Novatek Annual Report 2014

Plain-text annual report

K E T A V O N O A O H T W O R G F O Y T I L A U Q W E N 4 1 0 2 T R O P E R L A U N N A OF GROWTH QUALITY NEW Annual report 2014 WWW.NOVATEK.RU/EN NEW QUALITY OF GROWTH ANNUAL REPORT 2014 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 assets are located in the Yamal-Nenets Autonomous Region (YNAO), one of the largest gas regions in the world. The Company’s main strategic priorities are: growth of the resource base and efficient reserve management, maintaining sustainable rates of growth of hydrocarbon production, maintaining a low-cost structure, and optimizing and expanding existing marketing channels, and creating new marketing channels, including the future entry into the international market for liquefied natural gas. #4 globally among publicly traded companies by proved natural gas reserves #7 globally among publicly traded companies by natural gas production volumes 12.6 bln boe of proved hydrocarbon reserves under SEC 19% of total natural gas deliveries to the domestic market via the UGSS 62.1 bcm of natural gas produced in 2014 10%of total Russian natural gas production CONTENTS Letter to Shareholders ...............................................................................................................................6 Strategic priorities ...................................................................................................................................10 Key Events and Achievements 2014 .......................................................................................................11 Key Indicators ...........................................................................................................................................12 Main Achievements by Businesses 2014 ................................................................................................14 Review of Operating Results ..............................................38 Licenses .....................................................................................................................................................38 Hydrocarbon Reserves .............................................................................................................................38 Geological Exploration .............................................................................................................................39 Field Development ...................................................................................................................................40 Hydrocarbon Production .........................................................................................................................41 Yamal LNG Project ....................................................................................................................................42 Processing of Gas Condensate ................................................................................................................43 Natural Gas Sales ......................................................................................................................................44 Liquid Hydrocarbon Sales ........................................................................................................................44 Environmental and Social Responsibility ....................................................46 Environmental Protection .......................................................................................................................46 Health and Safety .....................................................................................................................................47 Human Resources .....................................................................................................................................47 Social Policy and Charity ..........................................................................................................................48 Management and Corporate Governance .................................................51 Corporate Governance .............................................................................................................................51 General Meeting of Shareholders ...........................................................................................................51 Board of Directors ....................................................................................................................................52 Board Committees ...................................................................................................................................53 Management Board .................................................................................................................................54 Remuneration to Members of the Board of Directors and Management Board ................................54 Internal Control and Audit ......................................................................................................................55 Share Capital ............................................................................................................................................56 Dividends ..................................................................................................................................................57 Information Transparency ......................................................................................................................57 Additional Information ..........................................................................59 Major Risk Factors ....................................................................................................................................59 Risk Insurance ..........................................................................................................................................63 Information on Members of NOVATEK’s Board of Directors and Management Board .......................63 Major Transactions and Interested Party Transactions ........................................................................68 Contact Information.................................................................................................................................72 Ust-Luga Yamal-Nenets Autonomous Region RUSSIA Our license areas are located in the Yamal- Nenets Autonomous Region of the Russian Federation – one of the largest regions in the world in terms of gas reserves and production volumes. We have a large conventional reserve base with high reserves concentration and high potential of new geological discoveries. FIELDS AND LICENSE AREAS WITH COMMERCIAL PRODUCTION PROSPECTIVE FIELDS AND LICENSE AREAS 1. Yurkharovskoye field main production asset 9. South-Tambeyskoye field reserve base for the Yamal LNG project 2. East-Tarkosalinskoye field first field of NOVATEK launched into commercial production 10. Termokarstovoye field 11. West-Yurkharovskoye field 12. Yarudeyskoye field 13. Raduzhnoye field 14. West-Urengoyskiy license area 15. North-Yubileynoye field 16. North-Russkiy license area 17. North-Russkoye field 18. Dorogovskoye field 19. East-Tazovskoye field 20. Malo-Yamalskoye field 21. West-Chaselskoye field 22. Yevo-Yakhinskiy license area 23. Yaro-Yakhinskiy license area 24. North-Chaselskiy license area 25. Ukrainsko-Yubileynoye field 26. Utrenneye field 27. Geofizicheskoye field 28. North-Obskiy license area 29. East-Tambeyskiy license area 30. North-Tasiyskiy license area 31. Trekhbugorniy license area large crude oil field new prospective production cluster reserve base for potential expansion of LNG production geological exploration in the Gulf of Ob license acquired in 2014 ultra-high content of gas condensate in the Achimov layers 3. Samburgskiy license area 4. Olimpiyskiy license area 5. Yumantilskiy license area 6. Khancheyskoye field 7. North-Urengoyskoye field 7а. Eastern Dome 7b. Western Dome 8. North-Khancheyskoye field* Purovsky Gas Condensate Processing Plant key element in the production chain used for gas condensate stabilization Ust-Luga Complex processes stable gas condensate into higher value added products gas condensate pipeline of NOVATEK trunk gas pipelines of Gazprom * Since October 2014 – North-Khancheyskoye + Khadyryakhinskoye field. 4 Yamal Peninsula Gydan Peninsula 28 30 9 29 26 27 31 Yamburg 11 1 7a 7б 20 12 Nadym 19 17 18 16 3 22 13 23 24 15 14 25 4 21 10 5 8 2 6 NEW QUALITY OF GROWTH 28 30 9 29 26 Yamal Peninsula Gydan Peninsula 20 12 Nadym 27 31 Yamburg 11 1 7a 7б 13 23 24 15 14 25 3 22 4 Purovsky Plant 5 8 2 6 19 17 18 16 21 10 5 ANNUAL REPORT 2014LETTER TO SHAREHOLDERS Dear Shareholders, TWO THOUSAND AND FOURTEEN (2014) ushered in a new period of transition for NOVATEK as well as representing our 20th anniversary of operations. We are extremely proud of the many valued em- ployees who have played a pivotal role in making the Company one of the largest natural gas pro- ducers in the world from our humble beginnings in 1994. Throughout this period, we remained focused on delivering exceptional operational and financial results, while adhering to international best practices of corporate governance, financial transparency, environmental excellence and sus- tainable development. Our transition to a NEW QUALITY OF GROWTH underscored our mid-term strategy of increasing our liquid hydrocarbon production and the sub- sequent processing of hydrocarbons into value- added sales. In 2014, our marketable production of gas condensate and crude oil increased by 27% year-on-year, our throughput volumes at the Purovsky Plant grew by 36%, while the recently constructed Ust-Luga Complex increased its out- put by 2.5 times. As part of our strategic plans, we launched, expanded capacities and prepared for launching several large new fields that are ex- pected to drive the growth of our gas condensate and natural gas production for the foreseeable future. The production of natural gas and the marketing of natural gas sales on the Russian domestic mar- ket has traditionally been our core business. Since our inception, we have been actively expanding our hydrocarbon resource base through successful exploration and development activities, and cur- rently rank amongst the Top Five globally among publicly traded companies in terms of proven 6 ALEXANDER NATALENKO Chairman of the Board of Directors LEONID MIKHELSON Chairman of the Management Board MARK GYETVAY Deputy Chairman of the Management Board NEW QUALITY OF GROWTH natural gas reserves and 7th worldwide in terms of gas production volumes. Over the past 20 years, NOVATEK grew from a business idea to one of the world’s largest natural gas producers with leading efficiency indicators. Production, processing and sales of liquid hydro- carbons, including the exports of petroleum products with high added value, such as naphtha and jet fuel, are continuously gaining importance for us. These ongoing changes in our production output and sales structure are transformational for NOVATEK and the structure of our business. During 2014, our production of liquids represent- ed 11% of our total marketable output, whereas the share of liquids in the Company’s consolidated revenues aggregated 35%, and their correspon- ding share in the Company’s EBITDA – approxi- mately 50%. Our NEW TRANSITION TO QUALITY GROWTH, namely the increased production of liquid hydro- carbons, provides a much higher profitability per unit of sales as compared with our natural gas sales as well as a broader exposure to international sales and hard currency earnings. Moving forward, we consider gas condensate and oil production growth a key driver for increasing our financial results. The past year was not without challenges as the oil and gas industry witnessed a dramatic fall in oil prices in the second half of 2014, forcing many oil and gas companies to proceed revise their plans, capital budgets and strategies. Our main competi- tive advantage has always been low “finding and development” and “lifting” cost structure ensuring sufficient flexibility and enabling us to continue implementing our strategy even in a sustained low oil-price environment. In particular, despite the drop in energy commodity prices, our proved reserves increased to 12.6 billion barrels of oil equivalent, while our year-on-year organic reserve replacement ratio exceeded 150%. We continued to fully fund our capital investment program with internally generated cash flows with the strate- gic aim of further developing of our production capacities. In April 2014, we launched the Urengoyskoye gas condensate field within the Samburgsky license area at our joint venture, SeverEnergia, which is characterized by ultra-high content of gas con- densate in the hydrocarbon production flow, and in December, we launched the second develop- ment phase of this field. In September 2014, we launched the third phase at the Samburgsky gas condensate field and in December – the North- Khancheyskoye gas field. During the reporting year, we were very busy preparing several other new fields for the start of commercial production, including the Yaro-Yakhinskoye, Termokarstovoye and Yarudeyskoye fields with construction and equipment installation works largely completed at the first two fields as at year-end. All three of these new fields will be launched in 2015, ensuring further growth of liquid hydrocarbon production and the successful completion of our Five-Year Strategy as outlined in 2011. We continued to demonstrate high-rates of pro- duction growth throughout 2014. In particular, the growth of our marketable gas production, excluding our share in Sibneftegas production in 2013, totaled 11.3%, while the overall production volumes exceeded 62 billion cubic meters, or bcm. Our crude oil and gas condensate production increased by 1.3 million tons, which increased the proportional share of liquid hydrocarbons in our overall production by 2.2 percentage points. With the field launches in the fourth quarter 2014 alone, we recorded a 42% growth in liquids production. The successful implementation of our field de- velopment program and the rapid growth of gas condensate production will enable us, already in 2015, to fully utilize the processing capacities of our Purovsky Plant and the Ust-Luga Complex put into operation in 2013. During 2014, throughput volumes of stable gas condensate at the Ust-Luga complex increased to 4.7 million tons, while the expanded Purovsky Plant achieved 85% capacity utilization by year-end. The Ust-Luga Complex had a substantial positive impact on our financial results in 2014 by creating value added petroleum products by processing stable gas condensate into naphtha, jet fuel, fuel oil and gasoil alongside 7 NOVATEK ANNUAL REPORT 2014the savings we achieved on transportation costs due to the facility’s convenient location on the Baltic Sea. We continued to successfully implement our marketing strategy. Our natural gas sales volume exceeded 67 bcm, whereas the share of end- customers in our overall gas sales volumes mix increased from 89% to 94%. Total sales volumes of liquid hydrocarbons increased to seven million tons, or by 30% over 2013 volumes, and, in the fourth quarter, we recorded a 53% growth. Due to high quality of our petroleum products we suc- cessfully increased our international sales, diversi- fied our customer base and expanded our sales geography. Due to our growing production volumes and despite a rapid deterioration in the macroeco- nomic environment in the second half of 2014, we continued to demonstrate robust growth in our financial indicators. Our total revenues increased by 20% to RR 357.6 bln. The Company’s norma- lized EBITDA (including the share in EBITDA of joint ventures) increased by 23% and the free cash flow grew by 1.6 times. As a result, the Board of Direc- tors recommended the General Meeting of Share- holders to approve dividends for the reporting year at RUR 10.3 per share, representing a growth of 31% compared with 2013. We continued to implement our long-term stra- tegy of expanding our eventual gas sales into the international gas markets via the LNG plant construction based on the hydrocarbon resource base of the South-Tambeyskoye field in the Yamal peninsula. The Yamal LNG Project is a unique and challenging project considering its geographical location in arctic climatic conditions. However, these challenges are offset by the substantial onshore conventional natural resources located on the prolific Yamal peninsula. One of the main competitive advantages of the Yamal LNG Project relative to other LNG projects globally is its high quality reserve base resulting in low cost deve- lopment and production, while the Arctic climate One of the main competitive advantages of the Yamal LNG Project relative to other LNG projects globally is its high quality reserve base resulting in low cost development and production, while the Arctic climate substantially enhances the efficiency of the liquefaction process. 8 NEW QUALITY OF GROWTH substantially enhances the efficiency of the lique- faction process. The combination of these factors makes the Yamal LNG project highly competitive in the end-consumer markets implying a low break- even price. We consider the reduction of energy prices in the second half of 2014 as an opportu- nity for natural gas to further grow its share in the global energy balance. As part of the ongoing construction activities at the Yamal LNG Project, we completed the cast- ing works for the external concrete walls on two LNG tanks for the plant’s first train in 2014. We also contracted for the fabrication of LNG plant mo- dules and, during the year, the steel cutting was done for the first modules and first LNG carriers of special Arctic design. We completed the first phase of construction at the International Sabetta Airport, where the milestone landing of the first Boeing 737 flight took place in December. At year- end 2014, 26 production wells were drilled at the South-Tambeyskoye field and the share of LNG volumes contracted exceeded 95%. Our strong operating and financial results along with successful implementation of the Company’s strategic projects would never be possible without adherence to the highest standards of corporate and social responsibility and commitment to envi- ronmental integrity and industrial safety. Since our core producing assets are located in the Far North, we support development in this region and coo- perate with local administrations and organizations promoting the interests of indigenous minorities of the North. We also pay particular attention to the protection of the fragile environment of the North, employ world-class technologies enabling us to minimize the impact of our operations on the region’s ecosystem, as well as actively participate in biodiversity conservation projects. We would like to highlight the contribution of our employees, whose diverse expertise enables the Company to successfully implement its growth strategy, improve operating performance and rea- lize our most challenging and advanced projects. We recognize the current macro- and micro-eco- nomic environment will be quite challenging for us in the upcoming year but we believe we have the financial resources and operational capacity to withstand a period of market volatility, and it is our primary focus to steer the Company according to our long-term strategic objectives. On behalf of the Board of Directors and Manage- ment, we are pleased to present the Annual Report of NOVATEK for 2014 and would like to thank our valued shareholders for your continued confidence in the Company and our long-term strategic plans. Kind regards, Alexander Natalenko Chairman of the Board of Directors Leonid Mikhelson Chairman of the Management Board Mark Gyetvay Deputy Chairman of the Management Board 9 NOVATEK ANNUAL REPORT 2014STRATEGIC PRIORITIES Prudent Investment Decisions Maintain sustainable growth rates of production Maintain low-cost structure GROWTH OF RESOURCE BASE AND EFFICIENT RESERVE MANAGEMENT Optimize and expand existing marketing channels, and create new marketing channels, including the future entry into the international market for liquefied natural gas Expand processing capacities* Conservative Financial Policies i H g h S t a n d a r d s o f C o r p o r a t e G o v e r n a n c e l t n e m p o e v e D e b a n i a t s u S l The Company has a number of key competitive advantages to successfully implement its strategy. Namely: the size and structure of its hydrocarbon resource base; the close proximity of existing infrastructure to core producing fields; a well-developed customer base for natural gas sales; its own facilities for gas condensate processing and product exports; and a well developed marketing channel for liquefied petroleum gases (LPG). Our high level of operational flexibility and our consistent and efficient use of leading edge technologies in production and processing practices as well as our adherence to sound and prudent business management support our competitive position. Our commitment to social responsibility and to observing the latest environmental, health and safety standards are integral parts of NOVATEK’s development strategy. * Fully accomplished in 2014. 10 NEW QUALITY OF GROWTH NOVATEK KEY EVENTS AND ACHIEVEMENTS 2014 Launch of the third stage of the Samburgskoye fi eld of the SeverEnergia joint venture enabling the fi eld to achieve full production capacity Launch of the fi rst and second stages of the Urengoyskoye fi eld development (within the Samburgsky license area of the SeverEnergia joint venture), which is characterized by ultra-high content of gas condensate in the hydrocarbon production fl ow 2 Despite the drop in energy commodity prices, our year-on- year organic proved reserve replacement ratio was 152% Construction progress on the EPC contract as part of the Yamal LNG project exceeded 20% Liquids exports increased by 20.5%, and the share of exports in the overall sales revenues grew to 28.2% EBITDA increased by 23.4% to a historical record of RR 159.6 bln 5 8 1 4 7 Our marketable production of liquid hydrocarbons increased by a record 27% to six (6) million tons, including crude oil production growth by 55% 3 6 The Yaro- Yakhinskoye (SeverEnergia joint venture) and Termokarstovoye (Terneftegas joint venture) gas and gas condensate fi elds were in advanced stages of preparation to be launched in the fi rst half 2015 ANNUAL REPORT 2014 11 KEY INDICATORS Unit 2013 2014 Change FINANCIAL INDICATORS Total revenues Normalized profit from operations (1) Normalized EBITDA (including share in EBITDA of JVs) (1) Normalized profit attributable to shareholders of OAO NOVATEK (1) Normalized earnings per share (1) Net cash provided by operating activities Capital expenditures (2) Free cash flow Net debt OPERATING INDICATORS Proved natural gas reserves (SEC) Proved liquid hydrocarbon reserves (SEC) RR mln RR mln RR mln RR mln RR RR mln RR mln RR mln RR mln bcm mmt 298,158 357,643 106,277 125,140 129,370 159,631 20.0% 17.7% 23.4% 35,197 (55.9)% 11.65 (55.8)% 79,825 26.35 88,525 59,254 29,271 110,253 63,179 47,074 157,732 204,361 1,740 134 1,747 135 Total hydrocarbon reserves (SEC) mmboe 12,537 12,578 Marketable production of natural gas Marketable production of liquid hydrocarbons Total marketable production POSITIONS IN THE RUSSIAN INDUSTRY Share in natural gas production Share in gas deliveries to the domestic market via UGSS bcm mt mmboe % % 61.22 4,751 439.0 9.3% 18.4% 62.13 6,036 456.7 9.7% 18.8% (1) Adjusted for the effect on disposal of interests in joint ventures. (2) Capital expenditures represent additions to property, plant and equipment excluding payments for mineral licenses. 12 NEW QUALITY OF GROWTH 24.5% 6.6% 60.8% 29.6% 0.4% 0.7% 0.3% 1.5% 27.0% 4.0% 0.4 p.p. 0.4 p.p. NOVATEK Total proved hydrocarbon reserves (SEC), mmboe Proved natural gas reserves (SEC), bcm 12,394 12,537 12,578 1,758 1,740 1,747 9,393 8,088 60% 1,144 1,321 40% 59% 41% 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Proved developed Proved undeveloped Proved developed Proved undeveloped Marketable natural gas production, bcm Marketable liquids production, mmt 52.9 56.5 61.2 62.1 37.3 4.1 4.3 3.6 6.0 4.8 19% 81% 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Gas condensate Crude oil Operating cash flow, RR bln Dividends per share, RR 110.3 88.5 71.9 75.8 6.0 6.86 7.89 10.3* 44.9 4.0 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 (1) Скорректировано на эффект от выбытия доли владения в совместных предприятиях. * Recommendation of the Board of Directors. ANNUAL REPORT 2014 13 27% LIQUID HYDROCARBON PRODUCTION GROWTH Liquid hydrocarbon production growth was due to the launch of the two stages of the Urengoyskoye field and the third stage of the Samburgskoye field of the SeverEnergia joint venture, drilling of crude oil production wells at the East-Tarkosalinskoye field and production growth at the Eastern dome of the North-Urengoyskoye field of the Nortgas joint venture (launched in 2013). We continued preparing the Yaro-Yakhinskoye, Termokarstovoye and Yarudeyskoye fields for the launch scheduled for 2015. 14 NEW QUALITY OF GROWTH а н и ж а в к с я а н т а с н е д н о к о з а Г . l l e w e t a s n e d n o c s a G . l d e fi e y o k s y e b m a T - h t u o S NOVATEK ANNUAL REPORT 2014 15 GEOLOGICAL EXPLORATION AND HYDROCARBON PRODUCTION Yamal Nenets Autonomous Region accounts for of Russian gas production 79% of global gas production 16% 28 years – reserve to production ratio at year-end 2014 2.4 USD per boe – reserve replacement costs in 2012-2014 costs in 20140.5 USD per boe – lifting As of 31 December 2014, NOVATEK’s SEC proved reserves, including the Company’s proportionate share in joint ventures, aggregated 12,578 mmboe, including 1,747 bcm of natural gas and 135 mmt of liquid hydrocarbons. Despite the price decline for benchmark crude oil prices on the international hydrocarbon market, the Company’s reserve replacement rate was 109%. Excluding decrease in the Company’s share in SeverEnergia, organic reserve replacement rate was 152% due to successful exploration works and production drilling, which amounted to reserves addition of 733 million boe. At year-end 2014, the Company’s reserve to production ratio was 28 years. In 2014, NOVATEK continued full-scale exploration works at license areas located on the Gydan Peninsula and offshore in the Gulf of Ob – assessment of the resource potential of the license areas was completed and exploration drilling on the Utrenneye field was conducted. Exploration work activities also continued at the fields and license areas in the Nadym-Pur-Taz region, including the license areas of the SeverEnergia joint venture. Supplementary exploration works were carried out at the Malo-Yamalskoye field located on the Yamal Peninsula. In 2014, NOVATEK carried out commercial hydrocarbon production at 10 fields. Marketable production from all fields (including the Company’s share in production of joint ventures) amounted to 457 mmboe, representing an increase of 4.0% over 2013. Total marketable production of natural gas including the share in production of joint ventures amounted to 62 bcm, representing 89% of our total hydrocarbon output. Marketable production of liquid hydrocarbons including the Company’s share in production of joint ventures totalled 6 mmt, of which 81% was gas condensate and 19% – crude oil. 16 NEW QUALITY OF GROWTH Proved reserves as of 31 December 2014 (SEC) 12.6 1,000 billion boe Cenomanian layers «Dry» gas not containing liquid hydrocarbons 23.4% of total natural gas reserves 1,700 m , h t p e D Valanginian layers Gas containing liquid hydrocarbons – «wet» gas 65.4% of total natural gas reserves 3,300 Achimov layers «Wet» gas with the highest share of liquid hydrocarbons 11.2% of total natural gas reserves 10 50 100 % of total natural gas reserves Marketable hydrocarbon production in 2014, mmboe 5% 2% 8% 9% 17% 457 59% Yurkharovskoye field SeverEnergia JV (NOVATEK’s share) East-Tarkosalinskoye Khancheyskoye field field Other fields Nortgas JV (NOVATEK’s share) Marketable production of natural gas, bcm Marketable production of liquid hydrocarbons, mmt 56.5 52.9 62.1 61.2 +1.5%* 37.3 4.3 4.1 3.6 6.0 4.8 +27% 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 * +11.3% excluding natural gas produced by Sibneftegas. GEOLOGICAL EXPLORATION AND HYDROCARBON PRODUCTION Yamal Nenets Autonomous Region accounts for of Russian gas production 79% of global gas production 16% 28 years – reserve to production ratio at year-end 2014 2.4 USD per boe – reserve replacement costs in 2012-2014 costs in 20140.5 USD per boe – lifting As of 31 December 2014, NOVATEK’s SEC proved reserves, including the Company’s proportionate share in joint ventures, aggregated 12,578 mmboe, including at the fields and license areas in the Nadym-Pur-Taz region, including the license areas of the SeverEnergia joint venture. Supplementary exploration 1,747 bcm of natural gas and 135 mmt of works were carried out at the liquid hydrocarbons. Despite the price Malo-Yamalskoye field located on the decline for benchmark crude oil prices on Yamal Peninsula. the international hydrocarbon market, the Company’s reserve replacement rate was 109%. Excluding decrease in the Company’s share in SeverEnergia, organic reserve replacement rate was 152% due to successful exploration works and production drilling, which amounted to reserves addition of 733 million boe. At year-end 2014, the Company’s reserve to production ratio was 28 years. In 2014, NOVATEK continued full-scale exploration works at license areas located on the Gydan Peninsula and offshore in the Gulf of Ob – assessment of the resource potential of the license areas was completed and exploration drilling on the Utrenneye field was conducted. Exploration work activities also continued In 2014, NOVATEK carried out commercial hydrocarbon production at 10 fields. Marketable production from all fields (including the Company’s share in production of joint ventures) amounted to 457 mmboe, representing an increase of 4.0% over 2013. Total marketable production of natural gas including the share in production of joint ventures amounted to 62 bcm, representing 89% of our total hydrocarbon output. Marketable production of liquid hydrocarbons including the Company’s share in production of joint ventures totalled 6 mmt, of which 81% was gas condensate and 19% – crude oil. Proved reserves as of 31 December 2014 (SEC) 12.6 1,000 billion boe Cenomanian layers «Dry» gas not containing liquid hydrocarbons 23.4% of total natural gas reserves 1,700 , m h t p e D Valanginian layers Gas containing liquid hydrocarbons – «wet» gas 65.4% of total natural gas reserves 3,300 Achimov layers «Wet» gas with the highest share of liquid hydrocarbons 11.2% of total natural gas reserves 10 50 % of total natural gas reserves 100 NOVATEK Marketable hydrocarbon production in 2014, mmboe 5% 2% 8% 9% 17% 457 59% Yurkharovskoye field SeverEnergia JV (NOVATEK’s share) East-Tarkosalinskoye field Khancheyskoye field Nortgas JV (NOVATEK’s share) Other fields Marketable production of natural gas, bcm Marketable production of liquid hydrocarbons, mmt 56.5 52.9 62.1 61.2 +1.5%* 37.3 4.3 4.1 3.6 6.0 4.8 +27% 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 * +11.3% excluding natural gas produced by Sibneftegas. ANNUAL REPORT 2014 17 153% PRODUCT OUTPUT GROWTH AT THE UST-LUGA COMPLEX Growth in gas condensate production resulted in substantial throughput increase at the Purovsky Gas Condensate Stabilization Plant leading to higher output of stable gas condensate. This enabled higher capacity utilization of the Ust-Luga Stable Gas Condensate Fractionation Complex and growth in output of higher value-added products. 18 NEW QUALITY OF GROWTH . t i n u n o i t a n o i t c a r f e t a s n e d n o c s a g e b a t S l l . x e p m o C a g u L - t s U ANNUAL REPORT 2014 19 PUROVSKY GAS CONDENSATE STABILIZATION PLANT Due to the estimated ramp up in gas condensate production, in early 2014 we completed the project for expanding the processing capacity of the Purovsky Plant from five (5) to 11 million tons. As a result, we have achieved a balance between our gas condensate production potential and processing capacity. The Purovsky Plant is the central element in our production value chain that provides us complete operational control over our processing needs and access to higher yielding marketing channels for our stable gas condensate. The Purovsky Plant produces stable gas condensate and light hydrocarbons (the feedstock for the production of marketable LPG). By the end of 2014, the capacity utilization rate at the Purovsky Plant reached 85%. Vitino Ust-Luga Purovsk – Ust-Luga since Q3 2013 3,795 km m 8 k till Q ii 3 7 1 0 3 2 4 , 1 Purovsky Plant 4 1 0 e 2 n since Ju Tobolsky Plant of SIBUR UST-LUGA STABLE GAS CONDENSATE FRACTIONATION COMPLEX The Ust-Luga Complex expands our vertically integrated chain and increases sales of higher value added products as well as diversifying the geographical markets and expanding the customer base for our products. The Gas Condensate Fractionation and Transshipment Complex located at the all-season port of Ust-Luga on the Baltic Sea processes stable gas condensate into petroleum products like light and heavy naphtha, jet fuel, fuel oil and gasoil, and enables us to ship the value-added petroleum products to international markets. The overall gas condensate processing capacity of the Ust-Luga Complex is six (6) million tons per annum. The launch of the Ust-Luga Complex in 2013 allowed us to improve logistics and reduce transportation costs due to a more favorable geographical location of Ust-Luga as compared to the port of Vitino, which was previously used for gas condensate exports. Unstable gas condensate processing volumes, th. tons 11 mmt per annum 8 stabilization trains Third stage Commercial output in 2014, th. tons Commercial output, th. tons Capacity 5 mmt per annum 4 stabilization trains Second stage 3,869 3,401 +36% 4,862 4,034 7,000 6,000 5,000 4,000 3,000 2,000 1,000 6,600 5% 16% 6,420 1,873 79% 2,006 1,425 836 686 542 472 190 94 179 25 2010 2011 2012 2013 2014 SGC Light hydrocarbons LPG 2013 2014 Heavy naphtha Light naphtha Fuel oil Jet fuel Gasoil 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 20 NEW QUALITY OF GROWTH Product pipeline of SIBUR Railway transportation Purovsk – Ust-Luga Railway transportation Purovsk – Vitino Transportation by sea Stable gas condensate processing volumes, th. tons 4,706 +151% PUROVSKY GAS CONDENSATE STABILIZATION PLANT Due to the estimated ramp up in gas condensate production, in early 2014 we completed the project for expanding the processing capacity of the Purovsky Plant from five (5) to 11 million tons. As a result, we have achieved a balance between our gas condensate production potential and processing capacity. The Purovsky Plant is the central element in our production value chain that provides us complete operational control over our processing needs and access to higher yielding marketing channels for our stable gas condensate. The Purovsky Plant produces stable gas condensate and light hydrocarbons (the feedstock for the production of marketable LPG). By the end of 2014, the capacity utilization rate at the Purovsky Plant reached 85%. Vitino Ust-Luga Purovsk – Ust-Luga since Q3 2013 3,795 km m 8 k till Q ii 3 7 1 0 3 2 4 , 1 Purovsky Plant 4 1 0 e 2 n since Ju Tobolsky Plant of SIBUR Product pipeline of SIBUR Railway transportation Purovsk – Ust-Luga Railway transportation Purovsk – Vitino Transportation by sea NOVATEK UST-LUGA STABLE GAS CONDENSATE FRACTIONATION COMPLEX The Ust-Luga Complex expands our vertically integrated chain and increases sales of higher value added products as well as diversifying the geographical markets and expanding the customer base for our products. The Gas Condensate Fractionation and Transshipment Complex located at the all-season port of Ust-Luga on the Baltic Sea processes stable gas condensate into petroleum products like light and heavy naphtha, jet fuel, fuel oil and gasoil, and enables us to ship the value-added petroleum products to international markets. The overall gas condensate processing capacity of the Ust-Luga Complex is six (6) million tons per annum. The launch of the Ust-Luga Complex in 2013 allowed us to improve logistics and reduce transportation costs due to a more favorable geographical location of Ust-Luga as compared to the port of Vitino, which was previously used for gas condensate exports. Unstable gas condensate processing volumes, th. tons 11 mmt per annum 8 stabilization trains Third stage Commercial output in 2014, th. tons 6,600 5% 16% +36% 4,862 6,000 Capacity 5 mmt per annum 4 stabilization trains Second stage 3,869 3,401 4,034 7,000 5,000 4,000 3,000 2,000 1,000 Commercial output, th. tons Stable gas condensate processing volumes, th. tons 4,706 +151% 6,420 1,873 79% 2,006 1,425 836 686 542 472 190 94 179 25 2010 2011 2012 2013 2014 SGC Light hydrocarbons LPG 2013 2014 Heavy naphtha Light naphtha Fuel oil Jet fuel Gasoil 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 ANNUAL REPORT 2014 21 30% LIQUIDS SALES VOLUMES GROWTH In 2014 we sold 7.1 mmt of liquids compared with 5.4 mmt in 2013. The growth was due to higher volumes processed at the Purovsky Plant and the Ust-Luga Complex as well as higher crude oil production volumes. Petroleum product sales volumes grew by 2.8 times to 4.4 mmt, and their share in total liquids sales increased to 63%. 22 NEW QUALITY OF GROWTH NOVATEK . е г у Л - ь т с У а н ы р е д н е т с е и к с р о М h t r e b r e t a w - p e e d e h t t a s m r a g n d a o L i l . x e p m o C a g u L - t s U ANNUAL REPORT 2014 23 Geography of sales LIQUID HYDROCARBON SALES The replacement of stable gas condensate exports by the sales of petroleum products with higher value added margins positively impacted the financial results of the Company. NOVATEK sells liquid hydrocarbons (stable gas condensate, petroleum products, light hydrocarbons, LPG and crude oil) domestically and internationally. We strive to respond quickly to changing market conditions by optimizing the customer base and supply geography. As a result of the launch of the Gas Condensate Fractionation and Transshipment Complex in the port of Ust-Luga in 2013 the Company ceased export deliveries of stable gas condensate and started exporting naphtha, jet fuel, fuel oil and gasoil. We changed our LPG sales scheme since the second quarter 2014 – we started delivering all the volumes of light hydrocarbons (feedstock for marketable LPG production) produced at the Purovsky Plant to SIBUR’s Tobolsky Petrochemical Complex. Russia Europe Belgium Denmark Estonia Finland Germany Hungary Latvia Lithuania Netherlands Norway Poland Romania Slovakia Sweden China Indonesia Japan Malaysia Singapore South Korea Taiwan Thailand America Brazil Canada USA Asian-Pacific Region North and South Liquids sales volumes, mmt 2014 liquids sales volumes breakdown, th. tons 3.4 2.8 0.6 4.1 4.2 3.5 0.6 3.4 0.8 5.4 4.4 1.0 7.1 5.3 75% 25% 1.8 Ust-Luga products LPG and light hydrocarbons Crude oil Stable gas condensate 1% 100% 4,438 1,434 903 303 39% 35% 99% 61% 65% 2010 2011 2012 2013 2014 Exports Domestic market Exports Domestic market 24 NEW QUALITY OF GROWTH Geography of sales LIQUID HYDROCARBON SALES The replacement of stable gas condensate exports by the sales of petroleum products with higher value added margins positively impacted the financial results of the Company. NOVATEK sells liquid hydrocarbons (stable gas condensate, petroleum products, light hydrocarbons, LPG and crude oil) domestically and internationally. We strive to respond quickly to changing market conditions by optimizing the customer base and supply geography. As a result of the launch of the Gas Condensate Fractionation and Transshipment Complex in the port of Ust-Luga in 2013 the Company ceased export deliveries of stable gas condensate and started exporting naphtha, jet fuel, fuel oil and gasoil. We changed our LPG sales scheme since the second quarter 2014 – we started delivering all the volumes of light hydrocarbons (feedstock for marketable LPG production) produced at the Purovsky Plant to SIBUR’s Tobolsky Petrochemical Complex. NOVATEK Russia Europe Belgium Denmark Estonia Finland Germany Hungary Latvia Lithuania Netherlands Norway Poland Romania Slovakia Sweden Asian-Pacific Region China Indonesia Japan Malaysia Singapore South Korea Taiwan Thailand North and South America Brazil Canada USA Liquids sales volumes, mmt 2014 liquids sales volumes breakdown, th. tons 3.4 2.8 0.6 4.1 4.2 3.5 0.6 3.4 0.8 7.1 5.3 5.4 4.4 1.0 1.8 75% 25% Ust-Luga products LPG and light hydrocarbons Crude oil Stable gas condensate 1% 100% 4,438 1,434 903 303 39% 35% 99% 61% 65% 2010 2011 2012 2013 2014 Exports Domestic market Exports Domestic market ANNUAL REPORT 2014 25 NATURAL GAS SALES The share of natural gas sales to end customers in 2014 grew from 89% to 94% compared with 2013, which is fully in line with our marketing strategy aimed at diversifying sales, maximizing margins and increasing the stability of our business. NOVATEK's 2014 natural gas sales volumes totaled 67 bcm, representing an increase of 4.8% as compared to 2013 sales volumes of 64 bcm. The growth in sales volumes was due to an increase in natural gas supplies to the Khanty-Mansiysk Autonomous Region and the Stavropol Region. Deliveries to these regions increased by 7.7 bcm as compared to 2013 due primarily to higher volumes delivered on existing contracts. During 2014, our total revenues from natural gas sales increased to RR 230 billion or by 12.4%, as compared to 2013, due to the combination of higher volumes sold, and an increase in year-average regulated gas prices in 2014 as compared to 2013, and the increase in the share of sales to end-customers. Natural gas sales volumes, bcm 2014 natural gas sales volumes breakdown by customers, bcm 64.2 67.2 58.9 53.7 6% 1% 6% 37.1 94% 89% 69% 64% Share of end customers 55% 24% 67.2 2010 2011 2012 2013 2014 63% Power generation companies Large industrial consumers Wholesale traders, ex-field Others Households 26 NEW QUALITY OF GROWTH Regional breakdown of 2014 natural gas sales volumes, bcm 30 Regions of natural gas sales in 2014 12 8 2 5 Natural gas sales, bcm 67.2 64.2 +5%growth 9 6 4 10 3 11 7 1 2013 2014 Main Regions (with sales volumes above 1 bcm each) Other Regions of gas sales (3.0 bcm in 2014) 1 14.6 14.7 2 11.9 10.7 3 4 5 6 8.2 7.8 7.9 7.9 4.6 4.9 4.8 2.7 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 Chelyabinsk Region Moscow City and Moscow Region Khanty-Mansiysk Autonomous Region Kostroma Region Yamal-Nenets Autonomous Region (mainly sales to traders) 2013 2014 Perm Territory 7 8 9 10 11 12 3.6 3.4 2.2 2.4 2.3 0.1 2.1 2.0 2.0 1.8 1.3 1.2 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 Orenburg Region Vologda Region Stavropol Region Sverdlovsk Region Tyumen Region St-Petersburg NATURAL GAS SALES The share of natural gas sales to end customers in 2014 grew from 89% to 94% compared with 2013, which is fully in line with our marketing strategy aimed at diversifying sales, maximizing margins and increasing the stability of our business. NOVATEK's 2014 natural gas sales volumes totaled 67 bcm, representing an increase of 4.8% as compared to 2013 sales volumes of 64 bcm. The growth in sales volumes was due to an increase in natural gas supplies to the Khanty-Mansiysk Autonomous Region and the Stavropol Region. Deliveries to these regions increased by 7.7 bcm as compared to 2013 due primarily to higher volumes delivered on existing contracts. During 2014, our total revenues from natural gas sales increased to RR 230 billion or by 12.4%, as compared to 2013, due to the combination of higher volumes sold, and an increase in year-average regulated gas prices in 2014 as compared to 2013, and the increase in the share of sales to end-customers. Natural gas sales volumes, bcm 2014 natural gas sales volumes breakdown by customers, bcm 64.2 67.2 58.9 53.7 6% 1% 6% 37.1 94% 89% 69% 64% Share of end customers 55% 24% 67.2 2010 2011 2012 2013 2014 63% Power generation companies Large industrial consumers Wholesale traders, ex-field Others Households NOVATEK Regional breakdown of 2014 natural gas sales volumes, bcm 30 Regions of natural gas sales in 2014 12 8 2 5 Natural gas sales, bcm 67.2 64.2 +5%growth 9 6 4 10 3 11 7 1 2013 2014 Main Regions (with sales volumes above 1 bcm each) Other Regions of gas sales (3.0 bcm in 2014) 1 14.6 14.7 2 11.9 10.7 3 4 5 6 8.2 7.8 7.9 7.9 4.6 4.9 4.8 2.7 2013 2014 2013 2014 2013 2014 Chelyabinsk Region Moscow City and Moscow Region Khanty-Mansiysk Autonomous Region 2013 2014 Perm Territory 2013 2014 2013 2014 Kostroma Region Yamal-Nenets Autonomous Region (mainly sales to traders) 7 8 9 10 11 12 3.6 3.4 2.2 2.4 2.3 0.1 2.1 2.0 2.0 1.8 1.3 1.2 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 Orenburg Region Vologda Region Stavropol Region Sverdlovsk Region Tyumen Region St-Petersburg ANNUAL REPORT 2014 27 20% PROGRESS OF THE YAMAL LNG PLANT CONSTRUCTION The Yamal LNG project envisages the construction of an LNG plant with annual capacity of 16.5 million tons per annum based on the feedstock resources of the South-Tambeyskoye field located in the north-east of the Yamal Peninsula. LNG will be delivered to the export markets of the Asian- Pacific region and Europe by ice-class LNG carriers. In the summer navigation the Northern Sea Route will be used to transport the LNG to the Asian-Pacific countries. 28 NEW QUALITY OF GROWTH NOVATEK . 5 1 0 2 l i r p A , s k n a t G N L e h t f o n o i t c u r t s n o C . G N L l a m a Y ANNUAL REPORT 2014 29 YAMAL LNG PROJECT Entry into the international gas market as a result of the Yamal LNG project implementation will become another significant change in our quality of growth. South-Tambeyskoye field Other NOVATEK license areas Yamal Peninsula Sabetta Gydan Peninsula Shareholders of Yamal LNG : 20% 20% Possible routes of LNG transportation from the Yamal Peninsula Natural gas produced at the South-Tambeyskoye ﬁeld will be delivered to the international markets in a form of LNG which requires construction of a liquefaction plant consisting of three (3) production trains of 5.5 mmt annual capacity each. The shipping infrastructure will include a jetty with two tanker loading berths at the port of Sabetta equipped with ice protection facilities. Ice-class LNG carriers of special ARC-7 design will be used to transport the LNG. With the opening of the ﬁrst winter navigation season at the Sabetta port in 2013, the port facilities handled 2.1 million tons of construction materials and equipment in the reporting year. Casting works for the external concrete walls on two LNG tanks for the plant’s ﬁrst train were completed as well as rooﬁng on the ﬁrst tank. The ﬁrst phase of construction at the International Sabetta Airport was ﬁnalized and the milestone landing of the ﬁrst Boeing 737 ﬂight took place in December 2014. Long-term contracts for more than 95% of LNG volumes were placed. Proved and probable reserves of the South-Tambeyskoye field under PRMS bcm of gas 926 30mmt of liquid hydrocarbons LNG plant workflow 3х Gas Gas treatment Gas liquefaction LNG tanks LNG 8 12 14 36 25 18 32 Latin America Europe Asian-Pacific countries (summer route) Asian-Pacific countries (winter route) Approximate number of travel days Transshipment in Europe Port of Sabetta 26 3х 4х 5х Condensate Stabilization unit Stable gas condensate tanks SGC Separation of propane-butane fraction 50,000 cubic m each 60% Production wells Gas separation unit Acid gases removal, drying, mercury removal, separation of LPG Compressors and heat exchangers 160,000 cubic m each s t r o p x E NOVATEK CNPC Total The development project of the South-Tambeyskoye field envisages drilling of 208 wells 30 NEW QUALITY OF GROWTH YAMAL LNG PROJECT Entry into the international gas market as a result of the Yamal LNG project implementation will become another significant change in our quality of growth. Natural gas produced at the South-Tambeyskoye ﬁeld will be delivered to the international markets in a form of LNG which requires construction of a liquefaction plant consisting of three (3) production trains of 5.5 mmt annual capacity each. The shipping infrastructure will include a jetty with two tanker loading berths at the port of Sabetta equipped with ice protection facilities. Ice-class LNG carriers of special ARC-7 design will be used to transport the LNG. With the opening of the ﬁrst winter navigation season at the Sabetta port in 2013, the port facilities handled 2.1 million tons of construction materials and equipment in the reporting year. Casting works for the external concrete walls on two LNG tanks for the plant’s ﬁrst train were completed as well as rooﬁng on the ﬁrst tank. The ﬁrst phase of construction at the International Sabetta Airport was ﬁnalized and the milestone landing of the ﬁrst Boeing 737 ﬂight took place in December 2014. Long-term contracts for more than 95% of LNG volumes were placed. South-Tambeyskoye field areas Other NOVATEK license Yamal Peninsula Sabetta Gydan Peninsula 926 bcm of gas 30mmt of liquid hydrocarbons Possible routes of LNG transportation from the Yamal Peninsula NOVATEK Proved and probable reserves of the South-Tambeyskoye field under PRMS 26 8 12 14 36 25 18 32 Latin America Europe Asian-Pacific countries (summer route) Asian-Pacific countries (winter route) Approximate number of travel days Transshipment in Europe Port of Sabetta Shareholders of Yamal LNG : 20% 20% LNG plant workflow 3х Gas 3х 4х Gas treatment Gas liquefaction LNG tanks LNG 60% Production wells separation Gas unit Acid gases removal, drying, mercury removal, separation of LPG Compressors and heat exchangers 160,000 cubic m each s t r o p x E NOVATEK CNPC Total The development project of the South-Tambeyskoye field envisages drilling of 208 wells Condensate Stabilization unit 5х Stable gas condensate tanks SGC Separation of propane-butane fraction 50,000 cubic m each ANNUAL REPORT 2014 31 637RR mln ENVIRONMENTAL EXPENDITURES IN 2014 NOVATEK’s core producing assets are located in the Far North, a harsh Arctic region with vast mineral resources and a fragile and vulnerable environment. Throughout all of its operations the Company is committed to environment protection. 32 NEW QUALITY OF GROWTH NOVATEK . l d e fi e y o k s v o r a h k r u Y e h t f o a e r a e h t n i e p a c s d n a L ANNUAL REPORT 2014 33 NOVATEK’s headcount, people Social Expenditures on employees, RR mln ENVIRONMENTAL AND SOCIAL RESPONSIBILITY NOVATEK adheres to the principles of effective and responsible business conduct and considers the welfare of its employees and their families, 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 responsibilities of the Company. 2,554 operating workplaces were certified in 2014 11comprehensive inspections of NOVATEK subsidiaries for occupational health, industrial, fire and environmental safety requirements in 2014 168RR mln expenses on Occupational Health and Safety in 2014 6% 9% 38% 18% 6,749 29% Administrative personnel Power supply Exploration and production Transportation and marketing Processing NOVATEK has implemented an Environment, Health and Safety Policy and all of the Company’s principal subsidiaries and joint ventures operate an Integrated Health, Safety and Environment Management System (IMS) that comply with the international ISO 14001:2004 and OHSAS 18001:2007 standards. In 2014, NOVATEK successfully passed another IMS compliance audit. In our Health, Safety and Environment (HSE) activities we pay special attention to preventive measures. In particular, the environmental aspects are taken into account in designing new production facilities: cutting-edge technology and equipment are used to considerably reduce the adverse environmental impact and risk of environmental accidents. The Company builds new and upgrades its existing waste disposal sites, equips its facilities with state-of-the-art oil sludge treatment units, sets up new sewage treatment facilities and revamps older ones. All NOVATEK’s subsidiaries and joint ventures conduct safety training and all types of briefings; personnel training and development programs are offered, among others, by specialized training centers, and a proper knowledge assessment system is in place. 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 development, dialogue between management and employees, as well as continuous, comprehensive training and development opportunities for the Company’s employees at all levels. Repayable Financial Aid Program Targeted Compensation and Socially Important Payments Culture and sports Health Resort Treatment and Rehabilitation Voluntary Medical Insurance State Guarantees Support Program Own Pension Program NOVATEK-Veteran Program Corporate Awards Program Environmental Expenditures in 2014, RR mln Injury frequency rate (number of injuries per million working hours) Water consumption by subsidiaries and joint ventures, th. cubic m 1% 1% 1% 4% 9% 12% 14% 637 34 NEW QUALITY OF GROWTH Enviromental protection against production and consumption waste Compensation payments Soil protection Environmental management Protection and use of water resources Atmospheric air protection 1 0.8 0.6 0.4 0.2 0 0.9 1,425 1,347 0.5 0.3 0.4 0.4 857 884 715 58% Environmental monitoring and evaluation of the background Subsurface protection 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 528 526 106 89 87 58 31 23 11 1,500 1,200 900 600 300 0 Downstream Upstream ENVIRONMENTAL AND SOCIAL RESPONSIBILITY NOVATEK adheres to the principles of effective and responsible business conduct and considers the welfare of its employees and their families, 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 responsibilities of the Company. 2,554 operating workplaces were certified in 2014 11comprehensive inspections of NOVATEK subsidiaries for occupational health, industrial, fire and environmental safety requirements in 2014 168RR mln expenses on Safety in 2014 Occupational Health and NOVATEK’s headcount, people Social Expenditures on employees, RR mln NOVATEK 6% 9% 38% 18% 6,749 29% Administrative personnel Power supply Exploration and production Transportation and marketing Processing NOVATEK has implemented an In our Health, Safety and Environment facilities with state-of-the-art oil sludge Environment, Health and Safety Policy (HSE) activities we pay special attention to treatment units, sets up new sewage and all of the Company’s principal subsidiaries and joint ventures operate an Integrated Health, Safety and preventive measures. In particular, the environmental aspects are taken into account in designing new production Environment Management System (IMS) facilities: cutting-edge technology and that comply with the international ISO equipment are used to considerably 14001:2004 and OHSAS 18001:2007 standards. In 2014, NOVATEK successfully passed another IMS compliance audit. reduce the adverse environmental impact and risk of environmental accidents. The Company builds new and upgrades its existing waste disposal sites, equips its treatment facilities and revamps older ones. All NOVATEK’s subsidiaries and joint ventures conduct safety training and all types of briefings; personnel training and development programs are offered, among others, by specialized training centers, and a proper knowledge assessment system is in place. 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 development, dialogue between management and employees, as well as continuous, comprehensive training and development opportunities for the Company’s employees at all levels. 528 526 106 89 87 58 31 23 11 Repayable Financial Aid Program Targeted Compensation and Socially Important Payments Culture and sports Health Resort Treatment and Rehabilitation Voluntary Medical Insurance State Guarantees Support Program Own Pension Program NOVATEK-Veteran Program Corporate Awards Program Environmental Expenditures in 2014, RR mln 1% 1% 1% 4% 9% 12% 14% 637 Enviromental protection against production and consumption waste Compensation payments Soil protection Environmental management Protection and use of water resources Atmospheric air protection 58% Environmental monitoring and evaluation of the background Subsurface protection Injury frequency rate (number of injuries per million working hours) Water consumption by subsidiaries and joint ventures, th. cubic m 0.9 0.5 0.3 0.4 0.4 1 0.8 0.6 0.4 0.2 0 1,500 1,200 900 600 300 0 1,425 1,347 857 884 715 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Downstream Upstream ANNUAL REPORT 2014 35 CORPORATE GOVERNANCE The Board of Directors membership as of 31 December 2014 MR. ALEXANDER Y. NATALENKO Born in 1946 Chairman of the Board of Directors Chairman of the Strategy Committee MR. ANDREI I. AKIMOV MR. LEONID V. MIKHELSON Born in 1953 Member of the Strategy Committee Born in 1955 Chairman of the Management Board MR. YVES LOUIS CHARLE JUSTIN DARRICARRERE MR. VLADIMIR A. DMITRIEV MR. GENNADY N. TIMCHENKO Born in 1951 Member of the Strategy Committee Born in 1953 Member of the Strategy Committee Born in 1952 Member of the Strategy Committee 36 NEW QUALITY OF GROWTH DR. BURCKHARD BERGMANN Born in 1943 Independent Director Member of the Remuneration and Nomination Committee Member of the Audit Committee Member of the Strategy Committee MR. ANDREI V. SHARONOV Born in 1964 Independent Director Chairman of the Audit Committee Member of the Remuneration and Nomination Committee MR. VICTOR P. ORLOV Born in 1940 Independent Director Chairman of the Remuneration and Nomination Committee Member of the Strategy Committee Member of the Audit Committee NOVATEK The Company has established an effective and transparent system of corporate governance complying with both Russian and international standards. The Company adheres to the internal Corporate Governance Code and the internal Code of Business Ethics and has a well-established and efficient internal control and audit system. INDEPENDENT BOARD MEMBERS 3 ANNUAL REPORT 2014 37 REVIEW OF OPERATING RESULTS Licenses NOVATEK’s ﬁ elds and license areas are located in the YNAO of the Russian Federation, which is one of the world’s larges t natural gas producing regions and accounts for approximately 16% of global natural gas production and 80% of Russian natural gas production. The concentration of the Company’s producing and prospective ﬁ elds, license areas and process- ing facilities in this proliﬁ c gas-producing region combined with the Region’s vast oil and gas infrastructure have allowed NOVATEK to minimize the risks associated with developing its assets and expanding its hydrocarbon resource base. The Company has many years of experience working in the YNAO, enabling us to eﬀ ectively capitalize on growth opportunities to increase shareholder value. Exploration and production of hydrocarbons in Russia is subject to State licensing regulations. As of 31 December 2014, our subsidiaries and joint ventures held 31 licenses for ﬁ elds and license areas, of which 29 are classiﬁ ed as either production or combined exploration and production licenses and two (2) are classiﬁ ed as exploration licenses. The duration of licenses for our core ﬁ elds exceeds 20 years: the license for the Yurkharovskoye ﬁ eld is valid until 2034, the East-Tarkosalinskoye ﬁ eld expires in 2043, and the South-Tambeyskoye ﬁ eld in 2045. NOVATEK is strictly observing all of its license obligations pursuant to current Russian legislation, and conducts continuous monitoring of license tenders in order to expand its resource base in strategi- cally important regions. In December 2014 “Arctic LNG 1” (the Company’s subsidiary) won an auction for exploration and production at the Trekhbugorniy license area located on the Gydan Peninsula and bordering the Company’s Geoﬁ zicheskiy license area. Estimated natural gas reserves of the Trekhbugorniy license area under the Russian C1+C2 reserve classiﬁ cation amount to 5.9 bcm, while the ﬁ eld’s broader recoverable resources classiﬁ cation exceed one (1) tcm of natural gas and 90 mln tons of liquid hydrocarbons. Payment for the license amounted to RR 435 mln. Hydrocarbon Reserves Most of the Company’s reserves are located onshore or can be developed from onshore locations and are attributed to the con- ventional hydrocarbon categories (capable of being exploited using conventional technologies, in contrast to unconventional gas deposits such as shale gas or coal-bed methane). The Company’s reserves are appraised on an annual basis by independent petroleum engineers, “DeGolyer and MacNaugh- ton” (“D&M”), under both the SEC and PRMS reserve reporting standards. As of 31 December 2014, NOVATEK’s SEC proved reserves, including the Company’s proportionate share in joint ventures, aggregated 12,578 mmboe, including 1,747 bcm of natural gas and 135 mmt of liquid hydrocarbons. Despite the price decline for benchmark crude oil prices on the international hydrocarbon market, the Company’s proved reserves increased by 0.3% com- pared to year-end 2013, and the reserve replacement rate was 109%. At year-end 2014, the Company’s reserve to production ratio (or R/P ratio) was 28 years. The reserves growth during the reporting period was aﬀ ected by the decrease in the Company’s proportional share in the SeverEnergia joint venture from 59.8% as at year-end 2013 to 54.9% as at 31 December 2014 resulting from an agreement with “Gazprom Neft” concluded in March 2014, and provid- ing for the gradual alignment of the ownership structure in “SeverEnergia”. Excluding this eﬀ ect, the proved reserves grew by 2%, with an organic reserve replacement of 152% due to successful exploration works and production drilling, which amounted to reserves addition of 733 million boe, inclusive of 2014 production. As a result of large-scale development and construction works at a number of large ﬁ elds, our proved developed reserves grew by 623 mmboe or 14%, and their share in overall proved reserves increased to 40.4% from 35.5% as at the end 2013. Under the PRMS reserves reporting standards, the Com- pany’s total proved plus probable reserves, including our proportionate share in joint ventures, totalled 22,886 mmboe, which includes 3,122 bcm of natural gas and 293 mln tons of liquid hydrocarbons, and represents a decline of 199 mmboe compared with year-end 2013. Excluding the effect from the reduction of our ownership in “SeverEnergia” as described above, our proven plus probable reserves increased by 203 mmboe, or by 0.9%. The high quality of the reserve base enables NOVATEK to maintain its position as one of the lowest cost producers in the global oil and gas industry. Our three-year (2012-2014) and ﬁ ve-year (2010-2014) reserve replacement costs amounted to RR 78.4 (USD 2.37) per boe and RR 69.8 (USD 2.16) per boe, respectively. 38 NEW QUALITY OF GROWTH NOVATEK Geological Exploration NOVATEK aims to expand its resource base through geological exploration at ﬁ elds and license areas not only in close proximity to existing transportation and production infrastructure, but also in new potentially prospective hydrocarbon areas. The Company ensures the eﬃ ciency of geological exploration work by deploy- ing state-of-the-art technologies and relying on the experience and expertise of the specialists in its geology department, and the Company’s Scientiﬁ c and Technical Center located in Tyumen. The Company uses a systematic and comprehensive approach to exploration and development of its ﬁ elds and license areas, beginning with the collection and interpretation of seismic data to the creation of dynamic ﬁ eld models for the placement of exploration and production wells. We employ modern geologi- cal and hydrodynamic modelling as well as new well drilling and completion techniques to maximize the ultimate recovery of hydrocarbons in a cost eﬀ ective manner. In 2014, we continued full-scale exploration works at our license areas located on the Gydan Peninsula and oﬀ shore in the Gulf of Ob – assessment of the resource potential of the license areas was completed and exploration drilling on the Utrenneye ﬁ eld was conducted. Exploration work activities also continued at the ﬁ elds and license areas in the Nadym-Pur-Taz region, including the license areas of the SeverEnergia joint venture. Supplemen- tary exploration works were carried out at the Malo-Yamalskoye ﬁ eld located on the Yamal Peninsula. In 2014, NOVATEK completed 828 square km of three-dimen- sional (3D) seismic, including seismic activities run at our joint ventures. Seismic works were conducted at the North-Russkiy, Yarudeyskiy and Samburgskiy license areas, and seismic studies were completed at the oﬀ shore part of the Geoﬁ zicheskoye ﬁ eld in the Gulf of Ob. Exploration drilling amounted to 26.3 thousand meters, the construction of six (6) prospecting and exploration wells was completed. As a result, Harbeyskoye oil and gas field with recoverable reserves (under the Russian reserve classification C1 + C2) of 26.7 bcm of natural gas and 7.8 mln tons of liquid hydrocarbons was discovered at the North-Russkiy license area. New hydrocarbon deposits were also discovered in the Jurassic sediments of the South-Tambeyskoye field, and wet gas reserves were increased in the Achimov deposits of the Urengoyskoye field at the Samburgskiy and Olympiyskiy license areas. Proved reserves under the SEC standards as of 31 December 2014 (based on our equity ownership interest in the respective ﬁ elds) and duration of licenses Field / license area Ownership Duration of license Gas reserves, bcm Liquids reserves, mln tons Yurkharovskoye South-Tambeyskoye Utrenneye East-Tarkosalinskoye Urengoyskoye (OAO “ARCTICGAS”) Geofi zicheskoye North-Urengoyskoye Yaro-Yakhinskoye Samburgskoye North-Chaselskoye Khancheyskoye North-Russkoye Olympiyskiy license area East-Tazovskoye Termokarstovoye Yarudeyskoye Other Total 100% 60% 100% 100% 54.9% 100% 50% 54.9% 54.9% 54.9% 100% 100% 100% 100% 51% 51% — — 2034 2045 2031 2043 2034 2034 2038 2034 2034 the lifetime of the fi eld 2044 2031 2026 2033 2021 2029 — — 363.4 294.8 259.8 163.9 153.1 125.6 99.6 84.8 55.7 29.2 26.7 22.5 21.4 17.1 15.6 4.4 9.2 17.2 8.3 9.6 15.2 38.3 0.4 9.0 8.3 7.9 1.3 3.1 1.9 2.1 2.5 4.5 5.1 0.2 1,746.7 135.0 ANNUAL REPORT 2014 39 Exploration works 3D seismic Subsidiaries Joint ventures Exploration drilling Subsidiaries Joint ventures Units square km square km square km th. m th. m th. m 2013 2,677 1,821 856 37.3 10.6 26.7 2014 828 730 98 26.3 19.3 7.0 Change (69)% (60)% (89)% (29)% 82% (74)% Field Development During 2014, NOVATEK’s subsidiaries spent RR 57.8 billion on the development of hydrocarbon reserves as part of our capital investment program in order to achieve sustainable hydrocar- bon production growth. Production drilling in 2014, including joint ventures, reached 595 thousand meters which amounted to 17% less production drilling than in 2013. The decrease was due to the development of the Yurkharovskoye and North-Urengoyskoye ﬁ elds nearing completion. A total of 85 wells were put on stream, including 56 gas and gas condensate wells and 29 oil wells. NEW FACILITIES COMMISSIONED AT PRODUCING FIELDS In July 2014, the third stage of compressor booster station, which included ﬁ ve compressor units, was launched at the Yurkharovskoye ﬁ eld, thus increasing the overall compressor ca- pacity at the station to 300 MW. The compressor booster station is required to keep the plateau production level at the ﬁ eld. To develop the Eastern part of the ﬁ eld and ensure even depletion of reservoirs, we continued drilling long-reach horizontal wells in 2014. Three (3) new gas condensate wells were put on stream and work over activities was performed on two (2) previously drilled wells. Wells at the Yurkharovskoye ﬁ eld reach 8.5 km in length with a vertical deviation of over seven (7) km and hori- zontal sections of up to 1.5 km. In September 2014, the third phase of the Samburgskoye gas condensate ﬁ eld developed by SeverEnergia (a joint venture between NOVATEK and GazpromNeft) was commissioned. The launch of the third stage, which exceeds two (2) bcm of natural gas per annum, will enable the ﬁ eld to achieve peak production capacity of approximately seven (7) bcm of natural gas and more than 900 thousand tons of gas condensate per annum. A total of 19 new production wells were commissioned at this ﬁ eld in 2014. At the East-Tarkosalinskoye ﬁ eld intensive drilling was performed targeting the ﬁ eld’s crude oil layers with 29 oil production wells 1 North-Khancheyskoye+Khadyryakhinskoye from October 2014. completed during the reporting year. The associated petroleum gas recovered during oil treatment is compressed at a booster compression station, which capacity was expanded from 3.5 to 10.5 MW as a result of launching two new compressor units in 2014. To maintain gas production capacity at the ﬁ eld, two new compressor units with a capacity of 16 MW each were launched at the natural gas booster compression station, thus increasing the overall capacity of the station to 128 MW. In September 2014, the second train of the booster compres- sion station including two compressor units with a capacity of 10 MW each was launched at the Western Dome of the North- Urengoyskoe ﬁ eld (developed by the Nortgas joint venture), thus increasing the station’s overall capacity to 40 MW. The compres- sor booster station enables maintaining production capacity of the ﬁ eld. Seven (7) new production wells were drilled at the North-Urengoyskoe ﬁ eld in 2014. NEW FIELDS COMMISSIONED IN 2014 The ﬁ rst phase of the Urengoyskoye ﬁ eld development (the SeverEnergia joint venture) was launched in April 2014, and the second phase followed in December 2014. Overall production capacity of the two phases is approximately 13 bcm of natural gas and 4.7 mmt of de-ethanized gas condensate per annum. Production drilling targets the Achimov deposits which are relatively deep (approximately 3,700 m) and are characterized by an ultra-high content of gas condensate in the hydrocarbon ﬂ ow. As of the end of 2014, a total of 36 production wells were in operation at the ﬁ eld. In December 2014, the North-Khancheyskoye1 gas ﬁ eld was commissioned with a total capacity of 0.4 bcm of natural gas per annum. Three (3) wells were in operation at the ﬁ eld as at year-end. NEW FIELDS PREPARED FOR COMMISSIONING During the reporting year the Company continued its develop- ment and construction activities at a number of large ﬁ elds planned for commissioning in 2015. 40 NEW QUALITY OF GROWTH NOVATEK At the Yaro-Yakhinskoye ﬁ eld (developed by the SeverEnergia joint venture) gas and gas condensate pipelines connecting the ﬁ eld to the trunk pipeline system were completed, construction of gas treatment facility was almost completed and the equip- ment testing commenced. A total of 17 production wells were drilled at the ﬁ eld in 2014 and the total well stock increased to 41 wells by the year end. In the reporting year, gas and gas condensate pipelines linking the Termokarstovoye ﬁ eld (developed by Terneftegas, a joint venture between NOVATEK (51%) and Total (49%)) were com- pleted, as well as gas gathering lines. The gas treatment facility and gas condensate de-ethanization unit were almost complet- ed by the year end – the equipment was installed and piping works were underway. There were 20 production wells drilled at the ﬁ eld as of the end of 2014. Production drilling targets Juras- sic deposits and the wells have long horizontal sections between 1.2 km and 2 km. At the Yarudeyskoye oil ﬁ eld developed by YARGEO (NOVATEK holds a 51% share) a central oil separation facility and a gas treat- ment unit were under construction. The construction of oil and gas pipelines linking the oil ﬁ eld to the trunk pipeline system were completed by more than 60%. Thirteen (13) production wells were drilled and two previously drilled exploration wells were side-tracked. Hydrocarbon Production In 2014, NOVATEK carried out commercial hydrocarbon production at 10 ﬁ elds. Marketable production from all ﬁ elds (including the Company’s share in production of joint ventures) amounted to 456.7 mmboe, representing an increase of 4.0% over the prior year. Total marketable production of natural gas including the Company’s share in production of joint ventures amounted to 62.13 bcm, representing 89% of our total hydrocarbon output. The share of gas produced from the Valanginian layers (or “wet gas”) in proportion to total gas production was 83%. Marketable production of natural gas increased by 1.5% or by 0.9 bcm, as compared to 2013 volumes. The production growth is attributable to the Eastern Dome of the North-Urengoyskoye ﬁ eld, Urengoyskoye and Dobrovols- koye ﬁ elds within the Olympiyskiy license area launched in 2013, Urengoyskoye ﬁ eld within the Samburgskiy license area and the third stage of Samburgskoye ﬁ eld both launched in 2014, as well as the growth of production at Yurkharovskoye ﬁ eld, and the growth of our eﬀ ective share in SeverEnergia from 25.5% in 2013 to 54.9% in 2014. Natural gas production was aﬀ ected by the disposal of the Company’s equity share in Sibneftegas at the end of 2013. Excluding the natural gas produced by Sibneftegas, NOVATEK’s natural gas production increased by 11.3% or by 6.3 bcm. Marketable production of liquid hydrocarbons including the Com- pany’s share in production of joint ventures totalled 6,036 thou- sand tons, of which 81% was unstable de-ethanized gas conden- sate and the remaining 19% consisted of crude oil. Marketable production of liquids increased by 27.0% or 1,285 thousand tons as compared with 2013, whereas crude oil production increased by 55.1% and amounted to 1,168 thousand tons. Gas condensate production growth was due to the launch of the Urengoyskoye ﬁ eld (within the Samburgskiy license area) in 2014, the growth of our eﬀ ective share in SeverEnergia, the launch of the third stage of the Samburgskoye ﬁ eld in 2014, and the launch of Dobrovolskoye ﬁ eld and the Eastern dome of the North-Urengoyskoye ﬁ eld in 2013. The overall increase in crude oil production was mainly due to production drilling eﬀ orts at the East-Tarkosalinskoye ﬁ eld. We continued to achieve some of the lowest lifting costs in the industry (expenses directly related to the extraction and processing of natural gas, gas condensate and crude oil from the reservoir). The Company’s lifting costs were RR 18.9 (USD 0.49) per boe in 2014. Marketable hydrocarbon production (including share in production by joint ventures) Gas Liquid hydrocarbons Total production Units mmcm mmboe mmt mmboe mmboe 2013 61,216 400.4 4,751 38.6 439.0 2014 62,129 406.3 6,036 50.4 456.7 Change 1.5% 27.0% 4.0% ANNUAL REPORT 2014 41 Marketable hydrocarbon production in 2014 (including share in production by joint ventures) Gas, mmcm Liquids, mt Yurkharovskoye (100%) East-Tarkosalinskoye (100%) North-Urengoyskoye (49% from 28 November 2012, 50% from 2 July 2013) ARCTICGAS fi elds (59.8% until 31 March 2014, 54.9% from 1 April 2014) Khancheyskoye (100%) North Khancheyskoye (100%) Urengoyskoye and Dobrovolskoye within the Olimpiyskiy license area (100%) Sterkhovoye (100%) 2013 37,775 10,946 2014 Change 38,154 10,348 1.0% (5.5)% 2,382 5,402 126.8% 1,224 3,256 — 131 106 4,129 237.3% 2,933 (9.9)% 14 — 1,066 713.7% 83 — (21.7)% — 1.5% 2013 2,712 1,094 250 174 483 — 8 30 — 2014 2,496 1,293 Change (8.0)% 18.2% 633 153.2 % 1,063 510.9% 445 (7.9)% — 85 21 — — 962.5% (30.0)% — 4,751 6,036 27.0% Sibneftegas fi elds (51% until 26 December 2013) 5,396 Total 61,216 62,129 Yamal LNG Project The Yamal LNG project envisages the construction of an LNG plant with annual capacity of 16.5 million tons per annum based on the feedstock resources of the South-Tambeyskoye ﬁ eld located in the north-east of the Yamal Peninsula. Yamal LNG is the operator of the project, the license holder and owner of all the assets. At year-end, the shareholder structure comprised NOVATEK (60%), Total (20%) and CNPC (20%). The launch of the ﬁ rst LNG train is planned for 2017. The South-Tambeyskoye field was discovered in 1974 and comprises five (5) shallow gas horizons and 37 deeper gas condensate horizons. The depth of the horizons varies from between 900 to 2,850 meters. The license for exploration and production at the South-Tambeyskoye field is valid until 2045. As of 31 December 2014, the ﬁ eld was estimated to contain 491 bcm of proved natural gas reserves and 14 mmt of proved liquid hydrocarbon reserves, under the SEC reserves methodol- ogy. Based on total proved hydrocarbon reserves, the South- Tambeyskoye ﬁ eld is the largest ﬁ eld in NOVATEK reserves portfolio. According to the PRMS reserves standards, the proved and probable reserves of the South-Tambeyskoye ﬁ eld were ap- praised at 926 billion cubic meters of natural gas and 30 mmt of liquid hydrocarbons. The South-Tambeyskoye ﬁ eld has already been thoroughly studied with a complex of exploration activities, including run- ning 3D seismic and exploration drilling, creation of the ﬁ elds’ geological model and reserves appraisal. The ﬁ eld development plan provides for the drilling of 208 wells at 19 well drilling pads, and the production potential of the ﬁ eld exceeds 27 bcm of natural gas per annum. Natural gas produced at the ﬁ eld will be delivered to the inter- national markets in a form of liqueﬁ ed natural gas, or LNG, which requires the construction of a liquefaction plant consisting of three (3) production trains of 5.5 mmt annual capacity each. The shipping infrastructure will include a jetty with two tanker load- ing berths at the port of Sabetta equipped with ice protection facilities. Ice-class LNG carriers of special Arc-7 design will be used to transport the LNG to international markets. At year-end 2014, 26 production wells were drilled at the South- Tambeyskoye ﬁ eld. Backﬁ lling and piling for the ﬁ rst train of the LNG plant was underway, fabrication of LNG plant modules was contracted and, during the year, the steel cutting was done for the ﬁ rst modules. Casting works for the external concrete walls on two LNG tanks for the plant’s ﬁ rst train were completed as well as rooﬁ ng on the ﬁ rst tank. EPC-contract progress exceeded 20% by the year-end. Steel was cut for the ﬁ rst Arc-7 ice class LNG carriers, and more than 20 million cubic meters of soil were dredged at the approach channel to the Sabetta port. With the opening of the ﬁ rst winter navigation season at the Sabetta port in 2013, the port facilities handled 2.1 million tons of construction materials and equipment (2.6 times more than in 2013) delivered by 95 marine ships and 351 river barges. The ﬁ rst phase of construction at the International Sabetta Airport was ﬁ nalized and the milestone landing of the ﬁ rst Boeing 737 ﬂ ight took place in December 2014. Long-term contracts for more than 95% of LNG volumes were placed as of the year-end and work continued on the external ﬁ nancing. 42 NEW QUALITY OF GROWTH NOVATEK There were approximately 6,800 construction workers and 1,350 construction machinery units at the site as of the year end 2014. Processing of Gas Condensate PUROVSKY PLANT Our subsidiaries and joint ventures are producing wet gas – a mixture of natural gas and gas condensate. After being sepa- rated at the field the unstable (de-ethanized) gas condensate is delivered via a system of condensate pipelines owned by the Company for further stabilization at our Purovsky Plant located in the YNAO in close proximity to the East-Tarkosalin- skoye field. The Purovsky Plant is the central element in our production value chain that provides us complete operational control over our processing needs and access to higher yielding marketing channels for our stable gas condensate. The Purovsky Plant pro- duces stable gas condensate, and light hydrocarbons. Due to the estimated ramp up in gas condensate production, in early 2014 we completed the project for expanding the process- ing capacity of the Purovsky plant from ﬁ ve (5) to 11 million tons. As a result, we have achieved a balance between our gas condensate production potential and processing capacity. Previously, the Purovsky Plant was producing marketable LPG which was shipped to customers by railway. Beginning in the second quarter 2014 all of the light hydrocarbon volumes (feedstock for LPG production) are delivered by pipeline to SIBUR’s Tobolsky Petrochemical Complex for further processing. The agreements executed with SIBUR on supplying the light hydrocarbons to the Tobolsky Petrochemical Complex enabled NOVATEK to reduce costs on expanding the Purovsky Plant capacities by eliminating the need to build additional units for LPG production and additional railway capacities for LPG transportation. Moreover, the railway capacities earlier used for LPG transportation, are currently used for transporting stable gas condensate. UST-LUGA STABLE GAS CONDENSATE TRANSSHIPMENT AND FRACTIONATION COMPLEX The Gas Condensate Fractionation and Transshipment Com- plex located at the all-season port of Ust-Luga on the Baltic Sea (the Ust-Luga Complex) processes stable gas condensate into petroleum products like light and heavy naphtha, jet fuel, fuel oil and gasoil, and enables us to ship the value-added petroleum products to international markets. The Ust-Luga Complex also allows for transshipment of stable gas condensate to exports. The overall gas condensate processing capacity at the Ust-Luga Complex is six (6) million tons per annum. The ﬁ rst stage was launched in June 2013 and the second stage in October 2013. As a result of increasing wet gas production at our ﬁ elds, the de- ethanized gas condensate processing volumes at the Purovsky Plant increased by 35.7% to 6.60 mmt in 2014. The correspond- ing output structure included 5,049 mt of stable gas condensate, 1,032 thousand tons of light hydrocarbons, 339 thousand tons of LPG and 14 thousand tons of regenerated methanol. By the end of 2014, the capacity utilization rate at the Purovsky Plant reached 85%. The Ust-Luga Complex expands our vertically integrated chain and increases sales of higher value added products as well as diversifying the geographical markets and expanding the customer base for our products. The successful implementation of the project also allowed us to improve logistics and reduce transportation costs due to a more favorable geographical loca- tion of Ust-Luga as compared to the port of Vitino, which was previously used for gas condensate exports. The Purovsky Plant is connected via its own railway line to the Russian rail network at the Limbey rail station. Since the launch of the Ust-Luga Complex in June 2013, most of the stable gas condensate volumes produced at the Purovsky Plant are delivered by rail to Ust-Luga for further processing (stable gas condensate was formerly exported via the Port of Vitino). In 2014, the Ust-Luga Complex processed 4,706 thousand tons of stable gas condensate into 4,624 thousand tons of end prod- ucts, including 3,431 thousand tons of light and heavy naphtha, 472 thousand tons of jet fuel and 721 thousand tons of fuel oil and gasoil. By the end of the reporting year, the Ust-Luga Com- plex reached its full design capacity as a result of the processing volumes growth at the Purovsky Plant. Processing volumes and output of the Purovsky Plant, thousand tons Processing of de-ethanized condensate Output: Stable gas condensate Light hydrocarbons Marketable LPG Methanol 2013 4,862 3,712 — 1,088 16 2014 6,600 5,049 1,032 339 14 Change 35.7% 36.0% n/a (68.8)% (12.5)% ANNUAL REPORT 2014 43 Processing volumes and output of the Ust-Luga Complex, thousand tons Stable gas condensate processing Output: Light naphtha Heavy naphtha Jet fuel Gasoil Fuel oil 2013 1,873 686 836 190 25 94 2014 4,706 1,425 2,006 472 179 542 Change 151.3% 107.7% 140.0% 148.4% 616.0% 476.6% Natural Gas Sales During 2014, NOVATEK supplied natural gas to 30 regions of the Russian Federation. Our customers were located primarily in the following regions (with gas sales of more than one (1) bcm per annum per region): Chelyabinsk, Perm, Stavropol, Moscow, Kostroma, Orenburg, Vologda, Sverdlovsk and Tyumen regions, Khanty-Mansiysk and Yamal-Nenets Autonomous Regions, and the cities of Moscow and St-Petersburg. The above-mentioned regions accounted for 96% of our total gas sales. The Com- pany accounted for 18.8% of total natural gas deliveries to the domestic market through the Uniﬁ ed Gas Supply System (UGSS), representing an increase of 0.4 percentage points as compared to 2013. NOVATEK’s 2014 natural gas sales volumes totalled 67.2 bcm, representing an increase of 4.8% as compared to 2013 sales volumes of 64.2 bcm. The growth in sales volumes was due to an increase in natural gas supplies to the Khanty-Mansiysk Au- tonomous Region and the Stavropol Region. Deliveries to these regions increased by 7.7 bcm as compared to 2013 due primarily to higher volumes delivered on existing contracts. During 2014, our total revenues from natural gas sales increased to RR 230.4 billion or by 12.4%, as compared to 2013, due to the combination of higher volumes sold, and an increase in year- average regulated gas prices in 2014 as compared to 2013, and the increase in the share of sales to end-customers. The share of natural gas sales to end customers in 2014 grew by 5.2 percentage points compared to 2013, which is fully in line with the marketing strategy of the Company aimed at diversifying sales, maximizing margins and increasing the stability of our business. In order to maintain production levels during periods of seasonal demand NOVATEK has entered into an agreement with Gazprom for underground storage services. Typically, natural gas inventories are accumulated during warmer periods when demand is lower and then used to meet increased demand during periods of colder weather. As at the end of 2014 our inventories of natural gas in gas storages amounted to 1.0 bcm. Liquid Hydrocarbon Sales NOVATEK sells liquid hydrocarbons (stable gas condensate, petroleum products, light hydrocarbons, LPG and crude oil) domestically and internationally. We strive to respond quickly to changing market conditions by optimizing the customer base and supply geography, as well as developing and maintaining our own logistics infrastructure. Liquid hydrocarbons produced at the Purovsky Plant are trans- ported by rail, products produced at the Ust-Luga Complex are exported by sea, while crude oil is transported through the trunk pipelines owned and operated by Transneft. Total sales volumes of liquid hydrocarbons in 2014 aggregated 7,089 thousand tons, representing a 30.4% increase over 2013 volumes. The growth is attributed to higher processing volumes at the Purovsky Plant and Ust-Luga Complex, and to increased crude oil production. Our export deliveries in 2014 grew by 20.5% to 5,287 thousand tons. Liquids sales revenues in 2014 increased to RR 125.2 billion, or by 35.3%, as compared to 2013. Revenue growth was mainly driven Natural gas sales, bcm Total gas sales, including: end customers traders Share of end-customers in total gas sales 44 NEW QUALITY OF GROWTH 2013 64,152 57,021 7,131 88.9% 2014 67,231 63,281 3,950 94.1% Change 4.8% 11.0% (44.6)% 5.2 p.p. NOVATEK by the increase in sales volumes as well as the growth of the share of higher value added products. the remaining part is sold to SIBUR. In the reporting year, sales of light hydrocarbons to SIBUR amounted to 504 thousand tons. As a result the launch of the Gas Condensate Fractionation and Transshipment Complex in the port of Ust-Luga in 2013 the Company ceased export deliveries of stable gas condensate and started exporting naphtha, jet fuel, fuel oil and gasoil. During 2014, stable gas condensate sales volumes decreased by 85.7% to 303 thousand tons with all the volumes sold on the domestic market. Petroleum product sales volumes grew by 2.8 times to 4,438 thousand tons, and their share in total liquids sales increased to 62.6% as compared to 29.5% in 2013. We sold 3,319 thousand tons of naphtha, 433 thousand tons of jet fuel, 686 thousand tons of fuel oil and gasoil. Sales to Asian-Paciﬁ c region accounted for 46.9% of total product sales volumes, 40.6% were sold to the European markets and 12.5% to North and South America. Naphtha was mainly exported to the Asian- Paciﬁ c countries, while jet fuel, fuel oil and gasoil was shipped to North-Western Europe. The replacement of stable gas condensate exports by the sales of petroleum products with higher value added margins posi- tively impacted the ﬁ nancial results of the Company. From the second quarter 2014 the LPG sales scheme changed – we started delivering all the volumes of light hydrocarbons (feedstock for marketable LPG production) produced at the Purovsky Plant to SIBUR’s Tobolsky Petrochemical Complex. A portion of these volumes is processed at the Tobolsky Petro- chemical Complex into marketable LPG on tolling terms, while LPG sales volumes totaled 930 thousand tons in 2014, repre- senting a decrease of 13.7% compared to 2013. The start of LPG deliveries from SIBUR’s Tobolsky Petrochemical Complex allowed us to reduce per-unit transportation costs due to a more favor- able geographical location of the Tobolsky Complex compared to the Purovsky Plant. In 2014, LPG export sales volumes amounted to 559 thousand tons or 60.1% of the total LPG sales volumes. Novatek Pol- ska, our wholly owned LPG trading company in Poland, sold 355 thousand tons of LPG, representing 63.5% of our total LPG export sales. Other export markets for LPG were Finland, Hungary, Lithuania, Slovakia and Romania. On the domestic market, our LPG is sold through large whole- sale channels, as well as through our network of retail and small wholesale stations. In 2014, large wholesale supplies to the domestic market were 244 thousand tons, representing 26.2% of total LPG sales volumes. We were also selling LPG via the net- work of 63 retail stations and seven (7) small wholesale stations in Chelyabinsk, Volgograd, Rostov and Astrakhan regions. The total amount of LPG sold through our domestic network of retail and small wholesale stations increased to 126 thousand tons or by 16.6% as compared to 2013. Sales of crude oil in 2014 totaled 903 thousand tons, represent- ing a 44% increase over 2013 volumes. We sold 65% of our crude oil volumes on the domestic market with the remaining volumes supplied to export markets. Liquid hydrocarbon sales, thousand tons Petroleum products (Ust-Luga) LPG Crude oil Light hydrocarbons Stable gas condensate Other Total 2013 1,606 1,078 627 0 2,117 10 5,438 2014 4,438 930 903 504 303 11 7,089 Change 176.3% (13.7)% 44.0% n/a (85.7)% 10.0% 30.4% ANNUAL REPORT 2014 45 ENVIRONMENTAL AND SOCIAL RESPONSIBILITY NOVATEK adheres to the principles of eﬀ ective and responsible business conduct and considers the welfare of its employees and their families, environmental and industrial safety, the creation of a stable and beneﬁ cial social environment as well as contributing to Russia’s overall economic development as priorities and responsi- bilities of the Company. Environmental Protection NOVATEK’s core producing assets are located in the Far North, a harsh Arctic region with vast mineral resources and a fragile and vulnerable environment. Throughout all of its operations the Company is committed to environment protection. In 2014 environmental expenditures of NOVATEK, its subsidiaries and joint ventures amounted to RR 637 mln. NOVATEK has implemented an Environment, Health and Safety Policy and all of the Company’s principal subsidiaries and joint ventures operate an Integrated Health, Safety and Environment Management System (IMS) that comply with the international ISO 14001:2004 and OHSAS 18001:2007 standards. In 2014, NOVATEK successfully passed another IMS compliance audit. In our HSE activities we pay special attention to preventive measures. In particular, the environmental aspects are taken into account in designing new production facilities: cutting-edge tech- nology and equipment are used to considerably reduce the adverse environmental impact and risk of environmental accidents. The Company builds new and upgrades its existing waste disposal sites, equips its facilities with state-of-the-art oil sludge treatment units, sets up new sewage treatment facilities and revamps older ones. Environmental monitoring was performed throughout 2014 at all of the license areas and production facilities of the Company. The monitoring process includes surveys into the condition of environment components and collecting samples of soil, ground, water, and river bed deposit. Plants, animals, and microorganisms that share the same habitats are checked. Air contamination level is inspected. The status of fish stock and fodder resources in water areas is studied as are hydrologic and hydrochemical parameters. The samples taken are later tested in certified laboratories, and based on the laboratory analysis the condition of the natural environment components is assessed and trends are observed over the year. The monitoring revealed that the natural environment components in the monitored locations were predominantly in a good condition. The Company systemically works to decrease harmful green- house gas emissions into the environment. In 2014, the Program for Rational Use of Associated Petroleum Gas enabled us to reach a 96% petroleum gas utilization rate at the Samburgskoye ﬁ eld and 95% at the East-Tarkosalinskoye ﬁ eld. In the reporting year, the Company continued its participation in the Carbon Disclosure Project (CDP) whereby information on greenhouse gas emissions and operational energy eﬃ ciency is disclosed. We also disclose data on the use of water resources as part of the CDP Water Disclosure Project. By taking part in these projects the Company intends to achieve a balance between the climate change risks and eﬃ ciency of investment projects. The Company oﬀ ers all stakeholders full access to its environmental information, including by publications in federal and local media, its website, etc. The Heritage Environmental Damage Remediation Program included actions to remediate land, surface and ground water and treat drilling sludge. In order to preserve biodiversity when developing our Yarudeyskoye oil ﬁ eld, we released muksun young ﬁ shes into the Ob-Irtysh basin rivers. One of the Company’s environmental priorities is the rational 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, its subsidiaries and joint ventures in 2014. Key Environmental Indicators of NOVATEK, its subsidiaries and joint ventures Water consumption Atmosphere emissions Unit th. cubic meters th. tons 2013 1,425 29.4 2014 1,347 51.4 Change (5.5)% 74.8%* * The increase is due to commissioning of the stable gas condensate transshipment and fractionation complex at the port of Ust-Luga, third stage of the Purovsky Gas Condensate Stabilization Plant, Eastern Dome of the North-Urengoyskoye ﬁ eld, Urengoyskoye ﬁ eld within the Samburgskiy license area, as well as third stage of the Samburgskoye ﬁ eld. 46 NEW QUALITY OF GROWTH NOVATEK Energy Resource Consumption by NOVATEK, its subsidiaries and joint ventures in 2014 Natural gas Electricity Heating energy Oil Motor gasoline Diesel fuel Other Units mmcm MW*h Gcal tons tons tons tons Volume RR mln, net of VAT 1,219 449,461 257,880 2,218 861 3,403 2,060 1,377.1 1,351.4 294.0 7.2 37.5 123.7 10.8 Health and Safety Our strategic goal is to achieve a leading position amongst oil and gas companies on all key indicators in terms of Occupa- tional Health and Safety. In order to accomplish this goal, the Company continually updates its IMS, improves employees’ qualiﬁ cation and applies advanced technologies. In accordance with the requirements of the federal law «On Industrial Safety of Hazardous Production Facilities» and «Rules on the Organization and Implementation of Industrial Control for Compliance with Requirements of Industrial Safety at Hazardous Production Facilities» all of our subsidiaries have developed their own rules for the organization and implementation of industrial control for compliance with these requirements. We have also established industrial control compliance commissions, which carry out periodic audits of departments and production facili- ties to comply with the HSE requirements. Workplace certiﬁ cation includes evaluating measures to control the harmful impact of hazardous factors in the workplace. Mea- sures on improving working conditions are developed on the basis of the results of the certiﬁ cation process. In the reporting year, we certiﬁ ed 2,554 operating workplaces. No workplaces with unacceptable working conditions were identiﬁ ed. In 2014, the NOVATEK commission continued comprehensive inspections of NOVATEK subsidiaries for occupational health, industrial, ﬁ re and environmental safety requirements. In the course of comprehensive inspections, occupational health, industrial, ﬁ re and environmental safety control systems are audited for compliance with international standards. In the re- porting year, NOVATEK’s commission performed comprehensive inspections of 11 entities, and, as a result, internal documents have been developed to address the violations noted. All NOVATEK’s subsidiaries and joint ventures conduct safety training and all types of brieﬁ ngs; personnel training and de- velopment programs are oﬀ ered, among others, by specialized training centers, and a proper knowledge assessment system is in place. Due to changes in the number of legislative and regula- tory acts of the Russian Federation, extra knowledge tests were organized in all entities and 4,880 employees underwent HSE training courses. In 2014, the ﬁ nancing of Occupational Health and Safety amounted to 168 million rubles. Human Resources Employees are NOVATEK’s most valuable resource, allowing the Company to grow rapidly and eﬀ ectively. The Company’s human resource management system is based on the principles of fair- ness, respect, equal opportunities for professional development, dialogue between management and employees, as well as continuous, comprehensive training and development opportu- nities for the Company’s employees at all levels. As of the end of 2014, NOVATEK and its subsidiaries had a total of 6,749 employees, of which 38.0% work in exploration and production, 18.6% in processing, 28.7% in transportation and marketing, 5.9% in power supply with the remaining 8.8% classiﬁ ed as administrative personnel. The middle-aged group (25–44 years) prevails in the structure of NOVATEK’s personnel, with the average age of 39 years. Key Health and Safety Indicators of NOVATEK, its subsidiaries and joint ventures Injury frequency rate (number of injuries per million working hours) Accident severity rate (total number of employee working hours lost per accident / number of accidents) 2013 0.41 922 2014 0.41 51 Change 0% (94.5)% ANNUAL REPORT 2014 47 PERSONNEL TRAINING AND DEVELOPMENT In an environment of rapidly developing technologies and management systems, our multilevel training and professional development program enables our employees to contribute to raising the Company’s competitiveness. In 2014, the primary goals of training and professional development included: ■ implementing a program aimed at providing the Company with a talent pool of senior managers; ■ implementing the “Steps in Discovering Talents” program for young specialists targeted at training highly qualiﬁ ed personnel whose competence level fully meets business needs; ■ implementing the “Technical Training” program based on the results of tests in the Corporate Technical Competency Assessment System for various lines of business; and ■ involving young specialists in NOVATEK’s “Research-to- Practice Conference”. Ten of the Company’s top managers continued participating in training activities aimed at developing a common understand- ing of the goals and strategy of NOVATEK in order to prepare for higher level positions within the Company. During 2014, Higher School of Management (on the base of the Higher School of Economics in Moscow) provided training program for managers, the main goal of the program is to systematize participants’ knowledge of management principles of an oil and gas company. The managers took part in the following training courses: “Personal Eﬀ ectiveness and HR”, “Project Management”, “Principles of Financial Management”, “Decision Making and Management of Oil and Gas Resources: International and Russian Practices”. The training was completed by presenting individual projects to the Company`s senior management. In 2014, NOVATEK continued its eﬀ orts to enhance employee skills, improve working conditions and ensure a safe environ- ment at its production facilities. During the reporting year, 36.9% of our specialists and line workers have upgraded their respec- tive qualiﬁ cations, and 68% of the Company’s engineers and technicians completed employee certiﬁ cation and industrial safety courses. Specialized training courses for employees of production divi- sions under the Technical Training Program were conducted at the Gubkin State University, the Petroleum Education Center at Tomsk Polytechnic University, Petersburg Engineering Institute of Professional Development, NExT Schlumberger educational center and other centers. In 2014, 183 employees underwent training under the program. During 2014, 231 people were tested under the Corporate Tech- nical Competency Assessment System, including 39 people dur- ing the hiring process to ﬁ ll vacant positions and 104 employees promoted to more senior positions. In 2014, we had our second class of graduates of “Steps in Discovering Talents” program, whereby 20 young specialists participated in training activities. By the autumn of 2014, 33 new young specialists joined the program. In 2014, for the ﬁ rst time young specialists participated in the «Mentoring Culture» training courses together with the mentors. In total, 15 mentors attended the training. The 9th Interregional Research-to-Practice Conference for the Company’s young specialists attended by 58 employees was held in Moscow in September 2014. Based on the results of the competition, all of the winners received cash prizes, while ﬁ fteen (15) prize-winners, who were nominated in the “Best Implement- ed Project” category, were oﬀ ered to study in the international oil and gas training centers in the UAE and Qatar. SOCIAL PROGRAMS Employee relations primary focus is on implementing social programs, and according to the Core Concept of the Company’s social policy which was adopted in 2006, the social beneﬁ ts package for employees includes the following programs: ■ voluntary medical insurance for employees; ■ therapeutic resort treatment for employees and members of their families; ■ provision of special-purpose short-term loans; ■ special-purpose compensation and social support payments; ■ provision of special-purpose interest-free loans to purchase housing, and ■ pension program. Along with providing an optimum social beneﬁ ts package, the Company is also committed to creating opportunities for employees to play sports and get involved in sports and cultural events. In 2014, our employees and their family members visited exhibitions at Russia’s national museums, classical music con- certs, 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 and corporate maga- zine “NOVATEK Plus” to inform employees about the Company’s activities and get employees, specialists and managers actively involved in business, cultural, sports, charitable and corporate activities. Social Policy and Charity NOVATEK attaches considerable importance to social policy and charity. The Company pays close attention to projects intended to support culture, preserve and revive the national values and intangible legacy of Russia, promote and integrate Russian art in the international cultural space, as well as advance “sports for all” and “high-performance sports”. NOVATEK enters into agreements with local regional governments where it operates and imple- ments programs to facilitate improvement in local populations’ living standards and preserve the distinctive cultural identity of the Far North indigenous peoples. 48 NEW QUALITY OF GROWTH NOVATEK In 2014, NOVATEK and its subsidiaries directly invested 727 mil- lion rubles in charitable, cultural and educational projects and activities to support the Far North indigenous peoples. COOPERATION WITH THE REGIONS During the year, the Company was investing funds in the Yamal-Nenets Autonomous District, the Leningrad, Chely- abinsk, Tyumen, and Samara Regions under social agree- ments reached with regions where the Company maintains operations. The Company conducted children and youth educational programs, provided support to low-income families and allocated funds for repairs and upgrades of social infrastructure facilities. COOPERATION WITH INDIGENOUS PEOPLES OF THE FAR NORTH NOVATEK provided ﬁ nancial support to the “Yamal for Descen- dants” association and its district branches. We assisted indig- enous peoples through ﬁ nancing arrangements for purchasing equipment and goods required by ﬁ shermen and reindeer herdsmen, as well as fuel for air delivery of the nomadic popula- tion and food in remote areas. In particular, the Company provided the following sponsorship in 2014: ■ “The Association of Minority Indigenous Peoples of the Far North, Siberia, and Far East of the Russian Federation” – information and legal services, training and educational workshops, and printed media; ■ Nadym District – purchase of a hovercraft to transport people across the Nadym river during transitional seasons; ■ Tazovsky District – construction of the road to transport products from the cold storage facility in the village of Gyda to the bank of the Yuntose river; and ■ Yamal District – ﬁ nancial aid to the persons among the indigenous people of the North who faced various hardships. EDUCATIONAL PROGRAMS NOVATEK continued to develop and support the Company’s continuing education program, which provides opportunities to gifted students, from the regions where we operate, to further their education at top rated universities, participate in NOVATEK internships and, upon completion of their studies, possible employment with the Company. Recruitment and career guidance for promising employees start with the “Gifted Children” program implemented at School No. 8 in Novokuybyshevsk and School No. 2 in Tarko-Sale. Special classes are formed on a competitive basis from the most talented grade 10 and 11 students with above-average test scores. The Company also implemented two “Grants” programs for school- children and teachers living in Purovsky District of the YNAO. The “Grants” program for schoolchildren is aimed at academic and creative development and encouraging a responsible at- titude towards studies. Under the program, students in grades ﬁ ve (5) through 11 are awarded grants from the Company. In 2014, the Company awarded 56 grants to students under this program. The “Grants” program for teachers is intended to raise the prestige of the teaching profession and create favorable conditions for developing new and talented teachers. In 2014, four (4) teachers from the Purovsky District received grants under this program. In an eﬀ ort to create conditions for more eﬀ ective use of univer- sity and college resources in preparing students for future pro- fessional 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 education 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 National Mineral Resources Univer- sity (University of Mines), 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 stud- ies, the students are oﬀ ered paid ﬁ eld, engineering and directed internships. This experience allows them to apply the knowledge obtained at lectures and seminars to real-life situations and gain experience in the professions they have chosen, while the Com- pany receives an opportunity to meet potential employees. SUPPORT OF CULTURAL TRADITIONS The strengthening of partnership relations between the Com- pany and Russia’s leading cultural and educational institutions, creative groups and charity funds continued in 2014, namely the Russian State Museum (St.Petersburg), the Moscow Kremlin Mu- seum, the Multimedia Art Museum (Moscow House of Photogra- phy), the Moscow Museum of Modern Art, the State Hermitage Museum (St.Petersburg). In 2014, NOVATEK continued its partnership with the Imperial Gardens of Russia, an annual international festival organized by the Russian State Museum, as well with “Manifesto 10” European biennial of contemporary art held in St. Petersburg. Supported by NOVATEK, the Multimedia Art Museum hosted such exhibi- tions as “Arkady Shaikhet. Photographs 1932-1941”, “Arctic” (as part of “Days of the Arctic in Moscow” festival), “New Orleans in Photography”, and “Vsevolod Tarasevich. Episode 2. Lenin- grad”. The Company’s support enabled the Moscow Museum of Modern Art to hold the “Detective” exhibition with works by contemporary Russian artists created through the prism of the popular literary genre. In 2014, NOVATEK became a partner of a major cultural event, the “MONUMENTA” modern art exhibition. Grand Palais (Paris, France), one of Europe’s leading cultural and exhibition centers, hosted the exhibition that featured the works of internationally celebrated Russian-born conceptual artists Ilya and Emilia Kabakov. ANNUAL REPORT 2014 49 Another landmark cultural event of 2014 was the “2.0” exhibi- tion co-organized by NOVATEK, the Multimedia Art Museum and the Moscow Museum of Modern Art and dedicated to NOVATEK’s 20th anniversary. The exhibition featured works by contemporary artists and photographers that looked into the evolution of Russian art in the 1990s and 2000s. The exhibi- tion toured all of the regions where the Company operates, namely Novy Urengoy, Kostroma, Tyumen, Chelyabinsk, and Samara. In 2014, NOVATEK supported the “Week of American dance” project of the Moscow Music Theatre of Stanislavsky and Nemirovich-Danchenko. During ﬁ ve evenings dancing groups from the United States headed by Azure Barton and Shen Wei gave performances for Russian audience. NOVATEK also continued as a General Partner of the Moscow Soloists Chamber Ensemble led by Yuri Bashmet. NOVATEK supported a European tour of the Russian Youth Symphony Orchestra during which they visited Geneva, Brussels, and Paris. To celebrate its 20th anniversary the Company organized concerts by the Moscow Soloists Chamber Ensemble in Moscow, Kostroma, Chelyabinsk, and Novy Urengoy. SPORTS PROJECTS NOVATEK continued its support for popular and high-level sports programs. The Company, its subsidiaries and joint ventures orga- nize regular tournaments in the most popular sports, including soccer, volleyball, swimming to name a few. The Company is the General Partner of the NOVA Volleyball Team (Novokuybyshevsk). In 2014, NOVATEK also was a General Partner of the Russian national football team. In 2014, the Company supported the Rus- sian Federation of acrobatic rock ‘n’ roll and Student Basketball Association. CHARITY The Company continued its cooperation with Chulpan Khama- tova’s Gift of Life charitable foundation in 2014. Jointly with the foundation, NOVATEK held two sessions at its Moscow head- quarters during which the Company employees donated blood for the children treated in the Russian Children’s Clinical Hospital. The All Together volunteer movement founded in 2008 carried on with its activities. The movement focuses on supporting orphans, children with various diseases, and the elderly as well as promoting blood donation. 50 NEW QUALITY OF GROWTH NOVATEK MANAGEMENT AND CORPORATE GOVERNANCE Corporate Governance NOVATEK strives to commit to the highest standards of corpo- rate 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 Com- pany’s operations. The Company has established an eﬀ ective and transparent sys- tem of corporate governance complying with both Russian and international standards. NOVATEK’s supreme governing body is the General Meeting of Shareholders. The corporate governance system also includes the Board of Directors, the Board Com- mittees, and the Management Board, 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 Federation, NOVATEK’s Charter and internal documents available on our website (ww.novatek.ru). NOVATEK strives to consider the principles of corporate gov- ernance outlined in the Corporate Governance Code recom- mended by the Central Bank of Russia (Information Letter № 06-52/2463 dated 10 April 2014). The Company follows the recommendations of the Code, as well as oﬀ ering to our shareholders and investors other solutions that are intended to protect their rights and legitimate interests. Since the Company’s shares are listed on the London Stock Ex- change 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 December 2005). This Code has been elaborated on in accordance with best Russian and international practices in corporate governance, ethical norms and speciﬁ c conditions of the Company’s operations and in accordance with Russian legislation and the Company’s Charter. 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 Directors, Management Board and Revision Commission, as well as NOVATEK’s management and employees, which were elaborated on the basis of moral and ethical values and profes- sional standards. The Code also determines the rules which govern mutual relationships inside the Company and NOVATEK’s relationships with its subsidiaries and joint ventures, sharehold- ers, investors, the government and public, consumers, suppliers, and other stakeholders. In order to increase the eﬀ ectiveness of the Company’s corpo- rate governance system and bring it into compliance with the new requirements of the Russian legislation, the new listing rules of Moscow Stock Exchange and the Corporate Governance Code following changes were made in the reporting year: ■ the General Meeting of Shareholders held on 18 April 2014 approved amendments to the Charter, the Regulations on the General Meeting of Shareholders and the Board of Directors; ■ the Board of Directors held on 18 April 2014 elected the members of the Audit Committee, the Remuneration and Nomination Committee and the Strategy Committee (previously the committees included the Audit Committee, the Strategy and Investment Committee, the Corporate Governance and Remuneration Committee), and inaugurated a Corporate Secretary position; ■ the Board of Directors held on 28 April 2014 approved the Regulations on the Board of Directors’ Committees, the Regulations on the Corporate Secretary, and the Regulations on Dividend Policy; ■ the Board of Directors held on 1 September 2014 approved the Regulations on the Risk Management System and Internal Control, and the Anti-corruption Policy. NOVATEK’s corporate governance practices make it possible for its executive bodies to eﬀ ectively manage ongoing operations in a reasonable and good faith manner and solely to the beneﬁ t 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 Share- holders is governed by the laws of the Russian Federation, the Company’s Charter, and the Regulations on the General Meet- ings approved by NOVATEK’s General Meeting of Shareholders in 2005 (Minutes No. 95 of 28 March 2005) with further alterations and amendments. The General Meeting of Shareholders is responsible for the approval of annual reports, annual ﬁ nancial statements, the distribution of proﬁ t, 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 18 April 2014, the Annual General Meeting of Shareholders approved the annual report, annual ﬁ nancial statements (in ac- ANNUAL REPORT 2014 51 cordance with the Russian Accounting Standards), distribution of proﬁ t and the size of dividends based on the results of FY2013, amendments to the Charter, to the Regulations on the General Meeting of Shareholders and the Regulations on the Board of Directors. The meeting also elected the Board of Directors and the Revision Commission, as well as approved remuneration to members of the Board of Directors, Revision Commission and the Company’s external auditor for 2014. On 14 October 2014, the Extraordinary General Meeting of Shareholders approved the amount of interim dividend for the ﬁ rst half of 2014. participate in the Board meetings and make balanced decisions in a timely manner. In order to support eﬃ cient operation of the Board of Directors the Corporate Secretary position was inaugurated in the reporting year. The Secretary has suﬃ cient independence (appointed and dis- missed by the Board of Directors) and endowed with the necessary powers and resources to carry out its tasks in accordance with the Regulations on the Corporate Secretary. The Corporate Secretary appointed by the Board of Directors in 2014 has the knowledge, expertise and skills suﬃ cient to perform assigned duties. Board of Directors The Board of Directors (the Board) activity 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 further alterations and amendments. The Board carries out the overall strategic management of the Company’s activity on behalf of and in the interests of all its shareholders, and ensures the Company’s eﬃ cient 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 ﬁ nancial performance, internal control, risk management and other matters within its competence, including optimization of corporate and capital structure, approval of major transac- tions, making decisions on investment projects and recom- mendations on the size of dividend per share and its payment procedure, 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 18 April 2014. The Board of Directors is comprised of nine (9) members, of which eight (8) are non-executive directors. Three (3) directors are considered to be independent as at the election date in accordance with the Corporate Governance Code recommended by the Central Bank of Russia and the UK Financial Reporting Council’s Combined Code on Corporate Governance. The Board Chairman is Alex- ander E. Natalenko. The Chairman is responsible for leading the Board and ensuring its eﬀ ectiveness. The members of NOVATEK’s Board have a wide range of ex- pertise as well as signiﬁ cant experience in strategic, ﬁ nancial, commercial and oil and gas activities. The Board members hold regular meetings 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 discus- sions to ensure regular exchange of information they need to THE BOARD OF DIRECTORS MEMBERSHIP AS OF 31 DECEMBER 2014: ■ Alexander E. Natalenko – Chairman of the Board ■ Andrei I. Akimov ■ Burckhard Bergmann ■ Yves-Louis Darricarrère ■ Vladimir A. Dmitriev ■ Leonid V. Mikhelson ■ Victor P. Orlov ■ Gennady N. Timchenko ■ Andrei V. Sharonov On 18 April 2014 the following changes took place in the Board of Directors membership: Mark A. Gyetvay and Kirill G. Seleznev ceased their Board membership, and independent directors Vic- tor P. Orlov and Andrei V. Sharonov joined the Board. BOARD ACTIVITIES DURING THE 2014 CORPORATE YEAR1 To ensure the Company’s eﬃ cient performance, the Board meet- ings shall be convened on a regular basis at least once every two months. In corporate year 2014, the Board met eight (8) times, of which four (4) meetings were held in absentia. The following key issues were discussed and respective decision made: ■ reviewed and approved the Company’s 2014 full year operating and ﬁ nancial results; ■ recommended an interim dividend for ﬁ rst half 2014, based on interim ﬁ nancial results for the period, and a full year dividend for 2014, based on full year ﬁ nancial results; ■ reviewed and approved NOVATEK’s business plan for 2015; ■ approved the following internal documents: — the Regulations on the Audit Committee of the Board of Directors; — the Regulations on the Remuneration and Nomination Committee of the Board of Directors; — the Regulations on the Strategy Committee of the Board of Directors; — the Regulations on Dividend Policy; — the Regulations on the Corporate Secretary; — the Regulations on Risk Management and Internal Control System; — the Anti-corruption Policy. 1 From the date of election on 18 April 2014 until the Annual General Meeting of Shareholders on 24 April 2015. 52 NEW QUALITY OF GROWTH NOVATEK Board and Committee Meetings Attendance in the 2014 Corporate Year Member Independence Alexander E. Natalenko Andrei I. Akimov Burckhard Bergmann independent * Yves-Louis Darricarrère Vladimir A. Dmitriev Leonid V. Mikhelson Victor P. Orlov Andrei V. Sharonov Gennady N. Timchenko executive independent * independent * Board of Directors Audit Committee Remuneration and Nomination Committee Strategy Committee 8/8 8/8 8/8 8/8 7/8 8/8 8/8 8/8 8/8 5/5 5/5 5/5 4/4 4/4 4/4 4/4 4/4 4/4 3/4 4/4 4/4 3/4 * Independent Director as at the election date in accordance with the Corporate Governance Code recommended by the Central Bank of Russia and the UK Financial Reporting Council’s Combined Code on Corporate Governance. Board Committees The Company has three Board Committees: the Audit Committee, the Strategy Committee and the Remuneration and Nomina- tion Committee. The Committees’ activities are governed by the Committees Regulations approved by the Board of Directors and available on our website. The Committees play a vital role in ensuring that the high standards for corporate governance are maintained throughout the Company and that speciﬁ c decisions are analyzed and the necessary recommendations are issued prior to general Board discussions. The minutes of the Committees 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 Committees may request information or documents from members of the Company’s ex- ecutive bodies or heads of the Company’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. STRATEGY COMMITTEE The primary functions of the Strategy Committee are the deter- mination of strategic objectives of the operations and control over the implementation of the strategy, as well as recommen- dations on the dividend policy. In carrying out its responsibilities and assisting the members of the Board in discharging their duties, the Strategy Committee is responsible for but not limited to: ■ evaluating the eﬀ ectiveness of the Company’s operations in the long-term; ■ preliminarily reviewing and making recommendations on the Company’s participation in other organizations; Committees membership as of 31 December 2014: Audit Committee Strategy Committee Remuneration and Nomination Committee Chairman Andrei V. Sharonov Alexander E. Natalenko Victor P. Orlov Deputy Chairman Victor P. Orlov Victor P. Orlov Andrei V. Sharonov Members Burckhard Bergmann Andrei I. Akimov Burckhard Bergmann Yves-Louis Darricarrère Vladimir A. Dmitriev Gennady N. Timchenko Burckhard Bergmann ANNUAL REPORT 2014 53 ■ assessing voluntary and mandatory oﬀ ers to acquire the Company’s securities; ■ considering the ﬁ nancial model and business valuation of the Company and its business segments in order to make recommendations to the Board of Directors in making decisions on the deﬁ nition of business priorities of the Company; ■ providing recommendations to the Board of Directors on transactions subject to approval by the Board of Directors; and ■ providing recommendations to the Board of Directors with respect to the Company’s policy on the use of its non-core assets. In corporate year 2014, the Strategy Committee met four times. REMUNERATION AND NOMINATION COMMITTEE The primary functions of the Remuneration and Nomination Committee is development of an eﬃ cient and transparent com- pensation practice of members of the Company’s management, enhancement of the professional expertise and improvement of the Board of Directors’ eﬀ ectiveness. In order to assist the Board, the Committee performs the follow- ing functions: ■ develop and regularly review the Company’s policy on remuneration of the members of the Board of Directors, members of the collective executive body and the sole executive body of the Company, oversee its implementation and realization; ■ preliminarily assess the work of the executive body of the Company for the year in accordance with the Company’s remuneration policy; ■ assess the Board of Directors in terms of professional expertise, experience, independence and involvement of its members in the work of the Board of Directors, determine the priority areas for strengthening the Board of Directors; ■ interact with shareholders in order to form the Board of Directors that best meets the goals and objectives of the Company; and ■ plan appointments of members of the executive body and the sole executive body on the base of continuity principles. In corporate year 2014, the Remuneration and Nomination Com- mittee met four times. AUDIT COMMITTEE The primary function of the Audit Committee is control over ﬁ nancial and operating activities of the Company. In order to assist the Board in performing control functions the Committee is responsible for but not limited to evaluating accuracy and completeness of the Company’s full year ﬁ nancial statements, the candidature of the Company’s external auditor and the auditor’s report, the eﬃ ciency of the Company’s internal control procedures and risk management system. The Audit Committee works actively with the Company’s executive bodies, inviting NOVATEK’s managers responsible for the preparation of the financial statements to attend the Committee meetings. In corporate year 2014, the Audit Committee met ﬁ ve times. Management Board NOVATEK’s Management Board is a collegial executive body responsible for the day-to-day management of the Company’s operations. The Management Board is governed by the laws of the Russian Federation, NOVATEK’s Charter, decisions of the General Meetings of Shareholders and the Board of Directors and by other internal documents. More information regarding the Manage- ment Board’s competence is provided in the Regulations on the Management Board approved by NOVATEK’s General Meeting of Shareholders in 2005 (Minutes No. 95 of 28 March 2005). Members of the Management Board are elected by the Board of Directors from among the Company’s key employees. The Man- agement Board is subordinated to the Board of Directors and the General Meeting of Shareholders. Chairman of the Manage- ment Board is responsible for leading the Board and ensuring its eﬀ ectiveness as well as organizing the Management Board meetings and implementing decisions of the General Meeting of Shareholders and the Board of Directors. The Management Board acting as of 31 December 2014 is comprised of eight members elected by the Board of Directors on 30 August 2012 (Minutes No. 150 of 30 August 2012). MANAGEMENT BOARD MEMBERS AS OF 31 DECEMBER 2014: ■ Leonid V. Mikhelson – Chairman ■ Vladimir A. Baskov – Deputy Chairman ■ Mark A. Gyetvay – Deputy Chairman ■ Tatyana S. Kuznetsova – Deputy Chairman – Director of Legal Department ■ Iosif L. Levinzon – Deputy Chairman ■ Mikhail V. Popov – First Deputy Chairman – Commercial Director ■ Alexander M. Fridman – Deputy Chairman ■ Kirill N. Yanovskiy – Director for Finance and Strategy Remuneration to Members of the Board of Directors and Management Board The procedure for and criteria of calculating remuneration to members of NOVATEK’s Board of Directors, as well as the com- pensation 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 members of NOVATEK’s Management Board, as well as the compensation of their expenses, are prescribed in the Regulations for the Management Board and the employment contracts they sign with the Company. 54 NEW QUALITY OF GROWTH NOVATEK Information on Remuneration of Members of NOVATEK’s Board of Directors and Management Board in 2014, RR mln Total paid, including: Salaries Bonuses Fees Other property advancements Board of Directors1 Management Board 106.0 — — 106.0 — 1,662.9 504.1 1,135.7 — 23.1 Internal Control and Audit The Company has a system of internal control over ﬁ nancial and business operations in accordance with international best practices. The process of internal control is an integral part of the risk management process. The system of internal control consists of the Board of Directors, the Audit Committee, the Chairman of the Management Board, the Management Board, the Revision Commission and the Internal Audit Division. The objects of internal control are OAO “NOVATEK”, its subsidiar- ies and joint ventures, and their subdivisions, as well as their ongoing business processes. In accordance with the Corporate Governance Code recom- mended by the Central Bank of the Russian Federation (Informa- tion Letter № 06-52/2463 dated 10 April 2014) at the meeting held on 1 September 2014 the Board of Directors approved the Anti-corruption Policy and the Regulations on the Risk Manage- ment System and Internal Control establishing goals, objectives, limitations and internal control principles (Minutes No. 170 of 01 September 2014). As part of the Anti-corruption Policy the Company established a “Hot Security Line”. The measures taken are aimed at ﬁ ghting corruption, reducing the regulatory, opera- tional and reputational risks for the Company. REVISION COMMISSION Revision Commission consisting of four members is elected at the Annual General 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 Companies No. 208-FZ dated 26 December 1995 as well as the Company’s Char- ter and the Regulations on the Revision Commission approved by the General Meeting of Shareholders in 2005 (Minutes No. 95 of 25 March 2005). The Revision Commission is an internal control body responsible for oversight of the Company’s ﬁ nancial and business activities. The Revision Commission audits the Company’s ﬁ nancial and business performance for the year, as well as for any other period as may be decided by its members or other persons authorized in accordance with Russian Federation law and the Company’s Charter. The results are presented in the form of ﬁ ndings by the Revision Commission. In March 2015, the Revision Commission completed the on-site audit revision of ﬁ nancial and business activity of the Company for the year 2014. As a result, the conclusions about the reliability of the data contained in the Company’s 2014 Financial Statements and Annual Report were prepared and submitted to the Annual General Meeting of Shareholders. INTERNAL AUDIT DIVISION In order to conduct a systematic, independent evaluation of the reliability and eﬀ ectiveness of the risk management and internal control system as well as corporate governance practices the Company carries out internal audit. The internal audit function is implemented by the independent Internal Audit Division, which has operated continuously since 2005. The Internal Audit Division is functionally subordinate to the Board of Directors and is guided by International professional internal audit standards of Institute of Internal Auditors. The Division carries out its activities on the basis of a strategic plan of inspections approved by the Audit Committee and uses a combination of risk-based and cyclic approaches. According to the results of inspections it develops measures to eliminate identiﬁ ed risks and optimize ﬁ nancial and business activities. To improve the eﬃ ciency and optimize the costs the Internal Audit Division employees serve on the revision commissions of subsidiaries and joint ventures. In March 2015, the Audit Committee considered the report on the activities of the Internal Audit Division in 2014. The members of the Audit Committee unanimously resolved that the results of the Internal Audit Division activities were positive. 1 Some members of NOVATEK’s Board of Directors are simultaneously members of the Management Board. Payments to such members in relation to their activities as members of the Management Board are included in the total payments to members of the Management Board. ANNUAL REPORT 2014 55 EXTERNAL AUDITOR The Annual General Meeting of Shareholders appoints an exter- nal auditor to conduct independent review of NOVATEK’s ﬁ nan- cial statements. The Audit Committee gives recommendations to the Company’s Board of Directors regarding the candidatures of external auditors and the price of their services. Based on the Committee’s recommendations, the Board proposes the auditor’ candidature for the consideration and for approval by the An- nual General Meeting of Shareholders. ZAO PricewaterhouseCoopers Audit was approved as the Company’s external auditor to conduct independent audit of the Company’s ﬁ nancial statements for 2014. In selecting the auditor’s candidature, attention is paid to level of their professional qualifications, independence, pos- sible risk of any conflict of interest, terms of the contract, and an amount of remuneration requested by the candidates. The Audit Committee oversees the external auditor’s inde- pendence and objectivity as well as the quality of the audit conducted. The Committee annually provides to the Board of Directors the results of review and evaluation of the audit opinion regarding the Company’s financial statements. The Audit Committee meets with the auditor’s representatives at least once per year. NOVATEK’s management is aware of and accepts recommenda- tions on independence of the external auditor by restricting such auditor’s involvement in providing non-audit services. Remuneration paid to the principle auditors for auditing and other services is speciﬁ ed in the Note 23 to the consolidated ﬁ - nancial statements prepared in accordance with IFRS standards for 2014. 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 De- cember 2014, NOVATEK did not have privileged shares. Our shares are traded in US dollars and Russian roubles on the Moscow Stock Exchange and have an A1 listing (symbol: NVTK). The Federal Financial Market Service issued to NOVATEK a permit for circulation of shares beyond the Russian Federation of 910,589,000 ordinary shares comprising 29.99% of the Com- pany’s share capital. Our Global Depositary Receipts (GDR) are listed on the London Stock Exchange (symbol: NVTK), with each GDR representing Equity stakes in NOVATEK’s share capital and the number of shares owned by members of the Board of Directors and Management Board1 Equity stake as of 31 December 2014, % Number of shares Board of Directors Alexander E. Natalenko Andrei I. Akimov Burckhard Bergmann Yves-Louis Darricarrère Vladimir A. Dmitriev Leonid V. Mikhelson Victor P. Orlov Gennady N. Timchenko Andrei V. Sharonov Management Board Vladimir A. Baskov Tatyana S. Kuznetsova Iosif L. Levinzon Mark A. Gyetvay Mikhail V. Popov Alexander M. Fridman Kirill N. Yanovskiy * In the form of GDRs. — — 0.0007 — — 0.7152 — — — 0.0288 0.1944 — — 0.1440 0.0817 0.1051 — — 20,000* — — 21,717,112 — — — 874,408 5,903,035 — — 4,372,038 2,481,049 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. 56 NEW QUALITY OF GROWTH NOVATEK 10 ordinary shares. As of 31 December 2014, NOVATEK’s GDRs were issued on 906,637,970 ordinary shares comprising 29.86% of the Company’s share capital. In 2014 the Member of the Board of Directors and the Chairman of the Management Board of OAO “NOVATEK”, L.V. Mikhelson made the following transactions on purchases of NOVATEK’s shares: Transaction date Number of acquired shares 11.03.2014 17.03.2014 29.04.2014 Dividends 199,850 272,400 362,110 In order to improve the transparency of the dividend policy, in 2014, the Board of Directors approved the Regulations on Divi- dend Policy of OAO “NOVATEK” (Minutes No 168 of 28.04.2014). The main change compared with the previous dividend policy is application of consolidated net income under IFRS (instead of unconsolidated net income under RAS) for calculation of the dividend size. NOVATEK’s dividend policy is based on keeping the balance be- tween the Company’s business goals and shareholder’s interests. A decision to pay dividends as well as the size, payout time and form of the dividend is passed by the Annual General Meeting of Shareholders according to the recommendation of the Board of Directors. Dividends are paid twice a year. In determining the recommended amount of dividend payments to be distributed the Board of Directors consider the current competitive and ﬁ nancial position of the Company, as well as its development prospects, including operating cash ﬂ ow and capital expendi- ture forecasts, ﬁ nancing requirements, debt servicing and other such factors as it may deem relevant to maintaining ﬁ nancial stability and ﬂ exible capital structure of the Company. NOVATEK is strongly committed to its dividend policy. On 12 March 2015, the Board of Directors of OAO NOVATEK recommended to the Annual General Meeting of Sharehold- ers to pay dividends for FY 2014 in the amount of RR 5.2 per ordinary share or RR 52 per one Global Depositary Receipt (GDR), exclusive of RR 5.1 of interim dividends per ordinary share or RR 51 per one GDR for the ﬁ rst six months of 2014. Thus, should the General Meeting of Shareholders approve the above recommended dividend, the dividends for 2014 will total RR 10.3 per ordinary share (RR 103 per one GDR), and the total amount of dividends payable for 2014 will be RR 31,273,951,800. This will represent a 30.5% increase in dividend per share com- pared to 2013. Information Transparency NOVATEK is committed to providing objective, reliable, and consistent information about the Company and its activities to all stakeholders and also complies with best practices 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), deﬁ ne main principles for disclosing information and increasing information transparency. Material information about the Company is disclosed in a timely manner in the form of press releases and material facts through authorized disclosure in accordance with the applicable laws of Russian Federation and United Kingdom. The Company discloses quarterly ﬁ nancial statements in accordance with the Russian (“RAS”) and International Financial Reporting Standards (“IFRS”), Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as presentations for investors. In addition to press releases and material facts, the Company’s website provides detailed information on all aspects of its activi- ties, including our Sustainability Report. We regularly participate in information disclosure on greenhouse gas emissions and energy eﬃ ciency 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. Accrued and paid dividends on NOVATEK shares for the period 2009 to 2014 Dividend Accrual Period Amount of dividends, RR per share Total amount of dividends accrued, RR Total amount of dividends paid, RR 2009 2010 2011 2012 2013 First half 2014 2.75 4.00 6.00 6.86 7.89 5.10 8,349,841,500 12,145,224,000 18,217,836,000 20,829,059,160 23,956,454,340 15,485,160,600 8,349,681,894 12,144,967,156 18,217,663,073 20,829,052,028 23,956,348,044 15,485,113,250 The amount of paid dividends accrued for the years 2009 to 2013, and for the ﬁ rst six months 2014 is reported as of 31 December 2014. Partial payment of the accrued dividends was made due to provision by shareholders (nominee holders) of incorrect postal and/or banking details and insuﬃ cient information regarding banking or postal details of shareholders. ANNUAL REPORT 2014 57 The Company maintains an ongoing dialogue with sharehold- ers and investors in order to ensure full awareness of investment community about its activities. The main channels of com- munication with the investment community are through the Chairman of the Management Board, Deputy Chairman and the Investor Relations department. The Company’s representatives meet on a regular base with key ﬁ nancial audiences to discuss issues of interest to them. In accordance with principles of its uniﬁ ed information policy, NOVATEK conducts an active, ongoing dialog with representa- tives of media outlets. The information disclosed to mass media comprises all aspects of the Company’s activities, including ﬁ nancial 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 2014, representatives of the Company participated in more than 20 exhibitions, conferences and round tables. One of the most important events of the past year was NOVATEK’s participation in the 21st World Petroleum Congress and the WPC Exhibition 2014 held in Moscow. 58 NEW QUALITY OF GROWTH NOVATEK ADDITIONAL INFORMATION Major Risk Factors The Company’s activities are subject to risks inherent only to the Company or associated with the Company’s core business- es. The risks described herein are not exhaustive and reﬂ ect an opinion about the most material risks based on the estimates of the Company’s management. Risk Risk description Risk management approaches used by the Company OPERATIONAL RISKS Risks of emergencies and incidents Monopoly risks Competitive risks The Company’s subsidiaries and joint ventures are subject to the risks of emergencies and incidents at hazardous production facilities that may entail business interruption, hazardous emissions or spills, which in turn may have a negative eff ect on the Company’s business reputation and fi nancial performance. The Company performs continuous monitoring of industrial safety compliance, develops and implements organizational and technical measures aimed at mitigating the risks of emergencies and incidents and reducing potential losses as part of its existing integrated industrial safety management system that is certifi ed under the OHSAS 18001:2007 standard. The Company holds property and business interruption insurance policies. The Company adheres to the principle of responsible investments which implies that new design solutions, technologies and equipment installed help signifi cantly mitigate accident risks. The Company depends on monopoly suppliers of transport services (such as Gazprom, RZD, or Transneft). The Company has no infl uence on the capacity of transport facilities of the above monopolies and rates established by the Federal Tariff Service. The Company enters into long-term agreements and in a timely manner arranges for interaction with monopolies regarding hydrocarbon transportation by pipeline and railway transport. To reduce its dependency, the Company implements investment projects that reduce the length of transportation of fi nished products, and concludes agreements enabling it to use alternative methods of product transportation (an agreement with SIBUR for the supply of light hydrocarbons to Tobolsk Petrochemical Complex). The Company operates in an environment of tough competition with Russian and international oil and gas companies in the following areas: ■ obtaining of subsoil licenses and acquisition of companies holding subsoil licenses ■ selling natural gas on the Russian market ■ selling liquid hydrocarbons in the Russian and global markets ■ acquisition of oil and gas equipment and services ■ employment of highly qualifi ed specialists to work for the Company and its subsidiaries and joint ventures. The Company monitors commercially available assets with regard to the objectives of its long-term development strategy, enabling the Company to make an objective assessment of its competitive positions and to take the maximum benefi t of its competitive advantages that include extensive regional work experience and synergy with the existing producing, transport, processing and distribution infrastructure. When acquiring equipment and services, the Company holds public tenders allowing it to diversify the suppliers and to ensure the best conditions. The Company works continuously to structure its relations with key service providers. Given the volatility in international relations with certain countries that are providers of sophisticated oil & gas equipment, the Company pursues import replacement policies where it is appropriate. The Company pursues an active marketing policy and takes eff orts to expand its customer base, and to enter into long-term agreements with buyers. To diversify its natural gas marketing portfolio, throughout the reporting period the Company was engaged in trading in the Natural Gas Section of the St. Petersburg International Mercantile Exchange. The Company implements an active HR policy and applies effi cient mechanisms of attracting and retaining highly qualifi ed employees. ANNUAL REPORT 2014 59 Risk Risk description Risk management approaches used by the Company Commodity price risks As an independent natural gas producer, NOVATEK is not subject to state regulation of natural gas prices. Nevertheless, the Company’s prices are strongly infl uenced by the prices established by the Federal Tariff Service (FTS). Moreover, the Company is exposed to the current pricing environment on the Russian and international liquid hydrocarbon markets as it has no power over the contracts’ base prices. Reduction of prices for liquid hydrocarbons may have a negative eff ect on the Company’s fi nancial performance. State regulation of gas prices signifi cantly reduces the risk of price volatility on the Russian gas market, but does not exclude potential price reduction. In view of the vertically integrated production chain for liquid hydrocarbons and taxation peculiarities, the Company does not use commodity derivative fi nancial instruments to reduce the risk of price changes for such type of products. Geological risks Exploration drilling is associated with multiple risks, including the risk of non-discovery of commercial reserves. Information on the Company’s reserves depends on a number of factors and assumptions. Actual production volumes at the fi elds, along with the cost- eff ectiveness of reserve development may deviate from estimates. To minimize geological risks, the Company relies on the geological modeling and engages major contractors that apply state-of-the-art exploration technologies and methods. The Company makes annual assessment and evaluation of its reserves based on the results of exploration and production drilling and other research information. An independent international adviser evaluates the Company’s reserves according to international standards on annual basis. Risk of early termination, suspension or restriction of the right to use subsurface mineral resources Exploration and production of hydrocarbons in Russia is subject to licensing. The Company is thus exposed to the risk of early termination, suspension or restriction of its right to use subsurface mineral resources. The Company strives to comply, and maintains a continuous monitoring of its compliance with the license agreements and the subsoil use laws, and submits timely requests for adjusting the terms of its license agreements. Environmental risks Ethical risks The Company is subject to the probability of events having adverse consequences for the environment and caused by a negative impact of its industrial and other activities, as well as natural and technology-related emergencies. The Company and its key subsidiaries have an environmental management system according to ISO 14001:2004 standard to ensure rational use of resources and to minimize the adverse eff ect the Company’s operation may have on the environment. The Company adheres to the principle of responsible investment in operations which implies that new design solutions, technologies and equipment installed help minimize environmental impact. The Company is exposed to the risks of disturbed relationships within the Company and with its subsidiaries and joint ventures, shareholders, investors, the government, the public, consumers or suppliers or other corporate entities or individuals, including the risk of fraud, corruption, and confl ict of interest. In 2011 in order to minimize ethical risks, the Company introduced a Code of Business Conduct and Ethics. To exclude ethical risks with respect to its shareholders and investors, the Company is governed by the provisions of the internal Code of Business Conduct and Ethics and Code of Corporate Conduct, as well as the applicable Russian and English law in terms of public company regulation. To exclude ethical risks in its relations with third parties, the Company carries out tender procedures to select counterparties and has a well established internal control and audit system. In 2014 the Board of Directors approved NOVATEK Anti-Corruption Policy that establishes key principles and standards of anti-corruption practices for employees and includes a set of corruption prevention measures. 60 NEW QUALITY OF GROWTH NOVATEK Risk Social risks Risk description Risk management approaches used by the Company The Company is subject to the following risks of a social nature: ■ internal risks associated with a possible incompliance of social programs implemented by the Company with the industry’s average level that may lead to a higher labor turnover; ■ internal risks associated with potential impediments in normal production activities caused by the public living in proximity to the production facilities The Company strives to ensure compliance of its social programs with the industry’s average level and uses the up-to-date mechanisms for attracting and retaining highly professional employees. The Company’s production facilities are located outside densely populated territories, and the Company monitors compliance with the rules and regulations while operating its facilities. The risks related to possible military confl icts, announcement of a state of emergency, or strikes, are insignifi cant, as the Company operates in economically and socially stable regions. Terrorism risks The Company is subject to a risk of terrorist threat. The Company takes measures required to ensure strict compliance with Federal Law No. 256-FZ of 21 July 2011 concerning the Fuel and Energy Complex Security. A complex of organizational and practical measures is constantly in place to ensure security of facilities, including linear ones. Export of liquid hydrocarbons, a balanced fi nancial policy and an active marketing policy enable the Company to mitigate the potential eff ect of the country risk. Moreover, the Company’s management continuously analyzes the macro-economic environment and makes prompt decisions to mitigate potential risks. NOVATEK is a Russian company operating in a number of Russian regions. Country risk is defi ned by the fact that Russia is still an emerging economy, the economic environment of which is not suffi ciently stable. In 2014, dropping oil prices and international sanctions caused volatility in foreign currencies, growing infl ation rates, an increase in interest rates and an economic growth slowdown. The said factors may have a negative impact on the Company’s operational and fi nancial performance. The Company produces and processes hydrocarbons within Western Siberia, a region with a challenging climate. The Company’s vulnerability to region-specifi c impacts is insignifi cant and is entirely taken into account by the Company’s management when carrying out fi nancial and production operations. The Company is exposed to a risk of losses related to a failure by counterparties to perform their contractual fi nancial obligations when due, and in particular depends on the reliability of banks in which the Company deposits its available cash. The Company’s business requires substantial investments into fi eld exploration and development, followed by the production, transportation, and processing of natural gas, oil, gas condensate and petroleum products. Insuffi cient funding for these and other expenditures may aff ect the Company’s fi nancial standing and performance. When selling natural gas on the domestic market, the Company continuously monitors the fi nancial soundness of its consumers and takes actions in case there are overdue payments. Most of NOVATEK’s international liquid sales are made to major customers with independent ratings. Almost all domestic sales of liquid hydrocarbons are made on a 100 percent prepayment basis. When selecting banks, the Company is governed by the bank’s reliability confi rmed by international ratings. The Company’s capital investment plans are defi ned in its long- term development strategy, are revised on an annual basis and are generally in line with the Company’s ability to generate cash fl ow from operations taking into account the need to pay dividend and service its debt. ANNUAL REPORT 2014 61 Country risk Regional risk FINANCIAL RISKS Credit risk Reinvestment risk Risk Risk description Risk management approaches used by the Company Interest risks Currency risks Liquidity risk Infl ation risk LEGAL RISKS Risk of law changes As a major borrower, the Company is subject to risks associated with an increase in interest rates. Interest rates on some of the Company’s loans may be linked to fl oating international and Russian base rates which dynamics is hard to predict. Growth of the interest rates may restrict the use of borrowed capital as a fi nancing source for the Company’s investment activity and may increase interest rate expenses. Part of the Company’s liabilities is denominated in foreign currencies which may lead to losses in the event of ruble depreciation. On the other hand, part of the Company’s proceeds is also denominated in foreign currencies which may lead to losses in the event of ruble appreciation. Liquidity risk is the risk that the Company will not be able to meet its fi nancial obligations as they fall due. The Company pursues a balanced debt policy and strives to maximize the share of long-term liabilities with fi xed rates in its debt portfolio. The Company works to maintain the fl exibility of its investment program and to fund its capital expenditures mainly with its own funds. The liabilities expressed in foreign currency on the one hand, and export proceeds on the other generally off set each other and serve as a natural mechanism to hedge currency risks. The Company’s approach to managing liquidity risk is to ensure that it will always have suffi cient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation. In managing its liquidity risk, NOVATEK maintains an adequate ratio between cash reserves and debt, monitors forecast and actual cash fl ows and matches the fi nancial assets and liabilities maturity profi les. The Company uses various short-term borrowings. The Company may use credit facilities and bank overdrafts to satisfy its short-term fi nance needs. To satisfy its needs for cash on a more permanent basis, the Company will normally raise long-term loans in the available markets. Changes in the consumer price index have an impact on NOVATEK’s profi tability and, as a consequence, its fi nancial standing. The signifi cant ruble depreciation in 2014 caused a surge in infl ation rates which are impossible to accurately predict. NOVATEK may not be able to predict the infl ation level, since, apart from the consumer price level, it is necessary to take into account the change in the real purchasing power of the Russian ruble, the pricing conditions in liquid hydrocarbon export markets, and government policy in relation to tariff s for natural gas. NOVATEK monitors the consumer price index and accordingly acts to mitigate its costs. The Company is subject to a risk of facing consequences of changes in Russian laws in the following areas: The Company is constantly monitoring draft laws enabling it to evaluate the consequences of such changes and to take them into account in its plans. ■ currency laws (in areas concerning export/import and borrowing operations) ■ tax laws (in areas regulating taxation systems and rates applicable to companies in general, and to companies producing and marketing natural gas and liquid hydrocarbons, specifi cally) ■ customs laws (in areas concerning the export of liquid hydrocarbons, including petroleum products); and ■ licensing requirements for natural resource extraction. Litigation risks The Company may be involved as a defendant or plaintiff in a number of proceedings arising in the normal course of its business. When conducting its business, the Company adheres to the principle of prudence. Due to this fact, as of the approval date of the Annual Report, the Company was not involved in any material litigation and the associated risks are insignifi cant. 62 NEW QUALITY OF GROWTH NOVATEK Risk Risk description Risk management approaches used by the Company Risk of sanctions In 2014, the Company was included into the US sectoral sanctions list whereby the US persons are prohibited to participate in providing fi nancing to the Company for more than 90 days. The sanctions imposed restrict the Company’s ability to refi nance its debt. Furthermore, there is a risk of tougher US sanctions and risk of including the Company into other countries’ sanctions lists, which may undermine the Company performance. The Company follows a balanced fi nancial policy enabling it to minimize its fundraising needs. Moreover, the Company still has a full access to the Russian capital market and a limited access to the international market. In case the US sanctions are toughened and the Company is included in other countries’ sanctions lists, the Company management will make every possible eff ort to minimize the negative impact on the Company’s business operations and fi nancial standing. Risk Insurance Risk insurance is an integral part of NOVATEK’s risk management system. In 2014, the insurance coverage guaranteed adequate protection against the risks of damage to the business of the Company or its subsidiaries and joint ventures. Insurance is provided by reputable insurance companies that have high rat- ings by leading rating agencies (Expert RA, M. Best, Standard & Poor`s) with the risks reinsured by major international insurance companies. OBLIGATORY RISK INSURANCE The Company and its subsidiaries and joint ventures fully meet the requirements of the applicable laws for maintaining obliga- tory insurance, such as civil liability insurance of: ■ owners of hazardous production facilities; ■ owners of transport vehicles. OPTIONAL RISK INSURANCE To reduce the risk of ﬁ nancial losses, the Company and its sub- sidiaries and aﬃ liates maintain the following types of optional insurance: ■ Insurance of the risk of property damage/loss, including the risk of mechanical failures; ■ Insurance of the risk of damage from business interruption; ■ Management liability insurance. On 1 May 2014, the Company restructured and implemented a comprehensive program of property and business risk insurance with respect to its and its subsidiaries’ and joint venture’s key assets. The program makes it possible to reduce potential losses resulting from the materialization of technology-related risks at gas production, processing and marketing facilities, including possible losses from reduced volumes of hydrocarbon produc- tion and processing and, as a result, reduced sales proceeds. The cumulative insured amount for the risks of property damage and business interruption is RR 309 bln. Full cost recovery is in place. The program meets all current international standards for oil and gas insurance, takes into account the technological character- istics of NOVATEK enterprises and the business processes of the Company. The implemented program is viewed by the Com- pany’s management as an additional measure for mitigating the consequences of potential accidents and provides additional guarantees for the attainment of the expected net proﬁ t and key indicators of the Company’s performance. During the comprehensive insurance program validity period, an incident occurred that was recognized as an insured event. The cost of restoring the property reached RR 106 mln and was reimbursed by the insurance company less the deductibles, within the contractual deadlines. The claims settlement process was completed in 2014 without any disputes arising. For more than nine (9) years the Company has maintained a management liability insurance for the top management of the Company and its subsidiaries against possible third-party claims for any losses incurred through any wrong action (or decision) made by its management bodies. The overall limit of all insur- ance coverage is Euro 120 mln. Information on Members of NOVATEK’s Board of Directors MR. ALEXANDER Y. NATALENKO ■ Chairman of NOVATEK’s Board of Directors and Chairman of its Strategy Committee Born in 1946 Mr. Natalenko completed his studies at the Irkutsk State University in 1969 with a primary focus in Geological Engineering. Subsequently, he worked with the Yagodninskaya, Bagdarinskaya, Berelekhskaya, Anadirskaya and East-Chukotskaya geological expeditions. In 1986, Mr. Natalenko headed the North-East Industrial and Geological Association and, in 1992, he was elected president of АО “Magadan Gold & Silver Company”. He subsequently held various executive po- sitions in Russian and foreign geological organizations. From 1996 to ANNUAL REPORT 2014 63 2001, Mr. Natalenko held the position of Deputy Minister of Natural Resources of the Russian Federation. He is a member of the Board of Directors of OAO Rosgeologia. From 2004 to present he is the Chair- man of NOVATEK’s Board of Directors. Mr. Natalenko is the recipient of the State Prize of the Russian Federation and an Honored Geologist of Russia. MR. ANDREI I. AKIMOV ■ Member of NOVATEK’s Board of Directors and Member of its Strategy Committee Born in 1953 Mr. Akimov graduated from the Moscow Financial Institute in 1975 where he specialized in international economics. Between 1974 and 1987, Mr. Akimov held various executive positions in the Bank for Foreign Trade of the USSR. From 1985 to 1987 he served as Deputy Chief General Manager of the Bank for Foreign Trade branch in Zurich (Switzerland) and between 1987 and 1990, Mr. Akimov was the Chairman of the Management Board of Donau Bank in Vienna (Austria). From February 1991 to January 2003 he was Managing Director of ﬁ nancial company, IMAG Investment Management & Advisory Group AG (Austria). Since 2003, Mr. Akimov has been the Chairman of the Manage- ment Board of Gazprombank (OAO). He is a member of Board of Directors of OAO Gazprom, Gazprombank (OAO), OAO Rosneft, OAO Rosneftegaz, Gazprom Germania GmbH, ООО Gazprom gas motor fuel, GPB International S.A. and other. DR. BURCKHARD BERGMANN ■ Member of NOVATEK’s Board of Directors, its Remuneration and Nomination Committee, its Audit Committee and its Strategy Committee Born in 1943 Dr. Bergmann studied physics at the Freiburg and Aachen Univer- sities 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 Jülich Nuclear Research Center. In 1972, Dr. Bergmann joined Ruhrgas AG (from 1 July 2004 – E.ON Ruhrgas AG), heading the LNG Purchas- ing Department. 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 Chairman. From March 2003 to February 2008 he was also a member of the Management Board of E.ON AG. Dr. Bergmann is also a member of the Board of Directors (Su- pervisory Board) of: Allianz Lebensversicherungs-AG, (till 2013), Commerzbank AG, (till 2013), Contilia GmbH, Telenor ASA. In ad- dition, he is a member of the Advisory Boards for Dana Gas Inter- national, IVG Immobilien AG. He has been elected as Chairman of the Advisory Board of Jaeger Beteiligungsgesellschaftmb H & Co KG, Vice Chairman of the Advisory Board of Accumulatoren- werke Hoppecke GmbH and is elected a member of the Board of Trustees of RAG AG. Dr. Bergmann holds the following distinctions: Commander of the Royal Norwegian Order of Merit (1997); Honorary Consul of the Russian Federation in the State of North Rhine-Westphalia a Foreign Member of the Academy of Technological Sciences of the Russian Federation (2003); Order of Merit of the State of North Rhine-Westphalia (2004) as well as a winner of Director of the Year, Moscow (2007); Oﬃ cer’s Cross of the Order of Merit of the Federal Republic of Germany (2008). In June 2011, by means of presidential Decree he became a recipient of the Order of the Friendship of Peoples award for signiﬁ cant contribution in development of the Russian-German relations. MR. YVES-LOUIS CHARLE JUSTIN DARRICARRÈRE ■ Member of NOVATEK’s Board of Directors and its Strategy Committee Born in 1951 After lecturing at the Ecole des Mines de Paris for 3 years, Yves- Louis Darricarrère began his career in Elf Aquitaine in 1978, ﬁ rst in the Mining Division in Australia and later in the Exploration & Production Branch, where he was appointed successively Country Representative for Australia and Egypt at head oﬃ ce; Managing Director of the subsidiaries in Egypt and then in Co- lombia; 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 for Europe and the United States and was nominated a member of the Management Board of Elf-Aquitaine. In 2000, he was appointed Senior Vice-President for Exploration & Production Northern Europe and became a member of the Total Group Management Board. On 1st September 2003, Yves-Louis Darricarrère was nominated to the Group’s Executive Committee and was appointed Presi- dent of Total Gas & Power. On 14th February 2007, he became President of Total Exploration & Production. On 1st July 2012, he became President of Total Upstream regrouping Total Explora- tion & Production and Total Gas & Power. Yves-Louis Darricarrère is a graduate of the Ecole Nationale Supérieure des Mines and the Institut d’Etudes Politiques in Paris and holds a master’s degree in economic science. He is chevalier de la Légion d’Honneur (Knight of the French Legion of Honour). MR. VLADIMIR A. DMITRIEV ■ Member of NOVATEK’s Board of Directors and Chairman of its Strategy Committee Born in 1953 In 1975, graduated from the Moscow Finance Institute, special- ty – “International Economic Relations”. Doctor of Economics. Corresponding member, Russian Academy of Natural Sciences. 64 NEW QUALITY OF GROWTH NOVATEK 1975-1979 – State Committee of USSR Council of Ministers for Foreign Economic Relations, engineer. 1979-1986 – Attache, third secretary, USSR Foreign Ministry Department. 1986-1987 – Institute of World Economics and International Relations, USSR Academy of Sciences, research worker. 1987-1992 – USSR Em- bassy of USSR Ministry for Foreign Aﬀ airs, Second, First Secretary. 1992-1993 – Russian Embassy of Russian Ministry for Foreign Aﬀ airs, First Secretary. 1993-1997 – Deputy Chief Executive Of- ﬁ cer, Russian Finance Ministry Department. 1997-2002 – Bank for Foreign Economic Aﬀ airs of the USSR, First Deputy Chairman. 2002-2004 – Bank for Foreign Trade of the USSR (OJSC), Deputy President – Chairman of the Board. 2004-2007 – Bank for Foreign Economic Aﬀ airs of the USSR, Chairman. From June 2007 – State Corporation “Bank for Development and Foreign Economic Af- fairs (Vnesheconombank)”, Chairman. For outstanding contribution to the development of the ﬁ nan- cial and banking system of Russia, long-standing and dedicated work he was awarded the Order of Alexander Nevsky, the Order “For Merits and Dedicated Service to the Country”, IV Degree, the Order of Honor, the Order of Saint Sergiy Radonezhsky, II Degree, the Order of Blessed Prince Daniil Moskovsky, II Degree, the Medal of the Order “For the Merits and Dedicated Service to the Country”, the Order of the Banner of the Republic of Serbia with Golden Wreath, the Order of Merit of the Italian Republic, Grand Oﬃ cer Grade, the Russian Association of Banks Decora- tion of Honor “For Merits and Dedicated Service to the Banking Community”, “Excellent Employee of Vnesheconombank” Badge, his name is recorded in Vnesheconombank’s Book of Honor, he was also oﬃ cially thanked by the President and the Government of the Russian Federation. MR. LEONID V. MIKHELSON ■ Member of NOVATEK’s Board of Directors ■ Chairman of NOVATEK’s Management Board Born in 1955 Mr. Mikhelson received his primary degree from the Samara Institute of Civil Engineering in 1977, where he specialized in Industrial Civil Engineering. That same year, Mr. Mikhelson began his career as foreman of a construction and assembling company in Surgut, Tyumen region, where he worked on the construction of the ﬁ rst section of Urengoi-Chelyabinsk gas pipeline. In 1985, Mr. Mikhelson was appointed Chief Engineer of Ryazantruboprovodstroy. In 1987, he became General Director of Kuibishevtruboprovodstroy, which in 1991, was the ﬁ rst compa- ny in the region to sell its shares and became 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 company “Novaﬁ ninvest”. Since 2003, Mr. Mikhelson has served as a member of the Board of Directors and Chairman of the Management Board of NOVATEK. From March 2008 to December 2010, he has been a member of the Board of Directors of OAO Stroytrans- gas. 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. From 2011 he is the Chairman of the Board of Directors of PJSC SIBUR Holding and from 2011 to 2013 he was a member of the Supervisory Board of the OAO Russian Regional Devel- opment Bank. Mr. Mikhelson is the recipient of the Russian Federation’s Order of the Badge of Honor, the Order of Merit for the Fatherland 2 degree and the title of honor “Honored man of the gas industry”. MR. VICTOR P. ORLOV ■ Member of NOVATEK’s Board of Directors ■ Chairman of NOVATEK’s Remuneration and Nomination Committee ■ Member of NOVATEK’s Strategy Committee ■ Member of NOVATEK’s Audit Committee Born in 1940 In 1968, Mr. Orlov graduated from the Tomsk State University as a geological engineer with a degree in “Geological survey and exploration of mineral deposits”, and in 1986 from the Acad- emy of National Economy under the USSR Council of Ministers, with a specialty in “Economics and Management of a National Economy”. From 1957 to 1963, he worked at coal mine and served in the Soviet Army. From 1968 to 1975, he was head of a geological survey, prospecting and exploration works in the geological organizations of Western Siberia, held positions of the geologist, chief geologist, chief of geological exploration crew. 1975-1978 – Consultant on geological exploration works in Iran. 1979-1981 – Deputy Head of the Geological Division of the Production Geo- logical Association of central areas of Russia (Tsentrgeologiya). 1981-1986 – Deputy Head of Geology and Production depart- ments of the Ministry of Geology of the RSFSR. 1986-1990 – CEO of Tsentrgeologiya. 1990-1992 – Deputy Minister of Geology of the USSR, First Deputy Chairman of the RSFSR State Com- mittee for Geology and Use of Energy and Mineral Resources. 1992-1996 – Chairman of the Russian Federation Committee on Geology and Mineral Resources. 1996-1999 – Minister of Natural Resources of the Russian Federation. 2001-2012 – Member of the Federation Council of the Federal Assembly of the Russian Federation. 2001-2004 – First Deputy Chairman of the Federation Council Committee on Natural Resources and Environmental Protection. 2004-2011 – Chairman of the Federation Council Committee on Natural Resources and Environmental Protection. Professor, Doctor of Economics, Candidate of geological-miner- alogical sciences, an Honored Geologist of Russia. Laureate of the State Prize of the Russian Federation in the ﬁ eld of science and technology. He was awarded the Order of Merit for the Fatherland 4 degree, 18 non-governmental awards, including 3 appreciation letters of the President of the Russian Federa- tion, the Certiﬁ cate of Merit of the Government of the Russian Federation. MR. GENNADY N. TIMCHENKO ■ Member of NOVATEK’s Board of Directors ■ Chairman of NOVATEK’s Strategy Committee Born in 1952 ANNUAL REPORT 2014 65 In 1976, Mr. Timchenko graduated with a Master’s of Science from the Mechanical University in Leningrad. He began his ca- reer at the Izjorskii Factory in Leningrad, an industrial plant which made components for the energy industry. Between 1982 and 1988, he was a Senior Engineer at the Ministry of Foreign Trade. Mr. Timchenko has more than 20 years of experience in Russian and International energy sectors and he has built interests in trading, logistics and transportation related companies. In 1988, Mr. Timchenko became a vice president of Kirishineft- ekhimexport, the export and trading arm of the Kirishi reﬁ nery in the Leningrad region. In 1991, he worked for Urals Finland which specialized in oil and petrochemical trading. Between 1994 and 2001, Mr. Timchenko was managing Director of IPP OY Finland and IPP AB Sweden. Between 1997 and 2014, he co-founded Gunvor, a leading independent oil-trading company. Mr. Tim- chenko was a member of the Board of Directors of OOO Transoil and OOO BalttransService, Airﬁ x Aviation OY. Since 2009, he is a member of the Board of Directors of OAO NOVATEK. He is a member of the Board of Directors of PJSC SIBUR Holding, the Chairman of the Board of Directors, President of the Ice Hockey Club SKA St-Petersburg, as well as the Chairman of the Board of Directors of OOO Kontinental Hockey League, a member of the Board of Trustees of the All-Russian public organization Russian Geographical Society, the Chairman of the Russian Council of the NPO Russian Chinese Business Council, the Chairman of the Board to promote OCD, Vice- President of the Olympic Commit- tee of the Russian Federation, the Chairman of the Economic Council of the Franco-Russian Chamber of Commerce (CCIFR). MR. ANDREI V. SHARONOV ■ Member of NOVATEK’s Board of Directors ■ Chairman of NOVATEK’s Audit Committee ■ Member of NOVATEK’s Remuneration and Nomination Committee Born in 1964 Mr. Sharonov graduated from the Ufa Aviation Institute and the Russian Academy of State Service at the President of the Russian Federation. 1989-1991 – Member of the USSR Parliament, until 1996 he headed the Committee for Matters Concerning Young Persons of the Russian Federation. From 1996 to 2007 – Head of Depart- ment, Deputy Minister, State Secretary in the Ministry of Eco- nomic Development and Trade of the Russian Federation. From 2007 to 2010 – Managing Director and Chairman of the Board of Directors of ZAO Investment Company Troika Dialog, head of the investment banking sector. From 2010 to 2013 – Deputy Mayor of Moscow for economic policy, was responsible for budgeting, procurement, industrial policy and business support, regulated market of trade and services. Served as a Chairman of the Re- gional Energy Commission. From September 2013 – President of the Moscow School of Management SKOLKOVO and Adviser to the Mayor of Moscow. of Committee on Innovative Development and Technology Policy of OAO Sovkomﬂ ot; Chairman of the Board of Directors, an Independent Member of the Board of Directors of OOO Manage- ment Company NefteTransService; Chairman of the Board of Directors of OAO Management Company Eko-sistema. Candidate of sociological sciences, an Honored Economist of the Russian Federation. He is the recipient of the “Aristos” Award in the “Independent Director” category in 2009, the National Award “Director of the Year – 2009” in the “Independent Director” category and the International Award “Person of the Year – 2012” in the “Business reputation” category. He was awarded the Order of Honor of the Russian Federation. Information on Members of NOVATEK’s Management Board MR. LEONID V. MIKHELSON ■ Chairman of NOVATEK’s Management Board ■ Member of NOVATEK’s Board of Directors Born in 1955 Details on Mr. Leonid V. Mikhelson are available in the “Informa- tion on Members of NOVATEK’s Board of Directors” section. MR. VLADIMIR A. BASKOV ■ Deputy Chairman of NOVATEK’s Management Board Born in 1960 In 1986, Mr. Baskov graduated from the Moscow Higher Police School of the USSR. In 2000, he completed courses at the Man- agement Academy at the Russian Ministry for Internal Aﬀ airs. From 1981 to 2003, he served in various departments within the Russian Ministry for Internal Aﬀ airs. From 1991 to 2003, Mr. Baskov held managerial positions within the aforementioned Ministry’s organizational structures. In 2003 he was appointed Director of the Business Support Department for NOVATEK. In 2005 he was appointed Deputy Chairman of NOVATEK’s Management Board and in August 2007 he became a member of NOVATEK’s Management Board. Candidate of legal Sciences. He was awarded the Order For Personal Courage, the Russian Federation’s Order of the Badge of Honor and other state and departmental awards: Honorary Diplomas of the President of the Russian Federation, the Ministry of Internal Aﬀ airs, 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). MR. MARK A. GYETVAY ■ Deputy Chairman of NOVATEK’s Management Board Member of ALROSA’s Supervisory Board (OAO); Member of the Board of Directors of OAO Bank of Moscow; Member of the Board of Directors, Member of the Strategy Committee, Member Mr. Gyetvay studied at Arizona State University (Bachelor of Sci- ence, Accounting, 1981) and later at Pace University, New York Born in 1957 66 NEW QUALITY OF GROWTH NOVATEK (Graduate Studies in Strategic Management, 1995). After gradu- ation, Mr. Gyetvay worked in various capacities at a number of independent oil and gas companies (Champlin Petroleum Co., Texas, Ensource Inc. and MAG Enterprises, Colorado, and Amerada Hess Corporation, New Jersey) where he specialized in ﬁ nancial and economic analysis for both upstream and down- stream 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 Pricewa- terhouseCoopers Global Energy where he assumed the role of client service engagement partner, Utilities and Mining practice, based in Russia (Moscow oﬃ ce). Mr. Gyetvay was an engage- ment partner on various energy and mining clients providing overall project management, ﬁ nancial 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 Certiﬁ ed Public Accountant, a member of the American Institute of Certiﬁ ed Public Accountants and an associ- ate member of the Society of Petroleum Engineers. From 2003 to 2014, Mr. Gyetvay became a member of NOVATEK’s Board of Directors. Since 2004-2008, he has been Chief Finan- cial Oﬃ cer and, in August 2007, Mr. Gyetvay was elected to NOVATEK’s Management Board. Since July 2010, he became Deputy Chairman of NOVATEK’s Management Board. MS. TATYANA S. KUZNETSOVA ■ Deputy Chairman of NOVATEK’s Management Board ■ Director of NOVATEK’s Legal Department Born in 1960 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 Purneftegasgeologiya. In 1998, she was appointed Deputy General Director of OAO Nordpipes. Since 2002, she has been Director of the Legal Department for NOVATEK. Since 2005, she has been the Deputy Chairman of NOVATEK’s Management Board – Director of NOVATEK’s Legal Department and in August 2007, she became a member of NOVATEK’s Management Board. Has the title “Honored em- ployee of OAO NOVATEK”, awarded the Order of Merit for the Fatherland 2 degree. MR. IOSIF L. LEVINZON ■ Deputy Chairman of NOVATEK’s Management Board Born in 1956 Mr. Levinzon graduated from the Tyumen Industrial Institute specializing in geology and is a Candidate of Geological 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 Purneftegasgeologiya. From 1996 to 2005, Mr. Levinzon was the Deputy Governor, 1st Deputy Governor and Vice-Governor of the Yamal-Nenets Autonomous Region. From 2005 to 2006, Mr. Levinzon he has been an Advi- sor to the Chairman of the Federation Council of the Federal Assembly of the Russian Federation. From 2006 to 2009, Mr. Levinzon has been an Advisor on Corporate and Strategic Development at ZAO OSTER and also at ZAO Investgeoservis. Since August 2009, Mr. Levinzon has held the position of Depu- ty Chairman of NOVATEK’s Management Board and in Decem- ber 2009 he was elected a member of NOVATEK’s Management Board. Mr. Levinzon is a recipient of the Honored Geologist of Russia, the Order of the Badge of Honor and the Order of the Friendship of Peoples awards and has been awarded the Certiﬁ cate of Merit from the Governor of the Yamal-Nenets Autonomous Region. MR. MIKHAIL V. POPOV ■ First Deputy Chairman of NOVATEK’s Management Board ■ Commercial Director Born in 1969 Mr. Popov studied at the Gubkin State Academy of Oil and Gas until 1992 and in 1994, graduated from the Kiev Insti- tute of National Economy. In 1992, he held the position of Deputy Chairman of AO Bankomsvyaz’s Managing Commit- tee (Kiev). In 2002, he was appointed Director of the Capital Construction Department and Deputy General Director of OAO Novafininvest. From 2003, Mr. Popov 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 Management Board. Since August 2007, he has been a member of the Management Board and since May 2011, he has been NOVATEK’s First Deputy Chairman-Com- mercial Director. MR. ALEXANDER M. FRIDMAN ■ Deputy Chairman of NOVATEK’s Management Board Born in 1951 In 1973, Mr. Fridman graduated from the Gubkin Institute of Oil and Gas in Moscow, with a degree in Oil and Gas Fields Develop- ment and Exploitation. Since 1973, he was employed by various Gazprom companies: as Chief Engineer of Nadymgazprom, Head of the Production and Technical Department of the Industrial Association, and Chief Engineer of Mostransgaz’s Kaluga Depart- ment for Gas Transportation and Underground Storage. From 1992 to 2003, he was First Deputy General Director of a joint venture established by OAO Gazprom and DKG-EAST (Hungary). Since 2003 Mr. Fridman was the Deputy General Director of No- vaﬁ ninvest. In 2004, Mr. Fridman was elected Deputy Chairman of the Management Board of OAO NOVATEK. In August 2007, he has been a member of NOVATEK’s Management Board. Mr. Frid- man is the recipient of the title of honor “Honored man of the oil and gas industry”. ANNUAL REPORT 2014 67 MR. KIRILL N. YANOVSKIY ■ Member of NOVATEK’s Management Board ■ Director for Finance and Strategy Born in 1967 In 1991, Mr. Yanovskiy graduated from the Gubkin Institute of Oil and Gas in Moscow. From 1992, he headed a department of the Yugorsky Joint-Stock Bank. From 1995, he headed the Securities Department at the Neftek Joint-Stock Commercial Bank. Since 2002, he has been Director of NOVATEK’s Financial Planning, Analysis and Control Department. In August 2007, Mr. Yanovskiy was elected to NOVATEK’s Management Board and in 2007 was appointed Deputy Director for Finance and Strategy. Since May 2011 he has been Director for Finance and Strategy. Major Transactions and Interested Party Transactions In 2014, NOVATEK consummated no interested party and major transactions. Forward–looking Statements This Annual Review includes ‘forward-looking information’ within the meaning of Section 27A of the US Securities Act of 1933, as amended, and Section 21E of the US Securities Exchange Act of 1934, as amended. Certain statements included in this Annual Report and Accounts, including, without limitation, statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other state- ments, which are other than statements of historical facts. The words “believe,” “expect,” “anticipate,” “intends,” “estimate,” “forecast,” “project,” “will,” “may,” “should” and similar expressions identify for- ward-looking statements. Forward-looking statements include statements regarding: strategies, outlook and growth prospects; future plans and potential for future growth; liquidity, capital resources and capital expenditures; growth in demand for our products; economic outlook and industry trends; developments of our markets; the impact of regulatory initiatives; and the strength of our competitors. The forward-looking statements in this Annual Review are based upon various assumptions, many of which are based, in turn, upon further assumptions, includ- ing without limitation, management’s examination of historical operating trends, data contained in our records and other data available from third parties. Although we believe that these as- sumptions were reasonable when made, these assumptions are inherently subject to signiﬁ cant uncertainties and contingencies, which are diﬃ cult or impossible to predict and are beyond our control. As a result, we may not achieve or accomplish these ex- pectations, beliefs or projections. In addition, important factors that, in our view, could cause actual results to diﬀ er materially from those discussed in the forward-looking statements include: ■ changes in the balance of oil and gas supply and demand in Russia and Europe; ■ the eﬀ ects of domestic and international oil and gas price volatility and changes in regulatory conditions, including prices and taxes; ■ the eﬀ ects of competition in the domestic and export oil and gas markets; ■ our ability to successfully implement any of our business strategies; ■ the impact of our expansion on our revenue potential, cost basis and margins; ■ our ability to produce target volumes in the event, among other factors, of restrictions on our access to transportation infrastructure; ■ the eﬀ ects 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 and/or independent petroleum reservoir engineers; ■ inherent uncertainties in interpreting geophysical data; ■ changes to project schedules and estimated completion dates; ■ our success in identifying and managing risks to our businesses; ■ the eﬀ ects of changes to the Russian legal framework concerning currently held and any newly acquired oil and gas production licenses; ■ changes in political, social, legal or economic conditions in Russia and the CIS; ■ the eﬀ ects of technological changes; ■ the eﬀ ects of changes in accounting standards or practices. This list of important factors is not exhaustive. When relying on forward-looking statements, one should carefully consider the foregoing factors and other uncertainties and events, especially in light of the political, economic, social and legal environment in which we operate. Such forward looking statements speak only as of the date on which they are made. Accordingly, we do not undertake any obligation to update or revise any of them, whether as a result of new information, future events or other- wise. We do not make any representation, warranty or prediction that the results anticipated by such forward-looking statements will be achieved, and such forward-looking statements rep- resent, in each case, only one of many possible scenarios and should not be viewed as the most likely or standard scenario. The information and opinions contained in this document are provided as at the date of this review and are subject to change without notice. 68 NEW QUALITY OF GROWTH NOVATEK Terms and Abbreviations Conversion Factors Mentions in this Annual Report of “OAO NOVATEK”, “NOVATEK”, “the Company”, “we” and “our” refer to OAO NOVATEK and/or its sub- sidiaries (according to IFRS methodology) and/or joint ventures (accounted for on an equity basis according to IFRS standards), depending upon the context, in which the terms are used. 1000 cubic meters of gas = 6.54 boe. To convert crude oil and gas condensate reserves from tons to barrels we used various coeﬃ cients depending on the liquids density at each ﬁ eld. one stock tank barrel, or 42 US gallons of liquid volume billion cubic meters barrels of oil equivalent kilometer(s) thousand boe thousand cubic meters thousand metric tons barrel bcm boe km mboe mcm mt mmboe million boe mmcm million cubic meters mmt ton SEC PRMS YNAO RR LPG LNG million metric tons metric ton United States Securities and Exchange Commission Petroleum Resources Management System Yamal-Nenets Autonomous Region Russian rouble liquiﬁ ed petroleum gases liquiﬁ ed natural gas ANNUAL REPORT 2014 69 NOTES 70 NEW QUALITY OF GROWTH NOTES NOVATEK ANNUAL REPORT 2014 71 CONTACT INFORMATION Legal address 22 A Pobedy Street, Tarko-Sale, Yamal-Nenets Autonomous Region, 629850, Russia Ofﬁ ce 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 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 Oﬃ ce 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 Website: www.novatek.ru (Russian version) www.novatek.ru/eng (English version) 72 NEW QUALITY OF GROWTH K E T A V O N O A O H T W O R G F O Y T I L A U Q W E N 4 1 0 2 T R O P E R L A U N N A OF GROWTH QUALITY NEW Annual report 2014 WWW.NOVATEK.RU/EN

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