Novatek Annual Report 2017

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FY2017 Annual Report · Novatek

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TRANSFORMING INTO
A GLOBAL GAS COMPANY

Annual Report

2017

Annual Report

Годовой отчет

2017
2017

Annual Report 2017

Contents

Letter to Shareholders
Strategic Priorities
Key Events and Achievements 2017
Key Indicators

6
12
16
26

REVIEW OF OPERATING RESULTS

Licenses
Hydrocarbon Reserves
Geological Exploration
Field Development
Hydrocarbon Production
Yamal LNG Project
Processing of Gas Condensate
Natural Gas Sales
Liquid Hydrocarbon Sales

42
43
44
46
46
47
48
49
50

ENVIRONMENTAL AND SOCIAL RESPONSIBILITY

Environmental Protection
Industrial Safety and Occupational Health
Human Resources
Social Policy and Charity

52
53
55
56

Transforming into a Global Gas Company

NOVATEK—
is one of the largest independent

natural gas producers in Russia.

The Company is engaged in the

exploration, production, processing,

transportation and marketing

of natural gas, LNG and liquid

hydrocarbons.

MANAGEMENT AND CORPORATE GOVERNANCE

Corporate Governance System
General Meeting of Shareholders
Board of Directors
Board Committees
Management Board
Remuneration to Members of the Board
of Directors and Management Board
Internal Control and Audit
Share Capital
Dividends
Information Transparency
Rebranding

59
60
60
62
63

63
64
65
66
67
68

ADDITIONAL INFORMATION

Risk Management System
Risk Insurance
Information on Members of
NOVATEK’s Board of Directors
Information on Members of
NOVATEK’s Management Board
Report on major, and interested-party T
ransactions that the Company
Did in the Reporting Year
Corporate Governance
Code Compliance Report
Forward–looking Statements
Terms and Abbreviations
Conversion Factors
IFRS Consolidated Financial Statements for 2017
Contact Information

69
76

82
106
107
107
108
181

Annual Report 2017

Letter to
Shareholders

ALEXANDER NATALENKO
Chairman of the Board
of Directors

DEAR SHAREHOLDERS,

IN TWO THOUSAND AND SEVENTEEN we reached a
landmark milestone in the Company’s history as we
successfully launched our Yamal LNG project and
outlined our new corporate strategy to the year
2030. Both events sent a clear and strong message
that our future lies in unlocking the vast resource po-
tential of the Yamal and Gydan peninsulas to become
one of the largest LNG producers in the world.

On 12 December 2017, we held our Corporate Strate-
gy Day in Moscow that comprehensively outlined our

long-term strategy covering the period up to 2030,
highlighting our views of the global markets and how
we believe NOVATEK can play a key role in delivering
clean-burning, affordable and secure energy to the
global markets. The process of TRANSFORMING INTO
A GLOBAL GAS COMPANY and a major global LNG
player began with the successful launch of our first
liquefied natural gas (LNG) production in 2017.

From July 2005, when we went public, we used the
analogy of the four pillars model to highlight the at-
tractiveness of NOVATEK as an investment opportu-
nity: high quality long life reserves, strong production

Transforming into a Global Gas Company

LEONID MIKHELSON
Chairman of the
Management Board

MARK GYETVAY
Deputy Chairman
of the Management Board

growth, low operating cost and low risk to commod-
ity price movements. Now we proudly add a fifth
column — scalable LNG projects — further strength-
ening our foundation, our uniqueness, and our invest-
ment story. Natural gas will play a leading role in the
global future energy mix to 2030 and beyond, and
our new corporate strategy transforms NOVATEK
into a global gas and LNG power. At the same time we
are still focused on our existing business model that
is committed to delivering uninterrupted natural gas
to the Russian domestic market. This path generates
sustainable operating cash flows to fund our larger
LNG ambitions.

Natural gas delivered to the markets in the form of
LNG will lead the way in a world quickly transforming
to a lower carbon, greener environment. NOVATEK’s
next strategic direction is to become one of the
world’s largest LNG producers by utilizing our sig-
nificant low-cost, conventional natural gas resource
base combined with the unique experience we gained
in LNG development and construction in the Arctic.

We also introduced our new brand identity, a creative
interpretation of liquefying gas molecules. Our new
corporate identity represents a symbolic break from
our past and the beginning of our new future and our

Annual Report 2017

The process of transforming into a global gas
company and a major global LNG player began
with the successful launch of our first liquefied
natural gas production in 2017.

bold and contemporary vision to meet the energy
challenges of tomorrow and for decades to come.

In December 2017, we successfully commenced pro-
ducing LNG at the Yamal LNG project first liquefaction
train with the nameplate capacity of 5.5 million tons
per annum, and made the first LNG tanker ship-
ment using the Arc7 ice-class tanker “Christophe de
Margerie”. This event represents an extraordinary
accomplishment. Yamal LNG is also a great example
of how we implement our strategy leveraging our
strengths while maintaining our strong focus on cost
control and project execution. We have taken con-
ceptual ideas and transformed these concepts into
tangible results. We constructed a world-class LNG
project on permafrost, the first of its kind. We devel-
oped a test model of a tanker hull and then delivered
the first Arc7 ice-class tanker.

The commencement of LNG production was the
cumulative result of many months of hard work
and dedication by thousands of construction work-
ers, installers, and engineers who have worked and
continue to work in Sabetta. We have developed this
large-scale project on time and on budget despite
harsh climatic conditions and less than ideal market
conditions. This accomplishment is something to be
very proud of as a company.

Successful development of our first LNG project
paves the way to develop the prolific resource base
of the Arctic region. In November 2017 we signed a
Strategic Cooperation Agreement with the Chinese
National Petroleum Company (CNPC) on cooperation
in implementing the Arctic LNG 2 project, as well as
collaborating in different segments of the LNG and
natural gas markets, including LNG trading and gas
infrastructure development. Our companies already
have a history of effective cooperation, and we
believe our continued cooperation will open up new

opportunities for both companies, utilizing our expe-
rience in implementing LNG projects combined with
the enormous opportunities in the Chinese market,
one of the most perspective gas markets globally. In
November, we also signed a Memorandum of Under-
standing with the China Development Bank on coop-
eration in implementing the Arctic LNG 2 project, as
well as other NOVATEK’s projects.

To efficiently develop our vast resource base in the Far
North, decrease construction costs and increase the
competitiveness of our future LNG-projects, we decid-
ed to create an LNG construction center in Russia. In
June 2017, we signed a Memorandum of Understanding
with the Ministry of Industry and Trade and the Mur-
mansk Region Government on creating a center for
the construction of large-scale offshore structures in
Belokamenka, located in the Murmansk region.

We are working to optimize LNG transportation logis-
tics via the Northern Sea Route and utilize lower cost
conventional LNG tankers to ultimately deliver LNG
to the Asian markets. We are studying the economic
feasibility of building an LNG transshipment terminal
at Kamchatka where the LNG will be delivered from
the Yamal and Gydan peninsulas by Arc7 ice-class
LNG carriers and then reloaded onto conventional
LNG tankers and shipped to the final customers. This
transshipment facility will reduce transportation
costs as well as provide security of supply for Asian
countries requiring flexibility to purchase volumes on
short notice and short delivery times. Moreover, we
will save a significant amount of travel time between
routes, lowering the boil-off gas volumes due to the
shorter transport distance. Our boil-off gas will be
sold to the local gas network in Kamchatka and cover
the operating costs of running the transshipment
facility. In 2017, we concluded a Cooperation Agree-
ment with the Kamchatka Territorial Government on
building a sea terminal reloading facility.

bcm — natural gas sales
volumes in 2017

Transforming into a Global Gas Company

91%

overall Yamal LNG
project progress as of
the end of 2017

Our massive hydrocarbon resource position ranks
NOVATEK as one of the largest oil and gas com-
panies in the world. Large, high quality, low-cost
resource base in the hydrocarbon rich Yamal and
Gydan peninsulas underlies our growth strategy.
In June and August of 2017, we successfully ex-
panded our resource base by winning the auctions
and obtaining the new licenses on the Yamal and
Gydan peninsulas complementing our LNG devel-
opment strategy: Gydanskoye, Verhnetiuteyskoye,
West-Seyakhinskoye and Shormovoye fields. During
the reporting year, we also acquired South-Khady-
ryakhinskoye, Syskonsynyinskoye fields, West-Ya-
royakhinskiy license area and won an auction for
the Osenniy license area thus adding to our re-
source base within the reach of the Unified Gas
Supply System, or UGSS.

In 2017, the Company’s reserves were also positive-
ly impacted by successful exploration works at the
Utrenneye, Kharbeyskoye, West-Yurkharovskoye
and Urengoyskoye (Samburgskiy license area) fields
and production drilling at the South-Tambeyskoye
field. Total SEC proved reserves, including the Com-
pany’s proportionate share in joint ventures, ag-
gregated 15,120 million barrels of oil equivalent (boe),
including 2,098 billion cubic meters (bcm) of natural
gas and 164 million metric tons (mmt) of liquid hydro-
carbons. Total proved reserves increased by 12.8%
compared to the year-end 2016, representing a
reserve replacement rate of 435% for the year.

Excluding the effect of obtaining new licenses, our
total proved reserves increased by 1.3%, represent-
ing an organic reserve replacement rate of 134%.
At year-end 2017, the Company’s reserve to pro-
duction ratio (or R/P ratio) increased to 29 years as
compared to 24 years in 2016. We retained our core
competitive advantage being ranked among the low-
est cost hydrocarbon producers globally, and our

lifting costs remained at a very low level of $0.8 per
BOE. We are fully committed to our strategy provid-
ing for strict cost control and conservative financial
policies.

We are actively working to sustain production levels
within the reach of the UGSS, which is one of NO-
VATEK’s strategic priorities. We are working both on
new fields’ development as well as conducting ex-
ploration activities on our current producing assets
to drill deeper into the Achimov and Jurassic layers.
Technology will be used to increase production at our
core domestic assets by using multi-stage fractur-
ing techniques to stimulate production flows in the
lower permeable Achimov and Jurassic formations.
At the wells drilled in 2017, we have achieved very
good flow rates for natural gas and gas condensate
as well as higher gas condensate factor than earlier
wells, which means we can optimize the cost of our
development program and increase profitability of
our projects. We will deploy this new deeper drilling
program across a range of our fields.

During the past year, total hydrocarbon production
totaled 513.3 million barrels of oil equivalent, includ-
ing 63.40 billion cubic meters of natural gas and
11,774 thousand tons of liquids (gas condensate and
crude oil). Loading our gas condensate processing
facilities to maximize risk-adjusted margins for many
years to come remains our priority, and in 2017, we
achieved this objective. In 2017, our processing facil-
ities reached milestone volumes: the Purovsky Plant
processed its 65th million tons of gas condensate
since its launch in 2005, and the Ust-Luga Complex —
its 25th million tons since its launch in 2013.

We increased our natural gas sales volumes to
65.0 bcm in 2017, including the first LNG sales vol-
umes, which was 0.5% higher compared with 2016. In
December 2017, NOVATEK sold its first cargo of LNG.

Annual Report 2017

We strengthened our balance sheet. Our current
business generates sufficient operating cash flows to
internally fund our operations, service our debt and
liabilities, and distribute cash to our shareholders in
the form of dividends. Our strong cash flow generat-
ed from our core domestic business has allowed us
to significantly reduce our long-term debt portfolio
and maintain strong credit metrics. In 2017, our reve-
nues increased by 8.5% to RR 583 bln and our EBITDA
increased by 5.8% to RR 256 bln while our Free Cash
Flow increased by 7.6% to RR 151 bln.

Based on the Company’s financial results, the Board
of Directors recommended to the General Meeting
of Shareholders to approve dividends for 2017 at RR
14,95 per share, exceeding the dividend paid out for
the previous year by 7,6%.

One of our key priorities is to protect the ecosys-
tems of the vulnerable and fragile environment of the
Arctic region where our fields are located. In 2017,
NOVATEK remained a constituent of the FTSE4Good
Emerging Index of FTSE Russel Ratings and the Vigeo

513

15.1

mmboe — hydrocarbon
production in 2017

bln boe — total hydrocarbon
reserves (SEC)

Eiris Best Emerging Markets performers ranking (the
100 most advanced companies in Emerging Markets
universe). Besides international acknowledgment
of our efforts in environmental protection, social
responsibility and corporate governance, we became
the winner of the 2017 National Environmental Award
named after Vladimir Vernadskiy in the nomination
“Science for Ecology” with our Corporate Greenhouse
Gas Emissions Control System implemented in 2017.

Stricter environmental standards are redefining the
shipping industry’s move towards cleaner types of
fuels. We are confident that more shipping companies

will opt for LNG to meet stricter emission standards for
marine transportation by 2020, and we are ready to
facilitate the LNG bunkering market and infrastructure
development. In 2017, Novatek Gas & Power, our wholly
owned trading subsidiary, has joined the Society for
Gas as a Marine Fuel and the SEA\LNG Association to
help promote liquefied natural gas as a marine fuel.

It’s also important to recognize the management team
of NOVATEK and the many dedicated employees of the
Company based at each of the subsidiary locations who
contribute to TRANSFORMING NOVATEK INTO A GLOBAL
GAS COMPANY. We would never achieve our strategic

Transforming into a Global Gas Company

goals without their commitment, dedication and hard
work. We truly value their contribution to our success.

On behalf of the Board of Directors and Manage-
ment Board, we are pleased to present to our valued
stakeholders the Company’s 2017 Annual Report. We
would like to thank everyone for your continued sup-
port, as we remain committed to growing NOVATEK
in a new strategic direction while implementing the
best international practices and principles of sus-
tainable development and corporate governance. We
have begun a new chapter in our Company’s history.

We are working both on new fields’ development
as well as conducting exploration activities on our
current producing assets to drill deeper into the
Achimov and Jurassic layers.

ALEXANDER NATALENKO
Chairman of the Board of Directors

LEONID MIKHELSON
Chairman of the
Management Board

MARK GYETVAY
Deputy Chairman
of the Management Board

Annual Report 2017

Strategic Priorities

EFFICIENT INVESTMENT
DECISIONS

n
o
t
a
v
o
n
n

INCREASE
HYDROCARBON
PRODUCTION

MAINTAIN
LOW COST
STRUCTURE

technology

RESOURCE BASE
GROWTH

technology

SUSTAINABLE
DEVELOPMENT

CORPORATE
GOVERNANCE

OPTIMIZE
MARKETING
CHANNELS

BUILD LOW COST,
SCALABLE LNG
PLATFORM

n
o
t
a
v
o
n
n

CONSERVATIVE FINANCIAL
POLICIES

On 12 December 2017, the Company held its Corpo-
rate Strategy Day that comprehensively outlined our
long-term strategy covering the period up to 2030.

The Company has a number of key competitive ad-
vantages to successfully implement its strategy: 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 gas (LPG).
Development of LNG production capacities and LNG

export sales is a key strategic priority for the Company.
Another core priority is to increase production with-
in the reach of the Unified Gas Supply System (UGSS)
through development of new fields and exploration
activities, and complimented by acquisitions which meet
certain criteria. 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.

Transforming into a Global Gas Company

Leveraging
Our Strengths

RESERVES, PRODUCTION, PROCESSING

TECHNOLOGY AND INNOVATION

• Prolific hydrocarbon resources in Western Siberia,
including the Yamal and Gydan Peninsulas and with-
in the reach of Unified Gas Supply System;

• Low cost of processing and production;
• Long-term, sustainable growth in production;
• Established liquids processing value chain.

• Efficient use of state-of-the-art technologies to

•

•
•

monetize prolific resource base;
Implement high-tech projects in construction of
processing facilities;
Implement LNG projects in the Arctic Circle;
Implement new innovative technology to build LNG
plants on GBS;

• New liquefaction technology adapted for Arctic

conditions.

COMPANY AND PEOPLE

FINANCE

• Transparent governance structure;
• Experienced management, highly qualified techni-

• Strong financial and operational performance;
• Compelling business model generating sufficient free

cal specialists and dedicated employees;

cash flows;

• High standards of corporate governance, trans-

parency and sustainability;

• Solid track record of project execution.

• Low financial leverage and strong credit metrics;
• Low debt levels and strong creditor protection.

Annual Report 2017

Hydrocarbon
Resource Base

Large, high quality, low-cost hydrocarbon resource base to support strategic
objectives

Yamal
Peninsula

Yamal-Nenets

Autonomous

Region

36 37

Gydan
Peninsula

Yamal

Peninsula

36 37

Gydan

Peninsula

Yamal

Peninsula

36 37

Gydan

Peninsula

Yamal-Nenets

Autonomous

Region

Transforming into a Global Gas Company

Yamal-Nenets
Autonomous
Region

fields and
license areas

PRODUCTION

PROSPECTIVE FIELDS AND LICENSE AREAS

1. Yurkharovskoye field
2. East-Tarkosalinskoye field
3. Khancheyskoye field
4. Olimpiyskiy license area
5. Yumantilskiy license area
6. Samburgskiy license area
7. North-Urengoyskoye field
8. North-Khancheyskoye field
9. Yaro-Yakhinskiy license area
10. Termokarstovoye field
11. Yarudeyskoye field
12. South-Tambeyskoye field1
13. West-Yaroyakhinskiy license area
14. Syskonsynyinskiy license area (located in the

Khanty-Mansiysk Autonomous Region)

Yamal LNG

Purovsky Gas Condensate Processing Plant

Gas condensate pipelines of NOVATEK

1. Yamal LNG Project.
2. Arctic LNG 2 Project.

15. West-Yurkharovskoye field
16. Raduzhnoye field
17. West-Urengoiskiy license area
18. North-Yubileynoye field
19. North-Russkiy license area
20. North-Russkoye field
21. Dorogovskoye field
22. Ukrainsko-Yubileynoye field
23. Malo-Yamalskoye field
24. West-Chaselskoye field
25. Yevo-Yakhinskoye field
26. North-Chaselskiy license area
27. Utrenneye field2
28. Geofizicheskoe field
29. North-Obskiy license area
30. East-Tambeyskiy license area
31. North-Tasiyskiy license area
32. East-Tazovskoye field
33. Trekhbugorniy license area
34. Nyakhartinskiy license area
35. Ladertoyskiy license area
36. Nyavuyahskiy license area
37. West-Solpatinskiy license area
38. North-Tanamskiy license area
39. Syadorskiy license area
40. Tanamskiy subsoil area
41. Kharbeyskiy license area
42. Gydanskiy license area
43. Shtormovoy license area
44. Verhnetiuteyskiy + West-Seyakhinskiy LA
45. South-Khadyryakhinskiy license area

Annual Report 2017

Key Events and
Achievements 2017

We signed a Memoran-
dum of Understanding
with the Ministry of
Industry and Trade and
the Murmansk Regional
Government on creating
a center for the con-
struction of large-scale
offshore structures.

We held our Corporate
Strategy Day that com-
prehensively outlined
our long-term strategy
covering the period up
to 2030.

We joined the Society for
Gas as a Marine Fuel and
the SEA\LNG Association.

NOVATEK remained a
constituent of the FTS-
E4Good Emerging Index
of FTSE Russel Ratings
and the Vigeo Eiris Best
Emerging Markets per-
formers ranking rep-
resenting the 100 most
advanced companies
in Emerging Markets
universe, and became
the winner of the 2017
National Environmen-
tal Award named after
Vladimir Vernadskiy in
the nomination “Science
for Ecology” with our
Corporate Greenhouse
Gas Emissions Control
System.

We signed Cooperation
Agreements with Tech-
nipFMC, Linde AG and
Research and Design
Institute for Gas Pro-
cessing and with JSC
Atomenergomash and
JSC United Shipbuilding
Corporation.

The first liquefaction
train at Yamal LNG suc-
cessfully commenced
producing LNG, and
the first LNG tanker
shipment was made
using the Arc7 ice-class
tanker “Christophe de
Margerie”.

Transforming into a Global Gas Company

We signed a Memorandum of Understanding (MOU)
with the China Development Bank, a Strategic Cooper-
ation Agreement with the Chinese National Petroleum
Company (CNPC), a trilateral MOU with Marubeni Cor-
poration and Mitsui O.S.K. Lines, Ltd. and an MOU with
Total and Siemens on cooperation in Vietnam.

We signed a Coopera-
tion Agreement with the
Kamchatka Territorial
Government on building
a sea terminal facility for
reloading liquefied natu-
ral gas (LNG).

We obtained the new licenses on the Yamal and Gydan
peninsulas winning the auctions for Gydanskoye, Verh-
netiuteyskoye, West-Seyakhinskoye and Shormovoye
fields and acquired the South-Khadyryakhinskoye, Sys-
konsynyinskoye fields and West-Yaroyakhinskiy license
area.

П-ов Ямал

Южно-

Тамбейское

месторожд.

Сабетта

Annual Report 2017

Yamal LNG Project

YAMAL LNG is an integrated project for natural gas production, liquefaction
and transportation. Starting LNG production at the first train of the plant and
loading the first tanker NOVATEK entered the global gas market and became a
worldwide gas company.

UPSTREAM

Gas and gas condensate

LNG PLANT

LNG and stable gas condensate

PORT
SABETTA

production trains
of liquefaction plant
with annual capacity
of 5.5 mmt each

17.4

mmt per annum —
capacity of the
LNG plant

208

production wells
stipulated by the field’s
development plan

Yamal
Peninsula

South-
Tambeyskoye
ﬁeld

Sabetta

bcm of natural gas per
annum — the field’s
production potential

П-ов Ямал

Южно-

Тамбейское

месторожд.

Сабетта

Transforming into a Global Gas Company

SEA
TRANSPORTATION

GLOBAL
MARKETS

NSR

E U R O P E

A S I A

reloading at
Zeebrugge

4th

train with a capacity
of 0.9 mmt

91%

overall Yamal LNG
project progress

Arc7

Ice-class LNG carrier
of special design for
LNG transportation

170

mcm — Cargo capacity
of the Project’s ARC7
tankers

Key Project Advantages
• Large onshore conventional reserve base with

high concentration of reserves;

• Well known geology and proven development tech-

nologies;

• Very low F&D and lifting costs;
• High efficiency factor of gas liquefaction process

due to sub-zero temperatures;

• Access to both European and Asian markets.

Project Implementation
As of the end of 2017, the overall project progress
was 91%. The South-Tambeyskoye field was estimated
to contain 683 bcm of proved natural gas reserves
and 21 mmt of proved liquid hydrocarbon reserves
(SEC). 103 production wells were drilled at the field, all
142 modules for the LNG plant three trains had been
delivered to the site by sea, 137 of them had been
installed on the prepared foundations. More than
95% of the LNG volumes produced within the three
trains of the project has been contracted on a long-
term basis.

Annual Report 2017

Yamal LNG
Project Implementation

50.1%

20%

9.9%

Shareholders of Yamal LNG are NOVATEK (50.1%),
Total (20%), CNPC (20%) and Silk Road Fund (9.9%).

Sabetta port
construction

Drilling start

1974

2009

2012

2013

2014

FEED

First piling
commenced

The South-
Tambeyskoye
field was
discovered

NOVATEK becomes a
shareholder of OAO Yamal
LNG, which holds license for
exploration and production
at the South-Tambeyskoye
field

Transforming into a Global Gas Company

2017

In December 2017,
the LNG production
started

2015

2016

2017

All modules
delivered

Project
financing
completed

First LNG
tanker test
started (Arc7)

Commissioning

Start of LNG production
at the first train

Delivery of the first LNG cargo
by the Arc7 ice-class tanker
“Christophe de Margerie”

First flight
to Sabetta
Airport

First LNG plant
module arrived

Annual Report 2017

LNG Logistics

The geographical location of our projects on Yamal
and Gydan Peninsulas allows us to supply LNG to Eu-
rope and Asia using the Northern Sea Route and the
traditional route through the Sea Route. We plan to
build an LNG trans shipment terminal on the
Kamchatka Peninsula, which will reduce
transportation costs and provide
direct access to premium markets.

LNG transshipment complex
on the Kamchatka Peninsula

Concept

• Moored LNG storage

ship

• Option to sell FOB

Kamchatka

3.7

thousand nautical miles
from Sabetta

mln tons per annum —
Planned transshipment
capacity

Transforming into a Global Gas Company

Winter
(Western)
route

Sales via
transshipment
at Kamchatka

Summer route —
direct sales to Asia
(NSR)

Yamal LNG/
Arctic LNG 2

Number of travel days

Transshipment (Europe/ Kamchatka)

Annual report 2017
Annual Report 2017

Transforming
into a Global
Gas Company

103

production wells
drilled

thousand
construction
workers in
Sabetta

142

large plant mod-
ules delivered

mmt of cargo
delivered for
plant construction

24
24

Transforming into a Global Gas Company
Transforming into a Global Gas Company

On 5 December, the first
train at Yamal LNG suc-
cessfully commenced
producing LNG and
on 8 December, the first
LNG was loaded onto
the ice-class tanker
“ Christophe
de Margerie”.

650

companies from 55
Russia’s constituent
regions

25
25

Annual Report 2017

Key Indicators

Unit

2016

2017

Change

FINANCIAL INDICATORS

Total revenues

RR mln

537,472

583,186

Normalized profit from operations1

RR mln

152,194

163,751

Normalized EBITDA (including share in EBITDA of JVs)1

RR mln

242,407

256,464

8.5%

7.6%

5.8%

Normalized profit attributable to shareholders of PAO NO-
VATEK2

RR mln

133,759

156,166

16.8%

Normalized earnings per share2

44.31

51.78

16.8%

Net cash provided by operating activities

RR mln

173,791

180,399

3.8%

Net cash used for capital expenditures3

RR mln

33,905

29,871

(11.9%)

Free cash flow

RR mln

139,886

150,528

7.6%

OPERATING INDICATORS

Proved natural gas reserves (SEC)

Proved liquid hydrocarbon reserves (SEC)

bcm

mmt

1,848

154

2,098

164

Total hydrocarbon reserves (SEC)

mmboe

13,402

15,120

Production of natural gas

Production of liquid hydrocarbons

Total production

Daily production

POSITIONS IN RUSSIA

Share in natural gas production4

Share in liquid hydrocarbon production4

bcm

67.6

12,441

mln boe

547.0

mln boe per
day

1.49

10.5%

2.3%

63.4

11,774

513.3

1.41

9.1%

2.2%

13.5%

6.5%

12.8%

(6.3%)

(5.4%)

(6.2%)

(5.9%)

(1.4) p.p.

(0.1) p.p.

1. Excluding the effect from disposal of interests in joint ventures.
2. Excluding the effects from the disposal of interests in joint ventures, as well as foreign exchange gains (losses).
3. Cash used for capital expenditures represents purchases of property, plant and equipment, materials for construction and capitalized interest

paid per Consolidated Statement of Cash Flows net of payments for mineral licenses and acquisition of subsidiaries.

4. According to CDU TEK information.

Transforming into a Global Gas Company

Total proved hydrocarbon reserves (SEC),

Proved natural gas reserves (SEC), bcm

mmboe

12,537

12,643

12,817

13,402

64%
15,120

36%

1,740

1,751

1,775

1,848

66%
2,098

34%

2013

2014

2015

2016

2017

2013

2014

2015

2016

2017

Proved undeveloped

Proved developed

Proved undeveloped in 2017

Proved developed in 2017

Natural gas production, bcm

Liquids production, mmt

61.2

62.1

67.9

67.6

63.4

4.8

6.0

9.1

12.4

59%
11.8

41%

2013

2014

2015

2016

2017

2013

2014

2015

2016

2017

Gas condensate

Gas condensate in 2017

Crude oil

Crude oil in 2017

Operating cash flow, RR bln

Dividends per share, RR

88.5

111.2

132.9

173.8

180.4

7.89

10.3

13.5

13.9

14.951

2013

2014

2015

2016

2017

2013

2014

2015

2016

2017

1. Recommendation of the Board of Directors.

Annual Report 2017

Geological Exploration
and Production

Yamal-Nenets Autonomous Region is the world’s largest natural gas pro-
ducing area and accounts for approximately 80% of Russia’s natural gas
production and approximately 15% of the world’s gas production.

As of 31 December 2017, NOVATEK’s SEC proved re-
serves, including the Company’s proportionate share
in joint ventures, aggregated 15,120 million barrels of oil
equivalent (mmboe), including 2,098 billion cubic meters
(bcm) of natural gas and 164 million metric tons (mmt) of
liquid hydrocarbons. The Company’s proved reserves
grew by 12.8%, and the reserve replacement ratio stood
at 435%. At year-end 2017, the Company’s reserve to
production ratio (or R/P ratio) was 29 years.

The Company’s reserves were positively impacted by
successful exploration works at the Utrenneye, Khar-
beyskoye, West-Yurkharovskoye and Urengoyskoye
(Samburgskiy license area) fields, production drilling
at the South-Tambeyskoye field, as well as the new li-
censes obtained through tender auctions (Gydanskoye,
Verhnetiuteyskoye and West-Seyakhinskoye fields) and
recent asset acquisitions (South-Khadyryakhinskoye,
Syskonsynyinskoye fields and West-Yaroyakhinskiy
license area).

In 2017, we completed the running of 1,465 square
kilometers of 3D seismic works and drilled 25 thousand

meters of exploration drilling. 26 new hydrocarbon
deposits were discovered. Production drilling in 2017,
including joint ventures, reached 262,000 m, which
is 12% above the 2016 number. Increase in the drilling
volumes was mainly driven by the development of the
Yaro-Yakhinskoye field of Arcticgas with 9 wells drilled
there (in 2016 no wells were drilled at the field). A total
of 68 production wells, including 55 natural gas and
gas condensate and 13 oil wells, were completed and
commissioned.

In 2017, NOVATEK produced commercial hydrocar-
bons at 16 fields. The Company’s production (including
attributable share in the production of JVs) amounted
to 513.3 mmboe, down 6.2% versus 2016. The produc-
tion volumes at mature fields of our subsidiaries and
joint ventures decreased mainly due to natural declines
in the reservoir pressure at the current gas produc-
ing horizons. The decrease was partially offset by the
improved efficiency of associated petroleum gas uti-
lization at our Yarudeyskoye field, as well as the com-
mencement of LNG production at the first LNG train at
Yamal LNG in the fourth quarter of 2017.

Structure of hydrocarbon production in 2017

513 mmboe

Yurkharovskoye field

Arcticgas (NOVATEK’s
share)

East-Tarko-
salinskoye
field

Nortgas
(NOVATEK’s
share)

Yaru-
deyskoye
field

Terneftegas
(NOVATEK’s
share)

Other
fields

42%

25%

11%

22%

CENOMANIAN LAYERS

«Dry» gas not containing liquid

hydrocarbons

VALANGINIAN LAYERS

Gas containing liquid hydrocarbons —

«wet» gas

1,000 m

1,700 m

67%

3,200 m

11%

ACHIMOV LAYERS

JURASSIC LAYERS

«Wet» gas with high share of liquid

hydrocarbons. The layers have low

permeability and require special development

techniques.

«Wet» gas with the highest share of liquid

hydrocarbons. The deposits are characterized with

complex geology and diﬃcult drilling conditions due

to abnormally high formation pressure.

Technologies to develop deep layers

—

m 3

1,500 m

Achimov

layers

Jurassic

layers

> 4,000 m

—

600 m

Hydrofracking

Increase in wells productivity,

Including increase in low permeable formations

1,500 — 2,000 m

Technology previously used

New technology

Main reserves and potential new resource additions

Li“ing costs will remain low:

from deep layers (Achimov, Jurassic etc.) are located

• Additional production from deeper layers utilize

in North-Russkoye cluster, South-Tambeyskoye ﬁeld,

existing infrastructure on legacy ﬁelds

Utrenneye ﬁeld, Geoﬁzicheskoye ﬁeld, Olimpiyskiy LA,

• Use new technologies

and West-Yurkharovskiy LA.

Achimov

Mid-Jurassic

Low-Jurassic

Transforming into a Global Gas Company

years — reserve to
production ratio at
year-end 2017

$2.3

per boe — 2013–2017
reserve replacement
costs

1,000 m

22%

CENOMANIAN LAYERS

«Dry» gas not containing liquid
hydrocarbons

15.1

bln boe of proved
hydrocarbon reserves
under SEC at 31.12.17

1,700 m

67%

3,200 m

11%

VALANGINIAN LAYERS

Gas containing liquid hydrocarbons —
«wet» gas

ACHIMOV LAYERS

JURASSIC LAYERS

«Wet» gas with high share of liquid
hydrocarbons. The layers have low
permeability and require special development
techniques.

«Wet» gas with the highest share of liquid
hydrocarbons. The deposits are characterized with
complex geology and diﬃcult drilling conditions due
to abnormally high formation pressure.

Technologies to develop deep layers

m
0
5
9
3

—
0
0
7
m 3
0
0

1
,
4

600 m

Hydrofracking

1,500 m

Achimov
layers

Jurassic
layers
> 4,000 m

m
0
0

1
,

4
—
0
0
5
3

Achimov
Mid-Jurassic
Low-Jurassic

1,500 — 2,000 m

Increase in wells productivity,
Including increase in low permeable formations

Technology previously used

New technology

Main reserves and potential new resource additions
from deep layers (Achimov, Jurassic etc.) are located
in North-Russkoye cluster, South-Tambeyskoye ﬁeld,
Utrenneye ﬁeld, Geoﬁzicheskoye ﬁeld, Olimpiyskiy LA,
and West-Yurkharovskiy LA.

Li“ing costs will remain low:
• Additional production from deeper layers utilize
existing infrastructure on legacy ﬁelds
• Use new technologies

Annual Report 2017

Ust-Luga Complex

Ust-Luga
Complex
Fractionation
and transshipment
of stable gas
condensate

Stable gas
condensate

Unstable gas

condensate

Purovsky

Plant

Stabilization

of gas

condensate

Light

hydrocarbons

SIBUR’s Tobolsk

Petrochemical

Complex

Producing of

marketable LPG

Output, thousand tons

Stable gas condensate processing volumes,

thousand tons

2,000

1,962

2,195 2,261

1,873

4,706

6,727

6,917

6,961

4,862

6,600

12,021

12,397

11,445

998 1,072 1,147 967

443 564

Gasoil

Jet fuel

Fuel oil

Light
naphtha

Heavy
naphtha

2016

2017

The six million ton per annun Gas Condensate Frac-
tionation and Transshipment Complex (the “Ust-Luga
Complex”) launched in 2013 is located at the all-sea-
son port of Ust-Luga on the Baltic Sea. The Ust-Luga
Complex processes stable gas condensate into light
and heavy naphtha, jet fuel, ship fuel component (fuel
oil) and gasoil, and enables us to ship the value-add-
ed petroleum products to international markets. The
Ust-Luga Complex also allows for transshipment of
stable gas condensate to the export markets.

Railway transportation of stable gas
condensate to Ust-Luga

Sea transportation of petroleum products

from Ust-Luga

Transportation of unstable gas condensate
by pipeline

Light hydrocarbons transportation by pipeline

443 564

998 1,072 1,147 967

2,000

1,962

2,195 2,261

Gasoil

Jet fuel

Fuel oil

Light

Heavy

2013

2014

2015

2016

2017

2013

2014

2015

2016

2017

Ust-Luga
Complex
Fractionation
and transshipment
of stable gas
condensate

Stable gas
condensate

Unstable gas

condensate

Purovsky

Plant

Stabilization

of gas

condensate

Light

hydrocarbons

SIBUR’s Tobolsk

Petrochemical

Complex

Producing of

marketable LPG

1,873

4,706

6,727

6,917

6,961

4,862

6,600

12,021

12,397

11,445

9,667

8,853

2,597 2,493

10.2 16.5

Regenerated

methanol

NGL and

LPG

Stable gas

condensate

naphtha

2013

2014

2015

2016

2017

2013

2014

2015

2016

2017

9,667

8,853

2,597 2,493

10.2 16.5

Regenerated

methanol

NGL and

LPG

Stable gas

condensate

2,000

1,962

2,195 2,261

998 1,072 1,147 967

443 564

Gasoil

Jet fuel

Fuel oil

Light

Heavy

Ust-Luga

Complex

Fractionation

and transshipment

of stable gas

condensate

Stable gas

condensate

Unstable gas
condensate

Purovsky
Plant

Stabilization
of gas
condensate

Transforming into a Global Gas Company

Purovsky Plant

Light
hydrocarbons

SIBUR’s Tobolsk
In 2017, our processing facilities reached milestone volumes: the Purovsky
Petrochemical
Complex
Plant processed its 65th million tons of gas condensate since the launch in
Producing of
marketable LPG
2005, and the Ust-Luga Complex — its 25th million tons since the launch in 2013.

1,873

4,706

6,727

6,917

6,961

4,862

6,600

12,021

12,397

11,445

Processing of de-ethanized condensate,

Output, thousand tons

thousand tons

9,667

8,853

naphtha

2013

2014

2015

2016

2017

2013

2014

2015

2016

2017

Ust-Luga

Complex

Fractionation

and transshipment

of stable gas

condensate

Stable gas

condensate

Unstable gas
condensate

Purovsky
Plant

Stabilization
of gas
condensate

Light
hydrocarbons

SIBUR’s Tobolsk
Petrochemical
Complex
Producing of
marketable LPG

2,000

1,962

2,195 2,261

998 1,072 1,147 967

443 564

Gasoil

Jet fuel

Fuel oil

Light

Heavy

1,873

4,706

6,727

6,917

6,961

4,862

6,600

12,021

12,397

11,445

2,597 2,493

10.2 16.5

Regenerated
methanol

NGL and
LPG

Stable gas
condensate

2016

2017

The Purovsky Plant is the central element in our ver-
tically integrated value chain that provides us com-
plete operational control over our processing needs
and access to higher yielding marketing channels
for our stable gas condensate. The Purovsky Plant
processes unstable gas condensate into stable gas
condensate and natural gas liquids (NGL).

The Purovsky Plant is connected via its own railway
line to the Russian rail network at the Limbey rail
station. Subsequent to the launch of the Ust-Luga
Complex in 2013, most of the stable gas condensate
volumes produced at the Purovsky Plant are deliv-
ered by rail to Ust-Luga for further processing or
transshipment to exports, with the remaining volume
of stable gas condensate sold directly from the plant
to the domestic market.

All of the NGL volumes (feedstock for LPG production)
produced at the plant are delivered by pipeline to
SIBUR’s Tobolsk Petrochemical Complex for further
processing.

9,667

8,853

2,597 2,493

10.2 16.5

naphtha

2013

2014

2015

2016

2017

2013

2014

2015

2016

2017

Regenerated

methanol

NGL and

LPG

Stable gas

condensate

Annual Report 2017

Natural Gas Sales

NOVATEK plays an important role in ensuring supplies of natural gas
to the Russian domestic market. During the past year, we supplied
natural gas to 39 gas consuming regions of the Russian Federation.

Revenues from natural gas sales in 2017 totaled RR
248 billion, representing a 7.8% increase compared
to 2016. The revenue increase was mainly driven
by growth in sales to end customers in Russia, the
increase of Russian domestic regulated prices, as well
as start of LNG deliveries.

Natural gas sales breakdown on the Russian domestic market by customers in 2017

Power generation
companies

Large industrial
consumers

Others

Wholesale traders,
ex-field

Households

44%

28%

21%

5% 2%

67.2
67,2

67.2

2014
2014

2014

64.2
64,2

Natural gas sales, bcm

64.2
64,2

64.2

2013
2013

2013

62.5
62,5

62.5

2015
2015

2015

64.7
64,7

64.7

2016
2016

2016

65.0
65,0

65.0

2017
2017

2017

Transforming into a Global Gas Company

regions of gas
sales in the Russian
Federation in 2017

Kostroma
region

Moscow
region,
Moscow

Smolensk
region

Vologda
region

Perm
territory

64.2

64,2

64.2

64,2

2013

67.2

67,2

67.2

67,2

2014

62.5

62,5

62.5

62,5

2015

64.7

64,7

64.7

64,7

2016

65.0

65,0

65.0

65,0

2017

Nizhny
Novgorod
region

Stavropol
region

Lipezk
region

Republic of
Tatarstan

Chelyabinsk
region

Tyumen
region

Khanty-
Mansiysk
autonomous
region

Yamal-
Nenets
autonomous
region

Main regions of gas sales

Other regions of gas sales

Annual Report 2017

Liquids Sales

NOVATEK sells liquid hydrocarbons (stable gas conden-
sate, petroleum products, light hydrocarbons, LPG and
crude oil) domestically and internationally.

Netherlands

Latvia

Estonia

Denmark

Poland

Germany

Belgium

Romania

Italy

Spain

Greece

6,743

98%

2,648

4,616

1,918

20%

80%

33%

67%

18%

82%

Ust-Luga products

LPG and light
hydrocarbons

Crude oil

Stable gas
condensate

60%

17% 23%

Naphtha

Jet fuel

Diesel and fuel oil

RUSSIA

Transforming into a Global Gas Company

RR 332

bln — Liquids sales
revenues in 2017

15.9

mmt — Sales
volumes of liquid
hydrocarbons
in 2017

In 2017, the liquids sales volume reached 15,939 mt,
or 5.4% less than in 2016. In 2017, export sales de-
creased by 8.5% as compared to 2016 and amounted
to 9,027 mt.

In 2017, our liquids sales revenues increased to RR
332 billion, or by 9.2% as compared to 2016, main-
ly driven by higher global oil prices and underlying
benchmark prices.

Norway

Sweden

Finland

Russia

China

Japan

RUSSIA

6,743

98%

2,648

4,616

1,918

20%

80%

33%

67%

18%

82%

Ust-Luga products

Crude oil

LPG and light

hydrocarbons

Stable gas

condensate

60%

17% 23%

Naphtha

Jet fuel

Diesel and fuel oil

USA

Thailand

Malaysia

Singapore

Taiwan

South Korea

Domestic market

Export markets
Ust-Luga Complex
Purovsky Plant

Exports of LPG and light hydrocarbons

Exports of Ust-Luga products:

Exports of crude oil

Jet fuel

Exports of stable gas condensate

Diesel and fuel oil

Naphtha

Annual Report 2017

Environmental and
Social Responsibility

0,4

0,9

0,5

0,3

2012

2013

2014

2015

2016

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.

Social Expenditures on employees in 2017

1,377
RR mln

36% Targeted Compen-
sation and Socially
Important Payments

14% Repayable Financial

Aid Program

11% Health Resort Treat-
ment and Rehabilita-
tion

11% Voluntary Medical

5% Pension Program

Insurance

2% NOVATEK-Veteran

10% Culture and sports

Program

7% State Guarantees
Support Program

4% Others

Environmental Expenditures in 2017

63% Protection and use of
water resources

14% Enviromental protec-
tion against produc-
tion and consumption
waste

6% Measures for the
protection of flo-
ra and fauna and
preservation of
biodiversity

5% Soil protection

1% Atmospheric air

4% Rational natural re-

sources management

4% Environmental moni-

toring and evaluation
of the background

1% Subsurface protec-

tion

protection and
climate change

1% Other
<1% Environmental
damage
compensation
<1% Environmental

management

2,066
RR mln

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.
Тhe Company is committed to environmental protec-
tion in its operations. In 2017, the Company’s overall
expenses on environment protection and sustainable
nature management amounted to RR 2,066 mln.

As part of its commitments under the Cooperation
Agreement among the Russian Ministry of Natural
Resources and Environment, the Russian Federal
Service for Supervision of Natural Resource Usage,
the Government of the Yamal-Nenets Autonomous
Region and NOVATEK, the Company developed a
greenhouse gas emission estimation module and ap-
proved its Standard SK-ISU-0-012 “Greenhouse Gas
Emission Management System”. The system covers all
of the Company’s core upstream and refining facili-
ties, namely six (6) producing and two (2) processing
entities. This project brings value by improving the
accuracy of greenhouse gas emission accounting

Transforming into a Global Gas Company

and combining estimation with actual measurements.
The project “GHG Emission Management System”,
implemented by the Company in 2017, was recognized
as the winner of the competition for the National
Environmental Prize named after V.I. Vernadsky in the
nomination “Science for Ecology”.

NOVATEK has in place an occupational health and
safety management system which is part of a wider
management system and ensures risk management
based on the key principle of prioritizing prevention
over incident containment and response.

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 con-
tinuous, comprehensive training and development op-
portunities for the Company’s employees at all levels.

0,4

0,9

0,3

0,5

2012

2013

2014

2015

2016

NOVATEK`s personnel structure as of 31.12.17

8,145 people

Exploration
and production

Transportation
and marketing

Processing

Administrative
personnel

Power
supply

Ancillary
services

40%

25%

16%

10%

7% <2%

RR 683

mln — Expenses on
Occupational Health
and Safety in 2017

3,109

employees were
assessed on industrial
safety in 2017

Annual Report 2017

Management and
Corporate Governance

THE BOARD OF DIRECTORS MEMBERSHIP AS OF 31 DECEMBER 2017

The Company has established an effective and transparent system of corpo-
rate governance complying with both Russian and international standards.
NOVATEK’s supreme governing body is the General Meeting of Shareholders.
The corporate governance system comprises the Board of Directors, the Board
Committees, and the Management Board, as well as internal control and audit
bodies and the Corporate Secretary.

independent
Board Members1

MR. ROBERT
CASTAIGNE

MR. VICTOR
P. ORLOV

MR. ANDREI
V. SHARONOV

Born in 1946
Independent Director
Member of the Audit
Committee
Member of the Remu-
neration and Nomination
Committee

Born in 1940
Independent Director
Chairman of the Remu-
neration and Nomination
Committee
Member of the Audit
Committee

Born in 1964
Independent Director
Chairman of the Audit
Committee
Member of the Remu-
neration and Nomination
Committee

Independent Director as of 31 December 2017 in accordance with the Corporate Governance Code recommended by the Central
Bank of Russia and the UK Corporate Governance Code.

Management and

Corporate Governance

Transforming into a Global Gas Company

MR. ALEXANDER
E. NATALENKO

Born in 1946
Chairman of the Board
of Directors
Chairman of the
Strategy Committee

MR. LEONID
V. MIKHELSON

Born in 1955
Chairman of the
Management Board

MR. ANDREI
I. AKIMOV

Born in 1953
Member of the Strategy
Committee

DR. BURCKHARD
BERGMANN

MR. MICHAEL
BORRELL

MR. GENNADY
N. TIMCHENKO

Born in 1943
Member of the Strategy
Committee

Born in 1962
Member of the Strategy
Committee

Born in 1952
Member of the Strategy
Committee

Annual report 2017
Annual Report 2017
Годовой отчет 2017

Transforming
into a Global
Gas Company

meetings between the
Company management
and journalists of
foreign and federal
international and
Russian periodicals

6.9

Thousand
publications in
foreign media
in 2017

70%

growth in number
of TV stories

40
40

Transforming into a Global Gas Company
Transforming into a Global Gas Company

On 12 December 2017,
the Company held its
Corporate Strategy Day
that comprehensively
outlined our long-term
strategy covering the
period up to 2030 and
new corporate identity
and logo.

Thousand unique
publications on the
Company

�15

exhibitions,
conferences and
round tables

41
41

Annual Report 2017

Review
of Operating Results

LICENSES

NOVATEK’s core fields and license areas are located in,
or in close proximity to, the Yamal-Nenets Autonomous
Region (YNAO) of the Russian Federation, which is one
of the world’s largest natural gas producing regions
accounting for approximately 80% of Russian and 15%
of global natural gas production. The concentration
of the Company’s fields in this prolific gas-producing
region provides favorable opportunities for increas-
ing NOVATEK’s shareholder value with a minimum level
of risks, low finding cost, and efficient replacement
of reserves. With more than 20 years of operational
experience in the region, NOVATEK is in a good position
to efficiently monetize its resource base.

Exploration and production of hydrocarbons in Rus-
sia is subject to federal licensing regulations.

As of 31 December 2017, NOVATEK subsidiaries and
joint ventures held 45 licenses for subsoil use. NO-
VATEK also entered into a concession agreement on
exploration and production of hydrocarbons off-
shore of the Republic of Montenegro. The duration
of licenses for the Company’s core fields exceeds 15
years. In particular, the license for the South-Tam-
beyskoye field is valid until 2045, for the East-Tarko-
salinskoye — until 2043, for the Yurkharovskoye
field — until 2034, for the Samburgsky license area of
Arcticgas — until 2034.

In the reporting year, NOVATEK significantly expand-
ed its portfolio of licenses.

In June, Arctic LNG 1, a subsidiary of the Company,
acquired in an auction a license for exploration and
production of hydrocarbons within the Gydanskiy
license area. The license was issued for 27 years. The

Gydanskiy license area is located in close proximity to
the Utrenneye field, the resource base for the Arctic
LNG 2 project. The hydrocarbon resources potential
of the license area according to the Russian classifi-
cation totals 4,740 mmboe.

In August, Arctic LNG 2 acquired in an auction an
exploration and production license for a federal
subsurface area including the Shtormovoye field.
The license area is located on the Gydan Peninsula
and partially in the Kara Sea Bays of Ob and Gydan.
It borders on the Utrenneye field and has the total
hydrocarbon recourses potential of 7,932 mmboe ac-
cording to the Russian classification. The license was
issued for 30 years.

In August, NOVATEK-YURKHAROVNEFTEGAS acquired
in an auction a geological study, exploration and
hydrocarbons production license for the license area
including the Verkhnetiuteyskoye and West-Seyakhin-
skoye fields. The license area is located on the Yamal
Peninsula in close proximity to the South-Tam-
beyskoye gas condensate field and has the overall
hydrocarbon recourses potential of 8,747 mmboe
according to Russian classification. The license was
issued for 27 years.

In November a transaction was closed for the pur-
chase of Severneft-Urengoy which holds exploration
and production license within the West-Yaroyakhin-
skiy subsoil area with the total resource potential of
918 mmboe under the Russian classification, located
in the Purovsky district of the Yamal-Nenets Autono-
mous Area in close proximity to the existing NOVATEK
infrastructure.

In December AO Yuzhno-Khadyryakhiskoye was pur-
chased, which holds the exploration and production

license within the South-Khadyryakhinskoye subsoil
area with the total resource potential of 228 mmboe
under the Russian classification, and which is located
in close proximity to the existing infrastructure of
the North-Khancheyskoye field being developed by a
NOVATEK subsidiary.

In December another entity acquired was Eurotek,
which owns an exploration and production license
for the Syskonsyninsky subsoil area with a total
resource potential of 48 mmboe under the Russian
classification. The area is located in the Khanty-Man-
siysk Autonomous Region, 120 km to the northwest
from Nyagan. In 2017, this license area produced
719.4 mmcm of natural gas and 2.9 thousand tons of
gas condensate.

In December, our joint venture Arcticgas acquired in
an auction a license for geological study, hydrocar-
bons exploration and production within the Osenniy
license area. Total resource potential of this area is
estimated at 4,411 mmboe under the Russian classi-
fication. The area is located in the Yamal-Nenets Au-
tonomous Area. The license was issued for 25 years.

On top of that, in December an agreement was made
for the acquisition of OOO Chernichnoye, a company
that owns an exploration and production license for
the Chernichnoye field with a total resource potential
of 179 mmboe under the Russian classification. The
field is located in close proximity to NOVATEK's exist-
ing infrastructure.

NOVATEK strives to strictly observe all of its license
obligations and conducts continuous monitoring of
license tenders in order to expand its resource base
in strategically important regions.

HYDROCARBON RESERVES

Most of the Company’s reserves are located onshore
or can be developed from onshore locations and are
attributed to the conventional hydrocarbon catego-
ries (capable of being exploited using conventional
technologies, in contrast to unconventional gas de-
posits such as shale gas or coal-bed methane).

DeGolyer and MacNaughton (“D&M”), an independent
petroleum engineers firm, estimates the Company’s
reserves on an annual basis under both the SEC and
PRMS reserves reporting standards.

As of 31 December 2017, NOVATEK's SEC proved re-
serves, including the Company’s proportionate share

Transforming into a Global Gas Company

in joint ventures, aggregated 15,120 million barrels of
oil equivalent (mmboe), including 2,098 billion cubic
meters (bcm) of natural gas and 164 million metric
tons (mmt) of liquid hydrocarbons. The Company’s
proved reserves grew by 12.8%, and the reserve re-
placement ratio stood at 435%. At year-end 2017, the
Company’s reserve to production ratio (or R/P ratio)
was 29 years.

The Company’s reserves were positively impacted by
successful exploration works at the Utrenneye, Khar-
beyskoye, West-Yurkharovskoye and Urengoyskoye
(Samburgskiy license area) fields, production drilling
at the South-Tambeyskoye field, as well as the new
licenses obtained through tender auctions (Gydan-
skoye, Verhnetiuteyskoye and West-Seyakhinskoye
fields) and recent asset acquisitions (South-Khady-
ryakhinskoye, Syskonsynyinskoye fields and West-Ya-
royakhinskiy license area). Excluding the effect of
obtaining new licenses, our total proved reserves
increased by 1.3%, representing an organic reserve
replacement rate of 134%.

As of 31 December 2017, the Company’s total PRMS
proved and probable reserves, including the Compa-
ny’s proportionate share in joint ventures, aggregat-
ed 28,471 mmboe, including 3,879 bcm of natural gas
and 366 mmt of liquid hydrocarbons, with a total R/P
rato of 55 years.

The high quality of the reserve base enables NOVATEK
to maintain its position as one of the lowest cost pro-
ducers in the global oil and gas industry. Our average
2017 and five-year (2013–2017) proved reserve re-
placement costs amounted to RR 25 (USD 0.4) per boe
and RR 94 (USD 2.3) per boe, respectively.

Annual Report 2017

SEC proved reserves as of 31 December 2017 (based on the Company's
equity ownership interest in joint ventures) and duration of licenses

Field /
license area

TOTAL RESERVES

Yurkharovskoye

South-Tambeyskoye

Utrenneye

Urengoyskoye
(Arcticgas)

Verkhnetiuteyskoye +
West-Seyakhinskoye

Geofizicheskoye

East-Tarkosalinskoye

Yarudeyskoye

North-Urengoyskoye

Yaro-Yakhinskoye

North-Russkoe

Kharbeyskoye

Gydanskiy

West-Yaroyakhinskiy

Samburgskoye

North-Chaselskoye

Khancheyskoye

Olimpiyskiy license area

East-Tazovskoye

Termokarstovoye

Others

Ownership

Duration of license

Natural gas
reserves, bcm

Liquids
reserves, mmt

—

100%

50.1% (60% of
reserves)

100%

53.3%

100%

51% (100% of
reserves)

50%

53.3%

100%

53.3%

100%

51%

—

2034

2045

2031

2034

2044

2034

2043

2029

2038

2034

2031

2036

2044

2025

2034

lifetime of the field

2044

2059

2033

2097

—

2 097,9

213,5

409,5

408,5

197,7

157,3

125.6

102.6

9.6

80.1

72.2

53.0

45.4

38.6

24.2

25.4

22.4

20.4

27.1

17.7

14.2

32.9

164,3

8,1

12,4

15,0

46,8

1,8

0.4

22.1

17.2

6.8

8.5

2.5

6.0

0.0

2.6

0.5

1.3

2.2

2.5

3.6

1.4

GEOLOGICAL EXPLORATION

NOVATEK aims to expand its resource base through
geological exploration at fields and license areas not
only in close proximity to existing transportation and
production infrastructure, but also in new potentially
prospective hydrocarbon areas. The Company en-
sures the efficiency of geological exploration work by
deploying state-of-the-art technologies and relying
on the experience and expertise of the specialists in
its geology department, and the Company’s Scientific
and Technical Center located in Tyumen.

fields and license areas, beginning with the collection
and interpretation of seismic data to the creation of
dynamic field models for the placement of explora-
tion and production wells. We employ modern geolog-
ical and hydrodynamic modelling as well as new well
drilling and completion techniques to maximize the
ultimate recovery of hydrocarbons in a cost effective
and environmentally prudent manner.

In 2017, NOVATEK continued exploration on the Yamal
and Gydan Peninsulas to expand the resource base
of LNG projects.

The Company uses a systematic and comprehen-
sive approach to exploration and development of its

At the Utrenneye field, we drilled an exploration well
into the Jurassic layers, whereby two (2) productive

Transforming into a Global Gas Company

formations with potentially high condensate content
were penetrated. Reserves estimation was complet-
ed as was the development plan based on six (6) ex-
ploration wells drilled between 2014 and 2017, testing
of four (4) previously drilled wells, and the running
and interpretation of 1,850 square kilometers of 3D
seismic. The field’s PRMS reserves addition for 2017
is estimated at 245 bcm of natural gas and 12 mmt of
gas condensate. The field's PRMS reserves as of 31
December 2017 amounted to 1,029 bcm of natural gas
and 49 mmt of gas condensate.

3D seismic (830 square km) was completed in the
Trekhbugorny license area, with the whole area cur-
rently covered by 3D seismics. Several prospects were
identified in the Cenomanian and Apto-Albian layers and,
accordingly, a prospecting well location was chosen.

2D and 3D seismic works were started in the
Shtormovoy, Gydanskiy, Verkhnetiuteyskiy and
West-Seyakhinskiy license areas.

Exploration also continued at the fields and license ar-
eas in the Nadym-Pur-Taz district to sustain pipeline
gas production and utilization of the Purovsky Plant.

At the Kharbeyskoye field of the North-Russkoye clus-
ter we tested one (1) well and drilled two (2) wells and
discovered four (4) new gas condensate deposits and
one (1) gas condensate and oil deposit. The PRMS proved
and probable reserves addition amounted to 38 bcm of
gas, 2 mmt of condensate and 20 mmt of crude oil.

At the West-Yurkharovskoye field, specifically within
the West-Yurkharovskiy license area, a Middle Ju-
rassic well was successfully tested. The Company
successfully completed a horizontal well using mul-
ti-stage hydro-fracturing at a total vertical depth of
4,100 meters with abnormally high reservoir pressure

Geological Exploration

of 820 standard atmosphere and co-mingled produc-
tion from two separate Jurassic horizons. This was
the first time that a well completion for an over-pres-
sured Jurassic reservoir was applied in Russia.

The well has been naturally flowing with a gas-con-
densate mixture flow rate of 650 thousand cubic
meters per day. This positive testing results were the
outcome of NOVATEK’s experience in constructing
horizontal wells with multi-stage hydro-fracturing
in the abnormally high Jurassic pressure reservoir
(anomalous pressure factor of 2.0). The field’s PRMS
proved and probable reserves addition totaled 37
bcm of gas and 5 mmt of condensate.

An exploration well was drilled in the Samburgskiy
license area and confirmed the potential of Achimov
gas condensate deposits in the northern part of the
area. Following the completion of and production
from the two wells drilled previously, a high conden-
sate ratio (up to 800 g/cm) was determined. The
PRMS proved and probable reserves addition totaled
95 bcm of gas and 24 mmt of condensate.

An exploration well was drilled at the Yarudeyskoye
field confirmed the prospects of 2 Jurassic deposits
adding another 8 bcm of gas to PRMS reserves.

In 2017, we completed the running of 1,465 square
kilometers of 3D seismic works and drilled 25 thou-
sand meters of exploration drilling.

The successful exploration works contributed
604 bcm of gas, 38 mmt of condensate and 23 mmt
of crude oil to the NOVATEK’s reserves under the
Russian reserve classification, and 344 bcm of gas,
24 mmt of condensate and 23 mmt of crude oil to our
PRMS reserves. In the reporting year, 26 new hydro-
carbon deposits were discovered.

3D SEISMIC

Subsidiaries

Joint ventures

2D SEISMIC

Subsidiaries

Joint ventures

EXPLORATION DRILLING

Subsidiaries

Joint ventures

Units

square km

linear km

th. m

2016

989

—

10.2

—

2017

1,465

1,215

250

—

24.5

16.2

8.3

Change

48.1%

22.9%

n/a

140.2%

58.8%

n/a

Annual Report 2017

FIELD DEVELOPMENT

tractors were selected and started the construction
of dry docks and berths.

In 2017, NOVATEK continued development activities at
our producing and prospective fields. In the reporting
year, the Company's subsidiaries invested RR 12.1 bln in
the resource base development.

Production drilling in 2017, including joint ventures,
reached 262,000 m, which is 12% above the 2016 num-
ber. Increase in the drilling volumes was mainly driven
by the development of the Yaro-Yakhinskoye field of
Arcticgas with 9 wells drilled there (in 2016 no wells
were drilled at the field).

A total of 68 production wells, including 55 natural gas
and gas condensate and 13 oil wells, were completed
and commissioned.

New facilities commissioned at producing fields

In 2017, two booster compressor stations, with a
capacity of 48 MW each, were commissioned at the
North-Urengoyskoye field (Eastern Dome) and at the
Samburgskoye field. These stations are needed to
transport gas and improve its treatment quality.

At the Yarudeyskoye field, the gas treatment unit was
upgraded, and a 3S (supersonic) separation unit was
commissioned. This allowed to increase the capacity
of the gas treatment unit with minimum capital costs,
significantly improve the quality of gas drying and
increase the yield of liquid hydrocarbons.

As part of the North-Russkoye field development, site
preparation has started. Well pads, roads, and infra-
structure sites were backfilled.

Preparatory works commenced with excavation and
rock blasting works a the yard to construct large-
scale offshore structures in Belokamenka, located in
the Murmansk Region. Area planning has been per-
formed, and land reclamation is in progress. The con-

HYDROCARBON PRODUCTION

In 2017, NOVATEK produced commercial hydrocar-
bons at 16 fields. The Company’s production (including
attributable share in the production of JVs) amounted
to 513.3 mmboe, down 6.2% versus 2016. The pro-
duction volumes at mature fields of our subsidiaries
and joint ventures decreased mainly due to natural
declines in the reservoir pressure at the current gas
producing horizons. The decrease was partially offset
by the improved efficiency of associated petroleum
gas utilization at our Yarudeyskoye field, as well as the
commencement of LNG production at the first LNG
train at Yamal LNG in the fourth quarter of 2017.

Total natural gas production including the Compa-
ny’s share in production of joint ventures aggregated
63.40 bcm, representing approximately 81% of our
total hydrocarbon output. The share of gas produced
from the gas condensate bearing layers (or “wet
gas”) in proportion to total gas production was 77%.
Production of natural gas decreased by 6.3% as com-
pared to 2016 volumes.

Production of liquid hydrocarbons including the Com-
pany’s share in production of joint ventures totaled
11,774 thousand tons, of which 59% was gas conden-
sate and the remaining 41% consisted of crude oil.
Production of liquid hydrocarbons decreased by 5.4%
as compared to 2016, with gas condensate produc-
tion amounting to 6,892 thousand tons and crude
oil production coming to 4,882 thousand tons. Liquid
hydrocarbons production share in NOVATEK’s aggre-
gate production remained approximately at the level
of the previous year and amounted to 19.2%.

In 2017, we continued to achieve some of the lowest
lifting costs in the industry. The Company’s lifting
costs were RR 44.3 (USD 0.76) per boe in 2017.

Hydrocarbon production (including share in production by joint ventures)

Units

MMBOE

mmcm
mmboe

th. tons
mmboe

2016

547.0

67 647
442,4

12 441
104.6

2017

513.3

63 399
414.6

11 774
98.7

Change

(6.2%)

(6.3%)

(5.4%)

TOTAL

Gas

Liquid hydrocarbons

Transforming into a Global Gas Company

Gross hydrocarbon production (including share in production by joint ventures)

Gas, mmcm

Liquids, mt

2016

67,647

34,554

13,790

8,305

5,064

2,529

1,185

562

1,658

2017

63,399

30,540

13,964

7,379

4,291

2,242

1,255

1,362

2,366

Change

2016

(6.3%)

(11.6%)

1.3%

(11.1%)

(15.3%)

(11.3%)

5.9%

142.3%

42.7%

12,441

1,813

4,300

1,354

519

353

428

3,556

118

2017

11,774

1,489

4,190

1,291

379

274

421

3,596

134

Change

(5.4%)

(17.9%)

(2.6%)

(4.7%)

(27.0%)

(22.4%)

(1.6%)

1.1%

13.6%

TOTAL

Yurkharovskoye (100%)

Arcticgas fields (53.3%)

East-Tarkosalinskoye (100%)

North-Urengoyskoye (50%)

Khancheyskoye (100%)

Termokarstovoye (51%)

Yarudeyskoye (100%)

Others

YAMAL LNG PROJECT

In December 2017, Yamal LNG’s Train 1 with a rated
capacity of 5.5 mln tons of LNG per annum started
LNG production. The first LNG cargo was loaded onto
the LNG carrier Christophe de Margerie, the world's
first Arc7 ice-class LNG carrier, on 8 December 2017
in the port of Sabetta.

The start of LNG production at the first train rep-
resents an important milestone of the Yamal LNG
project. This event turns a new page in NOVATEK’s
history, as the loading of the first LNG cargo means
that NOVATEK entered the global gas market and
became a worldwide gas company.

The South-Tambeyskoye field located in the North-
East of the Yamal Peninsula is the resource base
of the Project. Yamal LNG is the operator and the
owner of all the assets. As of the end of 2017, the
shareholding structure of Yamal LNG was as follows:
NOVATEK — 50.1%, Total — 20%, CNPC — 20%, and the
Silk Road Fund — 9.9%.

The total LNG liquefaction capacity of the plant will
be 17.4 mmt, the capacity of each of the first three
trains will be 5.5 mmt. In 2017, the project share-
holders approved the plan to build an additional
fourth LNG train with a capacity of 0.9 mmt based
on proprietary liquefaction technology developed by
NOVATEK called the “Arctic Cascade”. The low capital
expenditures per unit of production and the use of
the facilitity’s existing infrastructure to accommo-
date the additional fourth train will allow the Project
sponsors to decrease the unit cost of produced LNG
across the whole project.

As of the end of 2017, the overall project progress
was 91%. The project’s infrastructure includes the
sea port, the international airport, automobile roads,
power lines, gas gathering lines and living quarters.
The shipping infrastructure includes a jetty with two
loading berths in the port of Sabetta.

The South-Tambeyskoye field was discovered in 1974
and comprises 42 gas bearing layers with depths
ranging between 900 and 3,730 meters and includes
three domes. The field is being developed with hori-
zontal wells with drilled lengths up to 5,000 meters
and horizontal sections of up to 1,500 meters.

The license for exploration and production at the
South-Tambeyskoye field held by Yamal LNG is valid
until 2045.

As of 31 December 2017, the field was estimated to
contain 683 bcm of proved natural gas reserves and
21 mmt of proved liquid hydrocarbon reserves, under
the SEC reserves methodology. In 2017, based on pro-
duction drilling results, we were able to increase the
SEC proved natural gas reserves at the South-Tam-
beyskoye field by 77 bcm compared to year-end 2016.
Based on total proved hydrocarbon reserves, the
South-Tambeyskoye field is the largest field in NO-
VATEK reserves portfolio. According to the PRMS re-
serves standards, the proved and probable reserves
of the South-Tambeyskoye field as of the end of 2017
were appraised at 992 bcm of natural gas and 32
mmt of liquid hydrocarbons.

The field development plan provides for 208 wells
to be drilled from 19 well pads. The field’s production
capacity exceeds 27 bcm of natural gas and 1 mmt of

Annual Report 2017

stable gas condensate per annum. As of the end of
the reporting year, 103 production wells were drilled
at the South-Tambeyskoye field, exceeding the well
stock required for the first two production trains of
the LNG plant (93 wells).

At year-end, there were approximately 26 thousand
construction workers on site. The Sabetta inter-
national airport services regular flights from Novy
Urengoy, Moscow and Samara, ensuring high efficien-
cy of shift workers logistics. Regular flights served
approximately 364 thousand people in 2017.

To minimize construction activities on site due to
challenging climate conditions, a modular approach
to the LNG plant construction was selected. The
LNG plant will consist of 142 large plant modules with
weights ranging from 85 tons to 6,400 tons. The
modules were built at contractors' yards.

At year-end 2017, all 142 modules for the LNG plant
three trains had been delivered to the site by sea,
137 of them had been installed on the prepared
foundations, and commissioning of the equipment
for the second trains and third train hook up were
underway. All of the main LNG equipment, including
three main cryogenic heat exchangers (the core of
the natural gas liquefaction technology) for all three
trains of the LNG plant, compressor equipment,
packages of steel structures and pipe racks, and
power plant turbines are on site.

More than 95% of the LNG volumes produced within
the three trains of the project has been contracted
on a long-term basis. A total of three LNG cargoes
were offloaded over the course of December 2017.
Specially designed Arc7 ice-class LNG carriers are
used for LNG transportation. As of the end of 2017,
four Arc7 LNG carriers were put into operation while
eleven (11) LNG carriers were under construction.

In June 2017, credit facility agreements were signed
with European banks, inter alia Raiffeisen Bank
International AG and Intesa Sanpaolo on 14-year
credit line facilities for the total amount up to EUR
425 mln with insurance coverage provided by the
Swedish export credit agency EKN and the German
export credit agency Euler Hermes. The new cred-
itors have joined the terms of the project financ-
ing attracted earlier without increasing its overall
amount. The new facility agreements with European
banks will allow to optimize the Yamal LNG credit
portfolio and improve the project’s economic value
for its shareholders.

PROCESSING OF GAS CONDENSATE

Purovsky Plant

Our subsidiaries and joint ventures are producing
wet gas, a mixture of natural gas and gas conden-
sate. After being separated and de-ethanized at the
field the unstable (de-ethanized) gas condensate is
delivered via a system of condensate pipelines owned
and operated by the Company for further stabili-
zation at our Purovsky Plant located in the YNAO in
close proximity to the East-Tarkosalinskoye field.

In the reporting period, the Purovsky Plant pro-
cessed its milestone volume — 65 million tons of gas
condensate since the start of operation in 2005.

The Purovsky Plant processed 11,445 mt of de-etha-
nized gas condensate, representing a 7.7% decrease
compared to 2016. The Purovsky Plant’s processing
capacity is in line with the total production capacity
of the fields of NOVATEK and its joint ventures. The
output mix included 8,853 mt of stable gas conden-
sate, 2,493 mt of NGL and LPG and 16.5 mt of regen-
erated methanol.

All of the NGL volumes (feedstock for LPG production)
produced at the plant are delivered by pipeline to
SIBUR’s Tobolsk Petrochemical Complex for further
processing.

Transforming into a Global Gas Company

Processing volumes and output of the Purovsky Plant, thousand tons

PROCESSING OF DE-ETHANIZED CONDENSATE

OUTPUT:

Stable gas condensate

NGL and LPG

Regenerated methanol

Ust-Luga Complex

In 2017, it processed its milestone volume — 25 million
tons of stable gas condensate since the start of op-
eration in 2013.

2016

12,397

9,667

2,597

10.2

2017

11,445

8,853

2,493

16.5

Change

(7.7)%

(8.4)%

(4.0)%

61.8%

In the reporting year, the Ust-Luga Complex pro-
cessed 6,961 mt of stable gas condensate into
6,826 mt of end products, including 4,223 mt of light
and heavy naphtha, 1,072 mt of jet fuel and 1,531 mt of
ship fuel component (fuel oil) and gasoil.

High value-added petroleum products produced
at the Ust-Luga Complex have a significant positive
impact on the profitability of our liquid hydrocarbon
sales and the Company’s cash flow generation. As
the Ust-Luga Complex reached its full processing ca-
pacity we transshipped stable gas condensate to the
export markets by sea.

Processing volumes and output of the Ust-Luga Complex, thousand tons

STABLE GAS CONDENSATE PROCESSING

OUTPUT:

Heavy naphtha

Light naphtha

Ship fuel component (fuel oil)

Jet fuel

Gasoil

2016

6,917

2,195

2,000

1,147

998

443

2017

6,961

2,261

1,962

967

1,072

564

Change

0.6%

3.0%

(1.9%)

(15.7%)

7.4%

27.3%

NATURAL GAS SALES

NOVATEK sells natural gas within the Russian Federa-
tion as well as exports natural gas in the form of LNG.
The Company started exporting LNG in December 2017
when the first train at Yamal LNG started production.
Relatively small LNG volumes are also sold through the
Blue Gaz regas station acquired in December 2016.

NOVATEK plays an important role in ensuring sup-
plies of natural gas to the domestic market. During
2017, the Company supplied natural gas to 39 regions
of the Russian Federation. Our end users and trad-
ers were located primarily in the following regions:
the Chelyabinsk, the Khanty-Mansiysk Autonomous
Region, Moscow and the city of Moscow, Lipezk,
YNAO, Tyumen, Vologda, Stavropol, Smolensk, Nizhny

Annual Report 2017

Novgorod and Kostroma regions, Perm territory and
the Republic of Tatarstan. The above regions ac-
counted for more than 94% of our total gas sales.

to 2016. The revenue increase was mainly driven
by growth in sales to end customers in Russia, the
increase of Russian domestic regulated prices, as well
as start of LNG deliveries.

The total volume of natural gas sales in 2017, including
LNG, amounted to 65.0 bcm, increasing by 0.5% com-
pared to the previous year due to a minor increase in
sales volume within the Russian Federation as well as
the commencement of LNG export sales. The propor-
tional share of natural gas sales to the domestic end
customers increased compared to 2016 and amount-
ed to 94.9% of our total natural gas sales mix.

Revenues from natural gas sales in 2017 totaled RR
248 billion, representing a 7.8% increase compared

In order to manage gas demand seasonalities,
NOVATEK has entered into an agreement with Gaz-
prom for underground storage services. Natural gas
inventories are accumulated during warmer peri-
ods when demand is lower and then used to meet
increased demand during periods of colder weath-
er. At year-end 2017, our inventories of natural gas
in underground gas storage facilities and pipelines
amounted to approximately 0.87 bcm.

Natural gas sales, mmcm

TOTAL GAS SALES

International sales

Sales within the Russian Federation, including:

End customers

Traders

Share of end customers in domestic gas sales

2016

64,709

—

64,709

59,646

5,063

92.2%

2017

65,004

106

64,898

61,560

3,338

94.9%

Change

0.5%

n/a

0.3%

3.2%

(34.1%)

2.7 p.p.

LIQUID HYDROCARBON SALES

NOVATEK sells liquid hydrocarbons (stable gas con-
densate, petroleum products, light hydrocarbons,
LPG and crude oil) domestically and internationally.
The Company strives to respond quickly to changing
market conditions by optimizing the customer base
and supply geography, as well as developing and
maintaining logistics infrastructure.

The logistical supply chain varies according to loca-
tion and type of product — stable gas condensate
and LPG are transported by rail, finished petroleum
products produced at the Ust-Luga Complex are
exported by sea, while crude oil produced from our
fields is transported through the trunk pipelines
owned and operated by Transneft.

In 2017, the liquids sales volume reached 15,939 mt,
or 5.4% less than in 2016. In 2017, export sales de-
creased by 8.5% as compared to 2016 and amounted
to 9,027 mt.

In 2017, our liquids sales revenues increased to RR
332 billion, or by 9.2% as compared to 2016, main-
ly driven by higher global oil prices and underlying
benchmark prices.

Petroleum products from the Ust-Luga Complex
accounted for a 42% share of our overall liquids sales
volumes. We sold a total of 6,743 mt of petroleum prod-
ucts, including 4,102 mt of naphtha, 1,121 mt of jet fuel
and 1,520 mt of fuel oil and gasoil. The majority of pe-
troleum products (98%) were exported. Export volumes
were distributed as follows: Europe — 58%, Asia-Pacif-
ic — 29%, and North America — 13%. Most of our heavy
naphtha was exported to Asia Pacific, light naphtha —
to Northwest Europe and North America, and jet fuel,
diesel fraction and heavy fuel — to Northwest Europe.

Export and domestic sales of stable gas condensate
continued in 2017 as we reached full capacity utiliza-
tion at the Ust-Luga Complex. Total stable gas con-
densate sales volumes amounted to 1,918 mt, repre-
senting a 32% decrease compared to 2016.

Transforming into a Global Gas Company

A portion of light hydrocarbons produced at the
Purovsky Plant is processed on tolling terms at
SIBUR’s Tobolsk Petrochemical Complex into market-
able LPG, which is then delivered to NOVATEK’s cus-
tomer base, while the rest of the light hydrocarbons
volumes are sold to SIBUR. We sold 1,288 mt of light
hydrocarbons in 2017.

Marketable LPG sales volumes totaled 1,360 mt in 2017,
representing a 9.2% increase compared to 2016. LPG
export sales volumes amounted to 536 mt or 39% of
the total LPG sales volumes. Novatek Polska, our wholly
owned LPG trading company in Poland, sold 509 mt of
LPG, representing 95% of our total LPG export sales.
Apart from Poland, LPG was also exported to Finland.

In the domestic market, our LPG is sold through large
wholesale channels as well as through our network
of retail and small wholesale stations. In 2017, large
wholesale supplies to the domestic market stood at
679 mt, representing 82% of domestic LPG sales. We
also sold LPG via our network of 66 retail stations
and seven (7) small wholesale stations in the Chelya-
binsk, Volgograd, Rostov and Astrakhan Regions. The
combined sales from our retail and wholesale sta-
tions totaled 146 mt.

Sales of crude oil in 2017 totaled 4,616 mt, which is
0.7% below the similar indicator from 2016. We sold
67% of our crude oil volumes in the domestic market
with the remaining volumes exported.

Liquid hydrocarbon sales, thousand tons

TOTAL

Petroleum products (Ust-Luga)

Crude oil

Stable gas condensate

Light hydrocarbons

LPG

Other

2016

16,850

6,662

4,650

2,812

1,468

1,245

2017

15,939

6,743

4,616

1,918

1,288

1,360

Change

(5.4%)

1.2%

(0.7%)

(31.8%)

(12.3%)

9.2%

7.7%

Annual Report 2017

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, envi-
ronmental 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.

ENVIRONMENTAL PROTECTION

As part of the “Year of Ecology” in Russia, the NO-
VATEK Group developed and implemented an Action
Plan approved by Chairman of the Management
Board. It included the following principle actions:
• another stage of the Biodiversity Program was

implemented;

• actions were taken to ensure artificial repro-

duction of water bio resources within the areas
where the Company operates;

• a children’s drawing contest was organized and
held in Tarko-Sale themed around the Year of
Ecology in Russia and the protection of the Far
North nature; and

• employees of NOVATEK and its controlled enti-

ties took part in Green Spring 2017, a Russia-wide
community cleanup event.

proved its Standard SK-ISU-0-012 “Greenhouse Gas
Emission Management System”. The system covers all
of the Company’s core upstream and refining facili-
ties, namely six (6) producing and two (2) processing
entities. This project brings value by improving the
accuracy of greenhouse gas emission accounting and
combining estimation with actual measurements. The
project “GHG Emission Management System”, imple-
mented by the Company in 2017, was recognized as the
winner of the competition for the National Environmental
Prize named after V.I. Vernadsky in the nomination “Sci-
ence for Ecology”.

Following a re-certification audit by Bureau Veritas
Certification Rus, the NOVATEK’s Integrated Manage-
ment System for Environmental Protection, Occupa-
tional Health and Safety was found to be in compli-
ance with ISO 14001–2004 and OHSAS 18001–2007.

Environmental monitoring was performed through-
out the reporting year at all of the main license areas
and production facilities of the Company. During the
monitoring process the condition of the environment
components is studied, soil, ground, snow cover, water
and bed deposit samples are taken. 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 tak-
en are tested in certified laboratories. Based on the
laboratory analysis the condition of the environment
components is evaluated as well as its dynamic pattern
over the year. The monitoring revealed that the condi-
tion of the environment components in the Company’s
production facility locations is evaluated as stable.

Transforming into a Global Gas Company

In the reporting year, the Company continued its
participation in the Carbon Disclosure Project (CDP),
whereby information on greenhouse gas emissions
and operations energy efficiency is disclosed, as well
as in the CDP Water Disclosure Project to disclose
data on the use of water resources. Taking part in
these projects, the Company intends to achieve a bal-
ance between the climate change risks and efficiency
of investment projects. The Company offers all stake-
holders full access to its environmental information,

including by publications in federal and local printed
media, on its website, and other disclosure means.

NOVATEK was included in the Vigeo Eiris Best Emerg-
ing Markets Performers Index and therefore rated
among the 100 most stable companies in emerg-
ing markets in 2017. NOVATEK is also included in the
FTSE4Good international rating index of compliance
with the internationally recognized standards in the
area of corporate social responsibility.

Key Environmental Indicators of NOVATEK (including joint ventures)

Water consumption

Atmospheric emissions

Unit

’000 m3

’000 tons

2016

2,701

121.2

2017

2,779

108.9

Change

2.9%

(10.1%)*

*Decrease in atmospheric emissions is due to implementation of Rational APG Utilization
Program (putting on stream a 3S separator) at the Yarudeyskoye oil field.

One of the Company’s 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 in 2017.

Energy Resource Consumption by NOVATEK in 2017 (including joint ventures)

Natural gas

Electricity

Heating energy

Oil

Motor gasoline

Diesel fuel

Other

Units

mmcm

MW*h

Gcal

tons

Volume

2,121

927,183

459,435

2,150

1,133

6,398

96,448

RR mln, net of VAT

2,811.0

3,877.6

672.2

13.3

40.2

232.1

14.8

INDUSTRIAL SAFETY AND
OCCUPATIONAL HEALTH

NOVATEK is fully committed to putting the life and
health of its employees above operational results,
and is aware of its responsibility for ensuring acci-
dent-free operations and safe labor conditions for
its employees, as well as protecting the health of the
population in the areas in which it operates.

NOVATEK has in place an occupational health and
safety management system which is part of a wider

management system and ensures risk management
based on the key principle of prioritizing prevention
over incident containment and response.

The Company is engaged in exploration, production,
processing and sales of natural gas and liquid hy-
drocarbons, which implies setting up complex tech-
nological processes for operating fire-and explosion
hazardous facilities. Operation of fire-and explosion
hazardous facilities requires that work and services
at hazardous production facilities be performed in
strict compliance with industrial safety laws.

Annual Report 2017

To prevent accidents and incidents, and ensure acci-
dent containment and response at Class 1 and 2 haz-
ardous production facilities, a unified industrial safety
management system and industrial safety declaration
were developed providing estimates and specifying
activities for:
•

identification, assessment and forecasting of acci-
dent risks;

• planning and implementation of accident risk miti-

gation measures;

• coordination of activities to prevent accidents and

incidents;
industrial control procedure; and

•
• employees’ participation in the development and
implementation of accident risk mitigation meas-
ures.

NOVATEK Group set up industrial safety assessment
commissions to evaluate staff that operates hazard-
ous production facilities according to the annually
approved schedule. Safety certification protocols are
produced to document the results of staff knowl-
edge tests. In 2017, 3,109 employees were assessed.

During 2017, 344 industrial safety compliance checks
were carried out, with results documented in indus-
trial control reports.

To prevent accidents and incidents, technical inspec-
tion, certification and testing schedules for technical
equipment are developed annually and rigorously
followed. These audits are registered with territori-
al bodies of Rostechnadzor (Federal Environmental,
Industrial and Nuclear Supervision Service of Russia).
In 2017, industrial safety audits were carried out on
255 equipment items.

In 2017, NOVATEK ran programs of integrated and
targeted audits of controlled entities for compliance
with occupational health, industrial, fire and environ-
mental safety requirements by NOVATEK’s commit-
tee. In the reporting year, the Company conducted
integrated audits of four (4) entities, and targeted

audits of eight (8) subsidiaries. Based on their find-
ings, relevant reports were produced, and remedial
measures were developed.

To protect the right of employees to occupational
health-compliant workplace, special assessments
of working conditions are performed to cover all
workplaces. When workplaces with harmful working
conditions are identified, a range of measures is first
implemented to eliminate adverse factors. If these
prove impossible to eliminate, the affected employ-
ee is granted all guarantees and compensations for
operating in harmful working conditions, including
screening and regular medical examinations for
timely detection of contraindications and signs of
occupational diseases. In the reporting year, the
Company continued the certification procedure on
workplaces. No hazardous working conditions were
identified during the inspections. In 2017, NOVATEK
Group workplace certification costs totaled approxi-
mately RR 2 mln.

Occupational health training is mandatory for all cat-
egories of employees and is offered in all controlled
entities. Structural unit leaders, including top manag-
ers, take courses in training centers, while specialists
are offered in-house training opportunities. For that,
training programs were developed, and occupational
health knowledge testing commissions were set up.
In-house occupational health training and knowledge
testing not only enable significant cost optimization
but also save man-hours as such training and tests
take place on the job. In 2017, occupational health
training costs amounted to more than RR 6 mln.

The Company’s subsidiaries actively use their right
to receive a 20% refund of mandatory social insur-
ance payment that are duly transferred to the Social
Insurance Fund of the Russian Federation to cover
occupational accidents and diseases. In 2017, such
refunds across all subsidiaries totaled over RR 16 mln.
These funds are mainly used to finance procurement
of protective clothing and workplace certifications.

Key health and safety indicators of NOVATEK (including joint ventures)

Accidents at hazardous production facilities

Incidents at hazardous production facilities

2016

2017

HUMAN RESOURCES

Employees are NOVATEK’s most valuable resource,
allowing the Company to grow rapidly and effec-
tively. The Company’s human resource manage-
ment 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.

As of the end of 2017, NOVATEK and its subsidiaries
had 8,145 employees, 39.8% of whom work in explo-
ration and production, 15.8% in processing, 25.2%
in transportation and marketing, 7.2% in power
supply, 10.3% are administrative personnel and 1.7%
engaged in ancillary services. The predominant age
of the personnel is between 30 and 50. The aver-
age age of the Company’s employees is 40 years.

Personnel Training and Development

Amid the rapid development of technologies and
management systems, our multilevel training and
professional development program enable our
employees to contribute to raising the Company’s
competitiveness. In 2017, the primary activities of
training and professional development included:
•

implementing an In-house Training Program to
improve the competences of the Company's
employees;
implementing the Steps in Discovering Talents
program for young specialists targeted at train-
ing highly qualified personnel whose competence
level fully meets business needs;

•

• developing and improving the Corporate System
for the Evaluation of Technical Competencies; and

• engaging young specialists to take part in re-

search and practice conferences.

NOVATEK Scientific and Technical Center (NOVATEK
STC) has hosted an In-House Training Program
since 2016. In 2017, NOVATEK STC experts devel-
oped and delivered training courses on the follow-
ing subjects: Basics of Well Modelling. Production
Mode Analysis by Means of Digital Models; Basics of
Gas and Condensate Processing Facility Engineer-
ing and Operation; Well Design and Lining. Geome-
chanics; Field Development Engineering amid Low
Exploration Maturity; Basics of Hydrodynamic Stud-
ies; and Directional Drilling. A total of 63 employees
of the Company’s subsidiaries received training
under this program in 2017.

Transforming into a Global Gas Company

In 2017, NOVATEK continued its efforts to advance
the professional capabilities of its employees,
improve working conditions and train its person-
nel on safe working practices at its production
facilities. A total of 43.4 % of white-and blue-collar
workers upgraded their skills. In 2017, the Corpo-
rate System for the Evaluation of Technical Com-
petencies tested 648 employees across the Group,
including 37 persons who were tested at recruit-
ment and 49 persons — at promotion.

In 2017, we had our fifth class of graduates under
the Steps in Discovering Talents Program. Eighteen
(18) young specialists graduated from the on-
the-job adaptation and professional development
program. In autumn 2017, another 34 young spe-
cialists joined the program. In 2017 the number of
companies — program participants was increased
to seven. In 2017, young specialists received the
Mentoring Culture training courses together with
their mentors. In total, 26 mentors attended the
training.

In September 2017, Moscow hosted the 12th Inter-
regional Research-to-Practice Conference for the
Company’s young specialists attended by 42 em-
ployees. Based on the results of the competition,
all the winners received cash prizes, while five (5) of
the first place winners were also awarded a trip to
a petroleum training center in France and Italy.

In October 2017, the 3rd Professional Skills Con-
test among field workers of the NOVATEK Group
took place. Totally, 74 participants from 8 entities
took part in the event. The Contest was held in two
stages and included a theoretical and a practical
part with results of both defining the winners.

In 2017, the Innovator Corporate Idea Management
System, an automated framework to collect and
process employees’ proposals on improving and
developing business including labor-saving propos-
als, was launched in NOVATEK and its 11 subsidiaries.
More than 250 ideas have been submitted by the
employees, and more than 30 were approved for
implementation.

Social Programs

The focus in employee relations is on implementing
social programs. According to the Core Concept
of the Company’s social policy, which was adopted
in 2006, the social benefits package for employees
includes the following programs:

Annual Report 2017

• Voluntary medical insurance for employees

The program includes full outpatient care, dental care,
and emergency and scheduled hospitalization.

concerts, and attended sporting events like football
(soccer) games and acrobatic rock and roll competi-
tions with the Company’s assistance.

• Therapeutic resort treatment

Employees and their families can purchase health
resort vouchers at a discount. Under this program
the NOVATEK employees may spend their vacations in
45 health resorts located in Russia's most picturesque
settings.

• Repayable Financial Aid Program

The special-purpose loans program has two focus
areas:
• short-term special-purpose loans intended for
employees who experience economic hardship;

• special-purpose interest-free home loans to

employees residing in Tarko-Sale, Novy Urengoy,
Moscow, Nadym, Sosnovy Bor and Tyumen.

• Targeted compensation and social support

payments

This program provides targeted free support to the
Company's employees in specific life circumstances,
including childbirth, the event of natural disasters or
fire, compensation for care of a child up to 3 years
of age, financial aid for care of disabled children,
financial aid for burial, compensation for sports and
recreation classes for employees, as well as on the
occasion of the jubilee.

• Pension Program

Since 2007, NOVATEK has offered its retired employ-
ees supplementary benefits in line with the Regula-
tions on Social Benefits for Retired NOVATEK Group
Employees. Employees with an employment track re-
cord of at least five years with the Company who re-
sign at the full retirement age are entitled to monthly
benefit payments from the Company (suspendable
in case the retiree gets a job). The benefit amount is
subject to the employee's average salary, employ-
ment track record and geographical location.

Along with providing an optimum social benefits
package, the Company is also committed to creating
opportunities for employees to play sports and get
involved in sports and cultural events. In 2017, our
employees and their family members visited exhibi-
tions at Russia’s national museums, classical music

SOCIAL POLICY AND CHARITY

Social Policy and Charity make up an important
part of NOVATEK's activities. In 2017, the Company
continued to pay close attention to projects aimed
at supporting the culture, preserving and revital-
izing national values and spiritual legacy of Russia,
promoting and integrating the Russian art into the
international cultural space, developing mass and
high-performance sports. NOVATEK enters into
agreements with regional governments across the
Company's footprint and implements programs to
improve living standards and preserve the distinc-
tive cultural identity of the indigenous peoples of the
Far North.

In 2017, NOVATEK and its subsidiaries invested about
RR 2.8 billion in projects and activities related to the
support of indigenous peoples, charitable contribu-
tions, cultural and educational programs.

Cooperation with the regions

Within the framework of agreements signed with
various regions, the Company was investing in YNAO,
the Leningrad, Chelyabinsk, Tyumen, and Kostroma
Regions throughout 2017. The Company also financed
the construction, repairs and upgrades of social
infrastructure facilities, earmarked significant funds
to implementing educational, cultural, children and
youth programs and projects and was supporting
low-income families, people with disabilities, the el-
derly and veterans.

NOVATEK is annually providing assistance to various
regions by helping with settlement development,
construction and renovation of accommodation, ed-
ucational facilities and advancing local healthcare.

The Company is directly involved in funding the con-
struction of important social infrastructure facilities
across the YNAO, including an 800-student school in
the village of Gyda, Taz District.

Cooperation with Indigenous Peoples
of the Far North

During the reporting year, NOVATEK provided financial
support to the Yamal for Descendants Association
of indigenous peoples and its district branches. We

Transforming into a Global Gas Company

assisted indigenous peoples through financing the
purchase of equipment and materials required for the
work of fishermen and reindeer herders. NOVATEK fi-
nanced fuel purchases for air delivery of the nomadic
population and food to remote areas. One particular
area of support is taking part in organizing and stag-
ing ethnic festivals of indigenous peoples as well as
provision of funding for environmental program.

Educational Programs

NOVATEK continued to develop the Company’s con-
tinuing education program, which provides oppor-
tunities 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 employ-
ment with the Company.

Recruitment and career guidance for promising em-
ployees start with the Gifted Children program imple-
mented at School No. 8 in Novokuybyshevsk, school
No. 2 in Tarko-Sale and school No. 81 in Tyumen.
Special classes are formed on a competitive basis
from the most talented grade 10 and 11 students with
above-average test scores.

The Company has also implemented two Grants pro-
grams for schoolchildren and teachers living in the
Purovsky District of the Yamal-Nenets Autonomous
Area.

The Grants program for schoolchildren is aimed at
academic and creative development and encouraging
a responsible attitude towards studies. Under the
program, students in grades five (5) through eleven
(11) living in the districts are awarded grants from the
Company. In 2017, the Company awarded 38 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 2017, three (3) teachers from the Purovsky
District received grants under this program.

In an effort to create conditions for more effective
use of university and college resources in preparing
students for future professional activities, the Com-
pany 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 Saint-Petersburg University of Mines, the Gubkin
Russian State University of Oil and Gas in Moscow and
the Tyumen Industrial University.

Students, who have passed their exams with good
and excellent results, receive additional monthly
payments. During their studies, the students are of-
fered paid field, engineering and directed internships.
This experience allows them to apply the knowledge
obtained at lectures and seminars to real-life situa-
tions and gain experience in the professions they’ve
chosen, while the Company receives an opportunity
to meet potential employees.

Preserving Cultural Heritage

In 2017, NOVATEK continued its cooperation with
Russia’s leading museums including the Russian State
Museum, the Moscow Museum of Modern Art, and
the Multimedia Art Museum / Moscow House of Pho-
tography, and supported the contemporary art and
music projects in Russia and abroad.

The Company supported exhibitions “Children of the
Soviet State” and “Posters of the Revolutionary Era”
in the Russian State Museum to mark the 100th an-
niversary of the October Revolution, and supported
the annual Imperial Gardens of Russia international
festival of garden and park art in the Mikhailovsky
Garden of St. Petersburg. In 2017, the main theme of
the festival was avant-garde art.

In partnership with NOVATEK, the Moscow Museum
of Modern Art (MMOMA) presented the exhibition
“Nepokorennye Prospect” to celebrate St. Petersburg
artists of the 20th century. In the reporting year, NO-
VATEK also supported launching of the MMOMA Edu-
cation Center. MMOMA delivered a course of lectures
on the history of Russian and foreign art, photogra-
phy, and architecture at the office of NOVATEK to the
Company’s employees and their families.

For several years, NOVATEK has been the General
Partner of the History of Russia in Photographs, a
program of Multimedia Art Museum / Moscow House of
Photography. In 2017, exhibitions “Russia. 1917” in St. Pe-
tersburg, “The Industrial World of Alexander Rodchen-
ko” in Nizhny Novgorod, “Russia. 20th Century in Photo-
graphs. 1941–1945” in Samara, “Lilya Brick. The Journey
That Never Happened” in Ulyanovsk took place.

In 2017, NOVATEK continued as the General Partner
of the Moscow Soloists Chamber Ensemble led by

Annual Report 2017

Yuri Bashmet. NOVATEK is a permanent partner of
the international festival-school of contemporary art
TERRITORIYA. As part of the festival in 2017 Russian
and foreign performances and exhibitions were shown,
as well as an educational program. The Company also
supported the activities of the Gogol-center.

In 2017, the Company also sponsored a number of pro-
jects abroad. “Peter the Great, a Tsar in France. 1717”
exhibition was held in the Palace of Versailles national
museum in France, marking the 300th anniversary of
Peter I visiting France. MusicAeterna orchestra opened
the Salzburg Festival with Mozart’s La clemenza di Tito
under the baton of Teodor Currentzis.

Sports Projects

NOVATEK attaches great importance to programs
for the development of amateur and professional
sports. The Company, its subsidiaries and joint ven-
tures regularly hold tournaments in the most popular
and widespread sports, such as football, volleyball,
swimming, ski, to name a few.

The Company supported the children and youth
sports in the regions of its operations. In 2017, the
“NOVATEK — Step to Bigger Football” Indoor Football
Cups among secondary school teams were held in
the Chelyabinsk and Kostroma Regions, which were
attended by several thousand boys and girls. The
winning teams of the Chelyabinsk and Kostroma
championships went to the Russian National Football
Team training base in Sochi where the Super Cup
match was held.

The Company supported Figure Skating and Ice
Hockey Federations of the Yamal-Nenets Automon-
ous Region, and Student Basketball Association with
more than 800 teams and 10,000 boys and girls par-
ticipating in competitions. The Russian Federation of
DanceSport and Acrobatic Rock’n’Roll and the Com-
pany support corporate dance sport and acrobatic
rock’n’roll clubs in the regions where the Company
operates. In April 2017, members of the corporate
acrobatic rock’n’roll clubs participated in the first
Russia-wide acrobatic rock’n’roll competition where
the Kostroma team took the first place.

In the reporting year, NOVATEK continued coopera-
tion with the Football Union of Russia as the General
Partner of the Russian National Football Teams. The
Company supported woman’s volleyball club Dinamo
and the NOVA Volleyball Club (Novokuybishevsk).

Charity

In 2017, NOVATEK adopted its Charity Policy, which
provides for supporting children in desperate need
of medical care residing in the regions where the
Company operates. In the reporting year, the Com-
pany procured equipment for regional healthcare
facilities, and financed children treatment and reha-
bilitation programs.

The scope of activities undertaken by the All Togeth-
er volunteer movement, which NOVATEK founded in
2008, expanded. The main volunteer activities were
assistance to orphans and children with various
illnesses, as well as to seniors.

Transforming into a Global Gas Company

Management and
Corporate Governance

CORPORATE GOVERNANCE SYSTEM

NOVATEK strives to commit to the highest stand-
ards of corporate governance. We believe that
such standards are an essential prerequisite to
business integrity and performance and provide a
framework for socially responsible management of
the Company’s operations.

The Company has established an effective and
transparent system of corporate governance com-
plying with both Russian and international stand-
ards. NOVATEK’s supreme governing body is the
General Meeting of Shareholders. The corporate
governance system comprises the Board of Direc-
tors, the Board Committees, and the Management
Board, as well as internal control and audit bodies
and the Corporate Secretary. The activity of all
these bodies is governed by the applicable laws of
the Russian Federation, NOVATEK’s Articles of as-
sociation and internal documents available on our
website (www.novatek.ru).

NOVATEK strives to consider the principles of cor-
porate governance outlined in the Corporate Gov-
ernance Code recommended by the Central Bank
of Russia (Information Letter № 06-52/2463 dated
10 April 2014). The Company follows the recom-
mendations of the Code, as well as offering 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 Exchange in the form of depositary
receipts, NOVATEK places great emphasis on the
UK Corporate Governance Code and the Regulation
of the European Parliament and of the Council on
market abuse and follows their recommendations
as far as practicable.

The Company adheres to the internal Corporate
Governance Code approved by the Board of Direc-
tors in 2005 (Minutes No. 60 of 15 December 2005).

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,
the Management Board and the Revision Commis-
sion, as well as NOVATEK’s management and em-
ployees, which were drafted on the basis of moral
and ethical values and professional standards. The
Code also determines the rules governing mutual
relationships inside the Company and NOVATEK’s
relationships with its subsidiaries and joint ventures,
shareholders, investors, the government and public,
consumers, suppliers, and other stakeholders.

The Company monitors changes of the current legis-
lature and the Listing Rules of PAO Moscow Exchange
and harmonizes its internal documents according to
the changes. NOVATEK’s Regulations on the Corpo-
rate Secretary, the Internal Audit Policy, Regulations
on Risk Management and Internal Control System
and other regulations on the Company’s corporate
bodies are up to date and don’t require any correc-
tions.

On 12 December 2017, the Corporate Strategy Day,
the Company’s management noted corporate gov-
ernance as one of the Company’s strategic founda-
tions and announced the improvement of corporate
governance policy and procedure among the objec-
tives of sustainable development.

In order to improve the efficiency of the corporate
governance system, in 2017, the Company updated
its information policy. The Board of Directors ap-
proved a new edition of the Regulation on informa-

Annual Report 2017

tion policy (on 25 August 2017), taking into account
the relevant recommendations of the Corporate
Governance Code.

NOVATEK’s corporate governance practices make
it possible for its executive bodies to effectively
manage ongoing operations in a reasonable and
good faith manner and solely to the benefit of the
Company and its shareholders.

GENERAL MEETING OF SHAREHOLDERS

The General Meeting of Shareholders is NOVATEK’s
supreme governing body. The activity of the Gen-
eral Meeting of Shareholders is governed by the
laws of the Russian Federation, the Company’s
Articles of association, and the Regulations on the
General Meetings 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 respon-
sible for the approval of annual reports, annual
financial statements, the distribution of profit, in-
cluding dividends payout, the election of the Board
of Directors and the Revision Commission, approv-
al of the Company’s Auditor and other corporate
and business matters.

On 21 April 2017, the Annual General Meeting of
Shareholders approved the annual report, annual
financial statements (in accordance with the Rus-
sian Accounting Standards), distribution of profit
and the size of dividends based on the results of
FY2016. 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 Compa-
ny’s external auditor for 2017.

On 29 September 2017, the Extraordinary General
Meeting of Shareholders approved the amount of
interim dividend for the first half of 2017.

BOARD OF DIRECTORS

The Board of Directors (the Board) activity is
governed by the laws of the Russian Federation,
the Company’s Articles of association 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 man-
agement of the Company’s activity on behalf of
and in the interests of all its shareholders, and
ensures the Company’s efficient and effective per-
formance in order to increase shareholder value in
a prudent and responsible manner.

The Board determines the Company’s strategy
and priority lines of business, endorses long-term
and annual business plans, reviews financial per-
formance, internal control, risk management and
other matters within its competence, including op-
timization of corporate and capital structure, ap-
proval of major transactions, making decisions on
investment projects and recommendations on the
size of dividend per share and its payment proce-
dure, and convening General Meeting of Sharehold-
ers. The General Meeting of Shareholders elects
the members of the Board.

The current members of the Board were elected
at the Annual General Meeting of Shareholders
on 21 April 2017. The Board of Directors is com-
prised of nine (9) members, of which eight (8) are
non-executive directors. Three (3) directors are
considered to be independent in accordance with
the Corporate Governance Code recommended by
the Central Bank of Russia, the Listing Rules of PAO
Moscow Exchange and the UK Corporate Govern-
ance Code. The Board Chairman is Alexander E.
Natalenko. The Chairman is responsible for leading
the Board and ensuring its effectiveness.

The members of NOVATEK’s Board have a wide
range of expertise as well as significant experience
in strategic, operational, financial, commercial and
oil and gas activities. The Board members hold
regular meetings with NOVATEK’s senior manage-
ment to enable them to acquire a detailed under-
standing of NOVATEK’s business activities and
strategy and the key risks impacting the business.
In addition to these formal processes, Directors
have access to the Company’s medium-level man-
agers for both formal and informal discussions to
ensure the regular exchange of information need-
ed to participate in the Board meetings and make
balanced decisions in a timely manner.

Efficient operation of the Board of Directors is
supported by the Corporate Secretary, who has
sufficient independence (appointed and dismissed
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

Transforming into a Global Gas Company

Corporate Secretary (Minutes No. 168 of 28 April
2014 with further alterations and amendments).

• approved the Regulation on evaluation of the
Board of Directors and its committees; and

Board activities during the 2017 corporate year1

To ensure the Company’s efficient performance, the
Board meetings are convened on a regular basis at
least once every two months. During 2017, the Board
met nine (9) times, of which five (5) meetings were
held in absentia. The following key issues were dis-
cussed and respective decision made:
•

reviewed and approved the Company’s 2017 full
year operating and financial results;
recommended an interim dividend for first half
2017, based on interim financial results for the pe-
riod, and a full year dividend for 2017, based on full
year financial results;

•

• made decisions to convene an Extraordinary and
Annual General Meetings of shareholders, and in
2017, for the first time during the meetings, tel-
ecommunications facilities were used to provide
shareholders with remote access to participate
and to fill out an electronic form of ballots;

• approved the Corporate Strategy for the period

•

up to 2030;
reviewed and approved NOVATEK’s business plan
for 2018;
formed NOVATEK’s Management Board and re-
duced its numerical composition to 11 members;

• held a self-assessment of the Board of Directors

and Committees, resulting in a high assessment of
the Company’s development strategy, corporate
governance, management and Board of Directors
interaction, and overall organization and prepa-
ration of the Board of Director’s and Committees’
meetings.

The Board of Directors membership
as of 31 December 2017:
• Alexander E. Natalenko —
Chairman of the Board

• Andrei I. Akimov
• Burckhard Bergmann
• Michael Borrell
• Robert Castaigne
• Leonid V. Mikhelson
• Victor P. Orlov
• Gennady N. Timchenko
• Andrei V. Sharonov

During 2017, there were no changes to the composi-
tion of NOVATEK’s Board of Directors. In accordance
with the recommendations of the Corporate Gov-
ernance Code and the Listing Rules of PAO Moscow
Exchange, three (3) of the nine (9) elected members
of the Board are considered independent directors.

Board and Committee Meetings Attendance in the 2017 Corporate Year

Member

Independence2

Board of
Directors

Audit
Committee

Remuneration and
Nomination Com-
mittee

Strategy Com-
mittee

Alexander E. Natalenko

Andrei I. Akimov

Burckhard Bergmann

Michael Borrell

Robert Castaigne

independent

Leonid V. Mikhelson

executive

Victor P. Orlov

Andrei V. Sharonov

Gennady N. Timchenko

independent

9/9

4/4

3/3

1.
From the Annual General Meeting of Shareholders on 21 April 2017 until the Annual General Meeting of Shareholders on 20 April 2018.
2. Independent Director as of 31 December 2017 in accordance with the Corporate Governance Code recommended by the Cetral Bank

of Russia and the UK Corporate Governance Code.

Annual Report 2017

BOARD COMMITTEES

The Company has three (3) Board Committees: the
Audit Committee, the Remuneration and Nomina-
tion Committee and the Strategy Committee. The
Committees’ activities are governed by the specific
Committee Regulations approved by the Board of
Directors and are available on our website.

The Committees play a vital role in ensuring that the
high standards of corporate governance are main-
tained throughout the Company and that specific
decisions are analyzed and the necessary recom-

mendations are issued prior to general Board discus-
sions. The minutes of the Committees meetings are
circulated to the Board members and are accompa-
nied by necessary materials and explanatory notes.

In order to carry out their duties, the Committees
may request information or documents from mem-
bers of the Company’s executive 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 knowl-
edge and skills.

Committees membership as of 31 December 2017

Audit Committee

Strategy Committee

Remuneration and Nomi-
nation Committee

Andrei V. Sharonov

Alexander E. Natalenko

Victor P. Orlov

Robert Castaigne
Victor P. Orlov

Andrei I. Akimov
Burckhard Bergmann
Michael Borrell
Gennady N. Timchenko

Robert Castaigne
Andrei V. Sharonov

Chairman

Members

Audit Committee

The primary function of the Audit Committee is
control over financial 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 complete-
ness of the Company’s full year financial statements,
the candidature of the Company’s external auditor
and the auditor’s report, and the efficiency of the
Company’s internal control procedures and risk man-
agement system.

The Audit Committee works actively with the Revision
Commission, the external auditor and the Company’s
executive bodies, inviting NOVATEK’s managers re-
sponsible for the preparation of the financial state-
ments to attend the Committee meetings.

•

In corporate year 2017, the Audit Committee met four
(4) times.

Remuneration and Nomination Committee

The primary functions of the Remuneration and
Nomination Committee is the development of an
efficient and transparent compensation practice of
members of the Company’s management, enhance-
ment of the professional expertise and improvement
of the Board of Directors’ effectiveness.

In order to assist the Board, the Committee per-
forms the following 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;
• annual detailed and formalized performance

self-appraisal or external appraisal of the Board of
Directors and its members, as well as of BoD Com-
mittees, determination of the priority areas for
reinforcing the Board of Director’s composition;
interaction with shareholders, which shall not be
limited to major shareholders only, with a view to
generate recommendations to the shareholders
with respect to voting on the election of nominees
to the Company’s Board of Directors;

• plan appointments of members of the executive
body and the sole executive body on the base of
continuity principles; and

• supervision over disclosure of information on the
Company's shares owned by the members of the
Board of Directors and Management Board, and
other key management employees.

In corporate year 2017, the Remuneration and Nomi-
nation Committee met four (4) times.

Strategy Committee

The primary functions of the Strategy Committee
are the determination of strategic objectives of the
operations and control over the implementation of
the strategy, as well as recommendations 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 effectiveness of the Company’s

operations in the long-term;

• preliminarily reviewing and making recommen-

dations on the Company’s participation in other
organizations;

• assessing voluntary and mandatory offers to ac-

quire the Company’s securities;

•

• considering the financial model and business val-

uation of the Company and its business segments
in order to make recommendations to the Board
of Directors in making decisions on the definition
of business priorities of the Company;

• providing recommendations to the Board of Direc-
tors on transactions subject to approval by the
Board of Directors; and

• providing recommendations to the Board of Direc-
tors with respect to the Company’s policy on the
use of its non-core assets.

In corporate year 2017, the Strategy Committee met
three (3) 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 Articles of association, decisions of the
General Meetings of Shareholders and the Board of
Directors and by other internal documents. More in-
formation regarding the Management Board’s compe-
tence is provided in NOVATEK’s Articles of association.

Members of the Management Board are elected by
the Board of Directors from among the Company’s
key employees. The Management Board is subor-
dinated to the Board of Directors and the General
Meeting of Shareholders. The Chairman of the Man-
agement Board is responsible for leading the Board
and ensuring its effectiveness as well as organizing
the Management Board meetings and implementing

Transforming into a Global Gas Company

decisions of the General Meeting of Shareholders
and the Board of Directors. The Management Board
acting as of 31 December 2017 is comprised of eleven
(11) members elected by the Board of Directors on 25
August 2017 (Minutes No. 198 of 25 August 2017).

Management Board Members as of 31 December 2017:
• Leonid V. Mikhelson — Chairman
• Alexander M. Fridman — First Deputy Chairman
• Lev V. Feodosyev — Deputy Chairman — Commer-

cial Director

• Vladimir A. Baskov — Deputy Chairman
• Viktor N. Belyakov — Deputy Chairman of the

Management Board for Economics and Finance

• Mark A. Gyetvay — Deputy Chairman
• Denis G. Khramov — Deputy Chairman
• Tatyana S. Kuznetsova — Deputy Chairman —

Director of Legal Department
Igor A. Plesovskikh — Deputy Chairman of the
Management Board — Director for Geology
Ilya V. Tafintsev — Director for Strategic Projects

•
• Sergey V. Vasyunin — Deputy Chairman of the
Management Board — Operations Director

REMUNERATION TO MEMBERS OF THE BOARD OF
DIRECTORS AND MANAGEMENT BOARD

The procedure for calculating the remuneration and
compensations to members of NOVATEK’s Board of
Directors is governed by the Regulations on Remu-
neration and Compensations payable to members
of NOVATEK’s Board of Directors approved by the
Annual General Meeting of Shareholders (Minutes No.
122 of 24 April 2015). According to the Regulations the
remuneration consists of the following types:
• fixed part of remuneration;
•

remuneration for attending the Board of Direc-
tors meetings; and
remuneration for attending the meetings of the
committees of the Board of Directors.

•

The fixed part of remuneration to a Board member
constitutes RR 10 million per corporate year. The
Chairman of the Board of Directors is paid a fixed
remuneration for the performance of its functions
in the amount of RR 20 million per corporate year.
Members of the Board of Directors are also paid re-
muneration for attending the meetings of the Board
of Directors in the maximum amount of RR 3 million
per corporate year and remuneration for attend-
ing the meetings of the committees of the Board of
Directors in the maximum amount of RR 2 million per
corporate year. The Board members are also com-
pensated for travel and lodging expenses related

Annual Report 2017

to implementation of their functions as NOVATEK
Board of Directors members.

The procedure for and criteria of calculating remu-
neration 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 con-
tracts they sign with the Company.

Information on remuneration of members of NOVATEK’s Board of Directors and Management Board
in 2017, RR mln

TOTAL PAID, INCLUDING:

Salaries

Bonuses

Fees

Other property advancements

Board of Directors1

Management Board

134.1

—

133.1

1.0

2,171.0

666.6

1,471.0

—

33.4

1. Some members of NOVATEK’s Board of Directors are simultaneously members of the Management Board. Payments to such members in rela-

tion to their activities as members of the Management Board are included in the total payments to members of the Management Board.

INTERNAL CONTROL AND AUDIT

The Company has a system of internal control over
financial 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 primary objects of internal control are PAO
NOVATEK, its subsidiaries and joint ventures, and
their subdivisions, as well as their ongoing business
processes.

In order to combat corruption, mitigate compliance,
operational and reputation risks, the Company
adopted the Anti-Corruption Policy approved by the
Board of Directors on 1 September, 2014 (Minutes
No. 170 of 1 September 2014) and the Regulation on
NOVATEK Risk Management and Internal Audit Sys-
tem approved by the Board of Directors on 1 Sep-
tember, 2014 (Minutes No. 170 of 1 September 2014)
with amendments and additions.

petence of the Revision Commission is governed by
the Russian Federation Law On Joint Stock Compa-
nies No. 208-FZ dated 26 December 1995 as well as
the Company’s Articles of association and the Regu-
lations 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 financial
and business activities. The Revision Commission
performs audits of the Company’s financial and busi-
ness performance for the year, as well as any other
period as may be decided by its members or other
persons authorized in accordance with Russian Fed-
eration law and the Company’s Articles of associ-
ation. The results of these audits are presented in
the form of findings by the Revision Commission.

In March 2018, the Revision Commission completed
the on-site audit revision of financial and business
activity of the Company for the year 2017. As a re-
sult, the conclusions about the reliability of the data
contained in the Company’s 2017 Financial State-
ments (under the Russian accounting standards)
and Annual Report were prepared and submitted to
the Annual General Meeting of Shareholders.

Revision Commission

Internal Audit Division

The Revision Commission consisting of four (4) mem-
bers who are elected at the Annual General Meeting
of Shareholders for a period of one year. The com-

In order to conduct a systematic, independent eval-
uation of the reliability and effectiveness of the risk
management and internal control system as well as

Transforming into a Global Gas Company

corporate governance practices the Company per-
forms internal audits of the Company’s operations.
The internal audit function is implemented by the
independent Internal Audit Division, which has oper-
ated continuously since 2005.

In selecting the auditor’s candidature, attention is
paid to level of their professional qualifications, in-
dependence, possible risk of any conflict of interest,
terms of the contract, and an amount of remunera-
tion requested by the candidates.

The Internal Audit Division is functionally subordinate
to the Board of Directors and is guided by Interna-
tional professional internal audit standards of Insti-
tute of Internal Auditors. The Division also adheres to
the principles and rules of conduct stated in internal
auditor's Code of Business Conduct of the Institute
of Internal Auditors. In 2016, the Board of Directors
approved NOVATEK’s Internal Audit Policy (Minutes
No. 192 of 26 August 2016).

The Division carries out its activities on the basis of an
annual plan of inspections approved by the Audit Com-
mittee and uses a combination of risk-based and cyclic
approaches. According to the results of inspections it
develops measures to eliminate identified risks and op-
timize financial and business activities. Implementation
of the measures is monitored on a regular basis.

The Audit Committee oversees the external auditor’s
independence and objectivity as well as the quality of
the audit conducted. The Committee annually pro-
vides to the Board of Directors the results of review
and evaluation of the audit opinion regarding the
Company’s financial statements. The Audit Commit-
tee meets with the auditor’s representatives at least
twice per year.

NOVATEK’s management is aware of and accepts rec-
ommendations on the 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 specified in Note 24 to the consolidated financial
statements prepared in accordance with IFRS stand-
ards for 2017.

SHARE CAPITAL

Our share capital is RR 303,630,600 and consists of
3,036,306,000 ordinary shares, each with a nominal
value of RR 0.1. As of 31 December 2017, NOVATEK did
not have preference shares.

Our shares are traded in Russian roubles on the Mos-
cow Exchange and have a first grade listing (symbol:
NVTK).

The Federal Financial Market Service issued to NO-
VATEK a permit for circulation of shares beyond the
Russian Federation of 910,589,000 ordinary shares
comprising 29.99% of the Company’s share capital.

Our Global Depositary Receipts (GDR) are listed on
the London Stock Exchange (symbol: NVTK), with
each GDR representing 10 ordinary shares. As of
31 December 2017, NOVATEK’s GDRs were issued on
621,792,560 ordinary shares comprising 20.48% of
the Company’s share capital.

The Internal Audit Division regularly interacts with
the external auditor by exchanging information on
action plans, audit results and other matters of sig-
nificance to ensure the effective discharge of their
responsibilities.

To improve the efficiency and optimize the costs the
Internal Audit Division employees serve on the revi-
sion commissions of subsidiaries and joint ventures.

External Auditor

The Annual General Meeting of Shareholders ap-
points an external auditor to conduct independent
review of NOVATEK’s financial statements. The Audit
Committee gives recommendations to the Company’s
Board of Directors regarding the candidatures of ex-
ternal auditors and the price of their services. Based
on the Committee’s recommendations, the Board
proposes the auditor’ candidature for the considera-
tion and for approval by the Annual General Meeting
of Shareholders.

AO PricewaterhouseCoopers Audit (an internationally
recognized audit firm) was chosen as the Company’s
external auditor to conduct the audit of the annual
financial statements for 2017 under RAS, as well as
independent reviews of the Company's quarterly
financial statements and audit of the annual financial
statements under IFRS.

Annual Report 2017

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 2017, %

Number of shares

BOARD OF DIRECTORS

Alexander E. Natalenko

Andrei I. Akimov

Burckhard Bergmann

Michael Borrell

Robert Castaigne

Leonid V. Mikhelson

Victor P. Orlov

Andrei V. Sharonov

Gennady N. Timchenko

MANAGEMENT BOARD

Vladimir A. Baskov

Viktor N. Belyakov

Mark A. Gyetvay

Sergey V. Vasyunin

Tatyana S. Kuznetsova

Igor A. Plesovskikh

Ilya V. Tafintsev

Lev V. Feodosyev

Alexander M. Fridman

Denis G. Khramov

—

0.7181

—

0.0288

—

0.0003

0.1944

—

0.0817

—

21,803,332

—

874,408

—

9,320

5,903,035

—

2,481,049

—

1. The equity stakes are given based on the records in the register of NOVATEK’s shareholders and notification received from members of the

Board of Directors and Management Board, in accordance with the Russian Federation laws.

In 2017, Leonid V. Mikhelson, member of NOVATEK’s Board of Directors, made a transaction with NOVATEK’s
shares: acquisition of 86,220 shares under a securities sales and purchase agreement (20 December 2017).

DIVIDENDS

The Company’s Dividend Policy is regulated by the Reg-
ulations on Dividend Policy of PAO NOVATEK approved
by the Board of Directors on 28 April 2014 (Minutes No.
168 of 28 April 2014). According to the regulations, con-
solidated net income under IFRS is applied for calcula-
tion of the dividend size.

NOVATEK’s dividend policy is based on keeping the
balance between the Company’s business goals and
shareholder’s interests. A decision to pay dividends
as well as the amount of the dividend, the payment
deadline and form of the dividend is passed by the An-
nual General Meeting of Shareholders according to the
recommendation of the Board of Directors. Dividends
are paid twice a year. In determining the recommend-

ed amount of dividend payments to be distributed the
Board of Directors consider the current competitive
and financial position of the Company, as well as its
development prospects, including operating cash flow
and capital expenditure forecasts, financing require-
ments, debt servicing and other such factors as it may
deem relevant to maintaining financial stability and
flexible capital structure of the Company. NOVATEK is
strongly committed to its dividend policy.

On 13 March 2018, the Board of Directors of PAO NO-
VATEK recommended to the Annual General Meeting
of Shareholders to pay dividends for FY 2017 in the
amount of RR 8.0 per ordinary share or RR 80 per one
Global Depositary Receipt (GDR), exclusive of RR 6.95 of
interim dividends per ordinary share or RR 69.50 per
one GDR paid for the first six months of 2017.

Transforming into a Global Gas Company

Thus, should the General Meeting of Shareholders
approve the recommended dividend, the dividends
for 2017 will total RR 14.95 per ordinary share (RR
149.5 per one GDR), and the total amount of divi-

dends payable for 2017 will be RR 45,392,774,700.
This will represent a 7.6% increase in dividend per
share compared to 2016.

Accrued and paid dividends on NOVATEK shares for the period 2012 to 2017

Dividend Accrual Period

Amount of
dividends,
RR per share

Total amount of divi-
dends accrued, RR

Total amount of
dividends paid, RR

2012

2013

2014

2015

2016

First half 2017

6.86

7.89

10.30

13.50

13.90

6.95

20,829,059,160

20,829,057,901

23,956,454,340

23,956,386,795

31,273,951,800

31,273,942,156

40,990,131,000

40,990,059,262

42,204,653,400

42,204,575,052

21,102,326,700

21,102,282,190

The amount of paid dividends accrued for the years 2012 to 2016, and for the first six months 2017 is reported
as of 31 December 2017. Partial payment of the accrued dividends was made due to provision by shareholders
of incorrect postal and/or banking details and insufficient information regarding banking or postal details of
shareholders.

INFORMATION TRANSPARENCY

NOVATEK complies with best practices for informa-
tion disclosure while adhering to a maximum level
of transparency. The Regulations on Information
Policy approved by the Board of Directors (Minutes
No. 198 of 25 August 2017), define 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 notifications through authorized disclo-
sure in accordance with the applicable laws of Russian
Federation and United Kingdom. The Company dis-
closes quarterly financial statements in accordance
with the Russian (“RAS”) and International Financial
Reporting Standards (“IFRS”), Management’s Discus-
sion and Analysis of Financial Condition and Results of
Operations as well as presentations for investors.

The Company’s website provides detailed information
on all aspects of its activities, including our Sustaina-
bility Report. We regularly participate in information
disclosure on greenhouse gas emissions and energy
efficiency of production — the Carbon Disclosure Pro-

ject (CDP), and on the use of water resources — the
CDP Water Disclosure Project, as well as other indus-
try’s publications and studies.

In order to further increase the transparency of the
Company, and to improve the efficiency of interaction
with the external audience and the media, the Man-
agement Board of the Company approved changes
in the information strategy, which provide for expan-
sion of the range of speakers, securing their levels of
information activity and diversification of communica-
tion channels.

The Company maintains an ongoing dialogue with
shareholders and investors in order to ensure full
awareness of investment community about its activ-
ities. The main channels of communication with the
investment community are through the Chairman of
the Management Board, Deputy Chairman and the
Investor Relations department. The Company’s rep-
resentatives meet on a regular base with key financial
audiences to discuss issues of interest to them. In
order to inform our shareholders, investors and all
interested parties about the Company’s long-term
development plans, in December 2017, NOVATEK pre-
sented its strategy for the period up to 2030.

Annual Report 2017

Pursuant to the uniform information policy principles,
NOVATEK is actively involved in relations with federal,
foreign and regional media. In 2017, the Public Rela-
tions Department hosted 12 meetings between the
Company management and journalists of foreign and
federal periodicals and organized six (6) trips to visit
the Company's regional production facilities.

At the end of the reporting year, there were more
than 30 thousand unique publications on the Com-
pany. Among the topics covered were launch of the
Yamal LNG project, implementation plans of perspec-
tive LNG projects, the Company’s plans to create its
technological base on the basis of Russian enter-
prises, cooperation with foreign partners, long-term
strategy, assets acquisition, entering new markets
and our position on the global LNG market. In 2017,
the number of publications on the Company's ac-
tivities increased by 24% compared to the previous
year, the growth of TV stories on Federal channels
amounted to 70%.

The number of publications in 2017 in foreign media
increased to 6.9 thousand or by 77% compared with
the year 2016. The main topics were the Yamal LNG
Project implementation and the beginning of com-
mercial LNG deliveries along the Northern Sea route
of by Arc7 class tankers. Two press tours were or-
ganized for foreign journalists to Sabetta, as well as
separate trips of television groups to the plant site.

the NOVATEK newspaper and the NOVATEK PLUS
magazine, containing materials on production plans
and results as well as on cultural, sports and charity
programs and projects. The main events of NOVATEK
are published on the Company’s intranet portal.

REBRANDING

On 12 December, we introduced our new corporate
identity alongside of our new corporate strategy up
to the year 2030.

Over the past 15 years, the Company has evolved
from being primarily a domestic gas producer and
has now transitioned into a global gas player through
our LNG platform. As a result of this transition it
became readily apparent that a new corporate iden-
tity and logo was needed, one that was more easily
understood as an international visual communication
in any language in any part of the world.

One of the key elements of brand identity is the cor-
porate logo. It traditionally includes a graphic mark
and a wordmark. The former NOVATEK logo was
created in 2003 and was primarily tailored for the
Russian domestic market. It consisted of a stylized
Russian Cyrillic letter Н (“N”) crossed with three blue
lines representing the flows of natural gas from var-
ious producing horizons. The wide and solid word-
mark emphasized confidence, virility, and solidity.

NOVATEK takes active part in industrial exhibitions
and conferences. In 2017, NOVATEK's managers and
employees participated in more than 15 exhibitions,
conferences and round tables. In 2017, the Com-
pany took part in the St. Petersburg International
Economic Forum, Eastern Economic Forum, Russian
Energy Week, Forum «Arctic: Territory of dialogue»,
Forum «Arctic: Today and the Future», Exhibition —
Forum «Ecotech» as well as governmental dele-
gations within foreign business events. NOVATEK
delegation also took part in the work of major
international business and industry events — World
Economic Forum in Davos, Conference on Natural
Gas, LNG and associated gas, Gastech-2017 in Japan,
Conference «Oil&Money» in London, Х Eurasian Eco-
nomic Forum in Verona.

The following corporate periodicals are published to
inform the Company employees, their family mem-
bers, and third parties of the Company activities:

Our new logo symbolizes the vaporizing molecules
of natural gas and reflects two aggregate states
of methane: liquid and gaseous. The light blue color
symbolizes the environmentally friendly fossil of nat-
ural gas and our commitment to sustainable develop-
ment principles, the dark blue color represents the
Arctic environment where the Company operates,
and the red color means heat and energy. The word-
mark or typeset was also revisited and refined, and
the new typeface looks contemporary and conveys
pure shape and vigor.

Our new brand identity, including our corporate logo,
symbolizes the Company’s spirit and dynamism, and
better reflects our vision of transforming into a glob-
al gas power through our unique and value accretive
LNG platform. It also conveys our mission and values
as the Company leverages its massive hydrocarbon
resources into sustainable economic value for all of
our stakeholders.

Transforming into a Global Gas Company

Additional Information

RISK MANAGEMENT SYSTEM

The Company’s activities are subject to risks inherent
only to the Company or associated with the Compa-
ny's core business.

A multilevel system of risk management has been
implemented at the Company. Powers, duties and
responsibilities for specific risk management proce-
dures are delegated to different governance levels
of the Company depending on the assessment of
financial impact of risk. The Company's risk manage-
ment policy is laid out in the Regulations on OAO NO-
VATEK Risk Management and Internal Control System
approved by the Board of Directors on 1 Septem-
ber 2014 (Minutes No. 170 of 1 September 2014) with
amendments.

The Board of Directors' Audit Committee is respon-
sible for the supervision over the reliability and
efficiency of the risk management framework and
review of the risk management policy. In the report-
ing year, the Audit Committee after careful review
and analysis of the information provided, recognized
NOVATEK's risk management activities as compliant
with the risk management policy of the Company.

Below is the list of risks and approaches to risk
management applied by the Company. The risks
described herein are not exhaustive and reflect the
opinion on the most material risks based on the esti-
mates of the Company's management.

Risk

Risk description

Risk management approaches used
by the Company

OPERATIONAL
RISKS

RISKS OF EMERGEN-
CIES AND INCIDENTS

The Company’s subsidiaries and joint ven-
tures are subject to the risks of emergen-
cies and incidents at hazardous produc-
tion facilities that may entail business
interruption, hazardous emissions or spills,
which in turn may have a negative effect
on the Company's business reputation and
financial performance.

The Company performs continuous monitoring of in-
dustrial 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 inte-
grated industrial safety management system that is
certified 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 significant-
ly mitigate accident risks.

The Central Dispatch Office (CDO) operates in the
Company, one of its function is to ensure prompt
response to production incidents. Since 2017, the
functionality of the CDO was expanded by adding
centralized control of well construction and worko-

Annual Report 2017

MONOPOLY RISKS

The Company depends on monopoly sup-
pliers of transport services (such as Gaz-
prom, RZD, or Transneft). The Company
has no influence on the capacity of trans-
port facilities of the above monopolies and
rates established by a Federal body.

COMPETITIVE RISKS

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 ac-

quisition of companies holding subsoil
licenses

• selling natural gas on the Russian market
• selling liquid hydrocarbons in the Russian

and global markets

• access to transportation infrastructure,

which has technological limitations

• employment of highly qualified specialists
to work for the Company and its subsidi-
aries and joint ventures.

RISKS IN PROCURE-
MENT OF MATERI-
ALS, WORKS AND
SERVICES

Failure to perform their obligations by the
counterparties (quality and timeline of
procurement, works and services).

Procurement of materials, works and ser-
vices at prices higher than the market.

ver on top of the control of production, treatment
and transportation processes of production, treat-
ment and transportation processes.

A Digital Field Production Management System was
commissioned in Yamal LNG to ensure production
management and prompt response to process inci-
dents. It enables promptly calculating the optimum
process mode in a semi-automatic way, identifying
deviations and planning field operations.

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 concludes
agreements enabling it to use alternative methods
of product transportation (an agreement with SIBUR
for the supply of light hydrocarbons to Tobolsk Pet-
rochemical Complex).

The Company monitors commercially available assets
with regard to the objectives of its long-term de-
velopment strategy, enabling the Company to make
an objective assessment of its competitive positions
and to take the maximum benefit of its competitive
advantages that include extensive regional work
experience and synergy with the existing producing,
transport, processing and distribution infrastructure.

The Company pursues an active marketing policy
and takes efforts to expand its customer base, and
to enter into long-term agreements with buyers. To
diversify its natural gas marketing portfolio, through-
out the reporting period the Company was engaged
in trading in the Natural Gas Section of the St. Pe-
tersburg International Mercantile Exchange.

The Company implements an active HR policy and ap-
plies efficient mechanisms of attracting and retaining
highly qualified employees.

The Company has put in place internal regulations
and introduced a procedure to qualify counterpar-
ties and control performance of obligations. The
Company has continuously encouraged its coun-
terparties to improve their production capabilities,
while making long-term agreements with the stra-
tegic counterparties.

Counterparties are as far as possible selected on
a competitive basis. Strategic approaches ensuring
maximum procurement efficiency are defined for the
most critical and expensive procurement items.

Reputational risks deriving from com-
petition restriction and malpractice by
employees.

COMMODITY PRICE
RISKS

GEOLOGICAL RISKS

As an independent natural gas producer,
NOVATEK is not subject to state regu-
lation of natural gas prices. Neverthe-
less, the Company’s prices are strongly
influenced by the prices established by a
Federal body.

Moreover, the Company is exposed to
the current pricing environment on the
Russian and international liquid hydrocar-
bon markets as it has no power over the
contracts’ base prices. Reduction of pric-
es for liquid hydrocarbons may have a
negative effect on the Company’s financial
performance.

Exploration drilling is associated with mul-
tiple risks, including the risk of non-dis-
covery of commercial reserves. Informa-
tion on the Company’s reserves depends
on a number of factors and assumptions.
Actual production volumes at the fields,
along with the costeffectiveness of
reserve development may deviate from
estimates.

Transforming into a Global Gas Company

Procedures are developed within the Company that
provide for an objective, timely and transparent
process of counterparty qualification and selection.
There is no discrimination and unwarranted restric-
tion of competition in the Company when developing
qualification and technical requirements to counter-
parties and to the subject of procurement as part
of design and qualification as well as at the stage of
counterparty selection. The internal regulations in
place provide for a maximum transparency proce-
dure of counterparty selection with an adequate
system of control over the actions of employees.
Open ways to select counterparties are mostly used.

Given the volatility in international relations with the
countries providing sophisticated oil & gas equip-
ment, the Company pursues import replacement
policies where it is appropriate.

State regulation of gas prices significantly reduces
the risk of price volatility on the Russian gas market.

In view of the vertically integrated production chain
for liquid hydrocarbons and taxation peculiarities,
the Company does not use commodity derivative
financial instruments to reduce the risk of price
changes for such type of products.

To minimize geological risks, the Company relies on
the geological modeling and engages major con-
tractors that apply state-of-the-art exploration
technologies and methods.

Since 2015, the Company has been employing
foreign experts in geology and field development.
Individual focused training programs have been
implemented for the employees with due regard to
periodic testing.

The Company makes annual assessment and evalu-
ation of its reserves based on the results of explo-
ration and production drilling and other research
information. An independent international adviser
evaluates the Company's reserves according to
international standards on annual basis.

A Digital Field Production Management System was
commissioned in Yamal LNG to ensure production
management and prompt response to process inci-
dents. It enables promptly calculating the optimum

Annual Report 2017

RISK OF EARLY
TERMINATION,
SUSPENSION OR RE-
STRICTION OF THE
RIGHT TO USE SUB-
SURFACE MINERAL
RESOURCES

Exploration and production of hydrocar-
bons in Russia is subject to licensing. The
Company is thus exposed to the risk of
early termination, suspension or restric-
tion of its right to use subsurface mineral
resources.

ENVIRONMENTAL
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 technolo-
gy-related emergencies.

PROJECT RISKS

Volatile exchange rates of the national
currency and unstable lending conditions,
growing funding costs, drop in hydrocar-
bon prices, precarious financial position
of contractors and oil and gas equip-
ment suppliers may affect the Company's
Investment Program leading to delays in
project execution and/or rising project
costs.

ETHICAL RISKS

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 conflict of interest.

process mode in a semi-automatic way, identifying
deviations and planning field operations.

The Company strives to comply, and maintains a con-
tinuous 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.

The Company has an environmental management
system according to ISO 14001:2004 standard to
ensure rational use of resources and to minimize the
adverse effect the Company’s operation may have
on the environment.

The Company adheres to the principle of responsible
investment in operations, which implies that new de-
sign solutions, technologies and equipment installed
help minimize environmental impact.

The Company implements expert review of projects
at the project development stage. Investments are
only channeled into the projects that are most likely
to help the Company achieve its strategic objectives.

The Regulation on Investment Projects Preparation,
Coordination, Approval, Monitoring and Updating was
approved in the Company in 2016. The project risks
are evaluated at every stage.

The Company has tightened its selection require-
ments for contractors and suppliers of oil and gas
equipment. There is ongoing monitoring of their per-
formance, including on-site visits to the oil and gas
equipment plants involved in production and testing
of the equipment for the Company.

In 2011 in order to minimize ethical risks, the Com-
pany introduced a Code of Business Conduct and
Ethics.

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 appli-
cable Russian and English law in terms of public
company regulation. This mitigates ethical risk to
stakeholders and investors.

To exclude ethical risks in its relations with third
parties, the Company carries out tender proce-
dures to select counterparties and has a well-es-
tablished internal control and audit system.

In 2014 the Board of Directors approved NOVATEK’s
Anti-Corruption Policy that established key princi-
ples and standards of anti-corruption practices for
employees and includes a set of corruption preven-
tion measures.

SOCIAL RISKS

The Company is subject to the following
risks of a social nature:
• internal risks associated with a pos-

sible incompliance of social programs
implemented by the Company with the
industry’s average level that may lead
to a higher labor turnover;

• external risks associated with poten-

tial impediments in normal production
activities caused by the public living in
proximity to the production facilities.

TERRORISM RISKS

The Company is subject to a risk of ter-
rorist threat.

COUNTRY RISK

REGIONAL RISK

NOVATEK is a Russian company oper-
ating in a number of Russian regions.
Country risk is defined by the fact that
Russia is still an emerging economy, the
economic environment of which is not
sufficiently stable.

In 2015, a precipitous decline in crude
oil prices and international sanctions
caused volatility in foreign currencies,
growing inflation rates, an increase in
interest rates and an economic growth
slowdown. The said factors have a nega-
tive impact on the Company’s operational
and financial performance.

The Company produces and processes
hydrocarbons within Western Siberia, a
region with a challenging climate.

RISKS OF INFORMA-
TION TECHNOLOGY
AND INFORMATION
SECURITY (CY-
BER-RISKS)

The Company is exposed to the risks in
the area of information technologies and
information security, such as unauthor-
ized access and changing or destroying
digital assets.

Transforming into a Global Gas Company

As part of the Anti-Corruption Policy implementa-
tion a Security Hotline is in a 24/7 operation.

In 2016, the Company established the procedure for
notification and managing the conflicts of interest
employees may come across in performing their
job duties.

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 out-
side densely populated territories, and the Company
monitors compliance with the rules and regulations
while operating its facilities. The risks related to
possible military conflicts, announcement of a state
of emergency, or strikes, are insignificant, as the
Company operates in economically and socially sta-
ble regions.

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.

Active marketing and financial policy enable the
Company to mitigate the country risk.

Moreover, the Company’s management continuous-
ly analyzes the macro-economic environment and
makes prompt decisions to mitigate potential risks.

The Company’s vulnerability to region-specific
impacts is insignificant and is entirely taken into
account by the Company's management at the facil-
ities design and operation stage.

The Company uses a multilevel system for digital as-
sets protection, namely: all information systems are
classified, owners and terms for provision of access
rights are defined in relation to each of them, infor-
mation storage and archiving terms are regulated.
The Company makes use of licensed software only.

Annual Report 2017

FINANCIAL RISKS

CREDIT RISK

The Company is exposed to a risk of
losses related to a failure by counterpar-
ties to perform their contractual financial
obligations when due, and in particular
depends on the reliability of banks in which
the Company deposits its available cash.

REINVESTMENT RISK

INTEREST RISKS

CURRENCY RISKS

LIQUIDITY RISK

The Company’s business requires sub-
stantial investments into field exploration
and development, followed by the pro-
duction, transportation, and processing
of natural gas, oil, gas condensate and
petroleum products. Insufficient funding
for these and other expenditures may
affect the Company’s financial standing
and performance.

As a major borrower, the Company is sub-
ject to risks associated with an increase
in interest rates. Interest rates on some
of the Company’s loans may be linked to
floating international and Russian base
rates which dynamics are hard to predict.
Volatile interest rates may restrict the
use of borrowed capital as a financing
source for the Company's investment
activity and may increase interest rate
expenses.

Part of the Company’s liabilities is de-
nominated in foreign currencies, which
may lead to losses in the event of Russian
rouble 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 Russian
rouble appreciation.

Liquidity risk is the risk that the Company
will not be able to meet its financial obliga-
tions as they fall due.

The information technology development strategy
of NOVATEK has been developed and approved to
ensure the Company's sustainable development.

When selling natural gas on the domestic market, the
Company continuously monitors the financial sound-
ness 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 confirmed by international ratings.

The Company’s capital investment plans are defined
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 flow from oper-
ations taking into account the need to pay dividend
and service its debt.

The Company pursues a balanced debt policy and
strives to maximize the share of long-term liabili-
ties with fixed rates in its debt portfolio. The Com-
pany strives to maintain flexibility in its investment
program.

The liabilities expressed in foreign currency on
the one hand, and export proceeds on the other
generally offset 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 sufficient liquidity
to meet its liabilities when due, under both normal
and stressed conditions, without incurring unac-
ceptable losses or risking damage to the Company’s
reputation. In managing its liquidity risk, NOVATEK
maintains an adequate ratio between cash reserves

Transforming into a Global Gas Company

and debt, monitors forecast and actual cash flows
and matches the financial assets and liabilities matu-
rity profiles.

The Company uses various short-term borrowings.
The Company may use credit facilities and bank
overdrafts to satisfy its short-term finance needs.
To satisfy its needs for cash on a more permanent
basis, the Company will normally raise long-term
loans in the available markets.

INFLATION RISK

Changes in the consumer price index
have an impact on NOVATEK’s profita-
bility and, as a consequence, its financial
standing. The significant currency depre-
ciation in 2015 caused a surge in inflation
rates, which are impossible to accurately
predict.

NOVATEK may not be able to predict the inflation
level, since, apart from the consumer price level,
it is necessary to take into account the change in
the real purchasing power of the Russian rouble,
the pricing conditions in liquid hydrocarbon export
markets, and government policy in relation to tariffs
for natural gas.

LEGAL RISKS

RISK OF LAW
CHANGES

LITIGATION RISKS

RISK OF SANCTIONS

The Company is subject to a risk of facing
consequences of changes in Russian laws
in the following areas:
• currency laws (in areas concerning ex-
port/import and borrowing operations)

• tax laws (in areas regulating taxation

systems and rates applicable to compa-
nies in general, and to companies pro-
ducing and marketing natural gas and
liquid hydrocarbons, specifically)

• customs laws (in areas concerning the

export of liquid hydrocarbons, including
petroleum products); and

• licensing requirements for natural re-

source extraction.

The Company may be involved as a
defendant or plaintiff in a number of pro-
ceedings arising in the normal course of
its business.

In 2014, the Company was included into
the US sectoral sanctions list whereby the
US persons are prohibited to participate
in providing financing to the Company for
more than 60 days. The sanctions imposed
restrict the Company’s ability to refinance
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.

NOVATEK monitors the consumer price index and
accordingly acts to mitigate its costs.

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.

When conducting its business, the Company ad-
heres 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 insignificant.

The Company follows a balanced financial policy en-
abling 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 interna-
tional 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 effort to minimize the negative impact on
the Company’s business operations and financial
standing.

Annual Report 2017

RISK INSURANCE

Risk insurance is an integral part of NOVATEK’s risk
management system. In 2017, 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 pro-
vided by reputable insurance companies that have
high ratings by the leading rating agencies (Standard
& Poor’s, Fitch Ratings, Expert RA, A.M. Best) with
partial reinsurance of risks by major international
insurance and reinsurance companies.

Obligatory Risk Insurance

The Company and its subsidiaries and joint ventures
fully meet the requirements of the applicable laws for
maintaining obligatory insurance, such as civil liability
insurance of:
• owners of hazardous production facilities; and
•

owners of transport vehicles.

Optional Risk Insurance

To reduce the risk of financial losses, the Company
and its subsidiaries and affiliates maintain the follow-
ing 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;
Insurance of risks related to prospecting, explo-
ration and production (risk of loss of control over
a well); and

•

• Management liability insurance.

Since 2013, the Company implemented a comprehen-
sive program of property and business risk insur-
ance with respect to its and its subsidiaries’ and joint
venture’s key assets. The cumulative insured amount
for the risks of property damage and business in-
terruption as at the end 2017 was RR 713 billion. The
implemented program is viewed by the Company’s
management as an efficient measure for mitigating
the consequences of potential accidents and pro-
vides additional guarantees for the attainment of the
expected net profit and key indicators of the Compa-
ny's performance.

In the reporting year, no insured major accidents or
incidents occurred.

Since the end of 2016, one of NOVATEK's subsidiaries
has been insuring its receivables with a view to as-

sess how efficiently this instrument is used to man-
age risks.

For more than 12 years the Company has maintained
a management liability insurance for the top man-
agement 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 insurance
coverage is Euro 120 mln.

INFORMATION ON MEMBERS OF NOVATEK’S
BOARD OF DIRECTORS

MR. ALEXANDER E. 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 Geo-
logical Engineering. Subsequently, he worked with the
Yagodinskaya, Bagdarinskaya, Berelekhskaya, Anadir-
skaya and East-Chukotskaya geological expeditions.
In 1986, Mr. Natalenko headed the North-East Indus-
trial and Geological Association and, in 1992, he was
elected president of АО “Magadan Gold & Silver Com-
pany”. He subsequently held various executive posi-
tions in Russian and foreign geological organizations.
From 1996 to 2001, Mr. Natalenko held the position of
Deputy Minister of Natural Resources of the Russian
Federation. From 2013 to 2015 he was a member of
the Board of Directors of AO Rosgeologia. From 2004
to present he is the Chairman 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

Transforming into a Global Gas Company

of the Management Board of Donau Bank in Vienna
(Austria). From 1991 to 2002 he was Managing Direc-
tor of financial company, IMAG Investment Manage-
ment & Advisory Group AG (Austria). Since 2003, Mr.
Akimov has been the Chairman of the Management
Board, the Deputy Chairman of the Board of Direc-
tors of Gazprombank (OAO). He is a member of Board
of Directors of PAO Gazprom, Gazprombank (AO), AO
Rosneftegaz, ООО Gazprom gas motor fuel, Bank GPB
International S.A. and other.

DR. BURCKHARD BERGMANN
Member of NOVATEK’s Board of Directors, and Member

of its Strategy Committee
Born in 1943

Mr. Bergmann, born in Sendenhorst (Germany),
studied physics at Freiburg and Aachen Universities
from 1962 to 1968 and was awarded a doctorate in
engineering by Aachen University of Technology in
1970. From 1968 to 1969, he worked at the German
Federal Ministry for Research and Technology and
from 1969 to 1972 at the Jülich Nuclear Research Cen-
tre. In 1972, Mr. Bergmann joined Ruhrgas AG (from
1 July 2004 — E.ON Ruhrgas AG), heading the LNG
Purchasing Department. In 1978, he became Head
of the Gas Purchasing Division responsible for gas
purchasing, commercial aspects of gas transmission
and storage, as well as gas billing. In January 1980,
he was elected as a member of the Manage¬ment
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 Board of Manage-
ment of E.ON AG.

Mr. Bergmann is a Chairman of the Advisory Board
of Accumulatoren-Werke Hoppecke GmbH and a
member of the Advisory Boards for Dana Gas, Dubai.
Since October 2012 he is a member of the board of
trustees of RAG Stiftung. Between 1998 and 2000, Mr.
Bergmann held the position of President of Eurogas
(the European Union of the Natural Gas Industry)
and between 2000 and 2010 he was Vice-Chairman
of the Board of the German East-West Trade Com-
mittee. Mr. Bergmann was a member of the Board of
Gazprom OAO from 2000 to 2011.

Mr. Bergmann holds the following distinctions: Com-
mander of the Royal Norwegian Order of Merit (1997),
Foreign Member of the Academy of Technological
Sciences of the Russian Federation, Order of Merit of
the State of North Rhine-Westphalia (2004), Director

of the Year, Moscow (2007), Officer’s Cross of the
Order of Merit of the Federal Republic of Germany
(2008) and the Russian Order of Friendship (2011).

MR. MICHAEL BORRELL
Member of NOVATEK’s Board of Directors and Member

of its Strategy Committee
Born in 1962

Mr. Borrell graduated from the University of Cam-
bridge with a degree in Chemical and Mechanical Engi-
neering (Master of Science — 1993, Bachelor — 1984).
He joined TOTAL in 1985. Mr. Borrell worked with the
affiliated companies of the concern; from 1995 he held
a number of senior management positions in TOTAL.
From 2003, he worked at the position of Vice-Pres-
ident for Corporate Planning and Business Devel-
opment in Total E&P Indonesia. In July 2006, he was
appointed President and CEO of TOTAL E&P Canada
in Calgary. From September 2009 to June 2010, he
was Vice President of the Caspian Area and Central
Asia for TOTAL Exploration and Production. From July
2010, he served as First Vice President of Continen-
tal Europe and Central Asia. From January 2015 to
September 2017, he worked as Senior Vice-President
of Europe and Central Asia. From September 2017,
he has been appointed Senior Vice President North
Sea and Russia, which comprises the United Kingdom,
Norway, Denmark, the Netherlands and Russia.

MR. ROBERT CASTAIGNE
Independent member of NOVATEK's Board of Directors

Member of the Remuneration and Nomination

Committee of NOVATEK's Board of Directors

Member of the Audit Committee of NOVATEK's Board of

Directors
Born in 1946

Mr Castaigne graduated from the Ecole Centrale de
Lille in 1968 and the Ecole nationale supérieure du
pétrole et des moteurs, he holds a doctorate in eco-
nomics. He has spent his whole career at TOTAL SA,
first as an engineer, then in various positions. From
1994 to 2008, he was Member of the Executive Com-
mittee, Executive Vice-President and Chief Financial
Officer of TOTAL SA. He is Member of SANOFI's Board
of Directors and Chairman of its Audit Committee,
Member of VINCI's Board of Directors and its Audit
and Remuneration Committees, Member of Societe
Generale's Board of Directors and its Nomination and
Audit and Internal Control Committees. He is Cheva-
lier of the National Order of the Legion of Honour.

Annual Report 2017

MR. LEONID V. MIKHELSON
Member of NOVATEK’s Board of Directors

Chairman of NOVATEK’s Management Board
Born in 1955

Mr. Mikhelson received his primary degree from the
Samara Institute of Civil Engineering in 1977, where he
specialized in Industrial Civil Engineering. That same
year, Mr. Mikhelson began his career as foreman of
a construction and assembling company in Surgut,
Tyumen region, where he worked on the construction
of the first section of Urengoi-Chelyabinsk gas pipe-
line. In 1985, Mr. Mikhelson was appointed Chief Engi-
neer of Ryazantruboprovodstroy. In 1987, he became
General Director of Kuibishevtruboprovodstroy,
which in 1991, was the first company in the region to
sell its shares and became private company, AO SNP
NOVA. Mr. Mikhelson remained SNP NOVA’s Managing
Director from 1987 through 1994. Subsequently, he
became a General Director of the management com-
pany “Novafininvest”.

Since 2003, Mr. Mikhelson has served as a member of
the Board of Directors and Chairman of the Man-
agement Board of NOVATEK. From March 2008 to
December 2010, he has been a member of the Board
of Directors and the Chairman of the Board of Di-
rectors of AO Stroytransgas. From 2009 to 2010 he
was the Chairman of the Board of Directors of ОАО
Yamal LNG and from 2008 to 2011 he was a member
of the Board of Directors of OOO Art Finance. From
2011 he is the Chairman of the Board of Directors of
PAO SIBUR Holding and from 2011 to 2013 he was a
member of the Supervisory Board of the OAO Rus-
sian Regional Development 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”.

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 po-
sitions of the geologist, chief geologist, chief of geologi-
cal exploration crew. 1975–1978 — Consultant on geolog-
ical exploration works in Iran. 1979–1981 — Deputy Head
of the Geological Division of the Production Geological
Association of central areas of Russia (Tsentrgeologiya).
1981–1986 — Deputy Head of Geology and Production
departments 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 Committee 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 Commit-
tee on Natural Resources and Environmental Protec-
tion. 2004–2011 — Chairman of the Federation Council
Committee on Natural Resources and Environmental
Protection. From 1998 to present — President of “Rus-
sian Geological Society” public organization. Author and
co-author of over 300 scientific publications.

Professor, Doctor of Economics (1991), Candidate of
geological-mineralogical sciences (1974), an Honored
Geologist of Russia. Laureate of the State Prize of
the Russian Federation in the field of science and
technology. He was awarded the Order of Merit for
the Fatherland 4 degree (2001), the Order of Hon-
or (2015), 18 non-governmental awards, including
3 appreciation letters of the President of the Russian
Federation, 2 Certificates of Merit of the Government
of the Russian Federation.

MR. VICTOR P. ORLOV
Independent member of NOVATEK’s Board of Directors

MR. ANDREI V. SHARONOV
Independent member of NOVATEK’s Board of Directors

Chairman of NOVATEK’s Audit Committee

Chairman of NOVATEK’s Remuneration and Nomination

Member of NOVATEK’s Remuneration and Nomination

Committee

Member of NOVATEK’s Audit Committee
Born in 1940

Committee
Born in 1964

In 1968, Mr. Orlov graduated from the Tomsk State Uni-
versity as a geological engineer with a degree in “Ge-
ological survey and exploration of mineral deposits”,
and in 1986 from the Academy of National Economy
under the USSR Council of Ministers, with a specialty in
“Economics and Management of a National Economy”.

Mr. Sharonov graduated from the Ufa Aviation Insti-
tute 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 Concern-
ing Young Persons of the Russian Federation. From

Transforming into a Global Gas Company

1996 to 2007 — Head of Department, Deputy Minister,
State Secretary in the Ministry of Economic Devel-
opment 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 sec-
tor. 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 Regional Energy Commission. Mr.
Sharonov is a deputy Head of the Executive Commit-
tee of the Moscow Urban Forum. From 2013 to 2016 —
Dean of SKOLKOVO Business School and in September
2016 he was elected President of the Business School.

He is currently Chairman of the Board of Directors,
an Independent member of the Board of Directors
of OOO Management Company NefteTransService; a
member of the Boards of Directors of PAO Sovcom-
flot and PAO PhosAgro, a member of the Superviso-
ry Board of the Bank VTB (PAO).

Candidate of sociological sciences, an Honored Econ-
omist 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, special
award for personal contribution to the development
of corporate management in 2016 from the Inde-
pendent Directors Association and the Russian Union
of Industrialists and Entrepreneurs. He was awarded
the Order of Honor of the Russian Federation.

MR. GENNADY N. TIMCHENKO
Member of NOVATEK’s Board of Directors

Member of NOVATEK’s Strategy Committee
Born in 1952

In 1976, Mr. Timchenko graduated with a Master’s of
Science from the Mechanical University in Leningrad. He
began his career at the Izjorskii Factory in Leningrad, an
industrial plant which made components for the energy
industry. Between 1982 and 1988, he was a Senior En-
gineer at the Ministry of Foreign Trade. Mr. Timchenko
has more than 20 years of experience in Russian and In-
ternational energy sectors and he has built interests in
trading, logistics and transportation related companies.

of the Kirishi refinery. 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 Swe-
den. 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, and Airfix
Aviation OY. Since 2009, he is a member of the Board
of Directors of PAO NOVATEK. He is a member of the
Board of Directors of PAO SIBUR Holding, the Chair-
man of the Board of Directors, President of the Ice
Hockey Club SKA St-Petersburg, as well as the Chair-
man of the Board of Directors of OOO Kontinental
Hockey League, a member of the Board of Trustees
of the All-Russian public organization Russian Geo-
graphical Society, the Chairman of the Russian Coun-
cil of the NPO Russian Chinese Business Council, the
Chairman of the Board to promote OCD, Vice-Pres-
ident of the Olympic Committee of the Russian Fed-
eration, the Chairman of the Economic Council of the
Franco-Russian Chamber of Commerce (CCIFR).

ZULMIRA A. RAZAKOVA
NOVATEK’s Corporate Secretary

Ms. Razakova holds a higher legal education degree
and began working for NOVATEK in 2004. Between
2007 and 2012, Ms. Razakova held the position of lead
specialist of the Management Board and Board of
Directors staff. In April 2012, Ms. Razakova was elected
as Secretary of the Board of Directors. Since 2014, Ms.
Razakova has been NOVATEK’s Corporate Secretary.

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
“Information on Members of NOVATEK’s Board of
Directors” section.

MR. VLADIMIR A. BASKOV
Deputy Chairman of NOVATEK’s Management Board
Born in 1960

In 1988, Mr. Timchenko became a vice president of
Kirishineftekhimexport, the export and trading arm

In 1986, Mr. Baskov graduated from the Moscow
Higher Police School of the USSR. In 2000, he com-

Annual Report 2017

pleted courses at the Management Academy at the
Russian Ministry for Internal Affairs. From 1981 to
2003, he served in various departments within the
Russian Ministry for Internal Affairs. From 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 Manage-
ment Board and in 2007 he became a member of
NOVATEK’s Management Board. Candidate of legal
Sciences. He was awarded the Order For Person-
al 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 Minister of Internal Affairs,
the Governor of the Moscow Region. He also has the
awards of the Russian Orthodox Church (Order of
Holy Prince Daniel of Moscow, Order of Seraphim of
Sarov and a medal of St. Sergius).

Gyetvay worked in various capacities at a number
of U.S. independent oil and gas companies where he
specialized in financial and economic analysis for both
upstream and downstream segments of the petrole-
um industry.

In 1994, Mr. Gyetvay began his work at Coopers and
Lybrand, as Director, Strategic Energy Advisory Ser-
vices. He subsequently moved to Moscow in 1995 with
Coopers & Lybrand to lead the oil and gas practice.
He was admitted as a partner of Pricewaterhouse-
Coopers Global Energy where he assumed the role of
client service engagement partner, Utilities and Min-
ing practice, based in Russia (Moscow office). Mr. Gyet-
vay was an engagement partner on various energy
and mining clients providing overall project manage-
ment, financial and operational expertise, maintaining
and supporting client service relationships as well as
serving as concurring partner on transaction servic-
es to the petroleum sector.

MR. VIKTOR N. BELYAKOV
Deputy Chairman of the Management Board for

Economics and Finance
Born in 1973

Mr. Belyakov graduated from Tver State Technical Uni-
versity majoring in Automated Data Processing and
Management Systems (1995) and in Information Sys-
tems in Economics (1997). In 2000, he completed an
MBA degree program with Kingstone University (UK).
A holder of CMA (Certified Management Accountant).

From 2004 till 2014 Mr. Belyakov worked for PAO
Uralkali, where he successively held the positions of
Head of Division, Deputy Chief Financial Officer, Chief
Financial Officer, Vice President for Finance, Deputy
General Director, Executive Director. In 2015 he was
appointed Vice President for Economics and Finance
of PAO Far East Shipping Company (FESCO group). In
February 2016, Viktor Belyakov joined PAO NOVATEK
in the position of Deputy Chairman of the Manage-
ment Board for Economics and Finance.

Mr. Gyetvay is a Certified Public Accountant (inactive
status), a member of the American Institute of Certi-
fied Public Accountants and an associate member of
the Society of Petroleum Engineers. He is a recognized
expert in the oil and gas industry, a frequent speak-
er at various industry and investor conferences, has
published numerous articles on various oil and gas
industry topics and was a former member of PwC’s
Petroleum Thought Leadership team. He has been rec-
ognized by Investor Relations Magazine as one of the
best CFO’s in Russia and the CIS, and more recently by
Institutional Investor magazine as one of the Top Five
CFO’s in Europe’s Oil and Gas sector. Finance Monthly
magazine named Mark Gyetvay the Best CFO in Russia
for the years 2015, 2016 and 2017, and recently he re-
ceived the Game Changer 2017 Award for Russia.

From 2003 to 2014, Mr. Gyetvay was a member of
NOVATEK’s Board of Directors and served on the
Investment and Strategy Committee. From 2003
to2014, he has been Chief Financial Officer and, in
August 2007, Mr. Gyetvay was elected to NOVATEK’s
Management Board. In July 2010, he became Deputy
Chairman of NOVATEK’s Management Board.

MR. MARK A. GYETVAY
Deputy Chairman of NOVATEK’s Management Board
Born in 1957

Mr. Gyetvay studied at Arizona State University
(Bachelor of Science, Accounting, 1981) and later
at Pace University, New York (Graduate Studies in
Strategic Management, 1995). After graduation, Mr.

MR. SERGEY V. VASYUNIN
Deputy Chairman of the Management Board —

Operations Director
Born in 1967

In 1993, Sergey Vasyunin graduated from the Ufa Oil
Institute, specializing in the Development and Oper-

Transforming into a Global Gas Company

ation of Oil and Gas Fields. Between 1993 and 1997,
Mr. Vasyunin was employed with Condor as deputy
director, Stroykomplekt as head of sales department,
and with OAO Spetsnefteenergomontazhavtomati-
ka — as marketing engineer. From 1998, he worked in
the Urengoygazprom industrial association of OAO
Gazprom where he served in the capacity of an oil,
gas and condensate production foreman. Between
2002 and 2017, Mr. Vasyunin was employed in the
positions of gas condensate production shop manag-
er, deputy general director for operations, and first
deputy general director — chief engineer of OOO
NOVATEK-YURKHAROVNEFTEGAS. In April 2017, he
was appointed Deputy Chairman of the Management
Board — Director for Operations of NOVATEK.

In 2005, the Russian Ministry of Industry and Energy
issued a commendation to Sergey Vasyunin. He holds
the Honored Employee of NOVATEK title.

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 appoint-
ed 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 — Direc-
tor of NOVATEK’s Legal Department and in August
2007, she became a member of NOVATEK’s Manage-
ment Board. Ms. Kuznetsova has the title “Honored
employee of PAO NOVATEK”, and is awarded the Or-
der of Merit for the Fatherland 2 degree.

MR. IGOR A. PLESOVSKIKH
Deputy Chairman of the Management Board — Director

for Geology
Born in 1970

In 1993, Mr. Plesovskikh graduated from Tyumen In-
dustrial Institute specialising in Oil and Gas Geology.

He has over 20 years of experience in the oil and gas
industry. He started his career as Assistant Drill-
er at Noyabrskneftegaz, subsequently holding the

positions of General Director at Urengoyneftegazge-
ologia, General Director at YARGEO, Deputy General
Director — Chief Geologist at NOVATEK-TARKO-
SALENEFTEGAZ, Deputy General Manager of the
Federal Agency for Subsoil Use Rosnedra and Deputy
General Director — Chief Geologist at ITERA Oil & Gas
Company.

In December 2015, he joined PAO NOVATEK in the
capacity of Deputy Chairman of the Management
Board — Director for Geology.

Igor Plesovskikh has been awarded the Certificate of
Merit of the Ministry of Natural Resources and Envi-
ronment of the Russian Federation.

MR. ILYA V. TAFINTSEV
Member of the Management Board —

Director for Strategic Projects
Born in 1985

In 2006 Mr. Tafintsev obtained a BA in Economics
from the Higher School of Economics in Moscow. In
2007 graduated from University of London, where
he majored in Investment and Finance. From 2007 to
2011 Mr. Tafintsev held the position of Deputy Head
of PAO NOVATEK’s Representative Office in London.
In 2011–2014, he was a Finance & Investment Advisor
with United Bureau of Consultants Limited.

Since 2013 he has served as a Strategic Projects
Director of PAO NOVATEK, a member of the Board of
Directors at SIBUR Holding. From 2014 to 2016 he was
Chairman of the Board of Directors of OAO Yamal
LNG. In December 2015, Mr. Tafintsev was appointed
Member of the Management Board — Director for
Strategic Projects of PAO NOVATEK.

MR. LEV V. FEODOSYEV
Deputy Chairman of NOVATEK’s Management Board —

Commercial Director
Born in 1979

In 2002, Mr. Feodosyev graduated from the Bauman
Moscow State Technical University with a degree in
Machinery and Foundry Engineering Technologies. In
2002, Mr. Feodosyev was appointed lead specialist
at the Ministry of Energy of the Russian Federation.
From 2003, he has served as lead specialist, senior
specialist, adviser, deputy head of section, Deputy
Director of Department at the Ministry of Economic
Development and Trade of the Russian Federation.

Annual Report 2017

From October 2007, Mr. Feodosyev worked in NO-
VATEK as Director of the Strategic Planning and De-
velopment Department. From 2011, he was appointed
as Deputy Commercial Director, Director of the Mar-
keting and Gas Sales Department of NOVATEK. Since
February 2015, he has been appointed Commercial
Director, Deputy Chairman of the Management Board
of NOVATEK.

In 2014, Mr. Feodosyev was awarded NOVATEK’s Hon-
orary Certificate.

MR. ALEXANDER M. FRIDMAN
First Deputy Chairman of NOVATEK’s Management

Board
Born in 1951

In 1973, Mr. Fridman graduated from the Gubkin In-
stitute of Oil and Gas in Moscow, with a degree in Oil
and Gas Fields Development and Exploitation. Since
1973, he was employed by various Gazprom compa-
nies: as Chief Engineer of Nadymgazprom, Head of
the Production and Technical Department of the In-
dustrial Association, and Chief Engineer of Mostrans-
gaz’s Kaluga Department for Gas Transportation
and Underground Storage. From 1992 to 2003, he
was Technical Director, First Deputy General Direc-
tor of a joint venture established by PAO Gazprom
and DKG-EAST (Hungary). Since 2003 Mr. Fridman
was the Deputy General Director of Novafininvest. In
2004, Mr. Fridman was elected Deputy Chairman of
the Management Board of PAO NOVATEK. In August
2007, he was appointed a member of NOVATEK’s
Management Board. From February 2015 First
Deputy Chairman of the Management Board of PAO
NOVATEK. Mr. Fridman is the recipient of the title of
honor “Honored man of the oil and gas industry”.

MR. DENIS G. KHRAMOV
Deputy Chairman of the Management Board
Born in 1975

Graduated in 1997 from the Urals State Law Academy
with a degree in Law. In 1999 completed a master’s
course in Private Law with the Russian School of Pri-
vate Law. In 2004, he obtained his candidate degree
in Law.

From 1995 he was an in-house counsel at Transneft-
egaz CJSC. In 1997, he joined the Legal Center for
Northern Territories as a lawyer and was subse-
quently appointed Chief Specialist and Deputy Head

of Department with the Russian Ministry of Fuel and
Energy in 1999.

In 2001, he was appointed Deputy Head of Depart-
ment and Head of Department with the Russian Minis-
try of Economic Development and Trade.

In 2002, he joined Zarubezhneft JSC as Deputy Head
of Division with the responsibility of supervising subsoil
use, economic and financial affairs. In 2007 he became
Senior Lawyer at LeBoeuf, Lamb, Greene & MacRae LLP.

From 2008 he held a number of positions with the
Ministry of Natural Resources and Environment of the
Russian Federation, including Chief Officer for State
Policy and Regulation in Geology and Subsoil Use and
Deputy Minister of Natural Resources and Environ-
ment of the Russian Federation, and was appointed
First Deputy Minister of Natural Resources and Envi-
ronment of the Russian Federation in 2014. During his
service with the Russian Ministry of Natural Resourc-
es and Environment, he was in charge of economic
and financial affairs, geology and subsoil use.

His outstanding service was recognized with awards
at different levels.

In December 2015, he was appointed Deputy Chair-
man of the Management Board at PAO NOVATEK.

REPORT ON MAJOR, AND INTERESTED -PARTY
TRANSACTIONS THAT THE COMPANY DID IN THE
REPORTING YEAR

Information in this section of the Annual report 2017
is not provided pursuant to the Order of the Gov-
ernment of the Russian Federation No. 10 dated 15
January 2018.

CORPORATE GOVERNANCE CODE COMPLIANCE
REPORT

This Corporate Governance Code Compliance Re-
port (hereinafter ”the Report”) was reviewed at the
meeting of PAO NOVATEK’s Board of Directors on [13
March 2018 (Minutes No. 204)].

The Board of Directors certifies that data in this Report
contain full and reliable information on compliance by
the Company with the principles and recommendations
of the Corporate Governance Code for 2016.

When assessing our compliance with corporate gov-
ernance principles as set out in the Code we were

Transforming into a Global Gas Company

guided by the Guidelines for Reporting on Compliance
with the Corporate Governance Code recommended
by the Bank of Russia in its Letter No. IN-06-52/8 dat-
ed 17 February 2016.

An overview of the most relevant aspects of the
corporate governance model and practices in the
Company is presented in the Corporate Governance
section of this Annual Report.

№ Corporate Governance

Compliance criteria

Principles

Compliance
status

Reasons for non-compliance

THE СOMPANY SHOULD ENSURE EQUITABLE AND FAIR TREATMENT OF EVERY SHAREHOLDER EXERCIS-
ING THEIR RIGHT TO TAKE PART IN MANAGING THE СOMPANY.

1.1

1.1.1

The Сompany ensures the
most favorable conditions
for its shareholders to
participate in the general
meeting, develop an in-
formed position on agen-
da items of the general
meeting, coordinate their
actions, and voice their
opinions on items consid-
ered.

1.1.2

The procedure for giving
notice of, and providing
relevant materials for, the
general meeting enables
shareholders to properly
prepare for attending the
general meeting.

1.1.3

In preparing for, and hold-
ing of, the general meeting,
shareholders were able to
receive clear and timely
information on the meeting
and related materials, put
questions to the company’s
executive bodies and the
board of directors, and to
communicate with each
other.

This principle is
complied with.

—

This principle is
complied with.

—

This principle is
complied with.

—

1. The Сompany’s internal document
approved by the general meeting
of shareholders and governing the
procedures for holding the general
meeting is publicly available.

2. The Сompany provides accessible
means of communication via hotline,
e-mail or an online forum for share-
holders to voice their opinions and
submit questions on the agenda in
preparing for the general meeting.
The Сompany performed the above
actions in advance of each general
meeting held in the reporting period.

1. The notice of an upcoming general
meeting of shareholders is posted
(published) online at least 30 days
prior to the date of the general
meeting.

2. The notice of an upcoming meet-
ing specifies the meeting venue and
documents required for admission.

3. Shareholders were given access
to the information on who pro-
posed the agenda items and who
proposed nominees to the com-
pany’s board of directors and the
revision commission.

1. In the reporting period, share-
holders were able to put questions
to members of executive bodies
and members of the board of direc-
tors before and during the annual
general meeting.

Annual Report 2017

This principle is
not fully com-
plied with.

2. The position of the board of direc-
tors (including dissenting opinions
entered into the minutes) on each
agenda item of general meetings
held in the reporting period was
included in the materials to the gen-
eral meeting of shareholders.

When convening General Meet-
ings of Shareholders, the board
of directors reviews all agenda
items of the relevant meet-
ing and presents them to the
Meeting for consideration or
provides necessary advice.

Materials to the General Meet-
ing of Shareholders include
recommendations of the board
of directors as required by law.

In accordance with paragraph
1 of Art. 54 of the Russian
Federal Law "On Joint Stock
Companies", the list of infor-
mation (materials) provided to
shareholders in preparation for
the General Meeting of Share-
holders is determined by the
Board of Directors. According-
ly, the Board of Directors, if it
deems it necessary, to include
its position on the issues on the
agenda of the general meeting
of shareholders, if it deems it
necessary.

The Company considers the
established procedure to be
balanced, not bearing any risks
for the Company and its share-
holders, and does not plan to
change the existing approach.

This principle is
complied with.

—

This principle is
complied with.

—

3. The Company gave duly author-
ized shareholders access to the list
of persons entitled to attend the
General Meeting, as from the date
of its receipt by the Company, for all
general meetings held in the report-
ing period.

1. In the reporting period, share-
holders were able to submit, within
at least 60 days after the end of the
relevant calendar year, proposals
for the agenda of the Annual Gen-
eral Meeting.

2. In the reporting period, the Com-
pany did not reject any proposals
for the agenda or nominees to the
company’s governing bodies due
to misprints or other insignificant
flaws in the shareholder’s proposal.

1.1.4 There were no unjusti-

fied difficulties preventing
shareholders from exercis-
ing their right to request
that a General Meeting
be convened, to propose
nominees to the Compa-
ny’s governing bodies, and
to make proposals for the
agenda of the General
Meeting.

Transforming into a Global Gas Company

1.1.5

1.1.6

Each shareholder was able
to freely exercise their vot-
ing right in the simplest and
most convenient way.

The procedure for hold-
ing a General Meeting set
by the Company provides
equal opportunities for
all persons attending the
Meeting to voice their opin-
ions and ask questions.

This principle is
complied with.

—

This principle is
complied with.

—

This principle is
complied with.

—

This principle is
complied with.

—

1. An internal document (internal
policy) of the Company provides
that each participant of the General
Meeting may request a copy of the
ballot filled out by them and certified
by the counting commission before
the end of the relevant meeting.

1. General Meetings of Shareholders
held in the reporting period in the
form of a meeting (i.e. joint presence
of shareholders) provided for suf-
ficient time for making reports on
and for discussing agenda items.

2. Nominees to the Company’s gov-
erning and control bodies were avail-
able to answer questions of share-
holders at the Meeting at which their
nominations were put to vote.

3. When passing resolutions on pre-
paring and holding General Meet-
ings of Shareholders, the board of
directors considered using tele-
communication means for remote
access of shareholders to General
Meetings in the reporting period

1.2

SHAREHOLDERS ARE GIVEN EQUAL AND FAIR OPPORTUNITIES TO SHARE PROFITS OF THE COMPANY IN
THE FORM OF DIVIDENDS.

1.2.1 The Company has designed
and put in place a transpar-
ent and clear mechanism
to determine the dividend
amount and payout proce-
dure.

1.2.2 The Company does not
resolve to pay out divi-
dends if such payout, while
formally compliant with law,
is economically unjustified
and may lead to a false
representation of the Com-
pany’s performance.

1.2.3 The Company does not

allow for dividend rights of
its existing shareholders to
be impaired.

1. The Company has drafted and dis-
closed a dividend policy approved
by the board of directors.

This principle is
complied with.

—

2. If the Company’s dividend policy
uses reporting figures to determine
the dividend amount, then relevant
provisions of the dividend policy
take into account the consolidated
financial statements.

1. The Company’s dividend policy
clearly identifies financial / econom-
ic circumstances under which the
Company shall not pay out divi-
dends.

This principle is
complied with.

—

1. In the reporting period, the Com-
pany did not take any actions that
would lead to the impairment of
the dividend rights of its existing
shareholders.

This principle is
complied with.

—

Annual Report 2017

1.2.4 The Company makes every
effort to prevent its share-
holders from using other
means to profit (gain) from
the Company other than
dividends and liquidation
value.

This principle
is not complied
with.

1. To prevent shareholders from
using other means to profit (gain)
from the Company other than
dividends and liquidation value, the
Company’s internal documents
provide for controls to timely iden-
tify and approve deals with affili-
ates (associates) of the Company’s
substantial shareholders (persons
entitled to use votes attached to
voting shares) where the law does
not formally recognize such deals
as related-party transactions.

This principle is not complied
with as the Company believes
that statutory controls are suf-
ficient for relevant purposes.
The Company does not trans-
act with persons under control
by substantial shareholders,
which prevents substantial
shareholders from profiting
(gaining) from the Company.

The Company does not see any
risks in the established prac-
tice, as the system of procure-
ment procedures introduced
in the Company ensures the
conclusion of contracts on
market terms.

1.3

1.3.1

CORPORATE GOVERNANCE FRAMEWORK AND PRACTICES SHOULD ENSURE EQUALITY FOR THE SHARE-
HOLDERS OWNING THE SAME TYPE (CLASS) OF SHARES, INCLUDING MINORITY AND NON-RESIDENT
SHAREHOLDERS, AND THEIR EQUITABLE TREATMENT BY THE COMPANY.

The Company has created
conditions for fair treat-
ment of each shareholder
by the Company’s gov-
erning and control bodies,
including conditions that
rule out abuse by major
shareholders against mi-
nority shareholders.

1. In the reporting period, proce-
dures for management of potential
conflicts of interest among sub-
stantial shareholders were efficient,
while the board of directors paid
due attention to conflicts, if any,
between shareholders.

This principle is
complied with.

—

1.3.2 The Company does not

take any actions that lead
or may lead to artificial
redistribution of corporate
control.

1. No quasi-treasury shares were is-
sued or used to vote in the report-
ing period.

This principle is
complied with.

—

SHAREHOLDERS ARE PROVIDED WITH RELIABLE AND EFFICIENT MEANS OF RECORDING THEIR RIGHTS TO
SHARES AND ARE ABLE TO FREELY DISPOSE OF THEIR SHARES WITHOUT ANY HINDRANCE.

Shareholders are provided
with reliable and efficient
means of recording their
rights to shares and are
able to freely dispose of
their shares without any
hindrance.

1. The Company’s registrar maintains
the share register in an efficient and
reliable way that meets the needs of
the Company and its shareholders.

This principle is
complied with.

—

THE BOARD OF DIRECTORS PROVIDES STRATEGIC MANAGEMENT OF THE COMPANY, DETERMINES KEY
PRINCIPLES OF, AND APPROACHES TO, SETTING UP A CORPORATE RISK MANAGEMENT AND INTERNAL
CONTROL FRAMEWORK, MONITORS PERFORMANCE BY THE COMPANY’S EXECUTIVE BODIES, AND PER-
FORMS OTHER KEY FUNCTIONS.

The board of directors is
responsible for appointing
and dismissing execu-

1. The board of directors has the
authority stipulated in the Articles
of Association to appoint and

This principle is
not fully com-
plied with

The issue of determining the
amount of remuneration paid
to the Chairman of the Man

1.4

1.4.1

2.1

2.1.1

remove members of executive
bodies and to set out the terms and
conditions of their contracts.

tive bodies, including for
improper performance of
their duties. The board of
directors also ensures that
the Company’s executive
bodies act in accord-
ance with the Company’s
approved development
strategy and core lines of
business.

Transforming into a Global Gas Company

agement Board based on the
results of the work for the
year, falls withing the authority
of the Board of Directors.

In accordance with the Compa-
ny's Articles of Association, the
members of the Management
Board are elected by the Board
of Directors from among the
Company's employees, solely
on the recommendation of the
Chairman of the Management
Board. The amounts of official
salaries and other terms of
employment contracts with the
Company's employees, including
members of the Management
Board, are determined by the
Chairman of the Management
Board taking into account the
parameters of the Company's
business plan approved by the
Board of Directors.

The Company considers the
established procedure to be
effective, balanced, not bear-
ing any risks for the Company
and its shareholders, and does
not plan to change the existing
approach.

This principle is
complied with.

—

This principle is
complied with.

—

2. The board of directors reviewed
the report(s) by the sole executive
body or members of the collective
executive body on the implementa-
tion of the company’s strategy

At its meetings in the reporting
period, the board of directors re-
viewed strategy implementation and
updates, approval of the company’s
financial and business plan (budget),
and criteria and performance
(including interim) of the company’s
strategy and business plans.

2.1.2 The board of directors sets

key long-term targets for
the company, assesses and
approves its key perfor-
mance indicators and key
business goals, as well as
the strategy and business
plans for the company’s
core lines of business.

2.1.3 The Board of Directors

defines the Company's risk
management and internal
control principles and ap-
proaches.

1. The Board of Directors defined
the Company's risk management
and internal control principles and
approaches.

This principle is
complied with.

—

Annual Report 2017

2. The Board of Directors assessed
the company’s risk management
and internal control system in the
reporting period.

2.1.4 The board of directors de-
termines the company’s re-
muneration and reimburse-
ment (compensation) policy
for its directors, members
of executive bodies and
other key executives.

1. The company developed and put
in place a remuneration and reim-
bursement (compensation) policy
(policies), approved by the board of
directors, for its directors, mem-
bers of executive bodies and other
key executives.

This principle is
not fully com-
plied with.

2. At its meetings in the report-
ing period, the Board of Directors
discussed matters related to such
policy (policies).

The costs of the Management
Board members and other key
executives of the Company
shall be reimbursed (compen-
sated) under the applicable
legislation.

Remuneration of members of
the Management Board and
other key employees of the
Company shall be effected
upon the decision of the Chair-
man of the Management Board
within the amount determined
with consideration of the
parameters of the Company's
business plan approved by the
Board of Directors.

The Board of Directors also
determines the remuneration
of the Chairman of the Man-
agement Board based on the
performance of the Company
in the reporting year.

The Company considers the
established procedure to be
balanced, not bearing any
risks for the Company and its
shareholders, and does not
plan to change the existing
approach.

2.1.5 The board of directors
plays a key role in pre-
venting, identifying and
resolving internal conflicts
between the company’s
bodies, shareholders and
employees.

2.1.6 The board of directors

plays a key role in ensuring
that the company is trans-
parent, timely and fully dis-
closes its information, and
provides its shareholders
with unhindered access to
the company’s documents.

1. The board of directors plays a key
role in preventing, identifying and
resolving internal conflicts.

This principle is
complied with.

—

2. The company set up mechanisms
to identify transactions leading to
a conflict of interest and to resolve
such conflicts.

1. The board of directors approved
the company’s information policy
regulations.

This principle is
complied with.

—

2. The company identified persons
responsible for implementing the
information policy.

Transforming into a Global Gas Company

2.1.7 The board of directors

controls the company’s cor-
porate governance prac-
tices and plays a key role in
material corporate events
of the company.

1. In the reporting period, the board
of directors reviewed the compa-
ny’s corporate governance prac-
tices.

This principle is
complied with.

—

2.2 THE BOARD OF DIRECTORS IS ACCOUNTABLE TO THE COMPANY’S SHAREHOLDERS.

2.2.1 Performance of the board

of directors is disclosed
and made available to the
shareholders.

2.2.2 The chairman of the board

of directors is available to
communicate with the com-
pany’s shareholders.

1. The company’s annual report for
the reporting period includes the
information on individual attendance
at board of directors and committee
meetings.

2. The annual report discloses key
performance assessment results of
the board of directors in the report-
ing period.

1. The company has in place a
transparent procedure enabling
shareholders to forward questions
and express their position on such
questions to the chairman of the
board of directors.

This principle is
complied with.

—

This principle is
complied with.

—

2.3 THE BOARD OF DIRECTORS MANAGES THE COMPANY IN AN EFFICIENT AND COMPETENT MANNER AND

MAKE FAIR AND INDEPENDENT JUDGMENTS AND DECISIONS IN LINE WITH THE BEST INTERESTS OF THE
COMPANY AND ITS SHAREHOLDERS.

This principle is
complied with.

—

This principle is
complied with.

—

2.3.1 Only persons of impecca-
ble business and person-
al reputation who have
knowledge, expertise and
experience required to
make decisions within the
authority of the board of
directors and essential to
perform its functions in an
efficient way are elected to
the board of directors.

2.3.2 The company’s directors

are elected via a transpar-
ent procedure that enables
shareholders to obtain
information on nominees
sufficient to judge on their
personal and professional
qualities.

1. The procedure for assessing
the board of directors` perfor-
mance established in the company
includes, inter alia, assessment of
professional qualifications of the
board members.

2. In the reporting period, the
board of directors (or its nomina-
tion committee) assessed nomi-
nees to the board of directors for
required experience, knowledge,
business reputation, absence of
conflicts of interest, etc.

1. Whenever the agenda of the
general meeting of shareholders
included election of the board of
directors, the company provided
to shareholders the biographical
details of all nominees to the board
of directors, the results of their as-
sessment carried out by the board
of directors (or its nomination
committee), and the information on
whether the nominee meets.

Annual Report 2017

2.3.3 The board of directors

has a balanced member-
ship, including in terms of
directors’ qualifications,
experience, expertise and
business qualities, and en-
joys its shareholders’ trust.

2.3.4 The company has a suffi-

cient number of directors
to organize the board of
directors’ activities in the
most efficient way, including
ability to set up committees
of the board of directors
and enable the company’s
substantial minority share-
holders to elect a nominee
to the board of directors
for whom they vote.

the independence criteria set forth
in Recommendations 102–107 of
the Code, as well as the nominees’
written consent to be elected to the
board of directors.

1. As part of assessment of the
board of directors’ performance
run in the reporting period, the
board of directors reviewed its re-
quirements to professional qualifica-
tions, experience and business skills.

1. As part of assessment of the
board of directors’ performance
run in the reporting period, the
board of directors considered
whether the number of directors
met the company’s needs and
shareholders’ interests.

This principle is
complied with.

—

This principle is
complied with.

2.4 THE BOARD OF DIRECTORS INCLUDES A SUFFICIENT NUMBER OF INDEPENDENT DIRECTORS.

1. In the reporting period, all inde-
pendent directors met all independ-
ence criteria set out in Recommen-
dations 102–107 of the Code or
were deemed independent by the
board of directors.

This principle is
complied with.

—

2.4.1 An independent director is
a person who is sufficiently
professional, experienced
and independent to develop
their own position, and
capable of making unbi-
ased judgements in good
faith, free of influence by
the company’s executive
bodies, individual groups
of shareholders or other
stakeholders. It should
be noted that a nominee
(elected director) who is
related to the company, its
substantial shareholder,
substantial counterparty or
competitor of the company,
or related to the govern-
ment, may not be consid-
ered as independent under
normal circumstances.

2.4.2 The company assesses

compliance of nominees to
the board of directors and
reviews compliance

1. In the reporting period, the board of
directors (or its nomination commit-
tee) made a judgement on independ-
ence of each nominee to the board of

This principle is
complied with.

—

Transforming into a Global Gas Company

of independent directors
with independence criteria
on a regular basis. In such
assessment, substance
should prevail over form.

of directors and provided its opinion
to shareholders.

2. In the reporting period, the board
of directors (or its nomination com-
mittee) reviewed, at least once, the
independence of incumbent directors
listed by the company as independent
directors in its annual report.

3. The company has in place proce-
dures defining the actions to be taken
by a member of the board of direc-
tors if they cease to be independent,
including the obligation to timely notify
the board of directors thereof.

2.4.3 Independent directors make

up at least one third of the
elected board members.

1. Independent directors make up at
least one third of the board mem-
bers.

This principle is
complied with.

—

2.4.4 Independent directors play

a key role in preventing
internal conflicts in the
company and in ensuring
that the company per-
forms material corporate
actions.

1. Independent directors (with no
conflicts of interest) run a prelimi-
nary assessment of material cor-
porate actions implying a potential
conflict of interests and submit the
results to the board of directors.

This principle is
not fully com-
plied with.

In accordance with the Com-
pany’s Articles of Association,
the Regulations on the Board
of Directors and the Regu-
lations on the Committees
of the Board of Directors, a
large block of issues related to
significant corporate actions
is preliminarily considered by
the Audit Committee and the
Remuneration Committee con-
sisting of independent direc-
tors. In addition, most of such
decisions shall be approved by
the Board of Directors, if 8 out
of 9 directors voted for the
corresponding decision. Thus,
any two independent directors
may block the adoption of an
undesirable decision in their
opinion.

The Company believes that
independent directors have
sufficient capacity to assess
significant corporate actions.

2.5 THE CHAIRPERSON OF THE BOARD ENSURES THAT THE BOARD OF DIRECTORS DISCHARGES ITS DUTIES

IN THE MOST EFFECTIVE AND EFFICIENT WAY.

2.5.1 The board of directors is

chaired by an independent
director, or a senior inde-
pendent director supervis-
ing the activities of other
independent directors and

1.The board of directors is chaired
by an independent director, or a
senior independent director is ap-
pointed from among the independ-
ent directors.

This principle is
not fully com-
plied with.

The role of independent direc-
tors on the Company's Board
of Directors is very important,
since the Audit Committee and
the Remuneration and Nomina-
tion Committee of the Board

Annual Report 2017

interacting with the chair-
man of the board of direc-
tors is chosen from among
the elected independent
directors.

2. The role, rights and duties of the
chairman of the board of directors
(and, if applicable, of the senior inde-
pendent director) are duly set out in
the company’s internal documents.

of Directors are comprised
of independent directors
only. Formally, the Chairman
of the Board of Directors is
not an Independent Director.
However, the Chairman of the
Board of Directors meets all
independence criteria, except
for his tenure on the Board of
Directors. For chairmanship
purposes, the directors elected
the most experienced of the
Board members who is not an
independent director.

The Company considers the
established procedure to be
balanced and does not plan to
change the existing approach.

2.5.2 The chairman of the board

of directors maintains a
constructive environment
at meetings, enables free
discussion of agenda items,
and supervises the execu-
tion of resolutions passed
by the board of directors.

1. Performance of the chairman
of the board of directors was
assessed as part of assessment
of the board of directors’ perfor-
mance in the reporting period.

This principle is
complied with.

—

2.5.3 The chairman of the board
of directors takes all steps
necessary for the timely
provision to members of
the board of directors of
information required to
pass resolutions on agenda
items.

1. The company’s internal doc-
uments set out the duty of the
chairman of the board of directors
to take all steps necessary for the
timely provision to members of the
board of directors with materials on
agenda items of the board meeting.

This principle is
complied with.

—

2.6 DIRECTORS ACT REASONABLY AND IN GOOD FAITH IN THE BEST INTERESTS OF THE COMPANY AND ITS

SHAREHOLDERS, ON A FULLY INFORMED BASIS AND WITH DUE CARE AND DILIGENCE.

2.6.1 Directors pass resolutions

on a fully informed basis,
with no conflict of interest,
subject to equal treatment
of the company’s share-
holders, and assuming
normal business risks.

This principle is
complied with.

—

1. The company’s internal doc-
uments provide that a director
should notify the board of directors
of any existing conflict of interest as
to any agenda item of the meet-
ing of the board of directors or its
committee, prior to discussion of
the relevant agenda item.

2. The company’s internal doc-
uments provide that a director
should abstain from voting on any
item in connection with which they
have a conflict of interest.

Transforming into a Global Gas Company

3. The company has in place a
procedure enabling the board of
directors to get professional advice
on matters within its remit at the
expense of the company.

1. The company adopted and pub-
lished an internal document that
clearly defines the rights and duties
of directors.

1. Individual attendance at board
and committee meetings, as well
as time devoted to preparation for
attending meetings, was record-
ed as part of the procedure for
assessing the board of directors in
the reporting period.

2. Under the company’s internal
documents, directors notify the
board of directors of their inten-
tions to be elected to governing
bodies in other entities (apart from
the entities controlled by, or affili-
ated to, the company), and of their
election to such bodies.

1. Under the company’s internal doc-
uments, directors are entitled to ac-
cess documents and make requests
on the company and its controlled
entities, while executive bodies of the
company should furnish all relevant
information and documents.

2. The Company has in place a formal-
ized onboarding program for newly
elected Directors.

This principle is
complied with.

—

This principle is
complied with.

—

This principle is
complied with.

—

2.6.2 The rights and duties of

directors are clearly stated
and incorporated in the
company’s internal docu-
ments.

2.6.3 Directors have sufficient

time to perform their
duties.

2.6.4 All directors shall have

equal access to the com-
pany’s documents and
information. Newly elected
directors are furnished
with sufficient information
about the company and
performance of the board
of directors as soon as
possible.

2.7 MEETINGS OF THE BOARD OF DIRECTORS, PREPARATION FOR SUCH MEETINGS AND PARTICIPATION OF

BOARD MEMBERS THEREIN ENSURE EFFICIENT PERFORMANCE BY THE BOARD OF DIRECTORS.

2.7.1 Board meetings are held as
needed, taking into account
the scale of operations and
goals of the company at a
particular time.

2.7.2 The company's internal

regulations stipulate the
procedure to prepare for
and hold the board's meet-
ings, enabling the directors
to make proper prepara-
tions for them.

1. The board of directors held at
least six meetings in the reporting
year.

This principle is
complied with.

—

This principle is
complied with.

—

1. The company has an approved
internal document that describes
the procedure for arranging and
holding meetings of the board of
directors and sets out, in particu-
lar, that the notice of the meeting
shall be given, as a rule, at least five
days prior to such meeting.

Annual Report 2017

2.7.3 The format of the meeting

of the board of directors
is determined taking into
account the importance of
items on the agenda. The
most important matters
are dealt with at meetings
of the board of directors
held in person.

1. The company’s charter or internal
document provides for the most
important matters (as per the list
set out in Recommendation 168 of
the Code) to be passed at in-person
meetings of the board of directors.

This principle is
complied with.

—

2.7.4 Resolutions on most im-

portant matters relating to
the company’s operations
are passed at a meeting
of the board of directors
by a qualified majority or
by a majority of all elected
board members.

1. The company’s charter provides
for the most important matters set
out in Recommendation 170 of the
Code to be passed at a meeting of
the board of directors by a qualified
majority of at least three quarters
or by a majority of all elected board
members.

This principle is
not fully com-
plied with.

The Company’s Articles of
association do not provide for
resolutions of the Board to be
passed by qualified majority on
the following matters:
• submission to the General

Meeting of matters relating
to the Company’s liquidation

• submission to the General

Meeting of matters relating
to amendments to the Com-
pany’s Articles of association

• review of material issues

relating to operations of legal
entities controlled by the
Company.

The Company deems sufficient
the existing norm stipulated in
the legislation and the Articles
of Association according to
which decisions on amend-
ments and additions in the
Company's Articles of Associ-
ation, including approval of the
latter in a new wording, as well
as on Company's liquidation,
appointment of a winding up
commission and approval of
the interim and final liquidation
balance shall be made by the
general shareholders meeting
by the three-forths majority
of the votes of shareholders
holding the voting shares and
taking part in the general
shareholders meeting.

The Company considers the
established procedure to be
balanced, not bearing any risks,
and does not plan to change
the existing approach.

Transforming into a Global Gas Company

2.8 THE BOARD OF DIRECTORS SETS UP COMMITTEES FOR PRELIMINARY CONSIDERATION OF THE MOST

IMPORTANT ISSUES RELATED TO THE BUSINESS OF THE COMPANY.

2.8.1 To preview matters related

to controlling the compa-
ny’s financial and business
activities, it is recom-
mended to set up an audit
committee comprised of
independent directors.

2.8.2 To preview matters related
to adopting an efficient
and transparent remuner-
ation scheme, a remuner-
ation committee is set up,
comprised of independent
directors and headed by an
independent director who
is not the chairman of the
board of directors.

2.8.3 To preview matters related
to talent management
(succession planning),
professional composition
and efficiency of the board
of directors, a nomination
(HR) committee is set up,
predominantly comprised
of independent directors.

1. The board of directors has set up
an audit committee comprised sole-
ly of independent directors.

This principle is
complied with.

—

2. The company’s internal docu-
ments set out the tasks of the audit
committee, including those listed in
Recommendation 172 of the Code.

3. At least one member of the audit
committee represented by an in-
dependent director has experience
and knowledge of preparing, analyz-
ing, assessing and auditing account-
ing (financial) statements.

4. Meetings of the audit committee
were held at least once a quarter
during the reporting period.

1. The board of directors has set
up a remuneration committee
comprised solely of independent
directors.

2. The remuneration committee is
headed by an independent direc-
tor who is not the chairman of the
board of directors.

3. The company’s internal doc-
uments set out the tasks of the
remuneration committee, including
those listed in Recommendation 180
of the Code.

1. The board of directors has set up
a nomination committee (its tasks
listed in Recommendation 186 of
the Code are fulfilled by another
committee, the Remuneration and
Nomination Committee) predomi-
nantly comprised of independent
directors.

2. The company’s internal doc-
uments set out the tasks of the
nomination committee (or the tasks
of the committee with combined
functions), including those listed in
Recommendation 186 of the Code.

This principle is
complied with.

—

This principle is
complied with.

—

Annual Report 2017

2.8.4 Taking into account the

company’s scope of busi-
ness and level of risks,
the company’s board of
directors made sure that
the composition of its com-
mittees is fully in line with
company’s business goals.
Additional committees
were either set up or not
deemed necessary (strat-
egy committee, corporate
governance committee,
ethics committee, risk
management committee,
budget committee, health,
safety and environment
committee, etc.).

2.8.5 Committees are composed
so as to enable comprehen-
sive discussions of matters
under preview, taking into
account the diversity of
opinions.

This principle is
complied with.

—

1. In the reporting period, the board
of directors considered whether the
composition of its committees was
in line with the board’s tasks and the
company’s business goals. Additional
committees were either set up or
not deemed necessary.

1. Committees of the board of di-
rectors are headed by independent
directors.

This principle is
not fully com-
plied with.

2. The company’s internal docu-
ments (policies) include provisions
stipulating that persons who are
not members of the audit commit-
tee, the nomination committee and
the remuneration committee may
attend committee meetings only
by invitation of the chairman of the
respective committee.

The Board of directors' audit
committee and remuneration
and nomination committee are
not only headed by but also
fully consist of independent
directors.

Formally, the director heading
an additional committee, the
Strategy Committe, is not an
independent director. Howev-
er, he meets all independence
criteria, except for his tenure
on the Board of Directors.

The Company does not see any
risks in this.

2.8.6 Committee chairmen in-

form the board of directors
and its chairman on the
work of their committees
on a regular basis.

1. During the reporting period, com-
mittee chairmen reported to the
board of directors on the work of
committees on a regular basis.

This principle is
complied with.

—

2.9 THE BOARD OF DIRECTORS ENSURES PERFORMANCE ASSESSMENT OF THE BOARD OF DIRECTORS, ITS

COMMITTEES AND MEMBERS OF THE BOARD OF DIRECTORS.

This principle is
complied with.

—

2.9.1 The board of directors’

performance assessment
is aimed at determining the
efficiency of the board of
directors, its committees
and members, consisten-
cy of their work with the
company’s development
requirements, as well as
bolstering the work of the
board of directors and

1. Self-assessment or external as-
sessment of the board of directors’
performance carried out in the
reporting period included perfor-
mance assessment of the com-
mittees, individual members of the
board of directors and the board
of directors in general.

Transforming into a Global Gas Company

identifying areas for im-
provement.

2.9.2 Performance of the board

of directors, its committees
and directors is assessed on
a regular basis at least once
a year. An external organi-
zation (advisor) is engaged
at least once in three years
to conduct an independent
assessment of the board of
directors’ performance.

2. Results of self-assessment or
external assessment of the board
of directors’ performance carried
out in the reporting period were
reviewed at the in-person meeting
of the board.

1. The company engaged an exter-
nal advisor to conduct an inde-
pendent assessment of the board
of directors’ performance at least
once over the last three reporting
periods.

This principle
is not complied
with.

Over the past three reporting
periods the Company has not
engaged an external entity (ad-
visor) to conduct an independ-
ent assessment of the Board
of Director’s performance.
The Company did not run any
self-assessment of the Board
of Directors’ performance in
the reporting period.

3.1

3.1.1

THE COMPANY’S CORPORATE SECRETARY ENSURES EFFICIENT ONGOING INTERACTION WITH SHAREHOLD-
ERS, COORDINATES THE COMPANY’S EFFORTS TO PROTECT SHAREHOLDER RIGHTS AND INTERESTS AND
SUPPORTS THE ACTIVITIES OF THE BOARD OF DIRECTORS.

This principle is
complied with.

—

The corporate secretary
has the knowledge, expe-
rience and qualifications
sufficient to perform his/
her duties, as well as an
impeccable reputation and
the trust of shareholders.

1. The company has adopted and
published an internal document —
regulations on the corporate sec-
retary.

2. The biographical data of the
corporate secretary are published
on the corporate website and in the
company’s annual report with the
same level of detail as for members
of the board of directors and the
company’s executives.

3.1.2 The corporate secretary
is sufficiently independent
of the company’s executive
bodies and has the powers
and resources required to
perform his/her tasks.

The board of directors approves
the appointment, removal and addi-
tional remuneration of the corpo-
rate secretary.

This principle is
complied with.

—

4.1

REMUNERATION PAID BY THE COMPANY IS SUFFICIENT TO ATTRACT, MOTIVATE AND RETAIN PERSONS
WHO HAVE COMPETENCIES AND QUALIFICATIONS REQUIRED BY THE COMPANY. DIRECTORS, EXECUTIVE
BODY MEMBERS AND OTHER KEY MANAGERS ARE REMUNERATED AS PER THE COMPANY'S REMUNERA-
TION POLICY.

4.1.1 The amount of remunera-

tion paid by the company to
members of the board of
directors, executive bodies
and other key executives
creates sufficient incentives
for them to work efficiently,
while enabling the company
to engage and retain

1. The company has in place an
internal document (internal doc-
uments) — the policy (policies)
on remuneration of members of
the board of directors, executive
bodies and other key executives,
which clearly defines (define) the
approaches to remuneration of the
above persons.

This principle is
not fully com-
plied with.

Relevant comments are provid-
ed in items 2.1.1. and 2.1.4 hereof.

Annual Report 2017

competent and qualified
specialists. At the same
time, the company avoids
unnecessarily high remu-
neration, as well as unjus-
tifiably large gaps between
remunerations of the above
persons and the company’s
employees.

4.1.2 The company’s remunera-
tion policy is developed by
the remuneration committee
and approved by the board
of directors. The board of
directors, assisted by the
remuneration committee,
ensures control over the
introduction and implemen-
tation of the company’s
remuneration policy, revising
and amending it as required.

4.1.3 The company’s remunera-
tion policy includes trans-
parent mechanisms for
determining the amount
of remuneration due to
members of the board of
directors, executive bodies
and other key executives of
the company, and regulates
all types of expenses, bene-
fits and privileges provided
to such persons.

4.1.4 The company defines a

policy on reimbursement
(compensation) of costs
detailing a list of reimburs-
able expenses and spec-
ifying service levels that
members of the board of
directors, executive bodies
and other key executives
of the company can claim.
Such policy can make part
of the company’s remuner-
ation policy.

This principle is
complied with.

—

1. During the reporting period, the
remuneration committee consid-
ered the remuneration policy (pol-
icies) and the practical aspects of
its (their) introduction and present-
ed relevant recommendation to the
board of directors as required.

This principle is
not fully com-
plied with.

Relevant comments are provid-
ed in items 2.1.1. and 2.1.4 hereof.

1. The company’s remuneration
policy (policies) includes (include)
transparent mechanisms for de-
termining the amount of remuner-
ation due to members of the board
of directors, executive bodies and
other key executives of the compa-
ny, and regulates (regulate) all types
of expenses, benefits and privileges
provided to such persons.

1. The remuneration policy (policies)
defines (define) the rules for reim-
bursement of costs incurred by
members of the board of directors,
executive bodies and other key
executives of the company.

This principle is
complied with.

—

4.2 DIRECTORS' REMUNERATION ENSURES THAT THEIR FINANCIAL INTERESTS ARE ALIGNED WITH

LONG-TERM FINANCIAL INTERESTS OF SHAREHOLDERS.

4.2.1 The company pays fixed
annual remuneration to
members of the board of
directors.

1. Fixed annual remuneration was
the only form of monetary remu-
neration payable to members of the
board of directors for their service

This principle is
complied with.

—

Transforming into a Global Gas Company

on the board of directors during
the reporting period.

1. If the company’s internal docu-
ment(s) — the remuneration policy
(policies) stipulates (stipulate) pro-
vision of the company’s shares to
members of the board of directors,
clear rules for share ownership by
board members are defined and
disclosed, aimed at stimulating long-
term ownership of such shares.

The company does not pay
remuneration for attending
particular meetings of the
board of directors or its
committees.

The company does not
apply any form of short-
term motivation or addi-
tional financial incentive for
members of the board of
directors.

4.2.2 Long-term ownership of

the company’s shares helps
align the financial interests
of members of the board
of directors with long-term
interests of shareholders
to the utmost. At the same
time, the company does not
link the right to dispose of
shares to performance tar-
gets, and members of the
board of directors do not
participate in stock option
plans.

4.2.3 The company does not

provide for any extra pay-
ments or compensations in
the event of early termina-
tion of office of members
of the board of directors
resulting from the change
of control or any other
reasons whatsoever.

1. The company does not provide
for any extra payments or com-
pensations in the event of early
termination of office of members
of the board of directors resulting
from the change of control or any
other reasons whatsoever.

—

Not applica-
ble, since the
Regulations on
Remuneration
and Compen-
sations Payable
to Members of
PAO NOVATEK
board of direc-
tors does not
provide for re-
muneration of
the directors
with company
shares.

This principle is
complied with.

—

4.3 REMUNERATION OF EXECUTIVE BODY MEMBERS AND OTHER KEY MANAGERS IS LINKED

TO THE COMPANY'S RESULTS AND THEIR PERSONAL CONTRIBUTION THERETO.

4.3.1 Remuneration due to mem-

bers of executive bodies
and other key executives of
the company is determined
in a manner providing for
reasonable and justified
ratio of the fixed and varia-
ble parts of remuneration,
depending on the com-
pany’s performance and
the employee’s personal
contribution.

1. In the reporting period, annual
performance results approved by
the board of directors were used
to determine the amount of the
variable part of remuneration due
to members of executive bodies
and other key executives of the
company.

2. During the latest assessment of
the system of remuneration for
members of executive bodies and
other key executives of the compa-

This principle is
not fully com-
plied with.

The procedure for defining
and payment of bonuses to
members of the Management
Board and other key execu-
tives existing in the Company
does not allow receipt of such
payments by the persons
named. The Company believes
the executive bodies' members'
civil liability norms set out in the
applicable law to be sufficient.

Annual Report 2017

4.3.2 The company put in place
a long-term incentive
programme for members
of executive bodies and
other key executives of
the company with the use
of the company’s shares
(options and other deriva-
tive instruments where the
company’s shares are the
underlying asset).

company, the board of directors
(remuneration committee) made
sure that the company applies effi-
cient ratio of the fixed and variable
parts of remuneration.

3. The company has in place a pro-
cedure that guarantees return to
the company of bonus payments
illegally received by members of
executive bodies and other key
executives of the company.

1. The company has in place a long-
term incentive program for mem-
bers of executive bodies and other
key executives of the company with
the use of the company’s shares
(financial instruments based on the
company’s shares).

2. The long-term incentive pro-
gram for members of executive
bodies and other key executives of
the company implies that the right
to dispose of shares and other
financial instruments used in this
program takes effect at least three
years after such shares or other
financial instruments are granted.
The right to dispose of such shares
or other financial instruments is
linked to the company’s perfor-
mance targets.

This principle
is not complied
with.

Currently, The Company does
not consider necessary imple-
menting a long-term incen-
tive program for members of
executive bodies and other
key executives of the company
with the use of the Company’s
shares (financial instruments
based on the Company’s
shares).

This principle is
complied with.

—

4.3.3 The compensation (golden
parachute) payable by the
company in case of early
termination of powers of
members of executive bod-
ies or key executives at the
company’s initiative, pro-
vided that there have been
no actions in bad faith on
their part, does not exceed
the double amount of the
fixed part of their annual
remuneration.

1. In the reporting period, the
compensation (golden parachute)
payable by the company in case of
early termination of the powers of
executive bodies or key executives
at the company’s initiative, provided
that there have been no actions in
bad faith on their part, did not ex-
ceed the double amount of the fixed
part of their annual remuneration.

THE COMPANY PUT IN PLACE AN EFFECTIVE RISK MANAGEMENT AND INTERNAL CONTROL SYSTEM TO
GUARANTEE, IN A REASONABLE MANNER, FULFILLMENT OF THE COMPANY'S GOALS.

The board of directors of
the Company has de-

1. Functions of different manage-
ment bodies and divisions of the

This principle is
complied with.

—

5.1

5.1.1

100

Transforming into a Global Gas Company

company in the risk management
and internal controls are clearly de-
fined in the company’s internal doc-
uments /relevant policy approved
by the board of directors.

1. The company’s executive bodies
ensured the distribution of func-
tions and powers related to risk
management and internal controls
between the heads (managers) of
divisions and departments account-
able to them.

This principle is
complied with.

—

1. The company has in place an ap-
proved anti-corruption policy.

This principle is
complied with.

—

2. The company established an
accessible method of notifying the
board of directors or the board’s
audit committee of breaches of any
violations of the law, the company’s
internal procedures and code of
ethics.

1. In the reporting period, the board
of directors or the Board’s audit
committee assessed the efficiency
of the company’s risk management
and internal controls. Key results of
this assessment are included in the
company’s annual report.

This principle is
complied with.

—

fined the Company's risk
management and internal
control principles and ap-
proaches.

5.1.2 The company’s executive

bodies ensure establish-
ment and continuous
operation of efficient risk
management and internal
controls in the company.

5.1.3 The company’s risk man-

agement and internal con-
trols ensure an objective,
fair and clear view of the
current state and future
prospects of the company,
the integrity and trans-
parency of the company’s
reporting, as well as rea-
sonable and acceptable risk
exposure.

5.1.4 The company’s board of
directors shall take nec-
essary measures to make
sure that the company’s
risk management and inter-
nal controls are consistent
with the principles of, and
approaches to, its setup
determined by the board
of directors, and that the
system is functioning effi-
ciently.

5.2 THE COMPANY ARRANGES FOR AN INTERNAL AUDIT, TO ASSESS RELIABILITY AND PERFORMANCE OF
THE RISK MANAGEMENT AND INTERNAL CONTROL SYSTEM ON A REGULAR AND INDEPENDENT BASIS.

This principle is
complied with.

—

1. To perform internal audits, the
company set up a separate busi-
ness unit — internal audit division,
functionally reporting to the board
of directors or to the audit com-
mittee, or engaged an independent
external organization with the same
line of reporting.

5.2.1 The company set up a

separate business unit or
engaged an independent ex-
ternal organization to carry
out internal audits.

Functional and administra-
tive reporting lines of the
internal audit department
are delineated. The inter-
nal audit unit functionally
reports to the board of
directors.

101

Annual Report 2017

5.2.2 The internal audit division

assesses the performance
of the internal controls, risk
management, and cor-
porate governance. The
company applies generally
accepted standards of
internal audit.

1. In the reporting period, the per-
formance of the internal controls
and risk management was as-
sessed as part of the internal audit
procedure.

2. The company applies generally
accepted approaches to internal
audit and risk management.

This principle is
complied with.

—

THE COMPANY AND ITS OPERATIONS ARE TRANSPARENT FOR ITS SHAREHOLDERS, INVESTORS AND
OTHER STAKEHOLDERS.

6.1

6.1.1

The company has devel-
oped and implemented an
information policy ensuring
an efficient exchange of in-
formation by the company,
its shareholders, investors,
and other stakeholders.

6.1.2 The company discloses in-

formation on its corporate
governance and practice,
including detailed informa-
tion on compliance with the
principles and recommen-
dations of the Code.

This principle is
complied with.

—

This principle is
complied with.

—

1. The company’s board of directors
approved an information policy
developed in accordance with the
Code’s recommendations.

2. The board of directors (or its
committee) reviewed the compa-
ny’s compliance with its information
policy at least once in the reporting
period.

1. The company discloses informa-
tion on its corporate governance
and general principles of corporate
governance, including disclosure on
its website.

2. The company discloses infor-
mation on the membership of its
executive bodies and board of
directors, independence of the
directors and their membership in
the board’s committees (as defined
by the Code).

3. If the company has a controlling
person, the company publishes a
memorandum of the controlling
person setting out this person’s
plans for the company’s corporate
governance.

6.2 THE COMPANY DISCLOSES UP-TO-DATE, COMPLETE AND RELIABLE INFORMATION ON ITS OPERATIONS IN

DUE TIME, TO ENABLE ITS SHAREHOLDERS AND INVESTORS TO MAKE INFORMED DECISIONS.

6.2.1 The company discloses

information based on the
principles of regularity,
consistency and prompt-
ness, as well as availability,
reliability, completeness and
comparability of disclosed
data.

1. The company’s information policy
sets out approaches to, and criteria
for, identifying information that can
have a material impact on the com-
pany’s evaluation and the price of
its securities, as well as procedures
ensuring timely disclosure of such
information.

This principle is
complied with.

—

102

Transforming into a Global Gas Company

This principle is
not fully com-
plied with.

The Company discloses its
capital structure to the extent
required by the applicable laws.

This principle is
complied with.

—

2. If the company’s securities are
traded on foreign organized mar-
kets, the company ensured con-
certed and equivalent disclosure of
material information in the Russian
Federation and in the said markets
in the reporting year.

3. If foreign shareholders hold a
material portion of the company’s
shares, information was disclosed
both in the Russian language and
one of the most widely used foreign
languages in the reporting period.

1. In the reporting period, the
company disclosed annual and 6M
financial statements prepared un-
der the IFRS. The company’s annual
report for the reporting period
included annual financial statements
prepared under the IFRS, along with
the auditor’s report.

2. The company discloses full infor-
mation on its capital structure in ac-
cordance with Recommendation 290
of the Code both in the annual report
and on the company’s website.

1. The company’s annual report
contains information on the key as-
pects of its operating and financial
performance.

2. The company’s annual report
contains information on the envi-
ronmental and social aspects of the
company’s operations.

6.2.2 The company avoids a

formalistic approach to
information disclosure and
discloses material infor-
mation on its operations,
even if disclosure of such
information is not required
by law.

6.2.3 The company’s annu-

al report, as one of the
most important tools of its
information exchange with
shareholders and other
interested parties, contains
information enabling as-
sessment of the company’s
annual performance results.

6.3 THE COMPANY PROVIDES INFORMATION AND DOCUMENTS REQUESTED BY ITS SHAREHOLDERS

IN ACCORDANCE WITH PRINCIPLES OF FAIRNESS AND EASE OF ACCESS.

6.3.1 The company provides

information and documents
requested by its share-
holders in accordance with
principles of fairness and
ease of access.

1. The company’s information policy
establishes the procedure for
providing shareholders with easy
access to information, including
information on legal entities con-
trolled by the company, as request-
ed by shareholders.

This principle is
not fully com-
plied with.

The Company’s Information Pol-
icy determines an easy proce-
dure for providing shareholders
with access to information, with
the exception of information on
legal entities controlled by the
Company, the provision of which
is not prescribed for by law.

6.3.2 When providing information

to shareholders, the com-
pany shall ensure reason-
able balance between the
interests of particular

1. In the reporting period, the com-
pany did not refuse any sharehold-
er requests for information, or such
refusals were justified.

This principle is
complied with.

—

103

Annual Report 2017

shareholders and its own
interests consisting in pre-
serving the confidentiality
of important commercial
information which may
materially affect its com-
petitiveness.

2. In cases defined by the infor-
mation policy, shareholders are
warned of the confidential nature of
the information and undertake to
maintain its confidentiality.

7.1

ACTIONS WHICH WILL OR MAY MATERIALLY AFFECT THE COMPANY'S SHARE CAPITAL STRUCTURE
AND ITS FINANCIAL POSITION AND ACCORDINGLY THE POSITION OF ITS SHAREHOLDERS ("MATERIAL
CORPORATE ACTIONS") ARE TAKEN ON FAIR TERMS ENSURING THAT THE RIGHTS AND INTERESTS OF
THE SHAREHOLDERS AND OTHER STAKEHOLDERS ARE OBSERVED.

This principle is
not fully com-
plied with.

The Company’s Articles of
Association does not con-
tain a separate section with
a list of significant corporate
actions. At the same time, de-
cision-making on issues related
to significant corporate actions
falls within the authority of the
Board of Directors.

The Company does not see any
risks in this.

This principle is
not fully com-
plied with.

Relevant comments are pro-
vided in items 2.4.4. and 2.5.1
hereof.

This principle is
not fully com-
plied with.

In the reporting period one
material corporate action
was subsequently approved in
accordance with the applicable
law.

7.1.1 Material corporate actions

include restructuring of the
company, acquisition of 30%
or more of the company’s
voting shares (takeover),
execution by the compa-
ny of major transactions,
increase or decrease of
the company’s authorised
capital, listing or de-listing
of the company’s shares,
as well as other actions
which may lead to material
changes in the rights of
shareholders or violation of
their interests. The compa-
ny’s charter provides a list
(criteria) of transactions or
other actions classified as
material corporate actions
within the authority of the
company’s board of direc-
tors.

7.1.2 The board of directors
plays a key role in pass-
ing resolutions or mak-
ing recommendations on
material corporate actions,
relying on the opinions of
the company’s independent
directors.

7.1.3 When taking material cor-

porate actions which would
affect rights or legitimate
interests of shareholders,
equal terms and condi-
tions are guaranteed for all
shareholders; if the statu-
tory procedure designed
to protect shareholders’
rights proves

1. The company’s charter includes a
list of transactions or other actions
deemed to be material corporate ac-
tions, and their identification criteria.
Resolutions on material corporate
actions are referred to the jurisdic-
tion of the board of directors. When
execution of such corporate actions
is expressly referred by law to the
jurisdiction of the general sharehold-
ers meeting, the board of directors
presents relevant recommendations
to shareholders.

2. According to the company’s
charter, material corporate actions
include at least: company reorgani-
zation, acquisition of 30% or more of
the company’s voting shares (in case
of takeover), entering in major trans-
actions, increase or decrease of the
company’s charter capital, listing or
de-listing of the company’s shares.

1. The company has in place a
procedure enabling independent
directors to express their opinions
on material corporate actions prior
to approval thereof.

1. Due to specifics of the company’s
operations, the company’s charter
contains less stringent criteria for
material corporate actions than
required by law.

2. All material corporate actions in
the reporting period were duly ap-
proved before they were taken.

104

Transforming into a Global Gas Company

insufficient, additional meas-
ures are taken to protect
their rights and legitimate
interests. In doing so, the
company is guided by the
corporate governance
principles set forth in the
Code, as well as by formal
statutory requirements.

THE COMPANY PROVIDES A PROCEDURE FOR TAKING MATERIAL CORPORATE ACTIONS THAT WOULD
ENABLE ITS SHAREHOLDERS TO RECEIVE FULL INFORMATION ABOUT SUCH ACTIONS IN DUE TIME AND
INFLUENCE THEM, AND ALSO GUARANTEE THAT THE SHAREHOLDER RIGHTS ARE OBSERVED AND DULY
PROTECTED WHEN SUCH ACTIONS ARE TAKEN.

7.2

7.2.1

Information about material
corporate actions is dis-
closed with explanations of
the grounds, circumstanc-
es and consequences.

7.2.2 Rules and procedures

related to material corpo-
rate actions taken by the
company are set out in the
company’s internal docu-
ments.

This principle is
complied with.

—

This principle
is not complied
with.

The need to envolve an ap-
praiser for the valuation of the
purchase price of the Compa-
ny's shares is provided by the
current legislation. There is no
need to duplicate this require-
ment in the internal documents
of the Company.

1. In the reporting period, the com-
pany disclosed information about
its material corporate actions in
due time and in detail, including the
grounds for, and timelines of, such
actions.

1. The company’s internal docu-
ments set out a procedure for
engaging an independent apprais-
er to estimate the value of assets
either disposed of or acquired in a
major transaction or a related-par-
ty transaction.

2. The company’s internal docu-
ments set out a procedure for
engaging an independent apprais-
er to estimate the value of shares
acquired and redeemed by the
company.

3. The company’s internal docu-
ments provide for an expanded list
of grounds on which the company’s
directors and other persons as per
the applicable law are deemed to
be related parties to the company’s
transactions.

105

• potentially lower production levels in the future
than currently estimated by our management
and/or independent petroleum reservoir engi-
neers;
inherent uncertainties in interpreting geophysical
data;

•

• changes to project schedules and estimated com-

pletion dates;

• our success in identifying and managing risks to

•

our businesses;
the effects of changes to the Russian legal frame-
work concerning currently held and any newly
acquired oil and gas production licenses;

• changes in political, social, legal or economic con-

•
•

ditions in Russia and the CIS;
the effects of technological changes;
the effects of changes in accounting standards or
practices.

This list of important factors is not exhaustive. When
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 otherwise. We do
not make any representation, warranty or prediction
that the results anticipated by such forward-looking
statements will be achieved, and such forward-look-
ing statements represent, 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 provid-
ed as at the date of this review and are subject to
change without notice.

Annual Report 2017

FORWARD–LOOKING STATEMENTS

This Annual Review includes ‘forward-looking infor-
mation’ 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, strat-
egies, future events or performance, and underly-
ing assumptions and other statements, which are
other than statements of historical facts. The words
“believe,” “expect,” “anticipate,” “intends,” “estimate,”
“forecast,” “project,” “will,” “may,” “should” and similar
expressions identify forward-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 assump-
tions, many of which are based, in turn, upon further
assumptions, including without limitation, manage-
ment’s examination of historical operating trends,
data contained in our records and other data availa-
ble from third parties. Although we believe that these
assumptions were reasonable when made, these
assumptions are inherently subject to significant
uncertainties and contingencies, which are difficult
or impossible to predict and are beyond our control.
As a result, we may not achieve or accomplish these
expectations, beliefs or projections. In addition, im-
portant factors that, in our view, could cause actual
results to differ materially from those discussed in
the forward-looking statements include:
• changes in the balance of oil and gas supply and

•

demand in Russia and Europe;
the effects of domestic and international oil and
gas price volatility and changes in regulatory con-
ditions, including prices and taxes;
the effects of competition in the domestic and
export oil and gas markets;

• our ability to successfully implement any of our

•

business strategies;
the impact of our expansion on our revenue po-
tential, cost basis and margins;

• our ability to produce target volumes in the event,
among other factors, of restrictions on our ac-
cess to transportation infrastructure;
the effects of changes to our capital expenditure
projections on the growth of our production;

•

106

Transforming into a Global Gas Company

TERMS AND ABBREVIATIONS

Mentions in this Annual Report of “PAO NOVATEK”,
“NOVATEK”, “the Company”, “we” and “our” refer to PAO
NOVATEK and/or its subsidiaries (according to IFRS
methodology) and/or joint ventures (accounted for on
an equity basis according to IFRS standards), depend-
ing upon the context, in which the terms are used.

barrel

one stock tank barrel, or 42 US gal
lons of liquid volume
billion cubic meters
barrels of oil equivalent
kilometer(s)
thousand boe
thousand cubic meters
thousand metric tons

bcm
boe
km
mboe
mcm
mt
mmboe million boe
mmcm million cubic meters
mmt
ton
SEC

million metric tons
metric ton
United States Securities and Exchange
Commission
Petroleum Resources Management System
Yamal-Nenets Autonomous Region
Russian rouble
liquified petroleum gases
liquified natural gas

PRMS
YNAO
RR
LPG
LNG

CONVERSION FACTORS

1000 cubic meters of gas = 6.54 boe.

To convert crude oil and gas condensate reserves
from tons to barrels we used various coefficients
depending on the liquids density at each field.

107

IFRS Consolidated Fi-
nancial Statements for
2017

PAO NOVATEK

IFRS CONSOLIDATED
FINANCIAL STATEMENTS

FOR THE YEAR ENDED
31 DECEMBER 2017

AND INDEPENDENT
AUDITOR’S REPORT

PAO NOVATEK

IFRS CONSOLIDATED

FINANCIAL STATEMENTS

FOR THE YEAR ENDED

31 DECEMBER 2017

AND INDEPENDENT

AUDITOR’S REPORT

CONTENTS

Page

Independent Auditor’s Report ................................................................................................................................. 3

Consolidated Statement of Financial Position ......................................................................................................... 8

Consolidated Statement of Income .......................................................................................................................... 9

Consolidated Statement of Comprehensive Income .............................................................................................. 10

Consolidated Statement of Cash Flows ................................................................................................................. 11

Consolidated Statement of Changes in Equity ...................................................................................................... 13

Notes to the Consolidated Financial Statements:

Note 1. Organization and principal activities .................................................................................................... 14

Note 2. Basis of preparation .............................................................................................................................. 15

Note 3. Summary of significant accounting policies ......................................................................................... 16

Note 4. Critical accounting estimates and judgments ........................................................................................ 22

Note 5. Acquisitions and disposals .................................................................................................................... 25

Note 6. Property, plant and equipment .............................................................................................................. 28

Note 7. Investments in joint ventures ................................................................................................................ 30

Note 8. Long-term loans and receivables .......................................................................................................... 36

Note 9. Other non-current assets ....................................................................................................................... 37

Note 10. Inventories ............................................................................................................................................ 37

Note 11. Trade and other receivables .................................................................................................................. 37

Note 12. Prepayments and other current assets ................................................................................................... 38

Note 13. Cash and cash equivalents .................................................................................................................... 39

Note 14. Long-term debt ..................................................................................................................................... 39

Note 15. Short-term debt and current portion of long-term debt ......................................................................... 40

Note 16. Pension obligations ............................................................................................................................... 41

Note 17. Trade payables and accrued liabilities .................................................................................................. 42

Note 18. Shareholders’ equity ............................................................................................................................. 42

Note 19. Oil and gas sales ................................................................................................................................... 43

Note 20. Purchases of natural gas and liquid hydrocarbons ................................................................................ 43

Note 21. Transportation expenses ....................................................................................................................... 44

Note 22. Taxes other than income tax ................................................................................................................. 44

Note 23. Materials, services and other ................................................................................................................ 44

Note 24. General and administrative expenses .................................................................................................... 45

Note 25. Finance income (expense) .................................................................................................................... 45

Note 26. Income tax ............................................................................................................................................ 46

Note 27. Financial instruments and financial risk factors ................................................................................... 49

Note 28. Contingencies and commitments .......................................................................................................... 59

Note 29. Principal subsidiaries and joint ventures .............................................................................................. 63

Note 30. Related party transactions ..................................................................................................................... 64

Note 31. Segment information ............................................................................................................................ 65

Note 32. Subsequent events ................................................................................................................................ 66

Note 33. New accounting pronouncements ......................................................................................................... 67

Unaudited supplemental oil and gas disclosures ................................................................................................... 68

Contact Information .............................................................................................................................................. 73

Independent Auditor’s Report

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF PAO NOVATEK:

Our opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated
financial position of PAO NOVATEK and its subsidiaries (together – the “Group”) as at 31 December 2017, and
its consolidated financial performance and its consolidated cash flows for the year then ended in accordance
with International Financial Reporting Standards (IFRS).
What we have audited
The Group’s consolidated financial statements comprise:

•

the consolidated statement of financial position as at 31 December 2017;

the consolidated statement of income for the year then ended;

the consolidated statement of comprehensive income for the year then ended;

the consolidated statement of cash flows for the year then ended;

the consolidated statement of changes in equity for the year then ended; and

the notes to the consolidated financial statements, which include significant accounting policies and other
explanatory information.

Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities
under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated
Financial Statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Independence
We are independent of the Group in accordance with the International Ethics Standards Board for
Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements
of the Auditor’s Professional Ethics Code and Auditor’s Independence Rules that are relevant to our audit of
the consolidated financial statements in the Russian Federation. We have fulfilled our other ethical
responsibilities in accordance with these requirements and the IESBA Code.

Our audit approach
Overview

Materiality
Overall group materiality: 7,000 million Russian Roubles (“RUB”) which represents 4% of adjusted profit
before tax excluding currency exchange differences, net gain on disposal of interests in joint ventures and the
Group’s share of joint ventures’ currency exchange differences net of income tax.

Audit scope

• We conducted audit work covering all significant components and balances in Russia, Switzerland,

Singapore and Republic of Cyprus.

•

The group engagement team visited all significant locations in Russia and Switzerland.

• Our audit scope addressed more than 99% of the Group’s revenues and more than 99% of the Group’s

absolute value of underlying profit before tax.

Key audit matters

•

Accounting for trading activities in Europe;

Valuation of non-commodity financial derivatives.

AO PricewaterhouseCoopers Audit
White Square Office Center 10 Butyrsky Val Moscow, Russia, 125047
T: +7 (495) 967-6000, F:+7 (495) 967-6001, www.pwc.ru

Independent Auditor’s Report

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF PAO NOVATEK:

Our opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated

financial position of PAO NOVATEK and its subsidiaries (together – the “Group”) as at 31 December 2017, and

its consolidated financial performance and its consolidated cash flows for the year then ended in accordance

with International Financial Reporting Standards (IFRS).

What we have audited

The Group’s consolidated financial statements comprise:

the consolidated statement of financial position as at 31 December 2017;

the consolidated statement of income for the year then ended;

the consolidated statement of comprehensive income for the year then ended;

the consolidated statement of cash flows for the year then ended;

the consolidated statement of changes in equity for the year then ended; and

•

the notes to the consolidated financial statements, which include significant accounting policies and other

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities

under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated

Financial Statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our

We are independent of the Group in accordance with the International Ethics Standards Board for

Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements

of the Auditor’s Professional Ethics Code and Auditor’s Independence Rules that are relevant to our audit of

the consolidated financial statements in the Russian Federation. We have fulfilled our other ethical

responsibilities in accordance with these requirements and the IESBA Code.

explanatory information.

Basis for opinion

opinion.

Independence

Our audit approach

Overview

Materiality

Audit scope

Overall group materiality: 7,000 million Russian Roubles (“RUB”) which represents 4% of adjusted profit

before tax excluding currency exchange differences, net gain on disposal of interests in joint ventures and the

Group’s share of joint ventures’ currency exchange differences net of income tax.

• We conducted audit work covering all significant components and balances in Russia, Switzerland,

Singapore and Republic of Cyprus.

•

The group engagement team visited all significant locations in Russia and Switzerland.

• Our audit scope addressed more than 99% of the Group’s revenues and more than 99% of the Group’s

absolute value of underlying profit before tax.

Key audit matters

•

Accounting for trading activities in Europe;

Valuation of non-commodity financial derivatives.

AO PricewaterhouseCoopers Audit

White Square Office Center 10 Butyrsky Val Moscow, Russia, 125047

T: +7 (495) 967-6000, F:+7 (495) 967-6001, www.pwc.ru

We designed our audit by determining materiality and assessing the risks of material misstatement in the
consolidated financial statements. In particular, we considered where management made subjective
judgements; for example, in respect of significant accounting estimates that involved making assumptions and
considering future events that are inherently uncertain. We also addressed the risk of management override of
internal controls, including among other matters consideration of whether there was evidence of bias that
represented a risk of material misstatement due to fraud.
Materiality
The scope of our audit was influenced by our application of materiality. An audit is designed to obtain
reasonable assurance whether the consolidated financial statements are free from material misstatement.
Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of the
consolidated financial statements.
Based on our professional judgement, we determined certain quantitative thresholds for materiality, including
the overall group materiality for the consolidated financial statements as a whole as set out in the table below.
These, together with qualitative considerations, helped us to determine the scope of our audit and the nature,
timing and extent of our audit procedures and to evaluate the effect of misstatements, if any, both individually
and in aggregate on the financial statements as a whole.

Overall group materiality

RUB 7,000 million

How we determined it

Rationale for the materiality
benchmark applied

4% of adjusted profit before tax excluding currency differences, net gain
on disposal of interests in joint ventures and share of joint ventures’
currency differences net of income tax.

We chose profit before tax as the benchmark because, in our view, it is
the benchmark against which the performance of the Group is most
commonly measured by users, and is a generally accepted benchmark.
The use of adjusted profit before tax mitigates the effect of volatility
(that could be material) caused by non-recurring factors such as gains
on disposals of assets and foreign exchange differences and provides a
more stable basis for determining materiality, focusing on the
underlying profitability of the Group.
We chose 4% which is consistent with quantitative materiality
thresholds used for profit-oriented companies in this industry and prior
year approach.

Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit
of the consolidated financial statements of the current period. These matters were addressed in the context of
our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do
not provide a separate opinion on these matters.

Key audit matter

How our audit addressed the Key audit
matter

Accounting for trading activities in Europe
The Group conducts natural gas foreign trading in
active markets under long-term and short-term
purchase and sales contracts. The Group also
purchases and sells various derivative instruments
(with reference of the delivery points to the
European natural gas hubs) in order to increase
delivery optimization and decrease exposure to the
risk of negative changes in natural gas prices.
The fair value of long-term natural gas derivative
contracts involving the physical delivery of natural
gas is determined using internal models and other
valuation
techniques (the mark-to-market and
mark-to-model analysis) due to the absence of
quoted prices or other observable, market-
corroborated data, for the duration of the contracts.
We focused on this area because of the complexity of

We critically evaluated the appropriateness and
consistency of key valuation assumptions used for
the measurement of the contracts to ensure that the
resulting valuation is reasonable.
We tested material valuations in detail and sought
additional external evidence. We assessed the
methodologies used, and
judgements and
assumptions made. We identified the market data
input used by the Group and tested them against
independent data.
We tested the appropriateness of the valuation
methodology applied and the integrity of the models
used, and noted no material issues. We also tested
the accuracy of the contractual inputs and the
appropriateness of key valuation inputs including
price and discount rates, and noted no material

the

(ii)

Key audit matter

How our audit addressed the Key audit
matter

the models and because model parameters are
judgement applied by
inherently
management.

subject

issues.
Where the Group entered into new significant
contracts in the year, we tested the contracts and
assumptions used to assess whether the accounting
treatment
accordance with
International Accounting Standard 39.
We also gained an understanding of the controls that
are in place for these trading activities.
We identified no material issues.

adopted

Valuation of non-commodity financial derivatives
Certain shareholders’ loans provided by the Group
to its joint ventures include embedded derivatives
that modify the cash flows of the loans based on
financial and non-financial variables. The terms and
conditions of each of these loans related to those
variables were defined as a single compound
embedded derivative. The Group designated these
loans as financial assets at fair value through profit
or loss. In accordance with IFRS, such loans are
measured at fair value at each reporting date.
We focused on this area because of the significant
impact of the valuation results on the financial
statements of the Group and the fact that the
measurement of the fair value of these loans is based
on judgement and estimates applied by management
which can be highly subjective.

We evaluated the appropriateness and consistency of
key valuation assumptions (such as expected free
cash flows of the joint ventures, production volumes,
and discount rates used) to ensure that the resulting
valuation of the financial instruments is reasonable.
Those assumptions mainly referred to the Group’s
projections of future expected free cash flows to be
generated by the joint ventures and estimates of
market interest rates applied in the valuation. We
also tested the accuracy of the contractual inputs and
analyzed the appropriateness of the valuation
methodology.
We identified no material issues.

How we tailored our group audit scope
We tailored the scope of our audit in order to perform sufficient work to be able to give an opinion on the
consolidated financial statements as a whole, taking into account the geographic and management structure of
the Group, the accounting processes and controls and the industry in which the Group operates.
In establishing the overall group audit strategy and plan, we determined the type of work that needed to be
performed at the reporting units by the group engagement team and by the component auditors from other
PwC network firms. For each reporting unit we issued specific instructions to the component auditors within
our audit scope. We determined the level of our and component auditors involvement we needed to be
involved in the audit process at those reporting units so as to be able to conclude whether sufficient
appropriate audit evidence had been obtained as a basis for our opinion on the consolidated financial
statements as a whole. We determined whether we required an audit of full scope of financial information or
whether a defined scope of specified procedures was sufficient.
The group consolidation, financial statements disclosures and a number of complex items are audited directly
by the PAO NOVATEK audit engagement team. These items include the assessment of accounting estimates
performed by management in respect of fair values and classification of financial assets and liabilities,
deferred income tax asset recognition, estimation of oil and gas reserves, impairment of financial and non-
financial assets, impairment provision for trade receivables, pension obligations, asset retirement obligations
and assessment of joint arrangements.
By performing the procedures described above at the individual component level, combined with the
additional procedures performed at the group level, we have obtained sufficient and appropriate audit
evidence regarding the financial information of the Group to provide a basis for our opinion on the
consolidated financial statements.

Other information
Management is responsible for the other information. The other information comprises report “Management’s
discussion and analysis of financial condition and results of operations of PAO NOVATEK for the years ended
31 December 2017 and 2016” (but does not include the consolidated financial statements and our auditor’s
report thereon), which we obtained prior to the date of this auditor’s report, and “Quarterly Issuer's Report of
PAO NOVATEK for the first quarter of 2018” as well as “Annual Report Review of PAO NOVATEK for 2017”,
which are expected to be made available to us after that date.

(iii)

Key audit matter

How our audit addressed the Key audit

matter

the models and because model parameters are

issues.

inherently

subject

judgement applied by

management.

Where the Group entered into new significant

contracts in the year, we tested the contracts and

assumptions used to assess whether the accounting

treatment

adopted

accordance with

International Accounting Standard 39.

We also gained an understanding of the controls that

are in place for these trading activities.

We identified no material issues.

Valuation of non-commodity financial derivatives

Certain shareholders’ loans provided by the Group

We evaluated the appropriateness and consistency of

to its joint ventures include embedded derivatives

key valuation assumptions (such as expected free

that modify the cash flows of the loans based on

cash flows of the joint ventures, production volumes,

financial and non-financial variables. The terms and

and discount rates used) to ensure that the resulting

conditions of each of these loans related to those

valuation of the financial instruments is reasonable.

variables were defined as a single compound

Those assumptions mainly referred to the Group’s

embedded derivative. The Group designated these

projections of future expected free cash flows to be

loans as financial assets at fair value through profit

generated by the joint ventures and estimates of

or loss. In accordance with IFRS, such loans are

market interest rates applied in the valuation. We

measured at fair value at each reporting date.

also tested the accuracy of the contractual inputs and

analyzed the appropriateness of the valuation

We focused on this area because of the significant

impact of the valuation results on the financial

methodology.

statements of the Group and the fact that the

We identified no material issues.

measurement of the fair value of these loans is based

on judgement and estimates applied by management

which can be highly subjective.

How we tailored our group audit scope

We tailored the scope of our audit in order to perform sufficient work to be able to give an opinion on the

consolidated financial statements as a whole, taking into account the geographic and management structure of

the Group, the accounting processes and controls and the industry in which the Group operates.

In establishing the overall group audit strategy and plan, we determined the type of work that needed to be

performed at the reporting units by the group engagement team and by the component auditors from other

PwC network firms. For each reporting unit we issued specific instructions to the component auditors within

our audit scope. We determined the level of our and component auditors involvement we needed to be

involved in the audit process at those reporting units so as to be able to conclude whether sufficient

appropriate audit evidence had been obtained as a basis for our opinion on the consolidated financial

statements as a whole. We determined whether we required an audit of full scope of financial information or

whether a defined scope of specified procedures was sufficient.

The group consolidation, financial statements disclosures and a number of complex items are audited directly

by the PAO NOVATEK audit engagement team. These items include the assessment of accounting estimates

performed by management in respect of fair values and classification of financial assets and liabilities,

deferred income tax asset recognition, estimation of oil and gas reserves, impairment of financial and non-

financial assets, impairment provision for trade receivables, pension obligations, asset retirement obligations

and assessment of joint arrangements.

By performing the procedures described above at the individual component level, combined with the

additional procedures performed at the group level, we have obtained sufficient and appropriate audit

evidence regarding the financial information of the Group to provide a basis for our opinion on the

consolidated financial statements.

Other information

Management is responsible for the other information. The other information comprises report “Management’s

discussion and analysis of financial condition and results of operations of PAO NOVATEK for the years ended

31 December 2017 and 2016” (but does not include the consolidated financial statements and our auditor’s

report thereon), which we obtained prior to the date of this auditor’s report, and “Quarterly Issuer's Report of

PAO NOVATEK for the first quarter of 2018” as well as “Annual Report Review of PAO NOVATEK for 2017”,

which are expected to be made available to us after that date.

Our opinion on the consolidated financial statements does not cover the other information and we do not and
will not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other
information identified above and, in doing so, consider whether the other information is materially
inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise
appears to be materially misstated.
If, based on the work we have performed on the other information that we obtained prior to the date of this
auditor’s report, we conclude that there is a material misstatement of this other information, we are required
to report that fact. We have nothing to report in this regard.

Responsibilities of management and those charged with governance for the consolidated
financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements
in accordance with IFRS, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to
fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Group’s
ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless management either intends to liquidate the Group or to cease
operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.

Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a
whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that
includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated
financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional
scepticism throughout the audit. We also:

•

identify and assess the risks of material misstatement of the consolidated financial statements, whether
due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a
material misstatement resulting from fraud is higher than for one resulting from error, as fraud may
involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;

obtain an understanding of internal control relevant to the audit in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Group’s internal control;

evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates
and related disclosures made by management;

conclude on the appropriateness of management’s use of the going concern basis of accounting and, based
on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that
may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in our auditor’s report to the related
disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report.
However, future events or conditions may cause the Group to cease to continue as a going concern;

evaluate the overall presentation, structure and content of the consolidated financial statements, including
the disclosures, and whether the consolidated financial statements represent the underlying transactions
and events in a manner that achieves fair presentation;

obtain sufficient appropriate audit evidence regarding the financial information of the entities or business
activities within the Group to express an opinion on the consolidated financial statements. We are
responsible for the direction, supervision and performance of the group audit. We remain solely
responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant deficiencies in internal control that
we identify during our audit.

(iii)

(iv)

PAO NOVATEK
Consolidated Statement of Income
(in millions of Russian roubles, except for share and per share amounts)

Revenues

Oil and gas sales
Other revenues

Total revenues

Operating expenses

Purchases of natural gas and liquid hydrocarbons
Transportation expenses
Taxes other than income tax
Depreciation, depletion and amortization
Materials, services and other
General and administrative expenses
Exploration expenses
Net impairment expenses
Change in natural gas,

liquid hydrocarbons and work-in-progress

Total operating expenses

Net gain on disposal of interests in joint ventures
Other operating income (loss), net

Profit from operations

Finance income (expense)

Interest expense
Interest income
Change in fair value of

non-commodity financial instruments

Foreign exchange gain (loss), net

Total finance income (expense)

Share of profit (loss) of

joint ventures, net of income tax

Profit before income tax

Income tax expense

Current income tax expense
Deferred income tax benefit (expense), net

Total income tax expense

Profit

Profit attributable to:

Non-controlling interest
Shareholders of PAO NOVATEK

Basic and diluted earnings per share (in Russian roubles)
Weighted average number of shares outstanding (in millions)

Notes

Year ended 31 December:
2016
2017

579,819
3,367

533,857
3,615

583,186

537,472

20
21
22

6
23
24
6

25
25

27
25

(161,443)
(137,192)
(49,494)
(34,523)
(20,768)
(17,170)
(1,819)
(52)

2,602
(419,859)

-
424

(134,268)
(133,462)
(44,053)
(34,631)
(19,133)
(18,126)
(2,087)
(178)

439
(385,499)

73,072
221

163,751

225,266

(7,712)
15,872

(7,178)
13,676
14,658

(11,570)
18,732

10,387
(25,490)
(7,941)

22,430

90,839

200,839

308,164

(35,227)
858
(34,369)

(35,577)
(7,514)
(43,091)

166,470

265,073

10,083
156,387

51.85
3,016.2

7,278
257,795

85.41
3,018.5

The accompanying notes are an integral part of these consolidated financial statements.

PAO NOVATEK
Consolidated Statement of Comprehensive Income
(in millions of Russian roubles)

Profit

Other comprehensive income (loss)

Notes

Year ended 31 December:
2016
2017

166,470

265,073

Items that will not be reclassified subsequently to profit (loss)
Remeasurement of pension obligations
Share of remeasurement of

pension obligations of joint ventures

Items that may be reclassified subsequently to profit (loss)
Currency translation differences
Share of currency

translation differences of joint ventures

Other comprehensive income (loss)

Total comprehensive income

Total comprehensive income attributable to:

Non-controlling interest
Shareholders of PAO NOVATEK

(724)

(100)
(824)

(2,580)

21
(2,559)

(3,383)

(121)

(21)
(142)

4,368

-
4,368

4,226

163,087

269,299

10,083
153,004

7,278
262,021

The accompanying notes are an integral part of these consolidated financial statements.

PAO NOVATEK
Consolidated Statement of Cash Flows
(in millions of Russian roubles)

Profit before income tax

200,839

308,164

Notes

Year ended 31 December:
2016

2017

Adjustments to profit before income tax:
Depreciation, depletion and amortization
Impairment expenses (reversals), net
Foreign exchange loss (gain), net
Loss (gain) on disposal of assets, net
Interest expense
Interest income
Share of loss (profit) in joint ventures, net of income tax
Change in fair value of

non-commodity financial instruments

Revaluation of commodity derivatives through loss (profit)
Decrease (increase) in long-term advances given
Other adjustments

Working capital changes

Decrease (increase) in trade and other receivables,

prepayments and other current assets

Decrease (increase) in inventories
Increase (decrease) in trade payables and accrued liabilities,

excluding interest and dividends payable

Increase (decrease) in taxes payable, other than income tax

Total effect of working capital changes
Dividends received from joint ventures
Interest received
Income taxes paid excluding actual payments

relating to disposal of stakes in joint ventures

Net cash provided by operating activities

Cash flows from investing activities

Purchases of property, plant and equipment
Payments for mineral licenses
Purchases of materials for construction
Purchases of intangible assets
Acquisition of joint ventures
Additional capital contributions to joint ventures
Payments for acquisition of subsidiaries net of cash acquired
Proceeds from disposal of stakes in joint ventures
Costs to sell stakes in joint ventures
Actual income tax payments

relating to disposal of stakes in joint ventures

Interest paid and capitalized
Guarantee fees paid
Loans provided to joint ventures
Repayments of loans provided to joint ventures

5
7
5
5
5

8
8

34,523
52
(13,676)
305
7,712
(15,872)
(22,430)

7,178
9
655
240

(786)
(2,607)

6,592
1,962
5,161
2,383
5,949

34,631
178
25,490
(73,072)
11,570
(18,732)
(90,839)

(10,387)
1,778
(3,331)
152

2,592
(861)

9,953
2,836
14,520
-
1,983

(32,629)

(28,314)

180,399

173,791

(24,783)
(9,786)
(1,697)
(780)
(1,583)
(2,269)
(15,706)
-
-

-
(3,391)
(1,315)
(5,211)
8,246

(27,662)
(1,928)
(929)
(508)
-
(19,565)
(2,961)
84,978
(2,634)

(9,932)
(5,314)
(1,061)
(6,645)
6,038

Net cash provided by (used for) investing activities

(58,275)

11,877

PAO NOVATEK
Consolidated Statement of Cash Flows
(in millions of Russian roubles)

Cash flows from financing activities

Proceeds from long-term debt
Repayments of long-term debt
Repayments of short-term debt

with original maturity more than three months

Net increase (decrease) in short-term debt

with original maturity three months or less

Interest on debt paid
Dividends paid to shareholders
Payments of lease liabilities
Purchases of treasury shares

Net cash used for financing activities

Net effect of exchange rate changes on

cash and cash equivalents

Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the period

Cash and cash equivalents at the end of the period

Notes

Year ended 31 December:
2016

2017

-
(53,035)

6,373
(82,753)

(136)

(21,300)

(56)
(6,526)
(42,075)
(567)
(1,442)

(5,040)
(11,423)
(41,653)
-
(916)

(103,837)

(156,712)

(645)
17,642
48,301

(9,842)
19,114
29,187

65,943

48,301

The accompanying notes are an integral part of these consolidated financial statements.

PAO NOVATEK
Consolidated Statement of Changes in Equity
(in millions of Russian roubles, except for number of shares)

Number of
ordinary shares
(in millions)

Ordinary
share
capital

Treasury
shares

Additional
paid-in
capital

Currency
translation
differences

Asset
revaluation
surplus on
acquisitions

Equity
attributable to
PAO
NOVATEK
shareholders

Retained
earnings

Non-
controlling
interest

Total
equity

3,019.1

393

(5,997)

31,297

(5,092)

5,617

399,861

426,079

2,092

428,171

1 January 2016

Profit

Other comprehensive income (loss)

Total comprehensive income

Dividends (Note 18)

Effect from other changes in

joint ventures’ net assets (Note 7)

Purchase of treasury shares (Note 18)

(1.4)

(916)

4,368

257,795

7,278

265,073

(142)

4,226

257,653

262,021

7,278

269,299

(41,653)

2,819

(916)

(41,653)

2,819

(916)

31 December 2016

3,017.7

393

(6,913)

31,297

(724)

5,617

618,680

648,350

9,370

657,720

Profit

Other comprehensive loss

Total comprehensive income (loss)

Dividends (Note 18)

Purchase of treasury shares (Note 18)

(2.1)

(1,440)

(2,559)

156,387

10,083

166,470

(824)

(3,383)

155,563

153,004

10,083

163,087

(42,075)

(1,633)

(43,708)

(1,440)

31 December 2017

3,015.6

393

(8,353)

31,297

(3,283)

5,617

732,168

757,839

17,820

775,659

The accompanying notes are an integral part of these consolidated financial statements.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

ORGANIZATION AND PRINCIPAL ACTIVITIES

PAO NOVATEK (hereinafter referred to as “NOVATEK” or the “Company”) and its subsidiaries (hereinafter
jointly referred to as the “Group”) is an independent oil and gas company engaged in the acquisition, exploration,
development, production, processing, and marketing of hydrocarbons with its oil and gas operations located mainly
in the Yamal-Nenets Autonomous Region (“YNAO”) of the Russian Federation. The Group delivers its natural gas
and its liquid hydrocarbons on both the Russian domestic and international markets.

The Group sells its natural gas on the Russian domestic market at unregulated market prices (except for deliveries
to residential customers); however, the majority of natural gas sold on the Russian domestic market by all
producers is sold at prices regulated by the governmental agency of the Russian Federation that carries out state
regulation of prices and tariffs for goods and services of natural monopolies in energy, utilities and transportation.
The Group’s natural gas sales volumes on the domestic market fluctuate on a seasonal basis mostly due to Russian
weather conditions, with sales peaking in the winter months of December and January and troughing in the summer
months of July and August.

In December 2017, the Group’s joint venture OAO Yamal LNG started production at the first train of its natural
gas liquefaction plant (hereinafter referred to as the “LNG Plant”) based on the resources of the South-
Tambeyskoye field, located in the YNAO. Annual capacity of the LNG Plant after launching of the three trains will
amount to 16.5 million tons of liquefied natural gas (5.5 million tons for each train) and up to 1.2 million tons of
stable gas condensate. At the end of 2017, the shareholders of Yamal LNG approved a decision on construction of
the fourth train with the capacity of about 0.9 million tons of LNG per year that will expand the overall LNG plant
capacity from 16.5 million tons to 17.4 million tons of LNG per year. The Group purchases portion of produced
liquefied natural gas (“LNG”) and sells it on the international markets. The Group’s LNG sales volumes are not
subject to significant seasonal fluctuations.

The Group also purchases and sells natural gas on the European market under long-term and short-term supply
contracts to carry out its foreign commercial trading activities, as well as conducts LNG regasification business in
Poland.

The Group processes unstable gas condensate at its Purovsky Gas Condensate Processing Plant located in close
proximity to its fields into stable gas condensate and liquefied petroleum gas. The majority of stable gas condensate
is further processed at the Group’s Gas Condensate Fractionation and Transshipment Complex located at the port
of Ust-Luga on the Baltic Sea into higher-value refined products (naphtha, jet fuel, gasoil and fuel oil). The
remaining stable gas condensate volumes are sold on domestic and international markets. The Group sells its liquid
hydrocarbons at prices that are subject to fluctuations in underlying benchmark crude oil, naphtha and other gas
condensate refined products prices. The Group’s liquids sales volumes are not subject to significant seasonal
fluctuations.

In July 2017, NOVATEK acquired a 51 percent ownership interest in OOO Cryogas-Vysotsk for a cash
consideration of RR 1,583 million. Cryogas-Vysotsk undertakes a project for construction of the first train of a
medium-scale plant for natural gas liquefaction with annual capacity of 660 thousand tons, located at the port of
Vysotsk on the Baltic Sea.

In November 2017, the Group acquired a 100 percent ownership interest in OOO Severneft-Urengoy, an oil and gas
company located in YNAO, for a cash consideration of RR 13,062 million. Severneft-Urengoy is a holder of the
license for exploration and production of hydrocarbons within the West-Yaroyakhinsky license area.

In December 2017, the Group acquired 100 percent ownership interests in AO Eurotek and AO South-
Khadyryakhinskoye which held the licenses for exploration and production of hydrocarbons within the
Syskonsyninskiy license area located in Khanty-Mansiysk Autonomous Region and the South-Khadyryakhinskiy
license area located in YNAO, respectively, for total cash consideration of RR 5,412 million.

In February 2018, a Group’s subsidiary OOO Kola Yard was renamed to OOO NOVATEK-Murmansk to align
with the uniform brand image for NOVATEK.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

BASIS OF PREPARATION

The accompanying consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) under the historical cost convention, as modified by the initial recognition of
financial instruments based on fair value, and by the revaluation of available-for-sale financial assets and financial
instruments categorised at fair value through profit or loss. In the absence of specific IFRS guidance for oil and gas
producing companies, the Group has developed accounting policies in accordance with other generally accepted
accounting principles for oil and gas producing companies, mainly US GAAP, insofar as they do not conflict with
IFRS principles.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting
estimates. It also requires management to exercise judgment in the process of applying the Group’s accounting
policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates
are significant to the consolidated financial statements are disclosed in Note 4.

Functional and presentation currency. The consolidated financial statements are presented in Russian roubles, the
Group’s reporting (presentation) currency and the functional currency for the Company and the majority of the
Group’s subsidiaries.

Transactions denominated in foreign currencies are converted into the functional currency of each entity at the
exchange rates prevailing on the date of transactions. Monetary assets and liabilities denominated in foreign
currencies are converted into the functional currency of each entity by applying the year end exchange rate. Non-
monetary assets and liabilities denominated in foreign currencies valued at cost are converted into the functional
currency of each entity at the initial exchange rate. Non-monetary assets that are remeasured to fair value,
recoverable amount or realizable value, are converted at the exchange rate applicable to the date of remeasurement.
Exchange gains and losses resulting from foreign currency remeasurement into the functional currency are included
in profit (loss) for the reporting period.

On consolidation the assets and liabilities (both monetary and non-monetary) of the Group entities whose
functional currency is not the Russian rouble are translated into Russian roubles at the closing exchange rate at each
balance sheet date. All items included in the shareholders’ equity, other than profit or loss, are translated at
historical exchange rates. The financial results of these entities are translated into Russian roubles using exchange
rates at the dates of the transactions or the average exchange rate for the period when this is a reasonable
approximation. Exchange adjustments arising on the opening net assets and the profits for the reporting period are
taken to other comprehensive income and reported as currency translation differences in the consolidated statement
of changes in equity and the consolidated statement of comprehensive income.

Exchange rates for foreign currencies in which the Group conducted significant transactions or had significant
assets and/or liabilities in the reporting period were as follows:

Russian roubles to one currency unit

At 31 December 2017

At 31 December 2016

Average rate for the year
ended 31 December:
2016
2017

US dollar (USD)
Euro (EUR)
Polish zloty (PLN)

57.60
68.87
16.51

60.66
63.81
14.44

58.35
65.90
15.48

67.03
74.23
17.03

Exchange rates and restrictions. The Russian rouble is not a fully convertible currency outside the Russian
Federation and, accordingly, any remeasurement of Russian rouble amounts to US dollars or any other currency
should not be construed as a representation that such Russian rouble amounts have been, could be, or will in the
future be converted into other currencies at these exchange rates.

Reclassifications. Certain reclassifications have been made to the comparative figures to conform to the current
period presentation with no effect on profit for the period or shareholder’s equity.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Adoption of new and amended standards and interpretations. In 2017, the Group adopted all IFRS, amendments
and interpretations which are effective 1 January 2017 and relevant to its operations. None of them had material
impact on the Group’s consolidated financial statements. In addition, the following new standards were early
adopted by the Group starting from the annual period beginning on 1 January 2017:

IFRS 15, Revenue from Contracts with Customers. The standard introduces the core principle that revenue must
be recognized when the goods or services are transferred to the customer, at the transaction price. Any discounts on
the contract price must generally be allocated to the separate elements of contracts with customers. When the
consideration varies for any reason, minimum amounts must be recognized if they are not at significant risk of
reversal. Costs incurred to secure contracts with customers have to be capitalized and amortized over the period
when the benefits of the contract are consumed.

In accordance with the transition provisions in IFRS 15, the Group elected to apply the new rules retrospectively to
each prior period presented. The application of the standard had no material impact on the Group’s consolidated
financial statements and therefore the comparative period information was not restated.

IFRS 16, Leases. The standard requires lessees to recognize right-of-use assets and lease liabilities for most leases.
In accordance with the transition provisions in IFRS 16, the Group chose to apply the new rules retrospectively
with the cumulative effect of initially applying the standard recognized at 1 January 2017. The Group followed
allowed practical expedients and did not apply the new standard to leases for which the lease term ended within
twelve months of the date of transition.

As a result, at 1 January 2017, the Group recognized in the consolidated statement of financial position right-of-use
assets and lease liabilities in the amount of RR 256 million, with no effect on opening retained earnings. In the
consolidated statement of income for the year ended 31 December 2017, the Group has recorded RR 459 million
and RR 119 million in depreciation, depletion and amortization and interest expense, respectively, in relation to
leases accounted for under IFRS 16.

If the previous standard, IAS 17, Leases, was applied, the Group would have recorded for the year ended
31 December 2017 RR 366 million, RR 128 million and RR 5 million in transportation expenses, general and
administrative expenses and in materials, services and other expenses, respectively, instead of the above mentioned
depreciation, depletion and amortization and interest expenses.

Principles of consolidation. These consolidated financial statements present the assets, liabilities, equity, income,
expenses and cash flows of PAO “NOVATEK” and its subsidiaries as those of a single economic entity.
Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an
entity when the Group is exposed to, or has rights to, variable returns from its involvements with the entity and has
the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date on
which control is transferred to the Group (acquisition date) and are deconsolidated from the date that control
ceases.

Intercompany transactions, balances and unrealized gains on transactions between group companies are eliminated.
The Group and all of its subsidiaries use uniform accounting policies consistent with the Group’s policies.

Joint arrangements. The Group undertakes a number of business activities through joint arrangements, which exist
when two or more parties have joint control. Joint arrangements are classified as either joint operations or joint
ventures, based on the contractual rights and obligations between the parties to the arrangement.

Interests in joint ventures are accounted for using the equity method. With regard to joint operations, the Group
records its share of assets, liabilities, revenues and expenses of its joint operations in the consolidated financial
statements on a line-by-line basis.

Under the equity method, an investment in a joint venture is initially recognized at cost. The difference between the
cost of an acquisition and the share of the fair value of the joint venture’s identifiable net assets represents goodwill
upon acquiring the joint venture.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Post-acquisition changes in the Group’s share of net assets of a joint venture are recognized as follows: (a) the
Group’s share of profits or losses is recorded in the consolidated profit or loss for the year as share of financial
result of joint ventures; (b) the Group’s share of other comprehensive income or loss is recognized in other
comprehensive income or loss and presented separately; (c) dividends received or receivable from a joint venture
are recognized as a reduction in the carrying amount of the investment; (d) all other changes in the Group’s share of
the carrying value of net assets of joint ventures are recognized within retained earnings in the consolidated
statement of changes in equity.

After application of the equity method, including recognizing the joint venture’s losses, the entire carrying amount
of the investment is tested for impairment as a single asset whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable.

When the Group’s share of losses in a joint venture equals or exceeds its interest in the joint venture, the Group
does not recognize further losses, unless it has incurred obligations or made payments on behalf of the joint
ventures. The interest in a joint venture is the carrying amount of the investment in the joint venture together with
any long-term interests that, in substance, form part of the Group’s net investment in the joint venture, including
receivables and loans for which settlement is neither planned nor likely to occur in the foreseeable future.

Unrealized gains on transactions between the Group and its joint ventures are eliminated to the extent of the
Group’s interest in joint ventures; unrealized losses are also eliminated unless the transaction provides evidence of
an impairment of the asset transferred.

Accounting policies of joint ventures have been changed where necessary to ensure consistency with the policies
adopted by the Group.

Business combinations. The acquisition method of accounting is used to account for acquisitions of subsidiaries.
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are
measured at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest.

Goodwill is measured by deducting the net assets of the acquiree from the aggregate of the consideration
transferred for the acquiree, the amount of non-controlling interest in the acquiree and fair value of an interest in
the acquiree held immediately before the acquisition date. Any negative amount (“negative goodwill”) is
recognized in profit or loss, after management reassesses whether it identified all the assets acquired and all
liabilities and contingent liabilities assumed and reviews appropriateness of their measurement.

The consideration transferred for the acquiree is measured at the fair value of the assets transferred, equity
instruments issued and liabilities incurred or assumed, including fair value of assets or liabilities from contingent
consideration arrangements but excludes acquisition related costs such as advisory, legal, valuation and similar
professional services.

Disposals of subsidiaries, associates or joint ventures. When the Group ceases to consolidate a subsidiary or
account for an investment using the equity method because of a loss of control, joint control or significant
influence, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount
recognized in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently
accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts
previously recognized in other comprehensive income in respect of that entity are recycled to profit or loss.

If the ownership interest in a joint venture is reduced but joint control is retained or replaced with significant
influence, the Group continues to apply the equity method and does not remeasure the retained interest; only a
proportionate share of the amounts previously recognized in other comprehensive income are reclassified to profit
or loss where appropriate.

Extractive activities. The Group follows the successful efforts method of accounting for its oil and gas properties
and equipment whereby property acquisitions and development costs are capitalized, and exploration costs
(geological and geophysical expenditures, expenditures associated with the maintenance of non-proven reserves
and other expenditures relating to exploration activity), excluding exploratory drilling expenditures and exploration
license acquisition costs, are recognized within operating expenses in the consolidated statement of income as
incurred.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Exploration license acquisition costs and exploratory drilling costs are recognized as exploration assets within
property, plant and equipment until it is determined whether proved reserves justifying their commercial
development have been found. If no proved reserves are found, the relevant costs are charged to the consolidated
statement of income. When proved reserves are determined, exploration license acquisition costs are reclassified to
proved properties acquisition costs and exploratory drilling costs are reclassified to development expenditure
categories within property, plant and equipment. Exploration license acquisition costs and exploratory drilling costs
recognized as exploration assets are reviewed for impairment on an annual basis.

The cost of 3-D seismic surveys used to assist production, increase total recoverability and determine the
desirability of drilling additional development wells within proved reservoirs are capitalized as development costs.
All other seismic costs are expensed as incurred.

Production costs and overheads are charged to expense as incurred.

Property, plant and equipment. Property, plant and equipment are carried at historical cost of acquisition or
construction and adjusted for accumulated depreciation, depletion, amortization and impairment.

The cost of self-constructed assets includes the cost of direct materials, direct employee related costs, a pro-rata
portion of depreciation of assets used for construction and an allocation of the Group’s overhead costs.

Depreciation, depletion and amortization of oil and gas properties and equipment is calculated using the unit-of-
production method for each field based upon total proved reserves for costs associated with acquisitions of proved
properties and common infrastructure facilities, and proved developed reserves for other development costs,
including wells. Where unit-of-production method does not reflect useful life and pattern of consumption of
particular oil and gas assets, such as processing facilities serving several properties, those assets are depreciated on
a straight-line basis.

Property, plant and equipment, other than oil and gas properties and equipment, are depreciated on a straight-line
basis over their estimated useful lives. Land and assets under construction are not depreciated.

The estimated useful lives of the Group’s property, plant and equipment depreciated on a straight-line basis are as
follows:

Machinery and equipment
Processing facilities
Buildings

Years

5-15
20-30
25-50

At each reporting date management assesses whether there is any indication of impairment in respect of property,
plant and equipment. If any such indication exists, management estimates the recoverable amount, which is
determined as the higher of an asset’s fair value less selling costs and its value in use. For the purposes of assessing
impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which
are largely independent of the cash inflows from other assets or groups of assets (cash generating units).
The carrying amount is reduced to the recoverable amount and the impairment loss is recognized in profit or loss
for the respective period. An impairment loss recognized for an asset in prior years is reversed if there has been a
change in the estimates used to determine the asset’s recoverable amount.

Borrowing costs. Interest costs on borrowings and exchange differences arising from foreign currency borrowings
(to the extent that they are regarded as an adjustment to interest costs) used to finance the construction of property,
plant and equipment are capitalized during the period of time that is required to complete and prepare the asset for
its intended use. All other borrowing costs are recognized in the consolidated statement of income.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Asset retirement obligations. An asset retirement obligation is recognized when the Group has a present legal or
constructive obligation to dismantle, remove and restore items of property, plant and equipment whose construction
is substantially completed. The obligation is recognized when incurred at the present value of the estimated costs of
dismantling the assets, including abandonment and site restoration costs, and are included within the carrying value
of property, plant and equipment.

Changes in the asset retirement obligation relating to a change in the expected pattern of settlement of the
obligation, or in the estimated amount of the obligation or in the discount rates, are treated as a change in an
accounting estimate in the current period. Such changes are reflected as adjustments to the carrying value of
property, plant and equipment and the corresponding liability. Changes in the obligation resulting from the passage
of time are recognized in the consolidated statement of income as interest expense.

Leases. A contract is (or contains) a lease if it conveys the right to control the use of an identified asset for a period
of time in exchange for consideration.

Right-of-use assets are initially measured at cost and depreciated by the earlier of the end of the useful life of the
right-of-use asset or the end of the lease term. The cost of right-of-use assets comprises of initial measurement of
the lease liability, any lease payments made before or at the commencement date and initial direct costs. After the
commencement date, the right-of-use assets are carried at cost less accumulated depreciation and impairment losses
in accordance with IAS 16, Property, plant and equipment.

The lease liability is initially measured at the present value of the lease payments that are not paid at the
commencement date and subsequently measured at amortized cost with the interest expense recognized within
finance income (expense) in the consolidated statement of income.

In accordance with IFRS 16, the Group elected not to apply accounting requirements under this standard to short-
term leases.

Non-current assets held for sale. Non-current assets are classified as held for sale if their carrying amount will be
recovered principally through a sale transaction rather than through continuing use and a sale is considered highly
probable. They are measured at the lower of their carrying amount and fair value less costs to sell.

The Group ceases to use the equity method of accounting in relation to the interest in a joint venture or an associate
classified as an asset held for sale.

Inventories. Natural gas, gas condensate, crude oil and gas condensate refined products are valued at the lower of
cost or net realizable value. The cost of inventories includes direct cost of materials, direct operating costs, and
related production overhead expenses and is recorded on a first-in-first-out (“FIFO”) basis. Net realizable value is
the estimate of the selling price in the ordinary course of business, less selling expenses.

Materials and supplies are carried at amounts which do not exceed their respective recoverable amounts in the
normal course of business.

Financial instruments. Derivative instruments are accounted for at fair value and are carried as financial assets
when fair value is positive and as financial liabilities when fair value is negative. Gains or losses arising from
changes in the fair value of derivative instruments are included in the consolidated statement of income. The Group
does not apply hedge accounting.

Certain shareholders’ loans provided by the Group to its joint ventures include embedded derivatives that modify
cash flows of the loans based on financial (market interest rates) and non-financial (interest rate on borrowings of
the lender and free cash flows of the borrower) variables. The risks relating to these variables are interrelated;
therefore, terms and conditions of each of these loans related to those variables were defined as a single compound
embedded derivative. The Group designated these loans as financial assets at fair value through profit or loss (see
Note 27).

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The difference between the loan proceeds and the fair value at initial recognition is recorded as the Group’s
investment in the joint ventures. Subsequently, the loans are measured at fair value at each reporting date with
recognition of the revaluation through profit or loss. Interest income and foreign exchanges differences (calculated
using the effective interest method), and remaining effect from fair value remeasurement are disclosed separately in
the consolidated statement of income.

Where there is an active market for a commodity, commodity contracts are accounted for as derivatives except for
contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a commodity in
accordance with the Group’s expected purchase, sale or usage requirements. Gains or losses arising from changes
in the fair value of commodity derivatives are recognized within other operating income (loss) in the consolidated
statement of income (see Note 27).

Derivatives embedded in other non-derivative financial instruments or in non-financial host contracts are
recognized as separate derivatives when their risks and economic characteristics are not closely related to those of
the host contracts, and the host contracts are not carried at fair value.

A pricing formula in a purchase or sale contract will, for instance, be considered to be closely related to the host
purchase or sales contract if the price formula is related to the market for such host contracts. Where there is no
active market for the commodity, the Group assesses the characteristics of such a price to be closely related to the
host contract if the price formula is based on relevant indexations commonly used by other market participants.
Contracts are assessed for embedded derivatives when the Group becomes a party to them, including at the date of
a business combination.

Loans and receivables with fixed or determinable payments that are not quoted in an active market are recognized
initially at fair value, normally being the transaction price, plus directly attributable transaction costs, and
subsequently carried at amortized cost using the effective interest method. Loans and receivables are analyzed for
impairment on a debtor by debtor basis. A provision for impairment of loans and receivables is established when
there is objective evidence that the Group will not be able to collect all amounts due according to their original
terms.

The Group’s debt, trade payables and other non-derivative liabilities are classified as financial liabilities measured
at amortized cost. Financial liabilities included in this category are initially recognized at fair value less directly
attributable transaction costs and subsequently are measured at amortized cost using the effective interest method.

The effective interest rate is the rate that exactly discounts future cash payments and receipts through the expected
life of the financial instrument or, when appropriate, a shorter period to the net carrying value of the financial asset
or financial liability.

Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial
position only when there is a legally enforceable right to offset the recognized amounts, and there is an intention to
either settle on a net basis, or to realize the asset and settle the liability simultaneously.

Provisions for liabilities and charges. Provisions are recognized when the Group has a present legal or
constructive obligation as a result of past events; when it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation; and a reliable estimate of the amount of the obligation
can be made.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation
using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the
obligation. Provisions are reassessed at each reporting date, and those changes in the provisions resulting from the
passage of time are recognized in the consolidated statement of income as interest expense. Where the Group
expects a provision to be reimbursed, the reimbursement is recognized as a separate asset but only when the
reimbursement is virtually certain.

Pension obligations. The Group performs mandatory contributions to the Pension Fund of the Russian Federation
on behalf of its employees based on gross salary payments. These contributions represent a defined contribution
plan, are expensed when incurred and are included in the employee compensation in the consolidated statement of
income.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Group also operates a non-contributory post-employment defined benefit plan based on employees’ years of
service and average salary (see Note 16). The liability recognized in the consolidated statement of financial position
in respect of the defined benefit pension plan is the present value of the defined benefit obligations at the balance
sheet date. The defined benefit obligations are calculated annually by independent actuaries using the projected unit
credit method.

Actuarial gains and losses on assets and liabilities arising from experience adjustments and changes in actuarial
assumptions are charged or credited to other comprehensive income in the period in which they arise. They are not
reclassified to profit or loss in subsequent periods. Past-service costs are recognized in profit or loss in the period
when a plan is amended or curtailed.

Non-financial guarantees. The Group issued a number of shareholder guarantees that provide compensation to
third parties if a joint venture fails to perform a contractual obligation. Such guarantees meet the definition of
insurance contracts and are accounted for under IFRS 4, Insurance contracts. Liabilities for a non-financial
guarantee are recognized when an outflow of resources embodying economic benefits required to settle the
obligation is probable. The liabilities are recognized in the amount of best estimates of such an outflow.

Income taxes. The income tax charge or benefit comprises current tax and deferred tax and is recognized in the
consolidated statement of income unless it relates to transactions that are recognized, in the same or a different
period, in other comprehensive income or directly in equity.

Current tax is the amount expected to be paid to or recovered from the tax authorities in respect of taxable profits or
losses for the current and prior periods. Russian tax legislation allows to prepare and file a single, consolidated
income tax declaration by the taxpayers’ group comprised of a holding company and any number of entities with at
least 90 percent ownership in each (direct or indirect). Eligible taxpayers’ group must be registered with tax
authorities and meet certain conditions and criteria. The tax declaration can be submitted then by any member of
the group. The Group prepares a consolidated tax return for the taxpayers’s group including the Company and
majority of its subsidiaries in Russia.

Deferred tax assets and liabilities are recognized on temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax base. Deferred tax balances are measured at tax
rates enacted or substantively enacted at the balance sheet date which are expected to apply to the period when the
temporary differences will reverse or when the tax loss carry forwards will be utilized. Deferred tax assets for
deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that
future taxable profit will be available against which the deductions can be utilized.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax
assets against current tax liabilities and when the deferred income taxes balances relate to the same taxation
authority and the same taxable entity, consolidated tax group of entities or different taxable entities where there is
an intention to settle the balances on a net basis. Deferred tax assets and liabilities are netted only with respect to
individual companies of the Group (for companies outside the consolidated tax group of companies) and within the
consolidated tax payers’ group of companies.

The Group controls the reversal of temporary differences relating to taxes chargeable on dividends from
subsidiaries or on gains upon their disposal. The Group does not recognize deferred tax liabilities on such
temporary differences except to the extent that management expects the temporary differences to reverse in the
foreseeable future.

Treasury shares. Where any Group company purchases PAO NOVATEK’s equity share capital (treasury shares),
the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from
equity attributable to PAO NOVATEK shareholders until the shares are cancelled or reissued or disposed. Where
such shares are subsequently reissued or disposed, any consideration received, net of any directly attributable
incremental transaction costs and the related income tax effects, is included in equity attributable to
PAO NOVATEK shareholders. Treasury shares are recorded at weighted average cost. Gains or losses resulting
from subsequent sales of shares are recorded in the consolidated statement of changes in equity, net of associated
costs including taxation.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Dividends. Dividends are recognized as a liability and deducted from shareholders’ equity at the balance sheet date
only if they are declared before or on the balance sheet date. Dividends are disclosed when they are proposed or
declared after the balance sheet date but before the consolidated financial statements are authorized for issue.

Revenue recognition. Revenues represent the fair value of consideration received or receivable for the sale of
goods and services in the normal course of business, net of discounts, export duties, value-added tax, excise and
fuel taxes.

Revenues from oil and gas sales are recognized when control over such products has transferred to a customer,
which refers to ability to direct the use of, and obtain substantially all of the remaining benefits from the products.
The Group considers indicators of the transfer of control, which include, but are not limited to the following: the
Group has a present right to payment for the products; the Group has transferred physical possession of the
products; the customer has legal title to the products; the customer has the significant risks and rewards of
ownership of the products; the customer has accepted the products. Not all of the indicators have to be met for
management to conclude that control has transferred and revenue could be recognized. Management uses
judgement to determine whether factors collectively indicate that the customer has obtained control over the
products. Revenues from services are recognized in the period in which the services are rendered.

When the consideration includes a variable amount, minimum amounts must be recognized that are not at
significant risk of reversal. If sales contract includes the variability associated with market price it represents a
separated embedded derivative that is treated as part of revenue. Accordingly, at the date of sale the sales price is
determined on a provisional basis, and the fair value of the final sales price adjustment is re-estimated continuously
with changes in fair value recognized as an adjustment to revenue.

Trade receivables are recognized when the goods are transferred as this is the point in time that the consideration is
unconditional and only the passage of time is required before the payment is due. No significant element of
financing is deemed present as the sales are made with short-term credit terms consistent with market practice.

General and administrative expenses. General and administrative expenses represent overall corporate
management and other expenses related to the general management and administration of the business unit as a
whole. They include management and administrative compensation, legal and other advisory expenses, insurance
of administrative buildings, social expenses and compensatory payments of general nature not directly linked to the
Group’s oil and gas activities, charity and other expenses necessary for the administration of the Group.

Earnings per share. Earnings per share are determined by dividing the profit or loss attributable to
PAO NOVATEK shareholders by the weighted average number of shares outstanding during the reporting period.

Consolidated statement of cash flows. Cash and cash equivalents comprises cash on hand, cash deposits held with
banks and short-term highly liquid investments which are readily convertible to known amounts of cash and which
are not subject to significant risk of change in value and have an original maturity of three months or less.

The Group reports cash receipts and the repayments of short-term borrowings which have a maturity of three
months or less on a net basis in the consolidated statement of cash flows.

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

Consolidated financial statements prepared in accordance with IFRS require management to make estimates which
management reviews on a continuous basis, by reference to past experience and other factors considered as
reasonable. Adjustments to accounting estimates and assumptions are recognized in the period in which the
estimate is revised if the change affects only that period or in the period of the revision and subsequent periods, if
both are affected. Management also makes certain judgments, apart from those involving estimations, in the
process of applying the Group’s accounting policies.

Judgments and estimates that have the most significant effect on the amounts reported in these consolidated
financial statements are described below.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (CONTINUED)

Fair values of financial instruments. The fair value of financial assets and liabilities, other than financial
instruments that are traded in active markets, is determined by applying various valuation methodologies.
Management uses its judgment to make assumptions primarily based on market conditions existing at each
reporting date.

Discounted cash flow analysis is used for loans and receivables as well as debt instruments that are not traded in
active markets. The effective interest rate is determined by reference to the interest rates of financial instruments
available to the Group in active markets. In the absence of such instruments, the effective interest rate is determined
by reference to the interest rates of active market financial instruments available adjusted for the Group’s specific
risk premium estimated by management.

For commodity derivative contracts where observable information is not available, fair value estimations are
determined using mark-to-market analysis and other acceptable valuation methods, for which the key inputs include
future prices, volatility, price correlation, counterparty credit risk and market liquidity. Fair values of the Group’s
commodity derivative contracts and sensitivities are presented in Note 27.

Fair value estimation of shareholders’ loans to joint ventures is determined using benchmark interest rates adjusted
for the borrower credit risk and free cash flows from the borrower’s strategic plans approved by the shareholders of
the joint ventures. Fair values of the shareholders’ loans to joint ventures and sensitivities are presented in Note 27.

Deferred income tax asset recognition. Management assesses deferred income tax assets at each reporting date and
determines the amount recorded to the extent that realization of the related tax benefit is probable. In determining
future taxable profits and the amount of tax benefits that are probable in the future management makes judgments
and applies estimations based on prior years taxable profits and expectations of future income that are believed to
be reasonable under the circumstances.

Estimation of oil and gas reserves. Oil and gas reserves have a direct impact on certain amounts reported in the
consolidated financial statements, most notably depreciation, depletion and amortization, as well as impairment
expenses and asset retirement obligations. The Group’s principal oil and gas reserves have been independently
estimated by internationally recognized petroleum engineers whereas other oil and gas reserves of the Group have
been determined based on estimates of mineral reserves prepared by the Group’s management in accordance with
internationally recognized definitions.

Depreciation rates on oil and gas assets using the unit-of-production method are based on proved developed
reserves and total proved reserves estimated by the Group in accordance with rules promulgated by the Securities
and Exchange Commission (SEC) for proved reserves. The Group also uses estimated probable and possible
reserves to calculate future cash flows from oil and gas properties, which serve as an indicator in determining their
economic lives and whether or not property impairment is present.

A portion of the reserves estimated by the Group includes reserves expected to be produced beyond license expiry
dates. The Group’s management believes that there is requisite legislation and past experience to extend mineral
licenses at the initiative of the Group and, as such, intends to extend its licenses for properties expected to produce
beyond the current license expiry dates.

Due to the inherent uncertainties and the limited nature of reservoir data, estimates of underground reserves are
subject to change over time as additional information becomes available, such as from development drilling and
production activities or from changes in economic factors, including product prices, contract terms or development
plans. In general, estimates of reserves for undeveloped or partially developed fields are subject to greater
uncertainty over their future life than estimates of reserves for fields that are substantially developed and depleted.
As those fields are further developed, new information may lead to further revisions in reserve estimates.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (CONTINUED)

Impairment of investments in joint ventures and property, plant and equipment. Management assesses whether
there are any indicators of possible impairment of investments in joint ventures and property, plant and equipment
at each reporting date based on events or circumstances that indicate that the carrying value of assets may not be
recoverable. Such indicators include changes in the Group’s business plans, changes in commodity prices leading
to unprofitable performances, changes in product mixes, and for oil and gas properties, significant downward
revisions of estimated proved reserves. When value in use calculations are undertaken, management estimates the
expected future cash flows from the asset or cash generating unit and chooses a suitable discount rate in order to
calculate the present value of those cash flows.

Impairment provision for trade receivables. The impairment provision for trade receivables is based on
management’s assessment of the probability of collection of individual customer accounts receivable. Significant
financial difficulties of the customer, probability that the customer will enter bankruptcy or financial
reorganization, and default or delinquency in payments are considered indicators to determine that the receivables
are potentially impaired. Actual results could differ from these estimates if there is deterioration in a major
customer’s creditworthiness or actual defaults are higher than the estimates. When there is no expectation of
recovering additional cash for an amount receivable, it is written off against the associated provision.

Pension obligations. The costs of defined benefit pension plans and related current service costs are determined
using actuarial valuations. The actuarial valuations involve making demographic assumptions (mortality rates, age
of retirement, employee turnover and disability) as well as financial assumptions (discount rates, expected rates of
return on assets, future salary and pension increases). Due to the long-term nature of these plans, such estimates are
subject to significant uncertainty.

Asset retirement obligations. The Group’s exploration, development and production activities involve the use of
wells, related equipment and operating sites, oil and gas gathering and treatment facilities and in-field pipelines.
Generally, licenses and other regulatory acts require that such assets be decommissioned upon the completion of
production, i.e. the Group is obliged to decommission wells, dismantle equipment, restore the sites and perform
other related activities. The Group’s estimates of these obligations are based on current regulatory or license
requirements, as well as actual dismantling and related costs.

The Group’s management believes that due to the limited history of gas and gas condensate processing plants
activities, the useful lives of these assets are indeterminable (while certain of the operating components and
equipment have definite useful lives). Because of these reasons, and the lack of clear legal requirements as to the
recognition of obligations, the present value of an asset retirement obligation for such processing facilities cannot
be reasonably estimated and, therefore, legal or contractual asset retirement obligations related to these assets are
not recognized.

In accordance with the guidelines of IFRIC 1, Changes in Existing Decommissioning, Restoration and Similar
Liabilities, the amount recognized as a provision is the best estimate of the expenditures required to settle the
present obligation at the reporting date based on current legislation where the Group’s respective operating assets
are located, and is subject to change because of modifications, revisions and changes in laws and regulations and
their interpretation thereof. Estimating future asset retirement obligations is complex and requires management to
make estimates and judgments with respect to removal obligations that will occur many years in the future.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

ACQUISITIONS AND DISPOSALS

Acquisition of AO Eurotek and AO South-Khadyryakhinskoye

In accordance with IFRS 3, Business Combinations, the Group assessed fair values of the identified assets and
liabilities of acquired companies at the acquisition date:

AO Eurotek and AO South-Khadyryakhinskoye

Property, plant and equipment
Deferred income tax assets
Cash and cash equivalents
Other current assets
Non-current liabilities
Trade payables and accrued liabilities

Total identifiable net assets

Purchase consideration

Goodwill

Fair values
at the acquisition date

2,466
680
2,701
101
(375)
(161)

5,412

(5,412)

The financial and operational activities of the acquired companies would not have a material impact on the Group’s
revenues, if the acquisition had occurred in January 2017. The financial results of these companies after the
acquisition date did not have a material impact on the Group’s revenues and results for the year ended 31 December
2017.

Acquisition of ООО Severneft-Urengoy

In accordance with IFRS 3, Business Combinations, the Group assessed fair values of the identified assets and
liabilities of OOO Severneft-Urengoy at the acquisition date:

OOO Severneft-Urengoy

Property, plant and equipment
Other non-current assets
Cash and cash equivalents
Other current assets
Deferred income tax liabilities
Other non-current liabilities
Current liabilities

Total identifiable net assets

Purchase consideration

Goodwill

Fair values
at the acquisition date

14,252
140
67
208
(858)
(145)
(602)

13,062

(13,062)

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

ACQUISITIONS AND DISPOSALS (CONTINUED)

The financial and operational activities of Severneft-Urengoy would have increased the Group’s revenues by an
additional RR 6.3 billion, if the acquisition had occurred in January 2017. The financial results of this company
after the acquisition date did not have a material impact on the Group’s revenues and results for the year ended
31 December 2017.

Acquisition of a participation interest in ООО Cryogas-Vysotsk

In July 2017, NOVATEK acquired a 51 percent ownership interest in OOO Cryogas-Vysotsk for a cash
consideration of RR 1,583 million. Cryogas-Vysotsk undertakes a project to construct the first train of a medium-
scale plant for natural gas liquefaction with annual capacity of 660 thousand tons, located at the port of Vysotsk on
the Baltic Sea.

The Charter of Cryogas-Vysotsk stipulates that key financial and operating decisions regarding its business
activities are subject to unanimous approval by the Board of Directors. Consequently, the voting mechanism
effectively establishes joint control over Cryogas-Vysotsk and the Group accounts for the investment under the
equity method.

In accordance with IFRS 11, Joint Arrangements, the Group assessed fair values of the identified assets and
liabilities of Cryogas-Vysotsk at the acquisition date:

OOO Cryogas-Vysotsk

Property, plant and equipment
Deferred income tax assets
Prepayments and other current assets
Cash and cash equivalents
Short-term debt
Other current liabilities

Total identifiable net assets

Purchase consideration
Fair value of the Group’s interest in net assets

(RR 3,103 million at 51 percent ownership)

Goodwill

Acquisition of Blue Gaz Sp. z o.o.

Fair values
at the acquisition date

15,804
111
1,393
447
(13,199)
(1,453)

3,103

1,583

(1,583)

In December 2016, in order to expand activities on Polish market, the Group acquired a 100 percent participation
interest in Blue Gaz Sp. z o.o. the owner of a regasification station in Poland, for total cash consideration of
RR 26 million (PLN 2 million), which was paid by the end of 2016. The financial and operational activities of
Blue Gaz Sp. z o.o. would not have a material impact on the Group’s revenues and results for the year ended
31 December 2016 if the acquisition had occurred in January 2016.

Acquisition of OOO Evrotek-Yuh

In April 2016, the Group acquired a 100 percent participation interest equity stake in OOO Evrotek-Yuh for
RR 6 million. Evrotek-Yuh was a holder of the license for exploration and production of hydrocarbons within the
Ladertoyskiy license area located on the Gydan peninsula in YNAO. Evrotek-Yuh had no notable operating
activities up to and as at the acquisition date and accordingly, this acquisition is outside the definition of “business”
as defined in IFRS 3, Business Combinations. The acquisition cost has been fully allocated to the cost of the
license.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

ACQUISITIONS AND DISPOSALS (CONTINUED)

Disposal of an ownership interest in OAO Yamal LNG

In December 2015, the Group and China’s investment fund Silk Road Fund Co. Ltd., signed the Share Purchase
Agreement on the disposal of a 9.9 percent equity stake in Yamal LNG, the Group’s joint venture, to the fund. The
transaction contained a set of conditions precedent and, in accordance with IFRS 5, Non-current assets held for
sale and discontinued operations, the Group’s 9.9 percent equity stake in Yamal LNG has been classified as an
asset held for sale at 31 December 2015. The asset’s carrying amount of RR 7,987 million was determined based on
the net assets of Yamal LNG on the date of the agreement.

In March 2016, the transaction was closed upon the completion of the conditions precedent, and the Group
recognized the disposal of the 9.9 percent equity stake in Yamal LNG. The transaction included a cash payment
and the provision of a 15-year tenor loan to the Group for the purpose of financing the Yamal LNG project (see
Note 14). Concurrently, the Group committed to provide cash contributions to the capital of Yamal LNG with
regard to the interest disposed on the same terms that were previously applied upon the entrance of TOTAL S.A.
and China National Petroleum Corporation into the project.

The following table summarizes the consideration details and shows the gain on the sale of the ownership interest
in Yamal LNG:

Cash payment received (EUR 1,087 million at exchange rate of 78.18 to EUR 1.00)
Adjustment to fair value at initial recognition of the loan from Silk Road Fund (see Note 14)
Less: 49.9 percent share in the Group’s liability in relation to capital contributions to

Yamal LNG (*) (USD 149 million at exchange rate of 70.15 to USD 1.00)

Less: carrying amount of the Group’s disposed 9.9 percent interest

in the equity investment previously classified as held for sale

Costs to sell

Gain on the sale of ownership interest before income tax

(*) – excluding the Group’s 50.1 percent share in Yamal LNG’s capital increase as a result of these contributions.

RR million

84,978
9,173

(10,458)

(7,987)
(2,634)

73,072

Consequently, the Group recognized a gain on the transaction of RR 57,677 million, net of associated income tax
of RR 15,395 million.

As a result of this transaction, the Group’s interest in Yamal LNG is 50.1 percent. The Group continues to exercise
joint control over Yamal LNG and recognizes it as a joint venture, and, accordingly, accounts for this investment
under the equity method.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

PROPERTY, PLANT AND EQUIPMENT

Movements in property, plant and equipment, for the reporting periods are as follows:

Oil and gas
properties and
equipment

Assets under
construction
and advances
for construction

Other

Total

Cost
Accumulated depreciation,
depletion and amortization

348,268

64,778

15,195

428,241

(93,886)

(2,643)

(96,529)

Net book value at 31 December 2015

254,382

64,778

12,552

331,712

Additions
Transfers
Acquisition of subsidiaries
Changes in asset retirement costs
Depreciation, depletion and amortization
Disposals, net

3,099
58,674
53
2,990
(33,836)
(645)

29,191
(59,001)
-
-
-
(192)

26
327
-
-
(522)
(81)

32,316
-
53
2,990
(34,358)
(918)

Cost
Accumulated depreciation,
depletion and amortization

412,352

34,776

15,402

462,530

(127,635)

(3,100)

(130,735)

Net book value at 31 December 2016

284,717

34,776

12,302

331,795

Effect of change in accounting policy (see Note 3)

240

256

Cost
Accumulated depreciation,
depletion and amortization

412,368

34,776

15,642

462,786

(127,635)

(3,100)

(130,735)

Net book value at 1 January 2017

284,733

34,776

12,542

332,051

Additions
Transfers
Acquisition of subsidiaries (see Note 5)
Changes in asset retirement costs
Depreciation, depletion and amortization
Disposals, net
Currency translation differences

1,797
42,740
14,873
(1,486)
(33,943)
(371)
(99)

46,238
(43,640)
1,756
-
-
(207)
3

29
900
89
-
(668)
(27)
16

48,064
-
16,718
(1,486)
(34,611)
(605)
(80)

Cost
Accumulated depreciation,
depletion and amortization

479,569

38,926

16,709

535,204

(171,325)

(3,828)

(175,153)

Net book value at 31 December 2017

308,244

38,926

12,881

360,051

Included in additions to property, plant and equipment for the years ended 31 December 2017 and 2016 are
capitalized interest and foreign exchange differences of RR 3,827 million and RR 5,314 million, respectively.

Included within assets under construction and advances for construction are advances to suppliers for construction
and equipment of RR 6,554 million and RR 1,438 million at 31 December 2017 and 2016, respectively.

In 2017, the Group purchased through auctions oil and gas exploration and production licenses for the Shtormovoy,
the Gydanskiy, the Upper-Tiuteyskiy and the West-Seyakhinskiy license areas located in the YNAO for the total
amount of RR 9,727 million, which were included in additions to oil and gas properties and equipment.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

In 2016, the Group purchased through auctions oil and gas exploration and production licenses for the
Nyakhartinskiy and Syadorskiy license areas located in the YNAO and the Tanamskiy license area located in
Krasnoyarsk Territory for the total amount of RR 1,928 million, which were included in additions to oil and gas
properties and equipment.

The table below summarizes the Group’s carrying values of total acquisition costs of proved and unproved
properties included in oil and gas properties and equipment:

Proved properties acquisition costs
Less accumulated depletion of proved properties acquisition costs
Unproved properties acquisition costs

Total acquisition costs

At 31 December 2017 At 31 December 2016

58,951
(18,001)
11,376

47,243
(16,782)
10,069

52,326

40,530

The Group’s management believes these costs are recoverable as the Group has plans to explore and develop the
respective fields.

Reconciliation of depreciation, depletion and amortization (DDA):

Depreciation, depletion and amortization of property, plant and equipment
Add: DDA of intangible assets
Less: DDA capitalized in the course of intra-group construction services

DDA as presented in the consolidated statement of income

Year ended 31 December:

2017

2016

34,611
639
(727)

34,523

34,358
554
(281)

34,631

At 31 December 2017 and 2016, no property, plant and equipment were pledged as security for the Group’s
borrowings. No impairment was recognized in respect of oil and gas properties and equipment for the years ended
31 December 2017 and 2016.

Capital commitments are disclosed in Note 28.

Leases. Included in property, plant and equipment at 31 December 2017 are the right-of-use assets primarily related
to long-term agreements on time chartering of marine tankers. Movements in the carrying amounts of the right-of-
use assets for the reporting period are as follows:

At 31 December
2016

At 1 January
2017(*)

Additions

Depreciation

Other
movements

At 31 December
2017

Oil and gas properties

and equipment

Other

Total net book value

-
-

16
240

256

7,123
500

7,623

(375)
(129)

(504)

(130)
-

6,634
611

(130)

7,245

(*) – effect of initial application of IFRS 16, Leases, recognized at 1 January 2017 (see Note 3).

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

The maturity analysis of lease liabilities is disclosed in Note 27.

Exploration for and evaluation of mineral resources. The amounts of assets, liabilities, expense and cash flows
arising from the exploration and evaluation of mineral resources comprise the following:

Net book value of assets at 1 January

Additions
Expensed
Acquisition of subsidiaries
Reclassification to proved properties and development expenditures

Net book value of assets at 31 December

Liabilities
Cash flows used for operating activities
Cash flows used for investing activities

Year ended 31 December:

2017

2016

15,472

6,345
-
834
(4,846)

17,805

689
1,819
5,749

14,744

5,297
(3)
7
(4,573)

15,472

384
1,891
4,085

For the years ended 31 December 2017 and 2016, within operating expenses the Group has recognized exploration
expenses in the amount of RR 1,819 million and RR 2,087 million, respectively. These expenses included
employee compensations in the amount of RR 301 million and RR 300 million, respectively.

INVESTMENTS IN JOINT VENTURES

Joint ventures:

OAO Yamal LNG
OOO Yamal Development
ZAO Nortgas
OOO SeverEnergia (through Artic Russia B.V. at 31 December 2016)
OOO Cryogas-Vysotsk
ZAO Terneftegas

At 31 December 2017 At 31 December 2016

126,377
73,873
50,519
27,666
3,841
3,050

126,688
55,228
51,222
24,449
-
2,063

Total investments in joint ventures

285,326

259,650

The Group considers that Yamal LNG, Yamal Development, Nortgas, SeverEnergia, Artic Russia, Cryogas-
Vysotsk and Terneftegas constitute jointly controlled entities on the basis of the existing contractual arrangements.
The Charters and Shareholders’ agreements of these entities stipulate that strategic and/or key decisions of a
financial, operating and capital nature require effectively the unanimous approval by all participants or by a group
of participants. The Group accounts for its shares in joint ventures under the equity method.

OAO Yamal LNG. The Group holds a 50.1 percent ownership in Yamal LNG, along with TOTAL S.A.
(20 percent), China National Petroleum Corporation (“CNPC”, 20 percent) and Silk Road Fund Co. Ltd.
(9.9 percent). The joint venture is responsible for implementing the Yamal LNG project including the construction
of production facilities for natural gas, gas condensate and liquefied natural gas based on the resources of the
South-Tambeyskoye field, located on the Yamal peninsula in the YNAO. Yamal LNG is the holder of the LNG
export license. In December 2017, Yamal LNG started production on the first train of the LNG Plant and
commenced LNG deliveries to international markets.

At 31 December 2017 and 2016, the Group’s 50.1 percent ownership in Yamal LNG was pledged in connection
with credit line facility agreements signed by Yamal LNG with a number of Russian and foreign banks to obtain
external project financing.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

INVESTMENTS IN JOINT VENTURES (CONTINUED)

ZAO Nortgas. The Group holds a 50 percent ownership in Nortgas, its joint venture with PAO Gazprom Neft.
Nortgas operates the North-Urengoyskoye field, located in the YNAO.

OOO SeverEnergia, Artic Russia B.V. and OOO Yamal Development. SeverEnergia through its wholly owned
subsidiary AO Arcticgas operates the Samburgskoye, Urengoyskoye and Yaro-Yakhinskoye fields, located in the
YNAO.

At 31 December 2016, the Group held an effective 53.3 percent participation interest in SeverEnergia through two
of the Group’s other joint ventures, Artic Russia and Yamal Development. Artic Russia was owned by the Group
(a 13.6 percent participation interest) and Yamal Development (an 86.4 percent participation interest). Yamal
Development was a joint venture of the Group and PAO Gazprom Neft with a 50 percent participation interest held
by each investor. Artic Russia and Yamal Development held direct 49 and 51 percent participating interests,
respectively, in SeverEnergia.

In June 2017, as part of the restructuring procedures to simplify the ownership structure in SeverEnergia and
Articgas and to eventually achieve parity shareholdings by the Group and Gazprom Neft, Artic Russia was
liquidated, and its assets and liabilities were distributed between its shareholders. As a result, the Group obtained a
direct 6.7 percent participation interest in SeverEnergia, and Yamal Development’s direct participation interest in
SeverEnergia increased from 51 to 93.3 percent. The Group’s effective participation interest in SeverEnergia did
not change and was 53.3 percent at 31 December 2017.

Subsequent to the reporting date, in January 2018, Yamal Development and SeverEnergia were merged with
Arcticgas. As a result, the Group and Gazprom Neft obtained direct participation interests in Arcticgas,
53.3 percent and 46.7 percent, respectively. The Group’s management expects that further steps to achieve parity
shareholdings in Arcticgas will be undertaken in the nearest future.

ZAO Terneftegas. The Group holds a 51 percent ownership in Terneftegas, its joint venture with TOTAL S.A.
(49 percent). Terneftegas operates the Termokarstovoye field, located in the YNAO.

OOO Cryogas-Vysotsk. The Group holds a 51 percent ownership interest in Cryogas-Vysotsk acquired in
July 2017 (see Note 5). Cryogas-Vysotsk is a joint venture with AO Gazprombank group (49 percent). The joint
venture is carrying out a project for construction of the first train of a medium-scale plant for natural gas
liquefaction with annual capacity of 660 thousand tons, located at the port of Vysotsk on the Baltic Sea.

At 31 December 2017, the Group’s 51 percent ownership interest in Cryogas-Vysotsk was pledged in connection
with credit line facility agreements signed by the joint venture with a Russian bank to obtain external project
financing.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

INVESTMENTS IN JOINT VENTURES (CONTINUED)

The table below summarizes the movements in the carrying amounts of the Group’s joint ventures:

At 1 January

Share of profit from operations
Share of finance income (expense)
Share of total income tax benefit (expense)

Share of profit (loss) of joint ventures, net of income tax

Share of other comprehensive loss of joint ventures

Acquisitions of joint ventures (see Note 5)
Group’s costs capitalized in investments
Contributions to equity
Dividends received from joint ventures
Effect from initial measurement of loans

provided by the Group to joint ventures (see Note 27)
Effect from other changes in joint ventures’ net assets
Elimination of the Group’s share in profits of joint ventures

from hydrocarbons balances purchased by the Group
from joint ventures and not sold at the reporting date

At 31 December

Year ended 31 December:
2016

2017

259,650

39,854
(10,297)
(7,127)

22,430

(79)

1,583
1,328
2,269
(2,383)

-
-

154,725

33,655
74,236
(17,052)

90,839

(21)

-
753
9,802
-

836
2,819

528

(103)

285,326

259,650

For the years ended 31 December 2017 and 2016, the Group recorded commission fees in the amount of
RR 1,328 million and RR 753 million, respectively, for the guarantee received from the State Corporation “Bank
for Development and Foreign Economic Affairs (Vnesheconombank)” (see Note 28) as an increase to the
investment in Yamal LNG.

In October 2017, the capital of Cryogas-Vysotsk was increased through proportional contributions by its
participants totalling RR 4,449 million, of which RR 2,269 million was contributed by NOVATEK.

In September 2016, the capital of Yamal LNG was increased through a cash contribution made by the Group as a
result of the disposal of the 9.9 percent stake in Yamal LNG (see Note 5) in the amount of RR 19,565 million. The
Group’s 50.1 percent share in Yamal LNG’s capital increase was recorded in the Group’s investment in Yamal
LNG in the amount of RR 9,802 million. The Group’s shareholding in Yamal LNG did not change notably as a
result of this capital contribution.

For the year ended 31 December 2017, Nortgas declared dividends in the total amount of RR 4,766 million, of
which RR 2,383 million were attributable to NOVATEK.

For the year ended 31 December 2016, the Group recorded an increase in equity in the amount of RR 2,819 million
from the initial measurement of the disproportional loans provided to Yamal LNG by other shareholders.

The Group eliminates its share in profits of joint ventures from natural gas and liquid hydrocarbons balances
purchased by the Group from its joint ventures and not sold at the reporting date.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

INVESTMENTS IN JOINT VENTURES (CONTINUED)

The summarized statements of financial position for the Group’s principal joint ventures are as follows:

At 31 December 2017

Yamal LNG

SeverEnergia

Nortgas

Property, plant and equipment

and materials for construction

Other non-current non-financial assets
Non-current financial assets

Total non-current assets

Cash and cash equivalents
Other current financial assets
Current non-financial assets

Total current assets

Non-current financial liabilities
Non-current non-financial liabilities

Total non-current liabilities

Trade payables and accrued liabilities
Other current financial liabilities
Current non-financial liabilities

Total current liabilities

Net assets

At 31 December 2016

Property, plant and equipment
and materials for construction

Other non-current non-financial assets
Non-current financial assets

Total non-current assets

Cash and cash equivalents
Other current financial assets
Current non-financial assets

Total current assets

Non-current financial liabilities
Non-current non-financial liabilities

Total non-current liabilities

Trade payables and accrued liabilities
Other current financial liabilities
Current non-financial liabilities

Total current liabilities

1,741,465
391
-
1,741,856

29,297
19,793
16,994
66,084

(1,484,498)
(38,705)
(1,523,203)

(26,946)
(5,294)
(112)
(32,352)

380,715
276
155,527
536,518

8,658
17,484
948
27,090

(101,936)
(56,873)
(158,809)

(16,892)
(29,647)
(12,948)
(59,487)

135,180
44
12,226
147,450

1,409
2,550
321
4,280

(20,970)
(23,149)
(44,119)

(693)
(3,881)
(2,000)
(6,574)

252,385

345,312

101,037

1,265,939
273
6,061
1,272,273

12,842
23,211
14,314
50,367

(1,016,196)
(35,798)
(1,051,994)

(17,628)
-
(148)
(17,776)

385,404
278
120,655
506,337

13,517
15,520
1,013
30,050

(130,872)
(57,555)
(188,427)

(14,308)
(29,355)
(11,669)
(55,332)

138,768
47
11,213
150,028

277
2,639
631
3,547

(24,795)
(23,544)
(48,339)

(1,302)
-
(1,490)
(2,792)

Net assets

252,870

292,628

102,444

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

INVESTMENTS IN JOINT VENTURES (CONTINUED)

The summarized statements of comprehensive income (loss) of the Group’s principal joint ventures are presented
below:

For the year ended 31 December 2017

Yamal LNG

SeverEnergia

Revenue
Depreciation, depletion and amortization
Profit from operations
Change in fair value of

non-commodity financial instruments

Foreign exchange gain (loss), net
Profit before income tax
Income tax expense

Profit (loss), net of income tax

Other comprehensive loss

3,613
(895)
528

27,110
(26,089)
1,505
(4,589)

(3,084)

(94)

147,207
(22,903)
66,734

-
1
63,232
(10,482)

52,750

(66)

Total comprehensive income (loss)

(3,178)

52,684

For the year ended 31 December 2016

Revenue
Depreciation, depletion and amortization
Profit from operations
Change in fair value of

non-commodity financial instruments

Foreign exchange gain (loss), net
Profit before income tax
Income tax expense

Profit, net of income tax

Other comprehensive loss

Total comprehensive income

2,722
(650)
670

(25,223)
200,485
176,043
(28,952)

147,091

(27)

147,064

133,229
(26,451)
55,585

-
25
47,806
(7,930)

39,876

(23)

39,853

Nortgas

23,087
(6,914)
5,581

-
-
4,400
(950)

3,450

(91)

3,359

25,697
(7,749)
4,368

-
-
2,436
(574)

1,862

(14)

1,848

The information above reflects the amounts presented in the financial statements of the joint ventures adjusted for
differences in accounting policies between the Group and the joint ventures.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

INVESTMENTS IN JOINT VENTURES (CONTINUED)

Reconciliation of the summarized financial information presented to the Group’s share in net assets of the joint
ventures:

As at and for the year ended 31 December 2017

Yamal LNG

SeverEnergia

Net assets at 1 January 2017

Profit (loss), net of income tax
Other comprehensive loss
Other equity movements
Dividends

Net assets at 31 December 2017

Ownership

252,870

292,628

Nortgas

102,444

3,450
(91)
-
(4,766)

52,750
(66)
-
-

345,312

101,037

53.3%

50%

(3,084)
(94)
2,693
-

252,385

50.1%

Group’s share in net assets

126,377

184,155

50,519

As at and for the year ended 31 December 2016

Net assets at 1 January 2016

Profit, net of income tax
Other comprehensive loss
Other equity movements

Net assets at 31 December 2016

Ownership

77,442

147,091
(27)
28,364

252,870

50.1%

252,775

100,596

39,876
(23)
-

292,628

53.3%

1,862
(14)
-

102,444

50%

Group’s share in net assets

126,688

156,059

51,222

At 31 December 2017 and 2016, the Group’s cumulative investments in SeverEnergia and Yamal Development
totaled RR 101,539 million and RR 79,677 million, respectively, which differed from the Group’s share in the net
assets of SeverEnergia. The differences of RR 82,616 million and RR 76,382 million mainly related to the Group’s
interest in debt liabilities of Yamal Development, through which the Group held indirect interests in SeverEnergia.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

LONG-TERM LOANS AND RECEIVABLES

Long-term loans
Long-term interest receivable
Other long-term receivables

Total
Less: current portion of long-term loans

At 31 December 2017 At 31 December 2016

183,233
29,130
429

212,792
(891)

184,621
24,390
442

209,453
(308)

Total long-term loans and receivables

211,901

209,145

The Group’s long-term loans by borrowers are as follows:

OAO Yamal LNG
OOO Cryogas-Vysotsk
ZAO Terneftegas
OOO Yamal Development

Total long-term loans

At 31 December 2017 At 31 December 2016

175,568
5,211
2,454
-

173,845
-
3,201
7,575

183,233

184,621

OAO Yamal LNG. In accordance with the Shareholders’ agreement, the Group provided US dollar and Euro credit
line facilities to Yamal LNG, the Group’s joint venture. The loans interest rate is set based on market interest rates
and interest rates on borrowings of shareholders. The repayment schedule is linked to free cash flows of the joint
venture.

OOO Cryogas-Vysotsk. The Group provided Russian rouble denominated loans under agreed credit line facilities
to Cryogas-Vysotsk, the Group’s joint venture. The loans are repayable not later than 2033 and bear variable
interest rates.

OOO Yamal Development. The Group provided Russian rouble denominated loans under agreed credit line
facilities to Yamal Development, the Group’s joint venture. In 2017, the loans and accrued interest were fully
repaid to the Group ahead of the maturity schedule.

ZAO Terneftegas. In accordance with the Shareholders’ agreement, the Group provided US dollar denominated
loans to Terneftegas, the Group’s joint venture. The loans interest rate is set based on market interest rates and
interest rates on borrowings of shareholders. The repayment schedule is linked to free cash flows of the joint
venture.

During 2017, Terneftegas repaid to the Group a part of the loans and accrued interest in the total amount of
RR 910 million.

No provisions for impairment of long-term loans and receivables were recognized at 31 December 2017 and
31 December 2016. The carrying values of long-term loans and receivables approximate their respective fair
values.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

OTHER NON-CURRENT ASSETS

Financial assets

Commodity derivatives
Other financial assets

Non-financial assets

Long-term advances
Deferred income tax assets
Materials for construction
Intangible assets, net
Other non-financial assets

Total other non-current assets

At 31 December 2017 At 31 December 2016

1,705
10

20,228
6,898
2,694
1,665
248

33,448

1,172
13

20,882
4,671
2,004
1,510
232

30,484

At 31 December 2017 and 2016, the long-term advances represented advances to OAO Russian Railways. The
advances were paid in accordance with the Strategic Partnership Agreement signed with Russian Railways in 2012.

INVENTORIES

Natural gas and liquid hydrocarbons
Materials and supplies (net of provision of

RR 4 million at 31 December 2017 and 2016)

Other inventories

Total inventories

At 31 December 2017 At 31 December 2016

8,711

2,337
36

11,084

6,765

2,247
32

9,044

No inventories were pledged as security for the Group’s borrowings or payables at both dates.

TRADE AND OTHER RECEIVABLES

Trade receivables (net of provision of RR 284 million and

RR 196 million at 31 December 2017 and 2016, respectively)

Other receivables (net of provision of RR 19 million and

RR 22 million at 31 December 2017 and 2016, respectively)

Total trade and other receivables

At 31 December 2017 At 31 December 2016

43,387

1,116

44,503

40,606

980

41,586

Trade receivables in the amount RR 8,921 million and RR 5,362 million at 31 December 2017 and 2016,
respectively, are secured by letters of credit, issued by banks with investment grade rating. The Group does not
hold any other collateral as security for trade and other receivables (see Note 27 for credit risk disclosures).

The carrying values of trade and other receivables approximate their respective fair values. Trade and other
receivables were categorized as Level 3 in the fair value measurement hierarchy described in Note 27.

Trade and other receivables that are less than three months past due are generally not considered for impairment
unless other indicators of impairment exist. Trade and other receivables of RR 3,357 million and RR 4,269 million
at 31 December 2017 and 2016, respectively, were past due but not impaired. The Group has assessed the payment
history of these accounts and recognized impairment where deemed necessary.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

TRADE AND OTHER RECEIVABLES (CONTINUED)

The ageing analysis of these past due but not impaired trade and other receivables is as follows:

At 31 December 2017 At 31 December 2016

Up to 90 days past-due
91 to 360 days past-due
Over 360 days past-due

Total past due but not impaired

Not past due and not impaired

Total trade and other receivables

2,544
669
144

3,357

41,146

44,503

Movements in the Group provision for impairment of trade and other receivables are as follows:

At 1 January

Additional provision recorded
Acquisition of subsidiaries
Receivables written off as uncollectible
Provision reversed

At 31 December

Year ended 31 December:

2017

2016

218

58
55
(21)
(7)

303

3,628
561
80

4,269

37,317

41,586

113

269
-
(68)
(96)

218

The provision for impaired trade and other receivables has been included in the consolidated statement of income in
net impairment expenses.

PREPAYMENTS AND OTHER CURRENT ASSETS

At 31 December 2017 At 31 December 2016

Financial assets

Commodity derivatives
Current portion of long-term loans receivable (see Note 8)

Non-financial assets

Value-added tax receivable
Recoverable value-added tax
Prepayments and advances to suppliers
Deferred transportation expenses for liquid hydrocarbons
Deferred transportation expenses for natural gas
Deferred export duties for liquid hydrocarbons
Prepaid customs duties
Other non-financial assets

Total prepayments and other current assets

2,117
891

8,057
7,284
6,326
2,140
1,965
1,829
561
693

31,863

2,920
308

10,456
5,736
5,998
1,903
1,901
1,643
1,756
627

33,248

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

CASH AND CASH EQUIVALENTS

Cash at current bank accounts
Bank deposits with original maturity of three months or less

Total cash and cash equivalents

At 31 December 2017 At 31 December 2016

28,994
36,949

65,943

31,525
16,776

48,301

All deposits are readily convertible to known amounts of cash and are not subject to significant risk of change in
value (see Note 27 for credit risk disclosures).

LONG-TERM DEBT

Corporate bonds

Eurobonds – Ten-Year Tenor

(par value USD 1 billion, repayable in 2022)

Eurobonds – Ten-Year Tenor

(par value USD 650 million, repayable in 2021)

Eurobonds – Four-Year Tenor

(par value RR 14 billion, repaid in 2017)

Bank loans

Syndicated term credit line facility
Other bank loans

Other borrowings

Loan from Silk Road Fund
Other loans

Total
Less: current portion of long-term debt

At 31 December 2017 At 31 December 2016

57,481

37,364

13,280
6,887

39,716
1,022

155,750
(14,302)

60,503

39,318

13,996

41,906
6,381

41,125
13,536

216,765
(55,469)

Total long-term debt

141,448

161,296

Eurobonds. In December 2012, the Group issued US dollar denominated Eurobonds in the amount of
USD 1 billion. The US dollar denominated Eurobonds were issued with an annual coupon rate of 4.422 percent,
payable semi-annually. The Eurobonds have a ten-year tenor and are repayable in December 2022.

In February 2011, the Group issued US dollar denominated Eurobonds in the amount of USD 650 million.
The US dollar denominated Eurobonds were issued with an annual coupon rate of 6.604 percent, payable
semi-annually. The Eurobonds have a ten-year tenor and are repayable in February 2021.

In February 2013, the Group issued four-year tenor Russian rouble denominated Eurobonds in the amount of
RR 14 billion. The Russian rouble denominated Eurobonds were issued with an annual coupon rate of 7.75 percent,
payable semi-annually. In February 2017, the RR 14 billion Eurobonds were fully repaid at its maturity date.

Syndicated term credit line facility. In June 2013, the Group obtained a USD 1.5 billion unsecured syndicated term
credit line facility from a range of international banks and withdrew the full amount under the facility by
June 2014. The loan was repayable until July 2018 by quarterly equal installments starting from June 2015. The
facility included the maintenance of certain restrictive financial covenants. In February 2018, the credit line facility
was fully repaid ahead of its maturity schedule.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

LONG-TERM DEBT (CONTINUED)

Other bank loans. In December 2016, the Group obtained a EUR 100 million credit line facility from the Russian
subsidiary of a foreign bank which is repayable in December 2019. The facility includes the maintenance of certain
restrictive financial covenants.

Loan from Silk Road Fund. As part of the transaction for the sale of the Group’s 9.9 percent equity stake in
OAO Yamal LNG in December 2015, the Group obtained a loan from Silk Road Fund for financing
of the Yamal LNG project (see Note 5).

The loan is repayable until December 2030 by semi-annual equal installments starting from December 2019 and
includes the maintenance of certain restrictive financial covenants.

Other loans. At 31 December 2017 and 2016, other loans represented Russian rouble denominated loans, which
were provided to one of the Group’s subsidiaries by its non-controlling shareholder. The loans were initially
repayable until the end of 2017, which was subsequently extended to the end of 2018. During the years ended
31 December 2017 and 2016, a portion of the loans and accrued interest in the amount of RR 13,375 million and
8,673 million, respectively, was repaid.

The fair value of long-term debt including its current portion was RR 167,760 million and RR 224,183 million at
31 December 2017 and 2016, respectively. The fair value of the corporate bonds was determined based on market
quote prices (Level 1 in the fair value measurement hierarchy described in Note 27). The fair value of other
long-term loans was determined based on future cash flows discounted at the estimated risk-adjusted discount rate
(Level 3 in the fair value measurement hierarchy described in Note 27).

Scheduled maturities of long-term debt at the reporting date were as follows:

Maturity period:

1 January 2019 to 31 December 2019
1 January 2020 to 31 December 2020
1 January 2021 to 31 December 2021
1 January 2022 to 31 December 2022
After 31 December 2022

Total long-term debt

At 31 December 2017

8,614
3,453
40,816
60,937
27,628

141,448

Available credit line facilities. At 31 December 2017, the Group had available long-term credit line facilities from
banks with credit limits in the amounts of RR 100 billion, the equivalent of USD 750 million, and EUR 50 million.
The facilities include the maintenance of certain restrictive financial covenants.

SHORT-TERM DEBT AND CURRENT PORTION OF LONG-TERM DEBT

At 31 December 2017 and 2016, short-term debt and current portion of long-term debt consisted only of the current
portion of long-term debt in the amount of RR 14,302 million and RR 55,469 million, respectively.

Loans with original maturity three months or less. In 2017 and 2016, the Group had available revolving credit line
facilities under which the obtained loans with original maturities of three months or less to finance trade activities
were secured by cash revenues from specifically determined liquid hydrocarbons export sales contracts. At
31 December 2017 and 2016, these loans were repaid.

Available credit line facilities. At 31 December 2017, the Group had available a short-term revolving credit line
facility from a Russian bank, with a credit limit in the amount of RR 20 billion.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

PENSION OBLIGATIONS

Defined contribution plan. For the years ended 31 December 2017 and 2016, total amounts recognized as an
expense in respect of payments made by employer on behalf of employees to the Pension Fund of the Russian
Federation were RR 2,111 million and RR 1,853 million, respectively.

Defined benefit plan. The Group operates a post-employment benefit program for its retired employees. Under the
current terms of pension program, employees who are employed by the Group for more than five years and retire
from the Group on or after the statutory retirement age will receive lump sum retirement benefit and monthly
payments from NOVATEK for life unless they are actively employed. The amounts of payments to be disbursed
depend on the employee’s average salary, duration and location of employment.

The program represents an unfunded defined benefit plan and is accounted for as such under provisions of IAS 19,
Employee Benefits. The present value of the defined benefit obligation is included in other non-current liabilities in
the consolidated statement of financial position. The impact of the program on the consolidated financial statements
is disclosed below.

The movements in the present value of the defined benefit obligation are as follows:

At 1 January

Interest cost
Current service cost
Benefits paid
Pension plan revision
Actuarial remeasurement arising from:
- changes in financial assumptions
- changes in demographic assumptions
- experience adjustments

At 31 December

Defined benefit plan (benefits) costs were recognized in:

Materials, services and other (as employee compensation)
General and administrative expenses (as employee compensation)
Other operating income (loss)
Other comprehensive loss

The principal actuarial assumptions used are as follows:

Year ended 31 December:

2017

2016

2,249

197
181
(118)
(35)

345
122
257

3,198

225
153
(35)
724

1,905

201
126
(105)
-

110
(24)
36

2,249

184
143
-
122

Weighted average discount rate
Projected annual increase in employee compensation
Expected increases to pension benefits

At 31 December 2017 At 31 December 2016

6.9%
4.0%
4.3%

8.3%
5.0%
6.5%

The discount rate was determined by reference to Russian rouble denominated bonds issued by the Government of
the Russian Federation chosen to match the duration of the post-employment benefit obligations. The assumed
average salary and pension payment increases for Group employees have been calculated on the basis of inflation
forecasts, analysis of increases of past salaries and the general salary policy of the Group. Mortality assumptions
are based on the Russian mortality tables published by the State Statistics Committee of the Russian Federation
from the year 2010 adjusted for estimates of mortality improvements in the future periods, which management
believes are the most conservative and prudent Russian whole-population mortality tables available.

Management has assessed that reasonable changes in the principal significant actuarial assumptions will not have a
significant impact on the consolidated statement of income or the consolidated statement of comprehensive income
or the liability recognized in the consolidated statement of financial position.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

TRADE PAYABLES AND ACCRUED LIABILITIES

Financial liabilities
Trade payables
Commodity derivatives
Dividends payable to non-controlling interest
Interest payable
Other payables

Non-financial liabilities

Advances from customers
Salary payables
Other liabilities and accruals

Total trade payables and accrued liabilities

At 31 December 2017

At 31 December 2016

30,936
3,333
1,633
1,221
775

4,474
472
6,157

49,001

25,828
2,754
-
1,821
463

2,483
338
4,775

38,462

The carrying values of trade payables and accrued liabilities approximate their respective fair values. Trade and
other payables were categorized as Level 3 in the fair value measurement hierarchy described in Note 27.

During the years ended 31 December 2017 and 2016, advances from customers in the amount of RR 2,422 million
and RR 3,952 million, respectively, remained at the beginning of the respective period were recognized as revenue.

SHAREHOLDERS’ EQUITY

Ordinary share capital. Share capital issued and paid in consisted of 3,036,306,000 ordinary shares with a par
value of RR 0.1 each at 31 December 2017 and 2016. The total authorized number of ordinary shares was
10,593,682,000 shares at both dates.

Treasury shares. In accordance with the Share Buyback Programs authorized by the Board of Directors,
the Group’s wholly owned subsidiary, Novatek Equity (Cyprus) Limited, purchases ordinary shares of
PAO NOVATEK in the form of Global Depository Receipts (GDRs) on the London Stock Exchange (LSE) and
ordinary shares on the Moscow Exchange through the use of independent brokers. NOVATEK also purchases its
ordinary shares from shareholders where required by Russian legislation.

During the years ended 31 December 2017 and 2016, the Group purchased 2.1 million and 1.4 million ordinary
shares (both ordinary shares and GDRs) at a total cost of RR 1,440 million and RR 916 million, respectively.
At 31 December 2017 and 2016, the Group held in total (both ordinary shares and GDRs) 20.7 million and
18.6 million ordinary shares at a total cost of RR 8,353 million and RR 6,913 million, respectively. The Group has
decided that these shares do not vote.

Dividends. Dividends (including tax on dividends) declared and paid were as follows:

Year ended 31 December:

2017

2016

1
42,075
(42,075)

13.95
139.50

1
41,653
(41,653)

13.80
138.00

Dividends payable at 1 January
Dividends declared (*)
Dividends paid (*)

Dividends payable at 31 December

Dividends per share declared during the year (in Russian roubles)
Dividends per GDR declared during the year (in Russian roubles)

(*) – excluding treasury shares.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

SHAREHOLDERS’ EQUITY (CONTINUED)

The Group declares and pays dividends in Russian roubles. Dividends declared in 2017 and 2016 were as follows:

Final for 2016: RR 7.00 per share or RR 70.00 per GDR declared in April 2017
Interim for 2017: RR 6.95 per share or RR 69.50 per GDR declared in September 2017

Total dividends declared in 2017

Final for 2015: RR 6.90 per share or RR 69.00 per GDR declared in April 2016
Interim for 2016: RR 6.90 per share or RR 69.00 per GDR declared in September 2016

Total dividends declared in 2016

21,254
21,102

42,356

20,951
20,951

41,902

Distributable retained earnings. The basis for distribution of profits of a company to shareholders is defined by
Russian legislation as net profit presented in its statutory financial statements prepared in accordance with the
Regulations on Accounting and Reporting of the Russian Federation, which may differ significantly from amounts
calculated on the basis of IFRS. At 31 December 2017 and 2016, NOVATEK’s closing balances of the
accumulated profit including the respective year’s net statutory profit totaled RR 445,104 million and RR 366,928
million, respectively.

OIL AND GAS SALES

Natural gas
Naphtha
Crude oil
Other gas and gas condensate refined products
Liquefied petroleum gas
Stable gas condensate

Year ended 31 December:

2017

2016

247,663
111,979
77,102
69,066
40,016
33,993

229,716
103,103
64,952
57,163
31,652
47,271

Total oil and gas sales

579,819

533,857

PURCHASES OF NATURAL GAS AND LIQUID HYDROCARBONS

Unstable gas condensate
Natural gas
Other liquid hydrocarbons

Year ended 31 December:

2017

2016

107,082
51,053
3,308

93,854
38,119
2,295

Total purchases of natural gas and liquid hydrocarbons

161,443

134,268

The Group purchases not less than 50 percent of the natural gas volumes produced by its joint venture
ZAO Nortgas, some volumes of natural gas produced by its joint venture OOO SeverEnergia (through its wholly
owned subsidiary, AO Arcticgas), all volumes of natural gas produced by its joint venture ZAO Terneftegas and,
commencing December 2017, some volumes of liquefied natural gas produced by its joint venture
OAO Yamal LNG (see Note 30).

The Group purchases all volumes of unstable gas condensate produced by its joint ventures Nortgas, SeverEnergia
(through its wholly owned subsidiary, Arcticgas) and Terneftegas at ex-field prices based on benchmark reference
crude oil prices (see Note 30).

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

TRANSPORTATION EXPENSES

Natural gas transportation by trunk and low-pressure pipelines
Stable gas condensate and liquefied petroleum gas transportation by rail
Crude oil transportation by trunk pipelines
Gas condensate refined products,

stable gas condensate and crude oil transportation by tankers

Other

Year ended 31 December:

2017

2016

93,686
29,832
7,622

5,980
72

84,808
31,838
6,654

9,997
165

Total transportation expenses

137,192

133,462

TAXES OTHER THAN INCOME TAX

The Group is subject to a number of taxes other than income tax, which are detailed as follows:

Unified natural resources production tax
Property tax
Other taxes

Total taxes other than income tax

MATERIALS, SERVICES AND OTHER

Employee compensation
Repair and maintenance
Materials and supplies
Complex of services for preparation,

transportation and processing of hydrocarbons

Electricity and fuel
Liquefied petroleum gas volumes reservation expenses
Fire safety and security expenses
Transportation services
Rent expenses
Insurance expenses
Other

Year ended 31 December:

2017

2016

45,459
3,673
362

49,494

Year ended 31 December:

2017

2016

9,032
2,853
1,966

1,914
1,221
918
749
727
308
307
773

40,997
2,793
263

44,053

7,558
3,026
1,838

2,062
1,101
1,017
660
641
257
372
601

Total materials, services and other

20,768

19,133

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

GENERAL AND ADMINISTRATIVE EXPENSES

Employee compensation
Social expenses and compensatory payments
Legal, audit, and consulting services
Business travel expense
Fire safety and security expenses
Advertising expenses
Repair and maintenance expenses
Rent expenses
Other

Total general and administrative expenses

Year ended 31 December:

2017

2016

11,065
2,735
839
560
419
410
231
90
821

17,170

12,327
2,184
1,019
624
387
370
200
214
801

18,126

Auditor’s fees. AO PricewaterhouseCoopers Audit has served as the independent external auditor of
PAO NOVATEK for each of the reported financial years. The independent external auditor is subject to
appointment at the Annual General Meeting of shareholders based on the recommendations from the Board of
Directors. The aggregate fees for audit and other services rendered by PricewaterhouseCoopers Audit to the parent
company of the Group included within legal, audit, and consulting services are as follows:

Audits of PAO NOVATEK

(audit of the Group’s consolidated financial statements and
audit of statutory financial statements of PAO NOVATEK)

Other services

Total auditor’s fees and services

FINANCE INCOME (EXPENSE)

Interest expense (including transaction costs)

Interest expense on fixed rate debt
Interest expense on variable rate debt

Subtotal

Less: capitalized interest

Interest expense on debt

Provisions for asset retirement obligations:

effect of the present value discount unwinding

Interest expense on lease liabilities

Year ended 31 December:

2017

2016

34
9

Year ended 31 December:

2017

2016

8,234
2,001

10,235

(3,391)

6,844

749
119

34
9

11,469
4,828

16,297

(5,314)

10,983

587
-

Total interest expense

7,712

11,570

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

FINANCE INCOME (EXPENSE)( CONTINUED)

Interest income

Interest income on loans receivable
Interest income on cash, cash equivalents and deposits

Total interest income

Foreign exchange gains (losses)

Gains
Losses

Total foreign exchange gain (loss), net

INCOME TAX

Year ended 31 December:

2017

2016

13,747
2,125

15,872

17,597
1,135

18,732

Year ended 31 December:

2017

2016

48,322
(34,646)

41,124
(66,614)

13,676

(25,490)

Reconciliation of income tax. The table below reconciles actual income tax expense and theoretical income tax,
determined by applying the statutory tax rate to profit before income tax.

Profit before income tax

Theoretical income tax expense at statutory rate of 20 percent

Increase (decrease) due to:

Non-deductible differences in respect

of the Group’s share of loss (profit) of joint ventures

Non-deductible differences in respect of

net gain on disposal of interests in joint ventures
Tax benefits relating to priority investment projects
Other differences

Total income tax expense

Year ended 31 December:

2017

2016

200,839

40,168

(4,592)

-
(1,312)
105

34,369

308,164

61,633

(18,147)

781
(1,540)
364

43,091

A number of the Group’s investment projects were included by the government authorities in the list of priority
projects, in respect of them the Group was able to apply a reduced income tax rate of 16.5 percent and 15.5 percent
for the years ended 31 December 2017 and 2016, respectively.

Domestic and foreign components of current income tax expense were:

Russian Federation income tax
Foreign income tax

Total current income tax expense

Year ended 31 December:

2017

2016

34,811
416

35,227

35,025
552

35,577

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

INCOME TAX (CONTINUED)

Effective income tax rate. The Russian statutory income tax rate for 2017 and 2016 was 20 percent.

The Group recognizes in profit before income tax its share of net profit (loss) from joint ventures, which influences
the consolidated profit of the Group but does not result in additional income tax expense (benefit) at the Group’s
level. Net profit (loss) of joint ventures was recorded in their financial statements on an after-tax basis. The Group
holds at least a 50 percent interest in each of its joint ventures, and dividend income from these joint ventures is
subject to a zero withholding tax rate according to the Russian tax legislation.

Without the effect of net profit (loss) and dividends from joint ventures the effective income tax rate for the years
ended 31 December 2017 and 2016 was 19.3 percent and 19.8 percent, respectively.

In respect of PAO NOVATEK and majority of its Russian subsidiaries, the Group submits a single consolidated
income tax return in accordance with Russian tax legislation (see Note 3).

Deferred income tax. Differences between IFRS and Russian statutory tax regulations give rise to certain
temporary differences between the carrying value of certain assets and liabilities for financial reporting purposes
and for income tax purposes.

Deferred income tax balances are presented in the consolidated statement of financial position as follows:

Long-term deferred income tax asset (other non-current assets)
Long-term deferred income tax liability

Net deferred income tax liability

At 31 December 2017 At 31 December 2016

6,898
(26,167)

4,671
(24,656)

(19,269)

(19,985)

Movements in deferred income tax assets and liabilities during the years ended 31 December 2017 and 2016 are as
follows:

At 31 December
2017

Acquisition of
subsidiaries

Statement of
Income effect

Statement of
Comprehensive
Income effect

At 31 December
2016

Property, plant and equipment
Intangible assets
Inventories
Other

(31,983)
(346)
(297)
(639)

(1,637)
(97)
(7)
-

(1,614)
62
(23)
(212)

Deferred income tax liabilities

(33,265)

(1,741)

(1,787)

Less: deferred tax assets offset

7,098

Total deferred income tax liabilities

(26,167)

Tax losses carried forward
Property, plant and equipment
Inventories
Loans receivable
Asset retirement obligations
Trade payables and accrued liabilities
Other

Deferred income tax assets

Less: deferred tax liabilities offset

Total deferred income tax assets

3,607
3,102
2,438
1,996
1,389
1,237
227

13,996

(7,098)

6,898

Net deferred income tax liabilities

(19,269)

883

(858)

549
949
-
-
52
-
13

1,563

(883)

680

(178)

1,110

(677)

504
1,085
279
650
(122)
318
(69)

2,645

(1,110)

1,535

858

15
2
(17)
24

12
-
6
-
(5)
6
(7)

(28,747)
(313)
(250)
(451)

(29,761)

5,105

(24,656)

2,542
1,068
2,153
1,346
1,464
913
290

9,776

(5,105)

4,671

(19,985)

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

INCOME TAX (CONTINUED)

Property, plant and equipment
Intangible assets
Inventories
Other

At 31 December
2016

Statement of
Income effect

Statement of
Comprehensive
Income effect

At 31 December
2015

(28,747)
(313)
(250)
(451)

(1,989)
66
(34)
171

2
-
-
(14)

(26,760)
(379)
(216)
(608)

Deferred income tax liabilities

(29,761)

(1,786)

(12)

(27,963)

Less: deferred tax assets offset

Total deferred income tax liabilities

Tax losses carried forward
Inventories
Asset retirement obligations
Loans receivable
Property, plant and equipment
Trade payables and accrued liabilities
Assets held for sale
Other

Deferred income tax assets

Less: deferred tax liabilities offset

Total deferred income tax assets

Net deferred income tax liabilities

5,105

(24,656)

2,542
2,153
1,464
1,346
1,068
913
-
290

9,776

(5,105)

4,671

(19,985)

848

(938)

(616)
683
634
(2,662)
304
147
(4,316)
98

(5,728)

(848)

(6,576)

(7,514)

4,257

(12)

(23,706)

(2)
(1)
-
-
-
59
-
8

3,160
1,471
830
4,008
764
707
4,316
184

15,440

(4,257)

11,183

(12,523)

Deferred income tax assets expected to be realized within twelve months as of 31 December 2017 and 2016 were
RR 3,902 million and RR 3,356 million, respectively. Deferred tax liabilities expected to be reversed within twelve
months of 31 December 2017 and 2016 were RR 936 million and RR 701 million, respectively.

At 31 December 2017, the Group had recognized deferred income tax assets of RR 3,607 million (31 December
2016: RR 2,542 million) in respect of unused tax loss carry forwards of RR 18,373 million (31 December 2016:
RR 13,102 million). In accordance with tax legislation of Russian Federation effective 1 January 2017, taxable
profits can be reduced in the amount of tax losses carried forward for relief during unlimited period of time, at the
same time in 2017 to 2020 tax losses carried forward cannot exceed 50 percent of taxable profits. Up until 2017,
the tax legislation set a limit period for tax losses to be carried forward for relief against taxable profits for ten years
after they were incurred. In determining future taxable profits and the amount of tax benefits that are probable in
the future, the Group’s management makes judgments including expectations regarding the Group’s ability to
generate sufficient future taxable income and the projected time period over which deferred tax benefits will be
realized.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS

The accounting policies and disclosure requirements for financial instruments have been applied to the line items
below:

Financial assets

Loans and receivables

Long-term loans receivable
Trade and other receivables
Cash and cash equivalents
Other

At fair value through profit or loss
Long-term loans receivable
Commodity derivatives

At 31 December 2017

At 31 December 2016

Non-current

Current

Non-current

Current

5,211
29,559
-
10

-
44,503
65,943
-

7,575
24,832
-
13

-
41,586
48,301
-

177,131
1,705

891
2,117

176,738
1,172

308
2,920

Total financial assets

213,616

113,454

210,330

93,115

Financial liabilities

At amortized cost

Long-term debt
Long-term lease liabilities
Trade and other payables
Dividends payable to non-controlling interest

141,448
5,776
-
-

14,302
1,520
32,932
1,633

161,296
-
-
-

55,469
-
28,112
-

At fair value through profit or loss

Commodity derivatives

649

3,333

1,517

2,754

Total financial liabilities

147,873

53,720

162,813

86,335

Fair value measurement. The Group evaluates the quality and reliability of the assumptions and data used to
measure fair value in accordance with IFRS 13, Fair Value Measurement, in the three hierarchy levels as follows:

i.
ii.

iii.

quoted prices in active markets (Level 1);
inputs other than quoted prices included in Level 1 that are directly or indirectly observable in the market
(externally verifiable inputs) (Level 2);
inputs that are not based on observable market data (unobservable inputs) (Level 3).

Commodity derivative instruments. The Group conducts natural gas foreign trading in active markets under long-
term and short-term purchase and sales contracts, as well as purchases and sells various derivative instruments
(with reference to the European natural gas hubs) for delivery optimization and to decrease exposure to the risk of
negative changes in natural gas prices.

These contracts include pricing terms that are based on a variety of commodities and indices, and/or volume
flexibility options that collectively qualify them under the scope of IAS 39, Financial instruments: recognition and
measurement, although the activity surrounding certain contracts involves the physical delivery of natural gas. All
contracts mentioned above are recognized in the consolidated statement of financial position at fair value with
movements in fair value recognized in the consolidated statement of income.

The fair value of long-term natural gas derivative contracts involving the physical delivery of natural gas is
determined using internal models and other valuation techniques (the mark-to-market and mark-to-model analysis)
due to the absence of quoted prices or other observable, market-corroborated data, for the duration of the contracts.
Due to the assumptions underlying their fair value, the natural gas derivatives contracts are categorized as Level 3
in the fair value hierarchy, described above.

The fair value of short-term natural gas derivative contracts involving the physical delivery of natural gas and
likewise contracts used for the price risk management and delivery optimization is determined based on available
futures quotes in the active market (mark-to-market analysis) (Level 1).

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS (CONTINUED)

The amounts recognized by the Group in respect of the natural gas derivative contracts measured in accordance
with IAS 39, Financial instruments: recognition and measurement, are as follows:

Commodity derivatives

At 31 December 2017 At 31 December 2016

Within other non-current and current assets
Within other non-current and current liabilities

Included in other operating income (loss)

Operating income (loss) from natural gas foreign trading
Change in fair value

3,822
(3,982)

4,092
(4,271)

Year ended 31 December:

2017

2016

289
(9)

1,970
(1,778)

The table below represents the effect on the fair value estimation of natural gas derivative contracts that would
occur from price changes by ten percent by one megawatt-hour in 12 months after the reporting date:

Effect on the fair value

Increase by ten percent
Decrease by ten percent

Year ended 31 December:

2017

2016

(1,572)
1,572

(1,673)
1,673

Recognition and remeasurement of the shareholders’ loans to joint ventures. Terms and conditions of the
shareholders’ loans provided by the Group to its joint ventures OAO Yamal LNG and ZAO Terneftegas contain
certain financial (benchmark interest rates adjusted for the borrower credit risk) and non-financial (actual interest
rates on the borrowings of shareholders, expected free cash flows of the borrower and expected maturities)
variables and in accordance with the Group’s accounting policy were classified as financial assets at fair value
through profit or loss.

The following table summarizes the movements in the carrying amounts of shareholders’ loans provided to
Yamal LNG and Terneftegas and related interest receivable:

At 1 January

Loans provided
Repayment of the loans and accrued interest
Initial measurement at fair value allocated to

increase the Group’s investments in joint ventures (see Note 7)

Subsequent remeasurement at

fair value recognized in profit (loss) as follows:
 Interest income (using the effective interest rate method)
 Foreign exchange gain (loss), net
 Remaining effect from changes in fair value

(attributable to free cash flows of the borrowers and interest rates)

Year ended 31 December:

2017

2016

198,454

-
(910)

13,106
3,579

(7,178)

216,136

6,645
(1,298)

(836)

16,248
(48,828)

10,387

At 31 December

207,051

198,454

Fair value measurement of shareholders’ loans to joint ventures is determined using benchmark interest rates
adjusted for the borrower credit risk and free cash flows models based on the borrower’s strategic plans approved
by the shareholders of the joint ventures. Due to the assumptions underlying fair value estimation, shareholders’
loans are categorized as Level 3 in the fair value hierarchy, described above.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS (CONTINUED)

The fair value of the shareholders’ loans is sensitive to benchmark interest rates changes. The table below
represents the effect on fair value of the shareholders’ loans that would occur from one percent changes in the
benchmark interest rates.

Effect on the fair value

Increase by one percent
Decrease by one percent

Year ended 31 December:

2017

2016

(11,560)
12,536

(13,038)
14,272

Financial risk management objectives and policies. In the ordinary course of business, the Group is exposed to
market risks from fluctuating prices on commodities purchased and sold, prices of other raw materials, currency
exchange rates and interest rates. Depending on the degree of price volatility, such fluctuations in market prices
may create volatility in the Group’s financial results. To effectively manage the variety of exposures that may
impact financial results, the Group’s overriding strategy is to maintain a strong financial position.

The Group’s principal risk management policies are established to identify and analyze the risks faced by the
Group, to set appropriate risk limits and controls, and to monitor risks and adherence to these limits. Risk
management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s
activities.

Market risk. Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates,
commodity prices and equity prices, will affect the Group’s financial results or the value of its holdings of financial
instruments. The primary objective of mitigating these market risks is to manage and control market risk exposures,
while optimizing the return on risk.

The Group is exposed to market price movements relating to changes in commodity prices such as crude oil, oil
and gas condensate refined products and natural gas (commodity price risk), foreign currency exchange rates,
interest rates, equity prices and other indices that could adversely affect the value of the Group’s financial assets,
liabilities or expected future cash flows.

(a) Foreign exchange risk

The Group is exposed to foreign exchange risk arising from various exposures in the normal course of business,
primarily with respect to the US dollar and Euro. Foreign exchange risk arises primarily from future commercial
transactions, recognized assets and liabilities when assets and liabilities are denominated in a currency other than
the functional currency.

The Group’s overall strategy is to have no significant net exposure in currencies other than the Russian rouble, the
US dollar and Euro. The Group may utilize foreign currency derivative instruments to manage the risk exposures
associated with fluctuations on certain firm commitments for sales and purchases, debt instruments and other
transactions that are denominated in currencies other than the Russian rouble, and certain non-Russian rouble assets
and liabilities.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS (CONTINUED)

The carrying amounts of the Group’s financial instruments are denominated in the following currencies:

At 31 December 2017

Financial assets

Non-current

Long-term loans receivable
Trade and other receivables
Commodity derivatives
Other

Current

Trade and other receivables
Current portion

of long-term loans receivable

Commodity derivatives
Cash and cash equivalents

Financial liabilities

Non-current

Long-term debt
Long-term lease liabilities
Commodity derivatives

Current

Current portion of long-term debt
Current portion

of long-term lease liabilities

Trade and other payables
Dividends payable to

non-controlling interest

Commodity derivatives

Russian
rouble

US dollar

Euro

Other

Total

5,211
527
-
-

79,459
17,231
-
-

97,672
11,801
1,705
-

-
-
-
10

182,342
29,559
1,705
10

21,822

16,360

3,730

2,591

44,503

-
-
16,392

891
-
36,449

-
2,117
12,745

-
-
357

891
2,117
65,943

-
(340)
-

(134,561)
(5,360)
-

(6,887)
(3)
(649)

-
(73)
-

(141,448)
(5,776)
(649)

(1,022)

(13,280)

(14,302)

(116)
(25,651)

(1,633)
-

(1,349)
(3,563)

-
-

(2)
(3,505)

-
(3,333)

(53)
(213)

(1,520)
(32,932)

-
-

(1,633)
(3,333)

Net exposure

15,190

(7,723)

115,391

2,619

125,477

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS (CONTINUED)

Russian
rouble

US dollar

Euro

Other

Total

7,575
3,530
-
-

79,484
13,815
-
-

97,254
7,487
1,172
-

23,525

15,297

1,841

-
-
10,346

308
-
18,116

-
2,920
19,544

-
-
-
13

923

-
-
295

184,313
24,832
1,172
13

41,586

308
2,920
48,301

At 31 December 2016

Financial assets

Non-current

Long-term loans receivable
Trade and other receivables
Commodity derivatives
Other

Current

Trade and other receivables
Current portion

of long-term loans receivable

Commodity derivatives
Cash and cash equivalents

Financial liabilities

Non-current

Long-term debt
Commodity derivatives

Current

Current portion of long-term debt
Trade and other payables
Commodity derivatives

(27,532)
(23,593)
-

(27,937)
(2,319)
-

-
-

(154,915)
-

(6,381)
(1,517)

-
(2,064)
(2,754)

-
-

(161,296)
(1,517)

-
(136)
-

(55,469)
(28,112)
(2,754)

Net exposure

(6,149)

(58,151)

117,502

1,095

54,297

The Group chooses to provide information about market risk and potential exposure to hypothetical loss from its
use of financial instruments through sensitivity analysis disclosures in accordance with IFRS requirements.

The sensitivity analysis depicted in the table below reflects the hypothetical loss that would occur assuming a
ten percent increase in exchange rates and no changes in the portfolio of instruments and other variables at
31 December 2017 and 2016, respectively:

Effect on profit before income tax

Increase in exchange rate

2017

2016

Year ended 31 December:

RUB / USD
RUB / EUR

10%
10%

(772)
11,539

(5,815)
11,750

The effect of a corresponding ten percent decrease in exchange rate is approximately equal and opposite.

(b) Commodity price risk

The Group’s overall commercial trading strategy in natural gas and liquid hydrocarbons is centrally managed.
Changes in commodity prices could negatively or positively affect the Group’s results of operations. The Group
manages the exposure to commodity price risk by optimizing its core activities to achieve stable price margins.

Natural gas supplies on the Russian domestic market. As an independent natural gas producer, the Group is not
subject to the government’s regulation of natural gas prices, except for those volumes sold to residential customers.
Nevertheless, the Group’s prices for natural gas sold are strongly influenced by the prices regulated by the
governmental agency of the Russian Federation that carries out state regulation of prices and tariffs for goods and
services of natural monopolies in energy, utilities and transportation.

There were no changes in regulated wholesale natural gas prices on the domestic market (excluding residential
customers) since 1 January 2016 until 30 June 2017. From 1 July 2017, regulated wholesale natural gas prices were
increased by 3.9 percent.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS (CONTINUED)

Management believes it has limited downside commodity price risk for natural gas in the Russian Federation and
does not use commodity derivative instruments for trading purposes. The Group’s natural gas purchase and sales
contracts in the domestic market are entered to meet supply requirements to fulfil contract obligations or for own
consumption and are not within the scope of IAS 39, Financial instruments: recognition and measurement.
However, to effectively manage the margins achieved through its natural gas trading activities, management has
established targets for volumes sold to wholesale traders and end-customers.

LNG supplies on international markets. In 2017, the Group sold liquefied natural gas purchased from its joint
venture Yamal LNG on international markets under short-term contracts at prices based on benchmark reference
natural gas prices at the major natural gas hubs. These Group’s purchase and sales contracts are entered to meet
supply requirements to fulfil contract obligations and are not within the scope of IAS 39, Financial instruments:
recognition and measurement.

LNG regasification activity in Poland. The Group purchases LNG in Poland at prices depending on natural gas
prices quoted in Poland and sells regasified LNG as natural gas on the Polish market based on the prices regulated
by the Energy Regulatory Office through Blue Gaz Sp. z o.o., the Group’s wholly owned subsidiary. These
purchase and sales contracts are entered by the Group to meet supply requirements and are not within the scope of
IAS 39, Financial instruments: recognition and measurement.

Natural gas trading activities on the European and other foreign markets. The Group purchases and sells natural
gas on the European and other foreign markets under long-term and short-term supply contracts, as well as
purchases and sells different derivative instruments based on formulas with reference to benchmark natural gas
prices quoted for the North-Western European natural gas hubs, crude oil and oil products prices and/or a
combination thereof. Therefore, the Group’s results from natural gas foreign trading and derivative instruments
foreign trading are subject to commodity price volatility based on fluctuations or changes in the respective
benchmark reference prices.

Natural gas foreign
instruments are executed by
Novatek Gas & Power GmbH, the Group’s wholly owned subsidiary, and are managed within the Group’s
integrated trading function.

trading activities and respective foreign derivative

Liquid hydrocarbons supplies. The Group sells its crude oil, stable gas condensate and gas condensate refined
products under spot contracts. Naphtha and stable gas condensate volumes sold to the Asian-Pacific Region,
European and North American markets are primarily based on benchmark reference crude oil prices of Brent IPE
and Dubai and/or naphtha prices, mainly of Naphtha Japan and Naphtha CIF NWE or a combination thereof, plus a
margin or discount, depending on current market situation. Other gas condensate refined products volumes sold
mainly to the European market are based on benchmark reference jet fuel prices of Jet CIF NWE and gasoil prices
of Gasoil 0.1 percent CIF NWE plus a margin or discount, depending on current market situation. Crude oil sold
internationally is based on benchmark reference crude oil prices of Brent dated, or Dubai, plus a premium or a
discount, and on a transaction-by-transaction basis or based on benchmark reference crude oil prices of Brent and
Urals or a combination thereof for volumes sold domestically.

As a result, the Group’s revenues from the sales of liquid hydrocarbons are subject to fluctuations in the crude oil
and gas condensate refined products benchmark reference prices. The Group’s liquid hydrocarbons purchase and
sales contracts are entered to meet supply requirements to fulfil contract obligations or for own consumption and
are not within the scope of IAS 39, Financial instruments: recognition and measurement.

The Group is subject to interest rate risk on financial liabilities with variable interest rates. Changes in interest rates
impact primarily debt by changing either their fair value (fixed rate debt) or their future cash flows (variable rate
debt). To mitigate this risk, the Group’s treasury function performs periodic analysis of the current interest rate
environment and depending on that analysis management makes decisions whether it would be more beneficial to
obtain financing on a fixed-rate or variable-rate basis. In cases where the change in the current market fixed or
variable interest rates is considered significant management may consider refinancing a particular debt on more
favorable interest rate terms.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS (CONTINUED)

The interest rate profiles of the Group’s interest-bearing financial instruments were as follows:

At fixed rate
At variable rate

Total debt

At 31 December 2017

At 31 December 2016

RR million

Percent

RR million

Percent

141,448
14,302

91%
9%

161,323
55,442

74%
26%

155,750

100%

216,765

100%

The Group centralizes the cash requirements and surpluses of controlled subsidiaries and the majority of their
external financing requirements, and applies, on its consolidated net debt position, a funding policy to optimize its
financing costs and manage the impact of interest rate changes on its financial results in line with market
conditions. In this way, the Group is able to ensure that the balance between the floating rate portion of its debt and
its cash surpluses has a low level of exposure to any change in interest rates over the short term. This policy makes
it possible to significantly limit the Group's sensitivity to interest rate volatility.

The Group’s financial results are sensitive to changes in interest rates on the floating rate portion of the Group’s
debt portfolio. If the interest rates applicable to floating rate debt were to increase by 100 basis points (one percent)
at the reporting dates, assuming all other variables remain constant, it is estimated that the Group’s profit before
taxation would decrease by the amounts shown below:

Effect on profit before income tax

Increase by 100 basis points

Year ended 31 December:

2017

2016

143

554

The effect of a corresponding 100 basis points decrease in interest rate is approximately equal and opposite.

The Group is examining various ways to manage its cash flow interest rate risk by using a combination of floating
and fixed interest rates. No swaps or other similar instruments were in place at 31 December 2017 and 2016, or
during the years then ended.

Credit risk. Credit risk refers to the risk exposure that a potential financial loss to the Group may occur if a
counterparty defaults on its contractual obligations.

Credit risk is managed on a Group level and arises from cash and cash equivalents, including short-term deposits
with banks, as well as credit exposures to customers, including outstanding trade receivables and committed
transactions. Cash and cash equivalents are deposited only with banks that are considered by the Group during the
whole deposit period to have minimal risk of default.

The Group’s trade and other receivables consist of a large number of customers, spread across diverse industries
and geographical areas. The Group has developed standard credit payment terms and constantly monitors the status
of trade and other receivables and the creditworthiness of the customers.

Most of the Group’s international natural gas and liquid hydrocarbons sales are made to customers with
independent external ratings; however, if the customer has a credit rating below BBB-, the Group requires the
collateral for the trade receivable to be in the form of letters of credit from banks with an investment grade rating.
Most of domestic sales of liquid hydrocarbons are made on a 100 percent prepayment basis.

As a result of the domestic regional natural gas trading activities, the Group is exposed to the risk of payment
defaults of small and medium-sized industrial users and individuals. To minimize credit risk the Group monitors
the recoverability of these debtors by analyzing ageing of receivables by type of customers and their respective
prior payment history.

The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the
consolidated statement of financial position.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS (CONTINUED)

The table below highlights the Group’s trade and other receivables to published credit ratings of its counterparties
and/or their parent companies:

Moody’s, Fitch and/or Standard & Poor’s

At 31 December 2017 At 31 December 2016

Investment grade rating
Non-investment grade rating
No external rating

Total trade and other receivables

14,676
12,661
17,166

44,503

12,913
5,062
23,611

41,586

The table below highlights the Group’s cash and cash equivalents balances to published credit ratings of its banks
and/or their parent companies:

Moody’s, Fitch and/or Standard & Poor’s

At 31 December 2017 At 31 December 2016

Investment grade rating
Non-investment grade rating
No external rating

Total cash and cash equivalents

49,857
15,916
170

65,943

38,087
10,194
20

48,301

Investment grade ratings classification referred to as Aaa to Baa3 for Moody’s Investors Service, and as AAA to
BBB- for Fitch Ratings and Standard & Poor’s.

In addition, the Group provides long-term loans to its joint ventures for development, construction and acquisitions
of oil and gas assets. Required amount of loans and their maturity schedules are based on the budgets and strategic
plans approved by the shareholders of the joint ventures.

Liquidity risk. Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall
due. The Group’s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its
liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking
damage to the Group’s reputation. In managing its liquidity risk, the Group maintains adequate cash reserves and
debt facilities, continuously monitors forecast and actual cash flows and matches the maturity profiles of financial
assets and liabilities.

The Group prepares various financial plans (monthly, quarterly and annually) which ensures that the Group has
sufficient cash on demand to meet expected operational expenses, financial obligations and investing activities for a
period of 30 days or more. The Group has entered into a number of short-term credit facilities. Such credit lines and
overdraft facilities can be drawn down to meet short-term financing needs. To fund cash requirements of a more
permanent nature, the Group will normally raise long-term debt in available international and domestic markets.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS (CONTINUED)

The following tables summarize the maturity profile of the Group’s financial liabilities, except of natural gas
derivative contracts, based on contractual undiscounted payments, including interest payments:

At 31 December 2017

Debt at fixed rate

Principal
Interest

Debt at variable rate

Principal
Interest

Lease liabilities
Trade and other payables
Dividends payable to

non-controlling interest

Less than
1 year

Between
1 and 2 years

Between
2 and 5 years

More than
5 years

Total

-
7,272

14,314
168
1,606
32,932

1,633

8,890
7,272

-
-
1,494
-

107,061
16,655

32,055
6,163

148,006
37,362

-
-
4,393
-

-
-
937
-

14,314
168
8,430
32,932

1,633

Total financial liabilities

57,925

17,656

128,109

39,155

242,845

At 31 December 2016

Debt at fixed rate

Principal
Interest

Debt at variable rate

Principal
Interest

Trade and other payables

14,000
8,179

41,532
866
28,112

-
7,636

13,998
144
-

56,358
20,823

98,633
10,841

168,991
47,479

-
-
-

55,530
1,010
28,112

Total financial liabilities

92,689

21,778

77,181

109,474

301,122

The following table represents the maturity profile of the Group’s derivative commodity contracts based on
undiscounted cash flows:

At 31 December 2017

Cash inflow
Cash outflow

Net cash flows

At 31 December 2016

Cash inflow
Cash outflow

Net cash flows

Less than
1 year

Between
1 and 2 years

Between
2 and 5 years

More than
5 years

45,120
(46,422)

29,028
(28,182)

54,785
(54,572)

(1,302)

846

213

-
-

Total

128,933
(129,176)

(243)

39,310
(39,144)

25,336
(25,871)

57,713
(57,570)

13,704
(13,655)

136,063
(136,240)

166

(535)

143

(177)

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS (CONTINUED)

Reconciliation of liabilities arising from financing activities. The movements in the Group`s liabilities arising
from financing activities for the year ended 31 December 2017 are as follows:

At 31 December 2016

At 1 January 2017(*)

Cash flows

Non-cash movements

Non-cash additions
Interest accrued
Foreign exchange movements

At 31 December 2017

Long-term debt and
interest payables

Long-term lease
liabilities

218,586

(63,144)

-
10,235
(8,706)

156,971

256

(567)

7,623
119
(135)

7,296

Total

218,586

218,842

(63,711)

7,623
10,354
(8,841)

164,267

(*) – effect of initial application of IFRS 16, Leases, recognized at 1 January 2017 (see Note 3).

Capital management. The primary objectives of the Group’s capital management policy are to ensure a strong
capital base to fund and sustain its business operations through prudent investment decisions and to maintain
investor, market and creditor confidence to support its business activities.

Prior to 2015, the Group had investment grade credit ratings of Baa3 by Moody’s Investors Service, BBB- by Fitch
Ratings, and BBB- by Standard & Poor’s. In February 2015, following the decrease of the sovereign credit rating
of the Russian Federation by both Standard & Poor’s and Moody’s Investors Service, the Group’s investment grade
credit rating was also downgraded to noninvestment level BB+ and Ba1, respectively. In November 2016, the
Group’s credit rating was upgraded to investment level BBB- by Standard & Poor’s. In December 2017, the
Group’s credit rating was upgraded to investment level BBB by Fitch Ratings. In January 2018, the Group’s credit
rating was upgraded to investment level Baa3 by Moody’s Investors Service. The Group has established certain
financial targets and coverage ratios that it monitors on a quarterly and annual basis to maintain its credit ratings.

The Group manages its capital on a corporate-wide basis to ensure adequate funding to sufficiently meet the
Group’s operational requirements. The majority of external debts raised to finance NOVATEK’s wholly owned
subsidiaries are centralized at the parent level, and financing to Group entities is facilitated through inter-company
loan arrangements or additional contributions to share capital.

The Group has a stated dividend policy that distributes not less than 30 percent of the Group’s consolidated net
profit determined according to IFRS, adjusted for one-off profits (losses). The dividend payment for a specific year
is determined after taking into consideration future earnings, capital expenditure requirements, future business
opportunities and the Group’s current financial position. Dividends are recommended by the Board of Directors of
NOVATEK and approved by the NOVATEK’s shareholders.

The Group defines the term “capital” as equity attributable to PAO NOVATEK shareholders plus net debt (total
debt less cash and cash equivalents). There were no changes to the Group’s approach to capital management during
2017. At 31 December 2017 and 2016, the Group’s capital totaled RR 847,646 million and RR 816,814 million,
respectively.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

CONTINGENCIES AND COMMITMENTS

Operating environment. The Russian Federation continues to display some characteristics of an emerging market.
These characteristics include, but are not limited to, the existence of a currency that is in practice not convertible in
most countries outside of the Russian Federation, and relatively high inflation. In addition, the Russian economy is
particularly sensitive to world oil and gas prices; therefore, significant prolonged declines in world oil prices have a
negative impact on the Russian economy. The tax, currency and customs legislation is subject to varying
interpretations, frequent changes and other legal and fiscal impediments contribute to the challenges faced by
entities currently operating in the Russian Federation. The future economic direction of the Russian Federation is
largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the
Government, together with tax, legal, regulatory, and political developments.

The Group’s business operations are primarily located in the Russian Federation and are thus exposed to the
economic and financial markets of the Russian Federation.

Developments in Ukraine during 2014 and the subsequent negative reaction of the world community have had and
may continue to have a negative impact on the Russian economy, including difficulties in obtaining international
funding, devaluation of national currency and high inflation. These and other events, in case of escalation, may
have a significant negative impact on the operating environment in the Russian Federation.

Sectoral sanctions imposed by the U.S. government. On 16 July 2014, the Office of Foreign Assets Control
(OFAC) of the U.S. Treasury included PAO NOVATEK on the Sectoral Sanctions Identification List (the “List”),
which prohibits U.S. persons or persons within the United States from providing new financing to the Group for
longer than 60 days (prior to 28 November 2017, this restriction applied to new financing with a maturity of more
than 90 days). Whereas all other transactions, including financial, carried out by U.S. persons or within the United
States with the Group are permitted. The inclusion on the List has not impacted the Group’s business activities, in
any jurisdiction, nor does it affect the Group’s assets and debt.

Management has reviewed the Group’s capital expenditure programs and existing debt portfolio and has concluded
that the Group has sufficient liquidity, through internally generated (operating) cash flows, to adequately fund its
core oil and gas business operations including finance of planned capital expenditure programs of its subsidiaries,
as well as to repay and service all Group’s short-term and long-term debt existing at the current reporting date and,
therefore, inclusion on the List does not adversely impact the Group’s operational activities.

The Group together with its foreign partners currently raises necessary financing for our joint ventures from
non-US debt markets and lenders.

Contractual commitments. At 31 December 2017, the Group had contractual capital expenditures commitments
aggregating approximately RR 49 billion (at 31 December 2016: RR 13 billion) mainly for construction of future
LNG projects (through 2022) and for development at the Yarudeyskoye (through 2018), the East-Tarkosalinskoye
(through 2019), the Yurkharovskoye (through 2019), the North-Russkoye (through 2019) and the West-
Yaroyakhinskoye (through 2018) fields all in accordance with duly signed agreements.

In September 2016, the Group and Eni S.p.A. (hereinafter referred to as the “Concessionaries”) formed a joint
operation with a 50 percent participation interest held by each Concessionary under a Concession Contract with the
State of Montenegro for the exploration and production of hydrocarbons on four offshore blocks located in the
Adriatic Sea. The Group’s commitments with regard to this joint operation relate to performance obligations of the
Concessionaries to conduct mandatory work program exploration activities as stipulated by the Concession
Contract. The maximum amount to be paid to the State of Montenegro by the Group in case of non-performance
during the first exploration period of up to four years ending in 2020 is EUR 42.5 million. The outflow of resources
embodying economic benefits required to settle this contingent liability is not probable; therefore, no provision for
this liability was recognized in the consolidated financial statements.

The Group has entered into a number of agreements, maturing after the twelve months from the reporting date,
relating to time chartering of marine tankers with service terms up to six years for transportation of liquid
hydrocarbons. At 31 December 2017, the Group’s future minimum payments under the time charter agreements for
which provision of the services has not yet commenced amounted to RR 2.7 billion (at 31 December 2016: RR 11.5
billion).

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

CONTINGENCIES AND COMMITMENTS (CONTINUED)

Non-financial guarantees. The aggregated amount of non-financial guarantees in respect of the Yamal LNG
project issued by the Group to a number of third parties (the Ministry of Finance of the Russian Federation, Russian
and foreign banks, LNG-vessels owners, LNG-terminal owners) in favor of the Group’s joint venture OAO Yamal
LNG and its subsidiary totaled USD 3.0 billion and EUR 6.6 billion at 31 December 2017 (at 31 December 2016:
USD 3.0 billion and EUR 3.1 billion). These non-financial guarantees have various terms depending mostly on the
successful project completion (finalization of the LNG plant construction and achievement of its full production
capacity). For certain factors as stipulated in the project financing agreements, the Group plans to issue in the future
non-financial guarantees covering the project post-completion period.

With regard to the Group’s obligations under the non-financial guarantee issued to the banks providing project
financing to Yamal LNG, the State Corporation “Bank for Development and Foreign Economic Affairs
(Vnesheconombank)” issued in favor of the banks a counter guarantee for the amount not exceeding the equivalent
of USD 3 billion.

The aggregated amount of non-financial guarantees issued by the Group to a Russian bank in favor of the Group’s
joint venture Cryogas-Vysotsk totaled EUR 49 million at 31 December 2017.

The outflow of resources embodying economic benefits required to settle the obligations under these non-financial
guarantees issued by the Group is not probable; therefore, no provision for these liabilities was recognized in the
consolidated financial statements.

Taxation. Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which
can occur frequently. Correspondingly, the relevant regional and federal tax authorities may periodically challenge
management’s interpretation of such taxation legislation as applied to the Group’s transactions and activities.
Furthermore, events within the Russian Federation suggest that the tax authorities may be taking a more assertive
position in its interpretation of the legislation and assessments, and it is possible that transactions and activities that
have not been challenged in the past may be challenged. As a result, significant additional taxes, penalties and
interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three
calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods.

Management believes that its interpretation of the relevant legislation is appropriate and that it is probable that the
Group’s tax, currency and customs positions will be sustained. Where management believes it is probable that a
position cannot be sustained, an appropriate amount has been accrued in the consolidated financial statements.

Mineral licenses. The Group is subject to periodic reviews of its activities by governmental authorities with respect
to the requirements of its mineral licenses. Management cooperates with governmental authorities to agree on
remedial actions necessary to resolve any findings resulting from these reviews. Failure to comply with the terms of
a license could result in fines, penalties or license limitation, suspension or revocation. The Group’s management
believes any issues of non-compliance will be resolved through negotiations or corrective actions without any
material adverse effect on the Group’s financial position, results of operations or cash flows.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

CONTINGENCIES AND COMMITMENTS (CONTINUED)

The majority of the Group’s oil and gas fields and license areas are located in the YNAO. Licenses are issued by
the Federal Agency for the Use of Natural Resources of the Russian Federation and the Group pays unified natural
resources production tax to produce crude oil, natural gas and unstable gas condensate from these fields and
contributions for exploration of license areas. The principal licenses of the Group and its joint ventures and their
expiry dates are:

Field

License holder

License expiry date

Salmanovskoye (Utrenneye)
Yurkharovskoye
Upper-Tiuteyskoye

and West-Seyakhinskoye

West-Yurkharovskoye
East-Tarkosalinskoye
North-Russkoye
Kharbeyskoye
Urengoyskoye (within the
Olimpiyskiy license area)

Khancheyskoye
East-Tazovskoye
Dorogovskoye
North-Khancheyskoye +
Khadyryakhinskoye
Dobrovolskoye (within the
Olimpiyskiy license area)

Geofizicheskoye
Gydanskoye
Yarudeyskoye
West-Yaroyakhinskoye
South-Khadyryakhinskoye
Malo-Yamalskoye

South-Tambeyskoye
Urengoyskoye (within the
Samburgskiy and Yevo-
Yakhinskiy license areas)

Yaro-Yakhinskoye
Samburgskoye
North-Chaselskoye
Yevo-Yakhinskoye
North-Urengoyskoye
Termokarstovoye

(*) – subsidiary of OOO SeverEnergia

Subsidiaries:
OOO Arctic LNG 2
OOO NOVATEK-Yurkharovneftegas

OOO NOVATEK-Yurkharovneftegas
OOO NOVATEK-Yurkharovneftegas
OOO NOVATEK-Tarkosaleneftegas
OOO NOVATEK-Tarkosaleneftegas
OOO NOVATEK-Tarkosaleneftegas

OOO NOVATEK-Tarkosaleneftegas
OOO NOVATEK-Tarkosaleneftegas
OOO NOVATEK-Tarkosaleneftegas
OOO NOVATEK-Tarkosaleneftegas

OOO NOVATEK-Tarkosaleneftegas

OOO NOVATEK-Tarkosaleneftegas
OOO Arctic LNG 1
OOO Arctic LNG 1
OOO Yargeo
ООО Severneft-Urengoy
АО South-Khadyryakhinskoye
OOO NOVATEK-Yarsaleneftegas

Joint ventures:
OAO Yamal LNG

AO Arcticgas(*)
AO Arcticgas
AO Arcticgas
AO Arcticgas
AO Arcticgas
ZAO Nortgas
ZAO Terneftegas

2031
2034

2044
2029
2043
2031
2036

2059
2044
2033
2033

2029

2059
2034
2044
2029
2025
2031
2034

2045

2034
2034
2034
Life of field
2034
2038
2097

Management believes the Group has the right to extend its licenses beyond the initial expiration date under the
existing legislation and intends to exercise this right on all of its fields.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

CONTINGENCIES AND COMMITMENTS (CONTINUED)

Environmental liabilities. The Group operates in the oil and gas industry in the Russian Federation and abroad.
The enforcement of environmental regulation in the Russian Federation and other countries of operation is evolving
and the enforcement posture of government authorities is continually being reconsidered. The Group periodically
evaluates its obligations under environmental regulations and, as obligations are determined, they are recognized as
an expense immediately if no future benefit is discernible. Potential liabilities arising as a result of a change in
interpretation of existing regulations, civil litigation or changes in legislation cannot be estimated. Under existing
legislation, management believes that there are no probable liabilities, which will have a material adverse effect on
the Group’s financial position, results of operations or cash flows.

Legal contingencies. The Group is subject of, or party to a number of court proceedings (both as a plaintiff and a
defendant) arising in the ordinary course of business. In the opinion of management, there are no current legal
proceedings or other claims outstanding, which could have a material effect on the result of operations or financial
position of the Group and which have not been accrued or disclosed in the consolidated financial statements.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

PRINCIPAL SUBSIDIARIES AND JOINT VENTURES

The principal subsidiaries and joint ventures of the Group and respective effective ownership in the ordinary share
capital at 31 December 2017 and 2016 are set out below:

Ownership percent
at 31 December:
2016

2017

Country of
incorporation

Principal activities

Subsidiaries:

OOO NOVATEK-Yurkharovneftegas

OOO NOVATEK-Tarkosaleneftegas

OOO Yargeo

OOO Arctic LNG 1

OOO Arctic LNG 2

OOO Arctic LNG 3

OOO NOVATEK-Murmansk
(formerly OOO Kola Yard)

OOO NOVATEK-Purovsky ZPK

OOO NOVATEK-Transervice

OOO NOVATEK-Ust-Luga

OOO NOVATEK-AZK

OOO NOVATEK-Chelyabinsk

OOO NOVATEK-Kostroma

OOO NOVATEK-Perm

OOO NOVATEK Moscow Region

Novatek Gas & Power GmbH

Novatek Gas & Power Asia PTE. Ltd

Novatek Polska Sp. z o.o.

Blue gaz Sp. z o.o.

Joint ventures:

OAO Yamal LNG

OOO Yamal Development

OOO SeverEnergia

(includes a producing subsidiary,
AO Articgas, see Note 7)

ZAO Nortgas

ZAO Terneftegas

ООО Cryogas-Vysotsk

100

50.1

53.3

Russia

Switzerland

Singapore

Exploration and production

Exploration, development
and production

Exploration and development

Exploration and development,
construction of LNG plant

Exploration and development

Construction of
large-scale offshore structures

Gas Condensate
Processing Plant

Transportation services

Fractionation and
Transshipment Complex

Wholesale and retail trading

Trading and marketing

Poland

Trading and marketing

Poland

Russia

LNG regasification,
trading and marketing

Exploration and development,
production of LNG

Holding company

Exploration and production

Construction of
medium-scale LNG plant

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

RELATED PARTY TRANSACTIONS

Transactions between NOVATEK and its subsidiaries, which are related parties of NOVATEK, have been
eliminated on consolidation and are not disclosed in this Note.

For the purposes of these consolidated financial statements, parties are generally considered to be related if one
party has the ability to control the other party, is under common control, or can exercise significant influence or
joint control over the other party in making financial and operational decisions. Management has used reasonable
judgments in considering each possible related party relationship with attention directed to the substance of the
relationship, not merely the legal form. Related parties may enter into transactions, which unrelated parties might
not, and transactions between related parties may not be affected on the same terms, conditions and amounts as
transactions between unrelated parties.

Related parties – joint ventures

Transactions

Purchases of natural gas and liquid hydrocarbons
Interest income on loans issued
Dividends received
Other revenues
Materials, services and other

Year ended 31 December:

2017

2016

(137,784)
13,640
2,383
1,481
(193)

(112,498)
17,524
-
844
(91)

Related parties – joint ventures

At 31 December 2017 At 31 December 2016

Balances

Long-term loans receivable
Interest on long-term loans receivable
Trade payables and accrued liabilities
Current portion of long-term loans receivable
Trade receivables

182,342
29,130
19,785
891
246

184,313
24,496
15,440
308
423

The terms and conditions of the loans receivable from the joint ventures are disclosed in Note 8.

The Group issued non-financial guarantees in favor of its joint ventures as described in Note 28.

Related parties – parties under control of key management personnel

Year ended 31 December:

2017

2016

Transactions

Liquid hydrocarbons transportation by rail
Purchases of construction services

(capitalized within property, plant and equipment)

Materials, services and other

(9,496)

(9,405)

(661)
(16)

(343)
(72)

Related parties – parties under control of key management personnel

At 31 December 2017 At 31 December 2016

Balances

Prepayments and other current assets
Trade payables and accrued liabilities
Advances for construction

565
504
195

478
270
23

Transactions with related parties also included loans, which were provided to one of the Group’s subsidiaries by its
non-controlling shareholder (see Note 14).

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

RELATED PARTY TRANSACTIONS (CONTINUED)

Key management personnel compensation. The Group paid to key management personnel (members of the Board
of Directors and the Management Committee) short-term compensation, including salary, bonuses and excluding
dividends the following amounts:

Related parties – members of the key management personnel

Board of Directors
Management Committee

Total compensation

Year ended 31 December:

2017

2016

133
2,138

2,271

132
1,956

2,088

Such amounts include personal income tax and are net of payments to non-budget funds made by the employer.
Some members of key management personnel have direct and/or indirect interests in the Group and receive
dividends under general conditions based on their respective shareholdings.

SEGMENT INFORMATION

The Group’s activities are considered by the chief operating decision maker (hereinafter referred to as “CODM”,
represented by the Management Committee of NOVATEK) to comprise one operating segment: “exploration,
production and marketing”.

Starting from 2017, the Group’s management reviews financial information on the results of operations of the
reporting segment prepared based on IFRS. Previously, the Group’s internal reporting reviewed by CODM was
prepared in accordance with Regulations on Accounting and Reporting of the Russian Federation (“RAR”).

The CODM assesses reporting segment performance based on profit comprising among others revenues,
depreciation, depletion and amortization, interest income and expense, income tax and other items as presented in
the Group’s consolidated statement of income. The CODM also reviews capital expenditures of the reporting
segment for the period defined as additions to property, plant and equipment (see Note 6).

Geographical information. The Group operates in the following geographical areas:

Russian Federation – exploration, development, production and processing of hydrocarbons, and sales of
natural gas, stable gas condensate, gas condensate refined products, liquefied petroleum gas, crude oil and gas
condensate refined products;

Countries of Europe (primarily, the Netherlands, Belgium, Sweden, Denmark, Finland, the United Kingdom,
Italy, Poland and Montenegro) – exploration activities within joint operations, sales of naphtha, stable gas
condensate, gas condensate refined products, crude oil, liquefied petroleum gas and natural gas;

Countries of the Asia-Pacific region (primarily, China, Taiwan, South Korea, Japan and Singapore) – sales of
naphtha, stable gas condensate, gas condensate refined products and crude oil;

Countries of North America (primarily, the USA) – sales of naphtha.

Countries of the Middle East (primarily, Oman) – sales of naphtha and crude oil.

(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

SEGMENT INFORMATION (CONTINUED)

Geographical information for the years ended 31 December 2017 and 2016 is as follows:

Russia

Europe
Asia-Pacific region
North America
Middle East
Less: export duties

Total outside Russia

Total oil and gas sales

Year ended 31 December:

2017

2016

351,318

152,439
77,204
25,962
-
(27,104)

228,501

579,819

315,856

132,854
84,936
26,052
7,416
(33,257)

218,001

533,857

Revenues pertaining to geographical information are prepared based on the products geographical destination. For
products transported by tankers, the geography is determined based on the location of the port of
discharge/transshipment designated by the Group’s customer. Substantially all of the Group’s operating assets are
located in the Russian Federation.

Major customers. For the years ended 31 December 2017 and 2016, the Group had one major customer to whom
individual revenue exceeded 10 percent of total external revenues, which represented 19 percent (RR 110.3 billion)
and 18 percent (RR 97.7 billion) of total external revenues, respectively. The Group’s major customer resides
within the Russian Federation.

SUBSEQUENT EVENTS

In February 2018, the Group won an auction held by ALROSA group to purchase 100 percent participation interest
equity stakes in Maretiom Investments Limited and Velarion Investments Limited for RR 30.3 billion, of which
RR 21 billion were paid in January 2018 as the auction participation deposit. These companies are the owners of
100 percent participation interests in AO Geotransgas and OOO Urengoyskaya gasovaya companiya, the holders of
the licenses for exploration and production of hydrocarbons within the Beregovoy and Ust-Yamsoveyskiy license
areas located in YNAO, respectively. The transaction is expected to be closed in the nearest future.

In January 2018, the Group acquired a 100 percent participation interest equity stake in OOO Chernichnoye for
RR 616 million. OOO Chernichnoye is a holder of the license for exploration and production of hydrocarbons
within the Chernichniy license area located in YNAO.

In January 2018, the Group, Total S.A. and Eni S.p.A., through their subsidiaries NOVATEK Lebanon SAL,
Total E&P Liban SAL and Eni Lebanon B.V. (hereinafter referred to as the “Right holders”), entered into
Exploration and Production Agreements for Petroleum Activities with the Lebanese Republic for the exploration
and production of hydrocarbons on two offshore blocks located in the Eastern Mediterranean (hereinafter referred
to as the “Exploration and Production Agreements”). The Exploration and Production Agreements stipulate that the
Group is assigned a 20 percent participating interest and the Right holders are committed to undertake specified
joint upstream activities during the exploration phase within five years. The Group considers that the Exploration
and Production Agreements constitute a joint arrangement classified as a joint operation in accordance with
IFRS 11, Joint Arrangements.

PAO NOVATEK
Notes to the Consolidated Financial Statements
(in Russian roubles [tabular amounts in millions], unless otherwise stated)

NEW ACCOUNTING PRONOUNCEMENTS

The following new standards and interpretations have been issued that are mandatory for the annual periods
beginning on or after 1 January 2018, and which the Group has not early adopted:

Amendments to IFRS 10, Consolidated financial statements, and IAS 28, Investments in associates and joint
ventures (issued in September 2014, in November 2015 the effective date was postponed indefinitely). These
amendments address an inconsistency between the requirements in IFRS 10 and those in IAS 28 in dealing with the
sale or contribution of assets between an investor and its associate or joint venture. The amendments stipulate that a
full gain or loss is recognized when a transaction involves a business. A partial gain or loss is recognized when a
transaction involves assets that do not constitute a business, even if these assets are held by a subsidiary. The Group
is considering the implications of these amendments for the Group’s consolidated financial statements, and the
timing of their adoption by the Group.

IFRS 9, Financial Instruments: Classification and Measurement (issued in July 2014 and effective for annual
periods beginning on or after 1 January 2018, early adoption is permitted). The standard introduces new
requirements for classification and measurement of financial instruments, impairment, and hedge accounting. The
Group assesses that the adoption of this standard will not have a material impact on the Group’s consolidated
financial statements.

PAO NOVATEK
Unaudited Supplemental Oil and Gas Disclosures

UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES

The accompanying consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards (“IFRS”). In the absence of specific IFRS guidance for the oil and gas industry, the Group has
reverted to other relevant disclosure standards, mainly US GAAP, that are consistent with norms established for
companies in the oil and gas industry. While not required under IFRS, this section provides unaudited supplemental
information on oil and gas exploration and production activities but excludes disclosures regarding the standardized
measures of discounted cash flows related to oil and gas activities.

The Group’s exploration and production activities are mainly within the Russian Federation; therefore, majority of
the information provided in this section pertains to this country. The Group operates through various oil and gas
production subsidiaries, and also has an interest in oil and gas companies that are accounted for under the equity
method.

Oil and Gas Exploration and Development Costs

The following tables set forth information regarding oil and gas acquisition, exploration and development activities.
The amounts reported as costs incurred include both capitalized costs and costs charged to expense, these costs do
not include LNG liquefaction and transportation operations (amounts in millions of Russian roubles).

Costs incurred in exploration and development activities

Acquisition of unproved properties
Acquisition of proved properties
Exploration costs
Development costs

Total costs incurred in exploration and development activities

The Group’s share in joint ventures’

cost incurred in exploration and development activities

Capitalized costs relating to oil and gas producing activities

Proved and unproved properties
Wells, related equipment and facilities
Support equipment and facilities
Uncompleted wells, related equipment and facilities

Total capitalized costs relating to oil and gas producing activities

Less: accumulated depreciation, depletion and amortization

Year ended 31 December:

2017

2016

1,040
10,594
7,958
16,481

36,073

19,214

1,928
-
4,828
23,550

30,306

71,408

At 31 December 2017 At 31 December 2016

70,327
265,708
105,424
27,312

468,771

(161,083)

57,312
236,137
88,202
30,138

411,789

(119,674)

Net capitalized costs relating to oil and gas producing activities

307,688

292,115

The Group’s share in joint ventures’

capitalized costs relating to oil and gas producing activities

469,475

476,608

PAO NOVATEK
Unaudited Supplemental Oil and Gas Disclosures

UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES (CONTINUED)

Results of Operations for Oil and Gas Producing Activities

The Group’s results of operations for oil and gas producing activities are shown below. The results of operations
for oil and gas producing activities do not include general corporate overhead or its associated tax effects. Income
tax is based on statutory rates. In the following table, revenues from oil and gas sales are comprised of the sale of
hydrocarbons produced by the Group’s subsidiaries and include processing costs, related to processing facilities of
the Group’s subsidiaries as well as transportation expenses to customers (amounts in millions of Russian roubles).

Revenues from oil and gas sales

Lifting costs
Transportation expenses
Taxes other than income tax
Depreciation, depletion and amortization
Exploration expenses

Total production costs

Results of operations for oil and gas

producing activities before income tax

Less: related income tax expenses

Results of operations for oil and gas

producing activities of the Group’s subsidiaries

Share of profit of joint ventures

Year ended 31 December:

2017

2016

279,252

276,037

(14,071)
(73,356)
(48,842)
(31,644)
(1,819)

(14,233)
(76,356)
(43,844)
(32,049)
(2,087)

(169,732)

(168,569)

109,520

(21,904)

87,616

34,969

107,468

(21,494)

85,974

29,821

Total results of operations for oil and gas producing activities

122,585

115,795

Proved Oil and Gas Reserves

The Group’s oil and gas reserves estimation and reporting process involves an annual independent third party
reserve appraisal as well as internal technical appraisals of reserves. The Group maintains its own internal reserve
estimates that are calculated by qualified engineers and technical staff working directly with the oil and gas
properties. The Group’s technical staff periodically updates reserve estimates during the year based on evaluations
of new wells, performance reviews, new technical information and other studies.

The Group estimates its oil and gas reserves in accordance with rules promulgated by the Securities and Exchange
Commission (SEC) for proved reserves.

The oil and gas reserve estimates reported below are determined by the Group’s independent petroleum reservoir
engineers, DeGolyer and MacNaughton (“D&M”). The Group provides D&M annually with engineering,
geological and geophysical data, actual production histories and other information necessary for the reserve
determination. The Group’s and D&M’s technical staffs meet to review and discuss the information provided, and
upon completion of this process, senior management reviews and approves the final reserve estimates issued by
D&M.

The following reserve estimates were prepared using standard geological and engineering methods generally
accepted by the petroleum industry. The method or combination of methods used in the analysis of each reservoir is
tempered by experience with similar reservoirs, stages of development, quality and completeness of basic data, and
production history.

PAO NOVATEK
Unaudited Supplemental Oil and Gas Disclosures

UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES (CONTINUED)

The following information presents the quantities of proved oil and gas reserves and changes thereto as at and for
the years ended 31 December 2017 and 2016.

Extensions of production licenses are assumed to be at the discretion of the Group. Management believes that
proved reserves should include quantities which are expected to be produced after the expiry dates of the Group’s
production licenses. The principal licenses of the Group for exploration and production expire between 2029 and
2059. Legislation of the Russian Federation states that, upon expiration, a license is subject to renewal at the
initiative of the license holder provided that further exploration, appraisal, production or remediation activities are
necessary and provided that the license holder has not violated the terms of the license. Management intends to
extend its licenses for properties expected to produce beyond the license expiry dates.

Proved reserves are defined as the estimated quantities of oil and gas which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing
economic conditions. In some cases, substantial new investment in additional wells and related support facilities
and equipment will be required to recover such proved reserves. Due to the inherent uncertainties and the limited
nature of reservoir data, estimates of underground reserves are subject to change over time as additional
information becomes available.

Proved developed reserves are those reserves which are expected to be recovered through existing wells with
existing equipment and operating methods. Undeveloped reserves are those reserves which are expected to be
recovered as a result of future investments to drill new wells, to re-complete existing wells and/or install facilities
to collect and deliver the production.

Net reserves exclude quantities due to others when produced.

The reserve quantities below include 100 percent of the net proved reserve quantities attributable to the Group’s
consolidated subsidiaries and the Group’s ownership percentage of the net proved reserves quantities of the joint
ventures including volumes of natural gas consumed in hydrocarbons production and development activities.
Production and reserves of the South-Tambeyskoye field of Yamal LNG are reported at 60 percent including an
additional 9.9 percent interest not owned by the Group, since the Group assumes certain economic and operational
risks related to this interest (previously was reported at 50.1 percent). A portion of the Group’s total proved
reserves are classified as either developed non-producing or undeveloped. Of the non-producing reserves, a portion
represents existing wells which are to be returned to production at a future date.

For convenience, reserves estimates are provided both in English and Metric units.

PAO NOVATEK
Unaudited Supplemental Oil and Gas Disclosures

UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES (CONTINUED)

Net proved reserves of natural gas are presented below.

Net proved reserves

Group’s share in
joint ventures

Billions of
cubic feet

Billions
of cubic
meters

Billions of
cubic feet

Billions
of cubic
meters

Total net proved reserves
Billions
of cubic
meters

Billions of
cubic feet

37,241

1,055

26,713

756

63,954

1,811

At 31 December 2015 (1)

Changes attributable to:

Revisions of

previous estimates

Extension and discoveries
Production

789
633
(1,678)

22
18
(48)

1,923
360
(711)

55
10
(20)

2,712
993
(2,389)

77
28
(68)

At 31 December 2016 (1)

36,985

1,047

28,285

801

65,270

1,848

Changes attributable to:

Revisions of

previous estimates

Extension and discoveries
Acquisitions (2)
Production

(76)
1,485
8,117
(1,523)

(2)
42
230
(43)

374
1,154
-
(716)

10
33
-
(20)

298
2,639
8,117
(2,239)

8
75
230
(63)

At 31 December 2017

44,988

1,274

29,097

824

74,085

2,098

Net proved developed reserves (included above)

At 31 December 2015
At 31 December 2016
At 31 December 2017

17,089
14,399
12,685

Net proved undeveloped reserves (included above)

At 31 December 2015
At 31 December 2016
At 31 December 2017

20,152
22,586
32,303

484
407
359

571
640
915

7,995
8,487
12,820

18,718
19,798
16,277

226
240
363

530
561
461

25,084
22,886
25,505

710
647
722

38,870
42,384
48,580

1,101
1,201
1,376

(1) As a result of changes in the presentation of natural gas production and reserves volumes taking into account fuel gas

volumes, and the revision of the Group’s reported share in production and reserves of South-Tambeyskoye field of Yamal
LNG (see above), total net proved natural gas reserves as at 31 December 2016 and 2015 were increased by 3,307 billion of
cubic feet (93 billion cubic meters) and 1,281 billion of cubic feet (36 billion cubic meters), respectively.

(2) In 2017, the Group acquired oil and gas exploration and production licenses for the Upper-Tiuteyskoye, the West-

Seyakhinskoye and the Gydanskoye fields and 100 percent ownership interests in OOO Severneft-Urengoy, AO South-
Khadyryakhinskoye and AO Eurotek, exploration and production license holders of the East-Urengoiskoye+North-
Esetinskoye, the South-Khadyryakhinskoye and the Syskonsyninskoye fields, respectively.

The net proved reserves of natural gas reported in the table above included reserves attributable to a non-controlling
interest in a Group’s subsidiary of 167 billion of cubic feet (five billion cubic meters) and 178 billion of cubic feet
(five billion cubic meters) at 31 December 2017 and 2016, respectively, and reserves attributable to an additional
9.9 percent interest in Yamal LNG not owned by the Group (see above) of 2,386 billion of cubic feet (68 billion
cubic meters) and 2,121 billion of cubic feet (60 billion cubic meters) at 31 December 2017 and 2016, respectively.

PAO NOVATEK
Unaudited Supplemental Oil and Gas Disclosures

UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES (CONTINUED)

Net proved reserves of crude oil, gas condensate and natural gas liquids are presented below.

Net proved reserves
Millions
of barrels

Millions of
metric tons

Group’s share in
joint ventures

Millions
of barrels

Millions of
metric tons

Total net proved reserves
Millions of
metric tons

Millions
of barrels

At 31 December 2015

551

660

1,211

143

Changes attributable to:

Revisions of

previous estimates

Extension and discoveries
Production

At 31 December 2016

(1)

Changes attributable to:

Revisions of

previous estimates

Extension and discoveries
Acquisitions (2)
Production

At 31 December 2017

116
15
(59)

623

33
61
40
(55)

702

Net proved developed reserves (included above)

At 31 December 2015
At 31 December 2016
At 31 December 2017

305
275
307

Net proved undeveloped reserves (included above)

At 31 December 2015
At 31 December 2016
At 31 December 2017

246
348
395

11
1
(7)

4
8
5
(7)

38
33
38

30
40
45

59
18
(46)

691

(12)
62
-
(43)

698

302
326
359

358
365
339

8
3
(5)

(2)
7
-
(5)

34
37
41

41
44
40

175
33
(105)

19
4
(12)

1,314

154

21
123
40
(98)

2
15
5
(12)

1,400

164

607
601
666

604
713
734

72
70
79

71
84
85

(1) As a result of the revision of the Group’s reported share in production and reserves of South-Tambeyskoye field of Yamal
LNG (see above), total net proved crude oil, gas condensate and natural gas liquids reserves as at 31 December 2016 were
increased by 14 million of barrels (two million metric tons).

(2) In 2017, the Group acquired oil and gas exploration and production licenses for the Upper-Tiuteyskoye, the West-

The net proved reserves of crude oil, gas condensate and natural gas liquids reported in the table above included
reserves attributable to a non-controlling interest in a Group’s subsidiary of 65 million of barrels (eight million
metric tons) and 66 million of barrels (nine million metric tons) at 31 December 2017 and 2016, respectively, and
reserves attributable to an additional 9.9 percent interest in Yamal LNG not owned by the Group (see above) of
17 million of barrels (two million metric tons) and 14 million of barrels (two million metric tons) at 31 December
2017 and 2016, respectively.

PAO NOVATEK
Contact Information

PAO NOVATEK was incorporated as a joint stock company in accordance with the Russian law and is domiciled
in the Russian Federation.

The Group’s registered office is:

Ulitsa Pobedy 22a
629850 Tarko-Sale
Yamal-Nenets Autonomous Region
Russian Federation

The Group’s office in Moscow is:

Ulitsa Udaltsova 2
119415 Moscow
Russian Federation

Telephone:
Fax:

7 (495) 730-60-00
7 (495) 721-22-53

www.novatek.ru

Transforming into a Global Gas Company

Contact
Information

OFFICE IN TARKO -SALE

GDR PROGRAM ADMINISTRATOR

22-A, Pobedy Street, 629850, Tarko-Sale, Purovsky
district, Yamal-Nenets Autonomous Region, Russia

The Bank of New York Mellon
Depositary Receipts
101 Barclay Street, 22W, New York, NY 10286, USA

OFFICE IN MOSCOW

2, Udaltsova Street, 119415, Moscow, Russia

CENTRAL INFORMATION SERVICE

Tel: +7 495 730-6000
Fax: +7 495 721-2253
E-mail: novatek@novatek.ru

PRESS SERVICE

Tel: +7 495 721-2207
E-mail: press@novatek.ru

INVESTOR RELATIONS

Tel: +7 495 730-6013
Fax: +7 495 730-6000
E-mail: ir@novatek.ru

REGISTRAR

AO “Independent Registrar Company”
8 Ivana Franko Street,
121108, Moscow, Russia

Tel: +7 495 926-8160
Fax: +7 495 926-8178
E-mail: info@nrcreg.ru

New York +1 212 815-4158
London +44 207 163-7512
Moscow +7 495 967-3110

INDEPENDENT AUDITOR

AO PricewaterhouseCoopers Audit
White Square Office Center, Butyrsky Val 10,
125047, Moscow, Russia

Tel: +7 495 967-6000
Fax: +7 495 967-6001

INDEPENDENT RESERVES AUDITOR

DeGolyer and MacNaughton
5001 Spring Valley Road, Suite 800, East Dallas
Texas 75244, USA

Tel: +1 214 368-6391
Fax: +1 214 369-4061
E-mail: degolyer@demac.com

WEBSITE:

www.novatek.ru (Russian version)
www.novatek.ru/eng (English version)

181