
29
10
31
27
32
26
33
18
25
15
28
12
8
6
23
2
3
gas pipeline
other NOVATEK fields
and license areas
gas condensate pipeline
Purovsky Plant
NOVATEK producing fields
gas condensate pipeline from
the Yurkharovskoye field to the
Purovsky Plant
NOVATEK / ANNUAL REPORT / 2011 22
Producing fields
In 2011, hydrocarbon production was carried out at sev-
en fields and license areas of which, our three core fields,
Yurkharovskoye, East-Tarkosalinskoye and Khancheyskoye
accounted for approximately 90% of our natural gas and
liquid hydrocarbons production. These three fields made up
52% of our total 2011 SEC proved reserves, as appraised
by D&M. All of the fields are located in close proximity the
Unified Gas Supply System (UGSS), the world’s largest gas
transporting infrastructure.
Yurkharovskoye field
The field was discovered in 1970 and is located within the
polar circle on the southeast shore of the Tazov peninsula.
The Company’s wholly-owned subsidiary, OOO NOVATEK-
Yurkharovneftegas, 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
condensate since 2003. 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 demand for natural gas in the Russian domestic
market.
The field is connected to the UGSS and the Purovsky Plant
via our own pipeline infrastructure, which enables the trans-
port of over 37 bcm of natural gas and three million tons of
deethanized gas condensate, respectively, per annum. The
unstable gas condensate is deethanized at the field using
our own facilities with capacity for up to three million tons
per annum.
In 2011, twelve production wells were drilled and connect-
ed to inter-field pipelines and a gas-gathering system was
assembled. Currently, the field has 63 production wells for
natural gas and gas condensate production. As a result of
exploration works carried out at the field one new gas con-
densate deposit was discovered bringing the total number
of field hydrocarbon deposits to 25.
Total field production capacity is approximately 33 bcm of
natural gas and three mmt tons of unstable gas conden-
sate.
Total Marketable (Sales) Production (full year 2011)
Natural gas
Liquid hydrocarbons
32.04 bcm
(1,131 bcf)
2.718 mmt
(23.37 mmbbl)
Proved Reserves (SEC) as at 31 December 2011
Natural gas
Liquid hydrocarbons
445.6 bcm
(15,736 bcf)
24.22 mmt
(208.2 mmbbl)
YURKHAROVSKOYE FIELD
NATURAL GAS PRODUCTION, bcm
YURKHAROVSKOYE FIELD
GAS CONDENSATE PRODUCTION, mt
24.7
17.9
11.7
9.6
35
30
25
20
15
10
5
0
32.3
3,200
2,725
2,113
1,492
2,400
1,600
800
0
895
750
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011
03 Operations in Review
23
We also began work implementing the approved oil devel-
opment program, including; project documentation approval
for field development, drilling of five oil wells and one water
well, launch of two oil wells and hydrofracking work at 20 oil
wells to stimulate production. A crude oil gathering system
and well clusters were also under construction during the
period.
Total Marketable (Sales) Production (full year 2011)
Natural gas
Liquid hydrocarbons
12.15 bcm
(429.1 bcf)
0.808 mmt
(6.490 mmbbl)
Proved Reserves (SEC) as at 31 December 2011
Natural gas
Liquid hydrocarbons
212.0 bcm
(7,488 bcf)
22.06 mmt
(173.2 mmbbl)
East-Tarkosalinskoye field
The field’s license for exploration and production of hy-
drocarbons is held by NOVATEK’s wholly-owned subsidiary,
OOO NOVATEK-Tarkosaleneftegas, 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 is our most mature field
and has reached its respective plateau levels in terms of
natural gas and gas condensate production and 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 pipeline,
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 deethanized
at the field and is transported via our 2.4 mmt per annum
capacity pipeline to our Purovsky Plant.
Crude oil is transported via our pipeline collection system
to our complex gathering station for further processing. Af-
ter 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 operated by
Transneft.
In 2011, ten sidetracking wells were drilled, targeting the
field’s Cenomanian layers, of which seven were launched.
EAST-TARKOSALINSKOYE FIELD
NATURAL GAS PRODUCTION, bcm
EAST-TARKOSALINSKOYE FIELD
LIQUIDS PRODUCTION, mt
Gas condensate
Crude oil
16
14.6
14.9
1,000
906
938
898
853
810
12.4
11.7
10.0
12
8
4
0
800
600
400
200
0
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011
NOVATEK / ANNUAL REPORT / 2011
24
Beregovoy license area
Sibneftegas, in which NOVATEK owns a 51% share, holds
the exploration and development license for the Beregovoy
license area, which is valid until 2023. This license area en-
compasses the Beregovoye field, Sibneftegas’ largest field
in terms of reserves. The field is connected to the UGSS by
pipeline with capacity of up to 12.5 bcm per annum and
commercial production of natural gas began in 2007.
Currently, Sibneftegas has completed the interpretation of
3D seismic results in order to update the existing geological
model to determine the field’s further development plans.
Net Marketable (Sales) Production (full year 2011)
All of the field’s natural gas production is transported via
our gas pipeline to the East-Tarkosalinskoye field, and then
further transported to customers using the East-Tarkosal-
inskoye field’s connection to the UGSS. The intra-field pipe-
line’s current capacity is 7.5 bcm per annum.
The field’s unstable gas condensate production is trans-
ported via our pipeline to the East-Tarkosalinskoye field,
where it is deethanized and further transported to our
Purovsky Plant using the East-Tarkosalinskoye field’s un-
stable gas condensate pipeline. The intra-field unstable gas
condensate pipeline’s capacity is 1.1 mmt per annum.
Natural gas
Liquid hydrocarbons
4.920 bcm
(173.7 bcf)
-
-
A small amount of oil is extracted along from the gas con-
densate wells and is prepared and processed with the un-
stable gas condensate.
Total Marketable (Sales) Production (full year 2011)
Net Proved Reserves (SEC) as at 31 December 2011
Natural gas
Liquid hydrocarbons
3.263 bcm
(115.2 bcf)
0.560 mmt
(4.530 mmbbl)
Proved Reserves (SEC) as at 31 December 2011
Natural gas
Liquid hydrocarbons
33.72 bcm
(1,191 bcf)
3.952 mmt
(32.12 mmbbl)
Natural gas
Liquid hydrocarbons
Khancheyskoye field
81.57 bcm
(2,881 bcf)
0.356 mmt
(2.954 mmbbl)
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 hy-
drocarbons at the Khancheyskoye field is held by OOO NO-
VATEK-Tarkosaleneftegas and is valid until 2044. The field
began producing natural gas and gas condensate in 2001
and crude oil in 2007.
KHANCHEYSKOYE FIELD
NATURAL GAS PRODUCTION, bcm
4.2
4.1
3.1
3.3
3.0
5
4
3
2
1
0
KHANCHEYSKOYE FIELD
LIQUIDS PRODUCTION, mt
Gas condensate
Crude oil
727
661
619
635
560
1,000
800
600
400
200
0
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011
03 Operations in Review
Pyreinoye field
25
Sibneftegas also holds the license for exploration and pro-
duction at the Pyreinoye gas condensate field, which is valid
until 2021. Commercial production of gas and gas conden-
sate began in 2009, and the field is connected to the UGSS
by way of a 36 kilometer natural gas pipeline with capacity
of 2.5 bcm per annum.
Currently, Sibneftegas has completed the interpretation of
3D seismic exploration data at the field in order to update
the existing geological model for further development.
Net Marketable (Sales) Production (full year 2011)
Natural gas
0.464 bcm
(16.37 bcf)
Net Proved Reserves (SEC) as at 31 December 2011
Natural gas
8.413 bcm
(297.1 bcf)
In 2011, two new gas condensate deposits and one gas
deposit were discovered as a result of exploration activities
at the license area, which significantly increased the reserve
of the Dobrovolskoye field and increased the gas bearing
capacity of the Cenomanian deposits at the Urengoyskoye
field. Production from these fields is expected to commence
in the near future.
Yumantilskoye field
The license for exploration and production at the field is
held by OOO NOVATEK-Tarkosaleneftegas and is valid until
2024. Commercial production began in 2001, but has been
periodically interrupted due to well maintenance problems.
We expect production to restart after the necessary geo-
logical and technical activities are carried out and the eco-
nomics for further field development is assessed.
Total Marketable (Sales) Production (full year 2011)
Natural gas
Liquid hydrocarbons
0.004 bcm
(0.155 bcf)
0.001 mmt
(0.008 mmbbl)
Olimpiyskiy license area
The license for exploration and production of hydrocarbons
at the Olimpiyskiy license area is held by OOO NOVATEK-
Tarkosaleneftegas and is valid until 2026. Natural gas and
gas condensate production began in 2009 and is carried out
at the Sterkhovoye field, which is located within the
Olimpiyskiy license area.
Total Marketable (Sales) Production (full year 2011)
Natural gas
Liquid hydrocarbons
0.068 bcm
(2.401 bcf)
0.024 mmt
(0.196 mmbbl)
Proved Reserves (SEC) as at 31 December 2011
Natural gas
Liquid hydrocarbons
27.44 bcm
(969.1 bcf)
2.56 mmt
(20.88 mmbbl)
The Sterkhovoye field is connected to the UGSS by a
14 kilometer natural gas pipeline with transportation capacity
of 3.1 bcm per annum. Deethanized gas condensate from
the field is sent to the Purovsky Plant via a 12 kilometer
portion of the gas condensate pipeline connecting the
Yurkharovskoye field with the Purovsky Plant.
NOVATEK / ANNUAL REPORT / 2011
26
Prospective fields
In the medium-term period, we plan to launch 10 new
fields, which have either been discovered as a result of
exploration activities, or acquired through strategic
investments. These fields will not only support production
levels from producing fields, but will also provide production
growth in the short- and medium-term periods. All of the
fields are located in close proximity to our existing
infrastructure and the
transportation and processing
infrastructure of the Purovsky Plant.
Samburgskiy license area
and
field,
along with Severo-
The Samburgskoye
Yesetinskoye+Vostochno-Urengoiskoye
Severo-
Purovskoye fields and part of the Urengoiskoye field are all
located within the Samburgskiy license area. The license for
exploration and development is owned by OAO Arcticgas,
a wholly owned subsidiary of SeverEnergia. The ownership
structure of SeverEnergia includes Yamal Development, a
50/50 joint venture between NOVATEK and Gazprom Neft,
which holds a 51% equity stake and Italian companies ENI
and Enel, which together hold the remaining 49%.
In 2011, eight deviated wells have been completed and
tested and four new horizontal and two horizontal side-
track wells have been drilled at the Samburgskoye field. We
have completed the 46 kilometer gas pipeline connecting
the field’s gas preparation unit with the UGSS and the 20
kilometer deethanized gas condensate pipeline, connecting
to the Yurkharov-Purovsky Plant pipeline. The table below
shows NOVATEK’s net equity share in the reserves of the
Samburgskiy license area.
Net Proved Reserves (SEC) as at 31 December 2011
Natural gas
Liquid hydrocarbons
24.50 bcm
(865.3 bcf)
5.62 mmt
(45.87 mmbbl)
Yaro-Yakhinskiy, Severo-Chaselskiy and the
Yevo-Yakhinskiy license areas
In addition to the Samburgskiy license area, SeverEnergia,
holds through its wholly owned subsidiaries, ZAO Urengoil
Inc., OAO Neftegaztechnologia and OAO Arcticgas, licenses
for exploration and development of three more license areas;
Yaro-Yakhinskiy, Severo-Chaselskiy and Yevo-Yakhinskiy,
respectively.
All of SeverEnergia’s fields and license areas are in close
proximity to our producing fields and existing transporta-
tion and processing infrastructure. We are currently working
with the other partners to refine and approve the develop-
ment plans for these fields and license areas. The table below
shows NOVATEK’s net equity share in the reserves of Yaro-
Yakhinskiy, Severo-Chaselskiy and Yevo-Yakhinskiy license
areas.
Net Proved Reserves (SEC) as at 31 December 2011
Natural gas
Liquid hydrocarbons
Termokarstovoye field
37.37 bcm
(1,320 bcf)
4.225 mmt
(34.28 mmbbl)
The license for exploration and production of gas and gas
condensate at the Termokarstovoye field is held by NO-
VATEK’s associated company ZAO Terneftegas, our joint
venture with TOTAL Termokarstovoye B.V.
In December 2011, NOVATEK together with its partner
TOTAL made the final investment decision to develop the
field. The project start-up is expected in 2015 with produc-
tion capacity of approximately 65,000 barrels of oil equiva-
lent per day. The table below shows NOVATEK’s net equity
share in the reserves of the Termokarstovoye field.
Net Proved Reserves (SEC) as at 31 December 2011
Natural gas
Liquid hydrocarbons
12.57 bcm
(443.9 bcf)
2.360 mmt
(20.19 mmbbl)
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011
03 Operations in Review
27
North Khancheyskoye field
Additional prospective fields and license areas
In addition to the Beregovoy license area and Pyreinoye
field, Sibneftegas holds geological exploration and develop-
ment licenses for the Khadyryakhinskiy license area and the
Zapadno-Zapolyarnoye field, which are in the early stages of
geological exploration. Sibneftegas is currently planning to
conduct further exploration drilling at the Khadyryakhinskiy
license area where 3D seismic data interpretation is nearly
complete in order to determine the geological structure of
the deposits and identify any additional reserves that may
be ready for development. Sibneftegas’s fields are in close
proximity to the license areas of our subsidiaries and our ex-
isting transportation and processing infrastructure.
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 fields, deposits
and the most effective use of our assets.
Yamal and Gydan peninsula fields
With the 2009 acquisition of an equity stake in Yamal LNG,
the license holder of the South-Tambeyskoye field in the
Yamal peninsula, and the 2011 acquisition of four new
license areas on the Gydan peninsula and in the Gulf of Ob,
NOVATEK is rapidly expanding its operations in the northern
portion of the YNAO. These fields and license areas are
responsible for the Company’s long-term production growth
and may be used as feedstock for LNG and stable gas
condensate sold to the export markets as well as a potential
source for domestic deliveries of natural gas through the
UGSS. The fields and license areas are being developed from
“greenfield” stages and will require significant investment in
production, transportation and processing infrastructure.
The license for exploration and production is held by OOO
NOVATEK-Tarkosaleneftegas and is valid until 2029. In
2011, as a result of exploration works carried out at the field
two new gas deposits were discovered. Work is underway
on creating a geological field model in order to finalize a field
development plan.
Proved Reserves (SEC) as at 31 December 2011
Natural gas
1.959 bcm
(69.18 bcf)
Yarudeyskoye field
OOO YARGEO, in which NOVATEK has a 51% equity stake,
holds the license for exploration and production at the Yar-
udeyskoye field, which is valid until 2029. Most of the field’s
reserves are located in oil-rich deposits. In 2011, additional
exploration work was done and we are currently in the pro-
cess of finalizing the field’s development plan in order to
launch production. The table below shows NOVATEK’s net
equity share in the reserves of the Yarudeyskoye field.
Net Proved Reserves (SEC) as at 31 December 2011
Natural gas
Liquid hydrocarbons
North-Russkoye field
3.533 bcm
(124.8 bcf)
2.151 mmt
(16.70 mmbbl)
The license for exploration and production is held by OOO
NOVATEK-Tarkosaleneftegas and is valid until 2031. In
2011, as a result of exploration works carried out at the
field one new gas deposit was discovered and the field’s gas
bearing capacity was increased, which significantly increased
the resource base potential. The field’s development plan
was completed in 2011.
Proved Reserves (SEC) as at 31 December 2011
Natural gas
Liquid hydrocarbons
22.49 bcm
(794.3 bcf)
1.943 mmt
(15.59 mmbbl)
NOVATEK / ANNUAL REPORT / 2011
28
South-Tambeyskoye field
Geofizicheskoye and Salmanovskoye
(Utrenneye) fields
Yamal LNG, in which NOVATEK holds an 80% equity stake,
holds the license for exploration and production at the South-
Tambeyskoye field. Yamal LNG is engaged in the design and
construction work of an onshore integrated LNG facility at
the license area, and once completed, will be the operator of
the facility. The feedstock for the LNG facility is based on the
resources of the South-Tambeyskoye field.
The field has already been thoroughly studied with 3D
seismic and exploration wells drilled, and a detailed geologi-
cal model has been completed. In 2011, three exploration
wells were drilled as a result of which nine new hydrocarbon
deposits were discovered, confirming the field’s rich reserve
base.
In August 2011, our wholly owned subsidiary, OOO NO-
VATEK- Yurkharovneftegas, was granted four new license
areas for exploration and production in the YNAO based on
a positive ruling by the Russian Government as part of a ten-
der process.
Two of the license areas are located in the hydrocarbon-
rich Gydan peninsula. License obligations include a five-year
exploration period to run 250 linear kilometers (km) of 2D
seismic and 2,300 km2 of 3D seismic as well as the drill-
ing of four exploration wells. Licenses have been granted to
carry out exploration and production activities until 2031.
NOVATEK has already launched full-scale exploration and
seismic works at the fields.
Net Proved Reserves (SEC) as at 31 December 2011
ABC1+C2 Reserves as at 31 December 2011
Natural gas
Liquid hydrocarbons
377.3 bcm
(13,323 bcf)
16.00 mmt
(137.6 mmbbl)
Natural gas
Liquid hydrocarbons
978.6 bcm
(34,545 bcf)
46.32 mmt
(384.8 mmbbl)
North-Obskiy and East-Tambeyskiy license areas
The remaining two license areas are located offshore in the
northern portion of the Gulf of Ob. Both of the license areas
are adjacent to the Yamal peninsula where the Company is
developing its Yamal LNG project.
License obligations include a ten-year exploration period
to run 6,000 km of 2D seismic and 252 km2 of 3D seismic
as well as the drilling of four exploration wells. Licenses have
been granted to carry out exploration and production activi-
ties until 2041.
The field has no reserves under international standards.
D1 Resources as at 31 December 2011
Natural gas
Liquid hydrocarbons
1,763 bcm
(62,223 bcf)
220.7 mmt
(1,855 mmbbl)
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011
03 Operations in Review
Processing
Purovsky Plant
Gas condensate is produced from our fields in an unstable
form and requires further processing before it can be de-
livered to our customers. Our primary gas condensate pro-
cessing asset is the Purovsky Plant, which has total process-
ing capacity of five mmt of deethanized gas condensate per
annum, that allows us to produce approximately 3.7 mmt of
stable gas condensate and approximately 1.3 mmt of LPG
per annum. The Purovsky Plant is located in the YNAO and in
close proximity to the East-Tarkosalinskoye field.
The Purovsky Plant is an important link in our midstream
value chain that provides us complete operational control
over our processing needs and access to higher yielding
marketing channels for our stable gas condensate. Our abil-
ity 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 utilizing the services
of a third-party processor.
In 2011, the Purovsky Plant received feedstock from two
sources and a third was added in the first quarter of 2012:
• through our unstable gas condensate pipelines from the
East-Tarkosalinskoye and Khancheyskoye fields;
• through our Yurkharоv-Purovsk unstable gas condensate
pipeline from the Yurkharovskoye and Sterkhovoye fields;
and
• through the Yurkharov-Purovsk unstable gas condensate
pipeline from the Samburgskoye field.
In 2011, the Purovsky Plant processed 3.9 mmt of
deethanized unstable gas condensate, or 13.8% more than
in 2010, resulting in the commercial production of 2.9 mmt
of stable gas condensate and 883 mt of LPG as well as ap-
proximately 16 mt of methanol produced during the LPG
scrubbing process.
During the year, the Purovsky Plant operated at approxi-
mately 77% of full capacity, providing us with the ability to
continue developing our gas condensate fields. Substan-
tially 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 further transportation
to international markets. Also, the Purovsky Plant’s fourth
9,600 cm LPG storage facility was completed and the Com-
pany’s future plans include expanding the Purovsky Plant’s
29
PUROVSKY PLANT OUTPUT 2011, mt
Stable gas
condensate
LPG
Losses and own
usage
Regenerated
methanol
883
16
23
2,946
processing capacity to 11 mmt per annum by 2014, which
will allow us to process the deethanized gas condensate
produced from current and prospective fields.
The Purovsky Plant has storage facilities for stable con-
densate (90.0 mcm), LPG (25.2 mcm) and raw materials
(13.6 mcm). The Purovsky Plant also has facilities for load-
ing stable condensate and LPG into rail tank cars, and our
own railway line connects the plant to the Russian railway
network at the Limbey rail station.
Ust-Luga Transshipment and Gas
Fractionation Unit
As part of our strategy to maximize margins through value
added projects, we launched construction of 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 will be used as feedstock to the fractionation
unit for further processing into light and heavy naphtha,
aviation kerosene, diesel and heating oil, which will be sold
to both domestic and international export markets while the
remaining volumes supplied to the facility by rail transport will
be loaded onto tankers for delivery to export markets.
The estimated gas fractionation capacity of the Ust-Luga
terminal is up to six mmt per annum, and will be constructed
in two phases. We expect to launch the first phase with
fractionation capacity of three million tons of feedstock per
annum in the fourth quarter of 2012 and the second phase
with similar capacity in the fourth quarter of 2013.
NOVATEK / ANNUAL REPORT / 2011
30
Yamal LNG Facility
NOVATEK holds an 80% equity stake in Yamal LNG, which
is engaged in the engineering and design work for the con-
struction of an onshore LNG facility (the Project) on the
Yamal pensinsula. Yamal LNG holds the exploration and
production license for the South-Tambeyskoye field, which
will provide the resources for the Project. In June 2010, a
long-term agency agreement was signed between Gazprom
Export and Yamal LNG, pursuant to which GazpromExport
will act as an agent for export sales of LNG between Ya-
mal LNG and Yamal LNG’s wholly-owned export marketing
subsidiary.
In 2009, NOVATEK acquired a 51% shareholding in Yamal
LNG, and in September 2011, the Company increased its
shareholding to 100% by exercising two options for the re-
maining 49%. In October 2011, we reduced our sharehold-
ing to 80% as a result of the sale of a 20% stake in Yamal
LNG to TOTAL S. A., our strategic partner in the Project.
In early 2011, we completed pre-Front End Engineering
and Design concept (FEED) and currently the Company is
engaged in preparation of the site for construction and the
FEED, which is expected to be completed in the first quarter
of 2012.
Upon completion, the complex will include two 3 mmt per
annum fractionation trains, reservoir tank farms for feed-
stock and processed products, rail facilities for loading and
receiving finished and raw materials, two 17.5 meter deep-
water tanker berths and associated port facilities. Our wholly
owned subsidiary, NOVATEK-Ust-Luga will be the operator
of the terminal.
In 2011, we began construction of the reservoir tank farms,
which will consist of 25 reservoirs with total capacity of 640
mcm. Concrete forms for the jetty have been completed and
construction of two tanker loading berths, administrative fa-
cilities, the foundation for the first phase fractionation unit
and living quarters for employees began in 2011.
The project will allow us to move further down the hydro-
carbon value chain to realize premium pricing for the facilities
product slate and diversify customer risk by increasing the
number of potential off-takers for the new product mix as
well as decrease the transportation distance to the point of
export by approximately 383 kilometers.
In 2011, we started construction works on infrastructure
facilities related to the Project in Sabetta, including; housing
facilities, administrative buildings, a fuel depot, the inter-field
roads and the airport runway. We also validated the design
concept for the construction of a new 170,000 cubic meter
capacity Arc 7 LNG Carrier.
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011
31
In April 2011, NOVATEK through its subsidiaries acquired
OOO Yamalenergogaz, a Russian regional natural gas trader,
to support and expand natural gas sales opportunities in the
Perm region. In January 2012, OOO Yamalenergogaz was
merged into OOO NOVATEK-Perm.
In November 2011, NOVATEK through its wholly-owned
subsidiaries acquired a 100% participation interest in the
share capital of OOO Gazprom Mezhregiongas Chelyabinsk,
the largest gas distributor in the Chelyabinsk region, which is
one of the largest natural gas consuming regions. As a result
of the acquisition NOVATEK will now supply 100% of the
Chelyabinsk region’s natural gas demand.
In order to maintain production levels during periods of
seasonality in demand NOVATEK has entered into an agree-
ment with OAO Gazprom for the use of their underground
storage facilities on a space available basis. Historically, natu-
ral gas is injected into underground storage facilities during
warmer periods when demand is lower and later withdrawn
during periods of colder weather and increased demand.
In 2010, NOVATEK withdrew 1,199 mmcm of natural gas
from underground storage facilities during periods of high
demand and injected 1,171 mmcm when space was avail-
able. At the end of 2011, the Company had 732 mmcm of
natural gas in storage and available for withdrawal in future
periods.
03 Operations in Review
Marketing
During 2011, NOVATEK supplied natural gas to 33 re-
gions of the Russian Federation and acquired the largest
gas distributor in the Chelyabinsk region. The Company also
expanded its use of the Northern Sea Route to significantly
reduce delivery time for shipments of stable gas condensate
to countries of the Asian-Pacific region.
Natural Gas Sales
According to the CDU-TEK, total Russian natural gas pro-
duction increased by 3% in 2011 and Russia remained the
second largest consumer of natural gas in the world consum-
ing approximately 469.1 bcm. The largest Russian consumer
of natural gas is the power generation sector accounting for
35% of total 2011 domestic natural gas consumption.
In 2011, NOVATEK accounted for approximately 15%
of the total natural gas deliveries to the domestic market
through the UGSS.
NOVATEK’s 2011 natural gas sales volumes amounted to
53.7 bcm, an increase of 44.6% compared to 2010 sales
volumes of 37.1 bcm, of which 29.3 bcm (54.7%) was sold
to the end-customer segment and 24.3 bcm (45.3%) was
sold ex-field to the wholesale trader segment.
Total revenues from natural gas sales increased to RR
110.9 billion or by 56.1%, in 2011 as compared to 2010,
due to the higher volumes and an increase in prices.
In 2011, our customers were located primarily in the Perm
territory, Chelyabinsk, Orenburg, Sverdlovsk, Moscow, Ko-
stroma, Kirov and Tyumen regions, the city of St-Petersburg
as well as the YNAO and Khanty-Mansyisk Autonomous
regions.
NATURAL GAS SALES VOLUMES, bcm
Ex-field
End-customers
Electronic trading
53.7
32.1
33.3
32.9
37.1
2011 BREAKDOWN OF NATURAL
GAS SALES VOLUMES, %
Power generation
companies
Large industrial
Regional gas
distributors,
less than 1%
consumers
Others
Wholesale traders
ex-field
40%
2007
2008
2009
2010
2011
45%
2%
12%
60
40
20
0
NOVATEK / ANNUAL REPORT / 2011
32
Liquid Hydrocarbon Sales
The Company’s primary liquid hydrocarbon sales volumes
are comprised of stable gas condensate and liquefied pe-
troleum 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
transportation and storage make it an attractive fuel source
for automobiles and residential usage.
The Company’s liquid hydrocarbon sales results demon-
strate 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 strat-
egy based on the reliable supply of high quality processed
hydrocarbons to both the domestic and export markets.
2011 BREAKDOWN OF LIQUIDS
SALES VOLUMES, %
Stable gas
condensate (export)
Stable gas condensate
(domestic), less than 1%
LPG (export)
LPG (domestic)
Crude oil (export)
Crude oil (domestic)
Oil products, less than 1%
11%
10%
2%
4%
73%
2011 BREAKDOWN OF LIQUIDS
SALES REVENUES, %
Stable gas
condensate
LPG
Crude oil
Oil products,
less than 1%
24%
4%
LIQUIDS SALES VOLUMES, mt
Crude oil
Oil products
Stable gas
condensate
LPG
4,500
3,000
2,404
2,630
4,111
3,401
3,128
1,500
0
2007
2008
2009
2010
2011
LIQUIDS SALES REVENUE MARKET
DISTRIBUTION, %
Domestic
Export
100
80
60
40
20
0
2007
2008
2009
2010
2011
72%
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011
03 Operations in Review
33
Total sales volumes of liquid hydrocarbons in 2011 amount-
ed to 4,111 mt, a 20.9% increase over 2010 volumes, while
total revenues from liquids sales increased to RR 64.7 billion,
or by 46.6%, in 2011 as compared to 2010, due to the
increase in sales volumes and higher benchmark pricing on
international markets.
Stable gas condensate is transported by rail from the
Purovsky Plant to the loading and storage facilities we have
constructed, together with OAO Belomorskaya Neftebaza,
at the all season Port of Vitino. In 2011, we loaded 2.9 mmt
at the port or 19.4% more than in 2010.
During 2011, we sold 51 tankers of stable gas conden-
sate, of which 22.3% were sold to markets in the USA,
43.4% to countries in the Asian-Pacific region and 34.3%
to markets in Europe, accounting for over 99% of our export
volumes. We had one tanker in transit at year-end.
In 2011, NOVATEK opened the NSR’s navigational period
for high-tonnage tankers early, sending the first tanker on
23 June, and closed the navigational period in November.
During the five month navigational period, NOVATEK trans-
ported approximately 600 thousand tons of stable gas con-
densate to consumers in South Korea, China and Thailand.
The Company sells its LPG volumes to both the export
and domestic markets. In 2011, total LPG export sales vol-
umes accounted for 51.5% of total LPG sales volumes and
Novatek Polska, our wholly owned LPG trading company in
Poland, was responsible for 23.6% of our total LPG export
sales. NOVATEK’s LPG and oil products domestic sales,
through its network of retail and small wholesale stations
in the Chelyabinsk and Volgograd regions, doubled in 2011
compared to 2010. The total amount of LPG sold through
our domestic network of retail and small wholesale stations
amounted to 10.2% of total LPG sales volumes in 2011.
At the end of 2011, the Company’s owned and leased roll-
ing stock, for transportation of liquid hydrocarbons from the
Purovsky Plant, totaled six thousand rail cisterns.
LIQUIDS SALES REVENUE,
RR billion*
Crude oil
Oil products
Stable gas
condensate
LPG
64.7
44.1
33.3
30.4
24.8
80
60
40
20
0
NATURAL GAS SALES REVENUE,
RR billion*
110.9
71.1
53.6
45.7
35.6
120
90
60
30
0
2007
2008
2009
2010
2011
* Net of VAT, excise tax and export duties.
2007
2008
2009
2010
2011
* Net of VAT.
NOVATEK / ANNUAL REPORT / 2011 34
DOMESTIC GAS
DELIVERIES
ST.PETERSBURG
power generation
large consumers
SMOLENSK
REGION
MOSCOW
REGION
KOMI
REPUBLIC
PERM
TERRITORY
KOSTROMA
REGION
KIROV
REGION
NIZHNY
NOVGOROD
REGION
CHUVASH
REPUBLIC
SAMARA
REGION
REPUBLIC
OF TATARSTAN
REPUBLIC
OF BASHKORTOSTAN
ORENBURG
REGION
CHELYABINSK
REGION
SVERDLOVSK
REGION
TYUMEN
REGION
STAVROPOL
TERRITORY
LIQUID
HYDROCARBON
SALES
stable gas
condensate
export sales
LPG export
sales
LPG domestic
sales
crude oil export
sales
15
approximate #
of delivery days
USA
22
BRAZIL
GAS CONDENSATE —
SOUTH AMERICA
2010
178 mt
3 tankers
2011
—
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 201120101,242 mt21 tankers2011603 mt10 tankersGAS CONDENSATE — USA 03 Operations in Review
YAMAL NENETS
AUTONOMOUS
REGION
KHANTY MANSIYSKY
AUTONOMOUS
REGION
TYUMEN
REGION
MURMANSK
FINLAND
VITINO
10
NETHERLANDS
LATVIA
LITHUANIA
POLAND
ROMANIA
SLOVAKIA
HUNGARY
SERBIA
TURKEY
Natural Gas Sales Volumes, mmcm
2010
2011
YAMAL NENETS AUTONOMOUS REGION
(EX FIELD SALES)
13,371,883
24,335,370
End-Сustomer Sales Breakdown,
% of NOVATEK´s total deliveries to end-customers
3,725,053
CHELYABINSK
REGION
5,636,542
PERM
TERRITORY
3,238,476
2,602,084
1,073,386
2,165,576
ORENBURG
REGION
MOSCOW
REGION
KHANTY
MANSIYSKY
AUTONOMOUS
REGION
SVERDLOVSK
REGION
1,083,511
ST.PETERSBURG
21%
6,136,402
21%
6,091,884
12%
3,426,094
11%
3,165,132
8%
2,478,233
8%
2,397,050
4%
1,274,181
100
90
80
70
60
50
40
30
20
10
0
35
End-Сustomer
Sales Breakdown, %
2008
2009
2010 2011
others
regional gas distributors
large industrial consumers
power generation
companies
NOVATEK sent 9 tankers via the
Northern Sea Route in 2011
CHINA
SOUTH KOREA
26
41
THAILAND
38
SINGAPORE
GAS CONDENSATE —
ASIA-PACIFIC REGION
2010
2011
606 mt
1,294 mt
10 tankers
22 tankers
NOVATEK / ANNUAL REPORT / 2011RUSSIAGAS CONDENSATE — EUROPE2010299 mt5 tankers20111,083 mt18 tankers 37
04
Environmental
and Social
Responsibility
NOVATEK adheres to the principles of effective and responsible business
conduct and considers the welfare of its employees and their families, en-
vironmental and industrial safety, the creation of a stable and beneficial
social environment as well as contributing to Russia’s overall economic de-
velopment as priorities and responsibilities of the Company.
Environmental, Health
and Safety
Innovations related to resource efficiency and environmental safety play
a significant role at NOVATEK and its subsidiaries’ activities.
In 2011, the Company continued implementing a program to improve
the rational use of associated petroleum gas (APG), which reduced the
amount of flared APG by 114.6 mmcm.
As part of our commitment to communities and stakeholders, NOVATEK
participates in the Carbon Disclosure Project (CDP), which discloses infor-
mation on greenhouse gas emissions and the energy efficiency of produc-
tion on an annual basis.
In 2011, for the first time NOVATEK participated in the CDP Water Dis-
closure Project, which disclosed information on the use of water resources
and the assessment of water-related risks. We support the CDP’s initia-
tives to promote environmentally safe solutions during the implementation
of investment projects and our participation in the project is aimed not only
at disclosure of water use information but also at finding new solutions to
the management of water-related risks in light of the impact water supply
issues have on the development of the oil and gas industry.
During the implementation of NOVATEK’s Environmental Policy, the
Company reduced per unit water consumption by 12% compared to the
previous year as a result of the introduction of environmentally efficient
technologies at the Yurkharovskoye field, including water treatment equip-
ment for the low-tonnage (40 mt capacity) methanol production unit. As
NOVATEK / ANNUAL REPORT / 2011 38
AIR POLLUTION OF
NOVATEK E&P COMPANIES
Atmosphere emission, mt
Production, mmboe
WASTE GENERATION OF
NOVATEK E&P COMPANIES
Waste, mt
Production, mmboe
WATER CONSUMPTION OF
NOVATEK E&P COMPANIES
Water consumtion, mcm
Production, mmboe
mt
20
16
12
8
4
0
mmboe
400
mt
30
18.7
16.4
320
24
24.8
mmboe
mcm
400
1,000
21.5
320
800
668
19.6
11.6
10.8
9.5
240
18
16.2
15.5
240
600
521
521
397
160
12
80
0
6
0
160
400
80
200
0
0
mmboe
400
740
320
240
160
80
0
2007 2008 2009 2010 2011
2007 2008 2009 2010 2011
2007 2008 2009 2010 2011
part of this solution, the existing river water treatment unit,
which uses ultrafiltration and reverse osmosis technologies,
was supplemented by a new treatment block using chemical
agents. The new technology allowed the Company to reduce
unit water consumption at the field by approximately 1.3
times.
Employee training and education are integral parts of our
environmental management system. All activities related to
improving the qualifications of personnel are planned, imple-
mented and controlled both by NOVATEK and its subsid-
iaries and, in 2011, 2,197 employees underwent training
courses.
The Company provides access to information regarding
the effect of operations on the environment to the public
in a wide range of federal and regional media and on the
Company’s website.
As part of our ongoing Commitment to Environmen-
tal Protection and Occupational Health and Safety, OOO
NOVATEK-Transervice was certified in accordance with
ISO 14001:2004 and OHSAS 18001:2007 international
standards. NOVATEK’s primary operating subsidiaries have
already passed compliance and recertification audits of their
environmental management systems in accordance with
these internationally recognized standards.
According to NOVATEK’s Environmental, Health and Safety
(EHS) Policy (the Policy) our strategic goal is to achieve a
leading position amongst oil and gas companies in the sphere
of industrial and workforce safety through the implementa-
tion of best practices. In order to accomplish the goals set
forth by the Policy, the Company’s integrated management
system is continually updated, improved and implemented at
all of NOVATEK’s subsidiaries.
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011 04 Environmental and Social Responsibility
39
Energy Resource Consumption in 20111
Energy Sources
Natural gas, mcm
Electricity, MWh
Heating energy, Gcal
Oil, tons
Motor gasoline, tons
Diesel fuel, tons
Other, tons
1
Company data
Volume
465,740.43
228,868.28
237,139.52
-
596.50
3,130.56
1,023.20
Thousands of Russian roubles,
net of VAT
330,354.15
707,196.15
175,441.20
-
15,702.29
74,788.44
3,017.74
In 2011, the Company developed and implemented the
technical specifications for the manufacture of protective
clothing and these specifications will be standardized among
the Company’s subsidiaries and is also applicable to sub-con-
tractors, working at our facilities. We plan to provide our em-
ployees with the new protective clothing starting in 2012.
In accordance with the requirements of the federal law “On
Industrial Safety of Hazardous Production Facilities” and
“Rules on the Organization and Implementation of Industrial
Control for Compliance with Requirements of Industrial Safe-
ty at Hazardous Production Facilities” all of our subsidiaries
have developed their own rules for the organization and im-
plementation of industrial control for compliance with these
requirements. We have also established, industrial control
compliance commissions, which carry out periodic audits of
departments and production facilities to comply with the EHS
requirements.
The table above sets out the physical volume and Rus-
sian rouble equivalent of energy resources consumed by the
Company in 2011.
NOVATEK / ANNUAL REPORT / 2011
40
Human Resources
In assessing its current activities and future development
plans, NOVATEK considers its employees as the Company’s
most valuable resource. The Company’s human resource
management system is based on the principles of fairness,
respect, and equal opportunity, and provides an open dia-
logue between management and personnel. NOVATEK also
offers continuous, comprehensive training and professional
development opportunities for the Company’s employees at
all levels.
As of the end of 2011, NOVATEK had 4,767 employees,
43% of whom work in exploration and production and 57%
in plant operations, processing, transportation and sales.
Personnel Training and Development
In an environment of rapidly developing technologies and
management systems, our multilevel training and profes-
sional development program enables NOVATEK’s workers
to maintain the Company’s high level of competitiveness. In
2011, the primary goals in the field of training and profes-
sional development included the following:
• Completion of the “Leadership Horizons” program for de-
veloping future managers;
• Development and implementation of the corporate pro-
gram for assessment of employees’ technical qualifications
in the following areas: geology, field development, drilling,
oil treatment, oil production technology, gas preparation,
gas production technology, gas processing (synthetic
methanol production), processing of deethanized gas
condensate and environmental protection;
• Involvement of young specialists in NOVATEK’s “Re-
search-to-Practice Conferences” and the “Fuel and En-
ergy Complex (FEC) Competitions”; and
• Training and professional development for the Company’s
employees to specific requirements of Division Heads.
During the past year, NOVATEK continued its efforts
to increase employee training, improve working conditions
and ensure a safe environment at its production facilities.
In 2011, 43.6% of the Company’s engineers and techni-
cians completed employee certification and industrial safety
courses and 35.1% of our specialists and line workers have
upgraded their respective qualifications.
NOVATEK completed the implementation of the “Leader-
ship Horizons” program for developing future managers and
in 2011, employees participated in the following program
modules; “Economic Reasoning in Decision Making” – 65
employees, “Development Center” – 135 employees and
“Basics of Finance and Management Decisions” and “Human
Resources Management” – 53 employees.
In order to improve and develop the technical capabilities
of our employees, 333 employees from our exploration and
production units were tested in order to assess their techni-
cal qualifications. Based on the results, programs will be de-
veloped to ensure all of our technical employees are properly
trained.
In September 2011, the “6th Interregional Research-to-
Practice Conference” for NOVATEK’s young specialists was
held in Moscow and 38 of the Company’s employees partici-
pated. 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 award-
ed cash prizes. In addition, two winners nominated in the
category “Best Implemented Project 2011” were awarded
cash prizes and the top seven projects advanced to the “FEC
2010 Competition of Youth Projects” sponsored by the
Russian Federation’s Ministry of Energy.
In 2011, three of NOVATEK’s young specialists who were
winners of the “FEC 2010 Competition of Youth Projects”
received commendations from the Ministry of Energy.
Social Programs
The central feature of NOVATEK’s social policy is a sys-
tematic 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 employees includes the fol-
lowing programs:
• Voluntary medical insurance for employees;
• Therapeutic resort and spa treatment for employees and
members of their families;
• Provision of special-purpose short-term loans;
• Special-purpose compensation and social support pay-
ments;
• Provision of special-purpose interest-free loans to pur-
chase housing; and
• Pension program.
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011
04 Environmental and Social Responsibility
41
INJURY FREQUENCY RATE
(no. of injuries / million working hrs)
SERIOUS INJURY FREQUENCY
(no. of serious injuries / million working hrs)
1.50
0.52
0.71
0.51
0.30
2.0
1.5
1.0
0.5
0
0.25
0.20
0.15
0.10
0.05
0
0.20
0.14
0.00
0.00
0.00
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011
ACCIDENT SEVERITY RATE
(total no. of employee working hrs lost per
accident / no. of accidents)
803
800
600
400
200
0
76
260
248
214
BREAKDOWN OF PERSONNEL
AS AT 31 DECEMBER 2011
Administrative
E&P
Processing
Marketing
15%
31%
11%
2007
2008
2009
2010
2011
43%
TOTAL REVENUES PER EMPLOYEE,
RR million
NET CASH PROVIDED BY OPERATING
ACTIVITIES PER EMPLOYEE,
RR million
42.5
27.3
21.1
18.8
15.7
50
40
30
20
10
0
17.4
10.5
8.2
7.5
5.4
20
16
12
8
4
0
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011
NOVATEK / ANNUAL REPORT / 2011 42
Social Policy and Charity
During 2011, NOVATEK continued to contribute to an im-
provement in the living standards of the local populations in
the YNAO, Samara, Chelyabinsk and Tyumen regions. Spe-
cial priority was given to the performance of our long-term
agreements with the municipalities of these regions for fi-
nancing programs targeting education and youth develop-
ment, support for low-income families, repair and modern-
ization of socially important facilities and preservation of the
cultural heritage of the indigenous peoples of the Far North
and Russia as a whole. In 2011, NOVATEK invested approx-
imately RR 1,212 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
During 2011, NOVATEK financed projects aimed at repair
and construction of socially important facilities, located with-
in trading stations, as well as to support the learning and
development process of local communities in accordance to
agreements with the Yamal for Descendants association and
its district branches.
Throughout the year, the Company also provided sponsor-
ship assistance to the following organizations:
• The Association of Minority Populations of Indigenous
Peoples of the Far North, Siberia, and Far East of the
Russian Federation – for legal services and a workshop on
adaptation for Indigenous Peoples;
• The Administration of the YNAO – for publishing services
related to a book about the national peculiarities of life and
customs of the Indigenous Peoples of the Far North;
• The Yamal district – for the transportation of goods to
reindeer-breeders and hunters;
• The Tazov district – for construction of socially important
facilities at the Yuribey and Razvilka trading stations; and
• The Nadym district – for capital construction works and
infrastructure repair at the Kutopyugan village.
During the period, NOVATEK also created the Fund for
Development of Rural Yamal to provide assistance for infra-
structure improvements at Indigenous Peoples’ settlements,
which included the construction of a post-natal assistance
station in the Yar-Sale village.
Educational Programs
NOVATEK continued to develop the Company’s continuing
education program, which provides opportunities to gifted
students, from the regions where we operate, to further
their education at top rated universities, participate in NO-
VATEK internships and, upon completion of their studies,
possible employment with the Company.
Under the “Gifted Children” program initiated by NO-
VATEK in 1999 with school #8 of Novokuybyshevsk in the
Samara region, and in 2004 school #2 in Tarko-Sale in the
YNAO, special classes are formed on a competitive basis
from the most talented students. The program is designed
for students in grades 10 and 11 who have consistently
demonstrated 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.
In 2011, 341 grants were awarded and a total of 1,527
grants have been awarded since the launch of the program.
The “Grants” program for the teachers of the districts
was launched in 2007 and awards grants to highly effec-
tive teachers to raise the prestige of the teaching profes-
sion and create favorable conditions for developing new and
talented teachers. In 2011, 30 grants were awarded and a
total of 93 grants have been awarded since the launch of
the program.
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 Univer-
sity, the Gubkin Russian State University of Oil and Gas and
the Tyumen Oil and Gas University. The NOVATEK-VUZ pro-
gram operates on the basis of mutually beneficial cooperation
agreements that include support for pre-university prepara-
tion of students, subject competitions and professional ori-
entation. This cooperation system with higher educational
institutions is designed to resolve key issues confronting
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011 04 Environmental and Social Responsibility
43
the Company’s Human Resources policy. The NOVATEK-
VUZ program is a set of measures aimed at forming a fo-
cused high-quality five-year training program for specialists
enrolled in degree programs in areas that are important to
the Company’s development to meet the demand for young
specialists.
Students, who have passed their exams with good and ex-
cellent 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, technologi-
cal and pre-degree paid internships with the Company or its
subsidiaries. This experience allows them to apply the knowl-
edge obtained at lectures and seminars to real-life situations
and gain experience in the professions they’ve chosen, while
the Company receives an opportunity to meet potential em-
ployees.
Support of Cultural Traditions
The strengthening of partnership relations between the
Company and Russia’s leading cultural and educational insti-
tutions, creative groups and charity funds continued during
the 2011 period.
NOVATEK continued its long-term cooperation with the
Russian State Museum (St.Petersburg), the Moscow Krem-
lin Museum, the State Tretyakov Gallery, the Multimedia Art
Museum (the Moscow House of Photography Museum and
Exhibition Complex), the Moscow Museum of Modern Art
and the Samara Regional Art Museum.
An exhibition jointly sponsored by NOVATEK, the State
Tretyakov Gallery and the Russian State Museum of one of
the most famous artists of the 20th century, Boris Grigoriev,
attracted significant attention and was well received by crit-
ics. We also continued to support the annual International
Festival “Imperial Gardens of Russia”, sponsored and staged
by the Russian State Museum. NOVATEK was also a spon-
sor of the exhibition, “Mastership of the Russian Armorer”,
which was organized by the Moscow Kremlin Museum and
the Samara Regional Art Museum.
In 2011, special priority was given to projects and exhi-
bitions of modern art and NOVATEK supported the exhibi-
tion “Arte Povera”, which was organized for the first time in
Russia by the Multimedia Art Museum and presented works
of art from the most important Italian modern artists of the
second half of the 20th century. NOVATEK also became a
partner of the Moscow Museum of Modern Art in 2011
and supported the large-scale exhibition project “Impossible
Community”, which brought together 35 Russian and for-
eign painters, many of whom displayed they works in Russia
for the first time.
NOVATEK also remained a General Partner of the Moscow
Soloists Chamber Ensemble under the direction of soloist
and conductor Yuri Bashmet.
Sports Projects
NOVATEK has continued its support for semi-professional
and high-level amateur sports programs and is the General
Partner of the Dinamo Hockey Club (Moscow), the Spartak
Basketball Club (St. Petersburg) and the NOVA Volleyball
Team (Novokuybyshevsk). The Company also promotes
corporate sponsored sporting events in soccer, volleyball,
basketball and swimming, which are held annually among
teams from NOVATEK and its subsidiaries. A team made up
of Company employees also takes part in the annual Moscow
Mini-Soccer Championship.
Charitable Projects
The Company continued its cooperation with the “Gift of
Life” charity fund, founded by Chulpan Khamatova, which
raises funds to purchase modern medical equipment for chil-
dren’s hospitals.
In 2011, NOVATEK also actively supported the “Gift of Life”
charity fund’s blood donor movement whereby the Compa-
ny’s Moscow office hosted a blood donor session to benefit
the children of the Russian Children’s Clinical Hospital.
The activities of the ALL TOGETHER volunteer movement,
which was initially launched in 2008 by NOVATEK employ-
ees continues to provide aid and services to those in need.
In 2011, dozens of our employees, their relatives as well
as NOVATEK’s partners participated in a number of causes
including; support for orphans and children with various ill-
nesses, veterans, orphaned animals as well as support for
the blood donor movement and the organization of other
charitable programs..
NOVATEK / ANNUAL REPORT / 2011 45
05
Management
and Corporate
Governance
Corporate Governance
NOVATEK and its Board of Directors are committed to the highest stan-
dards of corporate governance. We believe that such standards are es-
sential 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 section 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 Corpo-
rate Governance Code promulgated by the Russian Federation’s Federal
Commission for Securities Markets (Minutes No. 49 of 28 November
2001).
The Board of Directors (Minutes No. 60 of 15 December 2005) has
approved the Corporate Governance Code of NOVATEK (the Code). The
Code has since been elaborated on in accordance with best Russian and
international practices in corporate governance, ethical norms and spe-
cific conditions for Russian public companies, local and international stock
markets and in accordance with Russian legislation and the Company’s
Charter.
NOVATEK’s Corporate Governance Code sets out the Company’s busi-
ness principles and is based on the respect of the rights and interests
of all stakeholders and aims to guarantee that NOVATEK’s activities are
directed and controlled in a responsible, professional and transparent
manner with the purpose of safeguarding the Company’s long-term suc-
cess. The principles are also intended to increase the confidence of vari-
ous stakeholders in NOVATEK.
NOVATEK / ANNUAL REPORT / 2011 46
The Company’s corporate governance system enables
management to act reasonably and conscientiously and to
manage NOVATEK’s operating activities to the benefit of
the Company while maintaining accountability to the Board
of Directors and shareholders.
We are incorporated in the Russian Federation and our
shares are listed on MICEX-RTS Stock Exchange. Our
shares are also listed on the London Stock Exchange (LSE)
in the form of Global Depository Receipts (GDR’s) and we
recognize the value of the UK Financial Reporting Council’s
Combined Code on Corporate Governance and have applied
the recommendations in so far as it is practicable and appro-
priate.We support high standards of corporate governance
and will progressively adopt best practices in line with the
Combined Code on Corporate Governance.
Board of Directors
Prior to 28 April 2011, the Board of Directors (the Board)
was comprised of the following members elected by the An-
nual General Shareholder Meeting on 27 May 2010:
• Alexander Y. Natalenko – Chairman of the Board
• Andrei I. Akimov
• Burckhard Bergmann
• Vladimir A. Dmitriev
• Mark A. Gyetvay
• Leonid V. Mikhelson
• Kirill G. Seleznev
• Gennady N. Timchenko
• Ruben Vardanian
The power of the Board elected on 28 April 2011 was
early terminated, and the current Board members were
elected at the Extraordinary General Meeting of Sharehold-
ers on 27 June 2011. The Board now is comprised of the
following members:
• Alexander Y. Natalenko – Chairman of the Board
• Andrei I. Akimov
• Burckhard Bergmann
• Yves Louis Darricarrere
• Mark A. Gyetvay
• Leonid V. Mikhelson
• Kirill G. Seleznev
• Gennady N. Timchenko
• Ruben K. Vardanian
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011
05 Management and Corporate Governance
47
The table below sets out the current Board of Directors and their Board Committee membership:
Director
Committee membership
Alexander Y. Natalenko1
Audit Committee, Corporate Governance and Remuneration Committee
Leonid V. Mikhelson
Andrei I. Akimov2
Audit Committee (chairman)
Burckhard Bergmann2
Corporate Governance and Remuneration Committee,
Strategy and Investments Committee
Yves Louis Darricarrere 2
Strategy and Investments Committee
Mark A. Gyetvay
Strategy and Investments Committee (chairman)
Kirill G. Seleznev2
Strategy and Investments Committee
Ruben Vardanian1,2
Corporate Governance and Remuneration Committee (chairman),
Gennady N. Timchenko2
Strategy and Investments Committee
Audit Committee
1
2
Denotes independent Board Member according to the definition contained in the UKLA Combined Code
Denotes independent Board Member according to the definition contained in the Russian Federal “Law on Joint-Stock Companies”
NOVATEK’s Board is responsible for directing and managing
the business activities of the Company under the provisions
stipulated by the Federal Law on Joint Stock Companies
and NOVATEK’s charter documents. The Board is account-
able to NOVATEK’s shareholders for creating and delivering
sustainable shareholder value by executing its managerial
responsibilities in an effective and efficient manner.
As well as oversight responsibility for financial perfor-
mance, internal controls and risk management, the Board
has a formal schedule of matters specifically reserved to it
for decision. These matters include, but are not limited to;
defining the Company’s strategy and ensuring that capi-
tal 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, recommen-
dations on dividends and the convening of Annual and Ex-
traordinary 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 and is chaired by Mr.
Alexander Natalenko. The Chairman is responsible for lead-
ing the Board and ensuring its effectiveness. The Board has
a strong independent element and currently comprises six
non-executive directors who are considered independent
according to the definition contained in the Russian Federal
“Law on Joint-Stock Companies” and two non-executive di-
rectors are considered independent according to the defini-
tion contained in the UKLA Combined Code.
NOVATEK’s Directors have a wide range of expertise as
well as significant experience in strategic, financial, commer-
cial 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 detailed under-
standing 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 infor-
mal discussions to ensure regular exchange of information
between non-executive directors and management. Direc-
tors 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 sec-
retary.
NOVATEK / ANNUAL REPORT / 2011
48
Board and Committee Meetings Attendance
To ensure an efficient and effective discharge of its responsibilities, the Board meets regularly, but not less than once every
two months, and in 2011, held 14 meetings, six of which were by proxy.
Member
Board of Direc-
tors
Audit Committee
Corporate
Governance and
Remuneration
Committee
Strategy and
Investments
Committee
Alexander Y. Natalenko1
Leonid V. Mikhelson
Andrei I. Akimov
Burckhard Bergmann
Yves Louis Darricarrere 2
Mark A. Gyetvay
Kirill G. Seleznev
Ruben Vardanian
Gennady N. Timchenko
14/14
14/14
14/14
14/14
6/6
14/14
13/14
14/14
10/14
2/2
4/4
6/6
6/6
4/4
6/6
3/3
2/2
3/3
3/3
2/3
1 Mr. Natalenko was elected to the Audit Committee on 27 June 2011 by approval of the Extraordinary General Meeting of Shareholders.
2 Mr. Darricarrere was elected to the Board of Directors and the Strategy and Investments Committee on 27 June 2011 by approval of the Extraordinary General Meeting
of Shareholders.
Board Activities during the Year
Board Committees
The Board met 14 times during 2011 where the following
key issues were discussed and respective decisions made:
• reviewed and approved the Company’s 2010 full year op-
erating and financial results;
On 25 March 2005, NOVATEK’s Board of Directors ap-
proved 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.
• reviewed and approved NOVATEK’s business plan for
2012;
• reviewed and approved NOVATEK’s corporate strategy
until 2020;
• approved the sale of a 20% equity interest in Yamal LNG
to TOTAL S.A.;
• approved the Company’s Internal Regulation on the pro-
cedure of accessing NOVATEK’s insider information, the
protection of its confidentiality, and the disclosure and
control over the unlawful use of NOVATEK’s insider in-
formation;
• approved NOVATEK’s Code of Business Conduct and Eth-
ics; and
• recommended a full year dividend for 2010, based on full
year financial results, and an interim dividend for first half
2011, based on interim financial results for that period.
The Board committees play a vital role in ensuring that
the high standards of corporate governance are maintained
throughout the Company and that specific decisions are an-
alyzed 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 accompanied by performance
reports.
Strategy and Investments Committee
The Strategy and Investments Committee is governed by a
Charter, which has been approved by the Board. The Char-
ter is available on the Company’s website and is summarized
below.
The primary function of the Strategy and Investments
Committee is to give recommendations to the Board for de-
termining priorities of the Company’s operations and assess-
ing the effectiveness of investment projects proposed to the
Board for consideration.
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011 05 Management and Corporate Governance
49
Committee membership as of 31 December 2011:
Chairman
Members
Audit Committee
Strategy and Investment
Committee
Corporate Governance
and Remuneration
Committee
Andrei Akimov
Mark Gyetvay
Ruben Vardanian
Ruben Vardanian
Burckhard Bergmann
Alexander Natalenko
Alexander Natalenko
Yves Louis Darricarrere
Burckhard Bergmann
Gennady Timchenko
Kirill Seleznev
The main objectives of the Strategy and Investment Com-
mittee are as follows:
such experts or specialists are to be stipulated in agreements
between the Company and such persons.
• determine strategic priorities for the Company’s opera-
tions; and
• assess the effectiveness of prospective investment proj-
ects and consider how these investments increase share-
holder value of the Company.
To ensure the Committee discharges its responsibilities, in
2011, the Strategy and Investment Committee met three
times.
Corporate Governance and Remuneration
Committee
In carrying out its responsibilities and assisting the members
of the Board in discharging their duties the Strategy and In-
vestment Committee is responsible for but not limited to:
• analyzing concepts, programs and plans of the Company’s
strategic development and giving recommendations to the
Board;
• developing recommendations to the Board with respect to
any transactions with assets the value of which exceeds
five percent of the Company’s assets’ book value, as cal-
culated in accordance with the accounting data as of the
last reporting date;
• developing recommendations to the Board following the
consideration of investment projects proposed by the
Company’s executive bodies for implementation; and
• developing recommendations to the Board for utilization
of the Company’s reserves and provisions.
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 engaging
The primary function of the Corporate Governance and Re-
muneration Committee is to review practices and policies of
the Company to ensure compliance with applicable 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 direc-
tors and senior executives as well.
The main objectives of the Corporate Governance and Re-
muneration Committee are as follows:
• develop and regularly review our corporate governance
documents and documents regulating corporate con-
flicts;
• develop recommendations with respect to our dividend
policy and distribution;
• evaluate the Company’s Investor Relations and Share-
holder communications policies;
• develop procedures for and perform an annual evaluation
of the work performed by the Board; and
• determine the annual compensation for the Board and Re-
vision Commission members.
In the 2011, the Corporate Governance and Remuneration
Committee met six times.
NOVATEK / ANNUAL REPORT / 2011 50
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
Company’s financial statements prepared in accordance
with the Russian and International accounting standards;
• the candidature of the Company’s external auditor;
• the independent auditor’s report, which is presented at
the Company’s Annual General Meeting of Shareholders
(AGM);
• the efficiency of the Company’s internal control proce-
dures and proposals for their improvement; and
• the Company’s compliance with applicable laws of the
Russian Federation.
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:
• obtain independent professional advice in the satisfaction
of its duties within the Committee’s budget;
• request and receive information from Company managers
and senior executives; and
• review reports and conduct meetings from/with the Com-
pany’s external auditors.
The Audit Committee develops recommendations to the
Board with respect to the candidature of the Company’s au-
ditor and the cost of its services. On the basis of the Com-
mittee’s recommendations, the Board proposes the candi-
date auditor company to NOVATEK’s AGM for approval. In
selecting proposed candidates, the Audit Committee takes
into account a prospective auditor’s expertise and indepen-
dence, the risk of conflicts of interest, contract terms and
conditions and remuneration. The Audit Committee exercises
control over the independence and objectiveness of the ex-
ternal 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.
In 2011, the Audit Committee met four times, including
once by absentee vote. The Company’s Chief Financial Of-
ficer and other senior financial management are available to
attend the meetings.
The Audit Committee reviews the Company’s Annual Re-
port and develops recommendations to the Board with re-
spect to preliminary approval of the report by the Board.
NOVATEK’s management acknowledges and recognizes
the requirement to uphold the independence of the Com-
pany’s principal external auditors by limiting their engage-
ment to provide a wide range of non-audit services. The
remuneration of the Company’s principal auditors for audit
services and other services has been set out in disclosure
note 22 to the Company’s 2011 IFRS consolidated financial
statements.
Audit Committee Charter regulating the Committee’s ac-
tivities is available on Company’s website.
Internal Audit
NOVATEK’s Internal Audit Division, in cooperation with the
Board of Directors and the Company’s management, takes
part in providing objective assurance on the adequacy and
effectiveness of the Company’s systems for risk manage-
ment and internal control and provides recommendations
to improve those systems. The Internal Audit Division has
adopted the Company’s internal Code of Ethics as well as in-
ternational 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 objectiveness.
NOVATEK’s internal standards envisage full access of the
Internal Audit Division employees to all functions, records,
property and personnel of the Company in implementing
their audit tasks. The Division’s employees regularly update
their qualifications and professional development as an inte-
gral part of the internal audit quality assurance.
A risk based approach is used to plan the internal audits.
In preparing reports on performance of audit tasks, the prin-
ciples of accuracy, objectiveness, completeness and timeli-
ness are observed.
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011 05 Management and Corporate Governance
51
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 Regulations
on NOVATEK’s Internal Control, which provides a wider dis-
closure of the functions and procedure of the Company’s
internal control activities.
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 shareholders at the
Company’s AGM. The Charter is available on the Company’s
website.
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, divi-
sions, departments, branches, and representative offices.
The Revision Commission audits the Company’s financial 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 pri-
or to the AGM, present to the Board its report on the internal
audit (review) of the Company’s financial and business per-
formance for the year, and its internal audit opinion confirm-
ing or denying the reliability of data contained in the Com-
pany’s Annual Report and Annual Accounting Statement.
Internal Control Framework
The corporate governance section of the Company’s web-
site contains a description of the main features of NO-
VATEK’s internal control and risk management systems in
relation to the financial reporting process and preparation of
consolidated accounts.
NOVATEK / ANNUAL REPORT / 2011 52
Management Committee
NOVATEK’s Management Committee is responsible for
the day-to-day management of the Company’s operations
within agreed limits set by the Board. More information re-
garding the general policies governing the Management
Committee is available on the Company’s website. The Man-
agement Committee is comprised of the Executive Directors
and the following senior managers of the Company.
Members of the Management Committee were elected by
the Board of Directors (minutes No.118 as of December 3,
2009 and minutes No.113 as of March 24, 2011).
Management Committee Members
• Leonid Mikhelson (Chairman)
• Mikhail Popov
• Vladimir Baskov
• Mark Gyetvay
• Tatyana Kuznetsova
• Iosif Levinzon
• Alexander Fridman
• Kirill Yanovskiy
Shareholder Communications
The Company maintains an active dialogue with its key fi-
nancial audiences, including institutional shareholders and
sell-side analysts to ensure that trading 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 Af-
fairs 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 during the rest
of the year. The Company also discloses all material facts to
shareholders through a Regulatory Information 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 operations and activities on
its website. The website also contains general investor infor-
mation, publications and Company policies and presentation
material from major Company events and investor seminars
and conferences.
The Board recognizes the importance of the communica-
tion with its shareholders and, as well as giving a balanced
report of results and progress at each AGM, the Company
regularly meets with, and responds to questions and issues
raised by shareholders and the analyst community. Informa-
tion for NOVATEK’s shareholders and contact information is
available on the Company website.
NOVATEK Corporate Culture, Brand
and Media Relations
In 2011, NOVATEK continued implementing a program
aimed at developing the Company’s corporate culture in or-
der to give employees, specialists and managers a sense of
involvement in the Company’s activities, and promote a pro-
active attitude to their work and creative thinking. Internal
corporate communication channels have been further devel-
oped to support effective program implementation.
Corporate Media
The main objectives of NOVATEK’s corporate media activi-
ties in 2011 were the following: to provide employees and
their family members with in-depth, reliable information about
the Company’s activities and involve NOVATEK employees,
specialists and managers in corporate cultural, sports and
charitable activities.
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011 05 Management and Corporate Governance
53
NOVATEK’s corporate newspaper, including its new
supplement “NOVATEK-Family”, is an effective means of
communication inside the company and in 2011, as in the
previous years, played an important role in achieving these
objectives.
Employee Access to Senior Management
of the Company’s operations and potential for social good;
business integrity, throughout all of the Company’s inte-
grated components, from hydrocarbon exploration and pro-
duction to processing and marketing to consumers; use of
innovative and proprietary technologies; focused and clear
strategy for implementing large-scale projects up to 2020;
and respect for people and the environment.
In 2011, we continued providing opportunities for em-
ployees to meet directly with the Company’s senior man-
agement. During the year, these meetings were attended
by the Chairman, Deputy Chairmеn and members of the
Management Board. Meetings with employees took place
in Moscow, Noviy Urengoy, Tarko-Sale and Tyumen at
least once a quarter.
During 2011, NOVATEK produced or updated the follow-
ing promotional materials to highlight these attributes:
• a Company booklet;
• video clips “Ahead of the Times” and “We produce gas in
Russia”;
Corporate Events: Sports, Culture and
Education
In 2011, we continued to create opportunities for em-
ployees to participate in recreational and sporting activities,
including competitions and social events. The number of em-
ployees who took part in corporate events has increased by
approximately 20% since 2009.
More than four thousand employees and their family
members spent their leisure time at exhibitions sponsored
by Russia’s national museums, classical music and jazz con-
certs as well as professional hockey, basketball and soccer
matches.
NOVATEK Image and Media Relations
NOVATEK has positioned itself as a transparent Company
through the timely disclosure of information on socially sig-
nificant 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. At year-end
2011, NOVATEK took first place on the Transparency Rat-
ing of Russian Fuel and Energy Companies, compiled by the
Agency for Political and Economic Communications. Accord-
ing to the judges, one of the key elements of NOVATEK’s
transparent information policy is effective communication
with investors and shareholders as well as an active dialogue
with representatives of media outlets.
Image and Publications
NOVATEK’s image is based on five key attributes that
characterize the Company. They include: confidence in our
capabilities based on our resources, the dynamic growth
• Annual Report; and
• a booklet on the Northern Sea Route and others.
Exhibitions and Conferences
During 2011, NOVATEK managers and employees repre-
sented the Group at 16 exhibitions, conferences and round
tables and gave eight presentations on key industry issues.
One of the most important events was the First Interna-
tional Conference on Construction of an Ice Class Tanker
Fleet, which was organized by NOVATEK. According to the
conference participants, among which were heads of the rel-
evant Russian ministries and institutions as well as scientists
and businessmen from Russia, Europe and the Asian-Pacific
Region, the conference was highly organized and a majority
of delegates supported the suggestion of making the con-
ference an annual event.
Media Relations
NOVATEK adheres to the principles of openness and trans-
parency in its relationship with media outlets, and the Com-
pany maintains a regular dialog with the press in keeping
with NOVATEK’s information policy approved by the Board.
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 / ANNUAL REPORT / 2011 54
Securities
Our share capital is RR 303,630,600 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 and Russian roubles
on the MICEX-RTS Stock Exchange and have an A1 listing
(symbol: NVTK)
In 2005, we listed Global Depositary Receipts (GDR) on the
London Stock Exchange (symbol: NVTK). Each GDR repre-
sents 10 ordinary shares. The GDRs are also traded in the
United States on NASDAQ PORTAL (symbol: NVATY) un-
der Rule 144A and on the Frankfurt Stock Exchange (sym-
bol: N10).
Registrar,
CJSC “Computershare Registrar”
8 Ivana Franko Street, Moscow
Russia 121108
Tel: +7 (495) 926-8160
Fax: +7 (495) 926-8178
E-mail: info@nrcreg.ru
GDR program Administrator,
Deutsche Bank Trust Company Americas
60 Wall Street, New York, New York
100056, USA
London +44 20 7547 6500
New York +1 212 250 9100
Moscow +7 495 797 5209
NOVATEK share price and RTS index 2011
As of the year-end NOVATEK’s market capitalization was $38 billion
NOVATEK’s GDRs on LSE outperformed RTS index in 2011 by 25%
RTS index
NOVATEK (LSE)
40%
20%
0%
-20%
-40%
January
February
March
April
May
June
July
August
September
October
November December
NOVATEK GDR price since IPO
(LSE, closing, US dollars)
160
120
80
40
0
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
647%
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011
05 Management and Corporate Governance
55
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 An-
nual General Meeting of Shareholders according to the rec-
ommendation 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.
The amount of paid dividends accrued for the years 2006
to 2010, and for the first six months of 2011 is reported
as of 31 December 2011. Partial payment of the accrued
dividends was made due to:
• provision by shareholders (nominee holders) of incorrect
postal and/or banking details; and
• insufficient information regarding banking or postal details
of shareholders.
On 19 March 2012, the Board of Directors of OAO NO-
VATEK recommended to the Annual General Meeting of
Shareholders to pay dividends for FY 2011 in the amount of
RR 3.5 per ordinary share or RR 35.0 per one Global Deposi-
tary Receipt (GDR), exclusive of RR 2.5 of interim dividends
per ordinary share or RR 25.0 per one GDR for the first six
months of 2011.
Thus, should the General Meeting of Shareholders ap-
prove the above recommended dividend, the dividends for
2011 will total six Russian roubles per ordinary share, and
the total amount of dividends payable for 2011 will be
18,217,836,000 Russian roubles.
Accrued and Paid Dividends on NOVATEK Shares
for the period 2006 to 2011
Dividend Accrual Period
Amount of
Dividends, RR
per Share
Total Amount of Dividends
Accrued, RR
Total Amount of Dividends
Paid, RR
20061
2007
2008
2009
2010
First 6 months of 2011
1.65
2.35
2.52
2.75
4.00
2.50
1
In July 2006 the Company executed a share split in proportion of 1:1000
5,009,904,900
7,135,319,100
7,651,491,120
8,349,841,500
12,145,224,000
7,590,765,000
5,009,904,900
7,135,293,833
7,651,310,957
8,349,681,894
12,144,967,156
7,590,367,500
NOVATEK / ANNUAL REPORT / 2011
56
06
Additional Information
Major Risk Factors Associated
with the Company’s Operations1
The risks provided herein are by no means exhaustive and
only reflect the Company’s own opinions and estimates.1
for purchasers of natural gas at agreed prices and entering
into long-term contracts with them.
Industry Risks
The major risks associated with the Russian domestic gas
market are largely attributable to the extensive government
regulation of prices for natural gas sold on the domestic
market as well as Gazprom’s dominant position in the indus-
try. The Russian Federation’s Gas Balance has a large por-
tion of natural gas forecasted to be supplied to the export
market. With the decrease of natural gas consumption in the
European markets, Gazprom could potentially increase natu-
ral gas supplies to the domestic market.
The following factors may adversely affect the Company’s
operations, or its financial and economic performance:
• Government regulation of natural gas sales prices on the
domestic market for Gazprom companies;
• Dependence on throughput capacity of trunk pipelines;
• Potential increases in government-regulated tariffs for
gas transportation;
• Decline in world prices for liquid hydrocarbons;
• The Company’s dependence on OAO AK Transneft and
OAO Russian Railways for the use of liquid hydrocarbons’
distribution networks; and
• Increasing competition in the Russian natural gas industry
from independent natural gas producers and vertically in-
tegrated companies.
NOVATEK implements specific measures to minimize the
potential impact of industry risks. In particular, the Company
is actively building productive partnerships with key service
suppliers, expanding its customer base, actively searching
1
The complete review of the Company’s risks is available at NOVATEK’s site:
www.novatek.ru/eng
In addition, NOVATEK strives to diversify its marketed
product line to include gas condensate, crude oil and petro-
leum 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 depen-
dence of the country’s industrial output on the demand for
raw materials in world markets.
The Company produces and processes hydrocarbons on the
territory of Western Siberia, a region with a challenging cli-
mate. The Company’s vulnerability to region specific impacts
is insignificant and is completely accounted for through the
management of the Company’s financial and economic op-
erations. The Company has built an efficient system of in-
teraction between its production and marketing units and its
principal production facilities are concentrated in close prox-
imity to the transportation networks in use.
Risks related to possible military conflicts, state of emergen-
cy announcements, or strikes, are non-existent, as the Com-
pany operates in economically and socially stable regions.
Financial Risks
NOVATEK’s financial performance is subject to financial
risks associated with the fluctuation of foreign currency ex-
change rates, as the Company borrows funds in foreign de-
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011 06 Additional Information
57
nominated currencies and markets 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 operations.
In the case of an interest rate decline, repayment of out-
standing amounts on existing loans and credits may become
less attractive in comparison with current offers in the loan
market. In this event, the Company will undertake to replace
existing debt facilities with current market offers on better
terms and conditions, including borrowing costs.
Overall interest rate growth may affect the Company’s
borrower liabilities, subject to change under specific condi-
tions. The resulting dynamic behavior in the borrowed 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 finan-
cial resources.
Commodity Price Risks
NOVATEK’s overall commercial 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 optimizing 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
influenced by the prices regulated by the Federal Tariffs
Service (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 gas condensate
under spot contracts. Gas condensate volumes sold to the
US, European and Asian Pacific markets are based on
benchmark reference prices of WTI and Brent plus a margin
or discount, depending on the current market situation.
Crude oil sold internationally is priced based on benchmark
reference crude oil prices of WTI and Brent, plus a margin or
a discount and on a transaction-by-transaction basis for
volumes sold domestically. As a result, NOVATEK’s
revenues from the sales of liquid hydrocarbons are subject
to commodity price volatility based on fluctuations or
changes in benchmark reference prices. Presently, the
Company does not use commodity derivative 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, includ-
ing 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 independent external
ratings. Almost all domestic sales of liquid hydrocarbons are
made on a 100 percent prepayment basis. The Company also
requires 100 percent prepayments from small customers for
NOVATEK / ANNUAL REPORT / 2011 58
natural gas deliveries and partial advances from others. Al-
though 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
receivables and the creditworthiness of the customers.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able
to meet its financial obligations as they fall due. The
Company’s approach to managing liquidity 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 maturity 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 markets.
Inflation Risks
The change in the consumer price index has an impact on
NOVATEK’s profitability and as a consequence, its financial
standing and ability to pay on liabilities and securities.
This factor is not considered a major risk to our business
due to the fact that the tariff policy of the Russian Fed-
eration contemplates 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 hydrocarbon
export markets and the government policy in relation to tar-
iffs for natural gas.
NOVATEK monitors the consumer price index and takes
this factor into account when determining its selling prices.
Risks Related to the Impact of Global
Financial Crisis
The main risks relating to the impact of global financial cri-
sis are Russian 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
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011 06 Additional Information
59
Operational Risks
The Company is not involved in any significant litigation and
the risks pertaining to such litigation are minor.
The Company and its affiliates hold long-term field devel-
opment licenses.
Certain risks exist for the Company’s operations associated
with field exploration and development. Exploration drilling
incorporates multiple risks, including the risk of non-avail-
ability of commercial reserves. Information on the Company’s
fields’ reserves is provided as estimated, subject to certain
factors and assumptions. Actual production volumes across
fields, along with the cost-effectiveness of reserve exploita-
tion may deviate from estimated figures.
The Company’s operations require substantial investment
into field exploration and development, followed by the pro-
duction, transportation, and processing of natural gas, oil,
and gas condensate. Insufficient funding for these and oth-
er expenditures may affect the Company’s financial standing
and performance results.
foreign currency denominated revenue received from export
sales of liquids and cost reduction due to the decrease of
domestic prices for materials and services, mitigate the con-
sequences of potential Russian rouble devaluation for NO-
VATEK.
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 segment,
public utilities, enable the Company to compensate for the
slump in the domestic demand for natural gas from in-
dustrial consumers. To increase the competitiveness of its
supplies the Company is developing a pricing strategy al-
lowing it to switch to buyers who are less dependent on
the external economic factors.
Legal Risks
The Company’s operations are susceptible to risks result-
ing from changes in the statutory regulation of the following
spheres:
• Currency laws (in areas concerning borrowings and ex-
port/import operations);
• Tax laws (in areas regulating taxation systems and rates
applicable to companies in general, and to companies mar-
keting natural gas and liquid hydrocarbons, specifically);
• Customs laws (in areas concerning the export of liquid hy-
drocarbons and their derivatives); and
• Licensing requirements for natural resource extraction.
NOVATEK / ANNUAL REPORT / 2011 60
Major Transactions and Interested Party
Transactions
In 2011, the Company has not consummated any major
transactions or transactions to be approved pursuant to the
Company’s Charter.
2. Deed of Guarantee between OAO NOVATEK (the
“Sponsor”) and JSCB Bank of Moscow (OAO) (the “Bank”).
The transaction’s material terms and conditions:
In 2011, the Company consummated the following trans-
actions where the scope of obligations totals 10 or more
percent of the Company’s assets’ book value according to
its financial statements for the last accounting quarter pre-
ceding the transaction date:
1. Non-Revolving Credit Facility Agreement between
OAO Sberbank of Russia (the “Lender”) and OAO NOVATEK
(the “Borrower”).
The transaction’s material terms and conditions:
• Provision of a non-revolving credit facility to finance oper-
ating costs and financial activities including the provision
and repayment of loans, acquisition of shareholdings /
equity participation in companies’ share capital, repayment
of credits provided by other banks;
• Loan amount: up to RR 40,000,000,000 (Forty billion);
• Loan term: up to 3 (three) years;
• Availability period: before 14 March 2012;
• The transaction amount comprises 16.5% of the Com-
pany’s assets value.
The transaction was approved by NOVATEK’s Board of Di-
rectors (Minutes № 144 of 23.12.2011).
Guarantor: JSCB Bank of Moscow (OAO);
Sponsor: OAO NOVATEK;
Principal: OOO NOVATEK Severo-Zapad;
Scope of the Transaction: The Sponsor shall be jointly and
fully liable to the Guarantor for the performance of the Prin-
cipal’s obligations under the Bank Guarantee Agreement en-
tered into by and between the Guarantor and the Principal;
• Bank Guarantee amount: up to RR 26,000,000,000
(Twenty six billion).
• Bank Guarantee duration: not more than 300 days from
the date of guarantee provision.
Beneficiaries under the Bank Guarantee: the entities selling
the ordinary registered shares in ОАО Sibneftegas in accor-
dance with the Principal’s Mandatory Offer to acquire issu-
able securities of ОАО Sibneftegas.
The transaction was approved by NOVATEK’s Board of Di-
rectors (Minutes № 130 of 08.12.2010).
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011 06 Additional Information
61
In 2011, the Company consummated one related party
transaction the amount of which exceeds 2 percent of the
Company’s assets’ book value as of the last accounting
date:
Amendment Agreement to the Gas Transportation Ser-
vices Agreement №22NPtr/k-2004 of 06.10.2003 be-
tween ОАО NOVATEK and ОАО Gazprom.
The transaction’s material terms and conditions:
• Provision of services to ОАО Gazprom for the transpor-
tation of gas owned by ОАО NOVATEK through the
territory of the Russian Federation and the Republic of
Kazakhstan from Yurkharovskoye, Khancheyskoye, East-
Tarkosalinskoye, Sterkhovoye, Yumantylskoye, Bere-
govoye and Pyreinoye fields and from/to Punginskoye,
North-Stavropolskoye and Kasimovskoye UGS.
• Services provision period: from 1 January 2012 to 31 De-
cember 2015.
• Gas transportation volume: 140,000,000,000 m3.
• Price of services: RR 227,444,888,000 (Two hundred
twenty seven billion four hundred forty four million eight
hundred eighty eight thousand) incl. an 18% VAT. The
price of services is calculated for the Contract duration
based on the forecasted increase in tariffs for gas trans-
portation via trunk pipelines.
Interested parties: NOVATEK’s Board Member Seleznev
Kirill Gennadievich is a member of OAO Gazprom’s Manage-
ment Board; NOVATEK’s Board Member, Burckhard Berg-
mann, is a member of OAO Gazprom’s Management Board.
The transaction was approved by NOVATEK’s AGM (Min-
utes № 112 of 28.04.2011).
NOVATEK / ANNUAL REPORT / 2011 62
Information on Members of NOVATEK’s Board
of Directors
MR. ALEXANDER Y. NATALENKO
Chairman of NOVATEK’s Board of Directors and member
of its Audit Committee and its Corporate Governance and
Remuneration Committee
Born in 1946
Mr. Natalenko completed his studies at the Irkutsk State
University in 1969 with a primary focus in Geological Engi-
neering. Subsequently, he worked with the Yagodinskaya,
Bagdarinskaya, Berelekhskaya, Anadirskaya and East-Chu-
kotskaya geological expeditions. In 1986, Mr. Natalenko
headed the North-East Industrial and Geological Associa-
tion and, in 1992, he was elected president of АО “Maga-
dan Gold & Silver Company”. He subsequently held various
executive positions in Russian and foreign geological organi-
zations. From 1996 to 2001, Mr. Natalelnko held the posi-
tion 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 Audit Committee
and Corporate Governance and Remuneration Committee of
NOVATEK’s Board of Directors.
Mr. Natalenko is the recipient of the State Prize of the Rus-
sian Federation and an Honored Geologist of Russia.
MR. ANDREI I. AKIMOV
Chairman of the Management Board of “Gazprombank”
(OAO), Member of NOVATEK’s Board of Directors and
Chairman of its Audit Committee
Born in 1953
Mr. Akimov graduated from the Moscow Financial Institute
in 1975 where he specialized in international economics. Be-
tween 1974 and 1987, Mr. Akimov held various executive
positions in the Bank of Foreign Trade (“Vneshtorgbank”) 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. Akimov headed Donau
Bank in Vienna (Austria). From January 1991 to November
2002 he was Managing Director of financial company, IMAG
GmbH Vienna (Austria) and, at the same time, served as an
Advisor to the Chairman of Vneshtorgbank. Since 2003, Mr.
Akimov has been the Chairman of the Management Commit-
tee of Gazprombank (OAO). He is a member of the Board of
Directors of ZAO Gerosgaz, Carbon Trade & Finance SICAR
S.E. and Chairman of the Supervisory Board of Gazprombank
(Switzerland) Ltd. Since June 2011, Mr. Akimov has been
a member of the Board of Directors of OAO Gazprom and
since October 2011, he has been the Chairman of the Board
of Directors of ОAO Rosneftegaz. Currently, he is a Chair-
man of Audit Committee of OAO NOVATEK.
DR. BURCKHARD BERGMANN
Member of NOVATEK’s Board of Directors, its Corporate
Governance and Remuneration Committee and its Strate-
gy and Investments Committee, Member of the Advisory
Board of the Union of German Science Funds
Born in 1943
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 Jülich Nuclear Research Cen-
ter. In 1972, Dr. Bergmann joined Ruhrgas AG (from 1 July
2004 – E.ON Ruhrgas AG), heading the LNG Purchasing
Department. In 1978, he became Head of the Gas Pur-
chasing Division responsible for gas purchasing, commercial
aspects of gas transmission and storage. 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,
Commerzbank AG, E.ON Energie AG, Contilia GmbH, Telenor
ASA. In addition, he is a member of the Advisory Boards for
Dana Gas International, Akkumulatorenwerke Hoppecke Carl
Zoeellner& Sohn GmbH, IVG Immobilien AG. He has been
elected as Chairman of the Advisory Board of Jaeger Beteili-
gungsgesellschaftmbH& Co KG.
Dr. Bergmann holds the following distinctions: Commander
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 Direc-
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011 06 Additional Information
63
tor of the Year, Moscow (2007). In June 2011, by means
of presidential Decree he became a recipient of the Order of
the Friendship of Peoples award for significant contribution
in development of the Russian-German relations.
completed executive management courses at INSEAD (Fon-
tainebleau, France) and, in 2001 and 2005, he completed
the courses at Harvard Business School (USA).
MR. MARK A. GYETVAY
MR. RUBEN VARDANIAN
Member of NOVATEK’s Board of Directors, Chairman of
its Corporate Governance and Remuneration Committee
and member of its Audit Committee
Member of NOVATEK’s Board of Directors and Chairman
of its Strategy and Investments Committee, Member and
Deputy Chairman of NOVATEK’s Management Board,
Chief Financial Officer
Born in 1968
Born in 1957
Ruben Vardanian is Co-head of the Corporate Investment
Unit and Head of Wealth Management of Sberbank of Rus-
sia. Mr. Vardanian is working at Troika Dialog since its foun-
dation in 1997, now he is President of Troika Dialog. Prior
to closing the deal to merge Sberbank of Russia and Troika
Dialog in January 2012 he was Chairman of the Board of
Directors of Troika Dialog.
Mr. Vardanian is a Board member of several companies:
OAO AvtoVAZ, OAO KAMAZ, OAO NOVATEK, ZAO SIBUR
Holding, Joule Unlimited, Inc (a pioneer in production of re-
newable fuel based on solar energy) and others. He is also
Board Chairman of several companies: OAO Rosgosstrakh,
AmeriaBank, OAO Russian Ventures Company.
Mr. Vardanian is Co-founder of the Moscow-based Skolk-
ovo School of Management and is represented on its Coor-
dinating Council. The school was established on the initiative
of Mr. Vardanian and several Russian businessmen. Between
2006 and 2011, Mr. Vardanian was President of the Skolk-
ovo School of Management.
Mr. Vardanian is also a member of the President’s Council
on Implementation of National Projects and Demographic
Policy, President’s International Advisory Committee on Es-
tablishment of International Financial Center in the Russian
Federation. He is a member of the RF Government’s Compe-
tition and Entrepreneurship Council.
The World Economic Forum (Davos) included Mr. Vardanian
in a list of “100 future world leaders”. He was also included
in the Top-22 Business Leaders of Russia for three con-
secutive years (rating by the “Kommersant” newspaper and
Managers Association).
Mr. Vardanian, graduated with honors from Moscow State
University with a degree in Economics. In 2000, he also
Mr. Gyetvay studied at Arizona State University (Bachelor
of Science, Accounting, 1981) and later at Pace Universi-
ty, New York (Graduate Studies in Strategic Management,
1995). After graduation, Mr. Gyetvay worked in various
capacities at a number of independent oil and gas compa-
nies (Champlin Petroleum Co., Texas, Ensource Inc. and MAG
Enterprises, Colorado, and Amerada Hess Corporation, New
Jersey) where he specialized in financial and economic analy-
sis for both upstream and downstream segments of the pe-
troleum industry.
In 1994, Mr. Gyetvay began his work at Coopers and Ly-
brand, New York, as Director, Strategic Energy Advisory
Services. 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 En-
ergy where he assumed the role of client service engage-
ment partner, Utilities and Mining practice, based in Russia
(Moscow office). Mr. Gyetvay was an engagement partner
on various energy and mining clients providing overall project
management, financial and operational expertise, maintaining
and supporting client service relationships as well as serving
as concurring partner on transaction services to the petro-
leum 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 Engineers.
In 2003, Mr. Gyetvay became a member of NOVATEK’s
Board of Directors and is also a Chairman of the Strategy
and Investments Committee of NOVATEK’s Board of Direc-
tors. Since 2003, he has been Chief Financial Officer and,
in August 2007, Mr. Gyetvay was elected to NOVATEK’s
Management Board and, in July 2010, he became Deputy
Director of NOVATEK’s Management Board.
NOVATEK / ANNUAL REPORT / 2011 64
MR. YVES LOUIS CHARLE JUSTIN DARRICARRERE
Executive Vice President, Total S.A., President, Total Ex-
ploration & Production, Member of NOVATEK’s Board of
Directors and its Strategy and Investments Committee
Born in 1951
After two years lecturing at the Ecole Nationale Supérieure
des Mines de Paris, Yves-Louis Darricarrère began his career
in Elf Aquitaine in 1978, first in the Mining Division in Aus-
tralia and later in the Exploration & Production Branch, where
he was appointed successively Country Representative for
Australia and Egypt at head office; Managing Director of the
subsidiaries in Egypt and Colombia; Director Business devel-
opment and new ventures, then Finance Director of the Ex-
ploration & Production Branch and of the Oil and Gas direc-
torate. In 1998, he was appointed Deputy Director-General
of Elf Exploration-Production responsible for Europe and the
United States and was nominated a member of the Manage-
ment Committee of Elf-Aquitaine.
In 2000, he was appointed Senior Vice-President for Explo-
ration & Production Northern Europe and became a member
of the Total Group Management Committee.
On 1 September 2003, Yves-Louis Darricarrère was nomi-
nated to the Group’s Executive Committee and was appointed
President of Total Gas & Power, and on 14 February 2007,
he became President of Total Exploration & Production.
Yves-Louis Darricarrère is a graduate of the Ecole Nationale
Supérieure des Mines and the Institut d’Etudes Politiques in
Paris and holds a master’s degree in economic science. He
is Chevalier de la Légion d’Honneur (Knight of the French
Legion of Honour).
MR. LEONID V. MIKHELSON
Member of NOVATEK’s Board of Directors, Chairman of
NOVATEK’s Management Board
Born in 1955
Mr. Mikhelson received his primary degree from the Samara
Institute of Civil Engineering in 1977, where he specialized
in Industrial Civil Engineering. That same year, Mr. Mikhelson
began his career as foreman of a construction 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 Engi-
neer of Ryazantruboprovodstroy. In 1987, he became Gen-
eral Director of Kuibishevtruboprovodstroy, which in 1991,
was the first company in the region to sell its shares and
became private company, AO SNP NOVA. Mr. Mikhelson re-
mained SNP NOVA’s Managing Director from August 1987
through October 1994. Subsequently, he became a General
Director of the management company “Novafininvest”.
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 and Chairman of the Board of Directors of
OAO Stroytransgas. From 2008 to 2011 he was a mem-
ber of the Board of Directors of OOO Art Finance. He is the
Chairman of the Board of Directors of ZAO SIBUR Holding
and a member of the Supervisory Board of the OAO Russian
Regional Development Bank. Mr. Mikhelson is the recipient of
the Russian Federation’s Order of the Badge of Honor.
MR. KIRILL G. SELEZNEV
Member of the Management Board, Director of Gas and
Liquid Hydrocarbons Marketing and Processing Depart-
ment of OAO “Gazprom”, General Director of OOO Gaz-
prom Mezhregiongaz, Member of NOVATEK’s Board of
Directors and its Strategy and Investments Committee
Born in 1974
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, Russia.
Since 2002, he has been the head of the Gas and Liquid Hy-
drocarbons Marketing and Processing Department of OAO
Gazprom and a Member of the OAO Gazprom Management
Board. Since 2003, Mr. Seleznev has been the General Di-
rector 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.
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011 06 Additional Information
65
Shares in NOVATEK’s equity capital held by Members of the Company’s
Board of Directors1
Share in equity capital and number of ordinary shares
Share as of
31 December 2011, %
Number of ordinary shares
Natalenko A.Y.
Akimov A.I.
Bergmann B.
Vardanian R.K.
Gyetvay M.
Darricarrere Y-L.
Mikhelson L.V.
Seleznev K.G.
Timchenko G.N.
-
-
0.0007
-
-
-
0.4686
-
-
1
Share information is based on NOVATEK’s shareholder register in compliance with Russian law.
-
-
20,000
-
-
-
14,228,940
-
-
MR. GENNADY TIMCHENKO
Member of NOVATEK’s Board of Directors and its Strat-
egy and Investments Committee
Born in 1952
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 industry. Be-
tween 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 sec-
tors and he has built interests in trading, logistics and trans-
portation related companies.
In 1988, Mr. Timchenko became a vice president of
Kirishineftekhimexport, the export and trading arm of the
Kirishi refinery in the Leningrad region. In 1991, he worked
for Urals Finland which specialized in oil and petrochemical
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 was a member of the Board
of Directors of OOO Transoil and OOO BalttransService.
Since 2009, he has been a member of NOVATEK’s Board of
Directors. Mr. Timchenko is also the Chairman of the Board
of Directors and President of the Ice Hockey Club SKA St-
Petersburg.
NOVATEK / ANNUAL REPORT / 2011 66
Information on Members of NOVATEK’s
Management Committee
LEONID VIKTOROVICH MIKHELSON
Chairman of NOVATEK’s Management Committee, Mem-
ber of NOVATEK’s Board of Directors
Born in 1955
IOSIF LIPATIEVICH LEVINZON
Deputy Chairman of NOVATEK’s Management Committee
Born in 1956
Details on Mr. Leonid V. Mikhelson are available in the “In-
formation on Members of NOVATEK’s Board of Directors”
section.
VLADIMIR ALEKSEEVICH BASKOV
Deputy Chairman of NOVATEK’s Management Committee
Born in 1960
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 Af-
fairs. From 2001 to 2003, Mr. Baskov held managerial po-
sitions within the aforementioned Ministry’s organizational
structures. In 2003 he was appointed Director of the Busi-
ness Support Department for NOVATEK. In 2005 he was
appointed Deputy Chairman of NOVATEK’s Management
Board and in August 2007 he became a member of NO-
VATEK’s Management Board.
Mr. Levinzon graduated from the Tyumen Industrial Insti-
tute specializing in geology and is a Candidate of Geologi-
cal and Mineralogical Science. He continued postgraduate
studies 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 Purneft-
egasgeologiya. 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 he has been an Advisor to the Chair-
man 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 Develop-
ment 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 Gov-
ernor of the Yamal-Nenets Autonomous Region.
MARK ANTHONY GYETVAY
Deputy Chairman of NOVATEK’s Management Committee,
Chief Financial Officer, Member of NOVATEK’s Board of
Directors and its Strategy and Investments Committee
Born in 1957
MIKHAIL VIKTOROVICH POPOV
First Deputy Chairman of NOVATEK’s Management Com-
mittee, Commercial Director
Born in 1969
Details on Mr. Mark A. Gyetvay are available in the “Informa-
tion on Members of NOVATEK’s Board of Directors” section.
TATYANA SERGEEVNA KUZNETSOVA
Deputy Chairman of NOVATEK’s Management Commit-
tee, Director of NOVATEK’s Legal Department
Born in 1960
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 of
OAO Nordpipes. Since 2002, she has been Director of the
Legal Department for NOVATEK. Since 2005, she has been
the Deputy Chairman of NOVATEK’s Management Commit-
tee - Director of NOVATEK’s Legal Department and in Au-
gust 2007, she became a member of NOVATEK’s Manage-
ment Committee.
Mr. Popov studied at the Gubkin State Academy of Oil and
Gas until 1992 and in 1994, graduated from the Kiev Insti-
tute of National Economy. In 1992, he held the position of
Deputy Chairman of AO Bankomsvyaz’s Managing Commit-
tee (Kiev). In 2002, he was appointed Director of the Capital
Construction Department and Deputy General Director of
OAO Novafininvest. In 2004, Mr. Popov was elected First
Deputy Chairman of NOVATEK’s Management Committee.
Since August 2007, he has been a member of the Man-
agement Committee and since May 2011, he has been NO-
VATEK’s First Deputy Chairman-Commercial Director.
ALEXANDER MIKHAILOVICH FRIDMAN
Deputy Chairman of NOVATEK’s Management Committee
Born in 1951
In 1973, Mr. Fridman graduated from the Gubkin Insti-
tute 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 Engineer
of Nadymgazprom, Head of the Production and Technical
Harnessing the Energy of the Far North!NOVATEK/ ANNUAL REPORT / 2011 06 Additional Information
67
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 venture established by OAO
Gazprom and DKG-EAST (Hungary). Since 2003 Mr. Fridman
was the Deputy General Director of Novafininvest. In 2004,
Mr. Fridman was elected Deputy Chairman of the Manage-
ment Committee of OAO NOVATEK. In August 2007, he has
been a member of NOVATEK’s Management Committee.
KIRILL NIKOLAYEVICH YANOVSKIY
Member of NOVATEK’s Management Committee, Di-
rector for NOVATEK Finance and Development Strat-
egy Department
Born in 1967
In 1991, Mr. Yanovskiy graduated from the Gubkin Insti-
tute of Oil and Gas in Moscow. From 1992, he headed a
department 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 Director
of NOVATEK’s Financial Planning, Analysis and Control De-
partment. In August 2007, Mr. Yanovskiy was elected to
NOVATEK’s Management Committee and in 2007 he was
appointed Deputy Director for Finance and Development
Strategy Department. Since May 2011 he has been Director
for Finance and Development Strategy Department.
Shares in NOVATEK’s equity capital held by Members of the Company’s
Management Committee1
Share in equity capital and number of ordinary shares
Mikhelson L.V.
Baskov V.A.
Gyetvay M.
Kuznetsova T.S.
Levinzon I.L.
Popov M.V.
Fridman A.M.
Yanovskiy K.N.
Share as of 31 December 2011, %
Number of ordinary shares
*information is given in the section on the Board of Directors
0.0288
-
0.1944
-
0.1440
0.0751
0.1051
874,408
-
5,903,035
-
4,372,038
2,281,049
3,192,530
1 Share information is based on NOVATEK’s shareholder register in compliance with Russian law.
Information on remuneration of Members of the Company’s Board of
Directors and Management Committee in 2011
Payment Description
Board of Directors1
Management Committee
Total paid, RR
including:
Salaries, RR
Bonuses, RR
Fees, RR
Other property advancements
103,504,508
1,510,548,476
103,253,726
250,782
400,531,813
839,379,736
-
270,636,927
1 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.
The procedure and criteria for determining fees payable and expenses reimbursable to NOVATEK’s Chairman of the Manage-
ment Committee and Members of the Management Committee are set forth in the Company’s Regulations on the Manage-
ment Committee and employment agreements entered into between OAO NOVATEK and the individual committee members.
The procedure and criteria for determining fees payable and expenses reimbursable to NOVATEK’s Members of the Board
of Directors are set forth in NOVATEK’s Articles of Association and the Regulations for Board of Directors.
NOVATEK / ANNUAL REPORT / 2011 NOVATEK/ ANNUAL REPORT / 2011
68
Harnessing the Energy of the Far North!
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 2011 and for the year then ended in conjunction with our audited consolidated financial statements
as of and for the years ended 31 December 2011 and 2010. The consolidated financial statements and the related
notes thereto have been prepared in accordance with International Financial Reporting Standards (IFRS).
The financial and operational 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 2011. In terms of proved natural gas reserves, we are also 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 and crude oil 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.
RECENT DEVELOPMENTS
In November 2011 and December 2010, the Group acquired OOO Gazprom mezhregiongas Chelyabinsk
(“Gazprom mezhregiongas Chelyabinsk”) and OOO Yamalgazresurs-Chelyabinsk, respectively, two natural gas
traders serving the Chelyabinsk Region of the Russian Federation, to support and expand the Group’s regional
natural gas sales commercial operations.
In September 2011, the Group increased its equity interest in Yamal LNG from 51% to 100% and subsequently
disposed of a 20% interest in the company in October 2011 to TOTAL S.A., the Group’s strategic partner in the
Yamal LNG project.
In June 2011, the Group took part in a tender organized by the Federal Agency of Mineral Resources for four
licenses in the Yamal Nenets Autonomous Region (“YNAO”): exploration and production licenses for the
Salmanovskoye (Utrenneye) and Geofizicheskoye fields, which have estimated recoverable reserves, according
to the Russian reserve classification category C1+C2, of 979 billion cubic meters of natural gas and 46 million
tons of liquid hydrocarbons as well as geological studies and production licenses for the North-Obskiy and East-
Tambeyskiy license areas, which have combined resources, according to the Russian reserve classification
category D1, of 1,763 billion cubic meters of natural gas and 221 million tons of liquid hydrocarbons. In August
2011, the Russian Government approved the transfer of these licenses to us for RR 6.9 billion in total
consideration.
In June 2011, we dispatched a consignment of stable gas condensate to China via the Northern Sea Route
(“NSR”) using a new route north of the New Siberian Islands making us the first company to utilize the NSR in
the 2011 navigational period. We shipped a total of nine cargos, or more than 600 thousand tons of stable gas
condensate, produced by the Purovsky Gas Condensate Plant (“Purovsky Plant”), to markets in the Asian-Pacific
region (“APR”) via the NSR in 2011.
In September 2010, we organized the historic voyage of a high-tonnage tanker which travelled from the Russian
port of Murmansk to the Chinese port of Ningbo, via the NSR, in just 22 days, approximately half the time
required by the traditional shipping route through the Suez Canal and the Strait of Malacca. The use of the NSR
for hydrocarbon transportation is an integral part of our logistical strategy to develop prospective fields in the
Yamal peninsula.
1
Our ongoing exploration work at existing fields in 2011 resulted in the discovery of one new gas condensate
deposit at the Yurkharovskoye field, two new gas condensate deposits at the North-Khancheyskiy license area,
two new oil deposits at the East-Tarkosalinskoye field, two new gas condensate deposits at the Olimpiyskiy
license area, a new gas deposit at the North-Russkiy license area and six gas condensate deposits at the South-
Tambeyskoye field. In addition, in August 2011, we received an exploration and production license for the
recently discovered Ukrainsko-Yubileynoye field.
In February 2011, the Group issued a debut Eurobond in an aggregate amount of USD 1,250 million. The bond
was issued at par in two tranches, a five-year USD 600 million bond with a coupon rate of 5.326% per annum
and a ten-year USD 650 million bond with a coupon rate of 6.604% per annum. The proceeds from the
Eurobonds were used to repay a bridge facility and a portion of the costs associated with the acquisition of
OAO Sibneftegas (“Sibneftegas”).
In December 2010, the Group acquired 51% of the outstanding ordinary shares of Sibneftegas, an oil and gas
company, which holds four geological studies and production licenses at the Beregovoye, Pyreinoye, Zapadno-
Zapolyarnoye and Khadyryakhinskoye fields located in the YNAO. Sibneftegas’ proved reserves, appraised by
DeGolyer and MacNaughton (“D&M”) under the Securities and Exchange Commission (SEC) and PRMS
reserves methodologies, as of 31 December 2010, totaled approximately 200 billion and 282 billion cubic meters
of natural gas and 0.7 million and 2.0 million tons of liquid hydrocarbons, respectively.
In July 2010, we created a 50/50 joint venture, OOO Yamal Development (“Yamal Development”), with
OAO Gazprom Neft to jointly develop potential hydrocarbon assets in the YNAO. In November 2010, Yamal
Development acquired a 51% participation interest in OOO SeverEnergia (“SeverEnergia”), those subsidiaries
hold licenses for the development of oil and gas condensate fields (Samburgskoye, Yaro-Yakhinskoye, North-
Chaselskoye, Urengoiskoye and other fields) in the YNAO. SeverEnergia’s proved reserves as appraised by
D&M under the SEC and PRMS reserves methodologies, as of 31 December 2010, totaled approximately
224 and 245 billion cubic meters of natural gas and 39 and 42 million tons of liquid hydrocarbons, respectively.
In October 2010, we launched the third stage of the second phase development at our Yurkharovskoye field,
which included 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% participation interest in OOO NOVATEK-Polymer
(“NOVATEK-Polymer”), a non-core subsidiary representing the segment “polymer production and marketing”,
to CJSC SIBUR Holding.
In August 2010, we acquired 100% of the outstanding ordinary shares of Intergaz-System Sp.z.o.o. (“Intergaz-
System”), an LPG trader located in the South-East of Poland, and in December 2010 it was merged with our
wholly owned Polish subsidiary Novatek Polska Sp.z.o.o. (“Novatek Polska”). Intergaz-System owns and
operates a discharging and transhipment facility at the wide track (Russian) and narrow track (European) railroad
junction. The acquisition 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 this infrastructure 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% of the outstanding ordinary shares of OAO Tambeyneftegas, an oil and
gas company, which holds the license for exploration and development of the Malo-Yamalskoye field (license
expires in 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.
2
Our ongoing exploration work at existing fields in 2011 resulted in the discovery of one new gas condensate
deposit at the Yurkharovskoye field, two new gas condensate deposits at the North-Khancheyskiy license area,
two new oil deposits at the East-Tarkosalinskoye field, two new gas condensate deposits at the Olimpiyskiy
license area, a new gas deposit at the North-Russkiy license area and six gas condensate deposits at the South-
Tambeyskoye field. In addition, in August 2011, we received an exploration and production license for the
recently discovered Ukrainsko-Yubileynoye field.
In February 2011, the Group issued a debut Eurobond in an aggregate amount of USD 1,250 million. The bond
was issued at par in two tranches, a five-year USD 600 million bond with a coupon rate of 5.326% per annum
and a ten-year USD 650 million bond with a coupon rate of 6.604% per annum. The proceeds from the
Eurobonds were used to repay a bridge facility and a portion of the costs associated with the acquisition of
OAO Sibneftegas (“Sibneftegas”).
In December 2010, the Group acquired 51% of the outstanding ordinary shares of Sibneftegas, an oil and gas
company, which holds four geological studies and production licenses at the Beregovoye, Pyreinoye, Zapadno-
Zapolyarnoye and Khadyryakhinskoye fields located in the YNAO. Sibneftegas’ proved reserves, appraised by
DeGolyer and MacNaughton (“D&M”) under the Securities and Exchange Commission (SEC) and PRMS
reserves methodologies, as of 31 December 2010, totaled approximately 200 billion and 282 billion cubic meters
of natural gas and 0.7 million and 2.0 million tons of liquid hydrocarbons, respectively.
In July 2010, we created a 50/50 joint venture, OOO Yamal Development (“Yamal Development”), with
OAO Gazprom Neft to jointly develop potential hydrocarbon assets in the YNAO. In November 2010, Yamal
Development acquired a 51% participation interest in OOO SeverEnergia (“SeverEnergia”), those subsidiaries
hold licenses for the development of oil and gas condensate fields (Samburgskoye, Yaro-Yakhinskoye, North-
Chaselskoye, Urengoiskoye and other fields) in the YNAO. SeverEnergia’s proved reserves as appraised by
D&M under the SEC and PRMS reserves methodologies, as of 31 December 2010, totaled approximately
224 and 245 billion cubic meters of natural gas and 39 and 42 million tons of liquid hydrocarbons, respectively.
In October 2010, we launched the third stage of the second phase development at our Yurkharovskoye field,
which included 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.
to CJSC SIBUR Holding.
In September 2010, the Group disposed of its 100% participation interest in OOO NOVATEK-Polymer
(“NOVATEK-Polymer”), a non-core subsidiary representing the segment “polymer production and marketing”,
In August 2010, we acquired 100% of the outstanding ordinary shares of Intergaz-System Sp.z.o.o. (“Intergaz-
System”), an LPG trader located in the South-East of Poland, and in December 2010 it was merged with our
wholly owned Polish subsidiary Novatek Polska Sp.z.o.o. (“Novatek Polska”). Intergaz-System owns and
operates a discharging and transhipment facility at the wide track (Russian) and narrow track (European) railroad
junction. The acquisition 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 this infrastructure 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% of the outstanding ordinary shares of OAO Tambeyneftegas, an oil and
gas company, which holds the license for exploration and development of the Malo-Yamalskoye field (license
expires in 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.
SELECTED DATA
millions of Russian roubles except as stated
Financial results
Total revenues (net of VAT and export duties)
Operating expenses
Profit attributable to shareholders of OAO NOVATEK
Profit attributable to shareholders of OAO NOVATEK,
excluding net gain on disposal
EBITDA (1)
Normalized EBITDA (2)
Normalized EBITDAX (3)
Earnings per share (in Russian roubles)
Normalized Earnings per share (in Russian roubles) (4)
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) (5)
Total daily production (thousand barrels of oil equivalent per day) (5)
Cash flow results
Net cash provided by operating activities
Capital expenditures
Free cash flow (6)
Year ended 31 December:
2010
2011
Change
%
176,064
(97,665)
119,655
56,707
148,349
85,401
87,220
39.45
18.69
53,667
2,984
880
242
5
380.6
1,043
71,907
31,143
40,764
117,024
(68,518)
40,533
39,204
57,506
56,177
57,772
13.37
12.93
37,117
2,330
876
185
10
274.0
751
44,863
26,030
18,833
50.5%
42.5%
195.2%
44.6%
158.0%
52.0%
51.0%
195.1%
44.6%
44.6%
28.1%
0.5%
30.8%
(50.0%)
38.9%
38.9%
60.3%
19.6%
116.4%
(1)
(2)
(3)
EBITDA represents profit (loss) attributable to shareholders of OAO NOVATEK adjusted for the addback of net impairment expense,
income tax expense and finance income (expense) from the Consolidated Statement of Income, and depreciation, depletion and
amortization and share-based compensation from the Consolidated Statement of Cash Flows.
Normalized EBITDA excludes net gain on disposal of interest in subsidiaries.
Normalized EBITDAX represents EBITDA as adjusted for the addback of exploration expenses and excludes net gain on disposal of
interest in subsidiaries.
(4)
Normalized Earnings per share represents Earnings per share adjusted for net gain on disposal of interest in subsidiaries.
(5)
Total hydrocarbons production and total daily production are calculated based on net production, including our proportionate share in the
production of our joint venture.
(6)
Free cash flow represents the excess of Net cash provided by operating activities over Capital expenditures.
Reconciliation of normalized EBITDA and EBITDAX to profit (loss) attributable to shareholders of
OAO NOVATEK is as follows for the years ended 31 December 2011 and 2010:
millions of Russian roubles
Year ended 31 December:
2010
2011
Profit (loss) attributable to shareholders of OAO NOVATEK
119,655
40,533
Depreciation, depletion and amortization
Net impairment expense
Total finance income (expense)
Total income tax expense
Share-based compensation
EBITDA
Less: Net gain on disposal of interest in subsidiaries
Normalized EBITDA
1
Exploration expenses
Normalized EBITDAX
2
9,475
782
2,703
15,734
-
6,757
541
(1,197)
10,804
68
148,349
(62,948)
85,401
1,819
87,220
57,506
(1,329)
56,177
1,595
57,772
3
SELECTED MACRO-ECONOMIC DATA
Exchange rate, Russian
roubles for one US dollar
1 quarter
2 quarter
3 quarter
4 quarter
Year
2011
2010
2011
2010
2011
2010
2011
2010
2011
2010
Change
Y-o-Y, %
At the beginning of the period 30.48
28.43
At the end of the period
29.27
Average for the period
30.24
29.36
29.89
28.43
28.08
27.99
29.36
31.20
30.24
28.08
31.88
29.05
31.20
30.40
30.62
31.88
32.20
31.23
30.40
30.48
30.71
30.48
32.20
29.39
30.24
30.48
30.37
0.8%
5.6%
(3.2%)
Crude oil prices, USD / bbl
2011
2010
2011
2010
2011
2010
2011
2010
2011
2010
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
106.7
94.6
83.8
78.9
95.4
102.3
75.6
78.1
79.2
89.5
80.0
76.2
98.8
94.1
91.4
85.2
98.8
95.1
91.4
79.6
8.1%
19.5%
Brent (2)
At the end of the period
Average for the period
116.9
105.4
80.3
76.4
111.5
117.0
75.0
78.2
105.2
113.4
81.0
76.9
106.5
109.4
92.5
86.4
106.5
111.3
92.5
79.5
15.1%
40.0%
Urals (2)
At the end of the period
Average for the period
113.1
102.6
78.2
75.4
110.1
113.7
74.3
76.9
102.3
111.5
79.9
75.6
104.3
108.7
90.3
85.1
104.3
109.1
90.3
78.3
15.5%
39.3%
(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)
1 quarter
2 quarter
3 quarter
4 quarter
Year
2011
2010
2011
2010
2011
2010
2011
2010
2011
2010
Change
Y-o-Y, %
Crude oil, stable gas condensate
At the end of the period
Average for the period
365.0
343.0
253.6
263.8
462.1
446.5
292.1
281.7
444.1
442.5
273.5
262.0
406.6
403.7
303.8
287.0
406.6
408.9
303.8
273.6
33.8%
49.5%
LPG
At the end of the period
Average for the period
150.2
166.1
80.0
63.7
189.8
137.0
27.3
48.4
192.0
182.6
45.2
34.3
221.8
218.3
118.1
98.5
221.8
176.0
118.1
61.2
87.8%
187.6%
(1) Export duties are determined by the government of the Russian Federation in US dollars and are paid in Russian roubles.
4
At the beginning of the period 30.48
At the end of the period
Average for the period
28.43
29.27
30.24
29.36
29.89
28.43
28.08
27.99
29.36
31.20
30.24
28.08
31.88
29.05
31.20
30.40
30.62
31.88
32.20
31.23
30.40
30.48
30.71
30.48
32.20
29.39
30.24
30.48
30.37
0.8%
5.6%
(3.2%)
Crude oil prices, USD / bbl
2011
2010
2011
2010
2011
2010
2011
2010
2011
2010
Y-o-Y, %
1 quarter
2 quarter
3 quarter
4 quarter
Year
Change
At the end of the period
Average for the period
106.7
94.6
83.8
78.9
95.4
102.3
75.6
78.1
79.2
89.5
80.0
76.2
98.8
94.1
91.4
85.2
98.8
95.1
91.4
79.6
8.1%
19.5%
At the end of the period
Average for the period
116.9
105.4
80.3
76.4
111.5
117.0
75.0
78.2
105.2
113.4
81.0
76.9
106.5
109.4
92.5
86.4
106.5
111.3
92.5
79.5
15.1%
40.0%
At the end of the period
Average for the period
113.1
102.6
78.2
75.4
110.1
113.7
74.3
76.9
102.3
111.5
79.9
75.6
104.3
108.7
90.3
85.1
104.3
109.1
90.3
78.3
15.5%
39.3%
(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)
1 quarter
2 quarter
3 quarter
4 quarter
Year
Change
2011
2010
2011
2010
2011
2010
2011
2010
2011
2010
Y-o-Y, %
Crude oil, stable gas condensate
WTI (1)
Brent (2)
Urals (2)
LPG
At the end of the period
Average for the period
150.2
166.1
80.0
63.7
189.8
137.0
27.3
48.4
192.0
182.6
45.2
34.3
221.8
218.3
118.1
98.5
221.8
176.0
118.1
61.2
87.8%
187.6%
(1) Export duties are determined by the government of the Russian Federation in US dollars and are paid in Russian roubles.
SELECTED MACRO-ECONOMIC DATA
CERTAIN FACTORS AFFECTING OUR RESULTS OF OPERATIONS
Exchange rate, Russian
roubles for one US dollar
1 quarter
2 quarter
3 quarter
4 quarter
Year
Change
2011
2010
2011
2010
2011
2010
2011
2010
2011
2010
Y-o-Y, %
Current financial market conditions
We continue to witness signs of economic instability in the Euro-Zone that have prolonged a period of market
volatility. The second Greek bailout package and the potential threat to the European banking community of a
sovereign-debt crisis in the European Union has been the main driver of the market volatility. The recent wave of
market uncertainty may continue to negatively impact all borrowers by limiting access to the capital markets as
well as causing continued volatility in the equity and currency markets, especially for those companies operating
in the so-called “emerging markets”.
We will continue to monitor the credit situation very closely and take various measures, we deem necessary, 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 continue to take proactive steps to ensure the safety of our excess
funds deposited with both domestic and international banks, as well as limit our risk 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 Group commensurate with our investment
grade credit ratings and our capital requirements.
At the end of the period
Average for the period
365.0
343.0
253.6
263.8
462.1
446.5
292.1
281.7
444.1
442.5
273.5
262.0
406.6
403.7
303.8
287.0
406.6
408.9
303.8
273.6
33.8%
49.5%
Natural gas prices
As an independent natural gas producer, we are not subject to the Russian Government’s regulation of natural
gas prices, 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 2011,
the weighted average FTS price for the primary regions where we delivered our natural gas increased by
RR 320 per mcm, or 13.9%, to RR 2,619 per mcm compared to RR 2,299 per mcm in 2010.
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 historical norm may or may not prevail in the present
or future market situations.
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 the increases in
the regulated price for natural gas by 15% effective from 1 January 2010 and 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 but there are various Governmental discussions indicating that this program
may be further extended. The regulation of the domestic natural gas price prior to 2015 will be based on the
netback parity of natural gas prices on the domestic and export markets. According to the revised Forecast of
Socio-economic Development of the Russian Federation for 2012 announced in September 2011, the regulated
natural gas prices will be increased by 15% effective from 1 July 2012, as well as an expected increase of 15% in
2013 and 2014. 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.
4
5
In 2011, our average natural gas price to end-customers (excluding trading activities) and ex-field price
increased by 13.7% and 14.9%, respectively, whereas our average transportation expense for the delivery of
natural gas to end-customers (excluding trading activities) increased by 7.9% primarily due to a 9.3% increase in
the average transportation tariff set by the FTS (see “Transportation tariffs” below). As a result, our average
netback price on end-customers sales (excluding trading activities) increased by 19.2%, while our total average
natural gas price excluding transportation expense increased by 17.3% compared to respective prices in 2010.
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 to
maintain our production growth.
The following table shows our average realized natural gas sales prices excluding trading activities (net of VAT)
for the years ended 31 December 2011 and 2010:
Russian roubles per mcm
Average natural gas price to end-customers (1)
Average natural gas transportation expense for sales to end-customers
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
2011
Change
%
2,627
(1,207)
1,420
1,392
1,407
2,310
(1,119)
1,191
1,211
1,199
13.7%
7.9%
19.2%
14.9%
17.3%
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. In 2011, the average benchmark crude oil prices were more than 20% higher than in 2010.
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 2011, our stable gas condensate export delivery terms were delivery at point of destination (DAP), or priced at
cost, insurance and freight (CIF), or cost and freight (CFR), or delivery to the port of destination ex-ship (DES),
or delivery at terminal (DAT), while in 2010 our delivery terms were either DES, CIF, or CFR. Our average
stable gas condensate export contract price, including export duties, in 2011 was approximately USD 931 per ton
compared to approximately USD 692 per ton in 2010.
In 2011, our crude oil export delivery terms were DAP Feneshlitke, Hungary, while in 2010 our delivery terms
were delivery at frontier (DAF, Feneshlitke, Hungary). Our average crude oil export contract price, including
export duties, was approximately USD 787 per ton compared to USD 557 per ton in 2010.
6
In 2011, our average natural gas price to end-customers (excluding trading activities) and ex-field price
increased by 13.7% and 14.9%, respectively, whereas our average transportation expense for the delivery of
natural gas to end-customers (excluding trading activities) increased by 7.9% primarily due to a 9.3% increase in
the average transportation tariff set by the FTS (see “Transportation tariffs” below). As a result, our average
netback price on end-customers sales (excluding trading activities) increased by 19.2%, while our total average
natural gas price excluding transportation expense increased by 17.3% compared to respective prices in 2010.
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 to
maintain our production growth.
The following table shows our average realized natural gas sales prices excluding trading activities (net of VAT)
for the years ended 31 December 2011 and 2010:
Russian roubles per mcm
Average natural gas price to end-customers (1)
Average natural gas transportation expense for sales to end-customers
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:
2011
2010
Change
%
2,627
(1,207)
1,420
1,392
1,407
2,310
(1,119)
1,191
1,211
1,199
13.7%
7.9%
19.2%
14.9%
17.3%
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. In 2011, the average benchmark crude oil prices were more than 20% higher than in 2010.
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 2011, our stable gas condensate export delivery terms were delivery at point of destination (DAP), or priced at
cost, insurance and freight (CIF), or cost and freight (CFR), or delivery to the port of destination ex-ship (DES),
or delivery at terminal (DAT), while in 2010 our delivery terms were either DES, CIF, or CFR. Our average
stable gas condensate export contract price, including export duties, in 2011 was approximately USD 931 per ton
compared to approximately USD 692 per ton in 2010.
In 2011, our crude oil export delivery terms were DAP Feneshlitke, Hungary, while in 2010 our delivery terms
were delivery at frontier (DAF, Feneshlitke, Hungary). Our average crude oil export contract price, including
export duties, was approximately USD 787 per ton compared to USD 557 per ton in 2010.
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 2011 and 2010 (prices in US dollars were
translated from Russian roubles using the average exchange rate for the period):
Russian roubles or US dollars per ton
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
Year ended 31 December:
2010
2011
Change
%
15,676
533.4
13,818
10,983
373.7
9,792
12,778
420.8
10,022
8,538
281.2
7,523
22.7%
26.8%
37.9%
28.6%
32.9%
30.2%
In 2011, our LPG export delivery terms were DAP at the border of the customer’s country, carriage paid to
(CPT) the Port of Temryuk (southern Russia) and free carrier (FCA) at terminal points in Poland, compared to
DAF (at the border of the customer’s country), CPT (the Port of Temryuk) and FCA (terminal points in Poland)
in 2010. In 2011, our average export contract price for LPG produced at the Purovsky Plant, including export
duties, was approximately USD 904 per ton compared to USD 619 per ton in 2010.
In 2011, as well as in 2010, 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 2011, we sold
a total of 58 thousand tons of LPG on the domestic market at the regulated price of RR 7,605 per ton, while in
2010, we sold 53 thousand tons at the regulated price of RR 6,557 per ton. In 2011, we sold 368 thousand tons at
an average commercial price of RR 13,822 per ton, including volumes sold through our wholly owned subsidiary
OOO NOVATEK-Refueling Complexes, compared to 389 thousand tons at an average commercial price of
RR 11,167 per ton in 2010.
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 2011 and 2010 (prices in US dollars were translated from
Russian roubles using the average exchange rate for the period):
Russian roubles or US dollars per ton
LPG
Net export price, RR per ton
Net export price, USD per ton
Domestic commercial price, RR per ton
Domestic regulated price, RR per ton
Oil products
Domestic price, RR per ton
Methanol
Domestic price, RR per ton
Year ended 31 December:
2010
2011
Change
%
21,401
728.2
13,822
7,605
18,433
606.9
11,167
6,557
-
6,773
10,000
-
16.1%
20.0%
23.8%
16.0%
n/a
n/a
6
7
Transportation tariffs
Natural gas
We transport our natural gas through our own pipelines into the Unified Gas Supply System (“UGSS”), which is
owned and operated by OAO Gazprom, a Russian government controlled monopoly. Transportation tariffs for
the use of the UGSS by independent producers are set by the FTS.
In accordance with 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), the
transportation tariff 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 2009, the FTS approved a 12.3% average increase for the 2010 transportation tariff for natural gas
effective 1 January 2010. 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 Russian Federation’s official inflation rate for 2010.
Effective from 1 January 2011, the rate for utilization of the trunk pipeline had a range of RR 44.97 to
RR 1,964.13 (excluding VAT) per mcm and the transportation rate was RR 11.23 (excluding VAT) per mcm per
100 km.
According to the announcement from the FTS in September 2011, the transportation tariff for natural gas will be
increased as of the same date as the increase in the regulated natural gas prices, effective from 1 July 2012, with
a range of between 6% to 12%.
The increases in regulated transportation tariffs are passed on to our end-customers pursuant to delivery terms in
the majority of our contracts.
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
primarily depends on the length of the transport route from the producing field to the ultimate destination.
Stable gas condensate and LPG
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.
In January 2010, the FTS approved the discount co-efficients to existing rail road transportation tariffs related to
export deliveries of stable gas condensate and LPG shipped from the Limbey rail station, located in close
proximity to our Purovsky Plant. The discount co-efficient for stable gas condensate was set at 0.89 for annual
volumes shipped to export markets of 2,235 thousand tons or more 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 stable gas condensate and LPG 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 or more, and the discount co-efficient for LPG is set at 0.68 for delivered annual volumes of
415 thousand tons or more. The revised discount co-efficients remained in effect throughout 2011.
8
Transportation tariffs
Natural gas
We transport our natural gas through our own pipelines into the Unified Gas Supply System (“UGSS”), which is
owned and operated by OAO Gazprom, a Russian government controlled monopoly. Transportation tariffs for
the use of the UGSS by independent producers are set by the FTS.
In accordance with 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), the
transportation tariff 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 2009, the FTS approved a 12.3% average increase for the 2010 transportation tariff for natural gas
effective 1 January 2010. 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 Russian Federation’s official inflation rate for 2010.
Effective from 1 January 2011, the rate for utilization of the trunk pipeline had a range of RR 44.97 to
RR 1,964.13 (excluding VAT) per mcm and the transportation rate was RR 11.23 (excluding VAT) per mcm per
100 km.
According to the announcement from the FTS in September 2011, the transportation tariff for natural gas will be
increased as of the same date as the increase in the regulated natural gas prices, effective from 1 July 2012, with
The increases in regulated transportation tariffs are passed on to our end-customers pursuant to delivery terms in
a range of between 6% to 12%.
the majority of our contracts.
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
primarily depends on the length of the transport route from the producing field to the ultimate destination.
Stable gas condensate and LPG
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.
In January 2010, the FTS approved the discount co-efficients to existing rail road transportation tariffs related to
export deliveries of stable gas condensate and LPG shipped from the Limbey rail station, located in close
proximity to our Purovsky Plant. The discount co-efficient for stable gas condensate was set at 0.89 for annual
volumes shipped to export markets of 2,235 thousand tons or more 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 stable gas condensate and LPG 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 or more, and the discount co-efficient for LPG is set at 0.68 for delivered annual volumes of
415 thousand tons or more. The revised discount co-efficients remained in effect throughout 2011.
In December 2011, the FTS revised the discount co-efficients to existing rail road transportation tariffs related to
export deliveries of stable gas condensate and LPG shipped from the Limbey rail station in 2012. The discount
co-efficient for stable gas condensate is set at 0.89 for companies with annual shipped volumes of
3,000 thousand tons or more, and the discount co-efficient for LPG is set at 0.71 for delivered annual volumes of
445 thousand tons or more. The revised discount co-efficients are expected to remain in effect throughout 2012.
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
APR. The costs associated with tanker transportation are determined by the distance to the final destination, as
well as tanker availability, seasonality of deliveries and standard shipping terms.
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, commonly referred as “MET” – mineral extraction
tax), 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, or by 61.2%, effective from 1 January 2011. The natural gas UPT rate for 2012 and 2013 is set
at RR 251 and RR 265 per mcm, respectively.
According to amendments to the Russian Tax Code, approved in November 2011, the UPT rate for gas
condensate was set at RR 556, RR 590 and RR 647 per ton for 2012, 2013 and 2014, respectively. In 2011 and
2010, the UPT rate for gas condensate was set at 17.5% of gas condensate revenues recognized by the producing
entities.
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
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.
8
9
Our proved reserves estimates are appraised by the Group’s independent petroleum engineers, DeGolyer and
MacNaughton (“D&M”). The Group’s total proved reserves, comprised of proved developed and proved
undeveloped reserves as of 31 December 2011 and 2010, 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.
The tables below provide a comparison of the Group’s estimated reserves under SEC and PRMS classifications
attributable to all consolidated subsidiaries and joint ventures 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 2009
34,150
967
38,124
1,080
Changes attributable to:
Revisions of previous estimates, extensions and discoveries
Disposals (1)
Reclassifications (2)
Production
Total proved reserves at 31 December 2010
Equity share of total proved reserves at 31 December 2010
2,392
(426)
(444)
(1,314)
34,358
6,057
68
(12)
(13)
(37)
973
171
2,579
(426)
(444)
(1,314)
73
(12)
(13)
(37)
38,519
1,091
7,726
219
Grand total proved reserves at 31 December 2010
40,415
1,144
46,245
1,310
Changes attributable to:
Revisions of previous estimates, extensions and discoveries
Acquisitions (3)
Disposals (1)
Reclassifications (2)
Production
Total proved reserves at 31 December 2011
Equity share of total proved reserves at 31 December 2011
2,238
8,161
(3,331)
(13,323)
(1,676)
26,427
20,236
64
231
(95)
(377)
(48)
748
573
2,918
11,861
(4,841)
(19,364)
(1,676)
27,417
28,562
82
336
(137)
(548)
(48)
776
809
Grand total proved reserves at 31 December 2011
46,663
1,321
55,979
1,585
(1)
Disposals represent reserves attributable to the sale of an equity stake in a subsidiary.
(2)
Reclassifications represent reserves attributable to equity stake in a subsidiary reclassified to joint venture due to loss of control.
(3)
Acquisitions represent reserves attributable to acquired equity stake in a subsidiary.
10
Our proved reserves estimates are appraised by the Group’s independent petroleum engineers, DeGolyer and
MacNaughton (“D&M”). The Group’s total proved reserves, comprised of proved developed and proved
undeveloped reserves as of 31 December 2011 and 2010, 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.
The tables below provide a comparison of the Group’s estimated reserves under SEC and PRMS classifications
attributable to all consolidated subsidiaries and joint ventures 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.
Total proved reserves at 31 December 2009
34,150
967
38,124
1,080
Based on our equity ownership interest in the fields
Revisions of previous estimates, extensions and discoveries
Changes attributable to:
Disposals (1)
Reclassifications (2)
Production
Total proved reserves at 31 December 2010
Equity share of total proved reserves at 31 December 2010
Revisions of previous estimates, extensions and discoveries
Changes attributable to:
Acquisitions (3)
Disposals (1)
Reclassifications (2)
Production
Total proved reserves at 31 December 2011
Equity share of total proved reserves at 31 December 2011
Natural gas
SEC
PRMS
Billions of
cubic feet
Billions
of cubic
meters
Billions of
cubic feet
Billions
of cubic
meters
2,392
(426)
(444)
(1,314)
34,358
6,057
2,238
8,161
(3,331)
(13,323)
(1,676)
26,427
20,236
68
(12)
(13)
(37)
973
171
64
231
(95)
(377)
(48)
748
573
2,579
(426)
(444)
(1,314)
73
(12)
(13)
(37)
38,519
1,091
7,726
219
2,918
11,861
(4,841)
(19,364)
(1,676)
27,417
28,562
82
336
(137)
(548)
(48)
776
809
Grand total proved reserves at 31 December 2010
40,415
1,144
46,245
1,310
Grand total proved reserves at 31 December 2011
46,663
1,321
55,979
1,585
(1)
(2)
(3)
Disposals represent reserves attributable to the sale of an equity stake in a subsidiary.
Reclassifications represent reserves attributable to equity stake in a subsidiary reclassified to joint venture due to loss of control.
Acquisitions represent reserves attributable to acquired equity stake in a subsidiary.
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 2009
529
63
650
79
Changes attributable to:
Revisions of previous estimates, extensions and discoveries
Disposals (1)
Reclassifications (2)
Production
Total proved reserves at 31 December 2010
Equity share of total proved reserves at 31 December 2010
Grand total proved reserves at 31 December 2010
Changes attributable to:
Revisions of previous estimates, extensions and discoveries
Acquisitions (3)
Disposals (1)
Reclassifications (2)
Production
Total proved reserves at 31 December 2011
Equity share of total proved reserves at 31 December 2011
Grand total proved reserves at 31 December 2011
43
(20)
(20)
(31)
501
103
604
91
84
(34)
(138)
(35)
469
283
752
6
(2)
(3)
(4)
60
13
73
11
10
(4)
(16)
(4)
57
34
91
66
(20)
(20)
(31)
645
116
761
91
125
(51)
(204)
(35)
571
399
970
9
(2)
(3)
(4)
79
14
93
10
15
(6)
(24)
(4)
70
48
118
(1)
Disposals represent reserves attributable to the sale of an equity stake in a subsidiary.
(2)
Reclassifications represent reserves attributable to equity stake in a subsidiary reclassified to joint venture due to loss of control.
(3)
Acquisitions represent reserves attributable to acquired equity stake in a subsidiary.
The following table provides for our combined SEC and PRMS proved reserves on a total boe basis.
Based on our equity ownership interest in the fields
Total proved reserves:
At 31 December 2009
At 31 December 2010
At 31 December 2011
including subsidiaries
including equity share of reserves
Combined natural gas, crude oil,
gas condensate and natural gas liquids
in millions of barrels of oil equivalent
PRMS
SEC
6,853
8,088
9,393
5,363
4,030
7,711
9,325
11,337
5,649
5,688
10
11
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 2009
At 31 December 2010
At 31 December 2011
including subsidiaries
including equity share of reserves
Possible reserves:
At 31 December 2009
At 31 December 2010
At 31 December 2011
including subsidiaries
including equity share of reserves
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
13,520
18,748
18,471
8,944
9,527
9,416
14,867
17,187
6,560
10,627
383
531
523
253
270
267
421
487
186
301
375
587
652
365
287
696
915
1,000
645
355
46
73
81
46
35
89
117
127
82
45
The Group’s PRMS proved reserves attributable to consolidated subsidiaries and joint ventures based on the
Group’s equity ownership interest in the respective fields aggregated approximately 1.6 trillion cubic meters
(tcm) of natural gas and 118 million tons of gas condensate and crude oil as of 31 December 2011. Combined,
these proved reserves represent approximately 11.3 billion barrels of oil equivalent.
Our total PRMS proved reserves attributable to consolidated subsidiaries and joint ventures based on the Group’s
equity ownership interest in their respective fields have increased by 21.6% during 2011 due primarily to the
29% increase in our equity stake in Yamal LNG as of 31 December 2011, revisions of previous estimates 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 2011 was also primarily due to the
increase in our equity stake in Yamal LNG that was partially offset by the migration of probable reserves to
proved reserve category at SeverEnergia’s fields as a result of ongoing field development activities.
The SEC and PRMS reserve tables noted above do not include reserves attributable to our recent acquisitions of
four new licenses in the Yamal and Gydan peninsulas, which will be appraised in subsequent reserve reports as
exploration and development activities commence.
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 2011 and
2010 under both reserves reporting methodologies based on our equity ownership interest, rather than 100% of
the reserves attributable to all consolidated subsidiaries and joint ventures:
Number of years (based on our equity ownership interest in the fields)
2011
2010
2011
2010
Total proved reserves to production
Total proved and probable reserves to production
Total proved, probable and possible reserves to production
25
-
-
30
-
-
30
40
51
34
49
62
SEC
At 31 December:
PRMS
At 31 December:
The decrease in our total proved reserves to production was primarily due to an increase in our production.
12
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.
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 the Group’s senior management.
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 2009
At 31 December 2010
At 31 December 2011
Possible reserves:
At 31 December 2009
At 31 December 2010
At 31 December 2011
including subsidiaries
including equity share of reserves
including subsidiaries
including equity share of reserves
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
13,520
18,748
18,471
8,944
9,527
9,416
14,867
17,187
6,560
10,627
383
531
523
253
270
267
421
487
186
301
375
587
652
365
287
696
915
1,000
645
355
46
73
81
46
35
89
117
127
82
45
The Group’s PRMS proved reserves attributable to consolidated subsidiaries and joint ventures based on the
Group’s equity ownership interest in the respective fields aggregated approximately 1.6 trillion cubic meters
(tcm) of natural gas and 118 million tons of gas condensate and crude oil as of 31 December 2011. Combined,
these proved reserves represent approximately 11.3 billion barrels of oil equivalent.
Our total PRMS proved reserves attributable to consolidated subsidiaries and joint ventures based on the Group’s
equity ownership interest in their respective fields have increased by 21.6% during 2011 due primarily to the
29% increase in our equity stake in Yamal LNG as of 31 December 2011, revisions of previous estimates 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 2011 was also primarily due to the
increase in our equity stake in Yamal LNG that was partially offset by the migration of probable reserves to
proved reserve category at SeverEnergia’s fields as a result of ongoing field development activities.
The SEC and PRMS reserve tables noted above do not include reserves attributable to our recent acquisitions of
four new licenses in the Yamal and Gydan peninsulas, which will be appraised in subsequent reserve reports as
exploration and development activities commence.
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 2011 and
2010 under both reserves reporting methodologies based on our equity ownership interest, rather than 100% of
the reserves attributable to all consolidated subsidiaries and joint ventures:
Number of years (based on our equity ownership interest in the fields)
SEC
At 31 December:
2011
2010
PRMS
At 31 December:
2011
2010
Total proved reserves to production
Total proved and probable reserves to production
Total proved, probable and possible reserves to production
25
-
-
30
-
-
30
40
51
34
49
62
The decrease in our total proved reserves to production was primarily due to an increase in our production.
12
13
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 2011 and 2010. 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 costs
Taxes other than income tax
Transportation expenses
Total production costs before DD&A
Depreciation, depletion and amortization (DD&A)
Year ended 31 December:
2010
2011
Change
%
5,180
17,287
46,064
68,531
8,878
4,469
9,831
37,187
51,487
6,384
15.9%
75.8%
23.9%
33.1%
39.1%
33.8%
Total production costs
77,409
57,871
RR per boe
Production costs:
Lifting costs
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 costs
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:
2010
2011
Change
%
15.0
50.1
133.6
198.7
25.8
224.5
16.3
35.9
135.8
188.0
23.3
211.3
(8.0%)
39.6%
(1.6%)
5.7%
10.7%
6.2%
Year ended 31 December:
2010
2011
Change
%
0.51
1.71
4.55
6.77
0.88
7.65
0.54
1.18
4.46
6.18
0.76
6.94
(5.6%)
44.9%
2.0%
9.5%
15.8%
10.2%
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.
14
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 2011 and 2010. 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:
Our lifting costs, as presented in the tables above, differ from lifting costs as reflected in the Unaudited
Supplemental Oil and Gas Disclosures in the Group’s IFRS consolidated financial statements, in that the lifting
costs as presented in the Group’s IFRS consolidated financial statements include 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 the Group’s IFRS consolidated financial statements is set forth below:
millions of Russian roubles
Year ended 31 December:
2010
2011
Change
%
Lifting costs presented in “Oil and Gas Production Costs” above
5,180
4,469
15.9%
Change in balances of natural gas and hydrocarbon liquids stated at
cost in the Group’s Consolidated Statement of Financial Position
56
385
(85.5%)
Lifting costs per “Unaudited Supplemental
Oil and Gas Disclosures”
5,236
4,854
7.9%
15
Total production costs
77,409
57,871
millions of Russian roubles
Production costs:
Lifting costs
Taxes other than income tax
Transportation expenses
Total production costs before DD&A
Depreciation, depletion and amortization (DD&A)
Total production costs before DD&A
Depreciation, depletion and amortization (DD&A)
RR per boe
Production costs:
Lifting costs
Taxes other than income tax
Transportation expenses
Total production costs
USD per boe
Production costs:
Lifting costs
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:
2011
2010
Change
%
5,180
17,287
46,064
68,531
8,878
4,469
9,831
37,187
51,487
6,384
Year ended 31 December:
2011
2010
Change
%
Year ended 31 December:
2011
2010
Change
%
15.0
50.1
133.6
198.7
25.8
224.5
0.51
1.71
4.55
6.77
0.88
7.65
16.3
35.9
135.8
188.0
23.3
211.3
0.54
1.18
4.46
6.18
0.76
6.94
15.9%
75.8%
23.9%
33.1%
39.1%
33.8%
(8.0%)
39.6%
(1.6%)
5.7%
10.7%
6.2%
(5.6%)
44.9%
2.0%
9.5%
15.8%
10.2%
14
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.
Hydrocarbon sales volumes
Our natural gas sales volumes increased primarily due to a combination of increased production at our core
producing fields and purchases from our joint venture, Sibneftegas. Liquids sales volumes increased primarily
due to an increase in unstable gas condensate production at the Yurkharovskoye field and, to a lesser extent, a
buildup in liquids inventory balances in 2010. Our inventory balances tend to fluctuate period-on-period due to
loading schedules and final destinations of stable gas condensate shipments.
Natural gas sales volumes
millions of cubic meters
Production from:
Yurkharovskoye field
East-Tarkosalinskoye field
Khancheyskoye field
Other fields
Year ended 31 December:
2010
2011
Change
%
32,035
12,151
3,263
72
24,436
9,735
3,013
77
31.1%
24.8%
8.3%
(6.5%)
Total natural gas production
47,521
37,261
27.5%
Purchases from:
Sibneftegas, the Group’s joint venture
Third parties
5,384
841
-
-
Total production and purchases
53,746
37,261
Purovsky Plant and own usage
Decrease (increase) in UGSF, UGSS and own pipeline infrastructure
(109)
30
(98)
(46)
n/a
n/a
44.2%
11.2%
n/a
Total natural gas sales volumes
53,667
37,117
44.6%
Sold to end-customers
Sold ex-field
29,332
24,335
23,745
13,372
23.5%
82.0%
In 2011, our total natural gas production (including our share in production of our joint venture Sibneftegas)
increased by 15,644 mmcm, or 42.0%, compared to 37,261 mmcm in 2010 primarily due to an increase in
production at our Yurkharovskoye and East-Tarkosalinskoye fields, as well as the consolidation of our share in
production of the Group’s joint venture. We were able to increase natural gas production at the Yurkharovskoye
field due to the launch of the third stage of the field’s second phase development in October 2010. The increase
in natural gas production at the East-Tarkosalinskoye field was due to increased demand in 2011 resulting in a
greater utilization of the field’s production capacity.
In December 2011, we purchased 841 mmcm of natural gas from third parties in the Chelyabinsk region, the
price of which included the cost of transportation to this region, through our subsidiary Gazprom mezhregiongas
Chelyabinsk, a regional gas trader acquired in November 2011. The purchases were made according to pre-
existing contractual obligations and effective January 2012 we will no longer purchase natural gas under these
agreements.
In 2011, we used 63 mmcm of natural gas as feedstock for the production of methanol compared to 53 mmcm in
2010. A significant portion of the methanol we produce is used for our own internal purposes to prevent hydrate
formation (condensation) during the production, preparation and transportation of hydrocarbons.
16
Hydrocarbon sales volumes
Our natural gas sales volumes increased primarily due to a combination of increased production at our core
producing fields and purchases from our joint venture, Sibneftegas. Liquids sales volumes increased primarily
due to an increase in unstable gas condensate production at the Yurkharovskoye field and, to a lesser extent, a
buildup in liquids inventory balances in 2010. Our inventory balances tend to fluctuate period-on-period due to
loading schedules and final destinations of stable gas condensate shipments.
Natural gas sales volumes
millions of cubic meters
Production from:
Yurkharovskoye field
East-Tarkosalinskoye field
Khancheyskoye field
Other fields
Year ended 31 December:
2011
2010
Change
%
32,035
12,151
3,263
72
24,436
9,735
3,013
77
5,384
841
(109)
30
-
-
(98)
(46)
53,746
37,261
31.1%
24.8%
8.3%
(6.5%)
n/a
n/a
44.2%
11.2%
n/a
Total natural gas production
47,521
37,261
27.5%
Purchases from:
Third parties
Sibneftegas, the Group’s joint venture
Total production and purchases
Purovsky Plant and own usage
Decrease (increase) in UGSF, UGSS and own pipeline infrastructure
Total natural gas sales volumes
53,667
37,117
44.6%
Sold to end-customers
Sold ex-field
29,332
24,335
23,745
13,372
23.5%
82.0%
In 2011, our total natural gas production (including our share in production of our joint venture Sibneftegas)
increased by 15,644 mmcm, or 42.0%, compared to 37,261 mmcm in 2010 primarily due to an increase in
production at our Yurkharovskoye and East-Tarkosalinskoye fields, as well as the consolidation of our share in
production of the Group’s joint venture. We were able to increase natural gas production at the Yurkharovskoye
field due to the launch of the third stage of the field’s second phase development in October 2010. The increase
in natural gas production at the East-Tarkosalinskoye field was due to increased demand in 2011 resulting in a
greater utilization of the field’s production capacity.
In December 2011, we purchased 841 mmcm of natural gas from third parties in the Chelyabinsk region, the
price of which included the cost of transportation to this region, through our subsidiary Gazprom mezhregiongas
Chelyabinsk, a regional gas trader acquired in November 2011. The purchases were made according to pre-
existing contractual obligations and effective January 2012 we will no longer purchase natural gas under these
agreements.
In 2011, we used 63 mmcm of natural gas as feedstock for the production of methanol compared to 53 mmcm in
2010. A significant portion of the methanol we produce is used for our own internal purposes to prevent hydrate
formation (condensation) during the production, preparation and transportation of hydrocarbons.
Liquids sales volumes
thousands of tons
Production from:
Yurkharovskoye field
East-Tarkosalinskoye field
Khancheyskoye field
Other fields
Total liquids production
Purchases from:
Third parties
Year ended 31 December:
2010
2011
Change
%
2,718
808
560
25
4,111
2,099
852
635
31
29.5%
(5.2%)
(11.8%)
(19.4%)
3,617
13.7%
6
12
(50.0%)
Total production and purchases
4,117
3,629
13.4%
Losses and own usage (1)
Gas condensate pipeline 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 domestic
Subtotal oil products
(37)
-
31
4,111
2,981
3
2,984
453
1
336
90
880
93
149
242
5
5
(39)
(36)
(153)
3,401
2,326
4
2,330
434
0
397
45
876
71
114
185
10
10
(5.1%)
n/a
n/a
20.9%
28.2%
(25.0%)
28.1%
4.4%
n/a
(15.4%)
100.0%
0.5%
31.0%
30.7%
30.8%
(50.0%)
(50.0%)
(1)
Losses associated with processing at the Purovsky Plant and Surgutsky refinery, as well as during rail road, trunk pipeline
and tanker transportation.
In 2011, our liquids production increased by 494 thousand tons, or 13.7%, to 4,111 thousand tons compared to
3,617 thousand tons in 2010, due primarily to the expansion of unstable gas condensate production capacity at
our Yurkharovskoye field resulting from the launch of the third stage of the field’s second phase development in
October 2010. The decrease in liquids production at the Khancheyskoye and East-Tarkosalinskoye fields was
due to lower concentration of gas condensate in the extracted gas. Natural declines in the concentrations of gas
condensate at our mature fields are expected due to decreasing reservoir pressure at the current gas condensate
producing horizons.
16
17
RESULTS OF OPERATIONS FOR THE YEAR ENDED 31 DECEMBER 2011 COMPARED TO THE YEAR
ENDED 31 DECEMBER 2010
The following table and discussion is a summary of our consolidated results of operations for the years ended
31 December 2011 and 2010. Each line item is also shown as a percentage of our total revenues.
millions of Russian roubles
Total revenues (net of VAT and export duties)
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 profit (loss) of equity investments,
net of income tax
Profit before income tax
Total income tax expense
Profit (loss)
Non-controlling interest
Year ended 31 December:
% of total
revenues
2010
% of total
revenues
100.0%
117,024
100.0%
63.0%
36.7%
(55.5%)
35.8%
0.1%
80.4%
(1.5%)
(2.2%)
76.7%
(8.9%)
67.8%
0.2%
71,060
44,102
(68,518)
1,329
396
50,231
1,197
(346)
51,082
(10,804)
40,278
255
60.7%
37.7%
(58.6%)
1.1%
0.4%
42.9%
1.0%
(0.2%)
43.7%
(9.3%)
34.4%
0.2%
2011
176,064
110,932
64,670
(97,665)
62,948
261
141,608
(2,703)
(3,880)
135,025
(15,734)
119,291
364
Profit attributable to shareholders
of OAO NOVATEK
119,655
68.0%
40,533
34.6%
18
ENDED 31 DECEMBER 2010
The following table and discussion is a summary of our consolidated results of operations for the years ended
31 December 2011 and 2010. Each line item is also shown as a percentage of our total revenues.
Total revenues (net of VAT and export duties)
100.0%
117,024
100.0%
millions of Russian roubles
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 profit (loss) of equity investments,
net of income tax
Profit before income tax
Total income tax expense
Profit (loss)
Non-controlling interest
Year ended 31 December:
% of total
revenues
2010
% of total
revenues
63.0%
36.7%
(55.5%)
35.8%
0.1%
80.4%
(1.5%)
(2.2%)
76.7%
(8.9%)
67.8%
0.2%
71,060
44,102
(68,518)
1,329
396
50,231
1,197
(346)
51,082
(10,804)
40,278
255
60.7%
37.7%
(58.6%)
1.1%
0.4%
42.9%
1.0%
(0.2%)
43.7%
(9.3%)
34.4%
0.2%
2011
176,064
110,932
64,670
(97,665)
62,948
261
141,608
(2,703)
(3,880)
135,025
(15,734)
119,291
364
Profit attributable to shareholders
of OAO NOVATEK
119,655
68.0%
40,533
34.6%
RESULTS OF OPERATIONS FOR THE YEAR ENDED 31 DECEMBER 2011 COMPARED TO THE YEAR
Total revenues
The following table sets forth our sales (net of VAT and export duties, where applicable) for the years ended
31 December 2011 and 2010:
millions of Russian roubles
Natural gas sales
End-customers
Ex-field sales
Stable gas condensate sales
Export
Domestic
Liquefied petroleum gas sales
Export
CIS
Domestic
Crude oil sales
Export
Domestic
Oil and gas products sales
Domestic
Total oil and gas sales
Sales of polymer and insulation tape
Other revenues
Total revenues
Natural gas sales
Year ended 31 December:
2010
2011
Change
%
110,932
77,046
33,886
46,778
46,732
46
15,227
9,697
10
5,520
2,479
1,021
1,458
186
186
71,060
54,860
16,200
29,754
29,720
34
12,747
8,052
9
4,686
1,458
603
855
143
143
175,602
115,162
-
462
1,699
163
56.1%
40.4%
109.2%
57.2%
57.2%
35.3%
19.5%
20.4%
11.1%
17.8%
70.0%
69.3%
70.5%
30.1%
30.1%
52.5%
n/a
183.4%
176,064
117,024
50.5%
In 2011, our revenues from sales of natural gas increased by RR 39,872 million, or 56.1%, compared to 2010
largely due to an increase in sales volumes and, to a lesser extent, an increase in natural gas prices.
Our proportion of natural gas sold to end-customers to total natural gas sales volumes decreased to 54.7% in
2011 from 64.0% in 2010. The decrease was due to the increase of sales volumes to one of our main gas traders
and the commencement from January 2011 of natural gas sales, ex-field, to ITERA, a Russian oil and gas
company, under a long-term contract signed in April 2010 for annual volumes of approximately four billion
cubic meters. There were no corresponding sales of natural gas to ITERA in 2010.
The average realized prices of our natural gas sold directly to end-customers (including transportation expense
and excluding trading activities) and sold ex-field were higher by 13.7% and 14.9% , respectively, in 2011
compared to 2010. In 2011, as well as in 2010, our sales of natural gas to end-customers were primarily to
energy utility companies and large industrial companies. In addition, in December 2011, we commenced natural
gas sales to a new end-customer segment in the Chelyabinsk region, residential customers, as a result of the
acquisition of our wholly owned trading subsidiary Gazprom mezhregiongas Chelyabinsk in November 2011.
18
19
Stable gas condensate sales
In 2011, our revenues from sales of stable gas condensate increased by RR 17,024 million, or 57.2%, compared
to 2010 due to both an increase in volumes sold and an increase in our average realized prices resulting from an
increase in the underlying benchmark crude oil prices used in the price formulation.
Our total stable gas condensate sales volumes increased by 654 thousand tons, or 28.1%, due to an increase in
our unstable gas condensate production and a decrease in the stable gas condensate inventory balance in 2011
compared to an increase in 2010 (see “Change in natural gas, liquid hydrocarbons, and polymer products and
work-in-progress” below). In 2011, we exported 2,981 thousand tons of stable gas condensate, or 99.9% of our
total sales volumes, to APR, Europe and the United States, with the remaining three thousand tons sold
domestically. In 2010, we exported 2,326 thousand tons of stable gas condensate, or 99.8% of our total sales
volumes, to the United States, APR, Europe and South America, with the remaining four thousand tons sold
domestically.
In 2011, our average realized price, excluding export duties, for stable gas condensate sold on the export market
increased by USD 112.6 per ton, or 26.8%, to USD 533.4 per ton (DAP, CIF, CFR, DES and DAT) from
USD 420.8 per ton (DES, CFR and CIF) in 2010 due to a 34.5% increase in our average export contract price
that was partially offset by a 48.3% increase in the 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 2011 compared to 2010.
Liquefied petroleum gas sales
In 2011, our revenues from sales of LPG increased by RR 2,480 million, or 19.5%, compared to 2010, primarily
due to an increase in our average realized prices.
In 2011, we sold 453 thousand tons of LPG, or 51.5% of our total LPG sales volumes, to export markets
compared to 434 thousand tons, or 49.5%, in 2010. In 2011, our export sales volumes of LPG representing
greater than 10% were primarily to Poland and Finland compared to sales to Poland, Finland and Turkey in
2010.
Our average realized LPG export price, excluding export duties, increased by USD 117.2 per ton, or 19.2%, to
USD 728.2 per ton in 2011 (DAP, CPT and FCA) compared to USD 611.0 per ton in 2010 primarily due to a
46.0% increase in our average contract price that was partially offset by a three-fold increase in the average
export duty per ton.
In 2011, we sold 426 thousand tons of LPG, or 48.4% of our total LPG sales volumes, on the domestic market at
an average price of RR 12,971 per ton (FCA, excluding VAT) representing an increase of RR 2,362 per ton, or
22.3%, compared to 2010.
Crude oil sales
In 2011, our revenues from sales of crude oil increased by RR 1,021 million, or 70.0% , compared to 2010, due
to an increase in sales volumes and, to a lesser extent, an increase in our average realized prices. Our crude oil
sales volumes increased by 57 thousand tons, or 30.8%, to 242 thousand tons from 185 thousand tons in 2010
due primarily to an increase in crude oil production at our East-Tarkosalinskoye field.
The majority of our crude oil sales volumes, representing 61.6% in 2011, was sold domestically at an average
price of RR 9,792 per ton (excluding VAT) representing an increase of RR 2,269 per ton, or 30.2%, compared to
2010. The remaining 38.4% of our crude oil volumes were sold to export markets at an average price of
USD 373.7 per ton (DAP, excluding export duties) representing an increase of USD 92.5 per ton, or 32.9%,
compared to 2010.
The increase in the average realized export price (excluding export duties) was the result of a 41.3% increase in
our average export contract price that was partially offset by a 50.4% increase in the average export duty per ton.
The increase in our average realized contract price was due to an overall increase in benchmark crude oil prices
on international markets in 2011 compared to 2010.
20
Stable gas condensate sales
Oil and gas products sales
In 2011, our revenue from the sales of oil and gas products increased by RR 43 million, or 30.1%, to
RR 186 million from RR 143 million in 2010.
Our revenues from oil products trading operations through our retail stations on the domestic market increased
by RR 37 million to RR 147 million in 2011, compared to RR 110 million in 2010 due to an increase in sales
prices. In 2011 and 2010, we sold approximately 5.4 thousand and 4.8 thousand tons of oil products (diesel fuel
and petrol) for an average price of RR 27,232 and RR 22,951 per ton, respectively.
In 2011, we had no revenues from domestic sales of oil products produced at the Surgutsky refinery, compared
to revenues of RR 33 million in 2010, due to the cessation of deliveries of our unstable gas condensate to the
Surgutsky refinery starting in September 2010. In August 2010, we launched our own unstable gas condensate
pipeline from the Yurkharovskoye field to the Purovsky Plant eliminating the need for third-party transportation
and processing.
In 2011, we sold approximately four thousand tons of methanol to our joint venture, Sibneftegas, and recorded
revenues of RR 39 million from such sale.
Sales of polymer and insulation tape
In 2011, we had no revenues from the sales of polymer and insulation tape, compared to revenues of
RR 1,699 million in 2010, due to the disposal of our polymer and insulation tape production subsidiary
NOVATEK–Polymer in September 2010.
In 2011, our revenues from sales of LPG increased by RR 2,480 million, or 19.5%, compared to 2010, primarily
due to an increase in our average realized prices.
Other revenues
Other revenues include geological and geophysical research services, rent, sublease, transportation, handling,
storage and other services. In 2011, other revenues increased by RR 299 million, or 183.4%, to RR 462 million
from RR 163 million in 2010. The increase was primarily comprised of RR 131 million in other revenue for the
sublet of leased tankers as well as a RR 81 million increase in revenue from transportation, handling and storage
services. The remaining increase of RR 87 million in other revenues was made up of various immaterial items.
In 2011, our revenues from sales of stable gas condensate increased by RR 17,024 million, or 57.2%, compared
to 2010 due to both an increase in volumes sold and an increase in our average realized prices resulting from an
increase in the underlying benchmark crude oil prices used in the price formulation.
Our total stable gas condensate sales volumes increased by 654 thousand tons, or 28.1%, due to an increase in
our unstable gas condensate production and a decrease in the stable gas condensate inventory balance in 2011
compared to an increase in 2010 (see “Change in natural gas, liquid hydrocarbons, and polymer products and
work-in-progress” below). In 2011, we exported 2,981 thousand tons of stable gas condensate, or 99.9% of our
total sales volumes, to APR, Europe and the United States, with the remaining three thousand tons sold
domestically. In 2010, we exported 2,326 thousand tons of stable gas condensate, or 99.8% of our total sales
volumes, to the United States, APR, Europe and South America, with the remaining four thousand tons sold
domestically.
In 2011, our average realized price, excluding export duties, for stable gas condensate sold on the export market
increased by USD 112.6 per ton, or 26.8%, to USD 533.4 per ton (DAP, CIF, CFR, DES and DAT) from
USD 420.8 per ton (DES, CFR and CIF) in 2010 due to a 34.5% increase in our average export contract price
that was partially offset by a 48.3% increase in the 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 2011 compared to 2010.
Liquefied petroleum gas sales
In 2011, we sold 453 thousand tons of LPG, or 51.5% of our total LPG sales volumes, to export markets
compared to 434 thousand tons, or 49.5%, in 2010. In 2011, our export sales volumes of LPG representing
greater than 10% were primarily to Poland and Finland compared to sales to Poland, Finland and Turkey in
2010.
Our average realized LPG export price, excluding export duties, increased by USD 117.2 per ton, or 19.2%, to
USD 728.2 per ton in 2011 (DAP, CPT and FCA) compared to USD 611.0 per ton in 2010 primarily due to a
46.0% increase in our average contract price that was partially offset by a three-fold increase in the average
In 2011, we sold 426 thousand tons of LPG, or 48.4% of our total LPG sales volumes, on the domestic market at
an average price of RR 12,971 per ton (FCA, excluding VAT) representing an increase of RR 2,362 per ton, or
export duty per ton.
22.3%, compared to 2010.
Crude oil sales
In 2011, our revenues from sales of crude oil increased by RR 1,021 million, or 70.0% , compared to 2010, due
to an increase in sales volumes and, to a lesser extent, an increase in our average realized prices. Our crude oil
sales volumes increased by 57 thousand tons, or 30.8%, to 242 thousand tons from 185 thousand tons in 2010
due primarily to an increase in crude oil production at our East-Tarkosalinskoye field.
The majority of our crude oil sales volumes, representing 61.6% in 2011, was sold domestically at an average
price of RR 9,792 per ton (excluding VAT) representing an increase of RR 2,269 per ton, or 30.2%, compared to
2010. The remaining 38.4% of our crude oil volumes were sold to export markets at an average price of
USD 373.7 per ton (DAP, excluding export duties) representing an increase of USD 92.5 per ton, or 32.9%,
compared to 2010.
The increase in the average realized export price (excluding export duties) was the result of a 41.3% increase in
our average export contract price that was partially offset by a 50.4% increase in the average export duty per ton.
The increase in our average realized contract price was due to an overall increase in benchmark crude oil prices
on international markets in 2011 compared to 2010.
20
21
Operating expenses
In 2011, our total operating expenses increased by RR 29,147 million, or 42.5%, to RR 97,665 million compared
to RR 68,518 million in 2010, primarily due to an increase in transportation expenses, taxes other than income
tax and purchases of natural gas. As a percentage of total operating expenses, our non-controllable expenses,
such as transportation and taxes other than income tax, decreased to 67.3% in 2011 compared to 69.0% in 2010.
Total operating expenses decreased as a percentage of total revenues to 55.5% in 2011 compared to 58.6% in
2010, 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 and liquids volumes and sales prices, as well as cost optimization
due to the launch of our own transport and processing infrastructure in August 2010.
millions of Russian roubles
Transportation expenses
Taxes other than income tax
Subtotal non-controllable expenses
Depreciation, depletion and amortization
General and administrative expenses
Purchases of natural gas and liquid hydrocarbons
Materials, services and other
Exploration expenses
Net impairment expense
Change in natural gas, liquid hydrocarbons, and
polymer products and work-in-progress
Year ended 31 December:
2011
48,176
17,557
65,733
9,277
8,218
5,994
5,947
1,819
782
(105)
% of total
revenues
27.4%
10.0%
37.3%
5.3%
4.7%
3.4%
3.4%
1.0%
0.4%
n/m
2010
37,200
10,077
47,277
6,616
6,733
154
6,072
1,595
541
(470)
% of total
revenues
31.8%
8.6%
40.4%
5.7%
5.8%
0.1%
5.2%
1.4%
0.5%
n/m
Total operating expenses
97,665
55.5%
68,518
58.6%
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 2011, non-controllable expenses of transportation and taxes other
than income tax increased by RR 18,456 million, or 39.0%, to RR 65,733 million from RR 47,277 million in
2010. The change in transportation expenses was primarily due to an increase in natural gas sales volumes, as
well as the increase in the natural gas and liquids transportation tariffs. Taxes other than income tax increased
primarily due to a 61.2% increase in the natural gas production tax rate effective from 1 January 2011, as well as
higher natural gas and liquids production volumes. As a percentage of total revenues, our non-controllable
expenses decreased to 37.3% in 2011 from 40.4% in 2010.
22
Operating expenses
Transportation expenses
In 2011, our total operating expenses increased by RR 29,147 million, or 42.5%, to RR 97,665 million compared
to RR 68,518 million in 2010, primarily due to an increase in transportation expenses, taxes other than income
tax and purchases of natural gas. As a percentage of total operating expenses, our non-controllable expenses,
such as transportation and taxes other than income tax, decreased to 67.3% in 2011 compared to 69.0% in 2010.
Total operating expenses decreased as a percentage of total revenues to 55.5% in 2011 compared to 58.6% in
2010, 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 and liquids volumes and sales prices, as well as cost optimization
due to the launch of our own transport and processing infrastructure in August 2010.
millions of Russian roubles
Transportation expenses
Taxes other than income tax
Subtotal non-controllable expenses
Depreciation, depletion and amortization
General and administrative expenses
Purchases of natural gas and liquid hydrocarbons
Materials, services and other
Exploration expenses
Net impairment expense
Change in natural gas, liquid hydrocarbons, and
polymer products and work-in-progress
Non-controllable expenses
Year ended 31 December:
% of total
revenues
% of total
revenues
2011
48,176
17,557
65,733
9,277
8,218
5,994
5,947
1,819
782
(105)
27.4%
10.0%
37.3%
5.3%
4.7%
3.4%
3.4%
1.0%
0.4%
n/m
2010
37,200
10,077
47,277
6,616
6,733
154
6,072
1,595
541
(470)
31.8%
8.6%
40.4%
5.7%
5.8%
0.1%
5.2%
1.4%
0.5%
n/m
Total operating expenses
97,665
55.5%
68,518
58.6%
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 2011, non-controllable expenses of transportation and taxes other
than income tax increased by RR 18,456 million, or 39.0%, to RR 65,733 million from RR 47,277 million in
2010. The change in transportation expenses was primarily due to an increase in natural gas sales volumes, as
well as the increase in the natural gas and liquids transportation tariffs. Taxes other than income tax increased
primarily due to a 61.2% increase in the natural gas production tax rate effective from 1 January 2011, as well as
higher natural gas and liquids production volumes. As a percentage of total revenues, our non-controllable
expenses decreased to 37.3% in 2011 from 40.4% in 2010.
In 2011, our total transportation expenses increased by RR 10,976 million, or 29.5%, compared to 2010.
million of Russian roubles
Natural gas transportation to customers
Liquids transportation by rail
Liquids transportation by tankers
Crude oil transportation to customers
Unstable gas condensate transportation from the fields to the
processing facilities through third party pipelines
Other transportation costs
Year ended 31 December:
2010
2011
Change
%
34,441
9,638
3,647
281
-
169
26,569
7,350
2,771
190
307
13
29.6%
31.1%
31.6%
47.9%
n/a
n/a
Total transportation expenses
48,176
37,200
29.5%
In 2011, our transportation expenses for natural gas increased by RR 7,872 million, or 29.6%, to
RR 34,441 million from RR 26,569 million in 2010. The change was mainly due to a 20.0% increase in our sales
volumes of natural gas to end-customers, for which we incurred transportation expense, as well as a 9.3%
increase in the natural gas transportation tariff set by the FTS (see “Transportation tariffs” above). 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.
In 2011, total expenses for liquids transportation by rail increased by RR 2,288 million, or 31.1%, to
RR 9,638 million from RR 7,350 million in 2010 due to an increase in our combined liquids volumes sold and
transported via rail, as well as higher average liquids transportation tariffs. In 2011, our combined liquids
volumes sold and transported via rail increased by 653 thousand tons, or 20.7%, to 3,806 thousand tons from
3,153 thousand tons in 2010.
In 2011, our weighted average transportation tariff for liquids delivered by rail increased by 8.7% to
RR 2,533 per ton from RR 2,331 per ton in 2010 primarily due to an 8.0% increase in rail tariffs set by the FTS
effective 1 January 2011. Our weighted average transportation tariff for liquids delivered by rail fluctuates
period-to-period and depends on products type and the geography of deliveries.
In 2011, as well as in 2010, we applied a co-efficient of 0.89 to the existing rail tariff for stable gas condensate
deliveries to export markets. In addition, in 2011, we applied a co-efficient of 0.68 to the existing rail tariff for
LPG export deliveries at the cross-border points of the Russian Federation compared to a co-efficient of 0.35,
applicable from the middle of April 2010 (see “Transportation tariffs” above).
Total transportation expense for liquids delivered by tankers to international markets
increased by
RR 876 million, or 31.6%, to RR 3,647 million in 2011 from RR 2,771 million in 2010. The change was
primarily due to a 28.2% increase in volumes sold, as well as a slight increase in average freight rates. In 2011,
we sold 43.4% of our total stable gas condensate export volumes to the APR, 34.3% to Europe and 22.3% to the
United States, whereas in 2010, we sold 53.4% to the United States, 26.1% to the APR, 12.9% to Europe and
7.6% to South America.
Starting from August 2010, we no longer incur expenses related to unstable gas condensate transportation from
the fields to the processing facilities through third party pipelines due to the launch of our own unstable gas
condensate pipeline from the Yurkharovskoye field to the Purovsky Plant (see “Recent developments” above).
22
23
Taxes other than income tax
millions of Russian roubles
Unified natural resources production tax (UPT)
Property tax
Excise and fuel taxes
Other taxes
Year ended 31 December:
2010
2011
Change
%
14,523
1,742
998
294
7,861
1,482
454
280
84.7%
17.5%
119.8%
5.0%
Total taxes other than income tax
17,557
10,077
74.2%
In 2011, taxes other than income tax increased by RR 7,480 million, or 74.2%, primarily due to an increase in
the unified natural resources production tax expense.
In 2011, our UPT for natural gas increased by RR 5,850 million, or 106.6%, due to a 61.2% increase in the
natural gas production tax rate effective 1 January 2011 (from RR 147 to RR 237 per mcm), and an increase in
our natural gas production volumes. The remaining increase in UPT expenses of RR 812 million related to the
UPT for gas condensate and crude oil and was primarily due to an increase in the crude oil tax rate and
production volumes. Our average UPT rate for crude oil is linked to the Urals benchmark crude oil price and
increased to RR 4,490 per ton in 2011 from RR 3,099 per ton in 2010.
In 2011, our property tax expense increased by RR 260 million, or 17.5%, to RR 1,742 million from
RR 1,482 million in 2010, primarily due to additions of property, plant and equipment (PPE) at our production
subsidiaries.
In 2011, our excise and fuel taxes expense in respect of LPG export sales through our subsidiary Novatek Polska
increased by RR 544 million, or 119.8%, due to an increase in our LPG export sales through this subsidiary. The
excise and fuel taxes are payable when LPG enters Polish territory.
Depreciation, depletion and amortization
In 2011, our depreciation, depletion and amortization (“DDA”) expense increased by RR 2,661 million, or
40.2%, to RR 9,277 million from RR 6,616 million in 2010 as a result of an increase in our depletable cost base,
as well as a 26.0% increase in our total hydrocarbon production (excluding our proportionate share in the
production of joint ventures) in barrels of oil equivalent (boe). The Group accrues depreciation and depletion
using the “units of production” method for producing assets and straight-line method for other facilities.
In 2011, our DDA per boe was RR 23.1 compared to RR 20.5 in 2010. 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 third stage of the second phase development at the Yurkharovskoye
field in October 2010 as well as other costs capitalized during 2011.
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 as of 31 December 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.
24
Taxes other than income tax
Unified natural resources production tax (UPT)
millions of Russian roubles
Property tax
Excise and fuel taxes
Other taxes
Year ended 31 December:
2011
2010
Change
%
14,523
1,742
998
294
7,861
1,482
454
280
84.7%
17.5%
119.8%
5.0%
Total taxes other than income tax
17,557
10,077
74.2%
In 2011, taxes other than income tax increased by RR 7,480 million, or 74.2%, primarily due to an increase in
the unified natural resources production tax expense.
In 2011, our UPT for natural gas increased by RR 5,850 million, or 106.6%, due to a 61.2% increase in the
natural gas production tax rate effective 1 January 2011 (from RR 147 to RR 237 per mcm), and an increase in
our natural gas production volumes. The remaining increase in UPT expenses of RR 812 million related to the
UPT for gas condensate and crude oil and was primarily due to an increase in the crude oil tax rate and
production volumes. Our average UPT rate for crude oil is linked to the Urals benchmark crude oil price and
increased to RR 4,490 per ton in 2011 from RR 3,099 per ton in 2010.
In 2011, our property tax expense increased by RR 260 million, or 17.5%, to RR 1,742 million from
RR 1,482 million in 2010, primarily due to additions of property, plant and equipment (PPE) at our production
subsidiaries.
In 2011, our excise and fuel taxes expense in respect of LPG export sales through our subsidiary Novatek Polska
increased by RR 544 million, or 119.8%, due to an increase in our LPG export sales through this subsidiary. The
excise and fuel taxes are payable when LPG enters Polish territory.
Depreciation, depletion and amortization
In 2011, our depreciation, depletion and amortization (“DDA”) expense increased by RR 2,661 million, or
40.2%, to RR 9,277 million from RR 6,616 million in 2010 as a result of an increase in our depletable cost base,
as well as a 26.0% increase in our total hydrocarbon production (excluding our proportionate share in the
production of joint ventures) in barrels of oil equivalent (boe). The Group accrues depreciation and depletion
using the “units of production” method for producing assets and straight-line method for other facilities.
In 2011, our DDA per boe was RR 23.1 compared to RR 20.5 in 2010. 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 third stage of the second phase development at the Yurkharovskoye
field in October 2010 as well as other costs capitalized during 2011.
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 as of 31 December 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.
General and administrative expenses
In 2011, our general and administrative expenses increased by RR 1,485 million, or 22.1%, to RR 8,218 million
compared to RR 6,733 million in 2010. The main components of these expenses were employee compensation,
social expenses and compensatory payments and legal, audit and consulting services, which, on aggregate,
comprised 80.7% and 76.5% of total general and administrative expenses in 2011 and 2010, respectively.
millions of Russian roubles
Employee compensation
Social expenses and compensatory payments
Legal, audit, and consulting services
Business trip expenses
Depreciation – administrative buildings
Fire safety and security expenses
Rent expense
Board remuneration
Concession management services
Bank charges
Other
Total general and administrative expenses
Year ended 31 December:
2010
2011
Change
%
4,650
1,212
774
218
198
178
140
103
63
58
624
8,218
3,874
774
504
265
141
149
270
93
125
59
479
6,733
20.0%
56.6%
53.6%
(17.7%)
40.4%
19.5%
(48.1%)
10.8%
(49.6%)
(1.7%)
30.3%
22.1%
Employee compensation increased by RR 776 million, or 20.0%, to RR 4,650 million in 2011 as compared to
RR 3,874 million in 2010 primarily due to a RR 530 million increase in bonuses paid for the results achieved in
2010 and accrued for the results achieved in 2011. In addition, an increase of RR 298 million was due to an
indexation of base salaries by 9.6% from 1 July 2011. The increase was partially offset by a decrease in the
recognition of charges related to NOVATEK’s share-based compensation program for the Group’s senior and
key management from RR 400 million in 2010 to RR 235 million in 2011.
In 2011, our social expenses and compensatory payments increased by RR 438 million, or 56.6%, to
RR 1,212 million compared to RR 774 million in 2010 primarily due to the commencement in 2011 of direct
payments to the YNAO government to undertake new socio-economic programs related to the Yamal LNG
project. Social expenses and compensatory payments will continue to fluctuate period-on-period depending on
the funding needs and the implementation schedules of specific programs we support in the regions where we
operate.
Legal, audit, and consulting services expenses increased by RR 270 million, or 53.6%, to RR 774 million
compared to RR 504 million in 2010 largely due to an increase in legal and consulting services connected with
the development of the Yamal LNG project.
In 2011, depreciation of administrative buildings increased by RR 57 million, or 40.4% , due to the completion
and opening of our new Moscow head-office in the second quarter 2011. Administrative buildings are
depreciated on a straight-line basis over their estimated useful lives.
Fire safety and security expenses increased by RR 29 million, or 19.5%, to RR 178 million in 2011 from
RR 149 million in 2010 as a result of the opening of our new Moscow head-office in May 2011.
In 2011, our rent expense decreased by RR 130 million, or 48.1%, to RR 140 million from RR 270 million in
2010 due to the relocation of Moscow head-office employees to our new office building in May 2011.
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 2011, our expenses related to
concession management services decreased by RR 62 million, or 49.6%, compared to 2010 due to the
termination of the concession agreement in 2011.
In 2011, other general and administrative expenses increased by RR 145 million, or 30.3%, to RR 624 million
from RR 479 million in 2010. The increase of RR 77 million related to the statutory requirement to maintain a
bank guarantee in respect of minority shareholders due to the Sibneftegas acquisition. In addition, our materials
and repair expenses related primarily to the maintenance of our new head-office in Moscow increased by
RR 46 and RR 22 million, respectively.
24
25
Purchases of natural gas and liquid hydrocarbons
In 2011, our purchases of natural gas and liquid hydrocarbons amounted to RR 5,994 million, of which
RR 5,854 million related to natural gas purchases from our joint venture Sibneftegas and from third parties
related to the acquisition and consolidation of Gazprom mezhregiongas Chelyabinsk in November 2011. The
remaining purchases of RR 140 million related to oil products (diesel fuel and petrol), which were resold. In
2010, our purchases of RR 154 million related to liquid hydrocarbons purchased for resale.
Materials, services and other
In 2011, our materials, services and other expenses decreased by RR 125 million, or 2.1%, to RR 5,947 million
compared to RR 6,072 million in 2010. The main components of this expense category were employee
compensation and repair and maintenance services, which comprised 49.7% and 24.1%, respectively, of total
materials, services and other expenses in 2011.
millions of Russian roubles
Employee compensation
Repair and maintenance services
Electricity and fuel
Materials and supplies
Security expenses
Transportation expenses
Processing fees
Rent expenses
Other
Total materials, services and other
Year ended 31 December:
2010
2011
Change
%
2,953
1,435
405
309
237
184
99
43
282
5,947
2,572
640
388
1,386
179
106
566
27
208
6,072
14.8%
124.2%
4.4%
(77.7%)
32.4%
73.6%
(82.5%)
59.3%
35.6%
(2.1%)
Our employee compensation increased by RR 381 million, or 14.8%, to RR 2,953 million compared to
RR 2,572 million in 2010 due primarily to a 9.6% indexation of base salaries effective 1 July 2011.
Repair and maintenance services increased by RR 795 million, or 124.2%, to RR 1,435 million in 2011
compared to RR 640 million in 2010. The increase was primarily related to on-going repair works at our
production assets and was consistent with our maintenance schedules.
In 2011, electricity and fuel expenses increased by RR 17 million, or 4.4%, to RR 405 million from
RR 388 million in 2010. The increase was primarily due to an increase in electricity volumes used by our
production subsidiaries resulting from recently completed infrastructure projects as well as higher electricity
rates in 2011 compared to 2010 which were partially offset by cost savings due to the disposal of NOVATEK-
Polymer in September 2010.
Materials and supplies expense decreased by RR 1,077 million, or 77.7%, mainly due to a cessation of purchases
of raw materials required for the production of polymer and insulation tape products as a result of the disposal of
NOVATEK-Polymer in September 2010, which accounted for RR 1,100 million of the total decrease in
materials and supplies expense.
Security expenses increased by RR 58 million, or 32.4%, to RR 237 million in 2011 from RR 179 million in
2010 largely due to additional security services related to recently completed infrastructure projects at our
production subsidiaries.
Transportation expenses related to the delivery of materials and equipment to our fields increased by
RR 78 million, or 73.6%, to RR 184 million in 2011 from RR 106 million in 2010 primarily due to an increase in
scheduled repair and maintenance works at our production subsidiaries.
Processing fees decreased by RR 467 million, or 82.5%, to RR 99 million in 2011, from RR 566 million in 2010
due primarily to the launch of our own unstable gas condensate de-ethanization facility at the Yurkharovskoye
field in August 2010 that allowed us to cease contracting similar third party services.
26
Purchases of natural gas and liquid hydrocarbons
Exploration expenses
In 2011, our purchases of natural gas and liquid hydrocarbons amounted to RR 5,994 million, of which
RR 5,854 million related to natural gas purchases from our joint venture Sibneftegas and from third parties
related to the acquisition and consolidation of Gazprom mezhregiongas Chelyabinsk in November 2011. The
remaining purchases of RR 140 million related to oil products (diesel fuel and petrol), which were resold. In
2010, our purchases of RR 154 million related to liquid hydrocarbons purchased for resale.
In 2011, our exploration expenses increased by RR 224 million, or 14.0%, to RR 1,819 million from
RR 1,595 million in 2010 primarily due to an increase in seismic works. In 2011, we expensed the capitalized
cost of three exploratory wells in accordance with our accounting policy aggregating RR 806 million at the
Raduzhny and Yarudeiskiy licence areas compared to the expensing of two exploratory wells aggregating
RR 821 million at the El Arish (Egypt) and Anomalny licence areas in 2010.
Materials, services and other
Change in natural gas, liquid hydrocarbons, and polymer products and work-in-progress
In 2011, our materials, services and other expenses decreased by RR 125 million, or 2.1%, to RR 5,947 million
compared to RR 6,072 million in 2010. The main components of this expense category were employee
compensation and repair and maintenance services, which comprised 49.7% and 24.1%, respectively, of total
materials, services and other expenses in 2011.
millions of Russian roubles
Employee compensation
Repair and maintenance services
Electricity and fuel
Materials and supplies
Security expenses
Transportation expenses
Processing fees
Rent expenses
Other
Year ended 31 December:
2011
2010
Change
%
2,953
1,435
405
309
237
184
99
43
282
2,572
640
388
1,386
179
106
566
27
208
14.8%
124.2%
4.4%
(77.7%)
32.4%
73.6%
(82.5%)
59.3%
35.6%
Total materials, services and other
5,947
6,072
(2.1%)
Our employee compensation increased by RR 381 million, or 14.8%, to RR 2,953 million compared to
RR 2,572 million in 2010 due primarily to a 9.6% indexation of base salaries effective 1 July 2011.
Repair and maintenance services increased by RR 795 million, or 124.2%, to RR 1,435 million in 2011
compared to RR 640 million in 2010. The increase was primarily related to on-going repair works at our
production assets and was consistent with our maintenance schedules.
In 2011, electricity and fuel expenses increased by RR 17 million, or 4.4%, to RR 405 million from
RR 388 million in 2010. The increase was primarily due to an increase in electricity volumes used by our
production subsidiaries resulting from recently completed infrastructure projects as well as higher electricity
rates in 2011 compared to 2010 which were partially offset by cost savings due to the disposal of NOVATEK-
Polymer in September 2010.
Materials and supplies expense decreased by RR 1,077 million, or 77.7%, mainly due to a cessation of purchases
of raw materials required for the production of polymer and insulation tape products as a result of the disposal of
NOVATEK-Polymer in September 2010, which accounted for RR 1,100 million of the total decrease in
materials and supplies expense.
Security expenses increased by RR 58 million, or 32.4%, to RR 237 million in 2011 from RR 179 million in
2010 largely due to additional security services related to recently completed infrastructure projects at our
production subsidiaries.
Transportation expenses related to the delivery of materials and equipment to our fields increased by
RR 78 million, or 73.6%, to RR 184 million in 2011 from RR 106 million in 2010 primarily due to an increase in
scheduled repair and maintenance works at our production subsidiaries.
Processing fees decreased by RR 467 million, or 82.5%, to RR 99 million in 2011, from RR 566 million in 2010
due primarily to the launch of our own unstable gas condensate de-ethanization facility at the Yurkharovskoye
field in August 2010 that allowed us to cease contracting similar third party services.
In 2011, we recorded a reversal of RR 105 million to change in inventory expense compared to a reversal of
RR 470 million in 2010:
millions of Russian roubles
Natural gas
Stable gas condensate
Other
Increase (decrease) in operating expenses due to
change in inventory balances and work-in-progress
Year ended 31 December:
2010
2011
(112)
91
(84)
2
(379)
(93)
(105)
(470)
In 2011, we recorded a reversal to our operating expenses of RR 112 million primarily due to an increase in the
cost of natural gas balances resulting from the higher UPT rate in 2011 as compared to 2010 that was partially
offset by a 30 mmcm decrease in our natural gas inventory balance. Our volumes of natural gas injected into
Gazprom’s underground gas storage facilities 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.
In addition, in 2011, we recorded a charge of RR 91 million to our operating expenses due to a 36 thousand tons
decrease in our inventory balance of stable gas condensate in transit and storage.
The following table highlights movements in our inventory balances:
Inventory balances in
transit or in storage
2011
2010
At
31 December
At
1 January
Increase /
(decrease)
At
31 December
At
1 January
Increase /
(decrease)
Natural gas (millions of cubic meters)
including Gazprom’s UGSF
Liquid hydrocarbons (thousand tons)
including stable gas condensate
760
732
325
228
790
761
356
264
(30)
(29)
(31)
(36)
790
761
356
264
744
584
167
111
46
177
189
153
Net gain on disposal of interest in subsidiaries
In 2011, we realized a net gain of RR 62,948 million on the disposal of a 20% participation interest in
OAO Yamal LNG to TOTAL S.A., our strategic partner in the Yamal LNG project. The net gain is comprised of
a net gain on disposal of RR 28,685 million and a gain of RR 34,263 million due to the revaluation to fair value
of our remaining 80% participation interest.
In 2010, we realized a net gain of RR 1,583 million on the disposal of a 49% participation interest in our
subsidiary ZAO Terneftegas to TOTAL Termokarstovoye B.V., which is comprised of a net income on disposal
of RR 776 million and a gain of RR 807 million due to the revaluation to fair value of our remaining
51% participation interest. In 2010, we recognized a net loss on the disposal of our non-core, wholly owned
subsidiary, NOVATEK-Polymer in the amount of RR 254 million.
26
27
Other operating income (loss)
In 2011, we recognized other operating income of RR 261 million, of which RR 192 million related to insurance
compensation received in respect of insured accident which incurred in 2010. 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.
Profit from operations
As a result of the factors discussed above, our profit from operations, increased by RR 91,377 million, or
181.9%, to RR 141,608 million in 2011, compared to RR 50,231 million in 2010. Our profit from operations,
adjusted for non-recurring transactions, primarily excluding the net gain on disposal of interest in subsidiaries,
increased by RR 29,758 million, or 60.9%, to RR 78,660 million in 2011 from RR 48,902 million in 2010. In
2011, our profit from operations, excluding the net gain on disposal of interest in subsidiaries, as a percentage of
total revenues increased to 44.7% compared to 41.8% in 2010 primarily due to higher natural gas and liquids
sales volumes and prices.
Finance income (expense)
In 2011, we recorded net finance expense of RR 2,703 million due primarily to an increase in a non-cash foreign
exchange loss from the depreciation of the Russian rouble relative to the US dollar as compared to a net finance
gain of RR 1,197 million in 2010 due to a non-cash foreign exchange gain.
In 2011, our total accrued interest expense increased to RR 5,422 million compared to RR 2,192 million in 2010
as a result of an increase in our average borrowings. In 2011 and 2010, we capitalized RR 3,709 and
RR 2,166 million, respectively, of interest expense to the cost of our property, plant and equipment construction
account in accordance with the Group’s accounting policy. In addition, we recognized RR 437 and
RR 411 million related to the fair value remeasurement of financial instruments and the unwinding of the present
value discount related to provisions of asset retirement obligations as part of interest expense in 2011 and 2010,
respectively.
Interest income increased to RR 3,392 million in 2011 from RR 598 million in 2010 primarily due to an increase
in interest income on loans provided to our joint ventures.
In 2011, we recorded a net foreign exchange loss of RR 3,945 million compared to a net foreign exchange gain
of RR 1,036 million in 2010 due primarily to the revaluation of our US dollar denominated borrowings. The
Russian rouble depreciated by 5.6% against the US dollar during 2011 compared to Russian rouble depreciation
of 0.8% in 2010. We will continue to record foreign exchange gains and losses each period based on the
movements between exchange rates and the currency denomination of our debt portfolio.
Share of profit (loss) of equity investments, net of income tax
loss of equity investments
Our proportionate share in
increased from RR 346 million in 2010 to
RR 3,880 million in 2011, of which a significant portion was related to our joint ventures Sibneftegas and Yamal
Development. The losses we recognized in Sibneftegas were primarily due to the revaluation of oil and gas
properties acquired to fair value and the subsequent amortization of those costs under IFRS. The losses related to
Yamal Development resulted from the recognition of interest expense on loans obtained.
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 11.7% and 21.2% for the years ended 31 December 2011 and
2010, respectively.
After excluding the effect of 20% disposal of Yamal LNG, the Group’s effective income tax rate for the year
ended 31 December 2011 was 21.7%. Our effective income tax rates, excluding the effect of foreign subsidiaries
and the net gain on disposal of subsidiaries, were 22.0% and 21.8% in the years ended 31 December 2011 and
2010, respectively.
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 or non-taxable income.
28
Other operating income (loss)
Profit attributable to shareholders and earnings per share
As a result of the factors discussed above, profit for the period increased by RR 79,013 million, or 196.2%, to
RR 119,291 million in 2011 from RR 40,278 million in 2010. The profit attributable to shareholders of
OAO NOVATEK increased by RR 79,122 million, or 195.2%, to RR 119,655 million in 2011 from
RR 40,533 million in 2010. The profit attributable to shareholders of OAO NOVATEK, adjusted to exclude the
net gain on disposal of subsidiaries, increased by RR 17,503 million, or 44.6%, to RR 56,707 million in 2011
from RR 39,204 million in 2010.
Our weighted average basic and diluted earnings per share, calculated from the profit attributable to shareholders
of OAO NOVATEK, increased by approximately RR 26.08 per share, or 195.1%, to RR 39.45 per share in 2011
from RR 13.37 per share in 2010.
Our weighted average basic and diluted earnings per share, calculated from the profit attributable to shareholders
of OAO NOVATEK, adjusted to exclude the net gain on disposal of subsidiaries, increased by RR 5.76 per
share, or 44.6%, to RR 18.69 per share in 2011 from RR 12.93 per share in 2010.
In 2011, we recognized other operating income of RR 261 million, of which RR 192 million related to insurance
compensation received in respect of insured accident which incurred in 2010. 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.
Profit from operations
sales volumes and prices.
Finance income (expense)
As a result of the factors discussed above, our profit from operations, increased by RR 91,377 million, or
181.9%, to RR 141,608 million in 2011, compared to RR 50,231 million in 2010. Our profit from operations,
adjusted for non-recurring transactions, primarily excluding the net gain on disposal of interest in subsidiaries,
increased by RR 29,758 million, or 60.9%, to RR 78,660 million in 2011 from RR 48,902 million in 2010. In
2011, our profit from operations, excluding the net gain on disposal of interest in subsidiaries, as a percentage of
total revenues increased to 44.7% compared to 41.8% in 2010 primarily due to higher natural gas and liquids
In 2011, we recorded net finance expense of RR 2,703 million due primarily to an increase in a non-cash foreign
exchange loss from the depreciation of the Russian rouble relative to the US dollar as compared to a net finance
gain of RR 1,197 million in 2010 due to a non-cash foreign exchange gain.
In 2011, our total accrued interest expense increased to RR 5,422 million compared to RR 2,192 million in 2010
as a result of an increase in our average borrowings. In 2011 and 2010, we capitalized RR 3,709 and
RR 2,166 million, respectively, of interest expense to the cost of our property, plant and equipment construction
account in accordance with the Group’s accounting policy. In addition, we recognized RR 437 and
RR 411 million related to the fair value remeasurement of financial instruments and the unwinding of the present
value discount related to provisions of asset retirement obligations as part of interest expense in 2011 and 2010,
respectively.
Interest income increased to RR 3,392 million in 2011 from RR 598 million in 2010 primarily due to an increase
in interest income on loans provided to our joint ventures.
In 2011, we recorded a net foreign exchange loss of RR 3,945 million compared to a net foreign exchange gain
of RR 1,036 million in 2010 due primarily to the revaluation of our US dollar denominated borrowings. The
Russian rouble depreciated by 5.6% against the US dollar during 2011 compared to Russian rouble depreciation
of 0.8% in 2010. We will continue to record foreign exchange gains and losses each period based on the
movements between exchange rates and the currency denomination of our debt portfolio.
Share of profit (loss) of equity investments, net of income tax
Our proportionate share in
loss of equity investments
increased from RR 346 million in 2010 to
RR 3,880 million in 2011, of which a significant portion was related to our joint ventures Sibneftegas and Yamal
Development. The losses we recognized in Sibneftegas were primarily due to the revaluation of oil and gas
properties acquired to fair value and the subsequent amortization of those costs under IFRS. The losses related to
Yamal Development resulted from the recognition of interest expense on loans obtained.
Income tax expense
2010, respectively.
2010, respectively.
Our overall consolidated effective income tax rates (total income tax expense calculated as a percentage of our
reported IFRS profit before income tax) were 11.7% and 21.2% for the years ended 31 December 2011 and
After excluding the effect of 20% disposal of Yamal LNG, the Group’s effective income tax rate for the year
ended 31 December 2011 was 21.7%. Our effective income tax rates, excluding the effect of foreign subsidiaries
and the net gain on disposal of subsidiaries, were 22.0% and 21.8% in the years ended 31 December 2011 and
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 or non-taxable income.
28
29
LIQUIDITY AND CAPITAL RESOURCES
The following table shows our net cash flows from operating, investing and financing activities for the years
ended 31 December 2011 and 2010:
millions of Russian roubles
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Year ended 31 December:
2010
2011
Change
%
71,907
(46,643)
(11,735)
44,863
(68,842)
23,782
60.3%
(32.2%)
n/a
Liquidity and credit ratios
31 December 2011
31 December 2010
Change, %
Current ratio
Total debt to equity
Long-term debt to long-term debt and equity
Net debt to total capitalization (1)
Net debt to EBITDA (2)
Net debt to Normalized EBITDA (2)
Interest coverage ratio (3)
1.16
0.40
0.24
0.20
0.48
0.84
42
0.51
0.43
0.22
0.25
1.08
1.10
35
127.5%
(7.0%)
9.1%
(20.0%)
(55.6%)
(23.6%)
20.0%
(1)
(2)
(3)
Net debt represents total debt less cash and cash equivalents. Total capitalization represents total debt, total equity and deferred income tax
liability.
For EBITDA and Normalized EBITDA definitions see “Selected data” above.
Interest coverage ratio is calculated as Normalized EBITDA divided by interest expense, including capitalized interest, less interest
income from the Consolidated Statement of Income.
Net cash provided by operating activities
In 2011, our net cash provided by operating activities increased by RR 27,044 million, or 60.3%, to
RR 71,907 million compared to RR 44,863 million in 2010. The increase was primarily due to an increase in
natural gas and liquids sales volumes and prices that was partially offset by an increase in income tax payments.
Net cash provided by (used in) investing activities
In 2011, our net cash used in investing activities decreased by RR 22,199 million, or 32.2%, to
RR 46,643 million as compared to RR 68,842 million in 2010 due primarily to a decrease in loans provided to
our joint ventures, that was partially offset by the payment in 2011 for shares of our joint venture Sibneftegas,
which was acquired in 2010, as well as the payment of RR 6.9 billion for four licenses in YNAO (see “Recent
developments” above).
Net cash provided by (used in) financing activities
In 2011, our cash used in repayment of debt and dividends, as well as cash paid to increase the Group’s equity
interest in Yamal LNG from 51% to 100%, exceeded cash provided by new loans by RR 11,735 million. In
2010, our cash provided by new loans and borrowings exceeded cash used for repayment of loans and dividends,
that resulted in a net cash inflow from financing activities of RR 23,782 million.
30
The following table shows our net cash flows from operating, investing and financing activities for the years
LIQUIDITY AND CAPITAL RESOURCES
ended 31 December 2011 and 2010:
millions of Russian roubles
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Year ended 31 December:
2011
2010
Change
%
71,907
(46,643)
(11,735)
44,863
(68,842)
23,782
60.3%
(32.2%)
n/a
Liquidity and credit ratios
Current ratio
Total debt to equity
Long-term debt to long-term debt and equity
Net debt to total capitalization (1)
Net debt to EBITDA (2)
Net debt to Normalized EBITDA (2)
Interest coverage ratio (3)
31 December 2011
31 December 2010
Change, %
1.16
0.40
0.24
0.20
0.48
0.84
42
0.51
0.43
0.22
0.25
1.08
1.10
35
127.5%
(7.0%)
9.1%
(20.0%)
(55.6%)
(23.6%)
20.0%
liability.
(1)
(2)
(3)
Net debt represents total debt less cash and cash equivalents. Total capitalization represents total debt, total equity and deferred income tax
For EBITDA and Normalized EBITDA definitions see “Selected data” above.
Interest coverage ratio is calculated as Normalized EBITDA divided by interest expense, including capitalized interest, less interest
income from the Consolidated Statement of Income.
Net cash provided by operating activities
In 2011, our net cash provided by operating activities increased by RR 27,044 million, or 60.3%, to
RR 71,907 million compared to RR 44,863 million in 2010. The increase was primarily due to an increase in
natural gas and liquids sales volumes and prices that was partially offset by an increase in income tax payments.
Net cash provided by (used in) investing activities
In 2011, our net cash used in investing activities decreased by RR 22,199 million, or 32.2%, to
RR 46,643 million as compared to RR 68,842 million in 2010 due primarily to a decrease in loans provided to
our joint ventures, that was partially offset by the payment in 2011 for shares of our joint venture Sibneftegas,
which was acquired in 2010, as well as the payment of RR 6.9 billion for four licenses in YNAO (see “Recent
developments” above).
Net cash provided by (used in) financing activities
In 2011, our cash used in repayment of debt and dividends, as well as cash paid to increase the Group’s equity
interest in Yamal LNG from 51% to 100%, exceeded cash provided by new loans by RR 11,735 million. In
2010, our cash provided by new loans and borrowings exceeded cash used for repayment of loans and dividends,
that resulted in a net cash inflow from financing activities of RR 23,782 million.
Working capital
Our net working capital position (current assets less current liabilities) at 31 December 2011 was positive
RR 8,202 million compared to a negative RR 27,876 million at 31 December 2010. The strengthening of our net
working capital position was due to a decrease of short-term debt and accounts payable, as well as an increase in
balance of cash and cash equivalents and trade and other accounts receivable.
At 31 December 2010, the Group had an outstanding bridge loan facility for the financing of the acquisition by
its joint venture, Yamal Development, of a 51% participation interest in SeverEnergia of RR 18,200 million
(USD 597 million), as well as an accounts payable to OAO Gazprombank of RR 21,176 million due to the
acquisition of a 51% stake in Sibneftegas. The Group successfully refinanced short-term payables through the
issuance of long-term Eurobonds in February 2011 (see “Recent developments” above).
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 to finance the Group’s
capital construction programs.
Capital expenditures
Total capital expenditures on property, plant and equipment for the years ended 31 December 2011 and 2010
were as follows:
millions of Russian roubles
Capital expenditures
Exploration, production and marketing
Polymer production and marketing
Total capital expenditures
Acquisition of mineral licenses per
Consolidated Statement of Cash Flows
Year ended 31 December:
2010
2011
Change
%
31,143
-
31,143
25,701
329
26,030
6,888
76
21.2%
n/a
19.6%
n/m
Total additions to property, plant and equipment per
Note 6 “Property, Plant and Equipment” in the Group’s
IFRS Consolidated Financial Statements
38,031
26,106
45.7%
Exploration, production and marketing expenditures represent our investments in exploring for and developing
our oil and gas properties. The following table shows the expenditures at our main fields and processing facilities
for the years ended 31 December 2011 and 2010:
millions of Russian roubles
Yurkharovskoye field
South-Tambeyskoye field
Gas Condensate Fractionation Complex and Transshipment Facility (Ust-Luga)
East-Tarkosalinskoye field
Purovsky Plant
Khancheyskoye field
North-Russkiy license area
West-Urengoiskiy license area
Olimpiyskiy license area
Other
Year ended 31 December:
2010
2011
11,403
4,148
3,923
2,430
1,369
612
574
515
345
5,824
15,375
1,678
664
1,058
1,292
87
399
33
424
4,691
Exploration, production and marketing
31,143
25,701
Our capital expenditures to oil and gas properties increased by RR 5,442 million and related primarily to the
fields at the early stage of development such as the South-Tambeyskoye field and the West-Urengoiskiy license
area, as well as the construction of processing assets such as Ust-Luga. We increased our capital expenditures at
the East-Tarkosalinskoye field due to further development of the field’s crude oil deposits and at the
Khancheyskoye field as a result of capitalized repair works.
30
31
In 2011, the Group purchased, through participation in a tender process, exploration and production licenses for
the Salmanovskoye (Utrenneye) and Geofizicheskoye fields and geological studies and production for the North-
Obskiy and East-Tambeyskiy license areas for a total payment of RR 6,870 million (see “Recent developments”
above).
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 and floating
interest rate instruments and a debt portfolio denominated in either Russian roubles or US dollars.
Overview
Our total debt increased from RR 72,226 million at 31 December 2010 to RR 95,478 million at 31 December
2011, or by RR 23,252 million, in order to supplement our internally generated cash flows for the financing of
capital expenditures related to the development of our fields, investments in processing assets such as the
Purovsky Plant and Ust-Luga, as well as acquisitions of new oil and gas assets.
Our total debt position (net of unamortized transaction costs) at 31 December 2011 and 2010 was as follows:
Facility
Amount
Maturity
Interest rate
Year ended 31 December:
2010
2011
Eurobonds Ten-Year
Eurobonds Five-Year
Sberbank
Gazprombank (1)
Russian rouble Bonds
Sumitomo Mitsui
Banking Corporation
Europe Limited
Nordea Bank
UniCredit Bank
Bridge loan facility (3)
Syndicated term
loan facility
Total
USD 650 million
USD 600 million
RR 15 billion
RR 10 billion
RR 10 billion
February 2021
February 2016
December 2013
November 2012
June 2013
6.604%
5.326%
7.5%
8% (2)
7.5%
USD 300 million
USD 200 million
USD 200 million
USD 600 million
December 2013
November 2013
October 2012
November 2011
LIBOR+1.45%
LIBOR+1.9%
LIBOR+3.25% (2)
LIBOR+1%
USD 800 million
April 2011
LIBOR+1.5%
(1) – the loan from Gazprombank repaid in January 2012 ahead of maturity schedule.
(2) – interest rates were changed during the periods.
(3) – bridge loan repaid in February 2011 ahead of maturity schedule.
Maturities of long-term loans
20,776
19,206
14,966
10,000
9,971
7,685
6,439
6,435
-
-
-
-
14,948
10,000
9,949
-
6,095
6,082
18,200
6,952
95,478
72,226
Scheduled maturities of our long-term debt outstanding (net of unamortized transaction costs) at 31 December
2011 were as follows:
Maturity schedule:
1 January 2013 to 31 December 2013
1 January 2014 to 31 December 2014
1 January 2015 to 31 December 2015
1 January 2016 to 31 December 2016
After 31 December 2016
Total long-term debt
RR million
35,198
-
-
19,206
20,776
75,180
32
In 2011, the Group purchased, through participation in a tender process, exploration and production licenses for
the Salmanovskoye (Utrenneye) and Geofizicheskoye fields and geological studies and production for the North-
Obskiy and East-Tambeyskiy license areas for a total payment of RR 6,870 million (see “Recent developments”
above).
Debt obligations
Overview
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 and floating
interest rate instruments and a debt portfolio denominated in either Russian roubles or US dollars.
Our total debt increased from RR 72,226 million at 31 December 2010 to RR 95,478 million at 31 December
2011, or by RR 23,252 million, in order to supplement our internally generated cash flows for the financing of
capital expenditures related to the development of our fields, investments in processing assets such as the
Purovsky Plant and Ust-Luga, as well as acquisitions of new oil and gas assets.
Our total debt position (net of unamortized transaction costs) at 31 December 2011 and 2010 was as follows:
Facility
Amount
Maturity
Interest rate
Year ended 31 December:
2011
2010
Eurobonds Ten-Year
Eurobonds Five-Year
Sberbank
Gazprombank (1)
Russian rouble Bonds
Sumitomo Mitsui
Banking Corporation
Europe Limited
Nordea Bank
UniCredit Bank
Bridge loan facility (3)
Syndicated term
loan facility
Total
USD 650 million
USD 600 million
RR 15 billion
RR 10 billion
RR 10 billion
February 2021
February 2016
December 2013
November 2012
June 2013
6.604%
5.326%
7.5%
8% (2)
7.5%
USD 300 million
USD 200 million
USD 200 million
USD 600 million
December 2013
November 2013
October 2012
November 2011
LIBOR+1.45%
LIBOR+1.9%
LIBOR+3.25% (2)
LIBOR+1%
USD 800 million
April 2011
LIBOR+1.5%
(1) – the loan from Gazprombank repaid in January 2012 ahead of maturity schedule.
(2) – interest rates were changed during the periods.
(3) – bridge loan repaid in February 2011 ahead of maturity schedule.
20,776
19,206
14,966
10,000
9,971
7,685
6,439
6,435
-
-
-
-
14,948
10,000
9,949
-
6,095
6,082
18,200
6,952
95,478
72,226
Scheduled maturities of our long-term debt outstanding (net of unamortized transaction costs) at 31 December
Maturities of long-term loans
2011 were as follows:
Maturity schedule:
1 January 2013 to 31 December 2013
1 January 2014 to 31 December 2014
1 January 2015 to 31 December 2015
1 January 2016 to 31 December 2016
After 31 December 2016
Total long-term debt
RR million
35,198
-
-
19,206
20,776
75,180
32
Available credit facilities
At 31 December 2011, 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 6,278 million (USD 195 million) at either fixed
or variable interest rates subject to the specific type of credit facility.
The Group also has funds available under credit facilities with OAO Sberbank in the amount of RR 40 billion
until July 2012 with an annual interest rate of 9.2%, Credit Agricole Corporate and Investment Bank in the
amount of USD 100 million until June 2012 and ZAO UniCredit Bank in the amount of USD 150 million until
August 2012, with the interest rates applicable under the aforementioned credit facilities to be negotiated at the
time of each withdrawal, as well as funds available under credit facility with ZAO BNP PARIBAS Bank in the
amount of USD 100 million until September 2012 with predetermined interest rate depending on the period of
debt.
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 2011, total amount of our long-term debt denominated in US dollars was RR 50,243 million, or
52.6% 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 29.7% in 2011, is denominated in US dollars. As of 31 December 2011, the
Russian rouble depreciated by approximately 5.6% against the US dollar since 31 December 2010.
A hypothetical and instantaneous 10% depreciation in the Russian rouble in relation to the US dollar as of
31 December 2011 would have resulted in an estimated non-cash foreign exchange loss of approximately
RR 6,054 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
QUALITATIVE AND QUANTITATIVE DISCLOSURES AND MARKET RISKS
Off balance sheet activities
As of 31 December 2011, 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.
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 2011, total amount of our long-term debt denominated in US dollars was RR 50,243 million, or
52.6% 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 29.7% in 2011, is denominated in US dollars. As of 31 December 2011, the
Russian rouble depreciated by approximately 5.6% against the US dollar since 31 December 2010.
A hypothetical and instantaneous 10% depreciation in the Russian rouble in relation to the US dollar as of
31 December 2011 would have resulted in an estimated non-cash foreign exchange loss of approximately
RR 6,054 million on foreign currency denominated borrowings held at that date.
Commodity risk
thus our export prices.
products.
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
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
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
35
NOVATEK/ ANNUAL REPORT / 2011
104
Harnessing the Energy of the Far North!
IFRS Consolidated
Financial Statements
and Independent
Auditor’s Report
for the years ended
31 December 2011
and 2010
CONTENTS
Page
Independent Auditor’s Report ............................................................................................................................ 3
Consolidated Statement of Financial Position ..................................................................................................... 4
Consolidated Statement of Income ..................................................................................................................... 5
Consolidated Statement of Comprehensive Income ............................................................................................ 6
Consolidated Statement of Cash Flows .............................................................................................................. 7
Consolidated Statement of Changes in Equity .................................................................................................... 8
Notes to the Consolidated Financial Statements:
Note 1. Organisation and principal activities ................................................................................................ 10
Note 2. Basis of presentation........................................................................................................................ 11
Note 3. Summary of significant accounting policies ..................................................................................... 12
Note 4. Critical accounting estimates and judgments .................................................................................... 20
Note 5. Mergers, acquisitions and disposals ................................................................................................. 23
Note 6. Property, plant and equipment ......................................................................................................... 34
Note 7.
Investments in joint ventures ........................................................................................................... 36
Note 8. Long-term loans and receivables ...................................................................................................... 38
Note 9.
Inventories ...................................................................................................................................... 39
Note 10. Trade and other receivables ............................................................................................................. 39
Note 11. Prepayments and other current assets ............................................................................................... 40
Note 12. Cash and cash equivalents ............................................................................................................... 41
Note 13. Long-term debt ................................................................................................................................ 41
Note 14. Pension obligations ......................................................................................................................... 43
Note 15. Short-term debt and current portion of long-term debt ...................................................................... 44
Note 16. Trade payables and accrued liabilities .............................................................................................. 45
Note 17. Shareholders’ equity ........................................................................................................................ 46
Note 18. Share-based compensation program ................................................................................................. 47
Note 19. Oil and gas sales .............................................................................................................................. 48
Note 20. Transportation expenses .................................................................................................................. 48
Note 21. Taxes other than income tax ............................................................................................................ 49
Note 22. General and administrative expenses ................................................................................................ 49
Note 23. Materials, services and other ............................................................................................................ 50
Note 24. Purchases of natural gas and liquid hydrocarbons ............................................................................. 50
Note 25. Finance income (expense)................................................................................................................ 51
Note 26. Income tax ...................................................................................................................................... 52
Note 27. Financial instruments and financial risk factors ................................................................................ 54
Note 28. Contingencies and commitments ...................................................................................................... 60
Note 29. Principal subsidiaries and joint ventures ........................................................................................... 62
Note 30. Related party transactions ................................................................................................................ 63
Note 31. Segment information ....................................................................................................................... 65
Note 32. Exploration for and evaluation of mineral resources ......................................................................... 70
Note 33. New accounting pronouncements..................................................................................................... 70
Unaudited supplemental oil and gas disclosures ............................................................................................... 73
Contact Information......................................................................................................................................... 78
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
Depreciation, depletion and amortization
General and administrative expenses
Materials, services and other
Purchases of natural gas and liquid hydrocarbons
Exploration expenses
Net impairment expenses
Change in natural gas, liquid hydrocarbons,
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 equity investments,
net of income tax
Profit before income tax
Income tax expense
Current income tax expense
Net deferred income tax expense
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
19
Year ended 31 December:
2010
2011
175,602
-
462
115,162
1,699
163
176,064
117,024
20
21
6
22
23
24
25
25
7
26
(48,176)
(17,557)
(9,277)
(8,218)
(5,947)
(5,994)
(1,819)
(782)
105
(97,665)
62,948
261
(37,200)
(10,077)
(6,616)
(6,733)
(6,072)
(154)
(1,595)
(541)
470
(68,518)
1,329
396
141,608
50,231
(2,150)
3,392
(3,945)
(2,703)
(437)
598
1,036
1,197
(3,880)
(346)
135,025
51,082
(12,467)
(3,267)
(15,734)
(9,405)
(1,399)
(10,804)
119,291
40,278
(364)
119,655
39.45
3,033,302
(255)
40,533
13.37
3,032,218
The accompanying notes are an integral part of these consolidated financial statements.
5
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 (loss)
Total comprehensive income (loss) attributable to:
Non-controlling interest
Shareholders of OAO NOVATEK
Notes
Year ended 31 December:
2010
2011
313
313
119,291
119,604
(364)
119,968
(8)
(8)
40,278
40,270
(255)
40,525
The accompanying notes are an integral part of these consolidated financial statements.
6
OAO NOVATEK
Consolidated Statement of Cash Flows
(in millions of Russian roubles)
Profit before income tax
Adjustments to profit before income tax:
Depreciation, depletion and amortization
Net impairment expenses
Net foreign exchange loss (gain)
Net loss (gain) on disposal of assets
Interest expense
Interest income
Share of loss (profit) in equity investments, 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 payable
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
Acquisition of mineral licenses
Purchases of inventories intended for construction
Acquisition of subsidiaries net of cash acquired
Acquisition of and capital contribution to equity investments
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
Net effect of exchange rate changes on
cash, cash equivalents and bank overdrafts
Notes
Year ended 31 December:
2010
2011
135,025
51,082
17
17
5
5
17
9,475
782
3,945
(62,811)
2,150
(3,392)
3,880
1,132
-
202
(6,103)
(132)
567
1,120
(4,548)
(13,933)
71,907
(25,317)
(6,888)
(773)
(4,188)
(25,131)
11,796
(3,508)
(6,729)
13,166
929
(46,643)
44,885
3,700
(8,552)
(21,321)
(818)
(15,166)
(14,817)
-
354
(11,735)
64
13,593
10,238
-
23,831
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
(21,360)
(76)
(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
(45)
(242)
10,532
(52)
10,238
Net increase (decrease) in cash, cash equivalents and bank overdrafts
Cash and cash equivalents at beginning of the period
Net decrease (increase) in cash and cash equivalents
reclassified to assets classified as held for sale
Cash, cash equivalents and bank overdrafts at end of the period
The accompanying notes are an integral part of these consolidated financial statements.
7
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9
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 and gas products remain relatively stable
from period to period.
In November 2011 and December 2010, the Group acquired OOO Gazprom mezhregiongas Chelyabinsk and
OOO Yamalgazresurs-Chelyabinsk, respectively, both Russian regional natural gas traders, to support and expand
natural gas sales opportunities in the Chelyabinsk Region of the Russian Federation (see Note 5).
In September 2011, the Group increased its ownership in OAO Yamal LNG from 51 percent to 100 percent. In
October 2011, the Group disposed a 20% stake in the company to TOTAL S.A., the strategy partner of the Group
in the Yamal LNG project (see Note 5).
In 2011, the Group continued the legal process of renaming its subsidiaries to create a uniform brand image for
NOVATEK and, as a result, the Group’s subsidiaries, Runitek GmbH and OOO Yamalgazresurs-Chelyabinsk,
were renamed to Novatek Gas & Power GmbH and OOO NOVATEK-Chelyabinsk, respectively.
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 (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 ZAO SIBUR Holding (see Note 5).
In August 2010, the Group acquired 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 December 2010, Intergaz-
System was merged into Novatek Polska, the Group’s wholly owned subsidiary.
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. Furthermore, in April 2011, the Group acquired
OOO Yamalenergogaz, a Russian regional natural gas trader, to support and expand natural gas sales opportunities
in the Perm Region for RR 75 million. In January 2012, Yamalenergogaz was merged into NOVATEK-Perm.
10
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
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.
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 Group’s 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 statements 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:
2011
2010
Average annual rate
2010
2011
32.20
9.47
30.48
10.17
29.39
9.94
30.37
10.09
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.
11
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Adoption of Revised IAS 24. Effective 1 January 2011 the Group adopted revised of IAS 24, Related Party
Disclosures which simplified the definition of a related party and eliminated inconsistencies and contradictions in
the standard. In accordance with the revised standard, parties under significant influence of key management
personnel are not related parties of the Group (see Note 30).
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.
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. Acquisition-related
costs are recognised as expenses rather than included in goodwill.
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. Changes in the Group’s ownership interest in a subsidiary that do not result in the loss of control
are accounted for as equity transactions.
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.
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)
Investments in associates and joint ventures. Associated companies and joint ventures are entities over which the
Group has significant influence or joint control, respectively, 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 and joint ventures. The carrying amount of associates and joint ventures
includes goodwill identified on acquisition less accumulated impairment losses, if any. Other post-acquisition
changes in the Group’s share of net assets of an associate or joint venture are recognised as follows: (i) the Group’s
share of profits or losses is recorded in the consolidated profit or loss for the year as share of result of associates or
joint ventures; (ii) the Group’s share of other comprehensive income is recognised in other comprehensive income
and presented separately; and (iii) all other changes in the Group’s share of the carrying value of net assets of
associates or joint ventures are recognised in profit or loss within the share of result of associates or joint ventures.
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.
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.
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)
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 of property, plant and equipment 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.
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 except for derivatives that are linked to and must be settled
by delivery of investments in equity instruments that do not have a quoted, market price in an active market and
whose fair value cannot be reliably determined. Derivative instruments are carried as assets when fair value is
positive and as liabilities when fair value is negative. Changes in the fair value of derivative instruments are
included in profit or loss for the year.
Derivatives that are linked to and must be settled by delivery of investments in equity instruments that do not have
a quoted, market price in an active market and whose fair value cannot be reliably determined, are measured at
cost.
Certain derivative instruments embedded in other financial instruments are treated as separate derivative
instruments when their risks and characteristics are not closely related to those of the host contract.
The Group did not hold any instruments qualifying for hedging accounting during both reporting periods.
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.
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)
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.
(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 include quoted non-derivative financial assets with fixed or determinable payments
and fixed maturities that the Group has both the intention and ability to hold 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 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 in other comprehensive income and
accumulated in revaluation reserve 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 a reclassification adjustment from other comprehensive income.
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)
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 other comprehensive income. Changes in the fair value of monetary and non-monetary
securities classified as available-for-sale are recognized in other comprehensive income. 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 a reclassification adjustment from other comprehensive income.
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 recognized in
the consolidated statement of income as a reclassification adjustment from other comprehensive 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. Effective 1 January 2012, Russian tax legislation introduced an option to prepare and file a single,
consolidated income tax declaration. According to the new legislation, the taxpayers’ group should comprise of a
holding company and any number of entities with at least 90 percent ownership in each (direct or indirect). To be
eligible for registration, the taxpayers’ group must be registered with tax authorities and meet certain conditions
and criteria. The tax declaration can be submitted then by any member of the group. Management has chosen to
adopt this option, as discussed in Note 26.
In prior periods, Russian legislation did not contain the concept of a “consolidated tax payer” and, accordingly, the
Group’s entities were subject to Russian taxation on an individual company basis.
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, in other comprehensive income or directly in
equity. 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.
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)
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 or joint ventures, 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. Any resultant deferred income tax is measured at the
expected tax rate.
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.
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)
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 on borrowings and exchange differences arising from foreign currency borrowings (to the extent that
they are regarded as an adjustment to interest costs) used 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.
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 whose construction
is substantially completed. 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.
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’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 (loss) for the reporting period.
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, legal and other advisory expenses, insurance
of properties, social expenses and compensatory payments of general nature not directly linked to the Group’s oil
and gas activities, charity 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.
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)
Share based compensation. The Group accounts for share-based compensation in accordance with IFRS 2, Share-
based Payment. 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 14).
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 and then attributing such present value to years of service of the respective
employees. 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.
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.
Segment reporting. Operating segments are defined as components of the Group where separate financial
information is available and reported regularly to the Group’s chief operating decision maker (hereinafter referred
to as “CODM”, represented by the Management Committee of NOVATEK). Segments whose revenues, results or
assets are ten percent or more of the total segments are reported separately.
4
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
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.
20
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)
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.
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.
21
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)
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.
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.
Fair value assessment of OAO Yamal LNG. As further discussed in Note 5, the Group ceased control of Yamal
LNG effective 6 October 2011, but retained joint control and, consequently, was required to fair value the
remaining interest in Yamal LNG in accordance with IFRS. The fair value of the investment in Yamal LNG was
calculated based on a discounted cash flow model for the Yamal LNG project. The discounted cash flow model
included a number of key assumptions, the sensitivities of which are included in Note 5.
22
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
5
MERGERS, ACQUISITIONS AND DISPOSALS
Acquisition of OOO Gazprom mezhregiongas Chelyabinsk
In November 2011, the Group acquired a 100 percent participation interest in OOO Gazprom mezhregiongas
Chelyabinsk to expand and market natural gas sales in the Chelyabinsk Region of the Russian Federation for cash
consideration of RR 1,550 million, which was fully paid in December 2011. Gazprom mezhregiongas Chelyabinsk
is responsible for the sale of natural gas to industrial and residential customers in the Chelyabinsk Region, one of
the top ten Russian regions in terms of natural gas consumption.
Management has assessed the fair value of identifiable assets and liabilities and calculated that no goodwill arose
on the acquisition. The following table represents the net fair values of the assets and liabilities of Gazprom
mezhregiongas Chelyabinsk:
OOO Gazprom mezhregiongas Chelyabinsk
Property, plant and equipment
Other non-current assets
Trade receivables
Other current assets
Cash and cash equivalents
Non-current liabilities
Trade payables
Other current liabilities
Total identifiable net assets
Purchase consideration
Goodwill
Fair values at the
acquisition date
321
1,230
2,112
205
654
(232)
(2,364)
(376)
1,550
(1,550)
-
The financial and operational activities of Gazprom mezhregiongas Chelyabinsk would have had an effect of an
additional RR 12.1 billion on the Group’s revenues and increased the Group’s profit before tax by RR 1.3 billion if
the acquisition occurred in January 2011. These figures do not include adjustments for the following: (a)
depreciation, depletion and amortization was not increased to reflect the higher carrying values of intangible assets
after fair value adjustments; (b) intercompany eliminations; and (c) income tax.
Acquisition of additional equity stake in OAO Yamal LNG
In May 2009, the Group signed a call option agreement, which provided the Group with the right, but not the
obligation, to purchase an additional 23.9 percent equity stake in Yamal LNG for USD 450 million until 4 June
2012. 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 February 2011, the Group reassigned the call option to purchase a 23.9 percent equity stake in Yamal LNG from
its foreign subsidiary to its Russian subsidiary. As a result of a change in the functional currency from US dollars to
Russian roubles, the call option was no longer considered an equity instrument and was reclassified to a financial
asset with a value of RR 284 million (USD 10 million).
In March 2011, the Group signed a second call option agreement, which provides the Group with the right, but not
the obligation, to purchase an additional 25.1 percent equity stake in Yamal LNG for USD 526 million until 1 July
2012. To enter into this call option agreement, the Group paid RR 422 million (USD 15 million), which was to be
offset against total consideration.
23
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
5
MERGERS, ACQUISITIONS AND DISPOSALS (CONTINUED)
On 28 September 2011, the Group increased its equity stake in Yamal LNG from 51 percent to 100 percent by
exercising the two aforementioned call options. The following table summarizes the total purchase consideration
for the acquisition of an additional 49 percent stake:
23.9% call option:
Cash
Accrued liability
25.1% call option:
Cash
Accrued liability
Total purchase consideration
USD million
Exchange rate
RR million
10
450
15
511
986
28.43
32.22
28.16
32.22
284
14,499
422
16,465
31,670
As a result of these two transactions, the Group reduced non-controlling interest by RR 19,920 million and
recorded a difference of RR 11,750 million directly to retained earnings.
In accordance with the aforementioned transactions, the Group recorded an aggregated liability of USD 961
million, payable in instalments with the final payment due by 30 June 2012. At 31 December 2011, the balance due
on these two transactions was RR 16,244 million (USD 505 million) (see Note 16).
Disposal of ownership interest in OAO Yamal LNG
On 5 October 2011, the Board of Directors of OAO NOVATEK approved the sale of a 20 percent stake in
OAO Yamal LNG, the Group’s wholly owned subsidiary, to TOTAL S.A., the strategic partner in the Yamal LNG
project (the “Project”). Prior to that date, the proposed sale received the necessary approvals from the Russian
Federation’s Strategic Investment Committee and Federal Anti-Monopoly Service.
On 6 October 2011, the Group entered into a Sales contract and signed a new shareholder’s agreement (the
“Shareholders’ agreement”) with TOTAL E&P YAMAL SAS, an affiliate of TOTAL S.A., establishing the
framework for joint cooperation in exploring and developing the South-Tambeyskoye field (held by Yamal LNG)
located in the YNAO.
Total consideration for the 20 percent stake in Yamal LNG to be paid by TOTAL E&P YAMAL comprises of three
tranches:
i.
first tranche – a cash payment of USD 425 million to NOVATEK upon the contract conclusion (payment
received in October 2011);
ii. second tranche – a cash payment of USD 375 million through additional capital contributions to the ordinary
share capital of Yamal LNG, of which USD 204 million was received in 2011 and the remainder is expected to
be received throughout 2012; and
iii. third tranche – an additional cash payment ranging from USD nil to USD 500 million depending on the
amount of the Project’s capital expenditure through additional capital contribution to the ordinary share capital
of Yamal LNG; the final amount of the additional payment will be determined based on the result of the Final
Investment Decision. Management has assessed that it is most likely that the full USD 500 million will need to
be paid. If the actual amount is less than the amount assessed then the associated consideration and gain
recognized for the disposal of the 20 percent stake would need to be adjusted.
In addition, TOTAL E&P YAMAL agreed to compensate past costs of USD 11 million, incurred by NOVATEK in
respect of the Project prior to finalization of contractual terms and conditions, through an additional capital
contribution to the ordinary share capital of Yamal LNG, which was paid in December 2011.
The Shareholders’ agreement further stipulates that additional financing for the Project, if needed, will be partly
exercised in a form of disproportional loans from shareholders. Management is unable to quantify at this time the
likelihood, amount, timing or interest rate for these loans and, based on this assessment, has determined that their
fair value cannot be measured reliably at this moment.
24
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 Shareholders’ agreement also permits the Group to subsequently reduce its shareholding in Yamal LNG to
51 percent based on certain pre-specified terms and governance structure.
Presently, the Group has retained an 80 percent interest in Yamal LNG after the transaction; however, the
Shareholders’ agreement stipulates that key strategic, operational and financial decisions are subject to approval by
eight out of nine members of the Board of Directors. As a result of these changes, the Group’s effective control
over Yamal LNG ceased on 6 October 2011. The Group has determined Yamal LNG to be a joint venture and will
account for this investment under the equity method.
Based on the Shareholders’ agreement and the provisions of the Sales contract, the Group recorded the disposal of a
20 percent interest in Yamal LNG for total consideration of RR 36,893 million realizing a gain of RR 62,831
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 Yamal LNG:
First tranche (USD 425 million at exchange rate of 32.64 to USD 1.00)
Compensation of past costs (80 percent of USD 11 million at exchange rate of 32.64 to USD 1.00)
Second tranche (80 percent of USD 375 million at exchange rate of 32.64 to USD 1.00)
Third tranche (80 percent of USD 500 million at exchange rate of 32.64 to
USD 1.00 discounted at 0.884 percent per annum)
Total consideration
Less: carrying amount of the Group’s 20 percent interest in the net assets
Add: fair value adjustment relating to the retained investment in joint venture
Gain on the sale of ownership interest
RR million
13,871
294
9,790
12,938
36,893
(8,208)
34,263
62,948
In accordance with IAS 27 “Consolidated and Separate Financial Statements”, the Group remeasured its retained
investment in Yamal LNG at fair value at the date of ceasing control, with the change in value of RR 34,263
million recognized as an additional gain from disposal as reflected in net gain on disposal of interest in subsidiaries
in the consolidated statement of income. The fair value of the investment in Yamal LNG was based on a discounted
cash flow model for the Yamal LNG project. The significant assumptions in the discounted cash flow model are:
forecasted prices for liquefied natural gas (“LNG”); anticipated production volumes; future capital expenditures
required to build necessary infrastructure and drill production wells; and the discount factor used in the fair value
calculation. The key sensitivities in relation to the discounted cash flows are:
•
•
•
•
future LNG prices were based on estimated Brent prices using growth rates as forecasted by the World Bank.
If these estimated future prices were to decrease by one percent for each year in the cash flow projection then,
assuming that other parameters remain unchanged, the fair value of the retained interest in Yamal LNG and
the associated gain on the revaluation would be reduced by RR 6,903 million;
future production was based on estimates of proved and probable reserves. If production volumes were to be
one percent lower in the cash flow projection then, assuming that other parameters remain unchanged, the fair
value of the retained interest in Yamal LNG and the associated gain on the revaluation would be reduced by
RR 4,903 million;
future capital expenditure over the life of the project has been estimated based on preliminary engineering and
costing estimates. If the level of capital expenditure were to be one percent higher in the cash flow projection
then, assuming that other parameters remain unchanged, the fair value of the retained interest in Yamal LNG
and the associated gain on the revaluation would be reduced by RR 3,904 million; and
the discount rate was assumed to be 11.9% (in US dollar terms). If the discount rate was increased by half of
one percent (to 12.4%) then, assuming that other parameters remain unchanged, the fair value adjustment and
the associated gain on the revaluation would be reduced by RR 21,139 million.
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)
Below is a breakdown of major classes of assets and liabilities at the date of disposal:
OAO Yamal LNG
Property, plant and equipment
Other non-current assets
Cash and cash equivalents
Other current assets
Other non-current liabilities
Short-term debt
Other current liabilities
Total identifiable net assets at disposal
RR million
45,867
1,404
1,846
1,135
(810)
(8,100)
(300)
41,042
The aforementioned property, plant and equipment in the amount of RR 45,867 million (including the costs of
mineral rights aggregating RR 39,714 million) was included in the line “disposal of subsidiaries, net” as disclosed
in Note 6. Short-term debt in the amount of RR 8,100 million, which was owed to the Group was settled in
December 2011 ahead of its maturity schedule.
The following table reconciles the carrying value of Yamal LNG 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:
OAO Yamal LNG
Carrying value of the net assets at disposal
Add: Group’s proportion of proceeds from additional shares emissions
Less: carrying amount of the Group’s 20 interest in the net assets
Add: fair value adjustment relating to the retained investment in joint venture
The carrying value of equity investment
RR million
41,042
23,022
(8,208)
34,263
90,119
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.
Acquisition of OOO Yamalgazresurs-Chelyabinsk
In December 2010, the Group acquired a 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 of the Russian Federation for RR 410 million. Management has assessed the fair value of identifiable assets
and liabilities and calculated that goodwill in the amount of 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 had 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 had 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.
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 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 million, of which RR 4,650
million was paid in December 2010 and the remaining RR 21,176 was paid in the first quarter of 2011. Sibneftegas
holds production licenses in four fields, of which two, the Beregovoye and Pyreinoye gas condensate fields expire
in 2023 and in 2021, respectively, are currently producing. Estimated aggregated proved reserves on these two
fields as well as the Khadyryahinskoye (which expires in 2031) field appraised by DeGolyer and MacNaughton at
31 December 2010 under the PRMS and SEC reserve methodologies totaled approximately 282 billion and 200
billion cubic meters of natural gas and 2 million 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 a 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, representing unanimous approval by both
shareholders and, consequently, the voting mechanism effectively establishes joint control over Sibneftegas. The
Group accounts for it under the equity method.
At 31 December 2010, in accordance with IAS 31 “Interests in Joint ventures”, the Group assessed preliminary
fair values of the identified assets and liabilities of Sibneftegas and recorded provisional figures for those items.
During 2011, an independent appraiser was engaged to assess the company’s fair values of identifiable assets and
liabilities at the acquisition date, which was completed in December 2011. As a result, the provisional values of
non-current assets and non-current liabilities were increased by RR 16,305 million and RR 3,264 million,
respectively, with a corresponding decrease in goodwill. The principal changes to the preliminary fair value
assessment related to changes in the assessment of the fair value of the production assets and mineral licenses.
Revisions made to the preliminary assessment were reflected as of the acquisition date and there was no goodwill
included in the carrying amount of the investment in the joint venture. Finalization of purchase price allocation did
not result in amendments to the comparative information.
The following table represents the final net fair values comprising 100 percent of the identifiable assets and
liabilities of Sibneftegas:
OAO Sibneftegas
Property, plant and equipment
Other non-current assets
Cash and cash equivalents
Other current assets
Long-term debt
Other non-current liabilities
Short-term debt
Other current liabilities
Total identifiable net assets
Purchase consideration
Fair value of the Group’s interest in net assets
(RR 50,639 million at 51% ownership)
Goodwill
27
Final fair values at
the acquisition date
83,128
107
432
657
(19,747)
(11,716)
(1,766)
(456)
50,639
25,826
(25,826)
-
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
5
MERGERS, ACQUISITIONS AND DISPOSALS (CONTINUED)
Establishment of OOO Yamal Development and acquisition of OOO SeverEnergia
In 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 this 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). NOVATEK
financed its part of the loan to Yamal Development through the use of a bridge loan facility (see Note 13).
SeverEnergia through its three wholly owned subsidiaries holds exploration and production licenses listed below:
Subsidiary of SeverEnergia
License area
OAO Arkticheskaya gazovaya kompaniya
ZAO Urengoil Inc.
OAO Neftegastehnologiya
Samburgskoye and Yevo-Yakhinskoye
Yaro-Yakhinskoye
North-Chaselskoye
Expiring date
2018
2018
Life of field
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 billion and 224 billion cubic
meters of natural gas and 42 million and 39 million tons of hydrocarbon liquids, respectively.
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.
As described above, Yamal Development acquired a 51 percent participation interest in SeverEnergia; however, the
Charter agreement of SeverEnergia stipulates that key financial and operational decisions regarding its business
activities are subject to approval by six out of the seven members of the Board of Directors, meaning that none of
the participants have a preferential voting right. As a result, the Group has determined that SeverEnergia is a joint
venture of Yamal Development; the assets and liabilities of SeverEnergia and its financial results are included in
the assets, liabilities and financial results of Yamal Development under the equity method in the disclosure of
summarized financial information about the Group’s investments in joint ventures (see Note 7). The transaction
provides the Group with an effective interest ownership of 25.5 percent in SeverEnergia.
At 31 December 2010, in accordance with IAS 31 “Interests in Joint ventures”, the Group assessed preliminary
fair values of the identified assets and liabilities of SeverEnergia and its subsidiaries and recorded provisional
figures for those items. During 2011, an independent appraiser was engaged to assess the fair values of identifiable
assets and liabilities of the company at the acquisition date, which was completed in December 2011. As a result,
the provisional values of non-current assets and non-current liabilities were decreased by RR 735 million and
RR 622 million, respectively, with the remaining RR 113 million recorded as changes in other items. The principal
changes to the preliminary fair value assessment related to changes in the assessment of the fair value of the
production assets and mineral licenses. Revisions made to the preliminary assessment were reflected as of the
acquisition date and there was no goodwill included in the carrying amount of the investment in the joint venture.
Finalization of purchase price allocation did not result in amendments to the comparative information.
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)
The following table represents the final net fair values comprising 100 percent of the identifiable assets and
liabilities of SeverEnergia and its subsidiaries:
SeverEnergia and its subsidiaries
Property, plant and equipment
Cash and cash equivalents
Other current assets
Deferred income tax liabilities
Other non-current liabilities
Short-term debt
Other current liabilities
Total identifiable net assets
Purchase consideration
Fair value of the Yamal Development’s interest in net assets
of SeverEnergia (RR 95,520 million at 51% ownership)
Goodwill
Disposal of ownership interest in ZAO Terneftegas
137,228
3,810
(22,950)
(22,568)
95,520
Final fair values at
the acquisition date
136,493
1,515
2,427
(22,060)
(268)
(19,613)
(2,974)
95,520
48,715
(48,715)
-
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 interest in ZAO Terneftegas (formerly a limited liability company, 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 had 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. In December 2011, a final investment decision was made and the respective field
development plan was approved.
In December 2009, the Group signed a Sales and Purchase contract with Total Termokarstovoye B.V., an affiliate
of TOTAL, for:
the sale of a 28 percent interest in 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)
was to be paid upon approval by TOTAL of the final investment decision (payment received in December
2011); and
a further increase of TOTAL’s equity share in Terneftegas to 49 percent through a subscription to the entity’s
additional shares emission for total consideration of USD 18 million.
The Group transferred legal ownership of a 28 percent interest in Terneftegas to Total Termokarstovoye B.V. in
February 2010 upon the execution of the first arrangement. In January 2010, 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 completed and the subscription for the issuance of the additional shares was registered with the
FSFM by Total Termokarstovoye B.V.
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 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.
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 following table summarizes the consideration details and shows the components of the gain from the sale of
the ownership interest in 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 Terneftegas; however, the Agreement stipulates that
key financial and operational decisions 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 Terneftegas ceased. As a result of these changes, the Group has
determined that Terneftegas is a joint venture and is accounted for using the equity method.
In accordance with IAS 27 “Consolidated and Separate Financial Statements”, the Group remeasured its retained
investment in 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 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.
Acquisition of controlling interests in 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, Oiltechproduct-Invest
obtained the production license for the West-Chaselskoe field, which expires in 2030.
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)
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.
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, Oiltechproduct-Invest into its wholly owned
subsidiary OOO NOVATEK-Tarkosaleneftegas. In November 2011, the Group merged its wholly owned
subsidiary, Tailiksneftegas into its wholly owned subsidiary OOO NOVATEK-Yurkharovneftegas. The
aforementioned mergers did not affect the Group’s consolidated financial and operational results.
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)
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 ZAO 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 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 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)
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 billion cubic meters and
14.4 million tons, 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.
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 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.
33
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
6
PROPERTY, PLANT AND EQUIPMENT
Movements in property, plant and equipment, for the years ended 31 December 2011 and 2010 are as follows:
Oil and gas
properties and
equipment
Assets under
construction
and advances
for construction
Other
Total
Cost
Accumulated depreciation, depletion
and amortization
157,955
19,885
5,319
183,159
(20,436)
-
(1,275)
(21,711)
Net book value at 1 January 2010
137,519
19,885
4,044
161,448
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
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 2011
5,960
3,265
27,018
(6,461)
-
(321)
(495)
1,875
22,828
(27,722)
-
(319)
-
(525)
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
108
10,140
15,455
(9,026)
(40,136)
(513)
(549)
-
(1,170)
(28,096)
16,022
3,066
185,573
183
27,869
(20,216)
-
(5,665)
(107)
(439)
30
22
4,761
(424)
(66)
-
(216)
321
38,031
-
(9,450)
(45,867)
(620)
(1,204)
177,788
17,647
8,603
204,038
(35,824)
141,964
-
(1,430)
(37,254)
17,647
7,173
166,784
Included within the oil and gas properties and equipment balance at 31 December 2011 and 2010 are proved
properties of RR 22,355 million and RR 62,509 million, net of accumulated depreciation, depletion and
amortization of RR 10,300 million and RR 8,915 million, respectively.
Included within the oil and gas properties and equipment balance at 31 December 2011 and 2010 are unproved
properties of RR 14,061 million and RR 6,991 million, respectively. The Group’s management believes these costs
are recoverable and has plans to explore and develop the respective unproved properties.
Included within assets under construction and advances for construction are advances to suppliers of equipment of
RR 3,781 million and RR 2,676 million at 31 December 2011 and 2010, respectively.
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 in additions to property, plant and equipment for the years ending 31 December 2011 and 2010 are
capitalized interest and foreign exchange differences of RR 4,145 million and RR 2,621 million, respectively. The
interest capitalization rates for 2011 and 2010 used for additions were 7.1 percent and 5.4 percent, respectively.
During 2011, the transfers to oil and gas properties and equipment include the completion of the third stage of the
second phase development of the Yurkharovskoye field in the amount of RR 9,785 million. During 2010, the
transfers to oil and gas properties and equipment included the second stage completion and third stage partial
completion of the second phase development of the Yurkharovskoye field in the amount of RR 20,618 million.
In June 2011, the Group purchased, through participation in a tender process, exploration and production licenses
for the Salmanovskoye (Utrenneye) and Geofizicheskoye fields and geological studies, exploration and production
for the North-Obskiy and East-Tambeyskiy license areas for a total payment of RR 6,870 million, which were
included in additions to oil and gas properties.
In October 2011, the Group ceased control of OAO Yamal LNG as described in Note 5 and has recorded a disposal
aggregating RR 45,867 million as “disposal of subsidiaries, net” in property, plant and equipment. The Group
retained 80 percent of Yamal LNG and has recorded its proportional share in investments in joint ventures (see
Note 7).
Reconciliation of depreciation, depletion and amortization (DD&A):
DD&A included in operating expenses (excluding RR 111 million and
RR nil million for the years ended 31 December 2011 and 2010, respectively,
related to Intangible assets)
DD&A included in general and administrative expenses (see Note 22)
DD&A capitalized in the course of intra-group construction services
Total depreciation, depletion and amortization
Year ended 31 December:
2011
2010
9,166
198
86
9,450
6,616
141
71
6,828
At 31 December 2011 and 2010, no property, plant and equipment were pledged as security for the Group’s
borrowings. Impairment of RR 620 million and RR 321 million was recognized in respect of oil and gas properties
and equipment for the years ended 31 December 2011 and 2010, 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 1,615 million and
RR 1,115 million at 31 December 2011 and 2010, 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 JOINT VENTURES
Joint ventures:
OAO Yamal LNG
OAO Sibneftegas
OOO Yamal Development (consolidated)
ZAO Terneftegas
Total investments in joint ventures
At 31 December:
2011
2010
89,549
24,187
8,100
1,193
123,029
-
25,758
-
1,268
27,026
In June 2011, the charter capital of OOO Yamal Development was increased by converting RR 20 billion of the
loans, including accrued interest, provided to the company by its participants, of which RR 10 billion, including
accrued interest in the amount of RR 225 million, is attributable to NOVATEK (see Note 8).
The Group’s investment in Yamal Development at 31 December 2010 was valued at RR 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 in the amount of RR 238 million
were recorded as a reduction of long-term loans provided by the Group to the joint venture (see Note 8).
As discussed in Note 5, in October 2011, the Group’s effective control over OAO Yamal LNG ceased and
subsequent to that event, the Group’s interest in this entity is accounted for using the equity method.
The table below summarizes the movement in the carrying amounts of the Group’s equity investments.
At 1 January
Share of profit (loss) of equity investments before income tax
Share of income tax (expense) benefit
Share of profit (loss) of equity investments, net of income tax
Acquisition of equity investments
Contribution to charter capital
Losses (reversals) recognized in excess of equity investments,
reclassified to long-term loans receivable for these companies
Disposals of subsidiaries resulting in recognition
of equity investments
Acquisition of controlling stake resulting in derecognition of
equity investments
At 31 December
Year ended 31 December:
2011
2010
27,026
(4,725)
845
(3,880)
-
10,000
(238)
90,121
-
123,029
1,214
(412)
66
(346)
25,836
-
238
1,298
(1,214)
27,026
36
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
7
INVESTMENTS IN JOINT VENTURES (CONTINUED)
At 31 December 2011 and 2010, the Group’s interests in its joint ventures and their summarized financial
information, relating to the Group’s interest, were as follows:
As at and for
the year ended
31 December 2011
Non-
current
assets
Current
assets
Non-
current
liabilities
Current
liabilities
Net
assets
Revenues
Profit
(loss)
Interest
held
Yamal LNG
Yamal Development
(consolidated)
SeverEnergia
Less: investment
and share of loss
of Yamal
Development in
SeverEnergia
Sibneftegas
Terneftegas
85,529
1,946
20,542
240
66,693
32
(707)
80%
24,340
37,068
109
1,264
-
5,933
16,349
8,376
8,100
24,023
-
-
(1,662)
(224)
50%
25.5%
(24,023)
40,046
1,713
-
640
164
-
15,469
668
-
1,030
16
(24,023)
24,187
1,193
-
3,661
-
224
(1,571)
(74)
-
51%
51%
Total
164,673
4,123
42,612
26,011
100,173
3,693
(4,014)
As at and for
the year ended
31 December 2010
Non-
current
assets
Current
assets
Non-
current
liabilities
Current
liabilities
Net
assets
Revenues
Profit
(loss)
Interest
held
Yamal Development
(consolidated)
SeverEnergia
Less: investment
and share of loss
of Yamal
Development in
SeverEnergia
Sibneftegas
Terneftegas
28,050
35,076
27
1,005
27,886
5,962
191
5,812
-
24,307
-
-
(248)
(50)
50%
25.5%
(24,307)
42,369
1,543
-
712
170
-
16,046
442
-
1,277
3
(24,307)
25,758
1,268
-
157
2
50
(68)
(30)
-
51%
51%
Total
82,731
1,914
50,336
7,283
27,026
159
(346)
At 31 December 2011, the Group's investment in Yamal LNG totaled RR 89,549 million which differed from its
share in the net assets of RR 66,693 million as noted above. This difference of RR 22,856 million relates to the
Group’s share in the second and third tranches recognized as part of the consideration for the disposal of the
20 percent interest in Yamal LNG (see Note 5).
All of the joint ventures listed above are registered in the Russian Federation.
37
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
US dollar denominated loans
Total
Less: current portion of long-term loans
Total long-term loans
Long-term receivables
Long-term interest receivable
Total long-term loans and receivables
At 31 December:
2011
2010
9,737
220
9,957
(634)
9,323
22,027
780
32,130
38,923
102
39,025
(968)
38,057
2,063
31
40,151
Russian rouble denominated loans. On 15 December 2010, the Group provided two loans to OAO Sibneftegas,
the Group’s joint venture, 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. The second loan was issued at an annual interest rate
of 9.5 percent and is repayable quarterly in equal parts starting from March 2011 until November 2014.
At 31 December 2011 and 2010, the loans provided to Sibneftegas amounted to RR 9,737 million and RR 11,038
million, respectively (see Note 30).
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 is repayable in
November 2011; however, 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 in the
amount of RR 28,123 million, net of accumulated losses 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). In June 2011, NOVATEK
converted RR 9,775 million, excluding accrued interest, of this loan to equity (see Note 7).
In November 2011, the participants of Yamal Development made a decision to pro-rata increase its charter capital
by converting the remaining unpaid part of the loan provided to the company in the amount of RR 32,697 million,
including accrued interest, to equity. The legal procedures to register the new charter were not completed at
31 December 2011 and, accordingly, the Group’s pro-rate share of RR 16,348 million, including accrued interest of
RR 1,162 million, was recognized as long-term receivables.
In December 2011, the shareholders of OAO Yamal LNG, the Group’s joint venture, made a decision to increase
its charter capital through a subscription to the entity’s additional shares emission in the amount of RR 10,780
million, which were fully paid. The legal procedures to register the new charter were not completed at
31 December 2011 and, accordingly, the Group’s share of RR 3,955 million was recognized as long-term
receivables. The Group’s shareholding will not change after the share emission.
No provisions for impairment of long-term loans and receivables were recognized in the consolidated statement of
financial position at 31 December 2011 and 2010.
38
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
9
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 31 million and RR 33 million at 31 December 2011and 2010, respectively)
Other inventories
Total inventories
At 31 December:
2011
2010
1,146
400
133
4
1,683
1,090
575
192
11
1,868
The Group recorded an impairment expense of nil and RR 8 million during the years ended 31 December 2011 and
2010, 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.
10
TRADE AND OTHER RECEIVABLES
Trade receivables (net of provision of RR 133 million and RR nil
million at 31 December 2011 and 2010, respectively)
Other receivables
Interest on loans receivable
Total trade and other receivables
At 31 December:
2011
2010
14,900
1,703
96
16,699
7,031
1,445
194
8,670
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 letters of credit in banks with investment grade rating as security for trade receivables in amount
RR 1,706 million and RR 1,667 million at 31 December 2011 and 2010, respectively. Also the Group holds as a
collateral 100 percent participation interest in OOO NOVATEK-Polymer for other receivables from ZAO 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 478 million and RR 8 million at
31 December 2011 and 2010, respectively, were past due but not impaired.
The Group has expanded its natural gas sales to a larger number of mid- to small-sized customers as a result of the
recent acquisitions of regional gas traders. The Group has assessed the payment history of these accounts and
recognized impairments where deemed necessary.
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
39
At 31 December:
2011
2010
343
135
-
478
16,221
16,699
-
-
8
8
8,662
8,670
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
10
TRADE AND OTHER RECEIVABLES (CONTINUED)
Movements on the Group provision for impairment of trade and other receivables are as follows:
At 1 January
Additional provision recorded
Acquisition of subsidiaries
Receivables written off as uncollectible
Provision reversed
At 31 December
Year ended 31 December:
2011
2010
-
184
76
(107)
(20)
133
7
184
-
(191)
-
nil
The provision for impaired trade and other receivables has been included in the consolidated statement of income in
net impairment expense.
11
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 12 million
and RR 89 million at 31 December 2011 and 2010, respectively)
Deferred export duties for stable gas condensate
Prepaid taxes other than income tax
Deferred transportation expenses for natural gas
Deferred transportation expenses for stable gas condensate
Other current assets
Total prepayments and other current assets
At 31 December:
2011
2010
6,859
17
1,550
3,322
922
668
1,139
413
60
14,950
969
-
1,340
2,388
1,151
912
824
514
406
8,504
On 29 April 2011, the direct and indirect shareholders of SeverEnergia, a joint venture of Yamal Development,
provided proportionally a loan facility to SeverEnergia in the aggregated amount up to RR 31 billion, of which
25.5 percent or RR 7,905 million is attributable to NOVATEK. The facility bears interest rate of MosPrime plus
three percent per annum (9.78 percent at 31 December 2011) and is repayable in April 2012. At 31 December 2011,
NOVATEK provided RR 6,225 million under this loan facility included in Russian rouble denominated loans (see
Note 30).
40
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
12
CASH AND CASH EQUIVALENTS
At 31 December:
2011
2010
Cash at current bank accounts
Russian rouble denominated deposits (average interest rate 4.5% p.a. and
2.4% p.a. for 2011 and 2010, respectively)
US dollar denominated deposits (average interest rate 0.8% p.a. and
0.3% p.a. for 2011 and 2010, respectively)
Other current denominated deposits
Total cash and cash equivalents
7,958
4,986
10,822
65
23,831
All deposits have original maturities of less than three months (see Note 27 for credit risk disclosures).
13
LONG-TERM DEBT
US dollar denominated bonds
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:
2011
2010
39,982
24,966
20,559
9,971
95,478
(20,298)
75,180
At 31 December 2011 and 2010, the Group’s long-term debt by facility is as follows:
Eurobonds – Ten-Year Tenor
Eurobonds – Five-Year Tenor
Sberbank
Gazprombank
Russian rouble denominated bonds
Sumitomo Mitsui Banking Corporation Europe Limited
Nordea Bank
UniCredit Bank
Syndicated term loan facility
Total
At 31 December:
2011
2010
20,776
19,206
14,966
10,000
9,971
7,685
6,439
6,435
-
95,478
4,509
4,105
1,584
40
10,238
-
24,948
19,129
9,949
54,026
(6,952)
47,074
-
-
14,948
10,000
9,949
-
6,095
6,082
6,952
54,026
Eurobonds. In February 2011, the Group issued Eurobonds in an aggregate amount of USD 1,250 million. The
Eurobonds were issued at par in two tranches, a five-year USD 600 million bond with a coupon rate of
5.326 percent and a ten-year USD 650 million bond with a coupon rate of 6.604 percent. The coupons are payable
semi-annually. At 31 December 2011, the outstanding amount was RR 39,982 million (USD 1,242 million), net of
unamortized transaction costs of RR 263 million.
Sberbank. On 16 December 2010, the Group obtained a RR 15 billion loan from Sberbank for general corporate
purposes including the financing of capital expenditures. The loan bears an interest rate of 7.5 percent per annum
and is repayable in December 2013. At 31 December 2011, the outstanding loan amount was RR 14,966 million,
net of unamortized transaction costs of RR 34 million.
41
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
13
LONG-TERM DEBT (CONTINUED)
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. By the end of 2010, the Group
withdrew the full amount of the loan facility. Throughout 2010 and the first three months of 2011, the Group
gradually reduced the stated interest rate from the initial 13 percent to 8 percent per annum. At 31 December 2011,
the outstanding amount was RR 10 billion. In January 2012, the loan was fully repaid ahead of its maturity
schedule.
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 2011, the outstanding amount was RR 9,971 million, net of unamortized
transaction costs of RR 29 million.
Sumitomo Mitsui Banking Corporation Europe Limited. On 5 April 2011, the Group obtained a USD 300 million
credit line facility with Sumitomo Mitsui Banking Corporation Europe Limited at an interest rate of LIBOR plus
1.45 percent per annum (2.03 percent at 31 December 2011). In April 2011, the Group withdrew the full amount of
the USD 300 million credit line facility payable until December 2013. The loan facility includes maintenance of
certain restrictive financial covenants. At 31 December 2011, the outstanding amount was RR 7,685 million
(USD 239 million), net of unamortized transaction costs of RR 42 million.
Nordea Bank. On 16 November 2010, the Group obtained a USD 200 million credit line facility with OAO Nordea
Bank. The facility has a three-year tenure, an interest rate of LIBOR plus 1.9 percent per annum (2.18 percent and
2.16 percent at 31 December 2011 and 2010, respectively) and includes the maintenance of certain restrictive
financial covenants. At 31 December 2011, the outstanding amount was RR 6,439 million (USD 200 million).
UniCredit Bank. At 31 December 2011 and 2010, the US dollar denominated loans included the outstanding loan
under credit line facility with UniCredit Bank until October 2012 in the amount of RR 6,435 million (USD 200
million), net of unamortized transaction costs of RR 4 million, and RR 6,082 million (USD 200 million), net of
unamortized transaction costs of RR 13 million, respectively. The loan bears an interest rate of LIBOR plus
4.65 percent per annum effective from 25 February 2010 and LIBOR plus 3.25 percent per annum effective from
11 January 2011 (3.52 percent and 4.92 percent at 31 December 2011 and 2010, respectively). The loan facility
includes the maintenance of certain restrictive financial covenants.
Syndicated term loan facility. At 31 December 2010, the US dollar denominated loans included an unsecured
syndicated term loan facility in the amount of RR 6,952 million (USD 228 million) net of unamortized transaction
costs of RR 15 million. The facility paid an interest of LIBOR plus 1.5 percent per annum (1.79 percent at
31 December 2010). In April 2011, the loan facility was fully repaid in accordance with its maturity schedule.
The fair values of long-term debt at 31 December 2011 and 2010 were as follows:
Eurobonds – Ten-Year Tenor
Eurobonds – Five-Year Tenor
Sberbank
Gazprombank
Russian rouble denominated bonds
Sumitomo Mitsui Banking Corporation Europe Limited
UniCredit Bank
Nordea Bank
Syndicated term loan facility
Total
At 31 December:
2011
2010
21,150
19,414
14,539
9,928
10,000
7,561
6,439
6,256
-
95,287
-
-
15,000
10,122
10,061
-
6,139
5,814
6,885
54,021
42
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
13
LONG-TERM DEBT (CONTINUED)
Scheduled maturities of long-term debt at 31 December 2011 were as follows:
Maturity period:
1 January 2013 to 31 December 2013
1 January 2014 to 31 December 2014
1 January 2015 to 31 December 2015
1 January 2016 to 31 December 2016
After 31 December 2016
Total long-term debt
14
PENSION OBLIGATIONS
RR million
35,198
-
-
19,206
20,776
75,180
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
(extended to five years effective 1 February 2011) 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:
2011
2010
810
(146)
664
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
Year ended 31 December:
2011
2010
758
48
(13)
88
-
-
(71)
810
758
(200)
558
620
31
(8)
66
51
(75)
73
758
43
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
14
PENSION OBLIGATIONS (CONTINUED)
The amounts recognized in the consolidated statement of income are as follows:
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
Year ended 31 December:
2011
2010
88
48
-
(71)
55
120
46
74
66
31
(75)
73
79
174
73
101
The Group recognized a loss of RR 5 million and a gain of RR 5 million as a result of experience adjustments on
plan liabilities during the years ended 31 December 2011 and 2010, respectively, included in actuarial (gain) loss.
The principal actuarial assumptions used at 31 December 2011 and 2010 are as follows:
Weighted average discount rate
Projected annual increase in employee compensation
Expected increases to pension benefits
At 31 December:
2011
2010
7.4%
5.8%
5.8%
7.6%
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 5.9 percent for 2012 to 4.7 percent in 2016 and on average equal to
4.4 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.
15
SHORT-TERM DEBT AND CURRENT PORTION OF LONG-TERM DEBT
US dollar denominated loans
Total
Add: current portion of long-term debt
Total short-term debt and current portion of long-term debt
At 31 December:
2011
2010
-
-
20,298
20,298
18,200
18,200
6,952
25,152
44
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
15
SHORT-TERM DEBT AND CURRENT PORTION OF LONG-TERM DEBT (CONTINUED)
Bridge loan facility. At 31 December 2010, the US dollar denominated loans included the RR 18,200 million
(USD 597 million), net of unamortized part of transaction costs of RR 85 million, bridge loan facility obtained for
financing of the acquisition by the Group’s joint venture OOO Yamal Development of a 51 percent participation
interest in OOO SeverEnergia. The bridge loan facility had a one-year tenure with a bullet repayment to be made
by 15 November 2011. The interest rate under the bridge facility was LIBOR plus one percent per annum. In
February 2011, the bridge loan was fully repaid ahead of its maturity schedule.
Available credit facilities. The Group’s available credit facilities at 31 December 2011 were as follows:
Credit Agricole Corporate and Investment Bank (a)
BNP PARIBAS Bank (a)
UniCredit Bank (a)
Sberbank (b)
Total available credit facilities
Par value
USD 100 million
USD 100 million
USD 150 million
RR 40 billion
(a) – interest rates are predetermined or negotiated at time of each withdrawal.
(b) – interest rate set to 9.2 percent per annum and the facility is repayable by December 2014.
Expiring
Within
one year
3,220
3,220
4,829
40,000
51,269
Between
1 and 2 years
-
-
-
-
-
The Group also maintained available funds under short-term credit lines in the form of bank overdrafts with various
international banks for RR 6,278 million (USD 195 million) and RR 5,943 million (USD 195 million) at
31 December 2011 and 2010, respectively, on either fixed or variable interest rates subject to the specific type of
credit facility.
16
TRADE PAYABLES AND ACCRUED LIABILITIES
Financial liabilities
Trade payables
Other payables
Interest payable
Non-financial liabilities
Advances from customers
Salary payables
Other liabilities
At 31 December:
2011
2010
5,187
16,615
1,009
743
1,124
244
2,194
24,760
53
412
897
163
Trade payables and accrued liabilities
24,922
28,479
At 31 December 2011, other payables included RR 16,244 million (USD 505 million) relating to the acquisition of
a 49 percent equity stake in ОАО Yamal LNG.
At 31 December 2010, other payables included RR 21,176 million relating to the acquisition of 51 percent
ownership in Sibneftegas, which was fully paid in March 2011.
45
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
17
SHAREHOLDERS’ EQUITY
Ordinary share capital. Share capital issued and paid in consisted of 3,036,306,000 ordinary shares at
31 December 2011 and 2010 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, during 2008 has
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 2011 and 2010, the Group held
196,853 GDRs (1,969 thousand ordinary shares) and 312,277 GDRs (3,123 thousand ordinary shares) at a total cost
of RR 281 million and RR 446 million, respectively. The Group has decided that these GDRs do not vote.
During the years ended 31 December 2011 and 2010, the Group sold 115,424 GDRs (1,154 thousand ordinary
shares) and 106,956 GDRs (1,070 thousand ordinary shares) for RR 536 million and RR 341 million, recognizing
gains of RR 355 million and RR 188 million, respectively, which were 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
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:
2011
2010
-
15,166
(15,166)
-
5.00
50.0
13
9,855
(9,868)
-
3.25
32.5
The Group declares and pays dividends in Russian roubles. Dividends declared in 2011 and 2010 were as follows:
Final for 2010: RR 2.50 per share or RR 25.0 per GDR declared in April 2011
Interim for 2011: RR 2.50 per share or RR 25.0 per GDR declared in October 2011
Total dividends declared in 2011
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
7,591
7,591
15,182
5,314
4,554
9,868
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. For 2011 and
2010, the net statutory profits of NOVATEK as reported in the published annual statutory reporting forms were
RR 39,714 million and RR 21,323 million, respectively. The closing balances of the accumulated profit including
the respective years net statutory profit totalled RR 120,889 million and RR 81,176 million at 31 December 2011
and 2010, respectively.
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.
46
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
18
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 (“LSE”) under the ticker symbol “NVTK”. At 31 December 2011
and 2010, the Program covered 146 and 164 employees, respectively. 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
Granted
Exercised
Forfeited
Total amount of GDRs granted at 31 December 2011
Number of GDRs
Weighted average or
closing price (LSE),
USD per GDR
407,766
5,352
-
(30,750)
382,368
-
(104,728)
(36,984)
240,656
68.1
94.1
-
-
119.5
-
105.0
-
125.2
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.
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.
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)
2011
2012
49.84%
-
0.09
48.62
49.84%
0.67%
1.09
48.62
47
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
18
SHARE-BASED COMPENSATION PROGRAM (CONTINUED)
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 (1.1 years). Risk-free interest rate is based on a benchmark USD curve
including Deposit Rates (DEPO), Forward Rate Agreements (FRA) and Interest Rate Swaps (IRS).
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.
The amounts recognized by the Group in respect of the Program are as follows:
Expenses included in
General and administrative expenses
Liabilities included in
Other non-current liabilities
Trade payables and accrued liabilities
Total share-based compensation program liabilities
19
OIL AND GAS SALES
Natural gas
Stable gas condensate
Liquefied petroleum gas
Crude oil
Oil and gas products
Total oil and gas sales
20
TRANSPORTATION EXPENSES
Natural gas transportation to customers
Liquids transportation by rail
Liquids transportation by tankers
Crude oil transportation to customers
Unstable gas condensate transportation from the fields to the
processing facilities through third party pipelines
Other
Year ended 31 December:
2011
2010
235
400
At 31 December:
2011
2010
226
244
470
236
164
400
Year ended 31 December:
2011
2010
110,932
46,778
15,227
2,479
186
71,060
29,754
12,747
1,458
143
175,602
115,162
Year ended 31 December:
2011
2010
34,441
9,638
3,647
281
-
169
26,569
7,350
2,771
190
307
13
Total transportation expenses
48,176
37,200
48
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
21
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:
2011
2010
14,523
1,742
998
294
17,557
7,861
1,482
454
280
10,077
The unified natural resources production tax for natural gas production was set at a rate of RR 237 and RR 147 per
thousand cubic meters for 2011 and 2010.
The unified natural resources production tax rate for gas condensate was 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.
22
GENERAL AND ADMINISTRATIVE EXPENSES
Employee compensation
Social expenses and compensatory payments
Legal, audit, and consulting services
Business trips expense
Depreciation – administrative buildings
Fire safety and security expenses
Rent expense
Board remuneration
Concession management services
Bank charges
Other
Total general and administrative expenses
Year ended 31 December:
2011
2010
4,650
1,212
774
218
198
178
140
103
63
58
624
8,218
3,874
774
504
265
141
149
270
93
125
59
479
6,733
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:
2011
2010
39
1
40
36
4
40
49
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
23
MATERIALS, SERVICES AND OTHER
Employee compensation
Repair and maintenance services
Electricity and fuel
Materials and supplies
Security expenses
Transportation expenses
Processing fees
Rent expenses
Other
Total materials, services and other
Year ended 31 December:
2011
2010
2,953
1,435
405
309
237
184
99
43
282
5,947
24
PURCHASES OF NATURAL GAS AND LIQUID HYDROCARBONS
Natural gas
Liquid hydrocarbons
Total purchases of natural gas and liquid hydrocarbons
Year ended 31 December:
2011
2010
5,854
140
5,994
2,572
640
388
1,386
179
106
566
27
208
6,072
-
154
154
Natural gas purchases included volumes procured from Sibneftegas, the Group’s joint venture, acquired in
December 2010 (see Note 5), pro-rata to its total production in the amount of RR 3,661 million (see Note 30) and
volumes procured from one of Gazprom’s subsidiaries by the Group’s regional gas trader, Gazprom mezhregiongas
Chelyabinsk, post its acquisition by the Group in November 2011 (see Note 5) in the amount of RR 1,929 million.
50
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
25
FINANCE INCOME (EXPENSE)
Interest expense (including transaction costs)
6.604% USD 650 million Eurobonds February 2021
7.5% RR 15 billion Sberbank December 2013
5.326% USD 600 million Eurobonds February 2016
8% RR 10 billion Gazprombank November 2012 (1)
7.5% RR 10 billion Bonds June 2013
LIBOR+3.25% USD 200 million UniCredit Bank October 2012 (1)
LIBOR+1.45% USD 300 million Sumitomo Mitsui Banking
Corporation Europe Limited December 2013
LIBOR+1.9% USD 200 million Nordea Bank November 2013
LIBOR+1.5% USD 800 million Syndicated term loan
facility April 2011
8.5% RR 5 billion Sberbank February 2011 (1)
Other interest expenses (2)
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:
2011
2010
1,165
1,144
879
805
772
215
148
125
37
-
132
5,422
(3,709)
1,713
212
225
2,150
(1) – interest rates were reduced during the periods (see Note 13).
(2) – including credit facility with interest rates negotiated at time of each withdrawal (see Note 15).
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
Year ended 31 December:
2011
2010
355
2,828
3,183
209
3,392
-
46
-
700
392
325
-
-
318
341
70
2,192
(2,166)
26
198
213
437
170
328
498
100
598
51
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.
Year ended 31 December:
2011
2010
Profit before income tax
Theoretical income tax expense at statutory
rate of 20 percent
Increase (decrease) due to:
Non-temporary differences in respect of
share of losses of equity investments
Non-deductible expenses
Russian entities’ taxation at lower income tax rate
Foreign entities’ taxation at lower income tax rate
Deferred taxes write-off
Disposal of 20% interest in Yamal LNG
Other non-temporary differences
Total income tax expense
Domestic and foreign components of current income tax expense were:
135,025
27,005
776
686
(118)
(226)
342
(12,473)
(258)
15,734
Russian Federation income tax
Foreign income tax
Total current income tax expense
Year ended 31 December:
2011
2010
12,364
103
12,467
51,082
10,216
-
538
-
(112)
31
-
131
10,804
9,289
116
9,405
Effective income tax rate. The Group’s Russian statutory income tax rate for 2011 and 2010 was 20 percent. For
the years ended 31 December 2011 and 2010, the Group’s effective income tax rate was 11.7 percent and
21.2 percent, respectively. Excluding the effect of 20% disposal of Yamal LNG, the Group’s effective income tax
rate for the year ended 31 December 2011 was 21.7 percent.
The Group did not file a consolidated tax return for 2010 and will not file one for 2011. Instead, each legal entity
filed (and will file for 2011) separate tax returns with various tax authorities, primarily in the Russian Federation.
As Russian tax legislation provided an option to submit a single consolidated income tax return starting from
1 January 2012, the Group’s management assessed such opportunity and is going to register NOVATEK and its
core Russian producing subsidiaries as a consolidated group of taxpayers for 2012 and thereafter.
The Group has recorded a deferred tax liability in respect of the temporary difference associated with the
investment in Yamal LNG at a zero tax rate as management expects that the carrying value of the investment in
Yamal LNG would be recovered primarily through dividends taxable at zero tax rate and also potentially partially
through a sale of an additional equity stake in the entity. The Group did not recognize deferred taxes related to a
future sale as the tax base in respect of potential interest in Yamal LNG to be sold is assessed to be equal to its
carrying amount.
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.
52
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
26
INCOME TAX (CONTINUED)
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:
2011
2010
660
(12,805)
(12,145)
1,392
(9,473)
(8,081)
Deferred income tax assets expected to be realized within twelve months of 31 December 2011 and 2010 were
RR 462 million and RR 747 million, respectively. Deferred tax liabilities expected to be reversed within twelve
months of 31 December 2011 and 2010 were RR 199 million and RR 258 million, respectively.
Movements in deferred income tax assets and liabilities during the years ended 31 December 2011 and 2010 are as
follows:
Property, plant and equipment
Intangible assets
Other
At
31 December
2011
(14,388)
(324)
(180)
Statement
of Income
effect
(3,426)
23
(20)
Acquisitions
Disposals
At
31 December
2010
-
(265)
(13)
138
-
-
(11,100)
(82)
(147)
Total deferred income tax liabilities
(14,892)
(3,423)
(278)
138
(11,329)
Inventories
Tax losses carried forward
Asset retirement obligation
Other
654
1,375
547
171
(167)
603
131
(411)
Total deferred income tax assets
2,747
156
-
16
-
11
27
Net deferred income tax liabilities
(12,145)
(3,267)
(251)
(83)
(519)
(80)
(2)
(684)
(546)
Property, plant and equipment
Intangible assets
Other
At
31 December
2010
(11,100)
(82)
(147)
Statement
of Income
effect
(2,050)
-
(67)
Acquisitions
Disposals
(70)
(82)
-
282
-
11
(9,262)
-
(91)
Total deferred income tax liabilities
(11,329)
(2,117)
(152)
293
(9,353)
Inventories
Tax losses carried forward
Asset retirement obligation
Other
Total deferred income tax assets
904
1,275
496
573
3,248
(14)
487
12
233
718
Net deferred income tax liabilities
(8,081)
(1,399)
299
38
38
(49)
326
174
102
(181)
-
(109)
(188)
105
517
931
446
498
2,392
(6,961)
53
904
1,275
496
573
3,248
(8,081)
At
31 December
2009
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 2011, the Group had recognized deferred income tax assets of RR 1,375 million (31 December
2010: RR 1,275 million) in respect of unused tax loss carry forwards of RR 6,875 million (31 December 2010:
RR 6,375 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
Current
Trade and other receivables
Prepayments and other current assets
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:
2011
2010
9,323
22,807
16,699
6,876
23,831
79,536
38,057
2,094
8,670
969
10,238
60,028
Measured at amortized cost
At 31 December:
2011
2010
75,180
-
20,298
-
22,811
118,289
47,074
110
6,952
18,200
27,007
99,343
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.
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)
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 2011
Financial assets
Non-current
Long-term loans receivable
Trade and other receivables
Current
Trade and other receivables
Prepayments and other current assets
Cash and cash equivalents
Financial liabilities
Non-current
Long-term debt
Current
Russian
rouble
9,103
22,761
8,692
6,859
10,774
US dollar
Other
Total
220
14
7,618
-
12,113
-
32
389
17
944
9,323
22,807
16,699
6,876
23,831
(24,937)
(50,243)
-
(75,180)
Current portion of long-term debt
Trade and other payables
(10,000)
(4,949)
(10,298)
(17,799)
-
(63)
(20,298)
(22,811)
Net exposure at 31 December 2011
18,303
(58,375)
1,319
(38,753)
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)
At 31 December 2010
Financial assets
Non-current
Long-term loans receivable
Trade and other receivables
Current
Trade and other receivables
Prepayments and other current assets
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
US dollar
Other
Total
Russian
rouble
37,955
2,072
4,759
969
6,085
102
-
3,582
-
3,169
(34,897)
-
-
-
(23,589)
(12,177)
(110)
(6,952)
(18,200)
(3,350)
-
22
329
-
984
-
-
-
-
(68)
38,057
2,094
8,670
969
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)
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 2011 and 2010, respectively:
Effect on pre-tax profit
Increase in exchange rate
Year ended 31 December:
2011
2010
RUR / USD
10%
(5,838)
(3,394)
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, in December 2010, the FTS approved an increase of 15 percent in the regulated prices effective
1 January 2011 for the year 2011.
56
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. According to the Government’s program, the regulation of the domestic
natural gas price after 2015 will be based on the net-back parity of natural gas prices on the domestic and export
markets.
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 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 and Naphtha CIF NWE,
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:
2011
2010
20,559
74,919
95,478
37,327
34,899
72,226
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.
57
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)
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
would decrease by the amounts shown below:
Effect on pre-tax profit
Increase by 100 basis points
Year ended 31 December:
2011
2010
206
373
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 2011 and 2010, or
during 2011 and 2010.
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.
As a result of recent acquisitions of Russian regional natural gas trading companies, the Group’s exposure to small
and medium-size industrial users and individuals has increased. The Group monitors the recoverability of these
debtors by analyzing ageing of receivables by type of customers and their respective prior payment history.
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:
2011
2010
9,059
1,581
6,059
16,699
4,489
1,338
2,843
8,670
58
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)
The table below highlights the Group’s cash and cash equivalents balances to published credit ratings of its banks
and/or their parent companies.
Moody’s and/or Fitch
Investment grade rating
Non-investment grade rating
No external rating
Total cash and cash equivalents
At 31 December:
2011
2010
19,381
4,358
92
23,831
8,008
1,781
449
10,238
Investment grade ratings classification referred to as Aaa to Baa3 for Moody’s Investors Service and as AAA to
BBB- for Fitch Rating, respectively.
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 2011
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
More than
5 years
10,000
4,748
10,303
366
22,811
25,000
3,825
10,302
135
-
19,318
6,298
20,927
5,655
-
-
-
-
-
-
Total
75,245
20,526
20,605
501
22,811
Total financial liabilities
48,228
39,262
25,616
26,582
139,688
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
More than
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
107,104
-
-
-
-
-
-
Total financial liabilities
(*) – differs from long-term debt (Note 13) for transaction costs.
55,640
18,880
32,584
59
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)
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 Investors
Service and BBB- (stable outlook) by Fitch Ratings, as well as a credit rating of BBB- (stable 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 or additional contributions to share capital.
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 ended 31 December 2011.
28
CONTINGENCIES AND COMMITMENTS
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 2011, the Group had contractual capital expenditures commitments aggregating
approximately RR 17,805 million (at 31 December 2010: RR 9,834 million) mainly for ongoing development
activities at the Yurkharovskoye field (through 2013), development of the North-Russkoe field (through 2013) and
Urengoiskoye field (within the Olimpiyskiy license area, through 2013), phase three construction of the Purovsky
Gas Condensate Plant (through 2013), construction of the terminal for the transshipment and fractionation of stable
gas condensate (through 2012) and development of the East-Tarkosalinskoye and Khancheyskoye fields (through
2012) all in accordance with duly signed agreements. Furthermore, the Group’s share in capital commitments for
its interests in joint ventures aggregates approximately RR 5,850 million for development of the South-
Tambeyskoye (through 2013), Urengoiskoye (within the Samburgskiy license area, through 2012) and
Termokarstovoye (through 2013) fields (at 31 December 2010: RR 2,661 million).
Taxation. Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which
can occur frequently. Management’s interpretation of such taxation legislation as applied to the Group’s
transactions and activities may be periodically 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.
60
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
28
CONTINGENCIES AND COMMITMENTS (CONTINUED)
As at 31 December 2011, 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, results of operations or cash flows.
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 of the Russian Federation and the Group pays unified natural resources production tax to produce crude
oil, natural gas and unstable condensate from these fields and contributions for exploration of license areas. The
principal licenses of the Group and its joint ventures and their expiry dates are:
Field
License holder
License expiry date
Yurkharovskoye
Salmanovskoye
(Utrenneye)
Geofizicheskoye
East-Tarkosalinskoye
Urengoiskoye (within the
Olimpiyskiy license area)
Khancheyskoye
North-Russkoe
Malo-Yamalsky
South-Tambeyskoye
Termokarstovoye
Yaro-Yakhinskoye
Urengoiskoye (within the
Samburgskiy and Yevo-Yakhinskiy
license areas)
Beregovoe
Pyreinoye
North-Chaselskoye
Subsidiaries:
OOO NOVATEK-Yurkharovneftegas
OOO NOVATEK-Yurkharovneftegas
OOO NOVATEK-Yurkharovneftegas
OOO NOVATEK-Tarkosaleneftegas
OOO NOVATEK-Tarkosaleneftegas
OOO NOVATEK-Tarkosaleneftegas
OOO NOVATEK-Tarkosaleneftegas
OAO Tambeyneftegas
Joint ventures:
OAO Yamal LNG
ZAO Terneftegaz
ZAO Urengoil Inc.
2034
2031
2031
2043
2026
2044
2031
2019
2045
2021
2018
OAO Arkticheskaya gazovaya kompaniya
OAO Sibneftegas
OAO Sibneftegas
OAO Neftegastehnologiya
2018
2023
2021
Life of field
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 arising 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, results of operations or cash flows.
61
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
28
CONTINGENCIES AND COMMITMENTS (CONTINUED)
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.
29
PRINCIPAL SUBSIDIARIES AND JOINT VENTURES
The principal subsidiaries and joint ventures of the Group and respective ownership in the ordinary share capital at
31 December 2011 and 2010 are set out below:
Ownership percent at
31 December:
2011
2010
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-Ust-Luga
OAO Tambeyneftegaz
OOO Gazprom mezhregiongas Chelyabinsk
OOO NOVATEK-Chelyabinsk
(formerly OOO Yamalgazresurs-Chelyabinsk)
OOO Yamalenergogaz
Novatek Gas & Power GmbH
(formerly Runitek GmbH)
Novatek Polska
Joint ventures
OOO Yamal Development
OOO SeverEnergia (through OOO Yamal Development)
OAO Sibneftegas
OAO Yamal LNG (subsidiary until October 2011)
100
100
100
100
100
100
100
100
-
100
-
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
100
Switzerland
100
Poland
Exploration and
production
Exploration and
production
Gas Condensate
Plant
Transportation
services
Wholesale and retail
trading
Trading and
marketing
Construction of
sea terminal
Exploration and
production
Trading and
marketing
Trading and
marketing
Trading and
marketing
Trading and
marketing
Trading and
marketing
50
25.5
51
51
Russia
Russia
Russia
Russia
Holding company
Exploration and
production
Exploration and
production
Exploration and
production
100
100
100
100
100
100
100
100
100
100
100
100
100
50
25.5
51
80
62
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
30
RELATED PARTY TRANSACTIONS
Transactions between the NOVATEK and its subsidiaries, which are related parties of the 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 – ОАО Gazprom and its subsidiaries
(until December 2010)
Transactions
ОАО Gazprom:
Natural gas sales
Natural gas transportation to customers
OOO Gazprom mezhregiongaz (formerly OOO Mezhregiongaz):
Natural gas sales
Other Gazprom subsidiaries:
Processing fees
Unstable gas condensate transportation
Year ended 31 December:
2011
2010
-
-
-
-
-
12,935
(26,550)
1,055
(458)
(307)
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.
Related parties – equity investments
Transactions
ОАО Sibneftegas (from December 2010):
Interest income on loans issued
Oil and gas products sales
Purchases of natural gas
OOO Yamal Development (from November 2010):
Interest income on loans issued
OOO SeverEnergia (from November 2010):
Interest income on loans issued
OAO Yamal LNG (from October 2011):
Interest income on loans issued
63
As at and for the year ended
31 December:
2011
2010
1,023
39
(3,661)
1,325
247
167
45
-
-
191
-
-
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 – equity investments
Balances
ОАО Sibneftegas (from December 2010):
Long-term loans receivable
Interest on long-term loans receivable
Short-term loans receivable
Trade payables and accrued liabilities
OOO Yamal Development (from November 2010):
Long-term loans and receivables
Interest on long-term loans receivable
OOO SeverEnergia (from November 2010):
Short-term loans receivable
Interest on short-term loans receivable
ZAO Terneftegas (from February 2010):
Long-term loans receivable
As at and for the year ended
31 December:
2011
2010
9,103
775
634
387
16,348
-
6,225
94
220
10,070
33
967
-
27,886
191
-
-
102
As discussed in Note 5, in October 2011, the Group’s effective control over OAO Yamal LNG ceased; therefore,
subsequent to that event, the Group’s balances and transactions with this entity are disclosed as related parties –
equity investments.
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 are disclosed as related parties –
equity investments.
In September 2011, the Chairman of the Management Committee of NOVATEK acquired a controlling stake in
ZAO SIBUR Holding. As a result, the Group’s balances with this company and its subsidiaries at 31 December
2011 were disclosed as related parties – parties under control of key management personnel.
Related parties – parties under control of key management personnel
Balances
OAO Pervobank:
Cash and cash equivalents
ZAO SIBUR Holding and its subsidiaries (from September 2011):
Long-term receivable
Trade and other receivables
As at and for the year ended
31 December:
2011
2010
4,066
1,424
248
1,760
-
-
Effective 1 January 2011, the Group adopted the revised standard IAS 24, Related Party Disclosures, which
adjusted the definition of the related party. In accordance with the revised standard, parties under significant
influence of key management personnel are not related parties of the Group. Thus OOO Nova, Aldi trading
Limited, Orsel consultant Limited and Innecto ventures Limited are no longer considered to be related parties.
The comparative figures in the disclosure with respect to balances at 31 December 2010 and transactions for the
year ended 31 December 2010 have been adjusted to reflect the change in definitions of a related party following
the adoption of the revised standard IAS 24, Related Party Disclosures.
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.
64
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 – members of the key management personnel
Board of Directors
Management Committee
Total compensation
Year ended 31 December:
2011
2010
103
1,242
1,345
93
1,049
1,142
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 15 members until 24 March 2011 and was subsequently
reduced to eight 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 was recognized during the year ended 31 December 2010 as part of the share-based
compensation scheme and included in general and administrative expenses. In May 2010, share-based
compensation to the key members of the Group’s management team was fully recognized.
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).
Segment information is provided to the CODM in accordance with 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.
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.
65
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
31
SEGMENT INFORMATION (CONTINUED)
Segment information for the year ended 31 December 2011 is as follows:
For the year ended 31 December 2011
References
External revenues
Operating expenses
Other operating income (loss)
Interest expense
Interest income
Foreign exchange gain (loss)
a
b, c, d, e
c, f
g
g
Exploration,
production
and
marketing
Segment
information as
reported to
CODM
176,340
(101,659)
12,950
(5,392)
3,137
(4,368)
176,340
(101,659)
12,950
(5,392)
3,137
(4,368)
Reconciling
items
(276)
3,994
50,259
3,242
255
423
Total per
consolidated
financial
statements
176,064
(97,665)
63,209
(2,150)
3,392
(3,945)
Segment result
81,008
81,008
57,897
138,905
Share of loss of equity
investments, net of income tax
Profit before income tax
Depreciation, depletion and amortization
Capital expenditures
b, c
g
12,925
30,510
12,925
30,510
(3,450)
7,521
(3,880)
135,025
9,475
38,031
Reconciling items mainly related to:
a.
b.
c.
d.
e.
f.
g.
different methodology of liquefied petroleum gas sales recognition under IFRS and the RAR which requires
reversal of external revenues for RR 207 million under IFRS;
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 3,892 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 280 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 (including
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 37 million and
additional payroll expenses of RR 233 million recorded in operating expenses under IFRS;
different methodology in the recognition of impairment expenses between IFRS and management accounting,
which resulted in net reversal of RR 755 million recorded in operating expenses under IFRS;
different methodology in recognizing the gain on disposal of ownership interest in OAO Yamal LNG between
IFRS and management accounting, which resulted in additional gain of RR 49,589 million recorded in other
operating income (loss) 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 differences of RR 3,942 million and additional capital
expenditures of RR 3,579 million under IFRS.
66
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
31
SEGMENT INFORMATION (CONTINUED)
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
External revenues
Operating expenses
Other operating income (loss)
Interest expense
Interest income
Foreign exchange gain (loss)
a, b, c, d
b, e
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
Total per
consolidated
financial
statements
117,024
(68,518)
1,725
(437)
598
1,036
Reconciling
items
(305)
906
943
1,573
182
456
Segment result
47,462
211
47,673
3,755
51,428
Share of loss of equity
investments, net of income tax
Profit before income tax
Depreciation, depletion and amortization
Capital expenditures
a, b
g, h
9,031
22,259
50
57
9,081
22,316
(2,324)
3,790
(346)
51,082
6,757
26,106
Reconciling items mainly related to:
a.
b.
c.
d.
e.
f.
g.
h.
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;
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 of
RR 2,349 million and additional capital expenditures of RR 1,441 million under IFRS.
67
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, its 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.
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 (hereinafter
referred to as “APR”) (sales of stable gas condensate) and other areas (sales of liquefied petroleum gas and sales of
polymer and insulation tape).
Geographical information for the years ended 31 December 2011 and 2010 is as follows:
For the year ended
31 December 2011
Russian
Federation
Europe
USA
APR
Other Export duty
Subtotal
Total
Outside Russian Federation
Natural gas
Stable gas condensate
Liquefied petroleum gas
Crude oil
Oil and gas products
110,932
46
5,520
1,458
186
-
28,265
12,023
2,143
-
-
17,920
-
-
-
-
35,642
-
-
-
-
-
10
-
-
-
(35,095)
(2,326)
(1,122)
-
- 110,932
46,778
15,227
2,479
186
46,732
9,707
1,021
-
Oil and gas sales
118,142
42,431
17,920
35,642
10
(38,543)
57,460 175,602
Other revenues
323
139
-
-
-
-
139
462
Total external revenues
118,465
42,570
17,920
35,642
10
(38,543)
57,599 176,064
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 and gas 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
(until September 2010)
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
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 2011 and 2010, the Group has two and three major customer
to whom individual revenues represent 30 percent and 42 percent of total external revenues, respectively.
Sales to major customers are included in the results of the Exploration, production and marketing segment.
68
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
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
Year ended 31 December:
2011
2010
6,372
13,500
-
(1,921)
(1,700)
16,251
650
1,469
10,093
2,535
1,394
7,894
(821)
(4,630)
6,372
3,026
1,151
2,112
69
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
33
NEW ACCOUNTING PRONOUNCEMENTS
Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on
or after 1 January 2012 or later, and which the Group has not early adopted.
IFRS 9, Financial Instruments: Classification and Measurement. IFRS 9, issued in November 2009, 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 and in December 2011 to (i)
change its effective date to annual periods beginning on or after 1 January 2015 and (ii) add transition disclosures.
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 amortised 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 amortised 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 payments of principal and interest only (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 recognise unrealised and realised 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.
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 at fair value through profit or loss in other
comprehensive income.
While adoption of IFRS 9 is mandatory from 1 January 2015, earlier adoption is permitted. The Group is
considering the implications of the standard, the impact on the Group and the timing of its adoption by the Group.
IFRS 10, Consolidated Financial Statements (issued in May 2011 and effective for annual periods beginning on or
after 1 January 2013), replaces all of the guidance on control and consolidation in IAS 27, Consolidated and
separate financial statements, and SIC-12, Consolidation - special purpose entities. IFRS 10 changes the definition
of control so that the same criteria are applied to all entities to determine control. This definition is supported by
extensive application guidance. The Group is currently assessing the impact of the new standard on its consolidated
financial statements.
IFRS 11, Joint Arrangements, (issued in May 2011 and effective for annual periods beginning on or after 1 January
2013), replaces IAS 31, Interests in Joint Ventures, and SIC-13, Jointly Controlled Entities—Non-Monetary
Contributions by Ventures. Changes in the definitions have reduced the number of types of joint arrangements to
two: joint operations and joint ventures. The existing policy choice of proportionate consolidation for jointly
controlled entities has been eliminated. Equity accounting is mandatory for participants in joint ventures. The
Group is currently assessing the impact of the new standard on its consolidated financial statements.
70
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
33
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
IFRS 12, Disclosure of Interest in Other Entities, (issued in May 2011 and effective for annual periods beginning
on or after 1 January 2013), applies to entities that have an interest in a subsidiary, a joint arrangement, an associate
or an unconsolidated structured entity. It replaces the disclosure requirements currently found in IAS 28,
Investments in associates. IFRS 12 requires entities to disclose information that helps financial statement readers to
evaluate the nature, risks and financial effects associated with the entity’s interests in subsidiaries, associates, joint
arrangements and unconsolidated structured entities. To meet these objectives, the new standard requires
disclosures in a number of areas, including significant judgments and assumptions made in determining whether an
entity controls, jointly controls, or significantly influences its interests in other entities, extended disclosures on
share of non-controlling interests in group activities and cash flows, summarised financial information of
subsidiaries with material non-controlling interests, and detailed disclosures of interests in unconsolidated
structured entities. The Group is currently assessing the impact of the new standard on its consolidated financial
statements.
IFRS 13, Fair value measurement, (issued in May 2011 and effective for annual periods beginning on or after
1 January 2013), aims to improve consistency and reduce complexity by providing a revised definition of fair
value, and a single source of fair value measurement and disclosure requirements for use across IFRSs. The Group
is currently assessing the impact of the standard on its consolidated financial statements.
IAS 27, Separate Financial Statements, (revised in May 2011 and effective for annual periods beginning on or after
1 January 2013), was changed and its objective is now to prescribe the accounting and disclosure requirements for
investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. The
guidance on control and consolidated financial statements was replaced by IFRS 10, Consolidated Financial
Statements. The Group is currently assessing the impact of the amended standard on its consolidated financial
statements.
IAS 28, Investments in Associates and Joint Ventures, (revised in May 2011 and effective for annual periods
beginning on or after 1 January 2013). The amendment of IAS 28 resulted from the Board’s project on joint
ventures. When discussing that project, the Board decided to incorporate the accounting for joint ventures using the
equity method into IAS 28 because this method is applicable to both joint ventures and associates. With this
exception, other guidance remained unchanged. The Group is currently assessing the impact of the amended
standard on its consolidated financial statements.
Amendments to IFRS 7, Disclosures—Transfers of Financial Assets – (issued in October 2010 and effective for
annual periods beginning on or after 1 July 2011). The amendment requires additional disclosures in respect of risk
exposures arising from transferred financial assets. The amendment includes a requirement to disclose by class of
asset the nature, carrying amount and a description of the risks and rewards of financial assets that have been
transferred to another party, yet remain on the entity's balance sheet. Disclosures are also required to enable a user
to understand the amount of any associated liabilities, and the relationship between the financial assets and
associated liabilities. Where financial assets have been derecognised, but the entity is still exposed to certain risks
and rewards associated with the transferred asset, additional disclosure is required to enable the effects of those
risks to be understood. The Group is currently assessing the impact of the amended standard on disclosures in its
consolidated financial statements.
Amendments to IAS 1, Presentation of Financial Statements (issued June 2011, effective for annual periods
beginning on or after 1 July 2012), changes the disclosure of items presented in other comprehensive income. The
amendments require entities to separate items presented in other comprehensive income into two groups, based on
whether or not they may be reclassified to profit or loss in the future. The suggested title used by IAS 1 has
changed to ‘statement of profit or loss and other comprehensive income’. The Group expects the amended standard
to change presentation of its consolidated financial statements, but have no impact on measurement of transactions
and balances.
Amended IAS 19, Employee Benefits (issued in June 2011, effective for periods beginning on or after 1 January
2013), makes significant changes to the recognition and measurement of defined benefit pension expense and
termination benefits, and to the disclosures for all employee benefits. The standard requires recognition of all
changes in the net defined benefit liability (asset) when they occur, as follows: (i) service cost and net interest in
profit or loss; and (ii) remeasurements in other comprehensive income. The Group is currently assessing the impact
of the amended standard on its consolidated financial statements.
71
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
33
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Amendments to IFRS 7, Disclosures—Offsetting Financial Assets and Financial Liabilities (issued in December
2011 and effective for annual periods beginning on or after 1 January 2013). The amendment requires disclosures
that will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting
arrangements, including rights of set-off. The amendment will have an impact on disclosures but will have no effect
on measurement and recognition of financial instruments.
Amendments to IAS 32, Offsetting Financial Assets and Financial Liabilities (issued in December 2011 and
effective for annual periods beginning on or after 1 January 2014). The amendment added application guidance to
IAS 32 to address inconsistencies identified in applying some of the offsetting criteria. This includes clarifying the
meaning of ‘currently has a legally enforceable right of set-off’ and that some gross settlement systems may be
considered equivalent to net settlement. The Group is considering the implications of the amendment, the impact on
the Group and the timing of its adoption by the Group.
Unless otherwise described above, the new standards and interpretations are not expected to significantly affect the
Group’s consolidated financial statements.
72
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 2011 and 2010 (amounts in millions of Russian roubles).
Costs incurred in exploration and development activities
Acquisition cost
Acquisition of unproved properties
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
Net capitalized costs relating to oil and gas producing activities
The share of the Group in its equity investees
Year ended 31 December:
2011
2010
-
7,448
2,447
23,098
32,993
2,051
7,694
76
2,042
22,047
31,859
78,300
At 31 December:
2011
2010
145,063
30,717
12,862
188,642
(35,540)
153,102
150,449
163,130
29,222
10,277
202,629
(26,698)
175,931
78,220
The Group has reclassified capitalized costs relating to oil and gas producing activities of Yamal LNG due to
cessation of control on 6 October 2011 and the subsequent accounting of its activities under the equity method (see
Note 5).
73
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, revenues from oil and gas sales are comprised of the sale of
the Group’s hydrocarbons and include processing costs, related to the Group’s processing facilities as well as
transportation expenses to the customer (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
Results of operations for oil and gas producing activities
before income tax
Less: related income tax expense
Year ended 31 December:
2011
2010
163,765
(5,236)
(46,064)
(17,287)
(8,878)
(1,819)
(79,284)
84,481
(16,896)
115,008
(4,854)
(37,187)
(9,831)
(6,384)
(1,595)
(59,851)
55,157
(11,031)
Results of operations for oil and gas producing activities
67,585
44,126
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”). 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.
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.
74
OAO NOVATEK
Unaudited Supplemental Oil and Gas Disclosures
UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES (CONTINUED)
The following information presents the quantities of proved oil and gas reserves and changes thereto as at and for
the years ended 31 December 2011 and 2010.
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 2018 and 2045, with the most significant licenses for
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.
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 and the Group’s ownership percentage of the net proved reserves quantities of the joint
ventures. 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.
75
OAO NOVATEK
Unaudited Supplemental Oil and Gas Disclosures
UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES (CONTINUED)
Net proved reserves of natural gas are presented below.
Net proved reserves
Group’s share in
equity companies
Billions of
cubic feet
Billions
of cubic
meters
Billions of
cubic feet
Billions
of cubic
meters
Total net proved reserves
Billions
of cubic
meters
Billions of
cubic feet
Reserves at 31 December 2009
40,726
1,153
-
-
40,726
1,153
Changes attributable to:
Revisions of previous
estimates
Extension and discoveries
Acquisitions
Disposals
Reclassifications
Production
(54)
3,097
-
(426)
(444)
(1,314)
(1)
88
-
(12)
(13)
(37)
-
-
5,613
-
444
-
-
-
158
-
13
-
(54)
3,097
5,613
(426)
-
(1,314)
(1)
88
158
(12)
-
(37)
Reserves at 31 December 2010
41,585
1,178
6,057
171
47,642
1,349
Changes attributable to:
Revisions of previous
estimates
Extension and discoveries
Disposals
Reclassifications
Production
(106)
3,398
(3,331)
(13,323)
(1,676)
(3)
97
(95)
(377)
(48)
370
676
-
13,323
(190)
11
19
-
377
(5)
264
4,074
(3,331)
-
(1,866)
8
116
(95)
-
(53)
Reserves at 31 December 2011
26,547
752
20,236
573
46,783
1,325
Net proved developed reserves (included above)
At 31 December 2009
At 31 December 2010
At 31 December 2011
20,612
22,515
20,763
Net proved undeveloped reserves (included above)
At 31 December 2009
At 31 December 2010
At 31 December 2011
20,114
19,070
5,784
584
638
588
569
540
164
-
2,536
2,348
-
3,521
17,888
-
71
66
-
100
507
20,612
25,051
23,111
20,114
22,591
23,672
584
709
654
569
640
671
The net proved reserves reported in the table above included reserves of natural gas attributable to non-controlling
interest of 120 billion of cubic feet and 4 billion of cubic meters and 7,227 billion of cubic feet and 205 billion of
cubic meters at 31 December 2011 and 2010, respectively.
76
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.
Net proved reserves
Millions
of barrels
Millions of
metric tons
Group’s share in
equity companies
Millions
of barrels
Millions of
metric tons
Total net proved reserves
Millions of
metric tons
Millions
of barrels
Reserves at 31 December 2009
589
70
-
-
589
70
Changes attributable to:
Revisions of previous
estimates
Extension and discoveries
Acquisitions
Disposals
Reclassifications
Production
(12)
60
-
(20)
(20)
(31)
Reserves at 31 December 2010
566
Changes attributable to:
Revisions of previous
estimates
Extension and discoveries
Disposals
Reclassifications
Production
10
116
(34)
(138)
(35)
Reserves at 31 December 2011
485
Net proved developed reserves (included above)
At 31 December 2009
At 31 December 2010
At 31 December 2011
272
304
282
Net proved undeveloped reserves (included above)
At 31 December 2009
At 31 December 2010
At 31 December 2011
317
262
203
(1)
8
-
(2)
(3)
(4)
68
1
14
(4)
(16)
(4)
59
33
36
33
37
32
26
-
-
83
-
20
-
103
4
38
-
138
-
283
-
-
-
-
103
283
-
-
10
-
3
-
13
1
4
-
16
-
34
-
-
-
-
13
34
(12)
60
83
(20)
-
(31)
669
14
154
(34)
-
(35)
768
272
304
282
317
365
486
(1)
8
10
(2)
-
(4)
81
2
18
(4)
-
(4)
93
33
36
33
37
45
60
The net proved reserves reported in the table above included reserves of crude oil, gas condensate and natural gas
liquids attributable to non-controlling interest of 16 million of barrels and 2 million of metric tons and 65 million of
barrels and 8 million of metric tons at 31 December 2011 and 2010, respectively.
In October 2011, the Group’s effective control over OAO Yamal LNG, the holder of the South-Tambeyskoye field,
ceased. As a result, the Group’s interest in Yamal LNG is accounted for using the equity method.
During 2010, the Group acquired 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.
SeverEnergia and its subsidiaries hold licenses on Samburgskiy, Yevo-Yakhinskiy, Yaro-Yakhinskiy and North-
Chaselskiy license areas (see Note 5).
In February 2010, the Group’s effective control over ZAO Terneftegas, the holder of the Termokarstovoye field,
ceased. As a result, the Group’s interest in Terneftegas is accounted for using the equity method.
77
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
The Group’s office in Moscow is:
Ulitsa Udaltsova 2
119415 Moscow
Russian Federation
Telephone:
Fax:
7 (495) 730-60-00
7 (495) 721-22-53
www.novatek.ru
78
NOVATEK/ ANNUAL REPORT / 2011
182
Contact information
Harnessing the Energy of the Far North!
Legal address
22 A Pobedy Street, Tarko-Sale, Yamal-Nenets Autono-
mous Region, 629850, Russia
Website:
www.novatek.ru (Russian version)
www.novatek.ru/eng (English version)
Office in Moscow
2, Udaltsova Street, 119415, Moscow, Russia
Central Information Service
Fax:
E-mail:
Tel: +7 495 730-6000
+7 495 721-2253
novatek@novatek.ru
Press Service
E-mail:
Tel: +7 495 721-2207
press@novatek.ru
Investor Relations
Fax:
E-mail:
Tel: +7 495 730-6013
+7 495 730-6000
ir@novatek.ru
Investor Information
Independent Auditor
ZAO PricewaterhouseCoopers Audit
10, Butyrsky Val, White Square Office Center,
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 infor-
mation including the following:
• Key business and production results
• Press-releases
• Current share prices
• Annual reports
• Information disclosures to regulators
• Investor presentations
• Social and environmental activities
Mentions in this Annual Report of “OAO NOVATEK”, “NO-
VATEK”, “the Company”, “we” and “our” refer to OAO NO-
VATEK and/or its subsidiary enterprises, depending upon
the context, in which the terms are used.
Abbreviations
barrel
one stock tank barrel, or 42 US gallons of liquid
volume
bcm
boe
km
km2
mm
billion cubic meters
barrels of oil equivalent. For natural gas, we use
the conversion factor of one mcm equals 6.54
barrels.
kilometer(s)
cubic kilometer(s)
millimeter
mboe
thousand boe
mcm
thousand cubic meters
mt
thousand metric tons
mmboe
million boe
mmcm
million cubic meters
mmt
million metric tons
bcf
tcf
ton
SEC
billion cubic feet
trillion cubic feet
metric ton
United States Securities and Exchange Commission
PRMS
Petroleum Resources Management System
YNAO
Yamal-Nenets Autonomous Region
RR
LPG
LNG
Russian rouble
liquid petroleum gases
liquified natural gas
06 Additional Information
NOVATEK / ANNUAL REPORT / 2011
183
Forward–looking statements
This Annual Review includes ‘forward-looking informa-
tion’ within the meaning of Section 27A of the US Secu-
rities 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 concerning plans,
objectives, goals, strategies, future events or performance,
and underlying assumptions and other statements, which
are other than statements of historical facts. The words
“believe,” “expect,” “anticipate,” “intends,” “estimate,” “fore-
cast,” “project,” “will,” “may,” “should” and similar expres-
sions identify forward-looking statements. Forward-looking
statements include statements regarding: strategies, out-
look and growth prospects; future plans and potential for
future growth; liquidity, capital resources and capital ex-
penditures; growth in demand for our products; economic
outlook and industry 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 with-
out limitation, management’s examination of historical oper-
ating trends, data contained in our records and other data
available from third parties. Although we believe that these
assumptions were reasonable when made, these assump-
tions are inherently subject to significant uncertainties and
contingencies, which are difficult or impossible to predict and
are beyond our control. As a result, we may not achieve or
accomplish these expectations, beliefs or projections. In ad-
dition, important factors that, in our view, could cause ac-
tual results to differ materially from those discussed in the
forward-looking statements include:
• changes in the balance of oil and gas supply and demand
in Russia and Europe;
• the effects of domestic and international oil and gas price
volatility and changes in regulatory conditions, including
prices and taxes;
• the effects of competition in the domestic and export oil
and gas markets;
• our ability to successfully implement any of our business
strategies;
• the impact of our expansion on our revenue potential, cost
basis and margins;
• our ability to produce target volumes in the event, among
other factors, of restrictions on our access to transporta-
tion infrastructure;
• the effects of changes to our capital expenditure projec-
tions on the growth of our production;
• potentially lower production levels in the future than cur-
rently estimated by our management and/or independent
petroleum reservoir engineers;
• inherent uncertainties in interpreting geophysical data;
• changes to project schedules and estimated completion
dates;
• our success in identifying and managing risks to our busi-
nesses;
• the effects of changes to the Russian legal framework
concerning currently held and any newly acquired oil and
gas production licenses;
• changes in political, social, legal or economic conditions in
Russia and the CIS;
• the effects of technological changes;
• the effects of changes in accounting standards or practices.
This list of important factors is not exhaustive. When rely-
ing 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 look-
ing statements speak only as of the date on which they are
made. Accordingly, we do not undertake any obligation to
update or revise any of them, whether as a result of new in-
formation, future events or otherwise. We do not make any
representation, warranty or prediction that the results antic-
ipated by such forward-looking statements will be achieved,
and such forward-looking statements represent, in each
case, only one of many possible scenarios and should not be
viewed as the most likely or standard scenario. The informa-
tion and opinions contained in this document are provided as
at the date of this review and are subject to change without
notice.