ANNUAL
REPORT
GROWTH
EFFICIENCY
INNOVATION
RUSSIA’S LARGEST
INDEPENDENT
NATURAL GAS PRODUCER
GROWTH
EFFICIENCY
INNOVATION
OAO NOVATEK
ANNUAL REPORT
2012
RUSSIA’S LARGEST
INDEPENDENT
NATURAL GAS PRODUCER
ANNUAL REPORT
OAO NOVATEK
2012
CONTENTS
Letter to Shareholders .......................................................................................................................... 6
Strategy ............................................................................................................................................... 11
Growth. Efficiency. Innovation ............................................................................................................. 12
Key events ........................................................................................................................................... 19
Key indicators ...................................................................................................................................... 20
01
REVIEW OF OPERATING RESULTS ...................................................................................... 23
Licenses and Reserves ....................................................................................................................... 23
Geological Exploration ........................................................................................................................ 25
Field Development .............................................................................................................................. 26
Hydrocarbon Production ..................................................................................................................... 27
Processing .......................................................................................................................................... 37
Marketing ............................................................................................................................................ 39
02
ENVIRONMENTAL AND SOCIAL RESPONSIBILITY ....................................................... 47
Environmental Protection .................................................................................................................... 47
Health and Safety ................................................................................................................................ 49
Human Resources .............................................................................................................................. 50
Social Policy and Charity .................................................................................................................... 53
03
MANAGEMENT AND CORPORATE GOVERNANCE ......................................................... 57
Corporate Governance System .......................................................................................................... 57
General Meeting of Shareholders ....................................................................................................... 58
Board of Directors .............................................................................................................................. 58
Board Committees ............................................................................................................................. 62
Management Committee ................................................................................................................... 64
Remuneration to Members of the Board of Directors and Management Committee ....................... 65
Internal Control and Audit ................................................................................................................... 65
Share Capital ....................................................................................................................................... 67
Dividends ........................................................................................................................................... 68
Information Transparency ................................................................................................................... 69
ADDITIONAL INFORMATION .................................................................................................... 70
Major Risk Factors ............................................................................................................................. 70
Information on Members of the Board of Directors and Management Committee .......................... 74
Major Transactions and Interested Party Transactions ...................................................................... 82
IFRS Consolidated Financial Statements ............................................................................................ 85
Management’s Discussion and Analysis of Financial Condition and Results of Operations .......... 160
Contact information .......................................................................................................................... 202
4
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
Yamal-Nenets
Autonomous Region
Russia
NOVATEK IS RUSSIA’S LARGEST
INDEPENDENT NATURAL GAS PRODUCER
AND THE SECOND-LARGEST NATURAL GAS
PRODUCER IN RUSSIA
NOVATEK’S MAIN BUSINESSES ARE EXPLORATION AND PRODUCTION,
PROCESSING, TRANSPORTATION AND MARKETING OF NATURAL GAS
AND LIQUID HYDROCARBONS. THE COMPANY’S PRIMARY PRODUCTION
AND PROCESSING ASSETS ARE LOCATED IN THE YAMAL-NENETS
AUTONOMOUS REGION (YNAO), ONE OF THE LARGEST GAS
PRODUCING REGIONS IN THE WORLD.
12.4
#4
#7
BLN BOE
OF PROVED
HYDROCARBON
RESERVES
UNDER SEC
GLOBALLY AMONG
PUBLICLY TRADED
COMPANIES BY PROVED
NATURAL GAS RESERVES
UNDER SEC
GLOBALLY AMONG
PUBLICLY TRADED
COMPANIES BY NATURAL
GAS PRODUCTION VOLUMES
57.3
BCM
OF NATURAL
GAS PRODUCED
IN 2012
9%
OF TOTAL RUSSIAN
NATURAL GAS
PRODUCTION
16%
OF TOTAL NATURAL
GAS DELIVERIES
TO THE DOMESTIC MARKET
VIA THE UGSS
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
5
LEGEND
– gas trunk pipeline
– gas condensate pipeline
of NOVATEK
3
– producing fields
of NOVATEK and JVs
24
– prospective fields
and license areas
of NOVATEK and JVs
– Purovsky plant
of NOVATEK
34
5
32
33
30
31
21
Yamburg
9
Nadym
7
11
1
35
16
15
17
14
26
10
28
19
13
18
4
27
24
23
29
25
12
2
3
22
8
6
20
FIELDS AND LICENSE AREAS
1. Yurkharovskoye field
2. East-Tarkosalinskoye field
3. Khancheyskoye field
4. Olimpiyskiy license area (Sterkhovoye field)
5. South-Tambeyskoye field
6. Termokarstovoye field
7. West-Yurkharovskoye field
8. North-Khancheyskoye field
9. Yarudeyskoye field
10. Raduzhnoye field
11. New-Yurkharovskiy license area
12. Yumantilskiy license area
13. West-Urengoyskiy license area
14. North-Yubileynoye field
15. North-Russkiy license area
16. North-Russkoye field
17. West-Tazovskiy license area
18. North-Yamsoveyskiy license area
19. Ukrainsko-Yubileynoye field
20. Pilyalkinskiy license area
21. Malo-Yamalskoye field
22. West-Chaselskoye field
23. Beregovoy license area
24. Pyreinoye field
25. Khadyryakhinskiy license area
26. Samburgskiy license area
27. Yevo-Yakhinskoye field
28. Yaro-Yakhinskiy license area
29. North-Chaselskiy license area
30. Salmanovskoye (Utrenneye) field
31. Geofizicheskoye field
32. North-Obskiy license area
33. East-Tambeyskiy license area
34. North-Tasiyskiy license area
35. North-Urengoyskoye field
6
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
LETTER TO
SHAREHOLDERS
Dear Shareholders,
OUR Core Business continued to
develop successfully throughout 2012
in full conformity with the Compa-
ny’s strategic objectives and priori-
ties, with a focus toward a balanced
growth on all key performance indi-
cators and the strengthening of our
competitive advantages. Achieve-
ments in the reporting year, com-
bined with our flexible and innova-
tive approach to business, offer an
excellent foundation for the efficient
increase of production volumes, en-
abling us to look into the future with
confidence.
Our main competitive advantag-
es are an extensive resource base,
which guarantees a steady increase
in hydrocarbon production at indus-
try-leading low costs, and our inte-
grated production chain, which helps
to maximize risk-adjusted margins
and improve the sustainability of our
business operations.
During 2012, we increased our prov-
en hydrocarbon reserves under the
SEC reserve standards by one-third
to approximately 12.4 billion boe and,
as at the end of the current report-
ing year, we ranked among the top
four public companies worldwide
in terms of proven natural gas re-
serves. Equally impressive, NOVATEK
achieved a record 842% reserve
replacement rate in 2012 (three-year
reserve replacement rate – 623%)
demonstrating the efficacy of our ex-
ploration and development program
as well as completing another value
accretive acquisition in close prox-
imity to our existing operations and
infrastructure.
Our hydrocarbon reserve base is
concentrated in the resource rich
Yamal Nenets Autonomous Region
of Russia, which is the world's largest
natural gas region with well-devel-
oped infrastructure, enabling us to
consistently report one of the lowest
cost levels in the oil and gas indus-
try. Our reserve replacement costs
in 2012 were RR 33.1 ($1.07) per boe
and lifting costs were RR 17.8 ($0.57)
per boe.
A key strategic priority for the Com-
pany is the steady and efficient
growth of production volumes com-
mensurate with our sustainable field
development activities and resource
base. At the end of 2012 more than
60% of our proved reserves under
the SEC reserve standards were
classified as "undeveloped", and our
reserve life increased from 25 years
to 31 years, providing an excellent
base for sustainable production
growth in the future. During the year,
we increased our gas production by
7% and the production of crude oil
and unstable gas condensate by 4%,
which is consistent with our opera-
tional guidance for the year.
The increase in our proven reserves
and production levels was support-
ed by the acquisition in November
2012 of a 49% equity stake in ZAO
Nortgas, which holds a production
license to develop the North-Uren-
goyskoye field. The field is located in
close proximity to existing NOVATEK
production and transportation capac-
ity and has considerable potential for
production growth with the planned
development of the field’s Eastern
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
7
A KEY STRATEGIC PRIORITY FOR THE COMPANY
IS THE STEADY AND EFFICIENT GROWTH
OF PRODUCTION VOLUMES COMMENSURATE
WITH OUR SUSTAINABLE FIELD DEVELOPMENT
ACTIVITIES AND RESOURCE BASE. AT THE END
OF 2012 MORE THAN 60% OF OUR PROVED
RESERVES UNDER THE SEC RESERVE STANDARDS
WERE CLASSIFIED AS "UNDEVELOPED", AND OUR
RESERVE LIFE INCREASED FROM 25 YEARS
TO 31 YEARS, PROVIDING AN EXCELLENT BASE FOR
SUSTAINABLE PRODUCTION GROWTH IN
THE FUTURE
dome. The Nortgas acquisition com-
plements NOVATEK’s existing asset
portfolio and will enable us to achieve
more ambitious targets for production
growth in the medium term.
We continued to invest capital to
further develop our existing asset
portfolio in 2012 and commissioned
new production capacities as sched-
uled. A fourth complex was launched
in the second development phase
at the Yurkharovskoye field bringing
total production output at the field to
its targeted plateau levels, as well as
launching the first stage of a booster
station to keep production at field’s
maximum levels. Production of nat-
ural gas and gas condensate began
at the Samburgskoye field of Sever-
Energia during 2012, where the first
and second stages of a gas treat-
ment facility were commissioned and
transport infrastructure was installed.
We also launched a central oil gath-
ering facility at the East Tarkosalin-
skoye field as part of our develop-
ment plans to exploit the oil layers
on this important field.
We have already worked diligently
and constructively in previous years
to create an integrated production
value chain, with our own processing
facilities and diversified distribution
channels. Preparations were made in
8
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
2012 for the start of construction work
to expand processing capacity at the
Purovsky gas condensate plant in
conjunction with planned increases of
unstable gas condensate output from
our fields, including purchases from
our joint venture partners. We also
signed an agreement on strategic
cooperation with OAO Russian Rail-
ways, ensuring that the expansion of
transport infrastructure will keep pace
with planned output increases from
the Purovsky processing plant.
Construction of main facilities was al-
most completed in the first phase of
the new complex for transshipment
and fractionation of gas conden-
sate at the port of Ust-Luga on the
Baltic Sea. The complex will allow
the Company to enter new markets,
expand its customer base and in-
crease sales of higher value added
products.
We took a number of important stra-
tegic steps in our commercial mar-
keting of natural gas in Russia during
2012. At year-end, we acquired an
82% participation interest in OOO
Gazprom mezhregiongaz Kostroma,
significantly increasing the volume
of our supplies to end-users in the
Kostroma region. A number of new
long-term contracts were also signed
with major end-users, guaranteeing
continued growth in the sales vol-
umes of our marketable natural gas.
For the first time in our history, we ex-
ecuted delivery contracts for periods
of up to 15 years, confirming a high
level of confidence in NOVATEK’s
commercial capabilities among end
customers. We also managed to
increase the proportional share of
end-users in our total gas volumes
sales mix from 55% in 2011 to 69%
in 2012, which represents another
important marketing achievement as
well as providing sales stability in our
customer relationships.
We remain bullish on the natural
gas markets over the long-term and
expect further growth in the share of
natural gas in the global energy mix
despite sluggish demand growth over
the past several years. Our longer-
term outlook for natural gas also
envisages a greater role for liquefied
natural gas, or LNG, in the global
supply balance. Development of LNG
production and transportation will,
to a large extent, be decisive for the
future of the global gas market.
The delivery of natural gas to the
international market in the form of
LNG has a key role in NOVATEK’s
long-term strategy, allowing us to
diversify our markets and efficiently
monetize our conventional natural
gas reserves on the Yamal Peninsula.
In 2012, we continued implementing
the Yamal LNG project, which pro-
vides for construction of an LNG plant
at our South-Tambeyskoye gas con-
densate field. Progress in the report-
ing year included the completion of
front end engineering design for the
field development, LNG plant and
port of Sabetta, as well as finalizing of
technical specifications and comple-
tion of basic design of a new ARC-7
ice-class LNG tanker. Tenders were
initiated for engineering, procurement
and construction of the LNG plant
and for the transportation of LNG.
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
9
THE DELIVERY OF NATURAL GAS TO THE
INTERNATIONAL MARKET IN THE FORM OF LNG
HAS A KEY ROLE IN NOVATEK’S LONG-TERM
STRATEGY, ALLOWING US TO DIVERSIFY OUR
MARKETS AND EFFICIENTLY MONETIZE OUR
CONVENTIONAL NATURAL GAS RESERVES ON
THE YAMAL PENINSULA. IN 2012, WE CONTINUED
IMPLEMENTING THE YAMAL LNG PROJECT,
WHICH PROVIDES FOR CONSTRUCTION OF AN
LNG PLANT AT OUR SOUTH-TAMBEYSKOYE
GAS CONDENSATE FIELD
We also commenced gas trading op-
erations on the international markets.
We continued to report strong fi-
nancial results in 2012 underpinned
by our commitment and focus on
cost controls, prudent investment
decisions, and commensurate with
the growth profile of our operations.
Our consolidated IFRS earnings per
share increased to RR 22.9, or by
23% compared to the normalized
level of 2011, excluding the effects of
gains on disposals, and, as a result,
the Board of Directors recommend-
ed the General Meeting of Share-
holders to approve dividends for the
reporting year at RR 6.86 per share,
which is 14% more than dividends
for 2011.
We recognize that the sustainable
development of the Company de-
pends on the high standards of social
responsibility and our commitment
to these principles. We have always
been cognizant of our operational
footprint to the regional development
in the Far North of Russia, where
our core production and processing
assets are located, and we remain
committed to ensure environmental
integrity and industrial safety, and
caring for our staff and the indige-
nous peoples of the region. These
are fundamental principles, which we
will not compromise.
We could not achieve the success
we have accomplished without the
contribution of every member of our
10
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
highly professional and well-organ-
ized team of employees formed
over the years since NOVATEK’s
foundation. Human capital under-
scores our solid foundation for the
successful implementation of the
Company’s strategic plans.
On behalf of the Board of Directors
and Management, we are pleased
to present the Annual Report of
NOVATEK for the year 2012, and
we would like to thank our share-
holders for their unfailing confi-
dence in the Company and our
long-term strategic plans. We en-
deavor to continue investing capital
efficiently in the development of our
facilities for extraction, processing
and transportation of natural gas
and liquid hydrocarbons, making
best use of the experiences we
have gained in the past and using
our competitive advantages to cre-
ate shareholder value in a sustain-
able manner.
ALEXANDER
E. NATALENKO
Chairman of the Board
of Directors
LEONID
V. MIKHELSON
Chairman of the Management
Committee
MARK
A. GYETVAY
Chief Financial Officer
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
11
STRATEGY
T
N
E
M
P
O
L
E
V
E
D
E
L
B
A
N
A
T
S
U
S
I
INCREASE HYDROCARBON
PRODUCTION
OPTIMIZE
AND EXPAND
MARKETING CHANNELS
PRUDENT INVESTMENT DECISIONS
GROW
RESOURCE BASE
CONSERVATIVE FINANCIAL POLICIES
MAINTAIN
LOW COST
STRUCTURE
EXPAND
PROCESSING
CAPACITY
C
O
R
P
O
R
A
T
E
G
O
V
E
R
N
A
N
C
E
Future development of Company busi-
ness is associated with further work on
expansion of a vertically integrated value
chain: from exploration and production
of hydrocarbons to the processing of
liquid hydrocarbons and sale of products
to end-users.
Main strategic priorities of NOVATEK are:
• Growth of the resource base and effi-
cient reserve management;
• Maintaining sustainable rates of
growth of hydrocarbon production;
• Maintaining a low-cost structure;
• Expansion of processing capacity
to maximize vertical integration and
develop the hydrocarbon value chain;
and
• Optimization and expansion of exist-
ing marketing channels, and creation
of new marketing channels.
The Company has a number of com-
petitive advantages to implement its
strategy successfully. These competitive
advantages include: size and structure
of the resource base; existing infra-
structure close to core producing fields;
a well-developed customer base for
natural gas sales; own facilities for gas
condensate processing and exports;
and developed marketing channels for
liquefied petroleum gases (LPG) and
stable gas condensate. NOVATEK’s
competitiveness is also supported by its
high level of operating flexibility and con-
sistent use of the latest technologies in
production and business management.
Our commitment to social responsibility
and to observing the latest environmen-
tal, health and safety standards are in-
tegral parts of NOVATEK’s development
strategy.
12
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
GROWTH
489 %
RESERVE
REPLACEMENT RATIO
IN 2005–2012
PROVED
RESERVES
Developed reserves
Undeveloped reserves
H
T
W
O
R
G
9.4
BLN BOE
4.6
BLN BOE
12.4
BLN BOE
31
YEARS
RESERVE
LIFE
63%
SHARE
OF UNDEVELOPED
RESERVES
7%
SHARE
OF LIQUIDS
2005
2011
2012
MARKETABLE HYDROCARBON
PRODUCTION
CAPACITY OF THE
PUROVSKY PLANT
NUMBER OF NATURAL GAS
END-CUSTOMERS*
184 405
2
5
74
3,482
MMBOE
MMBOE
MMT PER ANNUM MMT PER ANNUM
2005
2012
2005
2012
2005
2012
* Number of legal entities.
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
13
12
%
HYDROCARBON
PRODUCTION CAGR
IN 2005–2012
GROSS PRODUCTION
NATURAL GAS
LIQUIDS
57.3
BCM
53.5
BCM
25.2
BCM
2.6
MMT
4.1
MMT
4.3
MMT
2005
2011
2012
2005
2011
2012
REVENUES
EBITDA
PROFIT ATTRIBUTABLE
TO SHAREHOLDERS
OF OAO NOVATEK
38.4 211.0
19.4
95.2
10.1
69.5
RR BLN
RR BLN
RR BLN
RR BLN
RR BLN
RR BLN
2005
2012
2005
2012
2005
2012
Revenues are net of VAT, export duties, excise and fuel taxes. EBITDA and profit are adjusted for gain (loss) on disposal of interests in
subsidiaries and joint ventures.
14
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
EFFICIENCY
1.1
$/BOE
RESERVE
REPLACEMENT
COSTS
I
Y
C
N
E
C
F
F
E
I
HIGH QUALITY RESOURCE BASE
AND USE OF STATE-OF-THE-ART
TECHNOLOGIES
YURKHAROVSKOYE FIELD
RESERVE
RECOVERY
PER WELL
More than 7 bcm
of gas on average
FLOW RATE
Up to 4.5 mmcm per day
THE DRILLING OF LARGE DIAMETER
HORIZONTAL WELLS RESULTS IN HIGHER
FLOW RATES AND LOWER LIFTING COSTS
HIGHER RESERVE RECOVERY PER WELL
RAISES EFFICIENCY OF THE
DEVELOPMENT COSTS
0.57
$/BOE
LIFTING COSTS
83
TH. BOE
PRODUCTION
PER EMPLOYEE
0.7
kWh
ELECTRICITY
CONSUMPTION PER
BOE OF PRODUCTION
All data is for 2012.
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
15
69
INTEGRATED
PRODUCTION
CHAIN
%
SHARE OF END-USERS
IN TOTAL GAS VOLUMES
SALES MIX
01
EXPLORATION
High efficiency
due to regional
specifics; base for
long-term production
growth
02
DEVELOPMENT
AND PRODUCTION
Complex of technologies
for development and construction
of gas condensate fields
04
CONDENSATE
STABILIZATION
Guarantied efficient processing of
100% of unstable gas condensate
production
03
TRANSPORTATION
OF UNSTABLE GAS
CONDENSATE
Feedstock quality
maintenance
06
GAS
MARKETING
Additional margin
and guarantied stability
of the integrated chain
05
CONDENSATE
FRACTIONATION
(under construction
as at 31 December 2012)
Value added
and market
diversification
19.6
RR MLN
EBITDA
PER EMPLOYEE
06 LIQUIDS MARKETING
Additional margin and guarantied stability of the integrated chain
Petroleum products
Stable
gas
condensate
Liquefied
petroleum
gases
20%
ROACE
45%
EBITDA MARGIN
16
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
INNOVATION
1
DRILLING
2
DRILLING CUTTINGS
PROCESSING PLANT
The use of special hydrocarbon-based drilling mud
allows to increase drilling speed and results in the
high-precision penetration of production horizons.
Geosteering technology enables to maximize the length
of productive horizontal sections of our wells.
Application of these technologies allows to materially
increase flow rates.
A unique drilling cuttings processing plant at the
Yurkharovskoye field enables us to efficiently resolve
the drilling cuttings utilization problem, while drilling at
the coast of the Gulf of Ob, resulting in material
environmental benefits and cost savings due to
efficient recycling of hydrocarbon-based drilling mud.
I
N
O
T
A
V
O
N
N
I
4
5
3
PRODUCTION
WELLS
4
TURBO-EXPANDERS
A typical well casing at the Yurkharovskoye field
is up to 245 mm in diameter with the length of
horizontal part of the borehole exceeding 1,000
meters, which results in flow rate of up to 4.5
mmcm of gas per day. The use of large
diameter and multilateral horizontal wells
reduces the total number of wells required to
develop the field, thereby minimizing the field’s
overall capital expenditures.
Turbo-expanders operating at our
Yurkharovskoye field allow to materially increase
the efficiency of gas treatment operations due to
much lower electricity consumption and full
compliance with quality requirements to
marketable gas.
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
17
5
METHANOL PRODUCTION
FACILITY
6
ALTERNATIVE
ENERGY SOURCES
Methanol is an integral element of natural gas and
gas condensate production process allowing to
avoid hydrate formation. A unique methanol
production facility at our Yurkharovskoye field
eliminated the need to purchase and transport
methanol to the field, thus decreasing our lifting
costs and minimizing potential environmental
risks.
Solar panels and wind generators provide the
necessary electricity to operate the telemechanic
system and valves of the condensate pipeline
connecting our Yurkharovskoye field with the Purovsky
Plant therefore eliminating the need to build a costly high
voltage power transmission line along the entire pipeline
route and reducing pipeline construction time.
6
7
8
7
LPG DEHYDRATION UNIT
8
ON SPOT
LOADING SYSTEM
The LPG dehydration unit at our Purovsky
Plant is the first of its kind to be constructed
and utilized in Russia, which allows us to
produce LPG to the highest quality
requirements, including international
standards for export purposes.
NOVATEK was the first in Russia to introduce “On
Spot” loading system at its Purovsky Plant to
load stable gas condensate into rail tank cars.
This loading system ensures the fastest loading
possible (compared with gallery-type loading
systems) while minimizing environmental risks.
1,157 MT
OF STABLE GAS
CONDENSATE DELIVERED
VIA THE NORTHERN SEA ROUTE
FROM THE START OF ITS USAGE
RUSSIA’S LARGEST
INDEPENDENT
NATURAL GAS PRODUCER
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
19
KEY
EVENTS
01
04
07
Launch of the fourth stage
of Phase Two development
at the Yurkharovskoye field,
bringing total production at
the field to its target plateau.
Commissioning of the first
stage booster compressor
station at the field.
Acquisition of an 82% in-
terest in OOO Gazprom
mezhregiongas Kostroma,
which supplies gas to a
broad range of customers
in Kostroma region.
Successful placement of
Eurobonds with total nom-
inal value of $1 billion and
10-year maturity. Issue of
Russian rouble bonds with
total nominal value of RR 20
million and 3-year maturity.
02
Start of the first and
second phases of com-
mercial production at
the Samburgskoye field,
which is being devel-
oped by the joint venture,
OOO SeverEnergia.
03
Acquisition of a 49% equity
stake in ZAO Nortgas,
which owns a hydrocarbon
production license for the
North-Urengoyskoye field.
05
Start of construction work on
the port of Sabetta, which will
be the key transport infra-
structure link in the Yamal
LNG project.
06
Signing of gas supply agree-
ments with end-users, in-
cluding 15-year agreements
with the Russian subsidiar-
ies of E.ON and Fortum, a
10.5-year agreement with
MMK, contracts with Mechel
Group companies for 10
years and longer, a 5-year
contract with OAO Severstal
and a 3-year contract with
OAO Mosenergo.
08
Agreement on strategic
partnership up to 2020 with
OAO Russian Railways, pro-
viding for expansion of rail-
way infrastructure to ensure
guaranteed transportation
of products from the
Purovsky Plant.
09
Launch of the central oil
treatment facility at the East
Tarkosalinskoye field.
20
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
KEY
INDICATORS
FINANCIAL INDICATORS
Total revenues(1)
UNITS
2011
2012
CHANGE
RR mln
175,273
210,973
20.4%
Normalized profit from operations(2)
RR mln
78,660
85,394
8.6%
Normalized EBITDA(2)
RR mln
85,401
95,166
11.4%
Normalized profit attributable to shareholders
of OAO NOVATEK(2)
Normalized earnings per share(2)
RR mln
56,707
69,518
22.6%
RR
18.69
22.91
22.6%
Net cash provided by operating activities
RR mln
71,907
75,825
5.4%
Capital expenditures
Free cash flow
Net debt
Total debt to equity
RR mln
31,161
43,554
39.8%
RR mln
40,746
32,271
(20.8)%
RR mln
71,647
114,067
59.2%
Х
0.40
0.45
-
OPERATING INDICATORS
Proved natural gas reserves (SEC)
Proved liquid hydrocarbon reserves (SEC)
bcm
mmt
1,321
1,758
33.1%
91
106
16.5%
Total hydrocarbon reserves (SEC)
mmboe
9,393
12,394
31.9%
Gross production of natural gas
bcm
53.54
57.32
Gross production of liquid hydrocarbons
mt
4,124
4,287
7.1%
4.0%
POSITIONS IN THE RUSSIAN GAS INDUSTRY
Share in natural gas production
Share in gas deliveries to the domestic market
via the UGSS
(1) Net of VAT, export duties, excise and fuel taxes.
(2) Adjusted for gain (loss) on disposal of interests in subsidiaries.
%
%
8.0%
8.8%
0.8 p.p.
14.8%
16.3%
1.5 p.p.
Financial data is in accordance with the consolidated IFRS financial statements. Data on reserves and production include subsidiaries
and share in joint ventures.
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
21
PROVED NATURAL GAS
RESERVES (SEC), BCM
TOTAL PROVED HYDROCARBON
RESERVES (SEC), MMBOE
1,758
1,144
967
1,321
1,800
1,200
600
0
690
12,394
6,853
8,088
9,393
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
4,963
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
Proved undeveloped
Proved developed
Proved undeveloped
Proved developed
GROSS NATURAL GAS
PRODUCTION, BCM
GROSS LIQUIDS
PRODUCTION, MMT
53.5
57.3
30.9
32.8
37.8
70
60
50
40
30
20
10
0
4.3
4.1
3.6
3.0
2.6
5
4
3
2
1
0
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
EBITDA*,
RR BLN
100
80
60
40
20
0
95.2
85.4
56.2
36.7
39.5
PROFIT ATTRIBUTABLE TO SHAREHOLDERS
OF OAO NOVATEK*, RR BLN
69.5
56.7
39.2
22.9
26.0
80
60
40
20
0
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
* EBITDA is adjusted for the gain (loss) on disposal of interests in subsidiaries.
* Profit is adjusted for the gain (loss) on disposal of interests in subsidiaries.
842 RESERVE
%
REPLACEMENT RATIO
IN 2012
RUSSIA’S LARGEST
INDEPENDENT
NATURAL GAS PRODUCER
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
23
01
REVIEW OF
OPERATING RESULTS
THE FOURTH STAGE OF PHASE TWO
DEVELOPMENT AT THE YURKHAROVSKOYE
FIELD, OUR LARGEST PRODUCING FIELD,
WAS COMMISSIONED IN OCTOBER 2012,
BRINGING THE FIELD TO ITS PLANNED ANNUAL
PRODUCTION PLATEAU OF 36.5 BCM OF
NATURAL GAS
LICENSES
AND RESERVES
NOVATEK’s fields and license areas are
located in the YNAO of the Russian Federa-
tion, which is the world’s largest natural gas
producing region and accounts for approxi-
mately 17% of global natural gas production
and 84% of Russian natural gas produc-
tion. The concentration of the Company’s
producing and prospective fields, license
areas and processing facilities in this region
combined with the Region’s overall oil and
gas infrastructure have allowed NOVATEK
to minimize the risks associated with devel-
oping 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.
Exploration and production of hydrocarbons
in Russia is subject to licensing. As of 31
December 2012, our subsidiaries and joint
ventures held 35 licenses for fields and
license areas, of which 30 are classified as
either production or combined exploration
and production licenses and five are clas-
sified as exploration licenses. The duration
of licenses for our core fields exceeds 20
years: the license for the Yurkharovskoye
field is valid until 2034, the East-Tarko-
salinskoye field expires in 2043, and the
South-Tambeyskoye field in 2045. NO-
VATEK is strictly observing all of its license
obligations pursuant to current Russian
legislation, and carries out continuous mon-
itoring of license tenders in order to expand
its resource base in strategically important
regions.
The Company’s reserves are appraised on
an annual basis by independent petroleum
engineers, “DeGolyer and MacNaughton”
(“D&M”) under the SEC and PRMS reserves
reporting standards. Most of the Compa-
ny’s reserves are located onshore or can
be developed from onshore locations and
are attributed to the conventional categories
(capable of being exploited using conven-
tional technologies, in contrast to uncon-
ventional gas deposits such as shale gas).
As of 31 December 2012, NOVATEK’s SEC
proved reserves totaled 12,394 mmboe,
based on our equity ownership interest in
24
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
3.4
BLN BOE
OF PROVED
HYDROCARBON RESERVES
ADDED IN 2012
(INCLUDING PRODUCTION)
I
G
N
T
A
R
E
P
O
F
O
W
E
V
E
R
I
S
T
L
U
S
E
R
the respective fields, representing a 32%
increase compared to proved reserve
volumes as of the end of 2011. In 2012, we
added 3,405 mmboe of proved reserves
under the SEC reserves reporting stand-
ards, inclusive of 2012 production, and
recorded a more than eight-fold (842%)
reserve replacement rate (874% for natural
gas). Total proved reserves of natural gas
increased to 1,758 bcm or by 493 bcm,
inclusive of 2012 production. At year-end
2012, the Company’s reserve to production
ratio (or R/P ratio) increased from 25 years
in 2011 to 31 years.
Under the PRMS reserves reporting meth-
odology, the Company’s total proved re-
serves increased by 4,665 mmboe, inclu-
sive of 2012 production, and aggregated
15,597 mmboe. Total proved plus probable
reserves (2P reserves) increased by 45%
to 22,355 mmboe, including an increase of
natural gas reserves by 1,054 bcm, inclu-
sive of 2012 production, to 3,106 bcm.
The increase in all of our reserve categories
under international reserve reporting stand-
ards was due to successful exploration at
the Company’s fields, ongoing production
drilling, the inclusion of Salmanovskoye
(Utrennee) and Geofizicheskoye fields
acquired in 2011 into the reserve appraisal
(the reserves of these two fields increased
substantially in 2012 due do exploration
works conducted during the year), as well
as the acquisition of an equity stake in ZAO
Nortgas, which holds the license for the
North-Urengoyskoye field.
As of 31 December 2012, NOVATEK’s total
recoverable reserves under the Russian
reserve classification ABC1 + C2 totaled
4,398 bcm of natural gas and 523 mmt of
liquid hydrocarbons, based on our equity
ownership interest in the respective fields.
In 2012, these reserves increased by 400
bcm of gas and 28 mmt of liquid hydro-
carbons, inclusive of 2012 production. The
growth was due to successful exploration
works, which among other results allowed
us to substantially increase reserves at the
Salmanovskoye (Utrenneye) and Geofizich-
eskoye fields, as well as our acquisition of
the equity stake in ZAO Nortgas.
NOVATEK continued to deliver low cost
reserve growth in 2012 through strategically
investing capital in development and explo-
ration activities as well as strategic acquisi-
tions, which enabled the Company to main-
tain its position as one of the lowest cost
producers in the global oil and gas industry.
The Company’s total 2012 reserve replace-
ment costs were RR 33.1 per boe ($1.07 per
boe)(1) while our three-year and five-year
reserve replacement costs amounted to RR
41.5 per boe ($1.36 per boe) and RR 34.2
per boe ($1.14 per boe), respectively.
(1) At an average exchange rate of RR 31.09 per USD.
ANNUAL REPORT
OAO NOVATEK
2012
Exploration work
2D seismic
Subsidiaries
Joint Ventures
3D seismic
Subsidiaries
Joint Ventures
Exploration drilling
Subsidiaries
Joint Ventures
25
GROWTH
EFFICIENCY
INNOVATION
UNITS
linear km
linear km
linear km
2011
376
91
285
sq. km
1,689
sq. km
sq. km
th. m
th. m
th. m
899
790
41.3
20.8
20.5
2012
CHANGE, %
7,001
7,001
0
2,799
2,258
541
36.2
26.8
9.4
1,762%
7,593%
(100)%
66%
151%
(32)%
(12)%
29%
(54)%
GEOLOGICAL EXPLORATION
Exploration drilling totaled 36.2 thousand meters in 2012, eight prospect-
ing and exploration wells were completed leading to discovery of five new
deposits and a better understanding of the geology of previously discov-
ered deposits.
NOVATEK aims to expand its resource base
through geological exploration at fields and
license areas not only in close proximity to
existing transportation and production infra-
structure, but also in new potentially pro-
spective hydrocarbon areas. The Company
ensures the efficiency of geological explo-
ration work by deploying state-of-the-art
technologies and relying on the experience
and expertise of the specialists in its geology
department, and the Company’s Scientific
and Technical Center located in Tyumen.
The Company uses a systematic approach
to exploration and development of its fields
and license areas, beginning with the col-
lection and interpretation 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 to
maximize the ultimate recovery of hydro-
carbons in a cost effective manner.
In 2012, full-scale exploration work began at
our fields located on the Gydan Peninsula
and offshore license areas in the Gulf of Ob,
which were acquired in 2011. Exploration
work activities also continued at fields and
license areas in the Nadym-Pur-Taz region,
including the Yurkharovskoye, West-Yur-
kharovskoye, North-Khancheyskoye and
Yarudeyskoe fields and the Khancheyskiy,
Olimpiyskiy, New-Yurkharovskiy and
North-Russkiy license areas. The exploration
activities at these fields targeted gas con-
densate and crude oil bearing Lower Cre-
taceous (including Achimov) and Jurassic
deposits at subsurface depths of between
2,000 to 4,400 meters. We also continued
exploration work at the South-Tambeyskoye
field on the Yamal Peninsula.
In 2012, NOVATEK completed approximate-
ly 7,000 linear kilometers of two-dimen-
sional (2D) seismic and 2,799 square km of
three-dimensional (3D) seismic, including
seismic activities run at our joint ventures.
The major growth in seismic activities as
compared to 2011 was due primarily to 2D
seismic work activities in the Gulf of Ob and
3D work activities on the Gydan Peninsula.
Exploration drilling totaled 36.2 thousand
meters in 2012, eight prospecting and ex-
ploration wells were completed leading to
discovery of five new deposits and a better
understanding of the geology of previously
discovered deposits.
As a result of exploration works, production
drilling and the re-appraisal of reserves
(excluding the effect from the acquisition of
a stake in ZAO Nortgas), our recoverable
natural gas reserves under the Russian
reserve classification ABC1 + C2 increased
by 218 bcm. Most of the recoverable re-
serve growth was at the Geofizicheskoye,
Khancheyskoye, North-Khancheyskoye,
Yarudeyskoe, Pyreinoye, Beregovoye,
Samburgskoye, Urengoyskoye and Ya-
ro-Yakhinskoye fields.
26
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
BCM3.8
NATURAL GAS
PRODUCTION
GROWTH
IN 2012
I
G
N
T
A
R
E
P
O
F
O
W
E
V
E
R
I
FIELD DEVELOPMENT
Two phases of the Samburgskoye field with total annual capacity of 4.6
bcm of gas and more than 600 thousand tons of gas condensate were
launched in 2012, being the first field to start commercial production at
our SeverEnergia joint venture.
S
T
L
U
S
E
R
During 2012, NOVATEK’s subsidiaries in-
vested RR 32.0 billion in the development
and construction at our producing and pro-
spective fields as part of our capital invest-
ment program in order to achieve sustaina-
ble hydrocarbon production growth.
The fourth stage of Phase Two devel-
opment at the Yurkharovskoye field, our
largest producing field, was commis-
sioned in October 2012, bringing the field
to its planned annual production plateau
of 36.5 bcm of natural gas. The first stage
of a booster compressor station was also
brought into operation and will enable max-
imum levels of gas production to be main-
tained at the field.
Two phases of the Samburgskoye field with
total annual capacity of 4.6 bcm of gas and
more than 600 thousand tons of gas con-
densate were launched in 2012, being the
first field to start commercial production at
our SeverEnergia joint venture.
We also finalized the construction of a cen-
tral oil treatment facility at the East-Tarkosa-
linskoye field, where we began to success-
fully exploit the field’s oil deposits. The new
facility will allow us to substantially increase
crude oil production at the field.
Production drilling in 2012, including joint
ventures, amounted to 245.2 thousand
meters, which is 133% more than the
meters drilled in 2011. A total of 18 natu-
ral gas and 24 oil wells were completed,
including six wells at the Yurkharovskoye
field with average initial flow rate of 2.2
mmcm of natural gas per day. A new re-
cord was set for the wellbore length at the
Yurkharovskoye field following the comple-
tion of a 7,100-meter well with a horizontal
section of 1,200 meters.
ANNUAL REPORT
OAO NOVATEK
2012
Gross hydrocarbon production*
GROWTH
EFFICIENCY
INNOVATION
27
UNITS
2011
2012
CHANGE
Gas
bcm
53.54
Liquid hydrocarbons
mmboe
mt
mmboe
350.1
4,124
34.6
57.32
374.9
4,287
35.9
7.1%
4.0%
Total production
mmboe
384.7
410.8
6.8%
* Including share in production by joint ventures.
HYDROCARBON PRODUCTION
Gross natural gas production increased mainly due to organic growth
at the Yurkharovskoye and East-Tarkosalinskoye fields, production
start-up at the Samburgskoye field, and the acquisition in November
2012 of an equity stake in ZAO Nortgas, which is developing the North-
Urengoyskoye field.
NOVATEK’s 2012 gross production from all
fields (including the Company’s share in
production of joint ventures) amounted to
411 mmboe (405 mmboe of sales produc-
tion), representing an increase of 6.8% over
the prior year.
In 2012, total gross production of natural
gas amounted to 57.3 bcm (sales produc-
tion – 56.5 bcm), representing 91% of our
total hydrocarbon output. The share of gas
produced from the Valanginian layers (or
“wet gas”) in proportion to total gas pro-
duction was 72%. Gross natural gas pro-
duction increased by 7.1% or by 3.8 bcm,
as compared to 2011 volumes, mainly due
to organic growth at the Yurkharovskoye
and East-Tarkosalinskoye fields, production
start-up at the Samburgskoye field, and the
acquisition in November 2012 of an equity
stake in ZAO Nortgas, which is developing
the North-Urengoyskoye field.
The Yurkharovskoye field accounted for
55% of total gas production growth due
to drilling of new wells and the expansion
of field infrastructure. The East-Tarkosa-
linskoye field contributed about 19% of
production growth due to side-tracking
activities and an increase in production of
associated gas, while the Samburgskoye
field, launched in April 2012, contributed
approximately 12%. The Nortgas acquisi-
tion contributed 5% of growth in our pro-
duction profile from the date of acquisition
to year-end.
Gross production of liquid hydrocarbons
totaled 4.29 mmt (sales production – 4.27
mmt), of which 88% was unstable de-eth-
anized gas condensate and 12% of crude
oil. Gross production of liquids increased
by 4.0% or 163 thousand tons as compared
with 2011 mainly due to increased volumes
of crude oil production at the East-Tarkosa-
linskoye field, where the central oil treat-
ment facility was launched in 2012. Our total
crude oil production increased by 85.3%
year-on-year.
We continued to achieve some of the lowest
lifting costs in the industry (expenses direct-
ly related to the extraction and processing
of natural gas, gas condensate and crude
oil from the reservoir). Company lifting costs
were RR 17.8 ($0.57) per boe in 2012.
Main Producing Fields
In 2012, sales production of hydrocarbons
was carried out at nine fields and license
areas of which, our three core fields – Yur-
kharovskoye, East-Tarkosalinskoye and
Khancheyskoye – accounted for approxi-
mately 90% of total sales production. All of
the fields are located in close proximity to
the Unified Gas Supply System (UGSS), the
world’s largest gas transporting infrastructure.
28
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
I
G
N
T
A
R
E
P
O
F
O
W
E
V
E
R
I
PRODUCTION DRILLING AT THE YURKHAROVSKOYE FIELD
S
T
L
U
S
E
R
Yurkharovskoye field
The Yurkharovskoye oil and gas conden-
sate field is the main producing asset of
NOVATEK, and, as of the end of 2012, the
field accounted for approximately 25% of
the Company’s proved natural gas reserves
to SEC standards and 54% of proved de-
veloped SEC reserves. In 2012, the field
contributed more than 60% of our sales
natural gas production and 63% of liquids
production. The license for the field is valid
until 2034.
The field was discovered in 1970 and is
located within the polar circle on the south-
east shore of the Tazov peninsula. The field’s
western part lies on the Tazov peninsula,
while the central and eastern parts are situ-
ated offshore in the Tazov Gulf. The offshore
part of the field is being developed from
onshore locations using horizontal wells.
Proved SEC reserves as at the end of 2012
were 436.5 bcm of natural gas and 23.2
mmt of liquid hydrocarbons. Most of the gas
reserves are contained in Valanginian layers
and the productive layers are located over a
small geographical area, which we believe
enhances the efficiency of reserves devel-
opment and exploitation in terms of both
capital expenditures and operating costs.
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
29
SALES PRODUCTION OF NATURAL GAS
AT THE YURKHAROVSKOYE FIELD, BCM
SALES PRODUCTION OF NATURAL GAS
AT THE EAST-TARKOSALINSKOYE FIELD, BCM
32.0
34.1
24.4
40
30
20
10
0
17.7
11.5
15
10
5
0
14.7
11.5
9.7
12.2
12.7
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
Marketable production of gas and gas con-
densate at the Yurkharovskoye field began
in 2003, and, in 2012, reached 34.1 bcm
of natural gas and 2,672 thousand tons of
liquid hydrocarbons. The field development
model provides for the drilling of large-di-
ameter and multilateral horizontal wells,
which reduces the total number of wells
needed to develop the field, thereby min-
imizing capital expenditures. Wells at the
field are up to 245 mm in diameter and the
length of horizontal parts of the borehole
exceeds 1,000 meters, with initial flow rates
at some producing wells average up to 4.5
mmcm of gas per day. In 2012, a total of 6
new gas and gas condensate wells were
launched and the total well stock (produc-
ing wells) increased to 72 by the year end.
The launch of the fourth stage of Phase Two
development in October 2012 has brought
the field to its target production plateau of
36.5 bcm per annum of natural gas. The
fourth stage consists of two low-temper-
ature separation lines, each with annual
capacity of 3.5 bcm of natural gas.
The first stage booster compressor station
consisting of three units with total capacity
of 75 MW was also launched in 2012, which
enables gas production at the field to be
maintained at the maximum plateau level.
In 2012, one test well was drilled to prepare
for the future development of oil deposits at
the field, and achieved an initial flow rate of
83 tons per day.
East-Tarkosalinskoye field
The East-Tarkosalinskoye oil and gas con-
densate field was discovered in 1971 and
the license for its development is valid until
2043. The field began producing crude oil
in 1994 and natural gas and gas conden-
sate in 1998 and 2001, respectively.
At the end of 2012, proved SEC reserves
of the field were 198.2 bcm of natural gas
and 21.1 mmt of liquid hydrocarbons. The
East-Tarkosalinskoye field is our most
mature field and further field development
is focused on exploiting the field’s crude
oil layers and increasing crude oil produc-
tion. Accordingly, we launched the central
oil treatment facility in 2012 and 18 crude
oil wells were drilled as part of the field’s
development activities. From the central
treatment facility the crude oil is transported
via our pipeline to the metering station of
Transneft's oil pumping station and inject-
ed into the pipeline system operated by
Transneft.
There were 117 natural gas and 73 crude oil
wells at the field at the end of 2012. Pro-
duction at the field during 2012 totalled 12.7
bcm of natural gas and 984 thousand tons
of liquid hydrocarbons.
Khancheyskoye field
(Khancheyskiy license area)
The Khancheyskoye field was discovered
in 1990 and is located 65 kilometers to the
east of the East-Tarkosalinksoye field. The
license for the Khancheyskoye field is valid
until 2044. The field began producing nat-
ural gas and gas condensate in 2001 and
crude oil in 2007.
At the end of 2012, proved SEC reserves
totaled 32.6 bcm of natural gas and 3.3
mmt of liquid hydrocarbons. Drilling of a
pilot hole at a production well during the
year led to discovery of a new gas conden-
sate deposit. Two production wells were
successfully drilled in 2012 and field’s pro-
30
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
25 NUMBER OF
PRODUCTION WELLS
AT THE SAMBURGSKOYE FIELD
AS OF 31 DECEMBER 2012
I
G
N
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A
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E
P
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F
O
W
E
V
E
R
I
S
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L
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R
duction totalled 3.6 bcm of natural gas and
518 thousand tons of liquid hydrocarbons.
Gas and condensate production at the field
peaked in 2010–2011, and future potential is
associated with the development of field’s
crude oil reserves.
Other producing fields
The Company’s three core fields account-
ed for approximately 90% of marketable
production of hydrocarbons in 2012. The
remaining volumes were produced at the
following six fields and license areas: the
Beregovoy license area, the Pyreinoye
field, the Samburgskiy license area, the
Sterkhovoye field (at the Olimpiyskiy license
area), the Yumantilskiy license area and the
North-Urengoyskoye field.
Beregovoy license area
and Pyreinoye field
The Beregovoy license area and the Pyre-
inoye field, which are being developed by
our joint venture, OAO Sibneftegas (NO-
VATEK’s share – 51%), accounted for 9%
of NOVATEK’s marketable production of
hydrocarbons in 2012.
The Beregovoy license area, valid until 2023,
is the largest asset of Sibneftegas in terms
of reserves. Total proved gross reserves of
the Beregovoy area as at 31 December 2012
under the SEC reserves methodology are
estimated at 148.6 bcm of natural gas, of
which our share is 75.8 bcm. Commercial
production of natural gas at the field began in
2007 and, in 2012 the field produced 9.5 bcm
of natural gas (NOVATEK’s share – 4.9 bcm).
Interpretation of 3D seismic data was com-
pleted in 2012, the geological field model was
adjusted, and reserves were re-estimated in
order to optimize the field development plan.
The Pyreinoye gas condensate field, valid
until 2021, has proved gross gas reserves
of 19.3 bcm, as estimated under the SEC
reserves methodology as at 31 December
2012, with our proportional share in the
proved reserves apprised at 9.8 bcm of
natural gas. Commercial gas production
began at the field in 2009, and in 2012, the
field produced 0.95 bcm of natural gas
(NOVATEK’s share – 0.48 bcm). Interpreta-
tion of 3D seismic data was completed in
2012, the geological field model was adjust-
ed, and reserves were re-estimated in or-
der to optimize the field development plan.
One gas producing well was also drilled.
Samburgskoye field
(Samburgskiy license area)
The Samburgskoye field is located within
the Samburgskiy license area, which also
encompasses four other fields (North-Yes-
etinskoye, East-Urengoyskoye and North-
Purovskoye fields, as well as a part of the
Urengoyskoye field). The exploration and
production license for the Samburgskoye
field is valid until 2018 and is owned by
OAO Arcticgas, a wholly owned subsidi-
ary of SeverEnergia, in which we have a
25.5% economic interest (51% in SeverEn-
ergia is owned by Yamal Development,
a 50/50 joint venture between NOVATEK
and Gazprom neft). The Samburgskoye
field has proved gross gas reserves of 97.8
bcm (NOVATEK’s share – 24.9 bcm) and
reserves of liquid hydrocarbons of 15.7 mmt
(NOVATEK’s share – 4.0 mmt), as estimated
under SEC reserves methodology
at 31 December 2012.
Commercial production of natural gas and
unstable gas condensate began in April
2012 with various facilities commissioned
into operation at the field during the year: the
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
31
first and second phases of gas treatment
unit, a 46-km gas pipeline connecting the
gas treatment unit to the UGSS and a 20-km
gas condensate pipeline connecting the field
to the pipeline that links the Yurkharovskoye
field to the Purovsky processing Plant.
There were 25 production wells at the end
of 2012, and all of the unstable gas conden-
sate produced at the field is delivered to the
Purovsky Plant for further processing.
North-Urengoyskoye field
The North-Urengoyskoye gas condensate
field, discovered in 1966, is located 25 km
south of the Yurkharovskoye field. The
development license for the field is held by
ZAO Nortgas. In November 2012, NOVATEK
acquired a 49% equity stake in ZAO Nortgas.
The North-Urengoyskoye field has proved
gross gas reserves of 157.3 bcm of natural
gas and 21.1 mmt of liquid hydrocarbons,
as estimated under SEC reserves method-
ology at 31 December 2012. Our share in
the proved reserves is 77.1 bcm of natural
gas and 10.4 mmt of liquid hydrocarbons.
Field reserves are concentrated in two
domes – western and eastern. Commercial
production started at the western dome in
2001, and at the end of 2012, the field infra-
structure included 54 production wells, a
gas treatment facility with a 5.3 bcm annual
capacity and a booster compressor station
with a 20 MW capacity.
During 2012, the field produced 4.2 bcm of
natural gas and 426 thousand tons of un-
stable gas condensate (NOVATEK’s share
since acquisition of its equity interest was
0.2 bcm of natural gas and 19 thousand
tons of gas condensate). Preparatory work
was carried out to start production at the
eastern dome of the field, including con-
struction of well pads, drilling of production
wells, construction of gas gathering net-
works and a gas treatment unit. Production
launch at the eastern dome will more than
double production of natural gas and triple
production of gas condensate at the field.
Sterkhovoye field
(Olimpiyskiy license area)
The Sterkhovoye field located within the
Olimpiyskiy license area, the development
license for which is valid until 2026, con-
sists of two gas condensate layers and has
proved gas reserves of 1.4 bcm and liquid
hydrocarbons reserves of 0.36 mmt under
the SEC reserves methodology at 31 De-
cember 2012. The field is connected to the
UGSS by a 14 kilometer natural gas pipeline
with transportation capacity of 3.1 bcm per
annum, which will also be used to transport
gas produced at the Dobrovolskoye field,
also located within the Olimpiyskiy license
area. Hydrocarbon production at the Sterk-
hovoye field began in 2009 and in 2012,
amounted to 0.1 bcm of gas and 19 thou-
sand tons of gas condensate.
Yumantilskoye field
(Yumantilskiy license area)
The Yumantilskoe field is located within the
Yumantilskiy license area, the development
license for which is valid until 2024. Total
recoverable reserves of the field under
the Russian reserve classification ABC1 +
C2 amounted to 3.8 bcm of gas and 0.5
mmt of liquids at the end of 2012 (reserve
amounts to SEC and PRMS standards have
not been estimated). Commercial produc-
tion at the field began in 2001, but has been
occasionally suspended due to mainte-
nance works at the wells. Gas production at
the field totaled 0.1 mmcm in 2012.
32
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
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KHANCHEYSKOYE FIELD
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Prospective fields and license area
In 2012, full-scale exploration work began at our fields located on the
Gydan Peninsula and offshore license areas in the Gulf of Ob, which were
acquired in 2011. We carried out 6,260 linear km of 2D and 759 square
km of 3D seismic work at these fields and license areas.
Our asset base includes a number of
prospective fields and license areas at
various stages of exploration and de-
velopment, which provide a basis for
future sustainable hydrocarbon produc-
tion growth. Fields in the Nadym-Pur-Taz
Region are located in close proximity
to existing transportation and process-
ing infrastructure, which will enable
their cost-effective development. The
South-Tambeyskoye field, which is an
integral part of the Yamal LNG project,
is located on the coast of the Gulf of Ob,
enabling efficient shipment of LNG to the
international markets through the Port of
Sabetta. The Salmanovskoye (Utrenneye)
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
33
421 BCM
PROVED
NATURAL GAS RESERVES
OF SEVERENERGIA
FIELDS
field on the Gydan Peninsula is in close
proximity of the South-Tambeyskoye field,
across the Gulf of Ob.
SeverEnergia fields
OAO Arcticgas, a subsidiary of SeverEn-
ergia (51% in SeverEnergia is owned by
Yamal Development, a 50/50 joint venture
between NOVATEK and Gazprom neft;
economic interest of NOVATEK in SeverEn-
ergia is 25.5%), holds the exploration and
production license for the Samburgskiy
license area (which includes the Samburg-
skoye, North-Yesetinskoye, East-Urengoys-
koye and North-Purovskoye fields, as well
as a part of the Urengoyskoye field) and for
the Yaro-Yakhinskoye, North-Chaselskoye
and Yevo-Yakhinskoye fields.
As at 31 December 2012, the proved gross
reserves of the non-producing fields of
SeverEnergia under the SEC reserves
methodology were estimated at 322.9
bcm of natural gas and 54.4 mmt of liq-
uid hydrocarbons (with our share of 82.3
bcm of natural gas and 13.9 mmt of liquid
hydrocarbons), and the largest non-pro-
ducing fields in terms of reserves are the
Urengoyskoye, Yaro-Yakhinskoye and
North-Chaselskoye fields.
In 2012, SeverEnergia began preparatory
works for the construction of key infrastruc-
ture at the Urengoyskoye field, including a
gas treatment facility, gas pipeline to link
the field to the UGSS and a gas condensate
pipeline to link the field to the Yurkharov –
Purovsky Plant pipeline. Geological explo-
ration and development planning for other
fields of SeverEnergia continued in 2012.
The revision of the geological model for
the fields at the Samburgskiy license area
and re-estimation of their reserves carried
out in 2012 led to major upward revision
of resource potential of the license area.
The results from testing an appraisal well
at the Yaro-Yakhinskoye field resulted in a
significant increase in its hydrocarbon re-
serves. Testing of an exploration well at the
North-Chaselskoye field led to discovery of
a new gas condensate deposit.
Termokarstovoye field
The development license for the Termokar-
stovoye field is valid until 2021 and is held
by Terneftegaz, in which NOVATEK holds a
51% equity stake.
The Termokarstovoye field was discovered
in 1988 and consists of five gas conden-
sate deposits at depths of 2,550 to 3,000
meters. Proved reserves under the SEC
reserve reporting standards at the year-end
2012 amounted to 22.3 bcm of natural gas
and 6.9 mmt of liquid hydrocarbons (with
NOVATEK’s share of 11.4 bcm of natural
gas and 3.5 mmt of liquid hydrocarbons).
A decision was made to proceed with
field development following successful
geological exploration work carried out in
2011 and 2012. In 2012, we undertook work
activities relating to field development and
infrastructure, and on the project documen-
tation for the field’s transport infrastructure.
Preparations for construction works such
as hydraulic earth filling, construction of well
pads, and construction of river transport
facilities for offloading of construction mate-
rials were also made.
North-Khancheyskoye field
The license for the North-Khancheyskoye
field is valid until 2029, and has been ap-
prised to hold estimated proved reserves
34
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
481BCM
PROVED
NATURAL GAS RESERVES
OF THE SOUTH-TAMBEYSKOYE
FIELD
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as of 31 December 2012 in accordance
with SEC reserves standards of 2.5 bcm of
natural gas.
S
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One exploration well was drilled in 2012,
leading to the discovery of one gas and
one gas condensate reservoir. The field’s
geological model was finalized, allowing us
to proceed with field development planning
and design work relating to surface facilities.
Yarudeyskoye field
The license for the Yarudeyskoye field is
valid until 2029 and is held by Yargeo, in
which NOVATEK has a 51% equity stake.
Most of the recoverable reserves at the field
are located in crude oil deposits. Proved
reserves of the field to SEC reserves stand-
ards as of 31 December 2012 totaled 4.5
mmt of liquid hydrocarbons and 7.4 bcm of
natural gas (our share in proved reserves
is 2.3 mmt of liquid hydrocarbons and 3.8
bcm of natural gas). Reserves according
to C1+C2 Russian classification amounted
to 46 mmt of liquids and 28 bcm of natural
gas (NOVATEK’s share is 23 mmt of liquids
and 14 bcm of natural gas). In 2012, an
appraisal well was drilled at the field, which
confirmed the field’s geological model and
led to an increase of estimated reserves.
Work on a development plan for the field
was underway.
North-Russkoye field
The license for the North-Russkoye field is
valid until 2031. Proved reserves of the field
under SEC standards as of 31 December
2012 were 22.5 bcm of gas and 1.9 mmt of
liquid hydrocarbons. A development plan
for the field was completed in 2011, and site
preparation and hydraulic earth filling were
carried out in 2012.
Olimpiyskiy license area
The license for the Olimpiyskiy area is valid
until 2026. The area includes the Sterkho-
voye field, which is already in production
(see “Other producing fields”), as well as
the Dobrovolskoye field, Dremuchee field
and part of the Urengoyskoye field. As of 31
December 2012, proved SEC reserves at
Dobrovolskoye field and part of the Uren-
goyskoye field were estimated at 26.1 bcm
of natural gas and 2.2 mmt of liquid hydro-
carbons.
The results of seismic work and drilling of
wells at adjacent license areas helped to
clarify the geological model for the part of
the Urengoyskoye field located within the
Olimpiyskiy license area. The field’s drill-
ing program was decided in 2012 and the
project document for the field development
was approved, and works were carried
out on the documentation for the transport
infrastructure. Production drilling at the field
is planned to start in 2013.
South-Tambeyskoye field
(Yamal LNG project)
OAO Yamal LNG, in which NOVATEK holds
an 80% equity stake, holds the license
for exploration and production at the
South-Tambeyskoye field valid until 2045.
The South-Tambeyskoye field was dis-
covered in 1974 and is located in the
north-eastern portion of the Yamal Penin-
sula. The field has five shallow gas horizons
and 37 deeper gas condensate horizons.
The depth of the horizons varies from be-
tween 900 to 2,850 meters.
As of 31 December 2012, the field was
estimated to contain 481.4 bcm of proved
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
35
235 BCM
PROVED
NATURAL GAS RESERVES
OF THE SALMANOVSKOYE
FIELD
natural gas reserves and 13.4 mmt of
proved liquid hydrocarbon reserves, un-
der SEC reserves methodology. Our share
in the reserves of the field is 385.1 bcm
of gas and 10.7 mmt of liquid hydrocar-
bons. Based on total proved reserves, the
South-Tambeyskoye field is the largest field
in our reserves portfolio.
The field has already been thoroughly stud-
ied with 2D and 3D seismic and exploration
wells drilled, a detailed geological model
and reserve appraisal have been complet-
ed, which allowed us to optimize the field
development plan. As a result of explo-
ration works carried out in 2012 one new
gas condensate deposit was discovered.
Production potential of the field exceeds 27
bcm of natural gas per annum, and natural
gas produced at the field is planned to be
delivered to the international markets in a
form of liquefied natural gas, or LNG.
The field development plan provides for the
drilling of approximately 200 wells at 19 well
pads, construction of a gas gathering pipe-
line system, gas treatment facilities and a
liquefaction plant. The liquefaction plant will
include three trains of 5 to 5.5 mmt annual
capacity each as well as LNG storage facili-
ties. The shipment infrastructure will include
a jetty with two tanker loading berths at the
port of Sabetta equipped with ice protec-
tion facilities. LNG carriers of special design
ARC-7 will be used to transport the LNG to
international markets.
Front-end engineering design work of the pro-
ject was completed in 2012, a contractor was
selected for drilling of the first production wells,
two rigs were dispatched to the field, and work
was carried out on preparing the well pads.
Construction of cargo berths began at the
port of Sabetta for receipt of building materials
and LNG plant modules. Work was underway
on construction of roads, fuel depot, power
station and boiler house, housing facilities
and canteens. A consultant was selected for
issues of corporate and social responsibility,
and preparations began for certification of the
Yamal LNG integrated management system
to ISO 14001:2004 and OHSAS 18001:2007
international standards. Tenders for LNG
shipping, construction of LNG carriers and
engineering, procurement and construction
of the LNG plant were announced, and initial
proposals were received from the partici-
pants. We were also working on marketing
the expected LNG production and arranging
the necessary project financing.
Fields and license areas
on the Gydan Peninsula
and the offshore Gulf of Ob
Licenses for the Geofizicheskoye and
Salmanovskoye (Utrenneye) fields on the
Gydan Peninsula and the East-Tambeyskiy
and North-Obskiy areas in the Gulf of Ob
were acquired in September 2011 and are
valid through 2031 and 2041, respectively.
The Salmanovskoye (formerly Utrenneye)
field, located in the northern part of the
Gydan peninsula on the shores of the Gulf
of Ob in close proximity to the South-Tam-
beyskoye field, was discovered in 1980. It
is the largest field by recoverable reserves
that has been found to date on the Gydan
Peninsula. The field contains 34 hydrocar-
bon deposits, including 16 gas deposits,
15 gas condensate deposits, two oil and
gas condensate deposits and one crude oil
deposit. Proved reserves to SEC standards
were estimated for the first time in 2012
and as of 31 December 2012 amounted to
235.2 bcm of natural gas and 8.6 mmt of
liquid hydrocarbons.
36
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
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COMPRESSOR BOOSTER STATION AT THE EAST-TARKOSALINSKOYE FIELD
S
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The Geofizicheskoye oil and gas conden-
sate field, located in the middle part of
the Gydan peninsula on the shores of the
Gulf of Ob, was discovered in 1975 and
contains 35 hydrocarbon deposits, includ-
ing 19 gas deposits, 12 gas condensate
deposits, three crude oil deposits and one
crude oil and gas condensate deposit.
Proved reserves under SEC standards
were estimated for the first time in 2012,
and as of 31 December 2012 amounted
to 124.9 bcm of natural gas and 0.4 mmt
of liquid hydrocarbons.
In 2012, we carried out 351 linear km of 2D
and 759 square km of 3D seismic work
at the fields, and based on the geological
and geophysical work performed, the re-
serves of the fields were re-estimated and
additional work was performed on their
geological models.
The East-Tambeyskiy and North-Obskiy
licence areas, located offshore in the
Gulf of Ob, have a geographical acre-
age area of approximately 9,800 square
km. Their resources are estimated at 1.8
tcm of natural gas of D1+D1L categories
under the Russian reserve classification
system. In 2012, we conducted 5,909
linear km of 2D seismic work at these
licence areas.
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
37
4.03 MMT
OF GAS CONDENSATE
PROCESSED
AT THE PUROVSKY PLANT
IN 2012
PROCESSING
As part of our strategy to maximize margins through value added pro-
jects, we continued construction of a new terminal facility at Ust-Luga, lo-
cated on the Baltic Sea, for the transshipment and fractionation of stable
gas condensate.
Gas condensate is produced from our fields
in an unstable form and requires further
processing before it can be delivered to
our customers. Our primary gas conden-
sate processing asset is the Purovsky Plant,
which has total processing capacity of five
mmt of de-ethanized gas condensate per
annum, which allows us to produce approx-
imately 3.7 mmt of stable gas condensate
and approximately 1.3 mmt of liquefied
petroleum gas, or LPG per annum. The
Purovsky Plant is located in the YNAO and is
in close proximity to the East-Tarkosalinskoye
field. We also own a system of condensate
pipelines, enabling delivery of gas conden-
sate from our fields to the Purovsky Plant.
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.
In 2012, the Purovsky Plant received
feedstock from the Yurkharovskoye,
East-Tarkosalinskoye, Khancheyskoye,
Sterkhovoye and Samburgskoye fields,
supplied via the Company’s own con-
densate pipelines, as well as from the
North-Urengoyskoye field operated by
ZAO Nortgas.
In 2012, the Purovsky Plant processed 4.03
mmt of de-ethanized unstable gas conden-
sate, or 4.3% more than in 2011, resulting
in the commercial production of 3,081 mt
of stable gas condensate and 903 thou-
sand tons of LPG as well as approximately
17 thousand tons of methanol produced
during the LPG scrubbing process. The
growth in processing volumes mainly re-
flects the start of deliveries to the Purovsky
Plant of de-ethanized gas condensate from
the Samburgskoye field in April and the
North-Urengoyskoye field in November.
During the year, the Purovsky Plant oper-
ated at approximately 81% of full capaci-
ty. We continued working on a project to
expand annual capacity of the Plant to 11
mmt ahead of a scheduled increase of gas
condensate production: design documen-
tation was completed, orders were placed
for the main equipment and preparations
to start construction and assembly work
were carried out.
The expansion of the processing capac-
ity of the Purovsky Plant does not involve
the construction of any additional capac-
ity for LPG production. Under our long-
term agreements with OAO Sibur Holding
(“Sibur”), a related party, approved by the
EGM in January 2013, 100% of the light
hydrocarbons produced during the gas
condensate stabilization process at the
Company’s Purovsky Plant will be deliv-
ered to Sibur’s Tobolsk Petrochemical
Complex. Sibur will process up to 1.2 mmt
of light hydrocarbons on tolling terms and
will redeliver the produced LPG to us for
38
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
GAS CONDENSATE PROCESSING VOLUMES
AT THE PUROVSKY PLANT, MT
PUROVSKY PLANT OUTPUT
IN 2012, %
3,401
2,845
3,869
4,034
23%
< 1%
Stable gas condensate
LPG
Regenerated methanol
5,000
4,000
3,000
2,220
2,000
1,000
0
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P
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E
V
E
R
I
S
T
L
U
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E
R
2008
2009
2010
2011
2012
distribution via our existing marketing
network, while the remaining volumes of
light hydrocarbons will be sold to Sibur on
an “ex-plant” basis. These agreements will
allow us to minimize capital expenditures
on the expansion of the Purovsky Plant and
optimize logistics of LPG through NO-
VATEK’s marketing network.
The Purovsky Plant is connected to the
Russian rail network at the Limbey rail
station. Substantially all of the stabilized
gas condensate produced at the Purovsky
Plant is delivered by rail to the Port of Vitino
where it is loaded onto ocean tankers for
further transportation to international mar-
kets. Rail transport is also used to supply
LPG to the domestic market and export.
In March 2012, we signed a Strategic
Partnership Agreement for the period up
to 2020 with OAO Russian Railways. The
agreement calls for expansion of railway
capacity on the “Limbey – Surgut – Tobolsk”
route and guarantees the transport of 100%
of the volumes produced at the Purovsky
Plant taking into consideration the expected
growth in its production capacity.
Ust-Luga Stable Gas
Condensate Transshipment
and Fractionation Complex
As part of our strategy to maximize margins
through value added projects, we contin-
ued construction of a new terminal facility at
Ust-Luga, located on the Baltic Sea, for the
transshipment and fractionation of stable
gas condensate produced at the Purovsky
Plant. The estimated fractionation capacity
of the Ust-Luga complex is up to six mmt
per annum. After the launch of the complex
the stable gas condensate processed at
the Purovsky Plant will be redirected from
77%
the port of Vitino to our new complex at
Ust-Luga. Main portion of the stable gas
condensate will be used as feedstock to
the fractionation unit for further processing
into light and heavy naphtha, jet fuel, diesel
fraction and heating oil, which will be sold
to international export markets while the
remaining volumes supplied to the facility
by rail transport will be loaded onto tankers
for delivery to export markets.
Upon completion, the complex will include
two 3-mmt per annum fractionation trains,
reservoir tank farms for feedstock and pro-
cessed products, rail facilities for loading
and receiving finished and raw materials
and two deep-water tanker berths. Work on
main facilities of the first stage of the project
including the first fractionation train neared
completion in 2012.
The complex will allow us to expand our
vertically integrated chain and our customer
base, as well as to increase sales of higher
value added products and diversification
across markets. Since the distance from
the Purovsky Plant to Ust-Luga is nearly
400 km less than to Vitino we also expect
savings on railroad transport costs.
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
39
58.9 BCM
OF NATURAL GAS
SOLD IN 2012
MARKETING
We continued to increase the number of end-customers buying our natural
gas and for the first time in our history, we executed long-term delivery con-
tracts for periods of up to 15 years. The share of sales to the end-customer
segment in our total sales volumes mix rose to 69%.
Natural gas sales
During 2012, we supplied natural gas to 35
regions of the Russian Federation and ac-
counted for 16.3% of the total natural gas de-
liveries to the domestic market via the UGSS.
NOVATEK's 2012 natural gas sales volumes
totaled 58.9 bcm, representating an increase
of 9.7% compared to 2011 sales volumes of
53.7 bcm. The share of sales to the end-cus-
tomer segment in our total sales volumes mix
rose to 69.3% from 54.7% in 2011.
The growth in sales volumes was due to an
increase in natural gas supplies to the Che-
lyabinsk region, the Perm region and the
Komi Republic by approximately 10.4 bcm in
comparison with 2011. In 2012, our customers
were located primarily in the Perm Territory,
the Chelyabinsk, Orenburg, Sverdlovsk, Mos-
cow, Kostroma, Kirov and Tyumen regions,
the Komi Republic, the city of St-Petersburg,
as well as the YNAO and Khanty-Mansyisk
Autonomous Region.
During 2012, our total revenues from natural
gas sales increased to RR 142.6 billion or
by 28.6%, as compared to 2011, due to the
combination of higher volumes sold and an
increase in the regulated gas tariff effective
from 1 July.
We continued to increase the number of
end-customers buying our natural gas and
for the first time in our history, we executed
long-term delivery contracts for periods of up
to 15 years. Contracts were signed with MMK
(10.5 years), the Russian subsidiaries of E.ON
and Fortum (15 years), as well as with subsid-
iaries of Mechel Group (10 years and longer).
Annual delivery volumes under these con-
tracts are expected to represent up to 30% of
our total sales in the coming years.
A five-year contract was also signed with
OAO Severstal, providing for total supplies of
approximately 12 bcm of natural gas, as well
as a three-year contract with OAO Mosener-
go to supply 27 bcm of natural gas.
In December 2012, we acquired an 82%
stake in OOO Gazprom mezhregiongas Ko-
stroma, which supplies natural gas to a wide
range of consumers in the Kostroma region.
This newly acquired company supplied ap-
proximately 3.8 bcm of natural gas to cus-
tomers in the Kostroma region during 2012,
as compared with 0.8 bcm supplied directly
by NOVATEK.
In order to maintain production levels dur-
ing periods of seasonal demand NOVATEK
has entered into an agreement with OAO
Gazprom for the use of their underground
storage facilities on a space available basis.
Historically, natural gas is injected into un-
derground storage facilities during warmer
periods when demand is lower and later
withdrawn during periods of colder weather
and increased demand.
40
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
NATURAL GAS
SALES
Russia
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P
O
F
O
W
E
V
E
R
I
3.19
3.22
Moscow Region
1.27
1.07
St. Petersburg
S
T
L
U
S
E
R
24.34
18.25
Yamal-Nenets Autonomous Region
2.48
2.60
Khanty-Mansiysk
Autonomous Region
3.43
3.76
Orenburg Region
2.40 2.48
Sverdlovsk Region
6.14
15.51
6.09
6.70
Chelyabinsk Region
Perm Territory
LEGEND
Natural gas sales volumes
in 2011, bcm
5.19
3.19
Natural gas sales volumes in
2012, bcm
Regions with sales volumes
above 1 bcm
Regions with sales volumes
between 0.5 to 1.0 bcm
Regions with sales volumes
below 0.5 bcm
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
41
NATURAL GAS
SALES VOLUMES, BCM
NATURAL GAS
SALES REVENUES, RR BLN*
58.9
53.7
33.3
32.9
37.1
60
40
20
0
142.6
110.9
71.1
45.7
53.6
150
120
90
60
30
0
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
* Net of VAT.
NATURAL GAS SALES VOLUMES
TO END-CUSTOMERS, BCM
AVERAGE NATURAL GAS PRICE,
RR PER MCM*
40.8
29.3
22.4
23.7
15.8
50
40
30
20
10
0
3,000
2,500
2,000
1,500
1,000
1,372
500
0
2,422
1,914
2,067
1,628
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
BREAKDOWN OF 2012
NATURAL GAS SALES VOLUMES, %
31%
41%
5%
1%
22%
* Net of VAT.
REGIONAL BREAKDOWN OF 2012
NATURAL GAS SALES VOLUMES
TO END-CUSTOMERS, %
22%
38%
Chelyabinsk Region
Perm Territory
Orenburg Region
Moscow Region
Khanty-Mansiysk
Autonomous Region
Other regions
6%
8%
9%
17%
Power generation
companies
Large industrial con-
sumers
Households
Others
Wholesale traders,
ex-field
42
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
Natural gas and liquids sales volumes
Total gas sales volumes, including:
End customers
Traders
UNITS
2011
2012
CHANGE
mmcm
mmcm
mmcm
53,667
58,880
29,332
40,806
9.7%
39.1%
24,335
18,074
(25.7)%
Share of end-customers in total gas sales volumes
%
54.7%
69.3%
14.6 p.p.
Stable gas condensate sales volumes
LPG sales volumes
Crude oil sales volumes
mt
mt
mt
2,984
2,847
880
242
905
442
(4.6)%
2.8%
82.6%
I
G
N
T
A
R
E
P
O
F
O
W
E
V
E
R
I
In 2012, NOVATEK withdrew 945 mmcm
of natural gas from underground storage
facilities during periods of high demand
and injected 1,309 mmcm when space was
available. At the end of 2012, the Company
had 1,096 mmcm of natural gas in stor-
age and available for withdrawal in future
periods.
We also began work during the year to
establish a gas trading business on the
international markets, and accordingly,
agreements were signed in July 2012 for
the annual supply of two bcm of natural gas
to the German energy company EnBW. The
supplies under these commercial trading
activities began in October 2012.
S
T
L
U
S
E
R
Liquid Hydrocarbon Sales
In 2012, NOVATEK continued to use the Northern Sea Route for supplies
of stable gas condensate to the fast growing markets in the Asian-Pacific
region. During the seasonal navigational period, we sent eight tankers
through the Northern Sea Route, which delivered 487 thousand tons
of stable gas condensate to consumers in China and South Korea.
The Company's primary liquid hydrocar-
bon sales volumes are comprised of sta-
ble gas condensate and liquefied petro-
leum gases. We are also producing and
selling relatively small quantities of crude
oil. 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.
We strive to respond quickly to chang-
ing market conditions by optimizing the
customer base and supply geography, as
well as developing and maintaining logis-
tics infrastructure. Total sales volumes of
liquid hydrocarbons in 2012 amounted
to 4,203 thousand tons, a 2.2% increase
over 2011 volumes. The growth was due
to higher crude oil production and an in-
crease of volumes of unstable gas con-
densate processed at the Purovsky Plant.
The growth in our liquids sales volumes
was constrained by a significant increase
in stable gas condensate inventories due
to redirection of sales to Asian-Pacific
region, which essentially reserves itself
in the next quarter and is affected by the
loading schedule at each quarter end and
the destination of the cargos.
Total revenues from liquids sales in-
creased to RR 67.6 billion, or by 5.9%,
in 2012 as compared to 2011, due to the
increase in sales volumes and higher
realized prices.
Liquid hydrocarbons produced at the
Purovsky Plant are transported by rail. At
the end of 2012 we owned and leased
6,700 rail cisterns, of which 2,700 were
used for the transport of LPG and 4,000
for the transport of stable gas conden-
sate. Our crude oil is transported through
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
43
LIQUID HYDROCARBON
SALES VOLUMES, MT
LIQUID HYDROCARBON
SALES REVENUES, RR BLN*
4,111
4,203
3,128
3,401
5,000
4,000
3,000
2,630
2,000
1,000
0
63.9
67.6
43.6
30.4
33.3
80
60
40
20
0
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
* Net of VAT, excise tax and export duties.
On the domestic market, our LPG is sold
through large wholesale channels, as well
as our network of retail and small whole-
sale stations. In 2012, large wholesale
supplies to the domestic market were 323
thousand tons, representing 36% of total
LPG sales volumes. The total amount of
LPG sold through our domestic network
of retail and small wholesale stations
increased to 103 thousand tons or by 14%
as compared to 2011 volumes. At the end
of 2012, NOVATEK owned 66 stations in
Chelyabinsk, Volgograd, Rostov and As-
trakhan regions.
Sales of crude oil in 2012 were 442 thou-
sand tons, an 83% increase over 2011
volumes. Sixty six percent of our crude oil
volumes were sold on the domestic mar-
ket with the remaining volumes supplied
to export markets.
the trunk pipelines owned and operated
by OAO Transneft.
During 2012, we sold 2,847 thousand
tons of stable gas condensate, a 4.6%
decrease as compared to the volumes
sold in 2011. The lower sales volumes
reflected an increase in the stable gas
condensate inventories to 461 thousand
tons as at the end of the year mainly due
to an increased volume of sales to the
Asian-Pacific region that were in seaborne
transit and not recognized as revenues
in the current reporting period. More than
99% of all stable gas condensate sales
volumes, or 2,821 thousand tons, were
exported via the all season port of Vitino
on the White Sea. Fifty-six percent of ex-
port volumes were sold to countries in the
Asian-Pacific region, 29% to markets in
Europe, 11% to the USA and 4% to markets
in South America.
In 2012, NOVATEK continued to use the
Northern Sea Route (NSR) for supplies of
stable gas condensate to the fast growing
markets in the Asian-Pacific region. Dur-
ing the seasonal navigational period, we
sent eight tankers through the NSR, which
delivered 487 thousand tons of stable gas
condensate to consumers in China and
South Korea.
The Company sells its LPG volumes
to both the export and domestic mar-
kets. In 2012, total LPG sales volumes
amounted to 905 thousand tons, of
which 53% were exported. Novatek
Polska, our wholly owned LPG trading
company in Poland, was responsible for
55% of our total LPG export sales. Other
export markets for LPG were Finland,
Hungary, Lithuania, Latvia, Slovakia,
Romania and Turkey.
44
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
LIQUID
HYDROCARBON
SALES
I
G
N
T
A
R
E
P
O
F
O
W
E
V
E
R
I
S
T
L
U
S
E
R
USA
22
STABLE GAS CONDENSATE
SALES VOLUMES IN 2011–2012
(thousand tons)
22
Europe
Asian-Pacific
Region
1,023
811
Brazil
1,294
1,590
USA
300
664
South
America
0
120
2011
2012
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
45
8
TANKERS WITH CONDENSATE
SENT VIA THE NOTHERN SEA
ROUTE IN 2012
Vitino
Russia
Finland
10
Netherlands
Hungary
Serbia
Latvia
Lithuania
Poland
Slovakia
Romania
Turkey
China
26
South Korea
Thailand
40
Singapore
LIQUID HYDROCARBON
SALES VOLUMES IN 2012
(thousand tons)
Stable gas
condensate
2,847
LPG
905
Crude oil
442
1%
47%
66%
99%
53%
34%
stable gas condensate export sales
LPG export sales
crude oil export sales
approximate # of delivery days
exports
domestic market
242 GRANTS
AWARDED TO
SCHOOLCHILDREN
IN 2012
RUSSIA’S LARGEST
INDEPENDENT
NATURAL GAS PRODUCER
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
47
02
ENVIRONMENTAL
AND SOCIAL
RESPONSIBILITY
NOVATEK HAS IMPLEMENTED AN INTEGRATED
MANAGEMENT SYSTEM FOR ENVIRONMENTAL
PROTECTION, OCCUPATIONAL HEALTH AND
SAFETY IN COMPLIANCE WITH REQUIREMENTS
OF INTERNATIONAL STANDARDS
NOVATEK adheres to the principles of ef-
fective and responsible business conduct
and considers the welfare of its employ-
ees and their families, environmental and
industrial safety, the creation of a stable and
beneficial social environment as well as
contributing to Russia’s overall economic
development as priorities and responsibili-
ties of the Company.
In 2012, to prevent air pollution and reduce
greenhouse gas emissions from flared as-
sociated petroleum gas (APG) we complet-
ed the construction and launch of a central
oil treatment facility at our East-Tarkosalin-
skoye field. The facility’s capacity allows ra-
tional use of up to 700 mcm of APG per day
and reduces greenhouse gas emissions by
640 mt of СО2 equivalent per annum.
ENVIRONMENTAL
PROTECTION
NOVATEK’s core producing assets are lo-
cated in the Far North, a harsh Arctic region
with vast mineral resources and a fragile
environment. The Company is committed to
environmental protection in its operations.
NOVATEK has implemented an Environ-
mental, Health and Safety Policy, while at
the same time an Integrated Management
System for Environmental Protection, Occu-
pational Health and Safety (IMS) in com-
pliance with requirements of international
standards has been implemented at all of
our main subsidiaries. In 2012, as part of
our ongoing commitment to IMS, our joint
venture, Sibneftegas, was certified in ac-
cordance with ISO 14001:2004 international
standards.
In 2012, NOVATEK continued its participa-
tion in the Carbon Disclosure Project (CDP),
which discloses information on greenhouse
gas emissions and the energy efficiency of
production, and CDP Water Disclosure Pro-
ject, which discloses information on the use
of water resources. The Company provides
access to information regarding the effect
of its operations on the environment to all
our stakeholders in a wide range of federal
and regional media and on the Company’s
website.
The protection and preservation of the ma-
rine environment and natural resources is
a key principle of our Environmental Policy.
At the end of 2011, we acquired the licenses
for the East-Tambeyskiy and North-Ob-
skiy license areas and the Salmanovskoye
(Utrenneye) and Geofizicheskoye fields,
which are wholly or partially located in the
Gulf of Ob. Following this acquisition we
held public hearings on the environmental
48
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
WATER CONSUMPTION
OF NOVATEK E&P COMPANIES
ATMOSPHERE EMMISSIONS
OF NOVATEK E&P COMPANIES
mcm
1,200
800
668
400
0
mmboe
420
881
mt
30
740
280
20
521
397
140
10
10.8
11.6
0
0
mmboe
23.4
18.7
16.4
420
280
140
0
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
Water consumption
mcm
Hydrocarbon production,
mmboe
Atmosphere emissions,
mt
Hydrocarbon production,
mmboe
impact assessment of our planned opera-
tions before the commencement of geolog-
ical exploration in these license areas. We
received environmental approval for our off-
shore geophysical program and a baseline
study of environmental components was
carried out within the license areas along
with the development of the environmen-
tal monitoring and subsurface protection
programs.
on the Baltic Sea. State-of-the-art engi-
neering solutions and design have been
employed in the automatic closed flare sys-
tems, including automatic interlock circuits,
liquid valves, ultraviolet flame scanners,
fault-tolerant startup and shutdown system,
warning lights, multi-burner heads with
built-in flame arresters, devices to prevent
detonation, and pilot burners with remote
spark generators and UV scanners.
In 2012, innovative closed flare systems that
reduce the amount of harmful emissions
were designed and installed during the
first phase of construction of the stable gas
condensate transshipment and fractiona-
tion facility at the port of Ust-Luga, located
One of the Company’s priorities is the ra-
tional usage of resources, including energy
resources. The table below sets out the
physical volumes and the Russian rouble
equivalent of energy resources consumed
by the Company in 2012.
Energy resource consumption by the subsidiaries of NOVATEK in 2012
VOLUME
RR MLN, NET OF VAT
Natural gas, mmcm
Electricity, MW*h
Heating energy, Gcal
Oil, tons
Motor gasoline, tons
Diesel fuel, tons
Other, tons
665
269,351
202,804
543
819
4,481
42,860
320.1
766.4
197.7
12.5
25.5
131.3
103.5
I
I
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Y
T
L
B
S
N
O
P
S
E
R
L
A
C
O
S
I
D
N
A
L
A
T
N
E
M
N
O
R
V
N
E
I
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
49
INJURY FREQUENCY RATE
(NO. OF INJURIES / MLN WORKING HOURS)
ACCIDENT SEVERITY RATE
(TOTAL NO. OF EMPLOYEE WORKING HRS LOST
PER ACCIDENT / NO. OF ACCIDENTS)
1.50
2.0
1.5
1.0
0.5
0
0.71
0.51
0.92
0,41
1,000
800
600
400
200
0
803
260
290
248
214
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
HEALTH AND SAFETY
Our strategic goal is to achieve a leading position amongst oil and gas
companies on all key indicators in terms of Occupational Health and
Safety. In order to accomplish this goal, the Company continually up-
dates its IMS, improves employees’ qualification and applies advanced
technologies.
Our strategic goal is to achieve a leading
position amongst oil and gas companies
on all key indicators in terms of Occupation-
al Health and Safety. In order to accomplish
this goal, the Company continually updates
its IMS, improves employees’ qualification
and applies advanced technologies.
In accordance with the requirements of the
federal law "On Industrial Safety of Hazard-
ous Production Facilities" and "Rules on the
Organization and Implementation of Industrial
Control for Compliance with Requirements
of Industrial Safety at Hazardous Production
Facilities" all of our subsidiaries have devel-
oped their own rules for the organization and
implementation of industrial control for com-
pliance 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.
In 2012, 2,772 employees, including work-
ers and middle management, underwent
HSE training courses.
The Company started providing its employees
with the new protective clothing manufactured
according to the technical specifications devel-
oped in 2011 in order to standardize the require-
ments for protective clothing at our subsidiaries.
Due to the IMS effectiveness no accidents
or fires were recorded at the Company’s
hazardous production facilities in 2012.
50
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
41 %
OF OUR SPECIALISTS
AND LINE WORKERS
UPGRADED THEIR RESPECTIVE
QUALIFICATIONS IN 2012
I
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B
S
N
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S
E
R
L
A
C
O
S
I
D
N
A
L
A
T
N
E
M
N
O
R
V
N
E
I
HUMAN RESOURCES
In 2012, we developed and approved the Successor program, which aims
to provide executives with the ability to participate in training activities
aimed at developing a common understanding of the goals and the strat-
egy of the Company for preparation for higher level positions within the
Company.
Employees are NOVATEK’s most valuable
resource, allowing the Company to grow
rapidly and effectively. The Company’s
human resource management system is
based on the principles of fairness, respect,
equal opportunities for professional devel-
opment, dialogue between management
and employees, as well as continuous,
comprehensive training and development
opportunities for the Company’s employees
at all levels.
As of the end of 2012, NOVATEK and its
subsidiaries had 5,440 employees, 40% of
whom work in exploration and production
and 50% in processing, transportation and
marketing.
Personnel Training and
Development
In an environment of rapidly developing
technologies and management systems,
our multilevel training and professional
development program enables our employ-
ees to contribute to raising the Company’s
competitiveness. In 2012, the primary goals
of training and professional development
included:
• developing and implementing the “Suc-
cessor” program aimed at providing the
Company with a talent pool of senior
managers;
• developing and implementing the
“Steps in Discovering Talents” program
for young specialists targeted at train-
ing highly qualified personnel whose
competence level fully meets business
needs;
• developing and implementing the “Tech-
nical Training” program based on the
results of tests in the Corporate Techni-
cal Competency Assessment System
for various lines of business; and
• involvement of young specialists in NO-
VATEK’s “Research-to-Practice Confer-
ences” and the “Fuel and Energy Com-
plex (FEC) Competitions”.
In 2012, we developed and approved the
Successor program, which aims to provide
executives with the ability to participate in
training activities aimed at developing a
common understanding of the goals and the
strategy of the Company for preparation for
higher level positions within the Company.
During the past year, NOVATEK continued
its efforts to increase employee training, im-
prove working conditions and ensure a safe
environment at its production facilities. In
2012, 41% of our specialists and line workers
upgraded their respective qualifications, and
52% of the Company’s engineers and tech-
nicians completed employee certification
and industrial safety courses.
GROWTH
EFFICIENCY
INNOVATION
51
ANNUAL REPORT
OAO NOVATEK
2012
BREAKDOWN OF PERSONNEL
AS AT 31 DECEMBER 2012
33%
10%
E&P
Transportation
and Marketing
Processing
Administrative
5,440
Employees
17%
40%
Specialized training courses for employees
of production divisions started in Sep-
tember 2012 under the Technical Training
program at Gubkin Russian State University
Training and Research Center, the Petrole-
um Learning Center at Tomsk Polytechnic
University and other centers, and 81 em-
ployees underwent training through the
program. An on-site training program has
been developed and implemented at OOO
NOVATEK-Purovsky ZPK, in which 45 em-
ployees took part during the year.
A total of 103 people were tested under the
Corporate Technical Competency Assess-
ment System during the year, including 10
people during the hiring process to fill va-
cant positions and 41 employees promoted
to more senior positions. Six people have
been included in the Technical Training pro-
gram for 2013 as a result of testing newly
hired employees.
In 2012, we completed the first phase of
the “Steps in Discovering Talents” program,
whereby 47 young specialists participat-
ed in training courses (Effective Training
and Development, Presentation Skills and
Self-Organization) for personal skills devel-
opment. Mentors – employees with high
professional competencies able and willing
to share their experience – were assigned
to young specialists to help them adapt
quickly and effectively and develop suc-
cessfully as professionals. A Mentorship
Practicum in which 31 mentors took part
was organized and held in order to build
knowledge and skills of working with young
specialists. During the year, young special-
ists met with experts from various lines of
the Company’s business.
The 7th Interregional Research-to-Practice
Conference for the Company’s young spe-
cialists attended by 47 employees was held
in Moscow in September 2012. Based on
the results of the competition, 12 winners
were awarded a trip to a petroleum train-
ing center in Norway, and the second- and
third-place winners received cash prizes.
The winner nominated in the category “Best
Implemented Project 2012” was awarded
a cash prize, and the top seven projects
advanced to the FEC 2012 Competition for
Youth Projects, held by the Russian Federa-
tion’s Ministry of Energy.
In 2012, two of NOVATEK’s young spe-
cialists who were winners of the FEC-2011
Competition received commendations from
the Ministry of Energy.
Social Programs
The focus in employee relations is on
implementing social programs. Accord-
ing to the Core Concept of the Company’s
social policy which was adopted in 2006,
the social benefits package for employees
includes the following programs:
• voluntary medical insurance for employees;
• therapeutic resort treatment for employ-
ees and members of their families;
• provision of special-purpose short-term
loans;
• special-purpose compensation and
social support payments;
• provision of special-purpose inter-
est-free loans to purchase housing, and
• pension program.
Along with providing an optimum social
benefits package, the Company is also
committed to creating opportunities for em-
ployees to play sports and get involved in
sports and cultural events. In 2012, our em-
ployees and their family members visited
52
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
EMPLOYEES OF THE PUROVSKY PLANT
I
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T
L
B
S
N
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P
S
E
R
L
A
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S
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M
N
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V
N
E
I
exhibitions at Russia’s national museums,
classical music concerts, and attended
sporting events like hockey, basketball and
football (soccer) games in their free time
with the Company’s assistance.
The Company publishes its corporate
newsletter “NOVATEK”, including the
“NOVATEK Family” feature, to inform
employees about the Company’s activi-
ties and get employees, specialists and
managers actively involved in business,
cultural, sports, charitable and corporate
activities. In 2012, we began to publish a
new corporate magazine “NOVATEK Plus”
in conjunction with developing the overall
corporate media within the Company.
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
53
SOCIAL POLICY AND CHARITY
NOVATEK continued to finance programs targeting education and youth
development, support for low-income families, repair and modernization
of socially important facilities and preservation of the culture heritage of
the indigenous peoples of the Far North and Russia as a whole.
During 2012, NOVATEK continued to contrib-
ute to an improvement in the living stand-
ards of local populations in the YNAO as well
as the Samara, Chelyabinsk and Tyumen
regions. Special priority was given to the
performance of our long-term agreements
with the municipalities of these regions for
financing programs targeting education and
youth development, support for low-income
families, repair and modernization of socially
important facilities and preservation of the
culture heritage of the indigenous peoples
of the Far North and Russia as a whole. In
2012, NOVATEK invested more than RR 1.0
billion 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 2012, NOVATEK provided financial
support to the “Yamal for Descendants”
association and its district branches. We
achieved our statutory goals, including the
support of the youth branch of the Associa-
tion, air delivery of the nomadic population
and food in remote areas, purchase and
delivery of fuel to name a few items.
Throughout the year, the Company also
provided sponsorship 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, training
courses and seminars, and publishing;
• The Administration of the YNAO for
purchasing rehabilitation equipment for
the disabled and for arranging diagnosis
and treatment assistance for seriously ill
and disabled children;
• The Yamal District to fund measures on
behalf of the Ilebts Territorial Community
of Indigenous Peoples of the North and
organize expeditions to discover sacred
and ceremonial sites of Yamal’s indige-
nous population;
• The Tazov District for construction of a
cold storage facility in the village of Gyda
and purchasing snowmobiles and motor
boats for residents; and
• The Nadym District for the construction
of a helipad in the Kutopyugan village.
Educational Programs
NOVATEK continued to develop the Com-
pany’s continuing education program,
which provides opportunities to gifted
students, from the regions where we op-
erate, to further their education at top rated
universities, participate in NOVATEK intern-
ships and, upon completion of their studies,
possible employment with the Company.
Recruitment and career guidance for prom-
ising employees start with the “Gifted Chil-
dren” program implemented at School No.
8 in Novokuybyshevsk and School No. 2 in
54
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
52 GRANTS AWARDED
TO SCHOOL TEACHERS
FROM THE START
OF THE “GRANTS”
PROGRAM
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Tarko-Sale. Special classes are formed on
a competitive basis from the most talented
grade 10 and 11 students with above-aver-
age test scores.
The Company has also implemented two
“Grants” programs for schoolchildren and
teachers living in the Purovsky District 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 2012, the Company award-
ed 242 grants.
The “Grants” program for the teachers is
intended to raise the prestige of the teach-
ing profession and create favorable con-
ditions for developing new and talented
teachers. Since the program was launched,
52 teachers have received grants, including
nine in 2012.
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. The program
is an action plan for focused, high-quality
training for specialists with higher educa-
tion in key areas of expertise in order to
grow the Company’s business and meet its
needs for young specialists. The program
is based at the St. Petersburg State Mining
University, Gubkin Russian State University
of Oil and Gas in Moscow and the Tyumen
Oil and Gas University.
Students who have passed their exams
with good and excellent results receive
additional monthly payments. During their
studies, the students are offered paid field,
engineering and directed internships. 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 employees.
Support of Cultural Traditions
The strengthening of partnership rela-
tions between the Company and Russia’s
leading cultural and educational institutions,
creative groups and charity funds contin-
ued during the 2012 period, namely the
Russian State Museum (St.Petersburg), the
Moscow Kremlin Museum, the State Tret-
yakov Gallery, the Multimedia Art Museum
(the Moscow House of Photography Muse-
um and Exhibition Complex), the Moscow
Museum of Modern Art and the Samara
Regional Art Museum.
One of the most outstanding cultural events
in Russia became an exhibition of one of
the most famous artists of the 20th centu-
ry, Boris Grigoriev. The project was jointly
sponsored by the Russian State Museum,
the State Tretyakov Gallery and NOVATEK.
The Company was also a sponsor of the
exhibition “Mastership of the Russian
Armorer”, which was organized by the
Moscow Kremlin Museum and the Samara
Regional Art Museum. We also continued
to support the annual International Festival
“Imperial Gardens of Russia”, sponsored
and staged by the Russian State Museum.
In 2012, special priority was given to pro-
jects and exhibitions of modern art and
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
55
dren’s Clinical Hospital at its Moscow office
in collaboration with the foundation.
We continued our charitable activities of the
Company’s All Together volunteer move-
ment founded in 2008. As in previous years,
the volunteers’ participated in a number of
causes including support for orphans and
children with various illnesses, veterans,
orphaned animals as well as support for the
blood donor movement and the organiza-
tion of other charitable programs.
NOVATEK supported the exhibition “Arte
Povera”, which was organized for the first
time in Russia by the Multimedia Art Mu-
seum 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 Mu-
seum of Modern Art in 2011 and supported
the large-scale exhibition project “Impos-
sible Community”, which brought together
35 Russian and foreign painters, many of
whom displayed their works in Moscow for
the first time.
NOVATEK also remained a General Partner
of the Moscow Soloists Chamber Ensemble
under the direction of Yuri Bashmet.
Sports Projects
NOVATEK has continued its support for
semi-professional and high-level amateur
sports programs. The Company and its
subsidiaries organize regular tournaments
in the most popular sports, including soc-
cer, volleyball, swimming, et cetera. A team
made up of Company’s employees also
takes part in the annual Moscow Mini-Soc-
cer Championship. The Company is the
General Partner of the Dynamo Hockey
Club (Moscow), the Spartak Basketball Club
(St. Petersburg) and the NOVA Volleyball
Team (Novokuybyshevsk).
Charity
The Company continued its cooperation
with Chulpan Khamatova’s Gift of Life chari-
table foundation in 2012. Funds raised from
events are directed to children’s hospitals to
buy modern medical equipment.
In 2012, the Company held two blood donor
sessions for children from the Russian Chil-
10 MEETINGS
OF THE BOARD
OF DIRECTORS
WERE HELD IN 2012
RUSSIA’S LARGEST
INDEPENDENT
NATURAL GAS PRODUCER
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
57
03
MANAGEMENT AND
CORPORATE GOVERNANCE
NOVATEK STRIVES TO COMMIT TO THE HIGHEST
STANDARDS OF CORPORATE GOVERNANCE.
WE BELIEVE THAT SUCH STANDARDS ARE
AN ESSENTIAL PREREQUISITE TO BUSINESS
INTEGRITY AND PERFORMANCE AND PROVIDE
A FRAMEWORK FOR SOCIALLY RESPONSIBLE
MANAGEMENT OF THE COMPANY'S OPERATIONS
CORPORATE
GOVERNANCE SYSTEM
NOVATEK strives to commit to the high-
est standards of corporate governance.
We believe that such standards are an
essential prerequisite to business in-
tegrity and performance and provide a
framework for socially responsible man-
agement of the Company's operations.
The Company has established an ef-
fective and transparent system of cor-
porate governance complying with both
Russian and international standards.
NOVATEK's supreme governing body
is the General Meeting of Sharehold-
ers. The corporate governance system
also includes the Board of Directors, the
Board Committees, and the Manage-
ment Committee, as well as the system
of internal control and audit bodies. The
activity of all these bodies is governed by
the applicable laws of the Russian Fed-
eration, NOVATEK’s Charter and internal
documents available on our website
(www.novatek.ru/en).
NOVATEK strives to consider the principles
of corporate governance outlined in the
Corporate Governance Code recommend-
ed by the Russian Federation’s Federal
Commission for Securities Market dated
4 April 2002 №421/r. The Company follows
the recommendations of the Code, as well
as offering to our shareholders and inves-
tors other solutions that are intended to
protect their rights and legitimate interests.
Since the Company's shares are listed on
the London Stock Exchange in the form of
depositary receipts, NOVATEK places great
emphasis on the UK Financial Reporting
Council’s Combined Code on Corporate
Governance and follows its recommenda-
tions as far as practicable.
The Company adheres to the internal Corporate
Governance Code approved by the Board of
Directors in 2005 (Minutes No. 60 of 15 Decem-
ber 2005). This Code has been elaborated on
in accordance with best Russian and interna-
tional practices in corporate governance, ethical
norms and specific conditions of the Compa-
ny's operations and in accordance with Russian
legislation and the Company's Charter.
58
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
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The Company also adheres to the internal
Code of Business Ethics approved by the
Board of Directors in 2011 (Minutes No. 133
of 24 March 2011). The Code establishes
general norms and principles governing the
conduct of members of the Board of Direc-
tors, Management Committee and Revision
Commission, as well as NOVATEK's man-
agement and employees, which were elab-
orated on the basis of moral and ethical val-
ues and professional standards. The Code
also determines the rules which govern mu-
tual relationships inside the Company and
NOVATEK's relationships with its subsidiaries
and joint ventures, shareholders, investors,
the government and public, consumers,
suppliers, and other stakeholders.
NOVATEK’s corporate governance practic-
es make it possible for its executive bodies
to effectively manage ongoing operations
in a reasonable and good faith manner and
solely to the benefit of the Company and its
shareholders.
GENERAL MEETING
OF SHAREHOLDERS
The General Meeting of Shareholders is
NOVATEK's supreme governing body.
The activity of the General Meeting of
Shareholders is governed by the laws of
the Russian Federation, the Company's
Charter, and the Regulations on the Gen-
eral Meetings approved by NOVATEK’s
General Meeting of Shareholders in 2005
(Minutes No. 95 of 28 March 2005) with
amendments. The Guidelines were elab-
orated in accordance with Russian leg-
islation, the Company's Charter and the
recommendations of the Russian Corpo-
rate Code of Conduct.
The General Meeting of Shareholders is
responsible for the approval of annual
reports, annual financial statements, the
distribution of profit, including dividends
payout, the election of Board of Directors
and Revision Commission, approval of the
Company’s Auditor and other corporate
and business matters.
On 27 April 2012, the Annual General
Meeting of Shareholders approved the
annual report, annual financial statements
(in accordance with Russian Accounting
Standards), distribution of profit and the
size of dividends based on the results
of FY2011. The meeting also elected the
Board of Directors, Chairman of the Man-
agement Committee and the Revision
Commission, as well as approved re-
muneration to members of the Board of
Directors, Revision Commission and the
Company's auditor for 2012.
On 16 October 2012, the Extraordinary Gen-
eral Meeting of Shareholders approved the
amount of interim dividend for the first six
months of 2012 and a long-term contract
for natural gas purchase from OAO SIBUR
Holding.
BOARD OF DIRECTORS
The Board of Directors (the Board) activi-
ty is governed by the laws of the Russian
Federation, the Company's Charter and
the Regulations on the Board of Directors
approved by NOVATEK’s General Meeting
of Shareholders in 2005 (Minutes No. 96 of
17 June 2005) with amendments.
The Board carries out the overall strategic
management of the Company's activity
on behalf of and in the interests of all its
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
59
Board and Committee meetings attendance in 2012
MEMBER
INDEPENDENCE
BOARD
OF DIRECTORS
AUDIT
COMMITTEE
CORPORATE GOVERNANCE
AND REMUNERATION
COMMITTEE
STRATEGY AND
INVESTMENTS
COMMITTEE
Alexander Natalenko
independent*
Leonid Mikhelson
executive
Andrei Akimov
Burckhard Bergmann
Mark Gyetvay
Yves-Louis Darricarrere
Kirill Seleznev
Ruben Vardanian
Gennady Timchenko
independent **
independent **
executive
independent**
independent **
independent *, **
independent **
10/10
10/10
9/10
10/10
10/10
9/10
6/10
10/10
10/10
3/3
3/3
3/3
4/4
4/4
4/4
4/4
4/4
4/4
2/4
3/4
*
**
Independent Director in accordance with the UKLA Combined Code.
Independent Director in accordance with the Corporate Governance Code recommended by the RF Federal Commission for Securities Market.
shareholders, and ensures the Company’s
efficient performance in order to increase
its shareholder value.
The Board determines the Company's
strategy and priority lines of business,
endorses long-term and annual business
plans, reviews financial performance, in-
ternal control, risk management and other
matters within its competence, includ-
ing optimization of corporate and capital
structure, approval of major transactions,
making decisions on investment projects
and recommendations on the size of
dividend per share and its payment pro-
cedure, and convening General Meeting of
Shareholders. The members of the Board
are elected by the General Meeting of
Shareholders.
The current members of the Board were
elected at the Annual General Meeting of
Shareholders on 27 April 2012. The Board
of Directors is comprised of nine mem-
bers, of which seven are non-executive
directors. Six directors are considered to
be independent in accordance with the
Corporate Governance Code recommend-
ed by the Russian Federation’s Federal
Commission for Securities Market, and
two in accordance with requirements of
the UK Financial Reporting Council’s Com-
bined Code on Corporate Governance.
The Board Chairman is Alexander Egor-
ovich Natalenko. The Chairman is respon-
sible for leading the Board and ensuring its
effectiveness.
The members of NOVATEK's Board have a
wide range of expertise as well as sig-
nificant experience in strategic, financial,
commercial and oil and gas activities.
The Board members hold regular meet-
ings with NOVATEK's senior management
to enable them to acquire a detailed
understanding of NOVATEK’s business
activities and strategy and the key risks.
In addition to these formal processes,
Directors have access to the Company’s
medium-level managers for both formal
and informal discussions to ensure regular
exchange of information they need to par-
ticipate in the Board meetings and make
balanced decisions in a timely manner.
Board activities
during the year
To ensure the Company’s efficient per-
formance, the Board meetings shall be
convened on a regular basis at least once
every two months. In 2012, the Board met
10 times, of which 6 meetings were held
in absentia. During the year, the following
key issues were discussed and respective
decision made:
• reviewed and approved the Company's
2011 full year operating and financial
results;
• approved the acquisition as well as the
applicable financing of a 49% equity
stake in ZAO Nortgas;
• recommended a full year dividend for
2011, based on full year financial results,
and an interim dividend for first half
2012, based on interim financial results
for that period;
• approved Russian rouble bond registra-
tion with the total nominal value of RR 45
billion;
• approved the acquisition of an 82% in-
terest in OOO Gazprom mezhregiongas
Kostroma; and
• reviewed and approved NOVATEK's
business plan for 2013.
60
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
BOARD OF
DIRECTORS
OF NOVATEK
AS AT 31.12.2012
MR. ALEXANDER Y.
NATALENKO
MR. ANDREI I.
AKIMOV
Born in 1946
Born in 1953
Chairman of NOVATEK’s
Board of Directors
Member of NOVATEK’s
Board of Directors
Member of the Audit Committee
Member of the Corporate
Governance and Remuneration
Committee
Member of the Board of
Directors of OAO Rosgeologia
Chairman of the
Audit Committee
Chairman of the Management
Board of “Gazprombank” (OAO)
MR. LEONID V.
MIKHELSON
Born in 1955
Member of NOVATEK’s
Board of Directors
Chairman of the
Management Committee
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ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
61
DR. BURCKHARD
BERGMANN
Born in 1943
Member of NOVATEK’s
Board of Directors
Member of the Corporate
Governance and Remuneration
Committee
Member of the Strategy
and Investments Committee
Board Member of the Presidium
of the German-Russian Chamber
of Commerce
MR. YVES LOUIS CHARLE
JUSTIN DARRICARRERE
Born in 1951
MR. MARK A.
GYETVAY
Born in 1957
Member of NOVATEK’s
Board of Directors
Member of the Corporate
Governance and Remuneration
Committee
Executive Vice President
of Total S.A.
President of Total Exploration
& Production
Member of NOVATEK’s
Board of Directors
Chairman of the Strategy
and Investments Committee
Member and Deputy Chairman
of the Management Committee
Chief Financial Officer
MR. KIRILL G.
SELEZNEV
MR. GENNADY N.
TIMCHENKO
MR. RUBEN K.
VARDANIAN
Born in 1974
Born in 1952
Born in 1968
Member of NOVATEK’s
Board of Directors
Member of NOVATEK’s
Board of Directors
Member of NOVATEK’s
Board of Directors
Member of the Strategy
and Investments Committee
Member of the Strategy
and Investments Committee
Member of the Management
Board, Director of Gas and
Liquid Hydrocarbons Marketing
and Processing Department of
OAO “Gazprom”
General Director of OOO
“Gazprom Mezhregiongaz”
Chairman of the Corporate
Governance and Remuneration
Committee
Member of the Audit Committee
Co-head of Sberbank CIB
62
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
Committees membership as of 31 December 2012:
AUDIT COMMITTEE
STRATEGY
AND INVESTMENTS
COMMITTEE
CORPORATE GOVERNANCE
AND REMUNERATION
COMMITTEE
Chairman
Andrei Akimov
Mark Gyetvay
Ruben Vardanian
Members
Ruben Vardanian
Burckhard Bergmann
Alexander Natalenko
Alexander Natalenko
Yves-Louis Darricarrere
Burckhard Bergmann
BOARD COMMITTEES
The Company has three Board Commit-
tees: the Audit Committee, the Strategy and
Investments Committee and the Corporate
Governance and Remuneration Committee.
The Committees’ activities are governed
by the Committees Charters approved by
the Board of Directors. The specific terms
of reference for each of the Board Commit-
tees are available on our website.
The Committees play a vital role in ensur-
ing that the high standards for corporate
governance are maintained throughout the
Company and that specific decisions are
analyzed and the necessary recommen-
dations are issued prior to general Board
discussions. The minutes of the Commit-
tees meetings are circulated to the Board
members and are accompanied by any
necessary materials and explanatory notes.
In order to carry out their duties, the Com-
mittees may request information or doc-
uments from members of the Company's
executive bodies or heads of the Compa-
ny’s relevant departments. For the purpose
of considering any issues being within their
competence, the Committees may engage
experts and advisers having necessary
professional knowledge and skills.
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Gennady Timchenko
Kirill Seleznev
Strategy and Investments
Committee
The primary function of the Strategy and
Investments Committee is to develop and
give recommendations to the Board for
determining of priorities of the Company's
operations and assessing the effectiveness
of investment projects and their impact on
NOVATEK's shareholder value.
In carrying out its responsibilities and
assisting the members of the Board in
discharging their duties, the Strategy and
Investment Committee is responsible for
but not limited to:
• analyzing concepts, programs, and
plans of the Company's strategic devel-
opment and giving recommendations to
the Board;
• developing recommendations to the
Board with respect to any transactions
with assets the value of which exceeds
5% of the Company’s assets book value,
as calculated 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 imple-
mentation; and
• developing recommendations to the
Board for utilization of the Company's
reserves and provisions.
In 2012, the Strategy and Investments
Committee met four times.
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
63
Corporate Governance
and Remuneration Committee
Audit Committee
The primary function of the Audit Commit-
tee is the control over financial and busi-
ness operations of the Company and as-
sistance to the Board in exercising effective
control by assessing:
• the accuracy, transparency, and com-
pleteness of the Company's financial
statements prepared in accordance with
Russian and International accounting
standards;
• the candidature of the Company's exter-
nal auditor;
• the independent auditor’s report with re-
spect to the Company's annual financial
statements;
• the efficiency of the Company’s internal
control procedures and proposals for
their improvement.
The Audit Committee works actively with
the Revision Commission, external auditor
and Company's executive bodies, inviting
NOVATEK’s managers responsible for the
preparation of the financial statements to
attend the Committee meetings.
In 2012, the Audit Committee met three
times.
The primary function of the Corporate
Governance and Remuneration Commit-
tee is to improve the corporate governance
system and to review the Company’s prac-
tices and policies to ensure compliance
of the Company's business practices and
internal regulatory documents with appli-
cable standards of corporate governance
and Russian and international best practice
standards. The Corporate Governance and
Remuneration Committee is also responsi-
ble for determining the policy for executive
remuneration and for the remuneration and
benefits of individual executive directors
and senior executives as well.
In order to assist the Board, the Committee
performs the following functions:
• develop and regularly review our corpo-
rate governance documents and docu-
ments regulating corporate conflicts;
• develop recommendations with respect
to our dividend policy and distribution;
• evaluate the Company's Investor Rela-
tions and Shareholder communications
polices;
• develop procedures for and perform an
annual evaluation of the work performed
by the Board; and
• determine the annual compensation for
the Board and the Revision Commission
members.
In 2012, the Corporate Governance and Re-
muneration Committee met four times.
64
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
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MANAGEMENT
COMMITTEE
NOVATEK’s Management Committee is
a collegial executive body responsible
for the day-to-day management of the
Company’s operations. The Management
Committee is governed by the laws of the
Russian Federation, NOVATEK’s Char-
ter, decisions of the General Meetings of
Shareholders and the Board of Directors
and by other internal documents. More
information regarding the Management
Committee’s competence is provided in
the Management Committee Regulations
approved by NOVATEK’s General Meeting
of Shareholders in 2005 (Minutes No. 95 of
28 March 2005).
Members of the Management Committee
are elected by the Board of Directors from
among the Company's key employees. The
Management Committee is subordinated
to the Board of Directors and the General
Meeting of Shareholders. Chairman of the
Management Committee is responsible
for leading the Committee and ensuring
its effectiveness as well as organizing the
Management Committee meetings and
implementing decisions of the General
Meeting of Shareholders and the Board.
The Management Committee is currently
comprised of eight members elected by
the Board of Directors (Minutes No. 118
of 3 December 2009 and Minutes No. 113
of 24 March 2011). The Chairman of the
Management Committee is Leonid
Viktorovich Mikhelson.
Management Committee of NOVATEK as at 31.12.2012
Leonid Mikhelson
Chairman
Mikhail Popov
Vladimir Baskov
Alexander Fridman
First Deputy Chairman, Commercial Director
Deputy Chairman
Deputy Chairman
Mark Gyetvay
Deputy Chairman, Chief Financial Officer
Tatyana Kuznetsova
Deputy Chairman, Director of the Legal Department
Iosif Levinzon
Kirill Yanovskiy
Deputy Chairman
Director for Finance and Strategy
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
65
Remuneration paid to members of the Board of Directors and Management Committee
BOARD OF DIRECTORS(1)
MANAGEMENT COMMITTEE
Total paid, including:
105.5
1,297.5
Salaries
Bonuses
Fees
Other property advancements
-
-
105.0
0.5
495.8
786.5
-
15.2
(1) Some members of NOVATEK’s Board of Directors are simultaneously members of the Management Committee. Payments to such members in relation to their
activities as members of the Management Committee are included in the total payments to members of the Management Committee.
REMUNERATION TO
MEMBERS OF THE
BOARD OF DIRECTORS
AND MANAGEMENT
COMMITTEE
The procedure for and criteria of calculating
remuneration to members of NOVATEK’s
Board of Directors, as well as the compen-
sation of their expenses, are prescribed in
the Company’s Charter and Regulations on
NOVATEK’s Board of Directors.
The procedure for and criteria of calculating
remuneration to the Chairman and mem-
bers of NOVATEK’s Management Commit-
tee, as well as the compensation of their
expenses, are prescribed in the Regula-
tions for the Management Committee and
the employment contracts they sign with
the Company.
INTERNAL CONTROL
AND AUDIT
The Company has a system of internal
control over financial and business oper-
ations with the respect to modern interna-
tional best practices. The system of internal
control consists of the Audit Committee, the
Revision Commission, the Chairman of the
Management Committee, the Management
Committee, the Company's management
and the Internal Audit Division.
The objects of internal control are OAO
NOVATEK, its subsidiaries and joint ven-
tures, and their subdivisions, as well as their
activities.
The goals, objectives and internal control
procedures are established by the Regu-
lations on NOVATEK’s Internal Control, ap-
proved by the Board of Directors (Minutes
No. 114 of 31 August 2009).
Revision Commission
Revision Commission consisting of four
members is elected at the Annual Gener-
al Meeting of Shareholders for a period of
one year. The competence of the Revision
Commission is governed by the Russian
Federation Law On Joint Stock Compa-
nies No. 208-FZ as well as the Company's
Charter and the Regulations on the Revi-
sion Commission Procedures approved
by the General Meeting of Shareholders
(Minutes No. 95 of 28 March 2005).
The Revision Commission is an internal
control body responsible for oversight of the
Company’s financial and business activities,
management bodies, officers, divisions,
departments, branches, and representative
offices. The Revision Commission audits the
Company’s financial and business perfor-
mance for the year, as well as for any other
period as may be decided by its members
or other persons authorized in accordance
with Russian Federation law and the Regula-
tions for NOVATEK’s Revision Commission.
The results are presented in the form of
revisions Auditing Commission.
In 2012, the Revision Commission held
one documentary revision of financial and
business activity of the Company for the
year 2011. As a result the conclusions about
the reliability of the data contained in the
Company’s 2012 Financial Statements and
2012 Annual Report were prepared and
submitted to the Annual General Meeting of
Shareholders.
66
Internal Audit Division
NOVATEK’s Internal Audit Division is
working on raising assurances to achieve
the strategic goals of the Company and
effectiveness of its corporate governance.
The Internal Audit Division is guided by the
Code of Ethics of the Institute of Internal
Auditors and International internal audit
standards.
The Division reports directly to the Chair-
man of the Management Committee and
the Audit Committee. The Internal Audit
Division operates on the basis of the annu-
al strategic schedule of revisions based on
risk assessment and the approval of the
Chairman of the Management Committee
and annually provides to the Chairman of
the Management Committee and the Audit
Committee the results of its activities.
In performing its functions, the Internal
Audit Division is guided by the principles of
independence and objectiveness. NO-
VATEK’s internal standards envisage full
access of the Internal Audit Division em-
ployees to all functions, records, property
and personnel of the Company in imple-
menting their audit tasks.
According to the results of audits, the
Division develops plan-actions to eliminate
identified risks and to implement proposals
for optimization of the financial and busi-
ness activity.
External Auditor
The Annual General Meeting of Share-
holders appoints an external auditor
to conduct independent review of NO-
VATEK’s financial statements. The Audit
Committee gives recommendations to
the Company's Board of Directors re-
garding the candidatures of external
auditors and the price of their services.
Based on the Committee’s recommen-
dations, the Board proposes the auditor’s
candidature for the consideration and for
approval by the Annual General Meeting
of Shareholders.
ZAO PricewaterhouseCoopers Audit was
approved as the Company’s external au-
ditor to conduct independent audit of the
Company's financial statements for 2012.
In selecting the auditor’s candidature,
attention shall paid to level of their pro-
fessional qualifications, independence,
possible risk of any conflict of interest,
terms of the contract, and an amount of
remuneration requested by the candi-
dates. The Audit Committee oversees
the external auditor’s independence and
objectivity as well as the quality of the
audit conducted. The Committee annu-
ally provides to the Board of Directors the
results of review and evaluation of the
audit opinion regarding the Company's fi-
nancial statements. The Audit Committee
meets with the auditor's representatives
at least once per year.
NOVATEK’s management is aware of and
accepts recommendations on independ-
ence of the external auditor by placing
certain restrictions on such auditor's
involvement in providing non-audit ser-
vices. Remuneration paid to the principle
auditors for auditing and other services
is specified in the Note 22 to the con-
solidated financial statements prepared
in accordance with IFRS standards for
2012.
growthefficiencyinnovationannUaL rePortoao novateK2012ManageMent anDcorPorate governance ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
67
SHARE CAPITAL
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. As of 31 December 2012, NOVATEK
did not have privileged shares.
Our shares are traded in US dollars and
Russian roubles on the MICEX-RTS
Stock Exchange and have an A1 listing
(symbol: NVTK).
The Federal Financial Market Service
issued to NOVATEK a permit for circu-
lation beyond Russian Federation of
910,589,000 ordinary shares comprising
29.99% of the Company’s share capital.
Our Global Depositary Receipts (GDR) are
listed on the London Stock Exchange (sym-
bol: NVTK). Each GDR represents 10 ordi-
nary shares. As of 31 December 2012, NO-
VATEK’s GDRs were issued on 910,588,780
ordinary shares comprising 29.99% of the
Company’s share capital.
Equity stakes in NOVATEK’s share capital and the number of shares owned
by members of the Board of Directors and Management Committee
EQUITY STAKE
AS OF 31 DECEMBER 2012(1), %
NUMBER
OF SHARES
Board of Directors
Alexander Natalenko
Andrei Akimov
Burckhard Bergmann
Ruben Vardanian
Mark Gyetvay
Yves-Louis Darricarrere
Leonid Mikhelson
Kirill Seleznev
Gennady Timchenko
Management Committee
Vladimir Baskov
Alexander Fridman
Tatyana Kuznetsova
Iosif Levinzon
Mikhail Popov
Kirill Yanovskiy
-
-
-
-
-
-
0.6754
-
-
0.0288
0.0817
0.1944
-
0.1440
0.1051
-
-
-
-
-
-
20,506,542
-
-
874,408
2,481,049
5,903,035
-
4,372,038
3,192,530
(1) The equity stakes are given based on the records in the register of NOVATEK’s shareholders in accordance with the Russian Federation laws.
68
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
6.86 RR PER SHARE
RECOMMENDED
DIVIDEND
FOR 2012
DIVIDENDS
NOVATEK’s dividend policy is based on
keeping the balance between the Com-
pany’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 Annual
General Meeting of Shareholders accord-
ing to the recommendation of the Board
of Directors. Dividends are paid twice a
year; their size depends on market con-
ditions, cash flow and the Company’s
capital structure and investment program.
NOVATEK is strongly committed to its
dividend policy.
On 19 March 2013, the Board of Direc-
tors of OAO NOVATEK recommended
to the Annual General Meeting of Share-
holders to pay dividends for FY 2012
in the amount of RR 3.86 per ordinary
share or RR 38.6 per one Global Depos-
itary Receipt (GDR), exclusive of RR 3.0
of interim dividends per ordinary share
or RR 30.0 per one GDR for the first six
months of 2012.
Thus, should the General Meeting of
Shareholders approve the above recom-
mended dividend, the dividends for 2012
will total RR 6.86 per ordinary share (RR
68.6 per one GDR), and the total amount
of dividends payable for 2012 will be RR
20,829,059,160.
The amount of paid dividends accrued
for the years 2007 to 2011, and for the
first six months of 2012 is reported as
of 31 December 2012 in the table below.
Partial payment of the accrued dividends
was made due to provision by sharehold-
ers (nominee holders) of incorrect postal
and/or banking details and insufficient
information regarding banking or postal
details of shareholders.
Accrued and paid dividends on NOVATEK shares for the period from 2007 to 2012
DIVIDEND
ACCRUAL PERIOD
AMOUNT OF DIVIDENDS,
TOTAL AMOUNT OF
RR PER SHARE
DIVIDENDS ACCRUED, RR
TOTAL AMOUNT OF
DIVIDENDS PAID, RR
2007
2008
2009
2010
2011
First 6 months of 2012
2.35
2.52
2.75
4.00
6.00
3.00
7,135,319,100
7,135,293,833
7,651,491,120
7,651,310,957
8,349,841,500
8,349,681,894
12,145,224,000
12,144,967,156
18,217,836,000
18,217,663,073
9,108,918,000
9,108,864,267
E
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V
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O
P
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D
N
A
T
N
E
M
E
G
A
N
A
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ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
69
INFORMATION
TRANSPARENCY
NOVATEK is committed to providing ob-
jective, reliable, and consistent informa-
tion about the Company and its activities
to all stakeholders and also complies
with modern standards for information
disclosure while adhering to a maximum
level of transparency. The Regulations on
Information Policy approved by the Board
of Directors (Minutes No. 45 of 10 May
2005), define main principles for disclos-
ing information and increasing information
transparency.
Material information about the Company
is disclosed in a timely manner in the form
of press releases through authorized dis-
closure in accordance with the applicable
laws of Russian Federation and United
Kingdom. The Company discloses quar-
terly financial statements in accordance
with the International Financial Reporting
Standards (“IFRS”), Management’s Dis-
cussion and Analysis of Financial Condi-
tion and Results of Operations as well as
various presentations for investors.
In addition to press releases and material
facts, the Company's website provides
detailed information on all aspects of its
activities, including our Sustainability Re-
port. We regularly participate in informa-
tion disclosure on greenhouse gas emis-
sions and energy efficiency of production
– the Carbon Disclosure Project (CDP),
and on the use of water resources – the
CDP Water Disclosure Project, as well as
other industry’s publications and studies.
The Company maintains an ongoing dia-
logue with shareholders and investors in
order to ensure full awareness of invest-
ment community about its activities.
The main channels of communica-
tion with the investment community are
through the Chairman of the Management
Committee, Deputy Chairman (the Chief
Financial Officer) and the Investor Rela-
tions department. The Company’s repre-
sentatives meet on a regular basis with
key financial audiences to discuss issues
of interest to them.
In accordance with principles of its unified
information policy, NOVATEK conducts
an active, ongoing dialog with represent-
atives of media outlets. The information
disclosed to mass media comprises
all aspects of the Company's activities,
including financial and operating results
and projects under development, as well
as socially or environmentally important
aspects.
NOVATEK actively involves in a variety
of outside Exhibitions and Conferences.
During 2012, representatives of the Com-
pany participate in more than 15 exhibi-
tions, conferences and round tables and
gave seven presentations on key industry
issues. One of the most important events
was the Second International Confer-
ence – Yamal LNG starts marine transpor-
tation LNG in Arctic, which was organized
by NOVATEK. According to the confer-
ence participants, among which were
heads of the relevant Russian ministries
and institutions as well as scientists and
businessmen from Russia, Europe and
the Asian-Pacific Region, the conference
was highly organized.
70
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
ADDITIONAL
INFORMATION
MAJOR RISK FACTORS
The risks provided herein are by no means
exhaustive and only reflect the Company’s own
opinions and estimates.
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 industry.
The following factors may adversely affect the
Company’s operations, or its financial and eco-
nomic 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 pipeline transportation of natural gas
and crude oil as well as railway transporta-
tion;
• 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 net-
works; and
• Increasing competition in the Russian natural
gas industry from independent natural gas
producers and vertically integrated compa-
nies.
NOVATEK implements specific measures to
minimize the potential impact of industry risks. In
particular, the Company is actively building pro-
ductive partnerships with key service suppliers,
expanding its customer base, actively searching
for purchasers of natural gas at agreed prices
and entering into long-term contracts with them.
In addition, NOVATEK strives to diversify its mar-
keted product line to include gas condensate,
crude oil and petroleum 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 Russian economy; strong GDP growth, po-
litical stability, improving 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 dependence of the country’s
industrial output on the demand for raw materials
in world markets.
The Company produces and processes hydro-
carbons on the territory of Western Siberia, a re-
gion with a challenging climate. The Company’s
vulnerability to region-specific impacts is insig-
nificant and is completely accounted for through
the management of the Company’s financial
and economic operations. The Company has
built an efficient system of interaction between its
production and marketing units and its principal
production facilities are concentrated in close
proximity to the transportation networks in use.
Risks related to possible military conflicts, state
of emergency announcements, or strikes, are
non-existent, as the Company operates in eco-
nomically and socially stable regions.
Financial Risks
NOVATEK’s financial performance is subject to
financial risks associated with the fluctuation of
foreign currency exchange rates, as the Com-
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
71
pany borrows funds in foreign denominated
currencies and markets a portion of its products
internationally.
With respect to the fluctuation of the Russian
rouble in relation to other currencies, the mar-
keting of products internationally substantially
extensively reduces this risk and balances out
the adverse effects of the national currency’s
exchange value fluctuations. The inflow of export
profits will secure mainly 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 outstanding amounts on existing loans and
credits may become less attractive in compari-
son with current offers in the loan market. In this
event, the Company will undertake to replace ex-
isting debt facilities with current market offers on
better terms and conditions, including borrowing
costs.
Overall interest rate growth may affect the Com-
pany’s borrower liabilities, subject to change
under specific conditions. The resulting dynamic
behavior in the borrowed funds value restricts
their use as a source of funds throughout “ex-
pensive loan” periods.
Interest rate shifts in specific sectors of the
debt market will result in the Company diver-
sifying its funding sources and switching to
market sectors with more attractive financial
resources.
Commodity Price Risks
Commercial trading strategy for natural gas, sta-
ble gas condensate, LPG, crude oil and related
oil products is centrally managed in the Compa-
ny. Changes in commodity prices could nega-
tively or positively affect the Company’s results of
operations.
As an independent natural gas producer, NO-
VATEK is not subject to the government’s reg-
ulation of natural gas prices. Nevertheless, the
Company’s prices are strongly influenced by the
prices regulated by the Federal Tariffs Service
(FTS), a governmental agency.
The Company sells all of its crude oil and gas
condensate under spot contracts. Gas conden-
sate volumes sold to the US, European, South
America and Asian Pacific markets are based on
benchmark reference prices of light oil WTI and
Brent or naphtha. Crude oil sold internationally is
priced based on benchmark reference crude oil
prices of Brent, plus a margin or a discount and
on a transaction-by-transaction basis for vol-
umes 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 refer-
ence 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 ob-
ligations. NOVATEK mitigates credit risk through
the management of its cash and cash equiva-
lents, including short-term deposits with banks,
as well as credit exposure to customers, includ-
ing outstanding trade receivables and commit-
ted transactions. 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
72
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
external ratings. Almost all domestic sales of
liquid hydrocarbons are made on a 100 percent
prepayment basis. Although the Company does
not require collateral in respect of trade and other
receivables, it has developed standard credit
payment terms and constantly monitors the sta-
tus 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 condi-
tions, without incurring unacceptable losses or
risking damage to the Company’s reputation.
In managing its liquidity risk, NOVATEK main-
tains adequate cash reserves and debt facilities,
continuously monitors forecasted and actual
cash flows and matches the maturity profiles
of financial assets and liabilities. The Compa-
ny 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 en-
tered into a number of short-term credit facilities,
such as credit lines and overdraft facilities, which
can be drawn down to meet short-term financ-
ing needs. To fund cash requirements of a more
permanent nature, the Company will normally
raise long-term debt in international and domes-
tic 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 Federation contem-
plates 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
tariffs for natural gas.
NOVATEK monitors the consumer price index
and takes this factor into account when deter-
mining its selling prices.
Risks Related to the Impact
of the Global Financial Crisis
The main risks relating to the impact of global
financial crisis 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 natural gas planned by the Russian
government, combined with 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 consequences of potential
Russian rouble devaluation for NOVATEK.
The search for new customers along with pro-
vision 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 industrial consumers.
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
73
Legal Risks
Risk Insurance
The Company’s operations are susceptible to risks
resulting from changes in the statutory regulation
of the following spheres:
• Currency laws (in areas concerning export/im-
port and borrowings operations);
• Tax laws (in areas regulating taxation systems
and rates applicable to companies in general,
and to companies marketing natural gas and
liquid hydrocarbons, specifically);
• Customs laws (in areas concerning the export
of liquid hydrocarbons and their derivatives);
• Licensing requirements for natural resource
extraction.
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
development 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-availability of commercial
reserves. Information on the Company’s fields’
reserves is provided as estimated, subject to cer-
tain factors and assumptions. Actual production
volumes across fields, along with the cost-effec-
tiveness of reserve exploitation, may deviate from
estimated figures.
The Company’s operations require substantial
investment into field exploration and development,
followed by the production, transportation, and
processing of natural gas, oil, and gas conden-
sate. Insufficient funding for these and other
expenditures may affect the Company’s financial
standing and performance results.
Risk insurance is an integral part of NOVATEK’s
risk management system. In 2012, the insurance
coverage guaranteed adequate protection against
the risks of damage to our business. Insurance
is provided by reputable domestic insurance
companies that have the highest insurance ratings
in Russia (Standard & Poor`s BBB-/ Stable on
National Scale: ruAA +) with risk reinsurance by
major international insurance companies.
The Company fully complies with the applicable
legal requirements in terms of mandatory insur-
ance, such as third-party liability insurance of
owners of hazardous facilities and vehicles.
To reduce the risks of financial losses the Com-
pany utilizes the following voluntary insurance
products:
• Insurance of the risk of damage/loss
of property;
• Management liability insurance.
The risks of damage/loss of property resulting
from accidents are fully insured. Full cost recovery
with a franchise is in place. Following the assess-
ments made in 2011 we insured our production
equipment on new terms providing for better cov-
erage of risks. Since 1 January 2012 the property
insurance is applied at replacement cost, which
results in better compensation of potential damag-
es. For more than 7 years NOVATEK has procured
its top management liability insurance against
possible claims by third parties for any losses
incurred through wrong actions or decisions. The
overall limit on such insurance coverage is 150
million U.S. dollars.
In 2012, the Company began developing a com-
prehensive program for business interruption
insurance. The new program is estimated to cover
all of our main producing entities.
74
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
INFORMATION ON MEMBERS
OF NOVATEK’S BOARD OF
DIRECTORS AND MANAGEMENT
COMMITTEE
MR. ALEXANDER Y. NATALENKO
Born in 1946
MR. LEONID V. MIKHELSON
Born in 1955
Chairman of NOVATEK’s Board of Direc-
tors and member of its Audit Committee
and its Corporate Governance and Remu-
neration Committee
Mr. Natalenko completed his studies at
the Irkutsk State University in 1969 with a
primary focus in Geological Engineering.
Subsequently, he worked with the Yago-
dinskaya, Bagdarinskaya, Berelekhskaya,
Anadirskaya and East-Chukotskaya geo-
logical expeditions. In 1986, Mr. Natalenko
headed the North-East Industrial and Ge-
ological Association and, in 1992, he was
elected president of АО "Magadan Gold
& Silver Company". He subsequently held
various executive positions in Russian and
foreign geological organizations. From 1996
to 2001, Mr. Natalelnko held the position of
Deputy Minister of Natural Resources of the
Russian Federation. He is a member of the
Board of Directors of ZAO GC VERTEX. In
2012, Mr. Natalenko was elected member
of the Board of Directors of OAO Rosgeo-
logia.
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 Direc-
tors.
Mr. Natalenko is the recipient of the State
Prize of the Russian Federation and an
Honored Geologist of Russia.
Member of NOVATEK’s Board of Direc-
tors, Chairman of NOVATEK’s Manage-
ment Committee
Mr. Mikhelson received his primary de-
gree 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 pipe-
line. In 1985, Mr. Mikhelson was appointed
Chief Engineer of Ryazantruboprovodstroy.
In 1987, he became General Director of
Kuibishevtruboprovodstroy, which in 1991,
was the first company in the region to sell
its shares and became a private company,
AO SNP NOVA. Mr. Mikhelson remained
SNP NOVA’s Managing Director from 1987
through 1994. Subsequently, he became a
General Director of the management com-
pany “Novafininvest”.
Since 2002, Mr. Mikhelson has served as
a member of the Board of Directors and
Chairman of the Management Committeeof
NOVATEK. From March 2008 to December
2010, he has been a member of the Board
of Directors of OAO Stroytransgas. From
2009 to 2010 he was the Chairman of the
Board of Directors of ОАО Yamal LNG and
from 2008 to 2011 he was a member 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.
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
75
MR. ANDREI I. AKIMOV
Born in 1953
DR. BURCKHARD BERGMANN
Born in 1943
Chairman of the Management Board
of "Gazprombank" (OAO), Member
of NOVATEK’s Board of Directors
and Chairman of its Audit Committee
Mr. Akimov graduated from the Moscow
Financial Institute in 1975 where he special-
ized in international economics. Between
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 Gen-
eral 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 Vneshtorg-
bank. Since 2003, Mr. Akimov has been the
Chairman of the Management Committee
of Gazprombank (OAO). He is a member
of the Board of Directors of ZAO Geros-
gaz, Carbon Trade & Finance SICAR S.А.
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 Chairman of
the Audit Committee of OAO NOVATEK.
Member of NOVATEK’s Board of Di-
rectors, its Corporate Governance and
Remuneration Committee and its Strat-
egy and Investments Committee, Board
Member of the Presidium of the Ger-
man-Russian Chamber of Commerce,
Member of the Advisory Board of the
Union of German Science Funds
Dr. Bergmann studied physics at the Frei-
burg and Aachen Universities from 1962 to
1968 and was awarded a Doctorate in Engi-
neering 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 J lich Nuclear Research
Center. In 1972, Dr. Bergmann joined Ruhr-
gas AG (from 1 July 2004 – E.ON Ruhrgas
AG), heading the LNG Purchasing Depart-
ment. In 1978, he became Head of the Gas
Purchasing 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 Chair-
man. 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, Com-
merzbank AG, Contilia GmbH, Telenor ASA.
In addition, he is a member of the Adviso-
ry Boards for Dana Gas International, IVG
Immobilien AG. He has been elected as
Chairman of the Advisory Board of Jaeger
Grund und Dienste GmbH& Co KG and
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Mr. Vardanian is Co-founder of the
Moscow-based Skolkovo School of
Management and is represented on its
Coordinating Council. The school was
established on the initiative of Mr. Varda-
nian and several Russian businessmen.
Between 2006 and 2011, Mr. Vardanian
was President of the Skolkovo 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 Establishment of Inter-
national Financial Center in the Russian
Federation. He is a member of the RF
Government’s Competition and Entrepre-
neurship Council.
The World Economic Forum (Davos)
included Mr. Vardanian in a list of “100 fu-
ture world leaders”. He was also included
in the Top-22 Business Leaders of Russia
for three consecutive years (rating by the
“Kommersant” newspaper and Manag-
ers Association).
Mr. Vardanian, graduated with honors
from Moscow State University with a
degree in Economics. In 2000, he also
completed executive management
courses at INSEAD (Fontainebleau,
France) and, in 2001 and 2005, he com-
pleted the courses at Harvard Business
School (USA).
member of the Board of Trustees of RAG
Foundation since 2012.
Dr. Bergmann holds the following distinc-
tions: Commander of the Royal Nor-
wegian Order of Merit (1997); Honorary
Consul of the Russian Federation in the
State of North Rhine-Westphalia a For-
eign Member of the Academy of Tech-
nological Sciences of the Russian Fed-
eration (2003); Order of Merit of the State
of North Rhine-Westphalia (2004) as
well as a winner of Director 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.
MR. RUBEN K. VARDANIAN
Born in 1968
Member of NOVATEK’s Board of Direc-
tors, Chairman of its Corporate Gover-
nance and Remuneration Committee
and member of its Audit Committee
Ruben Vardanian is Co-head of Sberbank
CIB. 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, where
he was working since its foundation.
Mr. Vardanian is a Board member of
several companies: OAO AvtoVAZ, OAO
KAMAZ, OAO NOVATEK, OAO SIBUR
Holding, Joule Unlimited, Inc (a pioneer
in production of renewable fuel based
on solar energy) and others. He is also
Board Chairman of several companies:
OAO Rosgosstrakh, ZAO AmeriaBank
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77
MR. MARK A. GYETVAY
Born in 1957
Member of NOVATEK’s Board of Direc-
tors and Chairman of its Strategy and
Investments Committee, Member and
Deputy Chairman of NOVATEK’s Man-
agement Committee Chief Financial
Officer
Mr. Gyetvay studied at Arizona State Uni-
versity (Bachelor of Science, Accounting,
1981) and later at Pace University, New
York (Graduate Studies in Strategic Man-
agement, 1995). After graduation, Mr.
Gyetvay worked in various capacities at a
number of independent oil and gas com-
panies (Champlin Petroleum Co., Texas,
Ensource Inc. and MAG Enterprises,
Colorado, and Amerada Hess Corpora-
tion, New Jersey) where he specialized in
financial and economic analysis for both
upstream and downstream segments of
the petroleum industry.
In 1994, Mr. Gyetvay began his work
at Coopers and Lybrand, 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 Energy where he assumed the
role of client service engagement part-
ner, Utilities and Mining practice, based
in Russia (Moscow office). Mr. Gyetvay
was an engagement partner on various
energy and mining clients providing over-
all project management, financial and
operational expertise, maintaining and
supporting client service relationships
as well as serving as concurring partner
on transaction services to the petroleum
sector.
Mr. Gyetvay is a Certified Public Account-
ant, a member of the American Institute
of Certified Public Accountants and an
associate member of the Society of Pe-
troleum 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 Directors. Since 2004–2008, he
has been Chief Financial Officer and, in
August 2007, Mr. Gyetvay was elected
to NOVATEK’s Management Committee
and, in July 2010, he became Deputy
Director of NOVATEK’s Management
Committee.
MR. YVES LOUIS CHARLE
JUSTIN DARRICARRERE
Born in 1951
Executive Vice President, Total S.A.,
President, Total Exploration & Produc-
tion, Member of NOVATEK’s Board of
Directors and its Corporate Govern-
ance and Remuneration Committee
After two years lecturing at the Ecole
Nationale Superieure des Mines de Paris,
Yves-Louis Darricarrere began his career
in Elf Aquitaine in 1978, first in the Min-
ing Division in Australia 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 development and new
ventures, then Finance Director of the
Exploration & Production Branch and of
the Oil and Gas directorate. In 1998, he
was appointed Deputy Director-General
of Elf Exploration-Production responsible
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for Europe and the United States and
was nominated a member of the Man-
agement Committee of Elf-Aquitaine.
In 2000, he was appointed Senior
Vice-President for Exploration & Pro-
duction Northern Europe and became a
member of the Total Group Management
Committee.
On 1 September 2003, Yves-Louis Dar-
ricarrere was nominated 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 Darricarrere is a graduate
of the Ecole Nationale Superieure des
Mines and the Institut d’Etudes Politiques
in Paris and holds a master’s degree in
economic science. He is Chevalier de la
Legion d’Honneur (Knight of the French
Legion of Honour).
MR. KIRILL G. SELEZNEV
Born in 1974
Member of the Management Board, Di-
rector of Gas and Liquid Hydrocarbons
Marketing and Processing Department
of OAO “Gazprom”, General Director of
OOO Gazprom Mezhregiongaz, Mem-
ber of NOVATEK’s Board of Directors
and its Strategy and Investments Com-
mittee
Mr. Seleznev graduated from the D.F.
Ustinov Baltic State Institute of Tech-
nology 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 Finan-
cial Group "Management Investments
Development" and OAO "St. Peters-
burg 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 Sys-
tem", 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
Hydrocarbons Marketing and Process-
ing Department of OAO Gazprom and
a Member of the OAO Gazprom Man-
agement Board. Since 2003, Mr. Se-
leznev has been the General Director
of OOO Gazprom Mezhregiongaz.
Mr. Seleznev is also a member of the
Board of Directors and Supervisory
Board of several other entities. Since
2006, Mr. Seleznev has been a member
of NOVATEK’s Board of Directors.
MR. GENNADY N. TIMCHENKO
Born in 1952
Member of NOVATEK’s Board of Direc-
tors and its Strategy and Investments
Committee
In 1976, Mr. Timchenko graduated with a
Masters of Science from the Mechanical
University in Leningrad. He began his ca-
reer at the Izjorskii Factory in Leningrad,
an industrial plant which made compo-
nents for the energy industry. Between
1982 and 1988, he was a Senior Engineer
at the Ministry of Foreign Trade. Mr. Tim-
chenko has more than 20 years of ex-
perience in Russian and International
ANNUAL REPORT
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79
energy sectors and he has built interests
in trading, logistics and transportation
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 spe-
cialized in oil and petrochemical trading.
Between 1994 and 2001, Mr. Timchenko
was managing Director of IPP OY Fin-
land and IPP AB Sweden. In 1997, he
co-founded Gunvor, a leading independ-
ent oil-trading company. Mr. Timchenko
was a member of the Board of Directors
of OOO Transoil and OOO BalttransSer-
vice. Since 2009, he has been a mem-
ber 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,
as well as the Chairman of the Board
of Directors of OOO Kontinental Hockey
League.
MR. VLADIMIR A. BASKOV
Born in: 1960
Deputy Chairman of NOVATEK’s Man-
agement Committee
In 1986, Mr. Baskov graduated from the
Moscow Higher Police School of the
USSR. In 2000, he completed courses at
the Management Academy at the Rus-
sian Ministry for Internal Affairs. From
1981 to 2003, he served in various de-
partments within the Russian Ministry for
Internal Affairs. From 1991 to 2003, Mr.
Baskov held managerial positions within
the aforementioned Ministry's organiza-
tional structures. In 2003 he was ap-
pointed Director of the Business Support
Department for NOVATEK. In 2005 he
was appointed Deputy Chairman of NO-
VATEK’s Management Committee and
in August 2007 he became a member
of NOVATEK’s Management Committee.
Candidate of Legal Sciences. He was
awarded the Order For Personal Cour-
age, the Russian Federation’s Order of
the Badge of Honor and other state and
departmental awards: Honorary Diplo-
mas of the President of the Russian Fed-
eration, the Ministry of Internal Affairs, the
Governor of the Moscow Region. He also
has the awards of the Russian Orthodox
Church (Order of Holy Prince Daniel of
Moscow and a medal of St. Sergius).
MRS. TATYANA S. KUZNETSOVA
Born in: 1960
Deputy Chairman of NOVATEK’s Man-
agement Committee, Director of NO-
VATEK’s Legal Department
Ms. Kuznetsova graduated from the Far
East State University 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 Purneftegas-
geologiya. In 1998, she was appointed
Deputy General Director of OAO Nord-
pipes. Since 2002, she has been Director
of the Legal Department for NOVATEK.
Since 2005, she has been the Deputy
Chairman of NOVATEK’s Management
Committee – Director of NOVATEK’s Le-
gal Department and in August 2007, she
became a member of NOVATEK’s Man-
agement Committee.
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MR. IOSIF L. LEVINZON
Born in: 1956
MR. MIKHAIL V. POPOV
Born in: 1969
First Deputy Chairman of NOVATEK’s
Management Committee, Commercial
Director
Mr. Popov studied at the Gubkin State
Academy of Oil and Gas until 1992 and
in 1994, graduated from the Kiev Institute
of National Economy. In 1992, he held
the position of Deputy Chairman of AO
Bankomsvyaz’s Managing Committee
(Kiev). In 2002, he was appointed Direc-
tor of the Capital Construction Depart-
ment and Deputy General Director of
OAO Novafininvest. From 2003, Mr. Pop-
ov served as Director of Crude Oil and Oil
Products Department of OAO NOVATEK.
In 2004, Mr. Popov was elected First
Deputy Chairman of NOVATEK’s Man-
agement Committee. Since August 2007,
he has been a member of the Manage-
ment Committee and since May 2011, he
has been NOVATEK’s First Deputy Chair-
man-Commercial Director.
Deputy Chairman of NOVATEK’s
Management Committee
Mr. Levinzon graduated from the Tyu-
men Industrial Institute specializing in
geology and is a Candidate of Geo-
logical 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 Purnefte-
gasgeologiya. From 1996 to 2005, Mr.
Levinzon was the Deputy Governor, 1st
Deputy Governor and Vice-Governor of
the Yamal-Nenets Autonomous Region.
From 2005 to 2006, Mr. Levinzon was
an Advisor to the Chairman of the Fed-
eration Council of the Federal Assembly
of the Russian Federation. From 2006 to
2009, Mr. Levinzon was an Advisor on
Corporate and Strategic Development at
ZAO OSTER and also at ZAO Investgeo-
servis. Since August 2009, Mr. Levinzon
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 Or-
der of the Badge of Honor and the Order
of the Friendship of Peoples awards and
has been awarded the Certificate of Merit
from the Governor of the Yamal-Nenets
Autonomous Region.
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INNOVATION
81
MR. ALEXANDER M. FRIDMAN
Born in: 1951
MR. KIRILL N. YANOVSKIY
Born in: 1967
Deputy Chairman of NOVATEK’s Man-
agement Committee
In 1973, Mr. Fridman graduated from the
Gubkin Institute of Oil and Gas in Mos-
cow, with a degree in Oil and Gas Fields
Development and Exploitation. Since
1984, he was employed by various Gaz-
prom companies: as Chief Engineer of
Nadymgazprom, Head of the Production
and Technical Department of the Indus-
trial 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. Frid-
man was the Deputy General Director of
Novafininvest. In 2004, Mr. Fridman was
elected Deputy Chairman of the Man-
agement Committee of OAO NOVATEK.
In August 2007, became a member of
NOVATEK’s Management Committee.
Member of NOVATEK’s Management
Committee, Director for Finance and
Strategy
In 1991, Mr. Yanovskiy graduated from
the Gubkin Institute of Oil and Gas in
Moscow. From 1992, he headed a de-
partment of the Yugorsky Joint-Stock
Bank. From 1995, he headed the Securi-
ties Department at the Neftek Joint-Stock
Commercial Bank. Since 2002, he has
been Director of NOVATEK’s Financial
Planning, Analysis and Control Depart-
ment. In August 2007, Mr. Yanovskiy
was elected to NOVATEK’s Management
Committee and in 2007 was appointed
Deputy Director for Finance and Strategy.
Since May 2011 he has been Director for
Finance and Strategy .
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EFFICIENCY
INNOVATION
MAJOR TRANSACTIONS
AND INTERESTED PARTY
TRANSACTIONS
In 2012, the Company consummated
several major interested party trans-
actions:
Loan Agreement; Subscription Agreement;
Paying Agency Agreement; Trustee and
Agents Fee Side Letter; and Fee Side Letter
(the “Transaction”);
Scope of the Transaction:
The Loan Agreement between Novatek
Finance Limited (the “Lender”) and OAO
NOVATEK (the “Borrower”) whereby OAO
NOVATEK borrows an amount of funds
equal to those received from the placement
of relevant Eurobond tranche and the loan
participation notes and undertakes to repay
the principal amount and accrued interest
pursuant to the terms and conditions of the
Loan Agreement, as well as pay a specified
fee, reimburse expenses in relation to loan
provision and make other payments, includ-
ing indemnity, and assume other obligations
provided for by the Loan Agreement;
Subscription Agreement between Novatek
Finance Limited (the “Issuer”), OAO NO-
VATEK (the “Borrower”) and Barclays Bank
plc and Goldman Sachs International, and/or
their affiliates, and/or other entities designat-
ed in addition to or instead of these entities,
and/or other entities specified in the Sub-
scription Agreement (collectively referred to
as the “Joint Lead Managers”), whereby:
tions precedent set forth in the Subscription
Agreement, and
(b) OAO NOVATEK provides representa-
tions and warranties regarding inter alia
its business activity, as well as complete-
ness and reliability of information about
such business activity contained in the
Prospectus prepared in accordance with
international practices for the Transaction
purposes, and assumes unlimited liability
to pay indemnity and reimburse specific
expenses as expressly provided, and other
obligations envisaged by the Subscription
Agreement;
Paying Agency Agreement between No-
vatek Finance Limited (the “Issuer”), OAO
NOVATEK (the “Borrower”) and other
parties specified therein, whereby paying
and other agencies are appointed and the
procedure of Eurobonds servicing and
redemption is defined, and OAO NOVATEK
undertakes to make certain payments and
assumes obligations provided for by the
Paying Agency Agreement;
The Trustee and Agents Fee Side Letter
and the Fees Side Letter between Novatek
Finance Limited, OAO NOVATEK and other
parties to these Letters providing for the
payment of fees and other amounts in rela-
tion to raising funds in accordance with the
Loan Agreement in the amount and man-
ner specified in such Letters;
(a) Novatek Finance Limited acting as an
issuer undertakes to issue and sell Eu-
robonds, with proceeds channeled to
finance one or more loans, and the Joint
Lead Managers acting as initial buyers
undertake to subscribe to and pay for Eu-
robonds (or procure such subscription and
payment) subject always to meeting condi-
Deadline for obligations performance under
the transaction: until the parties fully dis-
charge their obligations.
Parties and beneficiaries to the transaction:
OAO NOVATEK (the “Borrower”); Novatek
Finance Limited (the “Lender”); Barclays
Bank plc and Goldman Sachs International;
ANNUAL REPORT
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2012
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EFFICIENCY
INNOVATION
83
The price (money value) of asset being
the scope of the Transaction equals to the
total amount, which includes the aggregate
amount of the principle debt on the loans of
1,000,000,000 (one billion) US dollars, inter-
est on the loan / each of the loans raised,
calculated based on an annual interest rate
of up to 4.4220% per annum, provided that
the loan / each loan is granted for up to 10
years, as well as the fees of the trustee,
agents and other persons comprising less
than 50% of the Company’s assets’ book
value as of the last accounting date.
The asset value as of the end of the ac-
counting period (quarter, year) preceding
the transactions date (agreement date) for
which financial statements are prepared in
accordance with the Russian Federation
laws: RR 265,835,437,000. The transaction
is considered to be a major transaction.
Transaction date (agreement date) –
10.12.2012.
The transaction was approved by NO-
VATEK’s Board of Directors (Minutes
No. 153 of 19.11.2012).
In 2012, the Company consummated
the following related party transactions
the amount of which exceeds 2 per-
cent of the Company’s assets’ book
value as of the last accounting date:
1. Gas supply contract entered into by and
between OAO SIBUR Holding (the “Suppli-
er”) and OAO NOVATEK (the “Buyer”).
The transaction’s material terms and con-
ditions:
• Between January 1, 2013 and December
31, 2022, inclusively, the Supplier under-
takes to deliver Natural Gas to the Gas
Delivery Points specified in the Gas Sup-
ply Contract, and the Buyer undertakes
to accept and timely pay for the Gas;
• Gas supply volume: up to
69,700,000,000 cm.
• Deadline for obligations performance
under the transaction and information
on obligations performance: The gas
supply contract is valid with respect to
gas deliveries until 31 December 2012
inclusively; and with respect to other ob-
ligations until they are fully discharged;
• The transaction amount in Russian
roubles is calculated for the period from
2013 through 2022, including the effec-
tive VAT (18%), and shall not exceed RR
360,000,000,000;
Interested parties: NOVATEK’s Board Mem-
ber Ruben Karlenovich Vardanian; Chair-
man of NOVATEK’S Management Commit-
tee and NOVATEK’s Board Member Leonid
Viktorovich Mikhelson; NOVATEK’s Board
Member Gennady Nikolaevich Timchenko.
The transaction was approved by resolution
of OAO NOVATEK’s Extraordinary General
Meeting of Shareholders (Minutes No. 116
of 17.10.2012).
2. Deed of Indemnity governed by the Eng-
lish law (the “Deed”);
The transaction’s material terms and con-
ditions:
• Parties: OAO NOVATEK, GPB-Financial
Services LTD, SIB (Cyprus) Limited and/
or their affiliates.
• Subject of the transaction: In view of
raising by OAO NOVATEK of one or
several loans from Novatek Finance
Limited funded through the issue
84
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2012
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EFFICIENCY
INNOVATION
Interested parties: NOVATEK’s Board Mem-
ber Andrei Igorevich Akimov; NOVATEK’s
Board Member Ruben Karlenovich Varda-
nian;
The transaction was approved by NO-
VATEK’s Board of Directors (Minutes No.
154 of 06.12.2012).
and placement of Novatek Finance
Limited loan participation notes (Eu-
robonds) in one or several tranches
in the international capital markets for
the total amount of USD 1,500,000,000
(One billion five hundred million) (or
its equivalent in any other currency)
with an annual interest rate of up to
9% and for the period of up to 10 years
for each of the loans, OAO NOVATEK
assumes obligations to reimburse
and compensate certain expenses
under the Deed as provided therein
within the below stated liability cap
to GPB-Financial Services LTD, SIB
(Cyprus) Limited and/or their affiliates
and other parties to which there will
be applicable the Deed provisions
relating to reimbursement or compen-
sation of possible expenses, and OAO
NOVATEK assumes other liabilities
envisaged by the Deed.
• Beneficiaries: GPB-Financial Services
LTD, SIB (Cyprus) Limited and/or their
affiliates and other parties to which there
will be applicable the Deed provisions
relating to reimbursement or compensa-
tion of possible expenses.
• Price of the transaction: The Deed price
shall be commensurate with the market
level and shall be determined based on
the scope of aggregate liabilities of OAO
NOVATEK assumed under the Deed,
in the amount of RR 5.2 billion which is
less than 2% of OAO NOVATEK’s asset
book value as of 30 September 2012,
the last accounting date before the date
of transaction.
The Deed terms not defined in this item as
the Deed material terms may be amend-
ed as agreed by the relevant Parties to the
Deed.
IFRS CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
31 DECEMBER 2012 AND 2011
AND INDEPENDENT AUDITOR’S
REPORT
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 ........................................................................................................... 9
Notes to the Consolidated Financial Statements:
Note 1. Organization and principal activities ....................................................................................................... 11
Note 2. Basis of presentation ............................................................................................................................... 11
Note 3. Summary of significant accounting policies ........................................................................................... 12
Note 4. Critical accounting estimates and judgments .......................................................................................... 21
Note 5. Acquisitions and disposals ...................................................................................................................... 24
Note 6. Property, plant and equipment ................................................................................................................ 29
Note 7.
Investments in joint ventures................................................................................................................... 30
Note 8. Long-term loans and receivables ............................................................................................................. 33
Note 9.
Inventories ............................................................................................................................................... 34
Note 10. Trade and other receivables..................................................................................................................... 34
Note 11. Prepayments and other current assets ...................................................................................................... 35
Note 12. Cash and cash equivalents ....................................................................................................................... 36
Note 13. Long-term debt ........................................................................................................................................ 36
Note 14. Pension obligations ................................................................................................................................. 38
Note 15. Short-term debt and current portion of long-term debt ........................................................................... 40
Note 16. Trade payables and accrued liabilities ..................................................................................................... 40
Note 17. Shareholders’ equity................................................................................................................................ 41
Note 18. Share-based compensation program ........................................................................................................ 42
Note 19. Oil and gas sales ...................................................................................................................................... 43
Note 20. Transportation expenses .......................................................................................................................... 43
Note 21. Taxes other than income tax.................................................................................................................... 44
Note 22. General and administrative expenses ...................................................................................................... 44
Note 23. Materials, services and other ................................................................................................................... 45
Note 24. Purchases of natural gas and liquid hydrocarbons .................................................................................. 45
Note 25. Finance income (expense) ....................................................................................................................... 46
Note 26. Income tax ............................................................................................................................................... 47
Note 27. Financial instruments and financial risk factors ...................................................................................... 49
Note 28. Contingencies and commitments ............................................................................................................ 57
Note 29. Principal subsidiaries and joint ventures ................................................................................................. 59
Note 30. Related party transactions ....................................................................................................................... 60
Note 31. Segment information ............................................................................................................................... 62
Note 32. Exploration for and evaluation of mineral resources .............................................................................. 65
Note 33. Subsequent events ................................................................................................................................... 65
Note 34. New accounting pronouncements ........................................................................................................... 66
Unaudited supplemental oil and gas disclosures ...................................................................................................... 69
Contact Information ................................................................................................................................................. 74
OAO NOVATEK
Consolidated Statement of Income
(in millions of Russian roubles, except for share and per share amounts)
Notes
Year ended 31 December:
2011
2012
19
20
21
24
6
22
23
25
25
7
26
Revenues
Oil and gas sales
Other revenues
Total revenues
Operating expenses
Transportation expenses
Taxes other than income tax
Purchases of natural gas and liquid hydrocarbons
Depreciation, depletion and amortization
General and administrative expenses
Materials, services and other
Exploration expenses
Net impairment expenses
Change in natural gas, liquid hydrocarbons
and work-in-progress
Total operating expenses
Net gain (loss) 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 joint ventures,
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)
210,246
727
174,811
462
210,973
175,273
(60,848)
(16,846)
(17,483)
(11,185)
(10,936)
(7,216)
(2,022)
(325)
1,086
(125,775)
(60)
196
(48,329)
(16,559)
(5,994)
(9,277)
(8,218)
(5,947)
(1,819)
(782)
105
(96,820)
62,948
207
85,334
141,608
(3,236)
1,731
4,491
2,986
(2,150)
3,392
(3,945)
(2,703)
(2,105)
(3,880)
86,215
135,025
(16,142)
(632)
(16,774)
(12,467)
(3,267)
(15,734)
69,441
119,291
(17)
69,458
22.89
3,034,245
(364)
119,655
39.45
3,033,302
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)
Profit (loss)
69,441
119,291
(cid:3)
Year ended 31 December:
2011
2012
Other comprehensive income (loss) after income tax:
Currency translation differences
Other comprehensive income (loss)
Total comprehensive income (loss)
Total comprehensive income (loss) attributable to:
Non-controlling interest
Shareholders of OAO NOVATEK
(395)
(395)
313
313
69,046
119,604
(17)
69,063
(364)
119,968
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 joint ventures, net of income tax
Net change in other non-current assets and long-term receivables
Change in pension obligations
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
Notes
Year ended 31 December:
2011
2012
86,215
135,025
7
11,499
325
(4,491)
101
3,236
(1,731)
2,105
780
709
(195)
(8,086)
(1,425)
5,014
(624)
(5,121)
(17,607)
9,475
782
3,945
(62,811)
2,150
(3,392)
3,880
1,132
120
82
(6,103)
(132)
567
1,120
(4,548)
(13,933)
Net cash provided by operating activities
75,825
71,907
Cash flows from investing activities
Purchases of property, plant and equipment
Prepayments for participation in tender for mineral licenses
Purchases of inventories intended for construction
Acquisition of subsidiaries net of cash acquired
Acquisition of joint ventures
Additional capital contributions to joint ventures
Proceeds from disposals of subsidiaries net of cash disposed
Interest paid and capitalized
Loans provided
Repayments of loans provided
Interest received
6
5, 7
8
5
(37,378)
-
(1,938)
184
(42,697)
(5,213)
302
(2,698)
(4,818)
8,102
2,030
(25,335)
(6,870)
(773)
(4,188)
(21,176)
(3,955)
11,796
(3,508)
(6,729)
13,166
929
Net cash (used for) provided by investing activities
(84,124)
(46,643)
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
Capital contributions to the Group’s subsidiaries
by non-controlling shareholders
Sales of treasury shares
Purchases of treasury shares
81,149
-
(40,412)
-
(2,320)
(19,718)
(16,290)
497
-
(303)
44,885
3,700
(8,552)
(21,321)
(818)
(15,166)
(14,817)
-
354
-
17
5
17
17
Net cash (used for) provided by financing activities
2,603
(11,735)
7
OAO NOVATEK
Consolidated Statement of Cash Flows
(in millions of Russian roubles)
Net effect of exchange rate changes on
cash, cash equivalents
Net increase (decrease) in cash, cash equivalents
Cash and cash equivalents at beginning of the period
Cash, cash equivalents at end of the period
Notes
Year ended 31 December:
2011
2012
285
(5,411)
23,831
18,420
64
13,593
10,238
23,831
The accompanying notes are an integral part of these consolidated financial statements.
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OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
1
ORGANIZATION 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 (except for deliveries
to residential customers); however, the majority of natural gas sold on the domestic market is sold at prices
regulated by the Federal Tariffs 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 December 2012, the Group acquired an 82 percent participation interest in OOO Gazprom mezhregiongas
Kostroma, a Russian regional natural gas trader, to support and expand natural gas sales opportunities in the
Kostroma Region of the Russian Federation (see Note 5).
In December 2012, the Group established a wholly owned subsidiary, OOO NOVATEK Moscow region, to
support the Group’s current natural gas deliveries as well as to expand potential sales opportunities in the Moscow
region of the Russian Federation.
In December 2012, the Group disposed of its wholly owned non-core subsidiary, OOO Purovsky Terminal (see
Note 5).
In November 2012, the Group acquired a 49 percent ownership interest in ZAO Nortgas, an oil and gas producing
company, which holds the license for the North-Urengoyskoye field located in the YNAO (see Note 5).
During 2012, the Group signed long-term natural gas purchase and sales contracts with third parties to commence
commercial trading activities in the European market. The contracts were signed for a period of ten years starting
from 1 October 2012 with the expected total volume of natural gas traded over this period of approximately
20 billion cubic meters (see Notes 27, 31).
In January and June 2012, the Group merged its wholly owned subsidiaries OOO Yamalenergogas and
OOO Gazprom mezhregiongas Chelyabinsk into its wholly owned subsidiaries OOO NOVATEK-Perm and
OOO NOVATEK-Chelyabinsk, respectively. The mergers did not affect the Group’s consolidated financial and
operational results.
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. 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 (a) depreciation, depletion
and amortization, and valuation of property, plant and equipment, (b) consolidation of subsidiaries, (c) business
combinations, (d) accounting for income taxes, and (e) valuation of unrecoverable assets, expense recognition and
other provisions.
11
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
2
BASIS OF PRESENTATION (CONTINUED)
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:
Russian roubles to one currency unit
At 31 December 2012
At 31 December 2011
Average rate for the year
ended 31 December:
2011
2012
US dollar (“USD”)
Polish Zloty (“PLN”)
30.37
9.87
32.20
9.47
31.09
9.56
29.39
9.94
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.
Reclassifications. Certain reclassifications have been made to the comparative figures to conform to the current
period presentation with no effect on profit for the period or shareholder’s equity. The export sales of liquefied
petroleum gas for the year ended 31 December 2012 are presented net of excise and fuel tax. Accordingly, liquefied
petroleum gas sales and excise and fuel tax expenses for the year ended 31 December 2011 were decreased by
RR 998 million.
3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 acquisition 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
recognized 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 recognized as expenses rather than included in goodwill.
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)
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 unrealized gains on transactions between group companies are eliminated;
unrealized 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 re-measured to its fair value, with the change in carrying amount
recognized 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 recognized 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 recognized 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 recognized in other comprehensive income are reclassified to profit or loss where
appropriate.
Acquisition of non-controlling interests. The difference between the purchase consideration and the carrying
amount of non-controlling interests acquired is recognized within equity to account for acquisitions of non-
controlling minority stakes.
Investments in associates and joint ventures. Associated companies and joint ventures are entities over which the
Group has significant influence 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 recognized as follows: (a) 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; (b) the Group’s share of other comprehensive income is recognized in other comprehensive income
and presented separately; and (c) all other changes in the Group’s share of the carrying value of net assets of
associates or joint ventures are recognized 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.
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)
Non-current assets held for sale. Non-current assets classified as held for sale are measured at the lower of
carrying amount and fair value less selling costs. Non-current assets are classified as held for sale if their carrying
amounts will be recovered through a sale transaction rather than through continuing use. This condition is regarded
as met only when the sale is highly probable and the asset is available for immediate sale in its present condition.
Management must be committed to the sale, which should be expected to qualify for recognition as a completed
sale within one year from the date of classification.
Property, plant and equipment are not depreciated once classified as held for sale.
Property, plant and equipment. Property, plant and equipment are carried at historical cost of acquisition or
construction and adjusted for accumulated depreciation, depletion, amortization and impairment.
The Group follows the successful efforts method of accounting for its oil and gas properties and equipment
whereby property acquisitions, successful exploratory wells, all development costs and support equipment and
facilities are capitalized. Unsuccessful exploratory wells are charged to expense at the time the wells are
determined to be non-productive. Production costs, overheads and all exploration costs other than exploratory
drilling and license acquisition costs are charged to expense as incurred. Acquisition costs of unproved properties
are evaluated periodically and any impairment assessed is charged to expense.
The Group’s principal oil and gas reserves have been independently estimated by internationally recognized
petroleum engineers whereas other oil and gas reserves of the Group have been determined based on estimates of
mineral reserves prepared by management in accordance with internationally recognized definitions. The present
value of the estimated costs of dismantling oil and gas production facilities, including abandonment and site
restoration costs, are recognized when the obligation is incurred and are included within the carrying value of
property, plant and equipment, subject to depletion using the unit-of-production method.
Costs of minor repairs and maintenance are expensed when incurred. Cost of replacing major parts or components
that extend the life of property, plant and equipment items are capitalized and depreciated over the estimated
remaining life of the major part or component. All components that are replaced are written off.
The cost of self-constructed assets includes the cost of direct materials, direct employee related costs, a pro-rata
portion of depreciation of assets used for construction and an allocation of the Group’s overhead costs.
At each reporting date management assesses whether there is any indication of impairment in respect of property,
plant and equipment. If any such indication exists, management estimates the recoverable amount, which is
determined as the higher of an asset’s fair value less selling costs and its value in use. The carrying amount is
reduced to the recoverable amount and the impairment loss is recognized in the consolidated statement of income.
An impairment loss recognized for an asset in prior years is reversed if there has been a change in the estimates
used to determine the asset’s recoverable amount.
Gains and losses on disposals 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.
The cost of 3-D seismic surveys used to assist production, increase total recoverability and determine the
desirability of drilling additional development wells within proved reservoirs are capitalized as development costs.
All other seismic costs are expensed as incurred.
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)
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
Intangible assets. Intangible assets that have a finite useful life are amortized using the straight-line method over
the period of their useful life. There were no intangible assets with indefinite useful lives held by the Group at the
reporting dates.
Effective interest method. The effective interest method is a method of calculating the carrying value of a financial
asset or a financial liability held at amortized costs and of allocating the interest income or interest expense over the
relevant period.
The effective interest rate is the rate that exactly discounts future cash payments and receipts through the expected
life of the financial instrument or, when appropriate, a shorter period to the net carrying value of the financial asset
or financial liability.
Financial assets. The Group classifies its financial assets in the following categories: financial assets at fair value
through profit or loss, held-to-maturity, loans and receivables, and available-for-sale. The classification depends on
the purpose for which the financial assets were acquired. Management determines the classification of its financial
assets at initial recognition. Subsequent reclassification of financial assets is made only as a result of a change in
intention or ability of management to hold the financial assets. Financial assets are recognized initially at fair value,
normally being the transaction price plus, in the case of financial assets not at fair value through profit or loss,
directly attributable transaction costs. The subsequent measurement of financial assets depends on their
classification.
(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.
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)
(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.
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. A 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:
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)
(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.
(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.
Derivative instruments. Derivative financial instruments are contracts: (a) whose value changes in response to the
change in one or more observable variables; (b) that do not require any material initial net investment; and (c) that
are settled at a future date. Accordingly, contracts to buy or sell a non-financial item that can be settled net in cash
or another financial instrument, or by exchanging financial instruments with the exception of contracts that were
entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance
with the Group’s expected purchase, sale or usage requirements, are accounted for as financial instruments. Gains
or losses arising from changes in the fair value of derivatives are recognized in the consolidated income statement
within other operating profit (loss).
Derivative instruments are carried as assets when the fair value is positive and as liabilities when the fair value is
negative. Derivative assets or liabilities expected to be recovered, or with the legal right to be settled more than
twelve months after the reporting date are classified as non-current, with the exception of derivative financial
instruments held for the purpose of being traded. The amounts of assets and liabilities associated with derivatives
are presented without netting assets and liabilities with the same counterparty except where the right of offset and
intent to net exist.
The estimated fair values of derivative financial instruments are determined with reference to various market
information and other valuation methodologies as considered appropriate, however considerable judgment is
required in interpreting market data to develop these estimates. Accordingly, the estimates are not necessarily
indicative of the amounts that the Group could realize in a current market situation.
Derivatives embedded in other non-derivative financial instruments or in non-financial host contracts are
recognized as separate derivatives when their risks and economic characteristics are not closely related to those of
the host contracts, and the host contracts are not carried at fair value. Where there is an active market for a
commodity or other non-financial item subject of a purchase or sale contract, a pricing formula will, for instance,
be considered to be closely related to the host purchase or sales contract if the price formula is based on the active
market in question. A price formula with indexation to other markets or products will however result in the
recognition of a separate derivative. Where there is no active market for the commodity or other non-financial item
in question, the Group assesses the characteristics of such a price related embedded derivative to be closely related
to the host contract if the price formula is based on relevant indexations commonly used by other market
participants. This applies to the Group’s liquid hydrocarbons and domestic natural gas sales and purchases
agreements. Contracts are assessed for embedded derivatives when the Group becomes a party to them, including at
the date of a business combination. Such embedded derivatives are measured at fair value at each period end, and
the changes in fair value are recognized in profit or loss for the period.
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 be comprised 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.
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)
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.
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). 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.
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)
Dividends. Dividends are recognized as a liability and deducted from shareholders’ equity at the balance sheet date
only if they are declared before or on the balance sheet date. Dividends are disclosed when they are proposed
before the balance sheet date or proposed or declared after the balance sheet date but before the consolidated
financial statements are authorized for issue.
Value added tax (VAT). Output VAT related to sales is payable to the tax authorities on the earlier of (a) collection
of the receivables from customers or (b) delivery of the goods or services to customers. Input VAT related to
purchases is generally recoverable against output VAT upon receipt of the VAT invoice. The tax authorities permit
the settlement of VAT on a net basis. VAT related to sales and purchases which is not settled or recovered at the
balance sheet date (VAT payable and VAT recoverable) is recognized on a gross basis and disclosed separately
within current assets and current liabilities. Where a provision has been made for the impairment of receivables, the
impairment loss is recorded for the gross amount of the debtor, including VAT.
Borrowings. Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are
subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the
redemption value is recognized in the consolidated statement of income over the period of the borrowings using the
effective interest method.
Interest costs 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.
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)
The Group’s exploration, development and production activities involve the use of wells, related equipment and
operating sites, oil and gas gathering and treatment facilities and in-field pipelines. Generally, licenses and other
regulatory acts require that such assets be decommissioned upon the completion of production, i.e. the Group is
obliged to decommission wells, dismantle equipment, restore the sites and perform other related activities. The
Group’s estimates of these obligations are based on current regulatory or license requirements, as well as actual
dismantling and related costs.
The Group’s management believes that due to the limited history of gas condensate processing 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 re-measurement 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 re-
measured to fair value, recoverable amount or realizable value, are translated at the exchange rate applicable to the
date of re-measurement.
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 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.
20
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Pension obligations. The Group operates a non-contributory post-employment defined benefit plan based on
employees’ years of service and average salary (see 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.
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)
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. For derivative contracts where observable information is not
available, fair value estimations are determined using mark-to-market models and other acceptable valuation
methods, for which the key inputs include future prices, volatility, price correlation, counterparty credit risk and
market liquidity. Fair values of the Group’s derivative commodity contracts and sensitivities to price assumptions
are presented in Note 27.
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.
22
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
4
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (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.
Information about the carrying amounts of major classes of non-financial assets – property, plant and equipment
and long-term investments is presented in Notes 6 and 7.
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, it 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 date 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 consolidated statement of financial position 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.
23
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
5
ACQUISITIONS AND DISPOSALS
Acquisition of OOO Gazprom mezhregiongas Kostroma
On 28 December 2012, the Group acquired an 82 percent participation interest in OOO Gazprom mezhregiongas
Kostroma, a Russian regional natural gas trader, to support and expand natural gas sales opportunities in the
Kostroma region in the Russian Federation, for total cash consideration of RR 554 million, which was subsequently
paid in 2013. At the date of acquisition, the company held three percent of its participation interest in the form of
treasury shares, which were eliminated upon consolidation and, accordingly, the Group’s effective participation
interest in Gazprom mezhregiongas Kostroma was 84.54 percent.
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 comprising 100 percent of the assets and
liabilities of Gazprom mezhregiongas Kostroma:
OOO Gazprom mezhregiongas Kostroma
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
Fair value of the Group’s interest in net assets
(RR 655 million at 84.54% ownership)
Goodwill
Fair values at the
acquisition date
735
895
12
296
(129)
(1,096)
(58)
655
554
(554)
-
The financial and operational activities of Gazprom mezhregiongas Kostroma would have had an effect of an
additional RR 6.7 billion in the Group’s revenues and immaterial effect on the Group’s profit before tax, if the
acquisition occurred on 1 January 2012.
Disposal of OOO Purovsky Terminal
In December 2012, the Group disposed of its 100 percent participation interest in OOO Purovsky Terminal, its non-
core subsidiary, to a third party for RR 97 million, which was fully paid in December 2012. The Group recognized
a loss on the sale before income tax of RR 60 million.
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.
24
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
5
ACQUISITIONS AND DISPOSALS (CONTINUED)
Acquisition of ZAO Nortgas
On 27 November 2012, the Group acquired 49 percent of the outstanding ordinary shares of ZAO Nortgas, an oil
and gas company located in the YNAO, for total cash consideration of RR 42,697 million (USD 1,375 million),
which was fully paid in November 2012. Nortgas holds a production license for the North-Urengoyskoye field,
which expires in 2018. Estimated proved reserves of the field appraised by DeGolyer and MacNaughton under the
PRMS and SEC reserve methodologies at 31 December 2012 totalled approximately 186 billion and 157 billion
cubic meters of natural gas and 25 million and 21 million tons of hydrocarbon liquids, respectively.
As described above, the Group acquired 49 percent of the ownership interest in Nortgas; however, the Charter
stipulates that key financial and operating decisions regarding its business activities are subject to unanimous
approval by the Board of Directors. Consequently, the voting mechanism effectively establishes joint control over
Nortgas and the Group accounts for the investment under the equity method.
At 31 December 2012, in accordance with IAS 31, Interest in Joint Ventures, the Group assessed preliminary fair
values of the identified assets and liabilities of Nortgas. In the consolidated financial statements for the year ended
31 December 2012, the fair value of purchase consideration and the fair value of the identifiable acquired assets
and liabilities are preliminary as the Group is in the process of finalizing the fair value estimates for certain assets
and liabilities, primarily for property, plant and equipment. Management is required to finalize the fair value
determination within 12 months of the date of acquisition. Any revisions to the provisional values will be reflected
as of the acquisition date.
The following table represents the preliminary fair values comprising 100 percent of the assets and liabilities of
Nortgas:
ZAO Nortgas
Property, plant and equipment
Other non-current assets
Trade receivables
Other current assets
Cash and cash equivalents
Long-term debt
Other non-current liabilities
Short-term debt
Dividends payable
Other current liabilities
Total identifiable net assets
Purchase consideration
Preliminary fair value of the Group’s interest in net assets
(RR 87,137 million at 49% ownership)
Preliminary goodwill
Preliminary fair values
at the acquisition date
130,135
1,623
2,312
2,246
966
(14,378)
(22,055)
(1,341)
(9,700)
(2,671)
87,137
42,697
(42,697)
-
Subsequent to the acquisition, the Group signed a purchase contract to buy 50 percent of total natural gas produced
by Nortgas starting from 1 January 2013 at a predetermined price reflecting current ex-field market price for the
region subject to indexation based on the relevant Federal Tariffs Service (FTS) prices. In addition, the Group
signed the contract until 31 December 2015 to purchase 100 percent of the unstable gas condensate produced by
Nortgas at ex-field prices based on benchmark crude oil and oil products market quotes adjusted for quality and
respective tariffs for transportation and processing.
25
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
5
ACQUISITIONS AND DISPOSALS (CONTINUED)
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
-
Acquisition of additional equity stake in OAO Yamal LNG
On 26 May 2009, the Group entered into the contract to acquire 51 percent of the outstanding ordinary shares of
OAO Yamal LNG, an exploration stage oil and gas company located in the north-eastern part of the Yamal
peninsula, YNAO. In September 2011, the Group exercised two call options, acquired in 2009 and 2011, and, as a
result, increased its equity stake in Yamal LNG to 100 percent through a purchase of additional 49 percent shares
of the company for the total consideration of RR 31,670 million (USD 986 million), of which RR 15,101 million
(USD 482 million) was paid in 2009-2011 and RR 16,290 million (USD 504 million) was paid in 2012. As a result
of these 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.
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 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.
26
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
5
ACQUISITIONS AND DISPOSALS (CONTINUED)
Total consideration for the 20 percent stake in Yamal LNG to be paid by TOTAL E&P YAMAL comprises of three
tranches:
i.
ii.
iii.
first tranche – a cash payment of USD 425 million to NOVATEK upon the contract conclusion (payment
received in October 2011);
second tranche – a cash payment of USD 375 million through additional capital contributions to the ordinary
share capital of Yamal LNG, of which USD 170 million was received in 2011 and the remainder USD 205 was
received in 2012; and
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.
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 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
27
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
5
ACQUISITIONS AND DISPOSALS (CONTINUED)
In accordance with IAS 27, Consolidated and Separate Financial Statements, the Group re-measured 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.
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
28
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
5
ACQUISITIONS AND DISPOSALS (CONTINUED)
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.
6
PROPERTY, PLANT AND EQUIPMENT
Movements in property, plant and equipment, for the years ended 31 December 2012 and 2011 are as follows:
Cost
Accumulated depreciation, depletion
and amortization
Oil and gas
properties and
equipment
Assets under
construction
and advances
for construction
193,411
16,022
Other
4,236
Total
213,669
(26,926)
-
(1,170)
(28,096)
Net book value at 1 January 2011
166,485
16,022
Acquisition of subsidiaries
Additions
Transfers
Depreciation, depletion and amortization
Disposal of subsidiaries, net
Impairment
Disposals, net
Cost
Accumulated depreciation, depletion
and amortization
108
10,140
15,455
(9,026)
(40,136)
(513)
(549)
183
27,869
(20,216)
-
(5,665)
(107)
(439)
3,066
30
22
4,761
(424)
(66)
-
(216)
185,573
321
38,031
-
(9,450)
(45,867)
(620)
(1,204)
177,788
17,647
8,603
204,038
(35,824)
-
(1,430)
(37,254)
Net book value at 31 December 2011
141,964
17,647
7,173
166,784
Acquisition of subsidiaries
Additions
Transfers
Depreciation, depletion and amortization
Disposal of subsidiaries, net
Disposals, net
Reclassifications
Cost
Accumulated depreciation, depletion
and amortization
24
1,564
21,608
(10,882)
(14)
(69)
1,415
33
41,522
(22,414)
-
-
(1,493)
-
23
468
806
(503)
(32)
(49)
(1,415)
80
43,554
-
(11,385)
(46)
(1,611)
-
202,420
35,295
8,031
245,746
(46,810)
-
(1,560)
(48,370)
Net book value at 31 December 2012
155,610
35,295
6,471
197,376
Included within the oil and gas properties and equipment balance at 31 December 2012 and 2011 are proved
properties of RR 28,205 million and RR 22,355 million, net of accumulated depreciation, depletion and
amortization of RR 11,744 million and RR 10,300 million, respectively.
Included within the oil and gas properties and equipment balance at 31 December 2012 and 2011 are unproved
properties of RR 7,753 million and RR 14,061 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 3,836 million and RR 3,781 million at 31 December 2012 and 2011, respectively.
29
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 2012 and 2011 are
capitalized interest and foreign exchange differences of RR 2,839 million and RR 4,145 million, respectively. The
interest capitalization rates for 2012 and 2011 used for additions were 6.8 percent and 7.1 percent, respectively.
In September 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 licenses 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 (DDA):
Depreciation, depletion and amortization of property,
plant and equipment
Add: DDA of intangible assets
Less: DDA included in general and administrative expenses (see Note 22)
Less: DDA capitalized in the course of intra-group construction services
DDA as presented in the consolidated statement of income
Year ended 31 December:
2012
2011
11,385
244
(314)
(130)
11,185
9,450
111
(198)
(86)
9,277
At 31 December 2012 and 2011, no property, plant and equipment was pledged as security for the Group’s
borrowings. Impairment of RR nil million and RR 620 million was recognized in respect of oil and gas properties
and equipment for the years ended 31 December 2012 and 2011, respectively.
Capital commitments are disclosed in Note 28.
(cid:3)
(cid:3)
7
INVESTMENTS IN JOINT VENTURES
Joint ventures:
OAO Yamal LNG
ZAO Nortgas
OOO Yamal Development (consolidated)
OAO Sibneftegas
ZAO Terneftegas
At 31 December 2012 At 31 December 2011
96,736
42,586
24,430
24,160
1,224
89,549
-
8,100
24,187
1,193
Total investments in joint ventures
189,136
123,029
OAO Yamal LNG. As discussed in Note 5, on 6 October 2011, the Group sold a 20 percent stake in OAO Yamal
LNG and signed a new Shareholder’s agreement with TOTAL E&P YAMAL, establishing the framework for joint
cooperation in exploring and developing the South-Tambeyskoye field (held by Yamal LNG) located in the
YNAO.
The Group 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, following which the Group has determined Yamal LNG to be a joint venture and
accounts for it under the equity method.
30
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
7
INVESTMENTS IN JOINT VENTURES (CONTINUED)
ZAO Nortgas. As discussed in Note 5, on 27 November 2012, the Group acquired 49 percent of the outstanding
ordinary shares of ZAO Nortgas, an oil and gas company holding the production license for the North-
Urengoyskoye field located in the YNAO for RR 42,697 million. The Charter of Nortgas stipulates that key
financial and operating decisions regarding its business activities are subject to unanimous approval by the Board
of Directors. Consequently, the voting mechanism effectively establishes joint control over Nortgas. The Group
accounts for it under the equity method.
OOO Yamal Development. The Group holds a 50 percent participation interest in OOO Yamal Development, its
joint venture with OAO Gazprom Neft, a subsidiary of OAO Gazprom, and accounts for its share of the joint
venture using the equity method.
Yamal Development holds a 51 percent participation interest in OOO SeverEnergia, which through its wholly
owned subsidiary OAO Arkticheskaya gazovaya kompaniya holds a number of exploration and production
licenses, located in YNAO (see Note 28).
The Charter 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, i.e. none of the participants have
a preferential voting right. As a result, the Group has determined SeverEnergia as 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.
OAO Sibneftegas. The Group holds 51 percent ownership in OAO Sibneftegas, an oil and gas company, which
holds a number of exploration and production licenses, located in the YNAO (see Note 28). The Charter of
Sibneftegas 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, that means effectively the unanimous
approval by both shareholders. Consequently the voting mechanism effectively establishes joint control over
Sibneftegas. The Group accounts for it under the equity method.
ZAO Terneftegas. The Group holds 51 percent ownership in ZAO Terneftegas, its joint venture with TOTAL E&P
ACTIVITIES PETROLIERES, established for joint cooperation in exploring and developing the Termokarstovoye
gas condensate field (held by Terneftegas) located in the YNAO.
The Shareholders’ 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. Consequently, the
Group’s interest in Terneftegas is accounted for using the equity method.
The table below summarizes the movement in the carrying amounts of the Group’s joint ventures:
At 1 January
Share of profit (loss) of joint ventures before income tax
Share of income tax (expense) benefit
Share of profit (loss) of joint ventures, net of income tax
Acquisitions of joint ventures (see Note 5)
Contributions to equity
Disposals of subsidiaries
resulting in recognition of joint ventures
Losses (reversals) recognized in excess of investments in joint ventures,
reclassified to long-term loans receivable for these companies
Year ended 31 December
2012
2011
123,029
(2,221)
116
(2,105)
42,697
25,515
-
-
27,026
(4,725)
845
(3,880)
-
10,000
90,121
(238)
At 31 December
189,136
123,029
31
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
7
INVESTMENTS IN JOINT VENTURES (CONTINUED)
In 2012, the equity of Yamal LNG was increased through disproportional contribution by its participants totalling
RR 23,811 million in accordance with the Shareholders’ agreement, of which RR 9,167 million was attributable to
NOVATEK (see Note 8). As a result of disproportional contributions, the Group’s shareholding did not change
notably.
In February 2012, the charter capital of Yamal Development was increased by converting RR 32,697 million of
loans provided to the company by its participants, of which RR 16,348 million was attributable to NOVATEK
(see Note 8). In June 2011, the charter capital of Yamal Development was increased by RR 20 billion through the
conversion of loans, provided to the company by its participants, of which RR 10 billion was attributable to
NOVATEK. As a result of each transaction, the participants’ pro-rata share in the joint venture increased.
As discussed in Note 5, in October 2011, the Group’s effective control over Yamal LNG ceased and subsequent to
that event, the Group classified Yamal LNG as a joint venture and recognized its carrying value in line ‘Disposals
of subsidiaries resulting in recognition of joint ventures’.
At 31 December 2012 and 2011, 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 2012
Yamal LNG
Nortgas
Yamal Development
(consolidated)
SeverEnergia
Less: investment and
share of profit of
Yamal
Development in
SeverEnergia
Sibneftegas
Terneftegas
Non-
current
liabilities
15,326
22,838
Non-
current
assets
96,586
64,904
24,421
42,493
Current
assets
3,378
1,899
9
1,322
Current
liabilities
Net
assets
Revenues
Profit
(loss)
Interest
held
708
1,379
83,930
42,586
51
365
(1,811)
(110)
80%
49%
50%
25.5%
-
16,799
-
2,993
24,430
24,023
-
1,297
(19)
11
(24,023)
37,931
3,479
-
1,056
1,053
-
13,984
3,220
-
843
88
(24,023)
24,160
1,224
(1,297)
5,272
1
(11)
(27)
30
-
51%
51%
Total
245,791
8,717
72,167
6,011
176,330
5,689
(1,937)
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)
32
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 2012 and 2011, the Group’s investment in Yamal LNG totaled RR 96,736 million and
RR 89,549 million, which differed from its share in the net assets of RR 83,930 million and RR 66,693 million,
respectively, as noted above. These differences of RR 12,806 million and RR 22,856 million, respectively, relate 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.
(cid:3)
(cid:3)
8
LONG-TERM LOANS AND RECEIVABLES
(cid:3)
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 2012 At 31 December 2011
8,564
4,366
12,930
(428)
12,502
394
254
13,150
9,737
220
9,957
(634)
9,323
22,027
780
32,130
Russian rouble denominated loans. At 31 December 2012 and 2011, the Russian rouble denominated loans
included loans to OAO Sibneftegas, the Group’s joint venture, in the amount of RR 8,564 million and RR 9,737
million, respectively (see Note 30). The loans had interest rates ranging from 9.5 percent to 10 percent per annum
(weighted average interest rate of 9.93 percent and 9.88 percent at 31 December 2012 and 2011, respectively) and
are repayable until November 2014.
US dollar denominated loans. At 31 December 2012 and 2011, the US dollar denominated loans included loans to
ZAO Terneftegas, the Group’s joint venture, in the amount of USD 48 million and USD 7 million, respectively.
The loans bear an interest rate of 3.88 percent per annum, which can be adjusted in the subsequent years subject to
certain conditions. The loans and interest are repayable after the commencement of commercial production.
In November 2012, the Group provided a shareholder loan to OAO Yamal LNG, the Group’s joint venture, in the
amount of USD 96 million at an interest rate of 5.09 percent per annum, which can be adjusted in subsequent years
subject to certain conditions. The loans and interest are repayable after the commencement of commercial
production.
Long-term receivables. In November 2011, the shareholders of OAO Yamal LNG made a decision to increase its
equity through a disproportional subscription to the entity’s additional shares emissions in the aggregated amount
of RR 17,046 million. 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 paid in 2011 was recognized as long-term receivables. In
January 2012, the Group paid the remaining RR 2,507 million. In April 2012, the new charter was formally
registered (see Note 7).
In November 2011, the participants of (cid:584)(cid:584)(cid:584) Yamal Development, the Group’s joint venture, made a decision to
pro-ratably increase its equity by converting the part of the loan provided to the company in the amount of
RR 32,697 million to equity. The legal procedures to register the new charter were not completed at
31 December 2011 and, accordingly, the Group’s share of RR 16,348 million was recognized as long-term
receivables. In February 2012, the new charter was formally registered (see Note 7).
No provisions for impairment of long-term loans and receivables were recognized in the consolidated statement of
financial position at 31 December 2012 and 2011.
33
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
9 (cid:3)
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 29 million and RR 31 million at 31 December 2012 and 2011, respectively)
Other inventories
Total inventories
At 31 December 2012 At 31 December 2011
2,239
583
256
13
3,091
1,146
400
133
4
1,683
No impairment expenses were recorded during the years ended 31 December 2012 and 2011. No inventories were
pledged as security for the Group’s borrowings or payables at both dates.
(cid:3)
(cid:3)
10
TRADE AND OTHER RECEIVABLES
Trade receivables (net of provision of RR 406 million and RR 133 million
at 31 December 2012 and 2011, respectively)
Other receivables (net of provision of RR 4 million and RR 14 million
at 31 December 2012 and 2011, respectively)
Interest on loans receivable
Total trade and other receivables
At 31 December 2012 At 31 December 2011
14,250
2,158
1
16,409
14,900
1,703
96
16,699
The carrying values of trade and other receivables approximate their respective fair values. The related exposure to
credit risk at the consolidated statement of financial position 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 1,610 million and RR 1,706 million at 31 December 2012 and 2011, respectively. Also the Group holds as a
collateral 100 percent participation interest in OOO BIAXPLEN NK (formerly OOO NOVATEK-Polymer) for
other receivables from OAO SIBUR Holding. 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 277 million and RR 478 million at
31 December 2012 and 2011, 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 impairment 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
At 31 December 2012 At 31 December 2011
185
85
7
277
16,132
16,409
343
135
-
478
16,221
16,699
34
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
Disposal of subsidiaries
Receivables written off as uncollectible
Provision reversed
At 31 December
Year ended 31 December:
2012
2011
147
272
124
(3)
(130)
-
410
-
92
76
-
(1)
(20)
147
The provision for impaired trade and other receivables has been included in the consolidated statement of income in
net impairment expense.
(cid:3)
(cid:3)
11
PREPAYMENTS AND OTHER CURRENT ASSETS
At 31 December 2012 At 31 December 2011
Financial assets
Russian rouble denominated loans
Cash restricted in the form of guarantee
Commodity derivatives
Short-term bank deposits (with original maturity over three months)
Non-financial assets
Deferred export duties for stable gas condensate and liquefied
petroleum gas
Recoverable value-added tax
Deferred transportation expenses for natural gas
Prepayments and advances to suppliers (net of provision of RR 13 million
and RR 12 million at 31 December 2012 and 2011, respectively)
Prepaid taxes other than income tax
Deferred transportation expenses for stable gas condensate
and liquefied petroleum gas
Other current assets
428
1,959
451
10
2,718
1,992
1,902
6,479
1,523
1,067
38
6,859
-
-
17
922
1,550
1,139
3,322
668
413
60
Total prepayments and other current assets
18,567
14,950
At 31 December 2011, the Russian rouble denominated loans included a loan provided by NOVATEK
proportionally with other participants to OOO SeverEnergia, the Group’s related party, in the amount of RR 6,225
million (see Note 30). The loan bore an annual interest rate of MosPrime plus three percent and was fully repaid in
March 2012.
35
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
12(cid:3)
CASH AND CASH EQUIVALENTS
Cash at current bank accounts
Russian rouble denominated deposits (average interest rate 4.7% p.a. and
4.5% p.a. for 2012 and 2011, respectively)
US dollar denominated deposits (average interest rate 0.6% p.a. and
0.8% p.a. for 2012 and 2011, respectively)
Other currency denominated deposits
Total cash and cash equivalents
At 31 December 2012 At 31 December 2011
8,206
4,223
5,686
305
18,420
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 bonds
Russian rouble denominated loans
US dollar denominated loans
Total
Less: current portion of long-term debt
Total long-term debt
At 31 December 2012 At 31 December 2011
67,998
29,960
24,821
9,708
132,487
(34,682)
97,805
39,982
9,971
24,966
20,559
95,478
(20,298)
75,180
At 31 December 2012 and 2011 the Group’s long-term debt by facility is as follows:
Eurobonds – Ten-Year Tenor (repayable in 2022)
Russian rouble denominated bonds (repayable in 2015)
Eurobonds – Ten-Year Tenor (repayable in 2021)
Eurobonds – Five-Year Tenor (repayable in 2016)
Sberbank three-year loan (repayable in 2013)
Russian rouble denominated bonds (repayable in 2013)
Sberbank credit line facility
Nordea Bank
Sumitomo Mitsui Banking Corporation Europe Limited
UniCredit Bank
Gazprombank
Total
At 31 December 2012 At 31 December 2011
30,232
19,969
19,620
18,146
14,984
9,991
9,837
6,075
3,633
-
-
132,487
-
-
20,776
19,206
14,966
9,971
-
6,439
7,685
6,435
10,000
95,478
Eurobonds. In December 2012, the Group issued Eurobonds in the amount of USD 1 billion. The Eurobonds were
issued with an annual coupon rate of 4.422 percent, payable semi-annually. The bonds have a ten-year tenure and
are repayable in December 2022.
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. The bonds are
repayable in February 2016 and February 2021, respectively.
36
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
13
LONG-TERM DEBT (CONTINUED)
Sberbank. In December 2011, the Group obtained a RR 40 billion credit line facility from OAO Sberbank available
to withdraw until March 2012 which was subsequently extended until June 2012. In June 2012, the Group
withdrew RR 10 billion under the facility until December 2014 at an interest rate of 8.9 percent per annum. The
remaining part of the credit line was not utilized. The facility includes the maintenance of certain restrictive
financial covenants.
In December 2010, the Group received a three-year Russian rouble denominated loan from OAO Sberbank in the
amount of RR 15 billion at an interest rate of 7.5 percent per annum. The loan is repayable in December 2013 and
includes the maintenance of certain restrictive financial covenants.
Gazprombank. In November 2009, the Group obtained a three-year Russian rouble denominated loan from
OAO Gazprombank in the amount of RR 10 billion at an interest rate of eight percent per annum. The loan was
fully repaid in January 2012 ahead of its maturity schedule.
Sumitomo Mitsui Banking Corporation Europe Limited. In April 2011, the Group obtained a US dollar
denominated loan from Sumitomo Mitsui Banking Corporation Europe Limited in the amount of USD 300 million
at an interest rate of LIBOR plus 1.45 percent per annum (1.76 percent and 2.03 percent at 31 December 2012 and
2011, respectively). The loan is payable until December 2013 and includes the maintenance of certain restrictive
financial covenants.
Nordea Bank. In November 2010, the Group obtained a US dollar denominated loan from OAO Nordea Bank in
the amount of USD 200 million at an interest rate of LIBOR plus 1.9 percent per annum (2.11 percent and
2.18 percent at 31 December 2012 and 2011, respectively). The loan is repayable until November 2013 and
includes the maintenance of certain restrictive financial covenants.
UniCredit Bank. In October 2009, the Group obtained a US dollar denominated loan from ZAO UniCredit Bank in
the amount of USD 200 million at an interest rate of LIBOR plus 3.25 percent per annum. In October 2012, the
loan was fully repaid in accordance with its maturity schedule.
Syndicated term loan facility. In November 2012, the Group obtained an unsecured syndicated term loan facility in
the amount of USD 667 million. The facility bore an interest rate of LIBOR plus one percent for the first six
months and was repayable in May 2014. In December 2012, the loan was repaid ahead of its maturity schedule.
Russian rouble denominated bonds. In October 2012, the Group issued three-year non-convertible Russian rouble
denominated bonds in the amount of RR 20 billion with a coupon rate of 8.35 percent per annum, payable semi-
annually. The bonds are repayable in October 2015.
In June 2010, the Group issued three-year non-convertible Russian rouble denominated bonds in the amount of
RR 10 billion with a coupon rate of 7.5 percent per annum, payable semi-annually. The bonds are repayable in June
2013.
The fair values of long-term debt at 31 December 2012 and 2011 were as follows:
Eurobonds – Ten-Year Tenor (repayable in 2022)
Eurobonds – Ten-Year Tenor (repayable in 2021)
Russian rouble denominated bonds (repayable in 2015)
Eurobonds – Five-Year Tenor (repayable in 2016)
Sberbank three-year loan (repayable in 2013)
Russian rouble denominated bonds (repayable in 2013)
Sberbank credit line facility
Nordea Bank
Sumitomo Mitsui Banking Corporation Europe Limited
UniCredit Bank
Gazprombank
Total
37
At 31 December 2012 At 31 December 2011
30,543
23,201
20,198
19,567
14,745
10,005
9,928
6,041
3,617
-
-
137,845
-
21,150
-
19,414
14,539
10,000
-
6,256
7,561
6,439
9,928
95,287
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
13
LONG-TERM DEBT (CONTINUED)
The fair value of the long-term loans was determined based on future cash flows discounted at the estimated risk-
adjusted discount rate. The fair value of the corporate bonds was determined based on market quote prices (Level 1
in the fair value measurement hierarchy described in Note 27).
Scheduled maturities of long-term debt at 31 December 2012 were as follows:
Maturity period:
1 January to 31 December 2014
1 January to 31 December 2015
1 January to 31 December 2016
1 January to 31 December 2017
After 31 December 2017
Total long-term debt
(cid:3)
(cid:3)
14
PENSION OBLIGATIONS
RR million
9,837
19,970
18,146
-
49,852
97,805
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 lump sum retirement benefit and monthly payments from NOVATEK for life unless they are actively
employed. The amounts of payments to be disbursed depend 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:
At 31 December 2012 At 31 December 2011
Present value of the defined benefit obligations
Unrecognized past service cost
Defined benefit plan liability recognized
in the consolidated statement of financial position
1,532
(132)
1,400
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 service cost
Actuarial (gain) loss
Lump sum retirement benefit
At 31 December
Year ended 31 December:
2012
2011
810
54
(18)
91
-
256
339
1,532
38
810
(146)
664
758
48
(13)
88
-
(71)
-
810
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
Actuarial (gain) loss
Amortization of past service cost
Lump sum retirement benefit
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:
2012
2011
91
54
256
13
339
753
278
475
88
48
(71)
55
-
120
46
74
The Group recognized a loss of RR 32 million and RR 9 million as a result of experience adjustments on plan
liabilities during the years ended 31 December 2012 and 2011, respectively, included in actuarial (gain) loss.
The principal actuarial assumptions used at 31 December 2012 and 2011 are as follows:
Weighted average discount rate
Projected annual increase in employee compensation
Expected increases to pension benefits
At 31 December 2012 At 31 December 2011
6.4%
5.2%
5.2%
7.4%
5.8%
5.8%
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 6.5 percent for 2013 to 4.9 percent in 2017 and subsequent years.
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.
39
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
15(cid:3)
SHORT-TERM DEBT AND CURRENT PORTION OF LONG-TERM DEBT
Short-term debt and current portion of long-term debt. At 31 December 2012 and 2011, short-term debt and
current portion of long-term debt consisted only of the current portion of long-term debt in the amount of
RR 34,682 million and RR 20,298 million, respectively.
Available credit facilities. The Group’s available credit facilities at 31 December 2012 were as follows:
BNP PARIBAS Bank (a)
Credit Agricole Corporate and Investment Bank (a)
UniCredit Bank (a)
Sberbank (a)
Par value
USD 100 million
USD 100 million
USD 350 million
RR 30 billion
Total available credit facilities
(a) – interest rates are predetermined or negotiated at time of each withdrawal.
Within
one year
3,037
3,037
-
30,000
36,074
Expiring
Between
1 and 3 years
-
-
10,630
-
10,630
The Group also maintained available funds under short-term credit lines in the form of bank overdrafts with various
international banks for RR 7,327 million (USD 175 million and EUR 50 million) and RR 6,278 million
(USD 195 million) at 31 December 2012 and 2011, respectively, on variable interest rates subject to the specific
type of credit facility.
(cid:3)
(cid:3)
16
TRADE PAYABLES AND ACCRUED LIABILITIES
At 31 December 2012 At 31 December 2011
Financial liabilities
Trade payables
Interest payable
Other payables
Commodity derivatives
Non-financial liabilities
Advances from customers
Salary payables
Other liabilities
9,959
1,464
718
43
1,227
251
2,263
5,187
1,009
16,615
-
743
210
1,158
Trade payables and accrued liabilities
15,925
24,922
At 31 December 2011, other payables included RR 16,244 million, relating to the acquisition of a 49 percent equity
stake in (cid:584)(cid:570)(cid:584) Yamal LNG, which was fully repaid in June 2012.
40
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 2012 and 2011 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 Programs authorized by the Board of Directors, the
Group’s wholly-owned subsidiary, Novatek Equity (Cyprus) Limited, during 2012 and earlier has purchased
ordinary shares of OAO NOVATEK in the form of Global Depository Receipts (GDRs) on the London Stock
Exchange (“LSE”) and ordinary shares on Moscow Interbank Currency Exchange (MICEX) through the use of
independent brokers. At 31 December 2012 and 2011, the Group held in total (both shares and GDRs) 2,894 and
1,969 thousand ordinary shares at a total cost of RR 584 million and RR 281 million, respectively. The Group has
decided that these shares do not vote.
During the year ended 31 December 2012, the Group purchased in total 925 thousand ordinary shares (both shares
and GDRs) at a total cost of RR 303 million. During the year ended 31 December 2011, the Group sold 115,424
GDRs (1,154 thousand ordinary shares) for RR 520 million, recognizing gain of RR 355 million, 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:
2012
2011
-
19,723
(19,718)
5
6.50
65.0
-
15,166
(15,166)
-
5.00
50.0
The Group declares and pays dividends in Russian roubles. Dividends declared in 2012 and 2011 were as follows:
Final for 2011: RR 3.50 per share or RR 35.0 per GDR declared in April 2012
Interim for 2012: RR 3.00 per share or RR 30.0 per GDR declared in October 2012
Total dividends declared in 2012
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
10,627
9,109
19,736
7,591
7,591
15,182
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 2012 and
2011, the net statutory profits of NOVATEK as reported in the published annual statutory reporting forms were
RR 28,830 million and RR 39,714 million, respectively. The closing balances of the accumulated profit including
the respective years net statutory profit totalled RR 149,719 million and(cid:3)RR 120,889 million at 31 December 2012
and 2011, 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.
41
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, Management Committee of NOVATEK 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 for
three one-year vesting periods ending 31 January 2011, 2012, and 2013.
The Program is established as a cash-settled payment program and references the Group’s GDRs, which are
publicly traded on the LSE under the ticker symbol “NVTK”. At 31 December 2012 and 2011, the Program
covered 134 and 146 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.
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 November 2012, the Group extended the Program’s tenor for an additional one-year vesting period ending
31 January 2014 with no change to other terms and conditions.
Total amount of GDRs granted at 31 December 2010
Granted
Exercised
Forfeited
Total amount of GDRs granted at 31 December 2011
Granted
Exercised
Forfeited
Total amount of GDRs granted at 31 December 2012
Number of GDRs
Weighted average or
closing price (LSE),
USD per GDR
382,368
-
(104,728)
(36,984)
240,656
-
(112,305)
(11,140)
117,211
119.5
-
105.0
-
125.2
-
144.2
-
119.3
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.
42
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
18
SHARE-BASED COMPENSATION PROGRAM (CONTINUED)
The fair value of the Program is determined based on the following assumptions:
Expected volatility
Risk-free interest rate
Expected option life (years)
Exercise price per GDR (USD)
2012
43.04%
-
0.96
48.62
2013
43.04%
0.22%
0.96
48.62
Expected volatility is calculated based on the historical volatility of the price per GDR for the historical period
equal to the expected life of the Program (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
Year ended 31 December:
2012
2011
121
235
Liabilities included in
At 31 December 2012 At 31 December 2011
Other non-current liabilities
Trade payables and accrued liabilities
Total share-based compensation program liabilities
(cid:3)
(cid:3)
19
OIL AND GAS SALES
Natural gas
Stable gas condensate
Liquefied petroleum gas
Crude oil
Oil and gas products
Total oil and gas sales
(cid:3)
(cid:3)
20
TRANSPORTATION EXPENSES
Natural gas transportation to customers
Liquid hydrocarbons transportation by rail
Liquid hydrocarbons transportation by tankers
Crude oil transportation to customers
Other
Total transportation expenses
43
57
181
238
226
244
470
Year ended 31 December:
2012
2011
142,613
46,684
15,599
5,000
350
110,932
46,778
14,436
2,479
186
210,246
174,811
Year ended 31 December:
2012
2011
45,925
10,537
3,742
527
117
60,848
34,441
9,791
3,647
281
169
48,329
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 (UPT)
Property tax
Other taxes
Total taxes other than income tax
Year ended 31 December:
2012
2011
14,833
1,754
259
16,846
14,523
1,742
294
16,559
The unified natural resources production tax for natural gas production was set at a rate of RR 251 and RR 237 per
thousand cubic meters for 2012 and 2011, respectively.
The unified natural resources production tax rate for gas condensate was set for 2011 at the level of 17.5 percent of
gas condensate revenues recognized by the producing entities. Effective 1 January 2012, the approach set by the
Tax Code of the Russian Federation was changed and a tax rate of RR 556 per ton of gas condensate produced was
set.
Under the Tax Code, 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.
According to the amendments to the Tax Code, effective from 1 January 2012, a zero UPT rate is set for crude oil
produced at fields located in the YNAO to the north of the 65th degree of the northern latitude. The Group’s East-
Tarkosalinskoye and Khancheyskoye fields are located within the applicable geographical area; therefore, the zero
UPT rate was applied for the crude oil produced at these fields effective from 1 January 2012.
22
GENERAL AND ADMINISTRATIVE EXPENSES
Employee compensation
Legal, audit, and consulting services
Social expenses and compensatory payments
Depreciation – administrative buildings
Business trips expense
Fire safety and security expenses
Repair and maintenance expenses
Rent expense
Board remuneration
Insurance expense
Bank charges
Other
Total general and administrative expenses
Year ended 31 December:
2012
2011
6,869
1,274
1,001
314
292
199
168
113
105
86
82
433
10,936
4,650
774
1,212
198
218
178
115
140
103
58
58
514
8,218
44
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
22
GENERAL AND ADMINISTRATIVE EXPENSES (CONTINUED)
Auditors’ fees and services. ZAO PricewaterhouseCoopers Audit has served as the Group’s independent external
auditor 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:
Year ended 31 December:
2012
2011
40
4
44
Year ended 31 December:
2012
2011
3,808
1,598
457
412
271
186
99
385
7,216
39
1
40
2,953
1,435
405
309
237
184
99
325
5,947
5,854
-
140
5,994
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
23
MATERIALS, SERVICES AND OTHER
Employee compensation
Repair and maintenance services
Electricity and fuel
Materials and supplies
Security expenses
Transportation expenses
Processing fees
Other
Total materials, services and other
(cid:3)
(cid:3)
24
PURCHASES OF NATURAL GAS AND LIQUID HYDROCARBONS
Natural gas
Unstable gas condensate
Other liquid hydrocarbons
Total purchases of natural gas and liquid hydrocarbons
Year ended 31 December:
2012
2011
14,706
2,498
279
17,483
Natural gas purchases included volumes procured from OAO Sibneftegas, the Group’s joint venture, pro-rata to its
total production (see Note 30). From January 2012, the Group began purchasing natural gas from its related party
OAO SIBUR Holding at prices based on the market prices in the region of purchases (see Note 30).
In November 2012, the Group began purchasing unstable gas condensate from ZAO Nortgas, the Group’s joint
venture from November 2012, at ex-field prices based on benchmark crude oil and oil products market quotes
adjusted for quality and respective tariffs for transportation and processing (see Note 30).
In April 2012, the Group began purchasing unstable gas condensate from OOO SeverEnergia, a related party,(cid:3)at ex-
field prices based on benchmark crude oil and oil products market quotes adjusted for quality and respective tariffs
for transportation and processing (see Note 30).
45
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
7.5% RR 10 billion Bonds June 2013
8.9% RR 10 billion Sberbank December 2014
8.35% RR 20 billion Bonds October 2015
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+3.25% USD 200 million UniCredit Bank October 2012 (1)
4.42% USD 1 billion Eurobonds December 2022
8% RR 10 billion Gazprombank November 2012 (1)
Other interest expenses (2)
Subtotal
Less: capitalized interest
Interest expense (on historical cost basis)
Effects of discounting of long-term financial liabilities
Provisions for asset retirement obligations:
effect of the present value discount unwinding
Total interest expense
(1) – interest rates were reduced during the periods.
(2) – including credit facility with interest rates negotiated at time of each withdrawal.
Interest income
Interest income on loans issued
Interest income on cash and cash equivalents
Interest income (on historical cost basis)
Long-term financial assets:
effect of the present value discount unwinding
Total interest income
Year ended 31 December:
2012
2011
1,355
1,143
1,022
772
520
355
148
133
71
69
42
72
5,702
(2,698)
3,004
-
232
3,236
1,165
1,144
879
772
-
-
148
125
215
-
805
169
5,422
(3,709)
1,713
212
225
2,150
Year ended 31 December:
2012
2011
1,051
444
1,495
236
1,731
2,828
355
3,183
209
3,392
46
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.
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 joint ventures
Non-deductible expenses
Russian entities’ taxation at lower income tax rate
Foreign entities’ taxation at lower income tax rate
Deferred taxes write-off
Tax benefit relating to priority investment projects in the YNAO
Disposal of 20 percent interest in Yamal LNG
Other non-temporary differences
Year ended 31 December:
2012
2011
86,215
17,243
135,025
27,005
421
546
(117)
(107)
(21)
(1,709)
-
518
776
686
(118)
(226)
342
-
(12,473)
(258)
Total income tax expense
16,774
15,734
In 2012, one of Group’s investment projects in the YNAO was included by the YNAO authorities in the list of
priority projects, which allows the Group’s subsidiary, that carried out the project, to apply a reduced income tax
rate of 15.5 percent.
Domestic and foreign components of current income tax expense were:
Russian Federation income tax
Foreign income tax
Total current income tax expense
Year ended 31 December:
2012
2011
16,011
131
16,142
12,364
103
12,467
Effective income tax rate. The Group’s Russian statutory income tax rate for 2012 and 2011 was 20 percent. For
the years ended 31 December 2012 and 2011, the consolidated Group’s effective income tax rate was 19.5 percent
and 11.7 percent, respectively. Excluding the effect of 20 percent 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 2011. Instead, each legal entity filed separate tax returns with
various tax authorities, primarily in the Russian Federation. Effective 1 January 2012, Russian tax legislation
introduced an option to submit a single consolidated income tax return, and, accordingly, in April 2012, the
Group’s management registered 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.
47
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 2012 At 31 December 2011
1,062
(13,969)
660
(12,805)
(12,907)
(12,145)
Deferred income tax assets expected to be realized within twelve months of 31 December 2012 and 2011 were
RR 983 million and RR 462 million, respectively. Deferred tax liabilities expected to be reversed within twelve
months of 31 December 2012 and 2011 were RR 629 million and RR 199 million, respectively.
Movements in deferred income tax assets and liabilities during the years ended 31 December 2012 and 2011 are as
follows:
At 31 December
2012
Statement of
Income effect
Acquisitions
Disposals
At 31 December
2011
Property, plant and equipment
Intangible assets
Other
(15,902)
(398)
(714)
(1,124)
51
(496)
-
(125)
(5)
Total deferred income tax liabilities
(17,014)
(1,569)
(130)
Tax losses carried forward
Inventories
Asset retirement obligation
Trade payables and accrued liabilities
Other
Total deferred income tax assets
1,474
1,077
577
809
170
4,107
Net deferred income tax liabilities
(12,907)
95
438
30
327
47
937
(632)
4
-
-
-
-
4
(126)
11
-
-
11
-
(15)
-
-
-
(15)
(4)
At 31 December
2011
Statement of
Income effect
Acquisitions
Disposals
(14,789)
(324)
(213)
(15,326)
1,375
654
547
482
123
3,181
(12,145)
At 31 December
2010
Property, plant and equipment
Intangible assets
Other
(14,789)
(324)
(213)
(3,827)
23
(53)
-
(265)
(13)
138
-
-
(11,100)
(82)
(147)
Total deferred income tax liabilities
(15,326)
(3,857)
(278)
138
(11,329)
Tax losses carried forward
Inventories
Asset retirement obligation
Trade payables and accrued liabilities
Other
1,375
654
547
482
123
603
(167)
131
27
(4)
Total deferred income tax assets
3,181
590
16
-
-
3
8
27
Net deferred income tax liabilities
(12,145)
(3,267)
(251)
(519)
(83)
(80)
-
(2)
(684)
(546)
1,275
904
496
452
121
3,248
(8,081)
48
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 2012, the Group had recognized deferred income tax assets of RR 1,474 million (31 December
2011: RR 1,375 million) in respect of unused tax loss carry forwards of RR 7,370 million (31 December 2011:
RR 6,875 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
Loans and receivables
Non-current
Long-term loans
Trade and other receivables
Long-term deposits
Current
Trade and other receivables
Russian rouble denominated loans
Short-term bank deposits
Cash restricted in the form of guarantee
Cash and cash equivalents
At fair value through profit or loss
Non-current
Commodity derivatives
Current
Commodity derivatives
Total assets
Financial liabilities
At amortized cost
Non-current
Long-term debt
Current
Current portion of long-term debt
Trade and other payables
At fair value through profit or loss
Non-current
Commodity derivatives
Current
Commodity derivatives
Total liabilities
49
At 31 December 2012 At 31 December 2011
12,502
648
3
16,409
428
10
1,959
18,420
148
451
9,323
22,806
1
16,699
6,859
17
-
23,831
-
-
50,978
79,536
At 31 December 2012 At 31 December 2011
97,805
34,682
12,141
592
43
75,180
20,298
22,811
-
-
145,263
118,289
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)
Derivative instruments. Certain foreign long-term natural gas purchase and sales contracts were entered into for
trading purposes on active markets that do not meet the expected own-use requirements. These contracts include
pricing terms that are based on a variety of commodities and indices and volume flexibility options that collectively
qualify them under the scope of IAS 39, Financial instruments: recognition and measurement, although the activity
surrounding these contracts involves the physical delivery of natural gas. Such contracts are recognized in the
statement of financial position at fair value with movements in fair value recognized in the income statement.
The Group determines the fair values of these financial commodity derivative contracts using the mark-to-market
and mark-to-model methods and as such, the Group evaluates the quality and reliability of the assumptions and data
used to measure fair value in accordance with IFRS 7, Financial instruments: Disclosures, in the three hierarchy
levels as follows:
i.
ii.
iii.
quoted prices in active markets (Level 1);
inputs other than quoted prices included in Level 1 that are directly or indirectly observable in the market
(externally verifiable inputs) (Level 2); and
inputs that are not based on observable market data (unobservable inputs). These inputs reflect the Group’s
own assumptions about the assumptions a market participant would use in pricing the asset or liability
(Level 3).
The fair values of natural gas derivative contracts are estimated using internal models and other valuation
techniques due to the absence of quoted prices or other observable, market-corroborated data, for the duration of
the contracts. Valuations were derived from quoted market prices for the periods in which market quotes are
available; thereafter, forward natural gas prices were developed by reference to equivalent oil and oil products
prices on other analogous markets. For periods beyond observable market prices the fair values of the long-term
contracts were calculated using the market yield curve at the reporting date. Due to the assumptions underlying
their fair value, the gas contracts are categorized as Level 3 in the fair value hierarchy, described above.
At 31 December 2012, the Group recognized RR 599 million of assets and RR 635 million of liabilities related to
long-term natural gas contracts in the consolidated statement of financial position. For the year ended
31 December 2012, a loss of RR 36 million was included within other operating income (loss) representing non-
cash mark-to-market net movements in fair values on these derivative instruments during the reporting period.
Trading operations under these contracts in 2012 resulted in the net income of RR 112 million that was recognized
in the consolidated income statement within other operating profit (loss).
The fair value of natural gas derivative contracts is sensitive to price changes in the event of a one-off shift step in
the market. The table below represents the effect on the fair value estimation of these derivative contracts that
would occur from price changes by RR 201.14 (five Euros) by 1 megawatt-hour:
Sensitivity summary
Market shift from 2014 sensitivity
Market shift from 2019 sensitivity
Price decrease
Price increase
2,454
2,011
(3,379)
(2,695)
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.
50
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 gas 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.
(cid:3)
(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 2012
Financial assets
Non-current
Long-term loans receivable
Trade and other receivables
Commodity derivatives
Long-term deposits
Current
Trade and other receivables
Russian rouble denominated loans
Short-term bank deposits
Commodity derivatives
Cash restricted in the form of guarantee
Cash and cash equivalents
Financial liabilities
Non-current
Long-term debt
Commodity derivatives
Current
Current portion of long-term debt
Trade and other payables
Commodity derivatives
Russian
rouble
8,136
562
-
-
9,604
428
-
-
-
8,251
US dollar
Other
Total
4,366
67
-
-
4,794
-
-
-
1,959
9,740
-
19
148
3
2,011
-
10
451
-
429
12,502
648
148
3
16,409
428
10
451
1,959
18,420
(29,818)
-
(24,963)
(9,135)
-
(67,987)
-
(9,719)
(1,400)
-
-
(592)
-
(1,606)
(43)
(97,805)
(592)
(34,682)
(12,141)
(43)
Net exposure at 31 December 2012
(36,935)
(58,180)
830
(94,285)
51
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
27
FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS (CONTINUED)
At 31 December 2011
Financial assets
Non-current
Long-term loans receivable
Trade and other receivables
Long-term deposits
Current
Trade and other receivables
Russian rouble denominated loans
Short-term bank deposits
Cash and cash equivalents
Financial liabilities
Non-current
Long-term debt
Other non-current liabilities
Current
Current portion of long-term debt
Trade and other payables
US dollar
Other
Total
Russian
rouble
9,103
22,761
-
8,692
6,859
-
10,774
220(cid:3)
14(cid:3)
-
7,618(cid:3)
-(cid:3)
-
12,113(cid:3)
(24,937)
-
(10,000)
(4,949)
(50,243)(cid:3)
-(cid:3)
(10,298)(cid:3)
(17,799)(cid:3)
-
31
1
389
-
17
944
-
-
-
(63)
9,323
22,806
1
16,699
6,859
17
23,831
(75,180)
-
(20,298)
(22,811)
Net exposure at 31 December 2011
18,303
(58,375)
1,319
(38,753)
The Group chooses 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.(cid:3)
The sensitivity analysis depicted in the table below reflects the hypothetical loss that would occur assuming a
10 percent increase in exchange rates and no changes in the portfolio of instruments and other variables at
31 December 2012 and 2011, respectively:
Effect on pre-tax profit
Increase in exchange rate
2012
2011
Year ended 31 December:
RUB / USD
10%
(5,818)
(5,838)
The effect of a corresponding 10 percent decrease in exchange rate is approximately equal and opposite.
(cid:3)
(b) Commodity price risk
The Group’s overall commercial trading strategy in natural gas and liquid hydrocarbons 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 supplies on the Russian domestic market. As an independent natural gas producer, the Group is not
subject to the government’s regulation of natural gas prices, except for those volumes sold to residential customers.
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.
52
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
27
FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS (CONTINUED)
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 to implement full liberalization of the
domestic natural gas market is planned on 1 January 2015; however, the Government reserves the right to amend or
change the proposed timetable. As part of the plan, in June 2012, the FTS approved an increase of
15 percent in the regulated prices effective 1 July 2012. 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. All of the Group’s natural gas purchase and sales contracts in the
domestic market are entered to meet supply requirements to fulfil contract obligations or for own consumption and
are not within the scope of IAS 39, Financial instruments: recognition and measurement. 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 eventually to the natural gas exchange when trading
commences.
Natural gas foreign trading activities. The Group purchases and sells natural gas on the European market under
long-term supply contracts based on formulas with reference to benchmark natural gas prices quoted for the North-
Western European natural gas hubs, crude oil and oil products prices and/or a combination thereof. As a result, the
Group’s results from natural gas trading are subject to commodity price volatility based on fluctuations or changes
in the respective benchmark reference prices.
Natural gas foreign trading activities are exercised by Novatek Gas & Power GmbH, the Group’s wholly owned
subsidiary, and are managed within the Group’s integrated trading function.
Liquid hydrocarbons. The Group sells all its crude oil and gas condensate under spot contracts. Gas condensate
volumes sold to the US, European, South American 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 a combination thereof)
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. All of the Group’s liquid hydrocarbon purchase and sales contracts are
entered to meet supply requirements to fulfil contract obligations or for own consumption and are not within the
scope of IAS 39, Financial instruments: recognition and measurement.
(cid:3)
(c)(cid:3)(cid:3) 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.
53
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
27
FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS (CONTINUED)
The interest rate profiles of the Group’s interest-bearing financial instruments at the reporting dates were as
follows:
At fixed rate
At variable rate
Total debt
At 31 December 2012 At 31 December 2011
122,779
9,708
132,487
74,919
20,559
95,478
The Group centralizes the cash requirements and surpluses of controlled subsidiaries and the majority of their
external financing requirements, and applies, on its consolidated net debt position, a funding policy to optimize its
financing costs and manage the impact of interest rate changes on its financial results in line with market
conditions. In this way, the Group is able to ensure that the balance between the floating rate portion of its debt and
its cash surpluses has a low level of exposure to any change in interest rates over the short term. This policy makes
it possible to significantly limit the Group's sensitivity to interest rate volatility.
The Group’s financial results are sensitive to changes in interest rates on the floating rate portion of the Group’s
debt portfolio. If the interest rates applicable to floating rate debt were to increase by 100 basis points at the
reporting dates, assuming all other variables remain constant, it is estimated that the Group’s profit before taxation
would decrease by the amounts shown below:
Effect on pre-tax profit
Increase by 100 basis points
Year ended 31 December:
2012
2011
97
206
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 2012 and 2011, or
during 2012 and 2011.
(cid:3)
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. 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 the ageing of receivables by type of customers and their respective prior payment history.
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)
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
and/or their parent companies:
Moody’s, Fitch and/or Standard & Poor’s
At 31 December 2012 At 31 December 2011
Investment grade rating
Non-investment grade rating
No external rating
Total trade and other receivables
7,208
4,825
4,376
9,059
1,581
6,059
16,409
16,699
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, Fitch and/or Standard & Poor’s
At 31 December 2012 At 31 December 2011
Investment grade rating
Non-investment grade rating
No external rating
Total cash and cash equivalents
16,887
1,526
7
18,420
19,381
4,358
92
23,831
Investment grade ratings classification referred to as Aaa to Baa3 for Moody’s Investors Service, and as AAA to
BBB- for Fitch Ratings and Standard & Poor’s.
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, except of natural gas derivative contracts, based
on contractual undiscounted payments, including interest payments:
At 31 December 2012
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
Total
25,000
7,589
9,719
116
12,141
10,000
6,097
38,224
11,062
50,115
11,279
123,339
36,027
-
-
-
-
-
-
-
-
-
9,719
116
12,141
Total financial liabilities
54,565
16,097
49,286
61,394
181,342
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)(cid:3)
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
(*) – differs from long-term debt (See Note 13) for transaction costs.
The following table represents the maturity profile of the Group’s derivative commodity contracts based on
undiscounted cash flows:
At 31 December 2012
Cash inflow
Cash outflow
Net cash flows
Less than
1 year
Between
1 and 2 years
Between
2 and 5 years
More than
5 years
Total
23,150
(22,678)
23,600
(23,175)
69,289
(68,593)
108,742
(107,598)
224,781
(222,044)
472
425
696
1,144
2,737
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, 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 plus 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 2012. At 31 December 2012 and 2011, the Group’s capital totalled
RR 404,117 million and RR 312,660 million, respectively.
56
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
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 2012, the Group had contractual capital expenditures commitments aggregating
approximately RR 22,476 million (at 31 December 2011: RR 17,805 million) mainly for ongoing development
activities at the Yurkharovskoye field (through 2015), development at the North-Russkoe field (through 2014), both
the Salmanovskoye (Utrenneye) and the Geofizicheskoye fields (through 2016), 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 2013) and ongoing development of the East-Tarkosalinskoye
(through 2014) and Khancheyskoye fields (through 2013) all in accordance with duly signed agreements.
Furthermore, the Group’s share in capital commitments for its interests in joint ventures aggregates approximately
RR 31,411 million (at 31 December 2011: RR 5,850 million) for development of the South-Tambeyskoye (through
2014), Termokarstovoye (through 2016), North-Urengoiskoye (through 2015) and Samburgskoye (through 2014)
fields.
Taxation. Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which
can occur frequently. Correspondingly, the relevant regional and federal tax authorities may periodically challenge.
Management’s interpretation of such taxation legislation as applied to the Group’s transactions and activities.
Furthermore, events within the Russian Federation suggest that the tax authorities may be taking a more assertive
position in its interpretation of the legislation and assessments, and it is possible that transactions and activities that
have not been challenged in the past may be challenged. As a result, significant additional taxes, penalties and
interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three
calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods.
As at 31 December 2012, 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.
57
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
28
CONTINGENCIES AND COMMITMENTS (CONTINUED)
The Group’s oil and gas fields and license areas are situated on land located in the Yamal-Nenets Autonomous
Region. Licenses are issued by the Federal Agency for the Use of Natural Resources of the Russian Federation and
the Group pays unified natural resources production tax to produce crude oil, natural gas and unstable gas
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
North-Russkoe
Khancheyskoye
Urengoiskoye (within the
Olimpiyskiy license area)
Malo-Yamalskoye
Yarudeyskoye
South-Tambeyskoye
North-Urengoyskoye
Urengoiskoye (within the
Samburgskiy and Yevo-Yakhinskiy
license areas)
Samburgskoye
Yaro-Yakhinskoye
North-Chaselskoye
Termokarstovoye
Beregovoe
Pyreinoye
Subsidiaries:
OOO NOVATEK-Yurkharovneftegas
OOO NOVATEK-Yurkharovneftegas
OOO NOVATEK-Yurkharovneftegas
OOO NOVATEK-Tarkosaleneftegas
OOO NOVATEK-Tarkosaleneftegas
OOO NOVATEK-Tarkosaleneftegas
OOO NOVATEK-Tarkosaleneftegas
OAO Tambeyneftegas
OOO Yargeo
Joint ventures:
OAO Yamal LNG
ZAO Nortgas
OAO Arkticheskaya gazovaya kompaniya
(Subsidiary of OOO SeverEnergia)
OAO Arkticheskaya gazovaya kompaniya
(Subsidiary of OOO SeverEnergia)
OAO Arkticheskaya gazovaya kompaniya
(Subsidiary of OOO SeverEnergia)
OAO Arkticheskaya gazovaya kompaniya
(Subsidiary of OOO SeverEnergia)
ZAO Terneftegas
OAO Sibneftegas
OAO Sibneftegas
2034
2031
2031
2043
2031
2044
2026
2019
2029
2045
2018
2018
2018
2018
Life of field
2021
2023
2021
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.
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.
58
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
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 2012 and 2011 are set out below:
Ownership percent
at 31 December:
2012
2011
Country of
incorporation
Principal
activities
Subsidiaries
OOO NOVATEK-Yurkharovneftegas
OOO NOVATEK-Tarkosaleneftegas
OOO NOVATEK-Purovsky ZPK
OOO NOVATEK-Transervice
OOO NOVATEK-Ust-Luga
OOO NOVATEK-AZK
OOO NOVATEK-Chelyabinsk
(formerly OOO Yamalgazresurs-Chelyabinsk)
OOO Gazprom mezhregiongas Chelyabinsk
(merged into OOO NOVATEK-Chelyabinsk in June 2012)
100
100
100
100
100
100
100
-
OOO Gazprom mezhregiongas Kostroma
84.54
OOO NOVATEK-Perm
OOO Yamalenergogas
(merged into OOO NOVATEK-Perm in January 2012)
OOO Yargeo
Novatek Gas & Power GmbH
Novatek Polska Sp. z o.o.
Joint ventures
OAO Yamal LNG
OAO Sibneftegas
ZAO Terneftegas
OOO Yamal Development
OOO SeverEnergia
(includes a producing subsidiary, see Note 7)
ZAO Nortgas
100
-
51
100
100
80
51
51
50
25.5
49
59
100
100
100
100
100
100
100
100
-
100
100
51
100
100
80
51
51
50
25.5
-
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Switzerland
Poland
Russia
Russia
Russia
Russia
Russia
Russia
Exploration
and production
Exploration
and production
Gas Condensate
Processing Plant
Transportation
services
Construction of
transhipment
and fractionation
facilities
Wholesale and
retail trading
Trading
and marketing
Trading
and marketing
Trading
and marketing
Trading
and marketing
Trading
and marketing
Exploration
and development
Trading
and marketing
Trading
and marketing
Exploration
and development
Exploration
and production
Exploration
and development
Holding
company
Holding
company
Exploration
and production
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
30
RELATED PARTY TRANSACTIONS
Transactions between NOVATEK and its subsidiaries, which are related parties of NOVATEK, have been
eliminated on consolidation and are not disclosed in this Note.
For the purposes of these consolidated financial statements, parties are generally considered to be related if one
party has the ability to control the other party, is under common control, or can exercise significant influence over
the other party in making financial and operational decisions. Management has used reasonable judgments in
considering each possible related party relationship with attention directed to the substance of the relationship, not
merely the legal form. Related parties may enter into transactions, which unrelated parties might not, and
transactions between related parties may not be affected on the same terms, conditions and amounts as transactions
between unrelated parties.
Related parties – joint ventures(cid:3)
Transactions
(cid:584)(cid:570)(cid:584) Sibneftegas:
Interest income on loans issued
Oil and gas products sales
Purchases of natural gas
OOO Yamal Development:
Interest income on loans issued
OOO SeverEnergia:
Interest income on loans issued
Purchases of unstable gas condensate
ZAO Terneftegas:
Interest income on loans issued
OAO Yamal LNG (from October 2011):
Interest income on loans issued
Other revenues (operator services sales)
ZAO Nortgas (from 27 November 2012):
Purchases of unstable gas condensate
Year ended 31 December:
2012
2011
901
41
(5,272)
-
145
(1,956)
45
17
97
(312)
1,023
39
(3,661)
1,325
247
-
5
167
15
-
In October 2011, the Group disposed of a 20 percent equity stake in OAO Yamal LNG, and in accordance with the
new shareholders’ agreement lost effective control over the entity, but joint control was retained (see Note 5);
therefore, subsequent to that event, the Group’s balances and transactions with this entity are disclosed as related
parties – equity investments.
Related parties – joint ventures
(cid:3)
Balances
(cid:584)(cid:570)(cid:584) Sibneftegas:
Long-term loans receivable
Interest on long-term loans receivable
Short-term loans receivable
Trade payables and accrued liabilities
OOO Yamal Development:
Long-term loans and receivables
OOO SeverEnergia:
Short-term loans receivable
Interest on short-term loans receivable
Trade payables and accrued liabilities
At 31 December 2012
At 31 December 2011
(cid:3)
8,136
187
428
705
-
-
-
398
9,103
775
634
387
16,348
6,225
94
-
60
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
30
RELATED PARTY TRANSACTIONS (CONTINUED)
Related parties – joint ventures
(cid:3)
Balances
ZAO Terneftegas:
Long-term loans receivable
Interest on long-term loans receivable
OAO Yamal LNG:
Long-term loans receivable
Long-term receivables
Interest on long-term loans receivable
ZAO Nortgas (from 27 November 2012):
Trade payables and accrued liabilities
At 31 December 2012
At 31 December 2011
(cid:3)
1,451
50
2,915
-
17
368
220
5
-
3,955
-
-
In September 2011, the Chairman of the Management Committee of NOVATEK acquired a controlling stake in
OAO SIBUR Holding. As a result, the Group’s balances and transactions with this company and its subsidiaries
following that date were disclosed as related parties – parties under control of key management personnel.
In October 2012, the Group signed an agreement for the transport of stable gas condensate from the Purovsky Gas
Condensate Plant to the Port of Vitino on the White Sea with OOO Transoil, an entity under control of a member of
the Board of Directors of NOVATEK. The Group’s balances and transactions with this company are disclosed
below as related parties – parties under control of key management personnel of the Group.
Related parties – parties under control of key management personnel
Year ended 31 December:
2012
2011
Transactions
OAO SIBUR Holding and its subsidiaries
(from 1 October 2011):
Natural gas sales
Purchases of natural gas
Purchases of liquid hydrocarbons
OOO Transoil:
Liquid hydrocarbons transportation by rail
2,042
(9,434)
(45)
(472)
-
-
-
-
Related parties – parties under control of key management personnel
At 31 December 2012 At 31 December 2011
Balances
OAO Pervobank:
Cash and cash equivalents
OAO SIBUR Holding and its subsidiaries:
Long-term receivable
Trade and other receivables
Trade payables and accrued liabilities
Prepayments and other current assets
OOO Transoil:
Trade payables and accrued liabilities
Prepayments and other current assets
1,224
-
1,568
826
1,690
170
61
4,066
1,424
248
-
-
-
-
61
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
30
RELATED PARTY TRANSACTIONS (CONTINUED)
Key management compensation. The Group paid to key management personnel (members of the Board of
Directors and the Management Committee) short-term compensation, including salary, bonuses, and excluding
dividends the following amounts.
Related parties – members of the key management personnel
Board of Directors
Management Committee
(cid:3)
Total compensation
Year ended 31 December:
2012
2011
105
1,282
1,387
103
1,242
1,345
Such amounts include personal income tax and are net of payments to non-budget funds made by the employer.
Some members of key management personnel have direct and/or indirect interests in the Group and receive
dividends under general conditions based on their respective shareholdings. 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.
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 one operating segment: “exploration,
production and marketing”.
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 segment 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.
Segment information for the year ended 31 December 2012 is as follows:
For the year ended 31 December 2012
References
External revenues
Operating expenses
Other operating income (loss)
Interest expense
Interest income
Foreign exchange gain (loss)
a
a - e
c
f
f
Exploration,
production and
marketing
Segment
information as
reported to
CODM
211,885
(130,558)
(292)
(5,231)
1,479
4,358
211,885
(130,558)
(292)
(5,231)
1,479
4,358
Reconciling
items
(912)
4,783
428
1,995
252
133
Total per
consolidated
financial
statements
210,973
(125,775)
136
(3,236)
1,731
4,491
Segment result
81,641
81,641
6,679
88,320
Share of profit (loss) of joint ventures,
net of income tax
Profit before income tax
Depreciation, depletion and amortization
Capital expenditures
b, c
f
15,286
36,021
15,286
36,021
(3,787)
7,533
(2,105)
86,215
11,499
43,554
62
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
31
SEGMENT INFORMATION (CONTINUED)
Reconciling items mainly related to:
a.
b.
c.
d.
e.
f.
different methodology of liquefied petroleum gas sales recognition under IFRS and the RAR which requires
reclassification of external revenues and expenses for RR 951 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 3,987 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 147 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 216 million and
additional payroll expenses of RR 1,962 million recorded in operating expenses under IFRS;
different methodology in recognizing of exploration expenses, which resulted in the reversal of operating
expenses of RR 2,364 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 capitalized interest and
foreign exchange differences of RR 2,156 million and additional capital expenditures of RR 5,377 million
under IFRS.
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
a - 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
(1,067)
4,839
50,205
3,242
255
423
Total per
consolidated
financial
statements
175,273
(96,820)
63,155
(2,150)
3,392
(3,945)
Segment result
81,008
81,008
57,897
138,905
Share of profit (loss) of joint ventures,
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
63
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
31
SEGMENT INFORMATION (CONTINUED)
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
reclassification of external revenues and expenses for RR 998 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 capitalized interest and
foreign exchange differences of RR 3,942 million and additional capital expenditures of RR 3,579 million
under IFRS.
Geographical information. The Group operates in the following geographical areas:
•
Russian Federation – exploration, development, production and processing of hydrocarbons, and sales of
natural gas, stable gas condensate, crude oil and related products;
• USA – sales of stable gas condensate;
•
•
Europe – sales of stable gas condensate, liquefied petroleum gas and crude oil; and
Asian-Pacific Region (“APR”) – sales of stable gas condensate.
Geographical information for the years ended 31 December 2012 and 2011 is as follows:
For the year ended
31 December 2012
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
142,613
319
5,968
3,215
350
-
22,857
12,137
3,661
-
-
8,614
-
-
-
-
46,351
-
-
-
-
3,597
-
-
-
-
(35,054)
(2,506)
(1,876)
-
- 142,613
46,684
15,599
5,000
350
46,365
9,631
1,785
-
Oil and gas sales
152,465
38,655
8,614
46,351
3,597
(39,436)
57,781
210,246
Other revenues
642
85
-
-
-
-
85
727
Total external revenues
153,107
38,740
8,614
46,351
3,597
(39,436)
57,866
210,973
64
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
31
SEGMENT INFORMATION (CONTINUED)
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
5,728
1,458
186
-
28,265
11,024
2,143
-
-
17,920
-
-
-
-
35,642
-
-
-
-
-
10
-
-
-
(35,095)
(2,326)
(1,122)
-
-
46,732
8,708
1,021
-
110,932
46,778
14,436
2,479
186
Oil and gas sales
118,350
41,432
17,920
35,642
10
(38,543)
56,461
174,811
Other revenues
323
139
-
-
-
-
139
462
Total external revenues
118,673
41,571
17,920
35,642
10
(38,543)
56,600
175,273
Revenues 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 operating assets are located in the Russian
Federation.
Major customers. For the years ended 31 December 2012 and 2011, the Group has one and two major customers to
whom individual annual revenues exceed 10 percent of total external revenues, which on an aggregate basis
represent 19 percent and 30 percent of total external revenues, respectively.
(cid:3)
(cid:3)
32
EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES
Net book value of assets value at 1 January
Additions
Disposals
Reclassification in proved properties
Transfers
Net book value of assets at 31 December
Liabilities
Cash flows used for operating activities
Cash flows used for investing activities
33
SUBSEQUENT EVENTS
Year ended 31 December:
2012(cid:3)
2011
16,251
1,212
(940)
(7,192)
(584)
8,747
1,483
1,174
1,730
6,372
13,500
(1,921)
(574)
(1,126)
16,251
650
1,469
10,093
On 20 February 2013, the Group issued four-year non-convertible Russian rouble denominated Eurobonds in the
amount of RR 14 billion with a coupon rate of 7.75 percent per annum.
On 28 February 2013, the Group repaid a Russian rouble denominated loan in the amount of RR 15 billion obtained
from OAO Sberbank. The loan was repaid ahead of its maturity schedule.
On 1 March 2013, the Group repaid the US dollar denominated loan in the amount of US 200 million obtained
from OAO Nordea bank. The loan was repaid ahead of its maturity schedule.
65
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
34
NEW ACCOUNTING PRONOUNCEMENTS
The Group has reviewed new and revised accounting pronouncements that have been issued but are not yet
effective for the Group and determined that the following may have an impact on the Group.
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:
(cid:120)
Financial assets are required to be classified into two measurement categories: those to be measured
subsequently at fair value, and those to be measured subsequently at amortized cost. The decision is to be made
at initial recognition. The classification depends on the entity’s business model for managing its financial
instruments and the contractual cash flow characteristics of the instrument.
(cid:120) An instrument is subsequently measured at amortized cost only if it is a debt instrument and both (i) the
objective of the entity’s business model is to hold the asset to collect the contractual cash flows, and (ii) the
asset’s contractual cash flows represent 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.
(cid:120) All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for
trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable
election can be made at initial recognition, to recognize unrealized and realized fair value gains and losses
through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains
and losses to profit or loss. This election may be made on an instrument-by-instrument basis. Dividends are to
be presented in profit or loss, as long as they represent a return on investment.
(cid:120) 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.
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.
66
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
34
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, summarized financial information of
subsidiaries with material non-controlling interests, and detailed disclosures of interests in unconsolidated
structured entities.
The Group will adopt IFRS 10, IFRS 11 and IFRS 12 from January 1, 2013. The adoption of IFRS 10 and IFRS 12
is not expected to have a material impact on the Group’s financial position or operations but will require additional
disclosures to be presented in the 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
adoption of this standard is not expected to have a material impact on the Group’s financial position or operations.
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 adoption of this amendment is not expected to have a material impact on the Group’s financial
position or operations.
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 International Accounting
Standards Board’s (“Board”) 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 adoption of this
amendment is not expected to have a material impact on the Group’s financial position or operations.
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 does not expect these
amendments to have a material impact on the Group's financial position or operations.
67
OAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles, [tabular amounts in millions] unless otherwise stated)
34
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.
Improvements to International Financial Reporting Standards (issued in May 2012 and effective for annual periods
beginning on or after 1 January 2013). The improvements consist of changes to five standards. IFRS 1 was
amended to (i) clarify that an entity that resumes preparing its IFRS financial statements may either repeatedly
apply IFRS 1 or apply all IFRSs retrospectively as if it had never stopped applying them, and (ii) to add an
exemption from applying IAS 23, Borrowing costs, retrospectively by first-time adopters. IAS 1 was amended to
clarify that explanatory notes are not required to support the third balance sheet presented at the beginning of the
preceding period when it is provided because it was materially impacted by a retrospective restatement, changes in
accounting policies or reclassifications for presentation purposes, while explanatory notes will be required when an
entity voluntarily decides to provide additional comparative statements. IAS 16 was amended to clarify that
servicing equipment that is used for more than one period is classified as property, plant and equipment rather than
inventory. IAS 32 was amended to clarify that certain tax consequences of distributions to owners should be
accounted for in the income statement as was always required by IAS 12. IAS 34 was amended to bring its
requirements in line with IFRS 8. IAS 34 will require disclosure of a measure of total assets and liabilities for an
operating segment only if such information is regularly provided to chief operating decision maker and there has
been a material change in those measures since the last annual consolidated financial statements. The Group does
not expect these amendments to have a material impact on the Group's financial position or operations.
68
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 2012 and 2011 (amounts in millions of Russian roubles).
Costs incurred in exploration and development activities
Acquisition of unproved properties
Exploration costs
Development costs
Total costs incurred in exploration and development activities
The share of the Group in joint ventures
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 joint ventures
Year ended 31 December:
2012
2011
-
2,028
29,988
32,016
80,777
7,053
2,447
23,493
32,993
2,051
At 31 December 2012 At 31 December 2011
157,048
38,922
17,312
213,282
(46,131)
167,151
226,887
145,063
30,717
12,862
188,642
(35,540)
153,102
150,449
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).
69
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
Year ended 31 December:
2012
2011
184,629
162,975
(7,599)
(57,888)
(16,546)
(10,589)
(2,022)
(5,403)
(46,216)
(16,307)
(8,937)
(1,819)
Total production costs
(94,644)
(78,682)
Results of operations for oil and gas producing activities
before income tax
Less: related income tax expenses
Results of operations for oil and gas producing activities
Share of profit (loss) of joint ventures
Total results of operations for oil and gas producing activities
Proved Oil and Gas Reserves
89,985
(17,997)
71,988
729
72,717
84,293
(16,859)
67,434
(555)
66,879
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.
70
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 2012 and 2011.
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 for exploration and production 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.
71
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
joint ventures
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 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
Changes attributable to:
Revisions of previous
estimates
Extension and discoveries
Acquisitions (*)
Production
231
738
12,717
(1,781)
6
21
360
(50)
(9)
1,018
2,729
(211)
-
29
77
(6)
222
1,756
15,446
(1,992)
6
50
437
(56)
Reserves at 31 December 2012
38,452
1,089
23,763
673
62,215
1,762
Net proved developed reserves (included above)
At 31 December 2010
At 31 December 2011
At 31 December 2012
22,515
20,763
20,053
Net proved undeveloped reserves (included above)
At 31 December 2010
At 31 December 2011
At 31 December 2012
19,070
5,784
18,399
638
588
568
540
164
521
2,536
2,348
3,222
3,521
17,888
20,541
71
66
91
100
507
582
25,051
23,111
23,275
709
654
659
22,591
23,672
38,940
640
671
1,103
(*) – the acquisitions include the first time reserve estimation for the Salmanovskoye (Utrenneye) and Geofizicheskoye fields,
that were acquired late in 2011 and additionally explored in 2012.
The net proved reserves reported in the table above included reserves of natural gas attributable to non-controlling
interest of 128 billion of cubic feet and 4 billion of cubic meters and 120 billion of cubic feet and 4 billion of cubic
meters at 31 December 2012 and 2011, respectively.
72
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
joint ventures
Millions
of barrels
Millions of
metric tons
Total net proved reserves
Millions of
metric tons
Millions
of barrels
Reserves at 31 December 2010
566
68
103
13
669
81
Changes attributable to:
Revisions of previous
estimates
Extension and discoveries
Disposals
Reclassifications
Production
10
116
(34)
(138)
(35)
Reserves at 31 December 2011
485
Changes attributable to:
Revisions of previous
estimates
Extension and discoveries
Acquisitions (*)
Production
Reserves at 31 December 2012
2
13
78
(35)
543
Net proved developed reserves (included above)
At 31 December 2010
At 31 December 2011
At 31 December 2012
304
282
269
Net proved undeveloped reserves (included above)
At 31 December 2010
At 31 December 2011
At 31 December 2012
262
203
274
1
14
(4)
(16)
(4)
59
-
1
9
(4)
65
36
33
32
32
26
33
4
38
-
138
-
283
(37)
40
85
(1)
370
-
-
26
103
283
344
1
4
-
16
-
34
(4)
3
10
-
43
-
-
3
13
34
40
14
154
(34)
-
(35)
768
(35)
53
163
(36)
913
304
282
295
365
486
618
2
18
(4)
-
(4)
93
(4)
4
19
(4)
108
36
33
35
45
60
73
(*) – the acquisitions include the first time reserve estimation for the Salmanovskoye (Utrenneye) and Geofizicheskoye fields,
that were acquired late in 2011 and additionally explored in 2012.
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 17 million of barrels and 2 million of metric tons and 16 million of
barrels and 2 million of metric tons at 31 December 2012 and 2011, respectively.
In November 2012, the Group acquired 49 percent of the outstanding ordinary shares of ZAO Nortgas, which holds
license on North-Urengoyskoye field (see Note 5).
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 (see Note 5).
73
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
74
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 2012 and for the year then ended in conjunction with our audited consolidated financial statements
as of and for the years ended 31 December 2012 and 2011. 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 2012. 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 produced
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 the Commonwealth of Independent States (“CIS”)) and domestic markets.
RECENT DEVELOPMENTS
In February 2013, the Group issued four-year Russian rouble denominated Eurobonds in the aggregate amount
of RR 14 billion with the annual coupon rate of 7.75%.
In December 2012, the Group acquired 82% of equity interest in OOO Gazprom mezhregiongas Kostroma
(“Gazprom mezhregiongas Kostroma”) to support and expand natural gas sales opportunities in the Kostroma
region. Gazprom mezhregiongas Kostroma is a regional natural gas trader in the Kostroma region of the Russian
Federation.
In December 2012, the Group established OOO NOVATEK Moscow region, a wholly owned subsidiary, to
support the Group’s current natural gas deliveries to the Moscow region, as well as to expand sales in the region.
In December 2012, the Group issued ten-year USD denominated Eurobonds in the aggregate amount of
USD one billion with a coupon rate of 4.422% per annum.
In November 2012, the Group acquired a 49% ownership interest in ZAO Nortgas (“Nortgas”) for total
consideration of USD 1,375 million. Nortgas is a Russian oil and gas production company that holds the
production license for the North-Urengoyskoye field (expires in 2018), located in the Yamal Nenets
Autonomous Region (“YNAO”), which is located in a close proximity to our transport and processing
infrastructure. The estimated proved reserves appraised under the PRMS reserve methodology totalled
186 billion cubic meters (bcm) of natural gas and 25 million tons of liquid hydrocarbons as of 31 December
2012, for combined total of 1.4 billion barrels of oil equivalent.
In October 2012, we launched the fourth stage of the second phase development at our Yurkharovskoye field,
which allows achieving design production capacity of the field. The fourth stage complex includes two gas
treatment trains with total annual capacity of seven billion cubic meters. The fourth stage launch increases
natural gas production at the field to a plateau level of 36.5 bcm per annum.
1
In 2012, the Group signed long-term natural gas purchase and sales contracts with third parties on the European
market. The gas purchase and sales contracts have been signed for a period of 10 years starting from 1 October
2012 with the total volume of natural gas supplied over this period is estimated to be approximately
210 terawatt-hours (or approximately 20 bcm). The financial result from natural gas trading activities, including
the effect from changes in fair value of gas contracts, was recorded in the consolidated statement of income
within other operating profit (loss).
During 2012, our joint venture OOO SeverEnergia (“SeverEnergia”) launched the first and the second phases of
the Samburgskoye field with combined annual natural gas production capacity of approximately 4.6 bcm and
650 thousand tons of gas condensate.
In November 2011, the Group acquired OOO Gazprom mezhregiongas Chelyabinsk (“Gazprom mezhregiongas
Chelyabinsk”), a regional natural gas trader, serving the Chelyabinsk region of the Russian Federation, to
support and expand the Group’s natural gas sales commercial operations in this region.
In September 2011, the Group increased its equity interest in OAO 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. The Yamal LNG project plans to construct a natural gas liquefaction plant
comprising three trains of 5.5 million tons per annum to exploit the hydrocarbon resources of the South-
Tambeyskoye field, located on the Yamal peninsula.
In June 2011, the Group took part in a tender organized by the Federal Agency for the Use of Natural Resources
of the Russian Federation for four licenses in the YNAO: exploration and production licenses for the
Salmanovskoye (Utrenneye) and Geofizicheskoye fields, as well as geological studies and production licenses
for the North-Obskiy and East-Tambeyskiy license areas. In August 2011, the Russian Government approved the
transfer of these licenses to us for RR 6.9 billion in total consideration. The estimated proved reserves at our
Salmanovskoye (Utrenneye) and Geofizicheskoye fields appraised under the PRMS reserve methodology
totalled 492 billion cubic meters (bcm) of natural gas and 14 million tons of liquid hydrocarbons as of
31 December 2012. Our combined resources at North-Obskiy and East-Tambeyskiy license areas according to
the Russian reserve classification category D1 totalled 1,763 bcm of natural gas and 221 million tons of liquid
hydrocarbons.
2
SELECTED DATA
millions of Russian roubles except as stated
Financial results
Total revenues (net of VAT, export duties, excise and fuel taxes)
Operating expenses
Profit attributable to shareholders of OAO NOVATEK
Normalized profit attributable to shareholders of
OAO NOVATEK (1)
EBITDA (2)
Normalized EBITDA (3)
Normalized EBITDAX (4)
Earnings per share (in Russian roubles)
Normalized Earnings per share (in Russian roubles) (5)
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)
Total hydrocarbons production (million barrels of oil equivalent) (6)
Total daily production (thousand barrels of oil equivalent per day) (6)
Cash flow results
Net cash provided by operating activities
Capital expenditures (7)
Free cash flow (8)
Year ended 31 December:
2011
2012
Change
%
210,973
(125,775)
69,458
69,518
95,106
95,166
97,188
22.89
22.91
58,880
2,847
905
442
405.1
1,107
75,825
43,554
32,271
175,273
(96,820)
119,655
56,707
148,349
85,401
87,220
39.45
18.69
53,667
2,984
880
242
380.6
1,043
71,907
31,161
40,746
20.4%
29.9%
(42.0%)
22.6%
(35.9%)
11.4%
11.4%
(42.0%)
22.6%
9.7%
(4.6%)
2.8%
82.6%
6.4%
6.1%
5.4%
39.8%
(20.8%)
(1) Normalized profit attributable to shareholders of OAO NOVATEK represents profit attributable to shareholders of
OAO NOVATEK excluding net gain (loss) on disposal of interest in subsidiaries.
(2) EBITDA represents profit (loss) attributable to shareholders of OAO NOVATEK adjusted for the add-back of net
impairment expenses (reversals), income tax expense and finance income (expense) from the Consolidated Statement of
Income, income (loss) from changes in fair value of derivative financial instruments from the “Financial instruments and
financial risk factors” in the notes to the consolidated financial statements and depreciation, depletion and amortization
from the Consolidated Statement of Cash Flows.
(3) Normalized EBITDA represents EBITDA excluding net gain (loss) on disposal of interest in subsidiaries.
(4) Normalized EBITDAX represents EBITDA as adjusted for the add-back of exploration expenses and excludes net gain
(loss) on disposal of interest in subsidiaries.
(5) Normalized Earnings per share represents Earnings per share adjusted for net gain (loss) on disposal of interest in
subsidiaries.
(6) Total hydrocarbons production and total daily production are calculated based on net production, including our
proportionate share in the production of our joint ventures.
(7) Capital expenditures represent additions to property, plant and equipment excluding prepayments for participation in
tender for mineral licenses.
(8) Free cash flow represents the excess of Net cash provided by operating activities over Capital expenditures.
3
Reconciliation of adjusted (cid:40)(cid:37)(cid:44)(cid:55)(cid:39)(cid:36)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:40)(cid:37)(cid:44)(cid:55)(cid:39)(cid:36)(cid:59)(cid:3) (cid:87)(cid:82)(cid:3) (cid:83)(cid:85)(cid:82)(cid:191)(cid:87)
OAO NOVATEK is as follows:
(loss) attributable to shareholders of
millions of Russian roubles
(cid:51)(cid:85)(cid:82)(cid:191)(cid:87)(cid:3)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:68)(cid:87)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:50)(cid:36)(cid:50)(cid:3)(cid:49)(cid:50)(cid:57)(cid:36)(cid:55)(cid:40)(cid:46)
Depreciation, depletion and amortization
Net impairment expenses
Loss (income) from changes in fair value
of derivative financial instruments
Total finance expense (income)
Total income tax expense
EBITDA
Net loss (gain) on disposal of interest in subsidiaries
Normalized EBITDA
Exploration expenses
Normalized EBITDAX
Year ended 31 December:
2011
2012
Change
%
69,458
11,499
325
36
(2,986)
16,774
95,106
60
95,166
2,022
97,188
119,655
9,475
782
-
2,703
15,734
(42.0%)
21.4%
(58.4%)
n/a
n/a
6.6%
148,349
(35.9%)
(62,948)
85,401
1,819
87,220
n/a
11.4%
11.2%
11.4%
4
SELECTED MACRO-ECONOMIC DATA
Exchange rate, Russian
roubles for one US dollar (1)
1 quarter
2 quarter
3 quarter
4 quarter
Year
2012
2011
2012
2011
2012
2011
2012
2011
2012
2011
Change
Y-o-Y, %
At the beginning of the period
At the end of the period
Average for the period
Depreciation (appreciation) of
Russian rouble to US dollar
32.20
29.33
30.26
30.48
28.43
29.27
29.33
32.82
31.01
28.43
28.08
27.99
32.82
30.92
32.01
28.08
31.88
29.05
30.92
30.37
31.08
31.88
32.20
31.23
32.20
30.37
31.09
30.48
32.20
29.39
5.6%
(5.7%)
5.8%
(8.9%)
(6.7%)
11.9% (1.2%)
(5.8%)
13.5% (1.8%)
1.0% (5.7%)
5.6%
n/a
(1) According to the Central Bank of Russian Federation (CBR). The average rates are calculated as the average of the daily
exchange rates on each business day (which rate is announced by the CBR for each such business day) and on each non-
business day (which rate is equal to the exchange rate on the previous business day).
(cid:404)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:404)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:404)
Crude oil prices, USD / bbl
2012
2011
2012
2011
2012
2011
2012
2011
2012
2011
1 quarter
2 quarter
3 quarter
4 quarter
Year
Change
Y-o-Y, %
WTI (2)
At the end of the period
Average for the period
103.0
103.0
106.7
94.6
85.0
93.5
95.4
102.3
92.1
92.2
79.2
89.5
91.8
88.2
98.8
94.1
91.8
94.2
98.8
95.1
(7.1%)
(0.9%)
Brent (3)
At the end of the period
Average for the period
123.5
118.6
116.9
105.4
94.5
108.3
111.5
117.0
111.0
109.5
105.2
113.4
110.0
110.1
106.5
109.4
110.0
111.7
106.5
111.3
Urals (3)
At the end of the period
Average for the period
120.0
116.9
113.1
102.6
94.2
106.6
110.1
113.7
109.9
108.9
102.3
111.5
108.1
108.8
104.3
108.7
108.1
110.4
104.3
109.1
3.3%
0.4%
3.6%
1.2%
(2) Based on New York Mercantile Exchange Light Sweet prices provided by Reuters to Platts.
(3) Based on Brent (Dtd) prices and Russian Urals/ESPO spot assessments prices as provided by Reuters to Platts. ESPO
stands for East Siberian Pipeline Ocean crude oil.
(cid:404)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:404)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:404)
Propane-butane mix prices,
USD / ton (4)
1 quarter
2 quarter
3 quarter
4 quarter
Year
2012
2011
2012
2011
2012
2011
2012
2011
2012
2011
Change
Y-o-Y, %
At the end of the period
Average for the period
837.5
782.6
740.0
734.6
612.5
786.4
814.0
795.9
812.5
720.7
890.0
834.4
840.0
829.6
808.5
847.5
840.0
779.8
808.5
803.5
3.9%
(2.9%)
(4) Based on spot prices for propane-butane mix at the Belarusian-Polish border (DAF, Brest) as provided by Argus.
(cid:404)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:404)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:404)
Export duties, USD / ton (5)
1 quarter
2 quarter
3 quarter
4 quarter
Year
2012
2011
2012
2011
2012
2011
2012
2011
2012
2011
Change
Y-o-Y, %
Crude oil, stable gas condensate
411.2
400.8
At the end of the period
Average for the period
LPG
365.0
343.0
419.8
443.0
462.1
446.5
393.8
366.6
444.1
442.5
396.5
406.6
406.6
403.7
396.5
404.3
406.6
408.9
(2.5%)
(1.1%)
At the end of the period
Average for the period
157.3
180.0
150.2
166.1
237.1
197.4
189.8
137.0
76.2
92.7
192.0
182.6
197.4
187.4
221.8
218.3
197.4
164.4
221.8
176.0
(11.0%)
(6.6%)
(5) Export duties are determined by the Government of the Russian Federation in US dollars and are paid in Russian roubles.
5
CERTAIN FACTORS AFFECTING OUR RESULTS OF OPERATIONS
Current financial market conditions
The economic instability in the Euro-Zone has appeared to subside with the various measures taken by the
respective governments, Central Banks and other quasi-governmental financial institutions. Although the main
financial and economic issues plaguing the Euro-Zone over the twelve months remains in the forefront of present
discussions, 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.
Exchange rate volatility between the Russian rouble and the US dollar exchange rate may significantly influence
the Group’s reporting financial results due to the fact that a significant portion of our long-term debt is
denominated in US dollars (see “Profit attributable to shareholders and earnings per share” below).
Natural gas prices
As an independent natural gas producer, we are not subject to the Russian Government’s regulation of natural
gas prices, except for those volumes delivered to residential customers, 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 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.
As part of the liberalization plan, the FTS increased the regulated price for natural gas by 15% effective from
1 January 2011 and 1 July 2012, respectively.
According to the Russian Government Directive No.1205 on Improvement of State Gas Price Regulation as of
31 December 2010, starting from 2013 natural gas prices for sales to end-customers on the domestic market
(excluding residential customers) are set for each region of the Russian Federation on a quarterly basis using a
price formula within the range of maximum and minimum wholesale price. The maximum and minimum
wholesale gas prices may be revised semiannually – as of 1 January and 1 July. In addition, the wholesale gas
prices may be recalculated twice a year (as of 1 April and 1 October) based on changes in oil products prices on
the European markets within a range of +/-3% from the average prices set previously.
According to the Forecast of Socio-economic Development for 2013, the regulated natural gas prices will be
increased by 15% effective in 2013, 2014 and 2015.
The FTS under the Governmental decisions may modify the percentages published, as well as to potentially
prolong the timetable toward market price liberalization based on market conditions and other factors.
6
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 December 2011, we commenced natural gas sales to residential customers at regulated prices in the
Chelyabinsk region as a result of the acquisition of a regional gas trader Gazprom mezhregiongas Chelyabinsk.
In December 2012, we acquired a regional gas trader Gazprom mezhregiongas Kostroma and commenced
natural gas sales to residential customers at regulated prices in the Kostroma region in 2013. We disclose such
sales within our end-customers category.
In 2012, our average natural gas price to end-customers and ex-field price increased by 7.4% and 9.1%,
respectively, whereas our average transportation expense for the delivery of natural gas to end-customers
increased by 2.2% primarily due to a 7.0% increase in the average transportation tariff set by the FTS effective
1 July 2012 (see “Transportation tariffs” below). As a result, our average netback price on end-customers sales
increased by 11.9%, while our total average natural gas price excluding transportation expense increased by
11.3% compared to respective prices in 2011.
The following table shows our average realized natural gas sales prices (net of VAT), excluding volumes
purchased for resale in the location of our end-customers:
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
2012
Change
%
2,821
(1,234)
1,589
1,518
1,566
2,627
(1,207)
1,420
1,392
1,407
7.4%
2.2%
11.9%
9.1%
11.3%
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
OAO AK Transneft (“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 liquids volumes sold on both the
domestic and international markets, among many other factors.
Our stable gas condensate, LPG and crude oil and oil products’ prices on both international and domestic
markets include transportation expense in accordance with the specific terms of delivery.
In 2012, our stable gas condensate export delivery terms were cost and freight (CFR), or delivery to the port of
destination ex-ship (DES), or delivery at point of destination (DAP), or priced at cost, insurance and freight
(CIF), while in 2011 our delivery terms were either CFR, DES, DAP, CIF or delivery at terminal (DAT). Our
average stable gas condensate export contract price, including export duties, in 2012, was approximately
USD 933 per ton compared to approximately USD 931 per ton in 2011.
7
In 2012, as well as in 2011, our crude oil export delivery terms were DAP (Feneshlitke, Hungary). Our average
crude oil export contract price, including export duties, was approximately USD 786 per ton compared to
USD 787 per ton in 2011.
The following table shows our average realized stable gas condensate and crude oil sales prices (net of VAT and
export duties, where applicable; 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:
2011
2012
Change
%
16,432
528.5
12,489
11,935
383.9
10,985
15,676
533.4
13,818
10,983
373.7
9,792
4.8%
(0.9%)
(9.6%)
8.7%
2.7%
12.2%
In 2012, as well as 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. In 2012, our average export contract price for LPG produced at the Purovsky Gas Condensate Plant
(“Purovsky Plant”), including export duties and excluding excise and fuel taxes expense, was approximately
USD 817 per ton compared to USD 829 per ton in 2011.
In 2012, as well as in 2011, we sold 426 thousand tons of our LPG on the domestic market at an average price of
RR 14,011 per ton and RR 13,458 per ton, respectively, including volumes purchased for resale and sold through
our wholly owned subsidiary OOO NOVATEK-AZK (“NOVATEK-AZK”).
In 2012, we sold approximately nine thousand tons of methanol produced by our production subsidiaries to our
joint ventures and third parties at an average price of RR 10,659 per ton as compared to sales of approximately
four thousand tons at an average price of RR 10,000 per ton in 2011.
The following table shows our average realized LPG and methanol sales prices, excluding LPG trading
activities. Prices in the table below are shown net of VAT, export duties, excise and fuel taxes expense, where
applicable. 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 price, RR per ton
Methanol
Domestic price, RR per ton
Year ended 31 December:
2011
2012
Change
%
20,109
646.8
14,009
19,199
653.3
13,458
4.7%
(1.0%)
4.1%
10,659
10,000
6.6%
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.
Effective from 1 January 2011, the FTS approved a 9.3% average increase in the transportation tariff for natural
gas and the rate for utilization of the trunk pipeline averaged between 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.
Effective from 1 July 2012, the FTS approved a 7.0% average increase of the transportation tariff for natural gas
and the rate for utilization of the trunk pipeline averaged between RR 50.78 to RR 1,995.44 (excluding VAT) per
mcm and the transportation rate was RR 12.02 (excluding VAT) per mcm per 100 km.
According to the Forecast of Socio-economic Development of the Russian Federation for 2013 announced in
September 2012 by the Ministry of Economic Development of the Russian Federation, the transportation tariff
for natural gas produced by independent producers will be increased in 2013, 2014 and 2015 as of the same date
as the increase in the regulated natural gas prices (expected to be 1 July) and will not exceed the forecasted
inflation rate (excluding the effect of possible property tax benefit cancellation for OAO Gazprom). According
to preliminary estimates of the Ministry of Economic Development, the transportation tariff will be increased by
5.4% effective from 1 July 2013, by 5.0% effective from 1 July 2014 and by 4.8% effective from 1 July
2015 (excluding the effect of possible property tax benefit cancellation for OAO Gazprom).
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. The FTS sets tariffs for transportation of crude oil through
Transneft’s pipeline network, which includes transport, dispatch, pumping, loading, charge-discharge,
transshipment and other services. The FTS sets tariffs for each separate route of the pipeline network, so the
overall expense for the transport of crude oil primarily depends on the length of the transport route from the
producing fields to the ultimate destination, transportation direction and other factors.
Crude oil transportation tariffs were increased in September and November 2011 on average by approximately
2.9% and 5.0%, respectively, and in November 2012 on average by approximately 5.5%.
Stable gas condensate and LPG
We transport our stable gas condensate (from the Purovsky Plant to the Port of Vitino on the White Sea or to
customers on the domestic markets) and LPG (from the Purovsky Plant to the customers on the domestic market)
by rail which is owned and operated by Russia’s state-owned monopoly railway operator – OAO Russian
Railways. Our transportation tariffs for transport by rail are set by the FTS and vary depending on product and
length of the transport route. For our stable gas condensate and LPG transportation purposes we use our own rail
cars and rail cars rented from independent Russian transportation companies.
In 2012 and 2011, we applied 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 was set at 0.89 for companies with annual shipped volumes of
2,600 thousand tons or more, and the discount co-efficient for LPG was set at 0.68 for delivered annual volumes
of 415 thousand tons or more. In 2012, the discount co-efficient for stable gas condensate was set at 0.89 for
companies with annual shipped volumes of 3,000 thousand tons or more, and the discount co-efficient for LPG
was set at 0.71 for delivered annual volumes of 445 thousand tons or more.
9
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 cost of tanker transportation is generally determined by the distance to the final destination, tanker
availability, seasonality of deliveries and standard shipping terms, all in accordance with general industry
practice.
Our tax burden and obligatory payments
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 and other contributions.
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.
UPT
In 2012, according to the Russian Tax Code, the UPT rate for natural gas was set at RR 251 per mcm (consisting
of base rate of RR 509 per mcm and a reducing co-efficient for independent natural gas producers of 0.493) as
compared to RR 237 per mcm in 2011.
In November 2012, the amendments to the Russian Tax Code were passed into law, according to which the UPT
rates were changed effective from 1 January 2013. According to these amendments, the UPT rate for natural gas
produced by independent natural gas producers was set at RR 265 per mcm effective from 1 January 2013,
RR 402 per mcm from 1 July 2013, RR 471 per mcm from 1 January 2014 and RR 552 per mcm from 1 January
2015. In addition, the Government of the Russian Federation is currently considering replacing the existing
approach to the calculation of the UPT rate for natural gas with a formula that takes into account the category of
extracted gas, field’s location, access to export markets and dynamics in regulated prices and transportation
tariffs. The proposed change in the tax calculation may take place in the nearest future; however, the discussions
are not yet completed as of the date of the issuance of our financial statements.
In 2011, the UPT rate for gas condensate was set at 17.5% of gas condensate revenues recognized by the
producing entities. Effective from 2012, the approach to the taxation of produced gas condensate was changed,
and the UPT rate for gas condensate for 2012 was set at RR 556 per ton. According to the amendments to the
Russian Tax Code, approved in November 2012, the UPT rate for gas condensate for 2013, 2014 and 2015 was
set at RR 590, RR 647 and RR 679 per ton, respectively.
The UPT rate for crude oil is linked to the Urals benchmark crude oil price and changes every month. It is
calculated in US dollar and translated and paid in Russian roubles using the monthly average exchange rate
established by the Central Bank of Russia.
The Russian Tax Code provides for reduced or zero UPT rate for crude oil produced in certain geographical
areas. We did not use the reduced or zero UPT rates from the production of crude oil prior to 1 January 2012.
According to the amendments to the Russian Tax Code, effective from 1 January 2012, a zero UPT rate is set for
crude oil produced at fields located in the YNAO to the north of the 65th degree of the northern latitude. Our
East-Tarkosalinskoye and Khancheyskoye fields are located in the mentioned geographical area; therefore, we
applied the allowed zero UPT rate for crude oil produced at these fields effective from 1 January 2012.
10
Export duties
We are subject to export duties on our exports of stable gas condensate, LPG and crude oil. The Government of
the Russian Federation sets the export customs duties for exported liquids on a monthly basis.
The export duty rate for stable gas condensate and crude oil is calculated based on the average Urals crude oil
price for the period from the 15th calendar day in the previous month to the 14th calendar day of the current
month and is set for the following month after the current calendar month.
The export duty rate for LPG is calculated based on the average LPG price at the Polish border (DAF, Brest) for
the period from the 15th calendar day in the previous month to the 14th calendar day of the current month and is
set for the following month after the current calendar month (see “Selected macro-economic data” above).
Social insurance tax
Effective from 1 January 2012, the social insurance tax rate for contributions to the Pension Fund of the Russian
Federation decreased from 26% to 22%, but the maximum taxable base per each employee was increased from
RR 463 thousand to RR 512 thousand of annual salary. In addition, effective from 1 January 2012, a new
insurance rate of 10% was implemented for amounts above the maximum taxable base of RR 512 thousand.
Effective from 1 January 2013, the maximum taxable base per each employee was increased to RR 568 thousand
of annual salary.
11
OIL AND GAS RESERVES
We do not file with the SEC nor are obliged to report our 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. We also provide 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 our probable and possible reserves.
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 2012 and 2011, 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 SEC reserve reporting methodology based on 100% of the
reserves attributable to all consolidated subsidiaries (whether or not wholly owned), as well as our proportionate
share of proved reserves accounted for by the equity method based on our equity ownership interest.
The tables below provide a comparison of the Group’s estimated reserves under SEC and PRMS reserve
classifications attributable to all consolidated subsidiaries and joint ventures based on the Group’s equity
ownership interest in the respective fields. Thus the proved reserves disclosure as noted above do not reconcile
to the proved reserves in the consolidated financial statements.
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 2010
40,415
1,144
46,245
1,310
Changes attributable to:
Revisions of previous estimates, extensions and discoveries
Acquisitions (1)
Disposals (2)
Production
Total proved reserves at 31 December 2011
including subsidiaries
including joint ventures
Changes attributable to:
Revisions of previous estimates, extensions and discoveries
Acquisitions of prior periods (3)
Acquisitions of current period (4)
Production
Total proved reserves at 31 December 2012
including subsidiaries
including joint ventures
3,284
8,161
(3,331)
(1,866)
46,663
26,427
20,236
1,970
12,717
2,729
(1,992)
62,087
38,324
23,763
94
231
(95)
(53)
1,321
748
573
56
360
77
(56)
1,758
1,085
673
4,580
11,861
(4,841)
(1,866)
55,979
27,417
28,562
2,920
17,386
3,221
(1,992)
77,514
44,062
33,452
129
336
(137)
(53)
1,585
776
809
83
492
91
(56)
2,195
1,248
947
(1) Acquisitions in 2011 represent reserves attributable to increased equity interest in Yamal LNG from 51% to 100%.
(2) Disposals in 2011 represent reserves attributable to the disposal of a 20% interest in Yamal LNG to TOTAL S.A.
(3) Acquisitions of prior periods represent reserves attributable to licenses acquired in 2011 (Salmanovskoye (Utrenneye)
and Geofizicheskoye fields), which were appraised in 2012 and include exploration surveys made after acquisition.
(4) Acquisitions of current period represent reserves attributable to our acquisition of a 49% equity stake in our joint venture
Nortgas completed in 2012.
12
Based on our equity ownership interest in the fields
Total proved reserves at 31 December 2010
Changes attributable to:
Revisions of previous estimates, extensions and discoveries
Acquisitions (1)
Disposals (2)
Production
Total proved reserves at 31 December 2011
including subsidiaries
including joint ventures
Changes attributable to:
Revisions of previous estimates, extensions and discoveries
Acquisitions of prior periods (3)
Acquisitions of current period (4)
Production
Total proved reserves at 31 December 2012
including subsidiaries
including joint ventures
Crude oil, gas condensate and natural gas liquids
SEC
PRMS
Millions
of barrels
Millions
of metric
tons
Millions
of barrels
Millions
of metric
tons
604
133
84
(34)
(35)
752
469
283
17
78
85
(36)
896
526
370
73
16
10
(4)
(4)
91
57
34
0
9
10
(4)
106
63
43
761
170
125
(51)
(35)
970
571
399
89
119
100
(36)
1,242
706
536
93
20
15
(6)
(4)
118
70
48
9
14
12
(4)
149
86
63
(1) Acquisitions in 2011 represent reserves attributable to increased equity interest in Yamal LNG from 51% to 100%.
(2) Disposals in 2011 represent reserves attributable to the disposal of a 20% interest in Yamal LNG to TOTAL S.A.
(3) Acquisitions of prior periods represent reserves attributable to licenses acquired in 2011 (Salmanovskoye (Utrenneye)
and Geofizicheskoye fields), which were appraised in 2012 and include exploration surveys made after acquisition.
(4) Acquisitions of current period represent reserves attributable to our acquisition of a 49% equity stake in our joint venture
Nortgas completed in 2012.
Our total SEC proved reserves, as presented in the tables above, differ from the total net proved reserves as
reported in the “Unaudited Supplemental Oil and Gas Disclosures” in the Group’s IFRS consolidated financial
statements, in that total net proved reserves as presented in the Group’s IFRS consolidated financial statements
include net proved reserves of natural gas and liquids attributable to non-controlling interest in our subsidiaries.
A reconciliation between total proved reserves at 31 December 2012 under the SEC reserve classification as
reflected in the “Unaudited Supplemental Oil and Gas Disclosures” in the Group’s IFRS consolidated financial
statements and total proved reserves in the tables above is set forth below:
Under SEC classification
Total proved reserves at 31 December 2012 presented in
“Oil and Gas Reserves” above
Net proved reserves of natural gas and liquids attributable to
non-controlling interest
Total net proved reserves per
Natural gas
Crude oil, gas
condensate and
natural gas liquids
Billions of
cubic feet
Billions
of cubic
meters
Millions
of barrels
Millions
of metric
tons
62,087
1,758
896
106
128
4
17
2
“Unaudited Supplemental Oil and Gas Disclosures”
62,215
1,762
913
108
13
The following table provides for our combined SEC and PRMS proved reserves on a total barrel of oil
equivalent basis.
Based on our equity ownership interest in the fields
Total proved reserves:
At 31 December 2010
At 31 December 2011
At 31 December 2012
including subsidiaries
including joint ventures
Combined natural gas, crude oil,
gas condensate and natural gas liquids
in millions of barrels of oil equivalent
PRMS
SEC
8,088
9,393
12,394
7,623
4,771
9,325
11,337
15,597
8,866
6,731
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 2010
At 31 December 2011
At 31 December 2012
including subsidiaries
including joint ventures
Possible reserves:
At 31 December 2010
At 31 December 2011
At 31 December 2012
including subsidiaries
including joint ventures
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
18,748
18,471
32,168
21,515
10,653
14,867
17,187
24,664
14,752
9,912
531
523
911
609
302
421
487
698
418
280
587
652
801
456
345
915
1,000
1,193
734
459
73
81
98
56
42
117
127
146
92
54
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 2.2 trillion cubic meters
(“tcm”) of natural gas and 149 million tons of crude oil, gas condensate and natural gas liquids as of
31 December 2012. Combined, these proved reserves represent approximately 15.6 billion barrels of oil
equivalent.
Our total PRMS proved reserves in barrels of oil equivalent basis attributable to consolidated subsidiaries and
joint ventures based on the Group’s equity ownership interest in their respective fields have increased by 37.6%
during 2012. The increase was primarily due to the first-time appraisal of the reserves of the Salmanovskoye
(Utrenneye) and Geofizicheskoye fields acquired in 2011, which also included exploration surveys performed on
these fields in 2012, and the acquisition of a 49% equity stake in Nortgas. 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 2012 was also primarily due to the
appraisal in 2012 of reserves attributable to the Salmanovskoye (Utrenneye) and Geofizicheskoye fields and the
acquisition of a 49% equity stake in Nortgas (holder of the production license for the North-Urengoyskoye field).
The Group’s reserves are all located in the Russian Federation, in the Yamal-Nenets Autonomous Region
(Western Siberia), thereby representing one geographical area.
14
The below table contains information about reserve/production ratios for the years ended 31 December 2012 and
2011 under both reserves reporting methodologies based on our equity ownership interest in the fields
attributable to consolidated subsidiaries and joint ventures:
Number of years (based on our equity ownership interest in the fields)
Total proved reserves to production
Total proved and probable reserves to production
Total proved, probable and possible reserves to production
SEC
At 31 December:
2012
2011
31
-
-
25
-
-
PRMS
At 31 December:
2012
2011
39
55
69
30
40
51
The increase in our reserve/production ratios was primarily due to an increase in our reserves estimates at
31 December 2012 as compared to 31 December 2011. The increase was mainly attributable to the reserves
acquired as previously noted, which more than offset our increase in production.
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 reserve estimates is the sole responsibility of the Group’s senior management.
15
OPERATIONAL HIGHLIGHTS
Oil and Gas Production Costs
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 and
relate to our consolidated subsidiaries. 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 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 DDA
Depreciation, depletion and amortization (“DDA”)
Total production costs
RR per boe
Production costs:
Lifting costs
Taxes other than income tax
Transportation expenses
Total production costs before DDA
Depreciation, depletion and amortization
Total production costs
USD per boe (1)
Production costs:
Lifting costs
Taxes other than income tax
Transportation expenses
Total production costs before DDA
Depreciation, depletion and amortization
Total production costs
Year ended 31 December:
2011
2012
Change
%
6,505
16,546
57,888
80,939
10,589
91,528
5,347
16,307
46,216
67,870
8,937
76,807
21.7%
1.5%
25.3%
19.3%
18.5%
19.2%
Year ended 31 December:
2011
2012
Change
%
17.8
45.3
158.4
221.5
29.0
250.5
15.5
47.2
133.8
196.5
25.9
222.4
14.8%
(4.0%)
18.4%
12.7%
12.0%
12.6%
Year ended 31 December:
2011
2012
Change
%
0.57
1.46
5.09
7.12
0.94
8.06
0.53
1.61
4.55
6.69
0.88
7.57
7.5%
(9.3%)
11.9%
6.4%
6.8%
6.5%
(1) Production costs in US dollars per boe were translated from Russian roubles per boe using the average exchange rate
for the period (see “Selected macro-economic data” above).
Production costs represent the amounts directly related to the extraction of natural gas and liquids, 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 and handling costs to end-
customers. The average production cost on a barrel of oil equivalent basis is calculated by dividing the
applicable costs by the respective barrel of oil equivalent of our hydrocarbons produced during the year. Natural
gas, gas condensate and crude oil volumes produced by our fields are converted to a barrel of oil equivalent
based on the relative energy content of each fields’ hydrocarbons.
16
Our lifting costs, as presented in the tables above, differ from lifting costs as reflected in the “Unaudited
Supplemental Oil and Gas Disclosures” in 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
Lifting costs presented in “Oil and Gas Production Costs” above
Change in balances of natural gas and hydrocarbon liquids stated at
cost in the Group’s Consolidated Statement of Financial Position
Lifting costs per
“Unaudited Supplemental Oil and Gas Disclosures”
Year ended 31 December:
2011
2012
Change
%
6,505
1,094
7,599
5,347
21.7%
56
n/a
5,403
40.6%
17
Hydrocarbon sales volumes
Our natural gas sales volumes increased primarily due to a combination of increased production at our core fields
and purchases from our related party OAO SIBUR Holding (“SIBUR”), which were partially offset by an
increase in natural gas inventory balances in 2012 as compared to a decrease in 2011. Liquids sales volumes
increased due to the initiation of unstable gas condensate purchases from the Group’s joint ventures, as well as
the increase in crude oil production, which were partially offset by an increase in liquids inventory balances in
2012 as compared to a decrease in 2011. Our liquids inventory balances tend to fluctuate periodically due to
loading schedules and final destinations of stable gas condensate shipments.
Natural gas sales volumes
millions of cubic meters
Production from (subsidiaries):
Yurkharovskoye field
East-Tarkosalinskoye field
Khancheyskoye field
Other fields
Total natural gas production
Purchases from the Group’s joint ventures
Total production and purchases from Group’s joint ventures
Other purchases
Total production and purchases
Purovsky Plant, own usage and methanol production
Decrease (increase) in UGSF, UGSS and own pipeline infrastructure
Total natural gas sales volumes
Sold to end-customers
Sold ex-field
Year ended 31 December:
2011
2012
Change
%
34,054
12,742
3,647
64
50,507
5,335
55,842
3,533
59,375
(126)
(369)
58,880
40,806
18,074
32,035
12,151
3,263
72
47,521
5,384
52,905
6.3%
4.9%
11.8%
(11.1%)
6.3%
(0.9%)
5.6%
841
320.1%
53,746
(109)
30
53,667
29,332
24,335
10.5%
15.6%
n/a
9.7%
39.1%
(25.7%)
In 2012, our total natural gas production increased by 2,986 mmcm, or 6.3%, to 50,507 mmcm from
47,521 mmcm in 2011 primarily due to increases in production at our core producing fields (Yurkharovskoye,
East-Tarkosalinskoye and Khancheyskoye). We were able to increase natural gas production at the
Yurkharovskoye field resulting from the field’s ongoing development activities and the launch of the fourth
stage of the second phase development in October 2012 (see “Recent developments” above). The increase in
natural gas production at the East-Tarkosalinskoye and Khancheyskoye fields in 2012 was due to increased
demand resulting in a greater utilization of the field’s production capacity.
In January 2012, we commenced purchasing natural gas from our related party, SIBUR, and purchased
3,533 mmcm during the year. 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 did not
purchase natural gas under these agreements. Purchases from SIBUR in 2012 and from third parties in 2011 are
disclosed as “Other purchases” in the table above.
In 2012, we used 75 mmcm of natural gas as feedstock for the production of methanol compared to 63 mmcm in
2011. 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.
18
Liquids sales volumes
thousands of tons
Production from (subsidiaries):
Yurkharovskoye field
East-Tarkosalinskoye field
Khancheyskoye field
Other fields
Total liquids production
Purchases from:
The Group’s joint ventures
Other
Total production and purchases
Losses and own usage (1)
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
Year ended 31 December:
2011
2012
Change
%
2,672
984
518
19
4,193
259
38
4,490
(49)
(238)
4,203
2,821
26
2,847
479
-
323
103
905
149
293
442
9
9
2,718
808
560
25
4,111
-
6
4,117
(37)
31
4,111
2,981
3
2,984
453
1
336
90
880
93
149
242
5
5
(1.7%)
21.8%
(7.5%)
(24.0%)
2.0%
n/a
n/m
9.1%
32.4%
n/a
2.2%
(5.4%)
n/m
(4.6%)
5.7%
n/a
(3.9%)
14.4%
2.8%
60.2%
96.6%
82.6%
80.0%
80.0%
(1) Losses associated with processing at the Purovsky Plant, as well as during railroad, trunk pipeline and tanker transportation.
In 2012, our liquids production increased by 82 thousand tons, or 2.0%, primarily due to an increase in crude oil
production at the East-Tarkosalinskoye field that was partially offset by a decrease in gas condensate production
at our core producing fields. Natural declines in the concentration of gas condensate at our mature fields are
expected due to decreasing reservoir pressure at the current gas condensate producing horizons.
Starting from 1 November 2012, we commenced purchasing of unstable gas condensate from Nortgas, which
became our joint venture from the end of November 2012. Purchases from Nortgas in November 2012 are
disclosed as “Other purchases” and purchases in December 2012 are disclosed as “Purchases from the Group’s
joint ventures” in the table above.
In April 2012, we commenced purchasing unstable gas condensate from our joint venture, SeverEnergia, after
the launch of the first phase of Samburgskoye field’s development activities.
19
RESULTS OF OPERATIONS FOR THE YEAR ENDED 31 DECEMBER 2012 COMPARED TO THE YEAR
ENDED 31 DECEMBER 2011
The following table and discussion is a summary of our consolidated results of operations for the years ended
31 December 2012 and 2011. Each line item is also shown as a percentage of our total revenues.
millions of Russian roubles
Total revenues (net of VAT, export duties,
excise and fuel taxes)
including:
natural gas sales
liquids’ sales
Operating expenses
Net gain (loss) on disposal of interest in
subsidiaries
Other operating income (loss)
Profit from operations
Finance income (expense)
Share of profit (loss) of joint ventures,
net of income tax
Profit before income tax
Total income tax expense
Profit (loss)
Non-controlling interest
Profit attributable to
shareholders of OAO NOVATEK
Normalized profit attributable to
shareholders of OAO NOVATEK
Year ended 31 December:
2012
210,973
142,613
67,633
% of total
revenues
100.0%
67.6%
32.1%
2011
175,273
110,932
63,879
% of total
revenues
100.0%
63.3%
36.4%
(125,775)
(59.6%)
(96,820)
(55.2%)
(60)
196
85,334
2,986
(2,105)
86,215
(16,774)
69,441
17
(0.1%)
0.1%
40.4%
1.5%
(1.0%)
40.9%
(8.0%)
32.9%
0.0%
62,948
207
141,608
(2,703)
(3,880)
135,025
(15,734)
119,291
364
35.9%
0.1%
80.8%
(1.6%)
(2.2%)
77.0%
(8.9%)
68.1%
0.2%
69,458
32.9%
119,655
68.3%
69,518
33.0%
56,707
32.4%
20
Total revenues
The following table sets forth our sales (net of VAT, export duties, excise and fuel taxes expense, where
applicable) for the years ended 31 December 2012 and 2011:
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
Other revenues
Total revenues
Natural gas sales
Year ended 31 December:
2011
2012
Change
%
142,613
115,180
27,433
46,684
46,365
319
15,599
9,631
-
5,968
5,000
1,785
3,215
350
350
110,932
77,046
33,886
46,778
46,732
46
14,436
8,698
10
5,728
2,479
1,021
1,458
186
186
210,246
174,811
727
462
210,973
175,273
28.6%
49.5%
(19.0%)
(0.2%)
(0.8%)
593.5%
8.1%
10.7%
n/a
4.2%
101.7%
74.8%
120.5%
88.2%
88.2%
20.3%
57.4%
20.4%
In 2012, our revenues from sales of natural gas increased by RR 31,681 million, or 28.6%, compared to 2011
due primarily to an increase in our average realized natural gas price and, to a lesser extent, due to an increase in
our total sales volumes. The increase in our average realized natural gas price was driven by a combination of
increases in the regulated FTS price tariff for natural gas by 15% effective from 1 July 2012 and in our
proportion of end-customer sales to total natural gas sales volumes.
Our proportion of natural gas sold to end-customers to total natural gas sales volumes increased to 69.3% in
2012 as compared to 54.7% in 2011. The increase was due to higher natural gas deliveries to the Chelyabinsk
region through our regional natural gas trader acquired in November 2011.
In 2012, our average netback price on end-customers sales, excluding volumes purchased for resale in the
location of our end-customers, increased by 11.9% as compared to 2011, while our average realized end-
customers sales price increased by 7.4%. The increase in our average realized end-customers sales netback price
was primarily due to a 15% increase in the regulated FTS price for natural gas effective from 1 July 2012
combined with a 7% increase in the average transportation tariff set by the FTS effective from 1 July 2012 (see
“Transportation tariffs” above). Our average realized ex-field price was higher by 9.1% than in 2011.
21
Stable gas condensate sales
In 2012, our revenues from sales of stable gas condensate decreased by RR 94 million, or 0.2%, compared to
2011 primarily due to a decrease in volumes sold, that was partially offset by an increase in our average realized
prices in Russian roubles.
Our total stable gas condensate sales volumes decreased by 137 thousand tons, or 4.6%, due to a combination of
an increase in the stable gas condensate inventory balance in 2012 as compared to a decrease in 2011 (see
“Change in natural gas, liquid hydrocarbons and work-in-progress” below) and a decrease in gas condensate
production at our core fields, that was partially offset by unstable gas condensate purchases from our joint
ventures in 2012. During 2012, we exported 2,821 thousand tons of stable gas condensate, or 99.1% of our total
sales volumes, to the APR, Europe, the United States and South America with the remaining 26 thousand tons
sold domestically. In 2011, we exported 2,981 thousand tons of stable gas condensate, or 99.9% of our total sales
volumes, to the APR, Europe and the United States, with the remaining three thousand tons sold domestically.
In 2012, our average realized net export price for stable gas condensate, excluding export duties and translated to
US dollars from Russian roubles using the average annual exchange rate, decreased by USD 4.9 per ton, or
0.9%, to USD 528.5 per ton (CFR, DES, DAP and CIF) from USD 533.4 per ton (CFR, DES, DAP, CIF and
DAT) in 2011 due to an increase in average annual exchange rate of Russian rouble against the US dollar
approximately by 5.8% in 2012 as compared to 2011, that was partially offset by a 0.4% decrease in our average
export duty per ton and an 0.2% increase in our average export contract price in US dollars.
Liquefied petroleum gas sales
In 2012, our revenues from sales of LPG increased by RR 1,163 million, or 8.1%, compared to 2011 due to both
increases in our average realized prices and volumes sold.
In 2012, we sold 479 thousand tons of LPG, or 52.9% of our total LPG sales volumes, to export markets as
compared to 453 thousand tons, or 51.5%, in 2011. In 2012, as well as in 2011, our export sales volumes of LPG
representing greater than 10% of total LPG export volumes were to customers located in Poland and Finland.
Our average realized LPG net export price, excluding export duties, excise and fuel taxes expense and translated
to US dollars from Russian roubles using the average annual exchange rate, decreased by USD 6.5 per ton, or
1.0%, to USD 646.8 per ton in 2012 (DAP, CPT and FCA) compared to USD 653.3 per ton in 2011 (DAP, CPT
and FCA) primarily due to an increase in the average annual exchange rate of Russian rouble against the US
dollar, that was partially offset by a decrease in our average export duty per ton by 3.5%. The reduction in our
average contract price by 1.4% was due to a decrease in the underlying benchmark prices on international
markets used in the price formulation in 2012 compared to 2011.
In 2012, we sold 426 thousand tons of LPG, or 47.1% of our total LPG sales volumes, on the domestic market at
an average price of RR 14,011 per ton (excluding VAT) representing an increase of RR 553 per ton, or 4.1%,
compared to 2011.
Crude oil sales
In 2012, our revenues from sales of crude oil increased by RR 2,521 million, or 101.7%, compared to
2011 primarily 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 200 thousand tons, or 82.6%, to 442 thousand tons from
242 thousand tons in 2011 due primarily to an increase in crude oil production at our East-Tarkosalinskoye field.
The majority of our crude oil sales volumes, accounting for 66.3% in 2012, were sold domestically at an average
price of RR 10,985 per ton (excluding VAT) representing an increase of RR 1,193 per ton, or 12.2%, compared
to 2011. The remaining 33.7% of our crude oil volumes were sold to export markets at an average price of
USD 383.9 per ton (DAP, excluding export duties) representing an increase of USD 10.2 per ton, or 2.7%,
compared to 2011. The increase in the average realized net export price (excluding export duties and translated
to US dollars from Russian roubles using the average annual exchange rate) was due to an increase in average
annual exchange rate of Russian rouble against the US dollar approximately by 5.8% and a 1.7% decrease in our
average export duty per ton.
22
Oil and gas products sales
Oil and gas products sales include trading operations with oil products on the domestic market through our retail
stations and methanol sales to third parties. In 2012, our revenue from sales of oil and gas products increased by
RR 164 million, or 88.2%, to RR 350 million from RR 186 million in 2011.
Our revenues from oil products trading operations through our retail stations on the domestic market increased
by RR 103 million, or 70.1%, to RR 250 million in 2012 compared to RR 147 million in 2011 primarily due to
an increase in volumes sold. In 2012, we sold approximately nine thousand tons of oil products (diesel fuel and
petrol) for an average price of RR 29,054 per ton, compared to sales of approximately five thousand tons for an
average price of RR 27,232 per ton in 2011.
In 2012, our revenue from methanol sales increased by RR 61 million, or 156.4%, to RR 100 million from
RR 39 million in 2011 primarily due to an increase in volumes sold.
Other revenues
Other revenues include geological and geophysical research services, rent, sublease, transportation, handling,
storage and other services. In 2012, other revenues increased by RR 265 million, or 57.4%, to RR 727 million
from RR 462 million in 2011. The increase was primarily comprised of a RR 162 million increase in revenue
from transportation, handling and storage services, as well as a RR 99 million increase in revenues from
geological and geophysical research services provided primarily to our joint ventures. In addition, in 2012, we
recognized RR 69 million of revenue by re-charging a part of icebreaking expenses to the third parties as
compared to RR 131 million of revenue for the sublet of a leased tanker in 2011. The remaining increase of
RR 66 million in other revenues was made up of various immaterial items.
23
Operating expenses
In 2012, our total operating expenses increased by RR 28,955 million, or 29.9%, to RR 125,775 million
compared to RR 96,820 million in 2011 primarily due to an increase in transportation expenses and purchases of
natural gas and liquid hydrocarbons. As a percentage of total operating expenses, our non-controllable expenses,
such as transportation and taxes other than income tax, decreased to 61.8% in 2012 compared to 67.0% in
2011 primarily due to a significant increase in purchases of natural gas from our related party, SIBUR, and
purchases of unstable gas condensate from our joint ventures in 2012 (see “Purchases of natural gas and liquid
hydrocarbons” below).
In 2012, total operating expenses as a percentage of total revenues increased to 59.6% in 2012 compared to
55.2% in 2011, as shown in the table below. The increase in our operating expenses as a percentage of total
revenues was caused by two main reasons. In January 2012, we commenced purchasing natural gas, which
included the cost of transportation, for subsequent resale to the regions where our end-customers are located, and
there was an increase in the UPT rate for natural gas effective 1 January 2012, while the regulated price for
natural gas was increased effective 1 July 2012.
millions of Russian roubles
Transportation expenses
Taxes other than income tax
Subtotal non-controllable expenses
Purchases of natural gas and liquid hydrocarbons
Depreciation, depletion and amortization
General and administrative expenses
Materials, services and other
Exploration expenses
Net impairment expenses
Change in natural gas, liquid hydrocarbons
and work-in-progress
Year ended 31 December:
2012
60,848
16,846
77,694
17,483
11,185
10,936
7,216
2,022
325
(1,086)
% of total
revenues
28.8%
8.0%
36.8%
8.3%
5.3%
5.2%
3.4%
1.0%
n/m
n/m
2011
48,329
16,559
64,888
5,994
9,277
8,218
5,947
1,819
782
(105)
% of total
revenues
27.6%
9.4%
37.0%
3.4%
5.3%
4.7%
3.4%
1.0%
n/m
n/m
Total operating expenses
125,775
59.6%
96,820
55.2%
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 2012, non-controllable expenses of transportation and taxes other
than income tax increased by RR 12,806 million, or 19.7%, to RR 77,694 million from RR 64,888 million in
2011. The change in transportation expenses was primarily due to an increase in the natural gas volumes sold to
end-customers in which we incurred transportation expenses, and excluded volumes of natural gas purchased for
resale in the location of our end-customers. Taxes other than income tax increased primarily due to an increase in
natural gas production volumes, as well as a 5.9% increase in the natural gas production tax rate effective from
1 January 2012 that was partially offset by the application of a zero UPT rate for crude oil from 1 January
2012 (see “Our tax burden” above). As a percentage of total revenues, our non-controllable expenses marginally
decreased to 36.8% in 2012 compared to 37.0% in 2011.
24
Transportation expenses
In 2012, our total transportation expenses increased by RR 12,519 million, or 25.9%, compared to 2011.
million of Russian roubles
Natural gas transportation to customers
Liquid hydrocarbons transportation by rail
Liquid hydrocarbons transportation by tankers
Crude oil transportation to customers
Other
Total transportation expenses
Year ended 31 December:
2011
2012
Change
%
45,925
10,537
3,742
527
117
60,848
34,441
9,791
3,647
281
169
48,329
33.3%
7.6%
2.6%
87.5%
(30.8%)
25.9%
In 2012, our transportation expenses for natural gas increased by RR 11,484 million, or 33.3%, to
RR 45,925 million from RR 34,441 million in 2011. The change was mainly due to a 30.8% increase in our
natural gas sales volumes to end-customers, for which we incurred transportation expense, and excluding
volumes of natural gas purchased for resale in the location of our end-customers, as well as a 7% average
increase in the natural gas transportation tariff set by the FTS effective 1 July 2012 (see “Transportation tariffs”
above). We do not incur transportation expenses in respect of natural gas volumes purchased for resale in the
location of our end-customers, as the purchase price includes the cost of transportation. 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 2012, our total expenses for liquids transportation by rail increased by RR 746 million, or 7.6%, to
RR 10,537 million from RR 9,791 million in 2011 due to higher average liquids transportation tariffs that was
partially offset by a decrease in our stable gas condensate volumes sold and transported via rail. In 2012, our
combined liquids volumes sold and transported via rail decreased by 115 thousand tons, or 3.0%, to
3,749 thousand tons from 3,864 thousand tons in 2011 due primarily to an increase in stable gas condensate
inventory balance during 2012 compared to a decrease in 2011. The transportation costs incurred in respect of
liquids volumes recognized as part of our inventory balance or in transit are capitalized in current assets as future
period expenses until the recognition of such volumes as sold.
In 2012, our weighted average transportation tariff for liquids delivered by rail increased by 11.0% to
RR 2,811 per ton from RR 2,533 per ton in 2011 primarily due to a 6.0% increase in rail tariffs for the domestic
market set by the FTS effective 1 January 2012, an increase in rail tariffs for LPG transportation on the territory
of CIS to export markets and a decrease in stable gas condensate share in total liquids volumes sold and
transported via rail. The change in the share of stable gas condensate volumes in our total liquids volumes
delivered by rail affects our weighted average rail tariff due to the relatively low transportation expense for
stable gas condensate compared to other liquids. Our weighted average transportation tariff for liquids delivered
by rail fluctuates period-to-period and depends on products type and the geography of deliveries.
Total transportation expense for liquids delivered by tankers to international markets increased by
RR 95 million, or 2.6%, to RR 3,742 million in 2012 from RR 3,647 million in 2011. The increase was due to a
change in the mix in geographical regions where we sold our stable gas condensate that was partially offset by a
5.4% decrease in volumes sold as a result of inventory movements and a decrease in unstable gas condensate
production. In 2012, we sold 56.4% of our total stable gas condensate export volumes to APR, 28.7% to Europe,
10.6% to the United States and 4.3% to the South America, whereas in 2011, we sold 43.4% to APR, 34.3% to
Europe and 22.3% to the United States.
25
Taxes other than income tax
millions of Russian roubles
Unified natural resources production tax
Property tax
Other taxes
Total taxes other than income tax
Year ended 31 December:
2011
2012
Change
%
14,833
1,754
259
16,846
14,523
1,742
294
16,559
2.1%
0.7%
(11.9%)
1.7%
In 2012, taxes other than income tax increased by RR 287 million, or 1.7%, primarily due to an increase in the
unified natural resources production tax expense.
In 2012, our UPT expense for natural gas increased by RR 1,446 million, or 12.8%, due to both a 5.9% increase
in the natural gas production tax rate effective from 1 January 2012 (from RR 237 per mcm to RR 251 per mcm)
and a 6.3% increase in our natural gas production volumes. In addition, our UPT for unstable gas condensate
production increased by RR 119 million, or 6.2%, due primarily to a change in the UPT rate (see “Our tax
burden” above).
In 2012, we applied a zero UPT rate for crude oil produced at our East-Tarkosalinskoye and Khancheyskoye
fields due to changes in the Russian Tax Code effective from 1 January 2012 (see “Our tax burden” above). In
2011, we incurred RR 1,255 million of UPT expense for crude oil produced.
Purchases of natural gas and liquid hydrocarbons
millions of Russian roubles
Natural gas
Unstable gas condensate
Other liquid hydrocarbons
Total purchases of natural gas and liquids hydrocarbons
Year ended 31 December:
2011
2012
Change
%
14,706
2,498
279
17,483
5,854
-
140
5,994
151.2%
n/a
99.3%
191.7%
In 2012, our purchases of natural gas and liquid hydrocarbons increased by RR 11,489 million, or 191.7%, to
RR 17,483 million from RR 5,994 million in 2011. The increase of RR 8,852 million, or 151.2%, was related to
purchases of natural gas, of which the major part related to purchases of natural gas from SIBUR, a related party,
commencing from 1 January 2012.
During 2012, we commenced purchasing unstable gas condensate from our joint ventures SeverEnergia and
Nortgas, which accounted for RR 2,498 million of total purchases in 2012. We had no purchases of unstable gas
condensate in 2011.
In 2012, our purchases of other liquid hydrocarbons increased by RR 139 million, or 99.3%, to RR 279 million
from RR 140 million in 2011 due to the expansion of trading activities at our wholly owned subsidiary
NOVATEK-AZK. Other liquid hydrocarbons purchases represent our purchases of oil products (diesel fuel and
petrol) and LPG.
Depreciation, depletion and amortization
In 2012, our depreciation, depletion and amortization (“DDA”) expense increased by RR 1,908 million, or
20.6%, to RR 11,185 million from RR 9,277 million in 2011 as a result of an increase in our depletable cost
base, as well as a 5.8% increase in our total hydrocarbon production (excluding our proportionate share in the
production of joint ventures) in barrels of oil equivalent basis. The Group accrues depreciation and depletion
using the “units of production” method for producing assets and straight-line method for other facilities.
In 2012, our DDA per barrel of oil equivalent was RR 26.4 compared to RR 23.1 in 2011. The increase in our
DDA charge calculated on a barrel of oil equivalent basis was due to the capitalization of costs related to the
launch of the fourth stage of the second phase development at our Yurkharovskoye field and ongoing crude oil
development activities at the East-Tarkosalinskoye field, as well as a decrease in our proved reserves estimates
as of 31 December 2012 compared to 31 December 2011, used as the denominator in the calculation of the DDA
under the “units of production” method, at our core producing fields.
26
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 2012, our general and administrative expenses increased by RR 2,718 million, or 33.1%, to RR 10,936 million
compared to RR 8,218 million in 2011. The main components of these expenses were employee compensation,
legal, audit, and consulting services and social expenses and compensatory payments, which, on aggregate,
comprised 83.6% and 80.7% of total general and administrative expenses in the years ended 31 December 2012
and 2011, respectively.
millions of Russian roubles
Employee compensation
Legal, audit, and consulting services
Social expenses and compensatory payments
Depreciation – administrative buildings
Business trip expenses
Fire safety and security expenses
Repair and maintenance expenses
Rent expense
Insurance expense
Bank charges
Other
Total general and administrative expenses
Year ended 31 December:
2011
2012
Change
%
6,869
1,274
1,001
314
292
199
168
113
86
82
538
10,936
4,650
774
1,212
198
218
178
115
140
58
58
617
8,218
47.7%
64.6%
(17.4%)
58.6%
33.9%
11.8%
46.1%
(19.3%)
48.3%
41.4%
(12.8%)
33.1%
Employee compensation increased by RR 2,219 million, or 47.7%, to RR 6,869 million in 2012 as compared to
RR 4,650 million in 2011. The increase was primarily due to an indexation of base salaries by 6.0% effective
1 July 2012, increases in the average number of employees, insurance contributions to the non-budget funds, as
well as an increase in bonuses accrued to key management for the results achieved in 2012. The increase in
average number of employees resulted from the acquisition of a regional gas trader in November 2011 and the
expansion of activities at our Ust-Luga project. Our insurance contributions to the non-budget funds increased in
2012 compared to 2011 due to the change of insurance contributions to the Pension Fund of the Russian
Federation effective from 1 January 2012 (see “Our tax burden” above). In addition, our expenses related to
defined benefit pension plan increased by RR 401 million in 2012 compared to 2011 primarily due to an
indexation of future payments, an increase in number of retirement age employees and the recognition in 2012 of
additional lump sum retirement benefits. The aforementioned increases were partially offset by a decrease of
RR 114 million in the recognition of charges related to NOVATEK’s share-based compensation program for the
Group’s senior and key management.
Legal, audit, and consulting services expenses increased by RR 500 million, or 64.6%, to RR 1,274 million
compared to RR 774 million in 2011 largely due to consulting services related to our recent acquisitions, as well
as an increase in services to prolong and acquire software solutions for our core subsidiaries.
In 2012, our social expenses and compensatory payments decreased by RR 211 million, or 17.4%, to
RR 1,001 million compared to RR 1,212 million in 2011 primarily due to the fact, that we did not consolidate
compensatory payments of Yamal LNG in 2012 as a result of a disposal of a 20% interest in Yamal LNG in
October 2011 and the consolidation of the company under the equity method starting from that date. Social
expenses and compensatory payments in 2012 were primarily related to our donations to sport clubs and
activities, educational schools, as well as continued support for charities and social programs in the regions
where we operate. Social expenses and compensatory payments fluctuate period-on-period depending on the
funding needs and the implementation schedules of specific programs we support in the regions where we
operate.
In 2012, depreciation of administrative buildings increased by RR 116 million, or 58.6%, primarily due to the
completion and opening of our new Moscow head-office in May 2011. Fixed assets of administrative nature are
depreciated on a straight-line basis over their estimated useful lives.
27
Fire safety and security expenses increased by RR 21 million, or 11.8%, to RR 199 million in 2012 from
RR 178 million in 2011 as a result of the opening of our new Moscow head-office in May 2011, as well as an
increase in rates charged for security services.
Repair and maintenance expenses increased by RR 53 million, or 46.1%, to RR 168 million in 2012 from
RR 115 million in 2011 primarily due to start of maintenance and repair works of administrative fixed assets
rented by our subsidiaries, OOO NOVATEK-Chelyabinsk and NOVATEK-Ust-Luga.
In 2012, our rent expense decreased by RR 27 million, or 19.3%, to RR 113 million from RR 140 million in
2011 primarily due to the relocation of Moscow head-office employees to our new office building in May 2011.
The decrease was partially offset by the consolidation of the regional gas trader acquired in November 2011,
which rents an office space for its employees and additional office space rented by NOVATEK-Ust-Luga since
May 2012.
Insurance expenses increased by RR 28 million, or 48.3%, to RR 86 million in 2012 from RR 58 million in
2011 due to insuring of recently launched fixed assets at our production subsidiaries.
Bank charges increased by RR 24 million, or 41.4%, to RR 82 million in 2012 from RR 58 million in
2011 primarily due to service charges applied to letters of credit, as well as commission services fees charged by
banks for the acceptance of payments from residential customers of natural gas at our recently acquired
subsidiaries, supplying natural gas in the regional markets.
In 2012, other general and administrative expenses decreased by RR 79 million, or 12.8%, to RR 538 million
from RR 617 million in 2011 primarily due to a RR 63 million decrease in expenses related to the termination at
the end of 2011 of the concession agreement at El-Arish concession area located in Egypt, which was partially
offset by the RR 27 million increase in expenses related to our participation in international economic,
geological and oil and gas forums and exhibitions, and RR 19 million increase in expenses related to the
advertising. The remaining decrease of RR 62 million was made up of other immaterial expense items of an
administrative nature.
Materials, services and other
In 2012, our materials, services and other expenses increased by RR 1,269 million, or 21.3%, to
RR 7,216 million compared to RR 5,947 million in 2011. The main components of this expense category were
employee compensation and repair and maintenance services, which on aggregate comprised 74.9% and 73.8%
of total materials, services and other expenses in 2012 and 2011, respectively.
millions of Russian roubles
Employee compensation
Repair and maintenance services
Electricity and fuel
Materials and supplies
Security expenses
Transportation expenses
Processing fees
Other
Total materials, services and other
Year ended 31 December:
2011
2012
Change
%
3,808
1,598
457
412
271
186
99
385
7,216
2,953
1,435
405
309
237
184
99
325
5,947
29.0%
11.4%
12.8%
33.3%
14.3%
1.1%
0.0%
18.5%
21.3%
Our employee compensation increased by RR 855 million, or 29.0%, to RR 3,808 million compared to
RR 2,953 million in 2011. The increase was primarily due to a 6.0% indexation of base salaries effective from
1 July 2012 and an increase in the average number of employees. The increase in the average number of
employees was the result of the acquisition of a regional gas trader Gazprom mezhregiongas Chelyabinsk in
November 2011 and an expansion of our trading activities at NOVATEK-AZK. In addition, in 2012 our
expenses related to defined benefit pension plan increased by RR 232 million as compared to 2011 primarily due
to changes in actuarial assumptions, as well as recognition of additional lump sum retirement benefit in 2012.
Repair and maintenance services increased by RR 163 million, or 11.4%, to RR 1,598 million in 2012 compared
to RR 1,435 million in 2011. The increase was primarily related to on-going repair works at our wholly owned
subsidiaries OOO NOVATEK-Tarkosaleneftegas and the OOO NOVATEK-Purovsky ZPK and was consistent
with our ongoing maintenance schedules.
28
In 2012, electricity and fuel expenses increased by RR 52 million, or 12.8%, to RR 457 million from
RR 405 million in 2011. The increase was primarily due to an increase in electricity and fuel volumes used by
our production subsidiaries resulting from recently completed infrastructure projects, as well as higher electricity
rates in 2012 as compared to 2011.
Materials and supplies expense increased by RR 103 million, or 33.3%, to RR 412 million in 2012 from
RR 309 million in 2011 mainly due to an increase in materials used for repair works of our production assets and
own rail cars used for transportation of LPG.
Security expenses increased by RR 34 million, or 14.3%, to RR 271 million in 2012 from RR 237 million in
2011 largely due to additional security services related to recently completed infrastructure projects at our
production subsidiaries and an increase in security services rates effective from January 2012.
Transportation expenses related to the delivery of materials and equipment to our fields marginally increased by
RR two million, or 1.1%, to RR 186 million in 2012 from RR 184 million in 2011.
In 2012, other material, services and other expenses increased by RR 60 million, or 18.5%, to RR 385 million
from RR 325 million in 2011 primarily due to increases in ecological and feasibility studies services provided to
our production subsidiaries.
Exploration expenses
In 2012, we incurred RR 2,022 million of exploration expenses of which RR 851 million was related to the
capitalized cost of two exploratory wells at the West-Urengoyskoye and North-Yubileynoye license areas,
written-off in accordance with our successful efforts accounting policy. In addition, we also recognized
RR 428 million as exploration expense related to 3-D seismic activities, which were not classified as
development costs in accordance with our accounting policy.
In 2011, we incurred RR 1,819 million of exploration expenses of which RR 740 million related to the
capitalized cost of three exploratory wells at the Raduzhniy and Yarudeiskiy licence areas, written-off in
accordance with our successful efforts accounting policy.
Net impairment expense
In 2012, we recognized net impairment expense of RR 325 million, of which the significant portion was related
to the impairment of trade accounts receivable for natural gas sold to small industrial companies and residential
customers.
In 2011, we recognized net impairment expense of RR 782 million, of which RR 548 million was related to the
write-off of assets at the Middle-Chaselskiy license area and RR 120 million to the impairment of our
investments at the El-Arish project.
Change in natural gas, liquid hydrocarbons and work-in-progress
In 2012, we recorded a reversal of RR 1,086 million to change in inventory expense as compared to a reversal of
RR 105 million in 2011:
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:
2011
2012
(228)
(897)
39
(1,086)
(112)
91
(84)
(105)
In 2012, we recorded a reversal to our operating expenses of RR 228 million primarily due to a 369 mmcm
increase 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.
29
In addition, in 2012, we recorded a reversal of RR 897 million to our operating expenses due to a 233 thousand
tons increase in our inventory balance of stable gas condensate in transit and storage and an increase in the cost
of stable gas condensate per ton.
The following table highlights movements in our inventory balances:
Inventory balances in
transit or in storage
At
31 December
2012
At
1 January
Increase /
(decrease)
At
31 December
2011
At
1 January
Increase /
(decrease)
Natural gas (millions of cubic meters)
including Gazprom’s UGSF
Liquid hydrocarbons (thousand tons)
including stable gas condensate
1,129
1,096
563
461
760
732
325
228
369
364
238
233
760
732
325
228
790
761
356
264
(30)
(29)
(31)
(36)
Net gain (loss) on disposal of interest in subsidiaries
In 2012, we recognized a net loss of RR 60 million on the disposal of the Groups’ wholly owned, non-core
subsidiary OOO Purovsky Terminal in December 2012.
In 2011, we realized a net gain of RR 62,948 million on the disposal of a 20% equity 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% equity interest.
Other operating income (loss)
In 2012, we recognized other operating income of RR 196 million. In October 2012, we commenced trading
operations for the purchase and sale of natural gas on the European market. As a result, in the fourth quarter of
2012, we purchased and sold approximately 4.7 terawatt-hours of natural gas. The total effect from natural gas
trading operations on the European market and from the changes in fair values of long-term contracts, which
were classified as derivative instruments in accordance with IAS 39 “Financial instruments: recognition and
measurement”, in 2012 resulted in the recognition of net income in the amount of RR 76 million.
The remaining other operating income of RR 120 million was primarily related to penalties charges received
from our suppliers due to non-compliance of their contractual obligations and other immaterial profit and loss
items.
In 2011, we recognized other operating income of RR 207 million of which RR 192 million related to insurance
compensation received in respect of an insured accident in 2010.
Profit from operations
As a result of the factors discussed above, our profit from operations decreased by RR 56,274 million, or 39.7%,
to RR 85,334 million in 2012, compared to RR 141,608 million in 2011. Our profit from operations, adjusted for
non-recurring transactions, primarily excluding the net gain (loss) on disposal of interest in subsidiaries,
increased by RR 6,734 million, or 8.6%, to RR 85,394 million in 2012 from RR 78,660 million in 2011. In 2012,
our profit from operations, excluding the net gain (loss) on disposal of interest in subsidiaries, as a percentage of
total revenues decreased to 40.5% compared to 44.9% in 2011 primarily due to the commencement in January
2012 of natural gas purchases for resale in the regions where our end-customers are located and the lower trading
margins we received for these volumes.
In addition, our operating expenses exceeded the growth rate of our total revenues during the year due primarily
to the UPT rate for natural gas, which was increased effective from 1 January 2012, while the regulated price for
natural gas was increased effective from 1 July 2012.
30
Finance income (expense)
In 2012, we recorded net finance income of RR 2,986 million as compared to a net finance expense of
RR 2,703 million in 2011 due primarily to the appreciation of the Russian rouble relative to the US dollar in
2012 compared to the depreciation of the Russian rouble relative to the US dollar in 2011.
loans amounted to RR 5,702 million compared to
In 2012, our total accrued interest expense on
RR 5,422 million in 2011. In 2012 and 2011, we capitalized RR 2,698 and RR 3,709 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 as part of interest expense RR 232 million and
RR 225 million related to the unwinding of the present value discount related to provisions of asset retirement
obligations in 2012 and 2011, respectively, and RR 212 million related to the effect of discounting of long-term
financial liabilities in 2011.
Interest income decreased by RR 1,661 million, or 49.0%, to RR 1,731 million in 2012 from RR 3,392 million in
2011 due to a decrease in loans provided to our joint ventures. In February 2012, the loan as well as the accrued
interest on this loan provided to our joint venture OOO Yamal Development was converted to charter capital.
In 2012, we recorded a net foreign exchange gain of RR 4,491 million compared to a net foreign exchange loss
of RR 3,945 million in 2011 due primarily to the revaluation of our US dollar denominated borrowings. The
Russian rouble appreciated by 5.7% against the US dollar during 2012 compared to the depreciation of the
Russian rouble by 5.6% in 2011. 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 joint ventures, net of income tax
In 2012, our proportionate share of loss of joint ventures decreased to RR 2,105 million compared to a loss of
RR 3,880 million in 2011.
In 2012, our proportionate share of loss relating to our joint venture Yamal Development decreased by
RR 1,643 million due to the conversion of loans received by the company to charter capital in February 2012,
which resulted in a decrease in interest expense.
In 2012, our proportionate share of loss relating to our joint venture Sibneftegas decreased by RR 1,544 million
due to increases in natural gas sales prices effective from 1 January and 1 July 2012. 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.
In 2012, we recognized our share of the losses in our joint venture Yamal LNG amounting to RR 1,811 million
as compared to a loss of RR 707 million in 2011 due primarily to an increase in compensatory payments related
to the Yamal LNG project.
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 19.5% and 11.7% for the years ended 31 December 2012 and
2011, 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%. The decrease in the effective income tax rate in 2012 as compared to
2011 was due to the application of a reduced income tax rate of 15.5% in respect of the Group’s priority
investment project in YNAO.
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.
31
Profit attributable to shareholders and earnings per share
Our profits attributable to shareholders and earnings per share tend to fluctuate periodically due to one-off events
or extraordinary items that require adjustments to exclude these events to normalize earnings and to make
period-on-period comparisons more meaningful.
As a result of the factors discussed above, our profit for the period decreased by RR 49,850 million, or 41.8%, to
RR 69,441 million in 2012 from RR 119,291 million in 2011. The profit attributable to shareholders of
OAO NOVATEK decreased by RR 50,197 million, or 42.0%,
in 2012 from
RR 119,655 million in 2011. The profit attributable to shareholders of OAO NOVATEK, adjusted to exclude the
net gain (loss) on disposal of subsidiaries, increased by RR 12,811 million, or 22.6%, to RR 69,518 million in
2012 from RR 56,707 million in 2011.
to RR 69,458 million
Our weighted average basic and diluted earnings per share, calculated from the profit attributable to shareholders
of OAO NOVATEK, decreased by approximately RR 16.56 per share, or 42.0%, to RR 22.89 per share in
2012 from RR 39.45 per share in 2011. 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 (loss) on
disposal of subsidiaries, increased by RR 4.22 per share, or 22.6%, to RR 22.91 per share in 2012 from
RR 18.69 per share in 2011.
32
LIQUIDITY AND CAPITAL RESOURCES
The following table shows our net cash flows from operating, investing and financing activities for the years
ended 31 December 2012 and 2011:
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
2012
Change
%
75,825
(84,124)
2,603
71,907
(46,643)
(11,735)
5.4%
80.4%
n/a
Liquidity and credit ratios
31 December 2012
31 December 2011
Change, %
Current ratio
Total debt to total equity
Long-term debt to long-term debt and total equity
Net debt to total capitalization (1)
Net debt to EBITDA (2)
Net debt to Normalized EBITDA (2)
Interest coverage ratio (3)
1.06
0.45
0.25
0.26
1.20
1.20
24
1.16
0.40
0.24
0.20
0.48
0.84
42
(8.6%)
12.5%
4.2%
30.0%
150.0%
42.9%
(42.9%)
(1) Net debt represents total debt less cash and cash equivalents. Total capitalization represents total debt, total equity and deferred income
tax liability.
(2) Net debt to EBITDA and to Normalized EBITDA ratios are calculated as Net debt divided by EBITDA or Normalized EBITDA for the
last twelve months.
(3) 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 2012, our net cash provided by operating activities increased by RR 3,918 million, or 5.4%, to
RR 75,825 million compared to RR 71,907 million in 2011 mainly due to higher natural gas sales volumes and
prices that was partially offset by an increase in income tax payments.
Net cash provided by (used in) investing activities
In 2012, our net cash used in operating activities increased by RR 37,481 million, or 80.4%, to
RR 84,124 million compared to RR 46,643 million in 2011, due primarily to the payment for shares of our joint
venture Nortgas, which was acquired in November 2012, as well as an increase in our cash used for purchases of
property, plant and equipment and ongoing development activities at our fields.
Net cash provided by (used in) financing activities
In 2012, our net cash provided by financing activities was RR 2,603 million compared to net cash used in
financing activities of RR 11,735 million in 2011. In 2012, cash provided by new borrowings increased by
RR 32,564 million to RR 81,149 million from RR 48,585 million in 2011, which was partially offset by an
increase in repayment of debts by RR 10,539 million from RR 29,873 million in 2011 to RR 40,412 million in
2012. Our cash used to pay dividends increased by RR 4,552 million in 2012 compared to 2011. The remaining
change was related to repayment of interest on debts and other miscellaneous categories.
33
Working capital
Our net working capital position (current assets less current liabilities) at 31 December 2012 was a positive
RR 3,113 million compared to RR 8,202 million at 31 December 2011. The change of our net working capital
position was primarily due to the increase in the current portion of long-term debt as of 31 December 2012. In
February 2013, the Group issued four-year, Russian rouble denominated Eurobonds in the amount of
RR 14 billion the proceeds from which were used to refinance our current portion of long-term debt (see “Debt
obligations” below).
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
Our total capital expenditures on property, plant and equipment for the years ended 31 December 2012 and
2011 were as follows:
millions of Russian roubles
Capital expenditures
Prepayments for participation in tender for mineral licenses
per consolidated statement of cash flows
Total additions to property, plant and equipment per
Note “Property, plant and equipment” in the Group’s
IFRS Consolidated Financial Statements
Year ended 31 December:
2011
2012
Change
%
43,554
31,161
39.8%
-
6,870
n/a
43,554
38,031
14.5%
Our total capital expenditures (including capitalized 3-D seismic surveys) represent our investments in
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 2012 and 2011:
millions of Russian roubles
Yurkharovskoye field
Gas Condensate Fractionation Complex and Transshipment Facility (Ust-Luga)
East-Tarkosalinskoye field
Purovsky Plant
Khancheyskoye field
North-Khancheyskiy license area
Salmanovskoye (Utrenneye) field
North-Russkiy license area
Olimpiyskiy license area
Geofizicheskoye field
West-Urengoiskiy license area
North-Yamsoveiskiy license area
South-Tambeyskoye field
Other
Capital expenditures
Year ended 31 December:
2011
2012
14,067
11,801
7,157
1,443
1,017
982
819
657
599
343
327
316
-
4,026
43,554
11,403
3,923
2,430
1,369
612
147
-
574
345
30
515
169
4,148
5,496
31,161
Total capital expenditures on property, plant and equipment in 2012 increased by RR 12,393 million, or 39.8%,
to RR 43,554 million from RR 31,161 million in 2011. The increase was primarily related to the construction of
processing assets at Ust-Luga, ongoing development activities and the launch of the fourth stage of the second
phase development at our Yurkharovskoye field, as well as further field development on the crude oil layers at
the East-Tarkosalinskoye and Khancheyskoye fields. The increase was partially offset by the fact, that we did
not consolidate capital expenditures related to South-Tambeyskoye field in 2012 as a result of the disposal of a
20% equity interest in Yamal LNG in October 2011, which is accounted for under the equity method starting
from that date.
34
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.
Subsequent events
In February 2013, the Group placed Russian rouble denominated Eurobonds in the amount of RR 14 billion with
a four-year maturity and an annual coupon rate of 7.75%.
In February 2013, we repaid a RR 15 billion loan from OAO Sberbank ahead of its maturity schedule.
In March 2013, we repaid a USD 200 million loan from OAO Nordea Bank ahead of its maturity schedule.
Overview
Our total debt increased from RR 95,478 million at 31 December 2011 to RR 132,487 million at 31 December
2012, or by RR 37,009 million. We periodically utilize credit facilities to supplement our internally generated
cash flows for the financing of capital expenditures related to the development of our fields and to construct
and/or expand processing assets such as the Purovsky Plant and Ust-Luga, as well as acquisitions of new oil and
gas assets. The increase in our total debt was largely due to the placement of a ten-year, US dollar denominated
Eurobond in December 2012 to finance the Nortgas acquisition.
Our total debt position (net of unamortized transaction costs) at 31 December 2012 and 31 December 2011 was
as follows:
Facility
Amount
Maturity
Interest rate
Year ended 31 December:
2011
2012
Eurobonds Ten-Year
Russian rouble Bonds
Eurobonds Ten-Year
Eurobonds Five-Year
Sberbank
Russian rouble Bonds
Sberbank
Nordea Bank
Sumitomo Mitsui (1)
UniCredit Bank
Gazprombank (2)
Total
USD 1 billion
RR 20 billion
USD 650 million
USD 600 million
RR 15 billion
RR 10 billion
RR 10 billion
December 2022
October 2015
February 2021
February 2016
December 2013
June 2013
December 2014
USD 200 million November 2013
December 2013
USD 300 million
October 2012
USD 200 million
November 2012
RR 10 billion
4.422%
8.35%
6.604%
5.326%
7.5%
7.5%
8.9%
LIBOR+1.9%
LIBOR+1.45%
LIBOR+3.25%
8.0%
30,232
19,969
19,620
18,146
14,984
9,991
9,837
6,075
3,633
-
-
132,487
(1) Sumitomo Mitsui Banking Corporation Europe Limited.
(2) The loan from OAO Gazprombank was repaid ahead of maturity schedule in January 2012.
Maturities of long-term loans
Scheduled maturities of our long-term debt at 31 December 2012 were as follows:
Maturity schedule:
1 January to 31 December 2014
1 January to 31 December 2015
1 January to 31 December 2016
1 January to 31 December 2017
After 31 December 2017
Total long-term debt
-
-
20,776
19,206
14,966
9,971
-
6,439
7,685
6,435
10,000
95,478
RR million
9,837
19,970
18,146
-
49,852
97,805
35
Available credit facilities
At 31 December 2012, 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 7,327 million (USD 175 million and
EUR 50 million) on variable interest rates subject to the specific type of credit facility.
At 31 December 2012, the Group also had funds available under credit facilities with interest rates
predetermined or negotiated at time of each withdrawal:
BNP PARIBAS Bank
Credit Agricole Corporate and Investment Bank
UniCredit Bank
Sberbank (1)
Total available credit facilities
Par value
USD 100 million
USD 100 million
USD 350 million
RR 30 billion
Expiring
Within
one year
Between
1 and 3 years
3,037
3,037
-
30,000
36,074
-
-
10,630
-
10,630
(1) The period of availability of the credit line facility ended 31 January 2013.
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.
36
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 and other benchmark price references. We are exposed to
foreign exchange risk to the extent that a portion of our sales, 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 2012, the total amount of our long-term debt denominated in US dollars was RR 67,987 million,
or 51.3% 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 partially mitigated by the fact that a
portion of our total revenues, approximately 24.8% in 2012, is denominated in US dollars. As of 31 December
2012, the Russian rouble appreciated by approximately 5.7% against the US dollar since 31 December 2011.
A hypothetical and instantaneous 10% depreciation in the Russian rouble in relation to the US dollar as of
31 December 2012 would have resulted in an estimated non-cash foreign exchange loss of approximately
RR 7,771 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 market
contracts, and our export prices are primarily 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 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.
The Group purchases and sells natural gas on the European market under long-term contracts based on formulas
with reference to benchmark natural gas prices quoted for the North-Western European natural gas hubs, crude
oil and oil products prices and/or a combination thereof. Therefore, the Group’s financial results from natural gas
trading activities are subject to commodity price volatility based on fluctuations or changes in the respective
benchmark reference prices.
Pipeline access
We transport substantially all of our natural gas through the Unified Gas Supply System (“UGSS”) owned and
operated by OAO Gazprom, which 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 available that is not
being used by Gazprom. In practice, 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.
37
Ability to reinvest
Our business requires significant ongoing capital expenditures in order to grow our production and meet our
strategic plans. 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.
Off balance sheet activities
As of 31 December 2012, 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.
38
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
199
FORWARD–LOOKING
STATEMENTS
This Annual Review includes ‘forward-looking
• the effects of competition in the domestic and
information’ within the meaning of Section 27A of
export oil and gas markets;
the US Securities Act of 1933, as amended, and
• our ability to successfully implement any of our
Section 21E of the US Securities Exchange Act of
business strategies;
1934, as amended. Certain statements included in
• the impact of our expansion on our revenue
this Annual Report and Accounts, including, without
potential, cost basis and margins;
limitation, statements concerning plans, objectives,
• our ability to produce target volumes in the
goals, strategies, future events or performance,
event, among other factors, of restrictions on
and underlying assumptions and other statements,
which are other than statements of historical
facts. The words “believe,” “expect,” “anticipate,”
“intends,” “estimate,” “forecast,” “project,” “will,”
“may,” “should” and similar expressions identi-
our access to transportation infrastructure;
• the effects of changes to our capital expenditure
projections on the growth of our production;
• potentially lower production levels in the future
than currently estimated by our management
fy forward-looking statements. Forward-looking
and/or independent petroleum reservoir engi-
statements include statements regarding: strate-
neers;
gies, outlook and growth prospects; future plans
• inherent uncertainties in interpreting geophysi-
and potential for future growth; liquidity, capital
cal data;
resources and capital expenditures; growth in
• changes to project schedules and estimated
demand for our products; economic outlook and
completion dates;
industry trends; developments of our markets; the
• our success in identifying and managing risks
impact of regulatory initiatives; and the strength of
to our businesses;
our competitors. The forward-looking statements
• the effects of changes to the Russian legal
in this Annual Review are based upon various as-
framework concerning currently held and any
sumptions, many of which are based, in turn, upon
newly acquired oil and gas production licenses;
further assumptions, including without limitation,
management’s examination of historical operating
trends, data contained in our records and oth-
er data available from third parties. Although we
• 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
believe that these assumptions were reasonable
or practices.
when made, these assumptions are inherently
subject to significant uncertainties and contingen-
This list of important factors is not exhaustive. When
cies, which are difficult or impossible to predict and
relying on forward-looking statements, one should
are beyond our control. As a result, we may not
carefully consider the foregoing factors and other
achieve or accomplish these expectations, beliefs
uncertainties and events, especially in light of the
or projections. In addition, important factors that, in
political, economic, social and legal environment in
our view, could cause actual results to differ mate-
which we operate. Such forward-looking statements
rially from those discussed in the forward-looking
speak only as of the date on which they are made.
statements include:
• changes in the balance of oil and gas supply
Accordingly, we do not undertake any obligation to
update or revise any of them, whether as a result of
new information, future events or otherwise. We do
and demand in Russia and Europe;
not make any representation, warranty or prediction
• the effects of domestic and international oil and
gas price volatility and changes in regulatory
that the results anticipated by such forward-looking
statements will be achieved, and such forward-look-
conditions, including prices and taxes;
ing statements represent, in each case, only one
200 ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
of many possible scenarios and should not be
Mentions in this Annual Report of “OAO NOVATEK”,
viewed as the most likely or standard scenario. The
“NOVATEK”, “the Company”, “we” and “our” refer
information and opinions contained in this document
to OAO NOVATEK and/or its subsidiary enterprises,
are provided as at the date of this review and are
depending upon the context, in which the terms
subject to change without notice.
are used.
ABBREVIATIONS
barrel
bln
bcm
boe
km
LNG
LPG
mboe
mcm
mln
mmboe
mmcm
mmt
mt
PRMS
RR
SEC
sq.
th.
ton
UGSS
YNAO
one stock tank barrel, or 42 US gallons of liquid volume
billion
billion cubic meters
barrels of oil equivalent. For natural gas, we use the
conversion factor of one mcm equals 6.54 barrels.
kilometer(s)
liquified natural gas
liquified petroleum gases
thousand boe
thousand cubic meters
million
million boe
million cubic meters
million metric tons
thousand metric tons
Petroleum Resources Management System
Russian rouble
United States Securities and Exchange Commission
square
thousand
metric ton
Unified Gas Supply System
Yamal-Nenets Autonomous Region
CONVERSION FACTORS
1000 cubic meters of gas = 6.54 boe.
coefficients depending on the liquids density at
To convert crude oil and gas condensate re-
each field.
serves from tons to barrels we used various
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
201
RESPONSIBILITY
STATEMENT
I hereby confirm that to the best of my
knowledge:
(a) the set of financial statements, which
has been prepared in accordance with
International Accounting Standards, gives
a true and fair view of the assets, liabilities,
financial position and profit or loss of the
undertakings included in the consolidation
as a whole as required by the Disclosure
and Transparency Rule (DTR) 4.1.6R,
(b) the management report includes a fair
review of the information required by DTR
4.1.9R, being a balanced and comprehen-
sive analysis of development and perfor-
mance of the business and the position of
the company and the undertakings includ-
ed in the consolidation taken as a whole,
together with a description of the principal
risks and uncertainties that the company
faces.
Mark Gyetvay,
Chief Financial Officer
202
ANNUAL REPORT
OAO NOVATEK
2012
GROWTH
EFFICIENCY
INNOVATION
CONTACT INFORMATION
LEGAL ADDRESS
22 A Pobedy Street, Tarko-Sale,
Yamal-Nenets Autonomous Region,
629850, Russia
OFFICE IN MOSCOW
2, Udaltsova Street, 119415, Moscow,
Russia
CENTRAL INFORMATION SERVICE
Tel: +7 495 730-6000
Fax: +7 495 721-2253
E-mail: novatek@novatek.ru
PRESS SERVICE
Tel: +7 495 721-2207
E-mail: press@novatek.ru
INVESTOR RELATIONS
Tel: +7 495 730-6013
Fax: +7 495 730-6000
E-mail: ir@novatek.ru
WEBSITE:
www.novatek.ru (Russian version)
www.novatek.ru/eng (English version)
REGISTRAR
ZAO “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
INDEPENDENT AUDITOR
ZAO PricewaterhouseCoopers Audit
White Square Office Center, Butyrsky Val 10,
125047 Moscow, Russia
Tel: +7 495 967-6000
Fax: +7 495 967-6001
INDEPENDENT RESERVES AUDITOR
DeGolyer and MacNaughton
5001 Spring Valley Road, Suite 800, East
Dallas, Texas 75244, USA
Tel: +1 214 368-6391
Fax: +1 214 369-4061
E-mail: degolyer@demac.com
www.novatek.ru