PJSC Tatneft Annual Report 2013

Plain-text annual report

EXPLORING NEW HORIZONS ANNUAL REPORT 2013 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS 2013 HAS BEEN A SUCCESSFUL YEAR FOR THE COMPANY IN ALL THE AREAS OF THE ACTIVITIES. THE MAJOR EVENT WAS THE START OF THE SYSTEM OPERATION OF THE CORE PRODUCTION FACILITIES OF THE TANECO REFINING COMPLEX – THE KEY INVESTMENT PROJECT OF THE TATNEFT COMPANY WHICH HAS BEEN REALIZED FROM 2005 YEAR AND OF HIGH SIGNIFICANCE FOR THE WHOLE INDUSTRY ATTAINMENT OF THE REFINING DESIGN CAPACITY BY THE TANECO COMPLEX BECAME A START OF THE NEW QUALITY PHASE OF THE COMPANY DEVELOPMENT IN THE STATUS OF THE FULL-SCALE VERTICALLY INTEGRATED OIL COMPANY. THE ANNUAL REPORT OF OPEN JOINT STOCK COMPANY TATNEFT FOR 2013 WAS PRELIMINARY APPROVED BY THE BORAD OF DIRECTORS. MINUTES NO. 12 DATED MAY 27, 2014 2 CONTENTS Joint Address of R.N. Minnikhanov, President of the Republic of Tatarstan, Chairman of the Board of Directors, and N.U. Maganov, General Director and Chairman of the Management Board of JSC TATNEFT to Shareholders, Investors and Partners Composition of Board of Directors and Management Board Strategic Initiatives and Objectives of the Company 2 4 9 Geography of the Company’s Activity 10 Main Indices of the Company’s Activity by the Results of FY 2012 12 ABOUT THE COMPANY 16 The Company’s Activity Status The Company’s Equity Structure Dividends Policy TATNEFT Group Structure. Main Enterprises The Basic Trends of Oil & Gas Industry Development and Factors Affecting the Competitiveness of the Company PRODUCTION ACTIVITY Oil and Gas Exploration and Production Processing and Sale of Oil and Oil Products Supply of Crude Oil and Oil & Gas Products Petrochemicals Production Thermoelectric Power 22 23 24 26 44 48 50 52 52 85 88 94 96 98 102 104 106 107 112 118 154 156 157 CORPORATE MANAGEMENT Company’s Management System Composition of the JSC TATNEFT Board of Directors in 2013 Composition of the JSC TATNEFT Management Board in 2013 List of Main Issues Reviewed at the Meetings of the Board of Directors in 2013 List of Main Issues Reviewed at the Meetings of the Management Board in 2013 Committees of the Board of Directors Corporate principles of interaction with the shareholders Environmental Activity Information about Compliance with the Code of Corporate Conduct in 2013 Registers of Compulsorily Disclosed Information and Voluntarily Disclosed Information in 2013 54 56 58 Main Corporate Events of 2013 Awards and Nominations of JSC TATNEFT in 2013 60 61 62 FINANCIAL RESULTS Audit Opinion 64 Balance Sheet Financial results of 2013 Essential Aspects of the Accounting Policy and Information Representation in Financial Statements for 2013 Consolidated ﬁ nancial in accordance with international ﬁ nancial reporting standard For the Year Completed December 31, 2013 Notes to consolidated ﬁ nancial statements List of Abbreviations Forecast Comments Annotation to the Report on Sustainable Development and Social Responsibility of JSC TATNEFT for 2013 Corporate Interaction with Shareholders of JSC TATNEFT in 2013 65 The Corporate Responsibility of the Company on the Stock Exchange 66 Ensuring the Insider Information Protection Corporate Management Standards Investment Policy Financial Management Assets Management Corporate Control and Internal Audit Program of Increasing Production Management Efﬁ ciency and Strengthening of JSC TATNEFT Financial and Economic Status for 2008-2015 Energy and Resource Efﬁ ciency Program of JSC TATNEFT for the Period till 2020 Logistics Management Risk Management Information Technologies Management HR Management Social Policy Ensuring Industrial Safety and Labor Protection 67 67 68 70 72 73 74 76 76 78 80 82 83 84 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS JSC TATNEFT The innovative and advanced technologies and equipment widely applied at the Company are of great interest for the industry. Contracts were executed for provision of services and supply of equipment to our partners in Turkmenistan and Kazakhstan. A large amount of work was performed by the Tire Complex enterprises to improve the quality and increase the competitive innovative products output. The factory for production of solid steel cord tires produced more than one million new generation tires for trucks and passenger motor transport. The Company paid special attention in the reporting year to improve the production organization and management. There was a corporate Program developed to improve labor productivity in the whole Company proﬁ le by 2020. Introduction of new equipment and technologies, active application of lean production, methods of process management, effective organization and rationalization of jobsites were deﬁ ned as main factors of the labor efﬁ ciency growth. Successful solving of strategic tasks to stabilize crude oil production and expand the resource base, increase in the value and quality improvement of the assets involved in crude oil production and reﬁ ning, petrochemicals production and thermal power generation ensured TATNEFT’s high appraisal by rating agencies. The Moody’s Rating Agency upgraded the Tatneft Group’s rating to «Baa3» investment grade with “stable” outlook. The Interbrand Agency included TATNEFT’s brand into the TOP 10 most expensive Russian brands. Special attention is paid in the Company to the social aspects, environmental safety, environmental protection and environmental management. The Company ensures high environmental standards at all the production sites. Social programs include support for education, health, culture and sports, as well as improvement of the human settlements. In 2013 we celebrated the 70th anniversary since the beginning of the Tatarstan’s oil ﬁ elds development. It was a milestone event for the whole industry of the Republic. This period witnessed establishment and successful development of the full-scale petrochemical complex, creation of the unique scientiﬁ c and technical potential and accumulation of vast production experience. The oil industry veterans have made invaluable contribution to the petroleum industry development. Today, the result of all this is stable JSC TATNEFT’s development and successful implementation of strategic plans along all the lines of the activities. In 2014, the Company’s staff faces a number of serious ongoing tasks to ensure the stabilization of crude oil production through application of advanced enhanced oil recovery technologies, increasing the volume of horizontal drilling and implementation of the extra-viscous oil ﬁ eld development project. Dear Shareholders and Investors! Thank you for your conﬁ dence vested and fruitful cooperation! We express our sincere appreciation to all our partners and colleagues at the Republican, all-Russia and international levels, as well as to our staff: managers at all the levels, professionals and workers for the successful realization of the production and social programs of the Company! R.N. Minnikhanov President of the Republic of Tatarstan, Chairman of the Board of Directors of JSC TATNEFT Introduction of the innovative equipment and technologies, improvement of organization and management of the production processes, harmonious team work of all employees of the Company in the current year will ensure the implementation of the shaped plans. We are sure that 2014 will be a year of new achievements and further growth! N.U. Maganov General Director, Chairman of the Management Board of JSC TATNEFT 70 YEARS from the beginning of the development of the oil ﬁ elds of Tatarstan JOINT ADDRESS TO THE SHAREHOLDERS, INVESTORS AND PARTNERS DEAR SHAREHOLDERS, INVESTORS AND PARTNERS! TATNEFT Company is consistently and successfully implementing strategic initiatives to expand the resource base, stabilize the oil and gas production volumes, develop reﬁ ning and petrochemicals production and output high quality products. During the reporting year the Company produced over 26 million tons of crude oil. Full-scale development of Ashalchinskoye extra-viscous oil ﬁ eld is underway. These achievements have been promoted by widespread application of advanced technologies in drilling, crude oil production and workover operations. The volume of primary processing was increased to 8 million tons of oil per year at the TANECO Reﬁ ning and Petrochemical Plants Complex. The combined hydrocracking installation started operation in the comprehensive testing mode. The complete commercial commissioning of this installation will signiﬁ cantly increase the output of desired petroleum products and provide for the output of competitive Euro 5 standard products. Considerable attention was paid last year to improving reliability of the power supply system and performance of resource-saving activities. One of the key aspects in this area is to increase the utilization level of associated petroleum gas through using gas powered electrical generators and microturbine units. In the frame of further TATNEFT’s own generating complex development the reconstruction of Nizhnekamsk CHP was continued, which will allow doubling the generating plant capacity. 2 3 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS JSC TATNEFT MEMBERS OF THE BOARD OF DIRECTORS AND THE MANAGEMENT BOARD OF JSC TATNEFT SHAFAGAT F. TAKHAUTDINOV RAIS S.KHISAMOV RINAT K. SABIROV AZAT K. KHAMAYEV MIRGAZIYAN Z. TAZIYEV MARIYA L. VOSKRESENSKAYA RENÉ STEINER Member of the Board of Directors, Chairman of the Management Board (before November 2013), General Director of JSC TATNEFT (before November 2013), since November 2013 – Advisor to Chairman of the Board of Directors of JSC TATNEFT. Member of the Board of Directors. Deputy General Director – Chief Geologist of JSC TATNEFT. Member of the Board of Directors’ Corporate Management Committee of JSC TATNEFT. Member of the Board of Directors. Assistant to the President of the Republic of Tatarstan. Member of the Board of Directors’ Corporate Management Committee of JSC TATNEFT. Member of the Board of Directors’ HR and Remuneration Committee of JSC TATNEFT. Member of the Board of Directors. Minister of Land and Property Relations of the Republic of Tatarstan. Member of the Board of Directors. Head of Almetyevneft Oil and Gas Production Division of JSC TATNEFT. Member of the Board of Directors. Independent Director. Director of Brentcross Co. LTD. Member of the Board of Directors’ Audit Committee of JSC TATNEFT. Member of the Board of Directors. Independent Director. Program Director of Private Equity in FIDES Business Partner AG. Member of the Board of Directors’ Audit Committee and Chairman of the Board of Directors’ HR and Remuneration Committee of JSC TATNEFT (since June 2013). NAIL G. IBRAGIMOV VLADIMIR P. LAVUSHCHENKO RADIK R. GAIZATULLIN RENAT KH. MUSLIMOV GHOSH SUSHOVAN VALERY YU. SOROKIN Member of the Board of Directors, Member of the Management Board. First Deputy General Director for Production - Chief Engineer of JSC TATNEFT. Member of the Board of Directors and Member of the Management Board. Deputy General Director of JSC TATNEFT for Economics. Chairman of the Board of Directors’ Information Disclosure Committee of JSC TATNEFT. Member of the Board of Directors. Minister of Finance of the Republic of Tatarstan. Member of the Board of Directors’ Audit Committee of JSC TATNEFT. Member of the Board of Directors. Advisor to the President of the Republic of Tatarstan on the issues of oil and oil/gas ﬁ elds development. Member of the Board of Directors. Independent Director. Managing Director of SGI Group LTD. Chairman of the Board of Directors’ Audit Committee. Member of the Board of Directors’ HR and Remuneration Committee of JSC TATNEFT. Member of the Board of Directors. General Director of JSC Svyazinvestneftekhim. 4 5 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS JSC TATNEFT FEDOR L. SHCHELKOV NIKOLAY M. GLAZKOV RUSTAM N. MUKHAMADEYEV EVGENIY A. TIKHTUROV VALERIY D. YERSHOV VLADLEN A. VOSKOBOINIKOV Member of the Management Board. Deputy General Director for General Issues of JSC TATNEFT. Member of the Management Board. Deputy General Director for Capital Construction of JSC TATNEFT. Member of the Management Board. Deputy General Director of JSC TATNEFT for HR and Social Development. Member of the Management Board. Head of Financial Department of JSC TATNEFT. Member of the Board of Directors’ Information Disclosure Committee of JSC TATNEFT. Member of the Management Board. Head of Legal Department of JSC TATNEFT. Member of the Board of Directors’ Corporate Management Committee of JSC TATNEFT. Member of the Management Board. Head of Department for Consolidated Financial Statements of JSC TATNEFT. Member of the Board of Directors’ Information Disclosure Committee of JSC TATNEFT. RIFKAT M. RAKHMANOV VIKTOR I. GORODNIY ISKANDAR G. GARIFULLIN RAFAIL S. NURMUKHAMETOV ZAGIT F. SHARAFEYEV ALEKSANDER T. YUKHIMETS Member of the Management Board. Deputy General Director for Workover, Drilling and Oil Recovery Enhancement of JSC TATNEFT. Member of the Management Board. Head of Accounting and Reporting Department – Chief Accountant of JSC TATNEFT. Member of the Management Board. Deputy General Director of JSC TATNEFT – Head of Property Department. Chairman of the Board of Directors’ Corporate Management Committee, Vice Chairman of the Board of Directors’ Information Disclosure Committee. Member of the Management Board. Head of Leninogorskneft Oil and Gas Production Division of JSC TATNEFT. Member of the Management Board. Deputy General Director of JSC TATNEFT for Petrochemical Production – Director of UK OOO TATNEFT- Neftekhim. Member of the Management Board. Secretary of the Board of Directors of JSC TATNEFT. Member of the Board of Directors’ Information Disclosure Committee of JSC TATNEFT. 6 7 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS JSC TATNEFT MISSION OF THE COMPANY THE COMPANY’S MISSION CONSISTS IN STRENGTHENING THE INTERNATIONALLY RECOGNIZED POSITIONS AND ENSURING THE COMPANY’S SUSTAINED DEVELOPMENT IN THE STATUS OF ONE OF THE LARGEST RUSSIAN VERTICALLY INTEGRATED COMPANIES PRODUCING OIL AND GAS, REFINED PRODUCTS, PETROCHEMICALS AND THERMAL AND ELECTRIC POWER BASED ON THE EFFICIENT ASSET MANAGEMENT OF THE SHAREHOLDERS, MANAGEMENT OF NATURAL RESOURCES AND CORPORATE SOCIAL RESPONSIBILITY. STRATEGIC INITIATIVES AND OBJECTIVES OF THE COMPANY INCREASE OF THE SHAREHOLDER’S EQUITY Ensure the increase of the long-term shareholder value and high dividend yield return on the shareholders invested capital on the basis of the efﬁ cient corporate management of natural, industrial, human, intellectual and professional assets and resources. • ENSURE FINANCIAL STABILITY AND ECONOMIC STABILITY • STABILIZE THE VOLUMES OF PROFITABLE OIL & GAS PRODUCTION ON THE DEVELOPED LICENSE FIELDS AND ACTIVE EXPLORATION OF NEW FIELDS INCLUDING HIGH VISCOSITY OIL AND HARD TO RECOVER OIL IN THE TERRITORY OF THE REPUBLIC OF TATARSTAN • EXPAND THE LICENSE PORTFOLIO OUTSIDE THE REPUBLIC OF TATARSTAN AND RUSSIAN FEDERATION • INCREASE THE PRODUCTION AND SALES VOLUMES OF HIGH COMPETITIVE FINISHED PRODUCTS THROUGH DEVELOPMENT OF REFINERIES AND PETROCHEMICAL PLANTS • FORMULATE AND IMPLEMENT THE INNOVATIVE ENGINEERING POLICY • ENSURE A HIGH LEVEL OF THE CORPORATE SOCIAL AND ENVIRONMENTAL RESPONSIBILITY The corporate management of the Company covers all the aspects of the activities of the TATNEFT Group and is aimed at strengthening of the ﬁ nancial position of the joint stock company and sustained development in compliance with its strategic initiatives and objectives set by the shareholders. In 2013 the Board of the Directors of JSC TATNEFT addressed the issues on prospective and current development plans of each business segment, implementation of the investment programs, provision of the internal audit, human resources, social and environmental policies, improvement of the productivity, as well as ﬁ nancial and business activities of subsidiaries and afﬁ liates. The special attention was paid to the Company’s capitalization and interaction with shareholders. 9 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS JSC TATNEFT GEOGRAPHY OF THE COMPANY’S ACTIVITY RUSSIA GREAT BRITAIN CHINA BELORUSSIA TATARSTAN UKRAINE GERMANY KAZAKHSTAN TURKMENISTAN LIBYA SYRIA PROVED OIL RESEVES AMOUNT OF JSC TATNEFT 847.3 million tons of oil According to Miller & Lentz, Ltd independent consulting ﬁ rm, as of beginning of 2014 MAP OF MAJOR FIELDS OF JSC TATNEFT WITHIN THE REPUBLIC OF TATARSTAN IN TERMS OF AVAILABILITY OF HYDROCARBON RESOURCES (THE RATIO BETWEEN THE CURRENT ANNUAL PRODUCTION AND THE AMOUNT OF RESERVES) THE COMPANY IS A LEADER IN RUSSIA, AS WELL AS IN THE WORLD. THE AVAILABLE RESOURCE BASE OF THE COMPANY ALLOWS IT TO MAINTAIN THE CURRENT PRODUCTION VOLUME FOR OVER 32 YEARS. KAZAN Bondyuzhskoe Pervomayskoye NABEREZHNYE CHELNY Romashkinskoye Novo-Yelkhovskoye ALMETYEVSK Sabanchinskoye Bavlinskoye LEGEND THE MAIN RESOURCE PORTFOLIO AND PRODUCTION FACILITIES OF THE COMPANY HAVE HISTORICALLY BEEN PLACED IN THE TERRITORY OF THE REPUBLIC OF TATARSTAN. THE SHARE OF THE TATNEFT GROUP ACCOUNTS FOR MORE THAN 80% OF THE OIL PRODUCED IN THE TERRITORY OF TATARSTAN, AND ABOUT 8% OF THE TOTAL OIL PRODUCED IN THE RUSSIAN FEDERATION Field development Oil refining Petrochemicals production Thermal electric power Supply of equipment, technologies and services Retail Distribution Network International stock exchanges where the depositary receipts for shares of JSC TATNEFT are listed on THE RETAIL BUSINESS OF THE COMPANY IS FORMED BY THE DEVELOPING NETWORK OF TATNEFT BRANDED FILLING STATION COMPLEXES IN THE TERRRITORIES OF RUSSIA, BELORUSSIA AND UKRAINE. THE RUSSIAN NETWORK OD THE FILLING STATIONS IS THE FORTH LARGEST RETAIL NETWORK AND REPRESENTED IN 22 REGIONS WITH HIGH POTENTIAL GROWTH INCLUDING THE CENTRAL FEDERAL DISTRICT AND VOLGA REGION. 10 11 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS JSC TATNEFT KEY PERFORMANCE INDICATORS OF THE COMPANY BASED ON THE RESULTS OF 2013 MAIN INDICES INDICATORS OF THE COMPANY’S SHAREHOLDER VALUE Market Capitalization as of December 31, 2013 Cost of an ordinary share as of December 31, 2013 Planned dividends by results of the Company's activity in 2013* Total number of shares Including: ordinary shares preferred shares Number of depositary receipts issued for shares of JSC TATNEFT (1 DR : 6 shares) as of December 31,2013 INDICATORS OF THE COMPANY’S PRODUCTION STATUS Oil and Gas Production Complex NATIONAL UNITS OF MEASUREMENT RUR 471.5 bln RUR 208.2 RUR 19.155 bln 2,326,199,200 2,178,690,700 147,508,500 625,174,618 MAIN INDICES Oil Refinery Complex Refining volume of TANECO Complex: Crude oil refining Natural gas liquids refining Daily refining throughput Level of capacity utilization Refining depth Output of light petroleum products Indicator of capabilities to process crude oil with sulfur content Sulfur content in refined products - EURO-5 diesel fuel, Amount of proved oil reserves as of January 1, 2014 (according to Miller & Lents Ltd. assessment) when using the average oil price for 12 months 2013 847.346 mln tons Refining at the refinery of NGDU Elkhovneft TATNEFT Group Oil production volume JSC TATNEFT Oil production volume Average daily production Average oil production rate of active producing wells of JSC TATNEFT Average oil production rate of new wells of JSC TATNEFT Associated petroleum gas production (collection) Liquefied petroleum gas production Operational stock of producing wells Active stock of producing wells Total penetration meterage for JSC TATNEFT Including: production drilling prospecting & exploratory drilling 26.419 mln tons 26.107 mln tons 0.72 mln tons 3.8 tons/day 9.3 tons/day 864.8 mln m3 275.3 thousand tons 22,289 wells 20,257 wells 450.1 thousand meters 430.4 thousand meters 19.747 thousand meters Total core products output Tatneftegazpererabotka Administration Associated gas accepted for processing LPG processing Sour gas delivered to sweetening Utilization coefficient of associated gas Petrochemical Complex Commercial carbon black production volume of JSC Nizhnekamsktehuglerod Commercial commodity output of JSC Nizhnekamskshina Total volume of produced commodity petrochemical products Carbon black production volume NATIONAL UNITS OF MEASUREMENT 7,621.6 thousand tons 4.4 thousand tons 167.6 thousand bbls 108.8% of designed capacity 73.54 % annual average depth of refining 48.16 % Oil processing with 1.8 % sulfur content 3 ppm 179.3 thousand tons 773.9 mln m3 276.0 thousand tons 125.4 mln m3 95.1 % RUR 3,265 mln RUR 5,509.85 mln RUR 38,980.13 mln 108.9 thousand tons 12 13 Balance Sheet Data as of December 31, 2013 Fixed assets and incomplete construction Long-term financial investments Current assets Equity capital Total liabilities FINANCIAL SOUNDNESS INDICATORS Equity capital level Net assets Current liquidity (ratio) INVESTMENT ACTIVITY INDICATORS Total volume of investments for TATNEFT Group Investments in the oil production in the territory of Tatarstan Republic drilling capital construction equipment not included in the construction estimate-sheets geological and technical activities redemption of property, land, etc. Investments into development of retail business Investments into non-production sphere Investments into oil production outside the Republic of Tatarstan Investments of the petrochemical complex enterprises Investments of service companies & other enterprises including: financing of Nizhnekamsk CHP reconstruction Investments into foreign projects Investments into construction of the Refining and Petrochemical complex MAIN INDICES Retail Network of Filling Stations. Total number of filling stations, Including: Number of filling stations in Russia Number of filling stations in Ukraine Number of filling stations in the Republic of Byelorussia Indicators on the Property Complex NATIONAL UNITS OF MEASUREMENT MAIN INDICES 648 524 114 10 Number of real estate assets registered on the ownership right RUR 8.1 bln Human Resources Number of employees of TATNEFT Group Average headcount of the employees of JSC TATNEFT PERFORMANCE INDICATORS OF THE COMMERCIAL ACTIVITY Supply of Oil and Gas products Oil export (far-abroad countries) Oil export (near-abroad countries) Supplies to the domestic market Gas products supply to the domestic market, export Sales of Oil and Gas Products Volume of oil products sold in the markets of Russia, Ukraine, Byelorussia Volume of gas products sold through TATNEFT retail networks of gas filling stations Sales of Petrochemical Complex Products Total tires shipped, including: Export Domestic market Tender shipments FINANCIAL AND ECONOMIC PERFORMANCE INDICATORS Revenues Revenue of TATNEFT Group Sales revenue of JSC TATNEFT, total Oil sales revenues (incl. own and purchased oil) Oil & gas products sales revenues Other products sales revenues Profit Pre-tax profit of TATNEFT Group Pre-tax profit of JSC TATNEFT Net profit of JSC TATNEFT Taxes and Payments to the Budget Taxes and payments to the Budget from JSC TATNEFT: including: Minerals extraction tax (MET) Income tax 14 77 thousand persons 20.78 thousand persons 11.3 mln tons 1.054 mln tons 13.408 mln tons 7.506 mln tons 1.52 mln tons 145.6 thousand tons 11.81 mln pcs 2.694 mln pcs 9.001 mln pcs 0.116 mln pcs RUR 454.983 bln RUR 363.531 bln RUR 205.030 bln RUR 133.112 bln RUR 5.389 bln RUR 101.291 bln RUR 83.485 bln RUR 63.850 bln RUR 319.260 bln RUR 104.850 bln RUR 19.155 bln * The Board of Directors of JSC TATNEFT made a decision to recommend to the Annual General Meeting of the Shareholders to approve payment of dividends for 2013 in the amount of 823% for preferred shares, and dividends for ordinary shares – in the amount of 823% of the nominal value. Comments: JSC TATNEFT considers that the use of the average oil price for 12 months fairly reflects its oil reserves in the current economic conditions, particularly in the environment of high volatility of the oil price that occurred during 2013. ADDED VALUE The volume of production of the value added of JSC TATNEFT increased by 0.9 billion rubles and amounted to 228 billion rubles in 2013. The share of the added value in the total volume of the Company’s products output amounted to 66%. In 2013 the added value in OJSC TANECO increased by 62% versus 2012 and amounted to 13.9 billion rubles. The share of the added value in the output of products increased from 54% in 2012 to 67% in 2013. 15 NATIONAL UNITS OF MEASUREMENT RUR 105.624 bln RUR 52.026 bln RUR 301,405 bln RUR 421,696 bln RUR 111,621 bln 0.791 RUR 421.7 bln 4.434 RUR 84,813 bln RUR 30,937 bln RUR 12,996 bln RUR 7,477 bln RUR 2,485 bln RUR 7,699 bln RUR 0.280 bln RUR 1,303 bln RUR 0.754 bln RUR 3,112 bln RUR 0.861 bln RUR 4,682 bln RUR 1,837 bln RUR 0.470 bln RUR 42,694 bln JSC TATNEFTANNUAL REPORT 2013EXPLORING NEW HORIZONSANNUAL REPORT 2013 EXPLORING NEW HORIZONS ABOUT THE COMPANY JSC TATNEFT ABOUT THE COMPANY The consolidated assets of the TATNEFT Group form the following business segments: exploration and production, oil reﬁ ning and sales of crude oil and petroleum products, petrochemicals, as well as the corporate segment. By the end of 2013 in the asset structure of the TATNEFT Group the main shares are distributed between the business segments of exploration and production - 281.4 billion rubles, and oil reﬁ ning and sales of crude oil and petroleum products - 259.9 billion rubles, indicating the high-quality proportion of the asset diversiﬁ cation. Over recent years within the framework of the vertical integration development of the Company together with a steady growth of the recovery segment there was an intensive growth of the assets value of reﬁ ning and sales owing to the project of the construction of own reﬁ ning facilities of the TANECO Complex. Before this large-scale project was started in 2005, the segment share was 5% of the all Company’s assets by the end of 2011, and with the completion of the main phase of this construction and testing of the Complex’ facilities, this segment share increased to 34%, and after the Complex reached its design capacity in 2013 the share became even 39%. In total, over 10 years the consolidated assets grew more than in 2.5 times. (In 2003 - 262.7 billion rubles.) As a result of this restructuring period, creation of a high-tech oil reﬁ nery block, modernization of the petrochemical production, expansion of a distribution network of ﬁ lling stations, acquisition of heat and power generating capacities the company achieved a high quality strengthening of the corporate business structure together with increased operating proﬁ tability. The Revenue from sales of JSC TATNEFT in the reporting year was 363.5 billion rubles (net of VAT and export duties), which was by 5.5% more than in 2012. The main reason is a price factor for crude oil and petroleum products, as well as changes in the sales structure. The cost of sales in 2013 amounted to 228.5 billion rubles. This is 9.7% higher than last year and associated mainly with the increased tax burden for natural resources production (MET) and inﬂ ationary developments. The revenue of the TATNEFT Group amounted to 455 billion rubles in 2013. There is the following distribution of shares in the consolidated revenue mix: the exploration and production - 45%, oil reﬁ ning and sales of crude oil and petroleum products - 44%, petrochemicals - 8%. JSC TATNEFT realized the proﬁ t before tax in the amount of 83.5 billion rubles. The after-tax proﬁ t of the parent company amounted to 63.85 billion rubles. The leverage ratio is 78% : 22% which is an indicator of the ﬁ nancial stability of the Company. The net assets increased by 11% to the level of 421.7 billion rubles by the end of 2013. The consolidated proﬁ t before tax of the TATNEFT Group amounted to 101.3 billion rubles. JSC TATNEFT provided timely payments to the budgets of all levels and off-budget funds. The total amount of accrued taxes and payments to the budgets of all levels was 323 billion rubles. Payables on all types of loans and credits for 2013 were reduced by 22.9 billion rubles. The main part of the loans was previously engaged to meet the current production problems in connection with the direction of signiﬁ cant own funds for ﬁ nancing the construction of the TANECO Reﬁ ning and Petrochemical Complex in Nizhnekamsk. The ﬁ nancial and economic potential gained over the years by the Company allows to continue the implementation of major investment projects, both on account of the own funds and borrowed funds. The total amount of investments by JSC TATNEFT and its subsidiaries and afﬁ liated companies in 2013 amounted to 84.8 billion rubles. The top priority goals are as follows: strengthening of the oil and gas production assets, including overseas projects and the reﬁ ning business unit. The most signiﬁ cant investments were allocated and spent in these areas in the reporting year, which amounted to 37.4 billion rubles in the production and 42.7 billion rubles in the construction of the Reﬁ ning and Petrochemical Complex in Nizhnekamsk. 471.6 BLN RUBLES Market Capitalization of the company As of the end of 2013 In 2013 the Moody’s Investor Services rating agency announced the rating upgrade of the TATNEFT corporate group up to investment level “Baa3, with a stable outlook”. STATUS OF THE COMPANY’S ACTIVITY IN 2013 JSC TATNEFT executes its business in the capital intensive industry of subsurface management and reproduction of power resources demanding increased corporate responsibility for all the activities. The organizational structure of the Company vertically integrates business processes, resources, manufacturing facilities for exploration, production, reﬁ ning, petroleum chemistry, thermal electric power industry, as well as sales of oil and petroleum products, providing diversiﬁ cation and quality interactions of all the business segments starting from extraction of reserves to production and marketing of high quality ﬁ nal petrochemical products. The Company strategic actions are based on the macroeconomic data of forecasted consumption of hydrocarbons until 2030, prospects of development of the global and domestic markets, market trends and market potential of petrochemical products. In 2013 the Company successfully solved the strategic objectives and present-day challenges aimed at strengthening the quality and proﬁ tability of corporate assets, stabilization of the production and ensuring replenishment of resources, development of reﬁ neries and petrochemical facilities, formation of a new value added by manufacturing high-quality and highly competitive products based on the integration of resource and production potentials of oil production, reﬁ ning and petrochemicals. The Company implemented the activities in order to improve the operating efﬁ ciency of the business segments and create new points of revenue growth, strengthen the competitiveness and sustainable level of the investment attractiveness. The Company realized the target production volumes and provided positive indicators of the ﬁ nancial and economic activity. 674 BLN RUBLES Consolidated asset value of the TATNEFT Group As of the end of 2013 323 BLN RUBLES Total amount of the tax payments to the budgets of all levels and non-budgetary funds by JSC TATNEFT in 2013 16 17 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS ABOUT THE COMPANY JSC TATNEFT 26.4 MLN TONS Oil production volume of the TATNEFT Group in 2013 The Company provides for a steady increase of the annual production which is 5.8 % for 10 years. Despite the fact that most of the deposits of the Company are in their late stage of development, JSC TATNEFT is the only oil company in Russia that has managed to avoid any signiﬁ cant decline in the production since 2000. At the beginning of 2014 the proved developed, undeveloped and undrilled reserves of JSC TATNEFT according to the estimates of the international independent consulting ﬁ rm Miller & Lentz amounted to 847.346 million tons of oil. In terms of availability of hydrocarbon resources (the ratio between the current annual production and the amount of reserves) the Company is a leader not only in Russia but also in the world. The oil production of JSC TATNEFT totalled 26.419 million tons of oil in 2013, the Company reached the maximum level of hydrocarbons production over last 20 years. The enterprises of JSC TATNEFT in the Republic of Tatarstan and outside it produced 26 million 107 thousand tons of oil, the subsidiaries and afﬁ liated companies produced 312 thousand tons of oil. The main part of the current oil production accounts for the conventional large deposits of the Republic of Tatarstan. In accordance with the objectives on to expand the resource base and increase oil reserves the Company forms a diversiﬁ ed portfolio of oil and gas assets. Outside the Republic of Tatarstan JSC TATNEFT holds the prospecting licenses for geological exploration and development of oil, gas and condensate ﬁ elds purchased through auctions as well as through the acquisition of the business parts of the oil companies in the Samara, Orenburg, Ulyanovsk Regions, Nenets Autonomous Okrug and the Republic of Kalmykia. In 2013 JSC TATNEFT jointly with its nine subsidiaries operating in the territory of the Russian Federation possessed 97 licenses for exploration and development of the hydrocarbons deposits. The Company continued the geological exploration programs in the territory of license sites in Libya and Syria, which had been suspended in 2011 due to the complicated political situation till the internal situation stabilization in these countries and guarantee the safety for the Company’s specialists. In accordance with the extra viscous ﬁ eld development plans the EVO production amounted to 145.6 thousand tons in the Ashalchi oil ﬁ eld in 2013. The total production of extra viscous oil from the beginning of the commercial ﬁ eld development reached 325.7 thousand tons of extra viscous by the end of 2013. The total production rate for the site by the end of the year reached 480 tons per day. In 2013 the Company started to implement the shale oil study program – there was a pilot well drilled at the depth of about 1700 m and it is in operation now. The drilling complex companies penetrated 450.1 thousand meters of rocks in the ﬁ elds of JSC TATNEFT in the reporting year and commissioned 266 new producing wells, The average ﬂ ow rate of new wells amounted to 9.3 tons per day. 248 wells were completed for water injection. In order to achieve maximum economic returns and increase proﬁ tability of the production assets, rational use of natural and material resources the Company implements the target program activities aimed at optimizing the infrastructure of mature ﬁ elds, increasing the oil recovery factor, ensuring cost control, resource saving, development and implementation of innovative technologies and equipment. JSC TATNEFT achieved one of the highest industry levels of associated gas utilization, which exceeds 95 %. Application of the gas powered electrical generators and microturbine units for utilization of associated petroleum gas contribute to increased reliability of the power supply systems of the Company. Thanks to implementation of a comprehensive resource saving program TATNEFT saved over 55.6 thousand tons of equivalent fuel in 2013, which allowed to reduce the fuel and energy resources consumption of the Company by 4.9%. The main energy savings were obtained through energy saving. 95.1 % level of associated gas utilization 1.7 MLN TONS of oil and gas products have been sold through TATNEFT retail network of ﬁ lling stations in 2013 The technological equipment and the level of implementation of innovative methods of operating companies of the Company conform to the international standards and are unique in some aspects. The Company actively develops the technology of dual completion production from two or more layers of one well to ensure effective operation of the oil ﬁ elds. At the beginning of the current year the number of these dual completion and dual injection systems exceeded 1900 units, the cumulative oil production amounted to 7.7 mln tons of oil. TATNEFT Company is an absolute industry’s leader in terms of the average turnaround time for wells among the major oil companies the Russian oil industry. The overall average turnaround time in JSC TATNEFT was 1198 days in 2013. This has been achieved through the introduction of a large variety of innovative technologies, high quality and timely maintenance of the oilﬁ eld equipment. TATNEFT Company is a supplier of the advanced technologies, equipment and oilﬁ eld services to external oil producing companies. The Company provided such supplies to Kazakhstan and provided EOR oilﬁ eld services in Turkmenistan in 2013. The oil reﬁ ning assets include TANECO Reﬁ ning and Petrochemical Complex in Nizhnekamsk, the construction of which was started by the Company in 2005 in order to form the own facilities for oil advanced processing and the reﬁ ning facility of NPU Elkhovneft. In 2013 the total reﬁ ning throughput was about 8 million tons, including 7.6 million tons of crude oil and 4.4 tons of gas condensate processed at TANECO. Main products are as follows: straight-run gasoline, stable natural gasoline, middle distillates, visbreaker tar, vacuum gas oil, commercial fuel oil. The level of the capacity utilization of TANECO reached a record level - 108.8 % of designed capacity (the average for Russia – 92.9 %). The processing volume amounted to about one-third of the Company’s annual production. The average annual oil reﬁ ning efﬁ ciency was 73.54% (which is higher than the Russian average level of 71.5%) light petroleum products output – 48.16%. Most sections of the integrated hydrocracking unit are in the comprehensive testing mode. In March 2014 OJSC TANECO completed commissioning works on the integrated hydrocracking unit and hydrogen generation unit, and obtained the Rostekhnadzor certiﬁ cate of conformity with requirements of the technical regulations and design documentation. TANECO obtained permits for commissioning of these facilities and the state registration of OJSC TANECO ownership of real estate assets. Further plans for the current year are as follows: continue to increase the capacity utilization of the TANECO ﬁ rst stage, to exceed the achieved level which will enhance the positive effect for JSC TATNEFT as well as for the whole Russian economy. In 2014 it is planned to ensure the reﬁ ning throughput volume of 8.5 million tons and to start the normal operation of the hydrocracking unit allowing production of high demand products – high quality light petroleum products EURO-5 diesel fuel, jet aviation fuel, base oils. The pilot batches of EURO-5 diesel fuel are characterized by a low sulfur content (3 ppm - this is signiﬁ cantly less than the upper limit for this emissions class which is 10 ppm). TANECO Complex became the ﬁ rst large-scale reﬁ nery facilities built from scratch in the post-Soviet countries over the last 30 years. The project was ﬁ nanced by JSC TATNEFT on account of own and borrowed funds. The mechanism of public-private partnership was also used in the construction of transport infrastructure objects of the Complex. The commercial operation of the reﬁ nery commenced on December 2, 2011. The sustainable development strategy of OJSC TANECO envisages further expansion of the volume and range of the products, a signiﬁ cant increase of the depth of processing, as well as the output of light petroleum products. The technological level of the Complex is consistent with international standards, both in the areas of ecological and industrial safety. The production facilities of NPU Elkhovneft were operated at constant load. 18 19 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS ABOUT THE COMPANY JSC TATNEFT 7.6 MLN TONS of crude oil processed at TANECO Complex in 2013 73.5 % is the average annual processing depth at TANECO Complex The development of the retail sales of petroleum products in 2013 was carried out in accordance with the current priority to improve proﬁ tability of ﬁ lling stations complexes at high quality control and extension of additional services. As of the end of 2013 the number of TATNEFT branded ﬁ lling stations totaled 648 units, among them 524 ﬁ lling stations – in Russia, 114 ﬁ lling stations – in Ukraine, 10 ﬁ lling stations – in Belorussia). 1.7 million tons of oil and gas products have been sold through TATNEFT retail network of ﬁ lling stations in the reporting year. In the coming years the retail network of JSC TATNEFT will be fully provided with its own high-quality oil products produced at the TANECO Complex, which will signiﬁ cantly increase the operating earnings and strengthen the competitive positions of this business segment. Power generating capacities of the Company supply the thermal electric power to the production facilities of the TATNEFT Group, as well as the large industrial enterprises and social infrastructure facilities in the South-East of the Republic of Tatarstan, providing JSC TATNEFT the status of a network, power generating and power supply company in the region of its core activity. In 2013 the total electric power output by the Company’s power generating enterprises was about 1.3 billion KWh. The total heat output increased by 15% owing to modernization of the facilities and totalled to 4.8 million Gcal. The Company continued works to double the production capacities of Nizhnekamsk CHP (Combined Heat & Power station) which provides the electric power to the largest petrochemical enterprises of Nizhnekamsk city, including TANECO Complex. The optimal load distribution and management of the most economical mode of operation at Nizhnekamsk thermal power station allowed to reduce the speciﬁ c fuel consumption for electricity supplied by 3.5% down to 288 g/kWh in 2013, which is 11% less than the national average. The Tire Manufacturing Complex of the Company covers 26% of this Russian industry segment in terms of production volumes; it is a supplier of the domestic car manufacturers KAMAZ, GAS, AVTOVAZ, as well as the car assembly plants of Volkswagen, Fiat and other foreign manufacturers. The cumulative tire production amounted to 12.5 million tires in 2013. At the end of 2013 a new Product & Marketing Strategy of the tire manufacturing complex was adopted for the period until 2018. The Company objective is to strengthen the position in the strategic group of the leaders of the Russian tire market and increase the Company’s combined market share in the Russian market of tire products. The strategy is based on forming the growth in production and sales of the tire products with the maximum use of the potential of the market conditions and the market capacity of OEM & Aftermarket markets, especially in the markets of Russia and CIS countries ensuring the proﬁ tability of the tire business comparable to the level of the world manufacturers of tire products. In 2013 after the commissioning of the own reﬁ ning facilities of TANECO the Company sent more than 31% of the produced crude oil for reﬁ ning. INCREASE OF THE RATIO OF VOLUMES OF PRIMARY OIL PROCESSING IN THE RF AND AT TANECO COMPLEX IN 2012-2013 VOLUME OF PRIMARY OIL PROCESSING IN THE RF 7.0 MLN TONS 2012 TANECO’s share in the total volume of crude oil processing in RF in 2012 271.4 MLN TONS 2013 277.3 MLN TONS 7.6 MLN TONS TANECO share in the total volume of crude oil processing in the RF in 2013 2.2% 10% Growth of primary oil TANECO share in the total processing in the Russian volume of crude oil processing Federation in 2013 versus 2012 in the Russian Federation RATIO OF AVERAGE ANNUAL PROCESSING DEPTH IN THE RF AND AT TANECO COMPLEX IN 2012-2013 % 74 73 72 71 70 +2.00% +0.25% 73.54% RF TANECO 71.25% 71.50% 71.54% ‘12 ‘13 ‘12 ‘13 20 21 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS ABOUT THE COMPANY JSC TATNEFT JSC TATNEFT EQUITY HOLDING STRUCTURE THE DIVIDEND POLICY As of December 31, 2013 according to the register of shareholders of JSC TATNEFT had 45,746 shareholders. Among them the largest owners (nominal holders) of the Company’s shares are as follows: • Non-bank Credit Company, closed joint stock company National Settlement Depository owns 56.199649 % of shares; • Joint Stock Company Central Depository of the Republic of Tatarstan owns 33.595570 % of shares. The shares of JSC TATNEFT have been traded on the Russian and International stock markets 19 years, and they are among the most liquid and representative instruments in the securities markets. The geography of the shareholders covers the territory of Russia (the main share of the shareholders), America, Australia, Europe and Asia. In terms of trading volumes on the Russian and London stock exchanges JSC TATNEFT ranks the sustainable fourth place among the Russian oil companies. The ordinary and preference shares are listed in the A1 Quotation List in the united JSC Moscow Stock Exchange. JSC TATNEFT shares are included in the index calculation base of RTS and MICEX, which are the main indicators of the Russian stock market. The current annual volume of trading on the Moscow stock exchange exceeds RUR 79 billion rubles (USD 2.4 billion). As of the end of 2013 the value of one ordinary share of JSC TATNEFT was RUR 208.2, the value of one preferred share was RUR 121.7. The dividend yield based on the calculation of the market value of the ordinary shares at the end of 2013 amounted to 4.13 %, the dividend yield of the preferred shares amounted to 7.07 %. 625,174,618 ordinary shares or 29.9 % of the shareholders equity have been deposited for conversion into global American Depositary Receipts (ADRs) (the conversion ratio of 1 DR = 20 shares, it was changed in 2009 to 1 DR = 6 shares). The Depositary Receipts of the Company are listed on the London Stock Exchange (Ticker symbol: ATAD) and traded in the Xetra trading system of Deutsche Börse group. The annual trading volume of JSC TATNEFT Depositary Receipts exceeds 2.5 billion pounds in the London Stock Exchange; and 8 million Euros – in the Xetra trading system. EQUITY HOLDING STRUCTURE OF THE COMPANY AS OF DECEMBER 31, 2013 TOTAL NUMBER OF SHARES Ordinary shares: JSC TATNEFT Nonresident stockholders Russian stockholders Preferred shares: JSC TATNEFT Nonresident stockholders Russian stockholders * without ownership through the Russian nominee holders 2,326,199,200 2,178,690,700 541,160* 2,178,149,540 147,508,500 101,800* 147,406,700 The Company successfully ensures sustainable growth of the market capitalization as the basis for high dividend yields on the capital invested by the shareholders. The Company invests in the production development and commits 30% for dividends payment. DIVIDEND HISTORY FOR 2010-2012 % 0 6 8 % 0 6 8 % 8 0 7 % 8 0 7 % 2 0 5 % 2 0 5 rubles 10 9 8 7 6 5 4 3 2 1 0 Preferred shares Ordinary shares Nominal value of one share The decision of the dividend payment was made at the Annual General Meeting of the Shareholders based on the results of 2010, 2011, 2012. ‘10 ‘11 ‘12 According to the 2013 results the Board of Directors of JSC TATNEFT proposed the Annual General Meeting of the Shareholders to approve the payment of dividends in the amount of 823 % for the ordinary and preferred shares of the nominal value (RUR 8.23 per share) and commit 30% of the net proﬁ ts of the joint stock company, which in total exceeds RUR 19 bln. DIVIDEND YIELD return on equity (shares) share for dividends 25 20 15 10 5 0 capitalization at the end of the reporting period 475.0 yield of preferred shares, % yield of ordinary shares % 307.6 7.57% 4.52% 344.6 5.70% 3.17% 6.73% 3.25% ‘10 ‘11 ‘12 500 450 400 350 300 250 200 150 100 50 0 22 23 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS ABOUT THE COMPANY JSC TATNEFT BOARD OF DIRECTORS OF JSC TATNEFT EXECUTIVE BODY OF JSC TATNEFT TATNEFT GROUP STRUCTURE MAIN ENTERPRISES CONSTITUTING THE TATNEFT GROUP The Company implements its vertical integration strategy of the full production cycle including reservoir geology, ﬁ eld development, oil & gas production, oil & gas reﬁ ning, sales of crude oil, petroleum and gas products, including through the retail network, production and sales of petrochemical raw materials and ﬁ nished products, production and supply of thermal electric power. 1 2 3 4 5 6 7 8 OIL REFINING AND CRUDE OIL & PETROLEUM PRODUCTS SALES Crude Oil & Oil Products Sales Department Construction Projects Management Department Tatneftegazpererabotka Administration OJSC TANECO OOO Tatneft-AZS-Tzentr OOO Tatneft-AZS-Zapad OOO Tatneft-AZS-Sibir’ OOO Tatneft-AZS-Yug OOO Tatneft-AZS Ukraina OOO Tatneft-Trans IOOO Tatbelnefteproduct OOO Saymen OOO Kharkov-Capital OOO Poltava-Capital OOO Processingovy Tzentr OOO Tatneft-Tzentroresurs OIL & GAS PRODUCTION NGDU Almetyevneft NGDU Aznakaevskneft NGDU Bavlyneft NGDU Jalilneft NGDU Yelkhovneft NGDU Leninogorskneft NGDU Nurlatneft NGDU Prikamneft NGDU Yamashneft SUBSIDIARIES AND AFFILIATES FOR OIL PRODUCTION OOO Tatneft-Abdullino OOO Tatneft-Severny OOO Tatneft-Samara ZAO Abdulinskneftegaz ZAO KalmTatneft* JSC Kalmneftegaz ZAO Severgeologiya* ZAO Severgaznefteprom* ZAO Yambuloil* 24 PETROCHEMICAL WORKS THERMAL ELECTRIC POWER OOO Nizhnekamsk CHP OOO Tatneft-Energosbyt JSC Almetyevsk Heat Networks OOO TATNEFT-Neftekhim Management Company JSC Nizhnekamskshina JSC Nizhnekamsk Mechanical Plant OOO Nizhnekamsk Truck Tire Plant OOO Energoshinservis OOO NZSh TzMK ZAO Yarpolymermash-Tatneft JSC Nizhnekamsktekhuglerod OOO Tatneft-Neftekhimsnab OOO Torgovy Dom Kama MAIN PRODUCTION SERVICES Tatneftesnab Department OOO UPTZH dlya PPD Tatar Geological Administration Bugulma Mechanical Plant Motor Transport Enterprise OOO Tatneft-URS OOO Torgovo-Tekhnichesky Dom Tatneft SCIENTIFIC & TECHNICAL SUPPORT, ORGANIZATIONAL MAINTENANCE TatNIPIneft R&D Institute Normative Research Station R&D Centre OOO NTTz Tatneft (in Skolkovo) OOO NPTz Neftegazovye Tekhnologiyi JSC TatNIIneftemash BRANCHES AND REPRESENTATIVE OFFICES Representative Ofﬁ ce in Moscow Representative Ofﬁ ce in Iraq CORPORATE CENTER FOR ASSET AND PROPERTY CONSOLIDATION Lease Relationship Department Representative Ofﬁ ce in Ukraine OOO TATNEFT-Aktiv Branch Ofﬁ ce in Libya Branch Ofﬁ ce in Turkmenistan OOO IPT Ideya Yugo-Vostok OOO P-D Tatneft- AlabugaSteklovolokno * Afﬁ liates 25 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS ABOUT THE COMPANY JSC TATNEFT THE BASIC TRENDS OF OIL & GAS INDUSTRY DEVELOPMENT The crude oil production in Russia totalled 523.5 million tons in 2013, which is 1% more than in 2012 (518 million tons). The increase in oil production was the result of outpacing growth rates in the “new” oil-bearing areas as compared with the rates of oil production decline in the “old” ﬁ elds. In the near term it is expected to have a continuing global demand for liquid hydrocarbons at the average growth rate within 1.2%. Russia continues to maintain the world’s top position in gas export and shares the 1-2 positions with Saudi Arabia in oil export. The Russian oil companies with the support of the Government of the Russian Federation have established their three important directions for development of domestic oil production: • Involvement in the production of hard-to-recover reserves; • Increase of the share of recoverable hydrocarbons in offshore ﬁ elds; • Development of reserves in new ﬁ elds in hard-to-reach regions. The activities of the Government of the Russian Federation on tax incentives for companies in development of hard-to-recover reserves in 2013 resulted in increase of the base of economically recoverable oil reserves in Russia from 12 billion tons up to 20 billion tons. The most important event of the industry became the closing of M&A transaction – between the Russian company ROSNEFT and TNK-BP, which resulted in the emergence of the largest public oil producing company in the world. It is expected that this event will inﬂ uence the oil and gas sector of Russia and the trend towards consolidation and integration in the fuel and energy sector will increase and as a result the competition will be reduced. In 2013 the Russian oil companies continued a large-scale modernization of reﬁ neries aimed at increasing the oil reﬁ ning depth, increasing the yield of gasoline components and improving fuel environmental standards. Realization of many projects is performed in accordance with the quadripartite agreement concluded with the State in October 2011 and is subject to regular monitoring by the Russian Government. Despite the development of projects aimed at reducing the output of fuel oil and other dark petroleum products in anticipation of increasing export duties on dark petroleum products, the reverse of the general trend of fuel oil production failed: - in 2013 its production increased by 4.3% (from 74.4 to 77 million tons). In many ways, this trend is due to the introduction of primary reﬁ ning capacities and increase of primary distillation which increased by 7.3 million tonnes and reached 277.3 million tons per year in 2013. Among the major development trends of the Russian retail market of petroleum products are the following: • Ongoing consolidation of the retail networks by vertically integrated oil companies: construction of new ﬁ lling stations and acquisition of the existing independent operators; • Strengthening the role of the State that resulted from the acquisition of independent vertically integrated oil companies by the state-owned companies; • Improved environmental quality requirements for petroleum products: ban on sales of fuels below EURO-3 grade. THE EVENTS OCCURRED IN THE REPORTING YEAR THAT SIGNIFICANTLY AFFECTED THE INDUSTRY In 2013, the activities of Company were carried out in the conditions of the industrial competition amid slowing growth rate of the industrial production index in all the sectors of the Russian Federation as compared to the previous year (0.3 % vs. 2.6 %), while the production index in mining operation slightly increased (1.2 % vs. 1.1 %). In 2013, the reﬁ ning industries developed more slowly (up 0.1%) than the resource industries (up 0.3%). The state budget was funded to 50% owing to the successful activity of the oil and gas production complex in 2013. The growth of oil production in Russia achieved in 2013 (523.5 million tons, 101% of 2012) has been provided mainly by commissioning of new ﬁ elds in the Eastern Siberia – Vankorskoye, Talakanskoye and Verkhnechonskoye. The appreciable quantity of tax innovations have been developed and adopted by the Government of the Russian Federation in 2010-2013 years, however, the bulk of oil revenues are taken in the form of taxes, which seriously hinders development of the innovation-oriented investment activity of oil-and- gas companies. The Law on the use of incentives in production of extra viscous oil came into force in 2012: its volume is 90% of the export duty for 10 years period. The resulting beneﬁ t will be extended to dozens of licensed areas of the Company, which opens for JSC TATNEFT a real prospect of growth of oil production and involvement in development of previously uneconomic reserves, primarily in the Republic of Tatarstan. In general the year of 2013 has proven to be challenging for the tire manufacturing complex of JSC TATNEFT. There is an observed trend of the demand shift of C-price segment products (low- price segment) in favor of the mid-price segment tires and premium tires in the Russian tire market. Reduction in demand for C-price segment products primarily affected the domestic manufacturers of tire products. Whereas the long-term tire market prospects in all remain encouraging, the competition among the tire manufacturers in the market of the Customs Union is increasing year by year: the foreign producers increase their production capacities in Russia, and import duties under WTO commitments will gradually decrease. As in previous years the State played a signiﬁ cant role in the thermal power industry. In 2013 there was continued consolidation of business entities by state-owned companies; the Government of the Russian Federation took measures to limit the growth of electricity rates for end consumers. Further the energy demand growth rates in 2013 were signiﬁ cantly lower than those planned by the RF Government. The large-scale introduction of new and upgraded generating capacities against an overall economic slowdown in the Russian Federation and Republic of Tajikistan led to increased competition in the industry. The social electricity rates for the population were introduced in sixteen regions. This action has the potential to reduce electricity consumption in case of expanded experience of social rates. 26 27 1 The Federal Law No. 239-FZ dated 03.12.2012 introduced alterations in Article 3.1 of the RF Law No. 5003-1 “About Customs tariff” dated 21.05.1993. ANNUAL REPORT 2013 EXPLORING NEW HORIZONS ABOUT THE COMPANY JSC TATNEFT The key event in the power generation market was the decision of the President of the Russian Federation to freeze electricity and heat tariffs in 2014 and limit their growth by the inﬂ ation rate in the next two years. In 2013, the Russian government paid attention to the problem of non-payments on the wholesale electricity market. To solve this problem the rules were adopted to simplify the procedure of withdrawing a status of the guaranteed power supplier, and introduce a mechanism of ﬁ nancial guarantees of payments for electricity through accredited banks. The measures taken will help to increase a ﬁ scal discipline of the retail companies and reduce the overdue indebtedness of the utilities. The world prices for hydrocarbons (especially oil) are the main external factor affecting the activity of JSC TATNEFT. A possible slowdown in the growth of the global economy, as well as development of the technologies for production of hard-to-recover reserves (bitumen, shales) and technologies for alternative energy production will inevitably lead to the decline in oil demand, and as a result, the decline in world prices. Among the factors that can negatively affect the Russian oil and gas industry as a whole, is the ever- increasing importance of rapidly improving technologies for extracting shale hydrocarbons (especially oil), which could lead to an increase in their supply on the world energy market. The «Shale gas revolution» has already led to a decrease in prices and reduction of gas imports to the U.S., have an impact on the global energy market as a whole, causing the downward correction in commodity prices. The main uncertainty factor for the oil reﬁ ning block of the Company is a frequently changing legislation of the Russian Federation in the ﬁ eld of the export taxation of oil and petroleum products, as well as the lack of long-term plans or concepts of the Russian Government on the tax law changing. The annual changes to the taxation system make it difﬁ cult to effectively plan long-term investments in the reﬁ neries and reliable assessment of their prospective proﬁ tability. Also in recent years in Russia there is a tendency of the tax burden shift from the oil production to the oil reﬁ ning industry. At the same time it is not applicable in Russia to provide the investment protection practice of the Russian investments against unplanned and unfavorable changes in the tax legislation, and therefore these changes lead to worsening economic performances of the investment projects which have been already launched in the oil reﬁ ning business. Consolidation of the retail networks by the state-owned vertically integrated oil companies (JSC Rosneft and JSC GazpromNeft) can have the negative impact on the retail business of JSC TATNEFT. After JSC Rosneft purchased JSC TNK-BP, the market share (by sales volume) of the state-owned vertically integrated oil companies in the regions of JSC TATNEFT’s region of operation has increased from 22% to 33%. Another factor hindering the development of the tire business of JSC TATNEFT in the coming years can become the commitments adopted by Russia under the framework of the World Trade Organization (WTO) to mitigate a number of barriers on the supply of tires of foreign producers to the Russian market. This, in particular, concerns the reduction of import duties for passenger car tires from the current 20% to 10% by 2017, and import duties for truck and bus tires will be reduced from 15% to 10% by 2015. Therefore, it is expected a substantial growth of the foreign tire supply to the Russian tire market from the Asian region, whereas the Chinese manufacturers are already ready to supply their products to the car plants of Russia at prices below the production cost of some Russian automotive producers. THE FACTORS AFFECTING THE COMPETITIVENESS OF JSC TATNEFT AND ITS SUBSIDIARIES AND THE BASIC STEPS OF THE COMPANY TO IMPROVE ITS FUTURE COMPETITIVENESS In the segment of oil & gas production and sales the key competitive advantage of the Company is, above all, the highest hydrocarbon resource endowment in the industry: the available resource base of the Company allows it to maintain the current production volume for over 35 years. Despite the signiﬁ cant depletion of reserves, the Company year after year increases the oil production volumes while maintaining a competitive cost level through the use of the advanced innovative technologies to improve oil recovery. With the general industrial trend of decrease in oil production rates, JSC TATNEFT is the only company among the Russian vertically integrated oil companies, which managed to avoid the decline in production over recent years. JSC TATNEFT is a recognized leader in the ﬁ eld of development and application of EOR methods for development of hard to recover reserves. Through the application of tertiary recovery methods (enhanced oil recovery) Company produced 6 million 192 thousand tons of oil in 2013 or 23.7% of the total production. Achievement of such performance indicators is ensured by the scientiﬁ c- technological support provided by the research and development divisions include in the Company structure. The Company’s developments are praised at the governmental level. In 2013 the collective of authors was awarded the Prize of the Russian Federation Government in the ﬁ eld of science and technology for the scientiﬁ c work «Creation and industrial introduction of the integrated technology for development of extra-viscous oil ﬁ elds». At present OOO NTC Tatneft runs three large projects related to the core production activity of the Company: development of Microbial Enhanced Oil Recovery methods (MEOR) for carbonate reservoirs, deep water processing for steam generation in extra viscous oil production, methods for determining the viscosity of heavy oils by NMR – relaxation. In order to achieve the objectives given to the R&D Centre there were three laboratories created and equipped with state-of-the-art equipment. The following experts are involved for working on the projects: the specialists of OOO NTC Tatneft, TatNIPIneft Petroleum Institute, as well as leading Russian scientiﬁ c institutions: Institute of Microbiology, RAS (Russian Academy of Sciences), University of Chemical Technology of Russia (RKhTU), Kazan (Volga Region) Federal University (K(P)FU). Some foreign oil corporations (France, Kazakhstan) are already interested in the research and developments conducted in the R&D Centre, they are currently negotiating for possible cooperation. The improvement of bituminous oil recovery technologies in the favorable conditions of the incentives given by the Government of the Russian Federation for development of extra-viscous oilﬁ elds provides the Company with a signiﬁ cant competitive advantage in terms of expanding the resource base and increasing the oil production volumes. In order to ensure the production proﬁ tability the Company realizes has the comprehensive programs of the activities to improve the economic efﬁ ciency of the production processes of production, energy- and resource saving. JSC TATNEFT works on conservation of non-commercial producing wells which allows to allocate the released investments between the most promising production targets. Another considerable advantage of JSC TATNEFT is the geographical proximity of the oil production center to the major regions of sales and reﬁ ning of crude oil and petroleum products. The Company has the lowest average tariff of the crude oil transportation to the European markets among the major vertically integrated oil companies of Russia. 28 29 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS ABOUT THE COMPANY JSC TATNEFT The key competitive advantage in the segment of oil & gas processing and petrochemical business is the technological level of a new reﬁ nery of the Company in Nizhnekamsk - TANECO built on the basis of application of the advanced proven international technologies and highest environmental standards, with a potential to achieve the processing depth up to 97% and production of high value added products after completion of the construction and commissioning in full production capacity. Through the construction of this Complex the Company provided an opportunity of processing of the oil produced in the territory of the Republic of Tatarstan very close to the production sites that optimizes the operating costs and further logistics of reﬁ ned products to the own network of ﬁ lling stations located in the surrounding areas but not limited to. Another important factor of the TANECO Complex efﬁ ciency is an access to the Sever product pipeline, which will allow signiﬁ cantly to reduce the costs of diesel fuel transportation to the European markets. The concept of the complex integrates the reﬁ ning and petrochemical plants with the output of 18 kinds of products from European quality standards motor fuels to raw materials components for production of a wide range of high-demand petrochemicals, including import substituting products in compliance with the high environmental quality standards and perspective requirements of the market. It is scheduled from 2014 to start the market supplies of EURO-5 diesel fuel, base oils of II and III groups, jet fuel, and from 2017 it is planned to start market supplies of EURO-5 motor gasoline, aromatic hydrocarbons, etc. With the completion of the construction of the ﬁ rst stage of the reﬁ nery it is planned to completely stop the fuel oil production and to minimize the output of dark petroleum products. In circumstances when from January 1, 2015 it is planned to increase the export duties for dark petroleum products, this conﬁ guration of the reﬁ nery will allow to achieve high efﬁ ciency of oil reﬁ ning. Unlike the most Russian reﬁ neries the TANECO Complex has the capacity to process the oil with high sulfur content. The reﬁ nery currently processes the oil with 1.8% sulfur content which is higher than in the system of OJSC AK Transneft, where the sulfur content is 1.4-1.6% (western directions). Therefore, the redirection of sour crude oil from the pipeline system of OJSC AK Transneft to the TANECO reﬁ ning facilities improves the quality of the Urals export oil, as well as the oil supplied to other Russian reﬁ neries. In this the conditions of quality deterioration of the oil supplied to the Russian reﬁ neries through the pipeline system of OJSC AK Transneft due to the industry-wide quality of raw materials stocks, the Company has the advantage to process the oil with high sulfur content, which will allow to adapt to new conditions with minimum investments. The retail business of the Company is formed by a growing distribution network of service ﬁ lling stations operating under the TATNEFT corporate brand in the territory of Russia, Byelorussia and Ukraine. The competitive advantage of the retail networks of JSC TATNEFT is its widespread scale and breadth covering virtually all the most attractive regions in Russia, ﬁ rst of all, the Volga region and the Central Federal District having high growth prospects and attractive retail margin. The retail networks of JSC TATNEFT is the fourth-largest fuel retailer ranked after Lukoil, Rosneft, GazpromNeft in terms of the number of ﬁ lling stations. The Company has formed the basic part of the retail network based on the prospects of strengthening its own power reﬁ ning block and output of high standard motor fuels. The completion of the TANECO complex will fully satisfy the needs of the TATNEFT network of ﬁ lling stations with high quality fuel of EURO-5 standard, which will signiﬁ cantly strengthen the competitive position of JSC TATNEFT in the retail market. Generally successful logistics location of ﬁ lling stations in the urban infrastructure highways provides a high potential of enhanced economic efﬁ ciency of the retail network. In order to improve the competitiveness of this business segment against the background of consolidation of the retail market by the state vertically integrated oil companies and strengthening of the positions of LUKOIL and other brands of retail networks, the Company with guaranteed fuel quality assurance will continue to modernize the retail ﬁ lling stations extend and improve the quality of non-fuel offers, increase the service levels, develop the target loyalty programs. Along with this the work will be continued to improve the internal efﬁ ciency of the retail business – business process optimization, cost optimization, automation systems improvement. The Tire Business of the Company has several competitive advantages, such as the proximity to the supply source of synthetic rubber, availability of the own carbon black production, a signiﬁ cant scale plants of passenger car, truck tires and solid metal core tires, availability of the up-to-date production lines meeting the highest market requirements and technical requirements, as well as geographical proximity to the large clusters of the car assembly plants and a developed dealer network. In order to increase the competitiveness of the tire business the Company will continue the works on modernization of the tire production, improvement of the production efﬁ ciency, development of new innovative tire products and introduction of higher requirements for quality characteristics of the products. Particular attention will be focused on strengthening the sales and marketing system: product brand management, product range development and price positioning in the light of the necessity to respond quickly to changing marketing conditions. The important aspect of the Company’s development concept of the business segment of reﬁ ning and sales of crude oil and petroleum products is the capacity building to replace oil export with the export and supplies of high-quality petroleum products to the domestic market, which correspond to the strategic objective of Russia. Power generating assets of the Company allow to improve reliability and proﬁ tability of heat and power supply of the production enterprises, reﬁ neries and petrochemical facilities of the Company and promote the growth of competitiveness of the whole Group. In the future, the Company associates additional operating revenue with development of this business segment. The key realizable levers of improving the TANECO competitiveness are currently as follows: increasing the capacity utilization of primary oil processing and secondary reﬁ ning processes at the reﬁ nery complex, which will allow to increase the labour productivity of the enterprise, as well as the approved program of energy saving and energy efﬁ ciency of TANECO, which aims at cost optimization and reduction of the processing cost. The implementation of the project of the Nizhnekamsk CHP modernization is continued with the plan of increasing its capacity from 380 to 730 MW. The commissioning of the state-of-the-art turbine units will allow using the excess thermal energy for generation of additional electric power. The project is expected to increase the Company’s revenue, increase proﬁ ts, as well as solve the problem of electric power shortage at the largest petrochemical plants in Nizhnekamsk, including TANECO Complex. Besides the power generating companies of JSC TATNEFT implement the activities on improvement of the heat and electric power reliability and cost reduction of the energy resources as part of the relevant corporate programs. 30 31 ANNUAL REPORT 2013 KEY INVESTMENT PROJECT OF JSC TATNEFT ‒ CONSTRUCTION OF TANECO REFINERY AND PETROCHEMICAL COMPLEX IN 2005-2013 JSC TATNEFT 2005 DECISION OF THE CONSTRUCTION OF THE TANECO REFINERY AND PETROCHEMICAL COMPLEX PRINCIPAL OBJECTIVES: • Heavy sulfur crude oil processing • Replacement of crude oil export by the export of high-quality petroleum products • Import substitution of petrochemical products • Improvement of the environmental situation THE PROJECT IS IMPLEMENTED IN COMPLIANCE WITH: • The main provisions of the Energy Strategy of Russia for the period till 2030 and the General Plan of the oil industry development until 2020 • The Directive of the President of the Russian Federation to increase the domestic oil reﬁ ning • The Development Program of the Petrochemical Complex of the Republic of Tatarstan for the periods of 2004-2008, 2010-2014 • The Decision of the Board of the Directors of JSC TATNEFT ANNUAL REPORT 2013 KEY INVESTMENT PROJECT OF JSC TATNEFT ‒ CONSTRUCTION OF TANECO REFINERY AND PETROCHEMICAL COMPLEX IN 2005-2013 JSC TATNEFT 2011 COMLETION OF INTEGRATED COMPREHENSIVE TESTING OF THE FIRST START-UP COMPLEX CONSISTING OF THE PROCESSING UNITS: ATMOSPHERIC DISTILLATION UNIT CDU-AVT-7 AND NAPHTHA STABILIZATION UNIT. TANECO OBTAINED THE PERMITS FOR COMMISSIONING OF THESE FACILITIES. COMPLETION OF THE SUPPLY STAGE OF TANECO WITH ALL THE NECESSARY ENERGY RESOURCES ANNUAL REPORT 2013 KEY INVESTMENT PROJECT OF JSC TATNEFT ‒ CONSTRUCTION OF TANECO REFINERY AND PETROCHEMICAL COMPLEX IN 2005-2013 EXPLORING NEW HORIZONS JSC TATNEFT 2013 HYDROCARBONS PROCESSING, PRODUCTION AND SHIPMENT OF PETROLEUM PRODUCTS, PERFROMANCE OF WORKS RELATED TO THE COMPLETION OF CONSTRUCTION AND COMMISSIONING OF THE PLANNED FACILITIES OF STAGE 1A1 AND HYDROCRACKING UNIT. THE CONCLUSION FOR MAIN CONSTRUCTION AND COMMISSIONING FOR VISBREAKING AND SULFUR PRODUCTION UNITS WAS OBTAINED. THE STATE REGISTRATION OF TANECO OWNERSHIP RIGHTS FOR REAL ESTATE UNIT OF TOTAL VALUE OF RUR 27,8 BLN IN APRIL 2013. • As part of the investment program implementation there were 9,5 bln rubles have been used in OJSC TANECO in 2013 • Since the beginning of realization of the construction project of the Reﬁ ning and Petrochemical Complex the investments amounted to 224 bln rubles. Assets of THE TATNEFT GROUP at the end of 2013 EXPLORATION AND PRODUCTION 281,384 MLN RUBLES 42% CRUDE OIL PROCESSING AND SALES OF CRUDE OIL & PETROLEUM PRODUCTS 259,879 MLN RUBLES 39% OTHER BUSINESS SEGMENTS 132,826 MLN RUBLES 19% ABOUT THE COMPANY JSC TATNEFT ASSETS OF THE TATNEFT GROUP The consolidated assets value of Tatneft Group amounted to 674 billion rubles at the end of 2013. The main shares in the structure of the assets are formed by the following business segments: exploration and production accounts for 42%, crude oil processing and sales of crude oil & petroleum products account for 39%, providing the principal intensive growth of the consolidated assets. From 2005 (start of the construction of the TANECO Complex) the consolidated assets increased by 2.4 times. 2013 674 BLN RUBLES (ACCORDING TO IFRS) 260 BLN RUBLES 39% TOTAL ASSETS OF TATNEFT GROUP CRUDE OIL PROCESSING AND SALES OF CRUDE OIL & PETROLEUM PRODUCTS 282 BLN RUBLES (ACCORDING TO US GAAP) 2005 5% 13 BLN RUBLES 39 Revenue of THE TATNEFT GROUP in 2013 EXPLORATION AND PRODUCTION 206,114 MLN RUBLES 45% CRUDE OIL PROCESSING AND SALES OF CRUDE OIL & PETROLEUM PRODUCTS 198,230 MLN RUBLES 44% OTHER BUSINESS SEGMENTS 50,639 MLN RUBLES 11% ABOUT THE COMPANY JSC TATNEFT REVENUE OF THE TATNEFT GROUP The Company implements a strategy for increasing the production and sales volumes of high quality competitive ﬁ nished products, through development of segments of reﬁ ning, petrochemicals, thermal energy, as well as tire manufacturing and retail sales of petroleum products. There was qualitative redistribution of revenues by the business segments. By the end of 2013 the proportion of shares of “the exploration and production” and “crude oil processing and sales of crude oil and petroleum products” was 45% and 44% respectively of the total revenue. 2013 455 BLN RUBLES (ACCORDING TO IFRS) 198 BLN RUBLES 44% TOTAL REVENUE OF TATNEFT GROUP 300 BLN RUBLES (ACCORDING TO US GAAP) 2005 78 BLN RUBLES 26% CRUDE OIL PROCESSING AND SALES OF CRUDE OIL & PETROLEUM PRODUCTS 41 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS ABOUT THE COMPANY JSC TATNEFT DYNAMICS OF OIL PRODUCTION-OUTPUT OF PETROLEUM PRODUCTS RATIO OF TATNEFT GROUP 2010 2011 2012 2013 OIL PRODUCTION 26.1 MLN TONS OUTPUT OF PETROLEUM PRODUCTS 0.2 MLN TONS OIL PRODUCTION 26.2 MLN TONS OUTPUT OF PETROLEUM PRODUCTS 2.3 MLN TONS OIL PRODUCTION 26.3 MLN TONS OUTPUT OF PETROLEUM PRODUCTS 7.2 MLN TONS OIL PRODUCTION 26.4 MLN TONS OUTPUT OF PETROLEUM PRODUCTS 8.2 MLN TONS 0.8% 8.8% OCTOBER 26, 2010 - THE OIL INTAKE MADE AND START-UP OF CDU/VDU-7 IN COMMISSIONING MODE NOVEMBER 01, 2011 – COMPLETION OF THE COMPREHENSIVE TESTING OF CDU-AVT-7 AND NAPHTHA STABILIZATION UNITS 27.4% 31.0% IN 2012 THE COMPLEX REACHED ITS DESIGNED CAPACITY – 7 MILLION TONS PER YEAR TANECO PROCESSED 7,621,631 TONS OF PETROLEUM FEEDSTOCKS. THE QUANTITY OF PROCESSED OIL – 108.8 % OF THE DESIGN CAPACITY 42 43 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS RODUCTION ACTIVITY JSC TATNEFT RODUCTION ACTIVITY OIL & GAS EXPLORATION AND PRODUCTION The Company provides for a steady increase of the production level. In 2013 JSC TATNEFT increased the crude oil production by 0.4% as compared with 2012 and produced 26.107 million tons of crude oil. 707 thousand tons of crude oil produced over the plan. The maximum level of crude oil production was achieved over the last 20 years. The level of 2012 was exceeded by 102 thousand tons. In general, the oil production in the Republic increased to 32 million 869 thousand tons. Savings on the reduced energy consumption and rational use of material and natural resources amounted to 4.7 billion rubles based on the results of 2013. These funds were spent to compensate additional costs connected with maintaining the economic oil production of the Company in the conditions of high ﬁ eld depletion. CRUDE OIL PRODUCTION FROM THE LARGEST FIELDS IN 2013 (THOUSAND TONS) NAME Romashkinskoye Novo-Yelkhovskoye Bavlinskoye Bondyuzhskoe Pervomaiskoye Sabanchinskoye 15,228 2,539 1,085 288 359 538 The average production rate of producing wells of JSC TATNEFT was 3.8 tons/day for 2013. The aggregate oil production of TATNEFT Group amounted to 26.419 million tons in 2013 (26.307 million tons of oil in 2012). Incremental oil production was provided by geological and technical activities. CRUDE OIL PRODUCTION BY JSC TATNEFT GROUP OF COMPANIES (MLN TONS) COMPANIES JSC TATNEFT Oil companies in the Russian Federation controlled companies by JSC TATNEFT 2011 25.928 2012 26.005 2013 26.107 0.266 0.302 0.312 JSC TATNEFT Group of companies 26.194 26.307 26.419 The Company aims to provide oil reserves increment in volumes compensating the current oil production. According to Miller & Lents evaluation proven oil reserves amounted to 847,346 million tons as of the beginning of 2014. As of 01.01.2014 jointly with nine subsidiaries operating in the territory of the Russian Federation possessed 97 licenses for exploration and development of hydrocarbon deposits. The bulk of the current crude oil production is accounted by six major ﬁ elds: Romashkinskoye, Novo-Yelkhovskoye, Bavlinskoye, Bondyuzhskoe, Pervomaiskoye and Sabanchinskoye. In 2013 deep drilling was introduced in 8 structures in the Republic of Tatarstan, 4 structures in Samara region, 1 structure in Orenburg region and 1 structure in the Republic of Kalmykia. KEY OPERATING PERFORMANCE INDICATORS FOR 2013 KEY PERFORMANCE INDICATORS Oil production volume of JSC TATNEFT Associated gas production volume Liquefied Petroleum Gas production & delivery Total meterage drilled for JSC TATNEFT, including Production drilling by JSC TATNEFT Exploration drilling by JSC TATNEFT UOM million tons million cub.m thousand tons thousand m thousand m 2013 26.107 864.8 275.3 450.147 430.4 19.747 33 structures in the Republic of Tatarstan, 4 structures in Samara region and 4 structures in Orenburg region were prepared for deep drilling. The main volumes of geological exploration works carried out in the Russian Federation licensed territories in Tatarstan, Orenburg, Samara and Ulyanovsk regions as well as in the Republic of Kalmykia, and Nenets Autonomous Okrug. There are 9 subsidiaries having 29 license areas with participation of JSC TATNEFT capital in the Russian Federation 23.7 % Of the total oil production was received through the application of enhanced oil recovery methods (EOR) in 2013 44 45 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS RODUCTION ACTIVITY JSC TATNEFT CONSTRUCTION OF WELLS AND GEOLOGICAL EXPLORATION TARGETS 289 producing wells were drilled and completed in 2013. 228 wells were brought into operation after drilling with oil production rate 9.3 tons per day. PRODUCING WELLS STOCK AS OF JANUARY 01, 2014 STOCK CATEGORY Active producing stock Idle producing stock Operating producing stock Producing stock in completion stage and waiting for completion NUMBER OF WELLS 20,257 2,023 22,289 9 OIL AND GAS PRODUCTION UTSIDE TATARSTAN Outside the Republic of Tatarstan JSC TATNEFT has prospecting licenses for exploration and ﬁ eld development of oil, gas and condensate in the Samara and Orenburg regions, Nenets Autono- mous Okrug and the Republic of Kalmykia. In these regions 21 oil ﬁ elds were in operation in 2013. Oil production is in 104 wells, including 98 wells in the Samara region and 6 wells in the Orenburg region. In the Samara region the previously drilled stock was equipped for production and new wells were drilled. 18 new wells were brought into production. The average daily production rate of new drilled wells amounted to 8 tons/day. OIL AND GAS PRODUCTION OUTSIDE THE RUSSIAN FEDERATION JSC TATNEFT and State Company «Turkmenneft» have signed the service contract in 2010 for to enhanced oil recovery and crude oil production in the Goturdepe ﬁ eld in Turkmenistan. The work schedule of the contract execution have been developed and approved. Anticipated incremental oil production for the full-term of the Contract is 321 thousand tons. Currently, the certiﬁ cate of JSC TATNEFT Branch registration in Turkmenistan has been received. A residential township for workers of the JSC TATNEFT Branch has been built. The budget of the JSC TATNEFT Branch in Turkmenistan has been approved for 2014.Works are started on a possible contract extension with subsequent conclusion of the Supplementary Agreement to expand JSC TATNEFT activities in Turkmenistan. Performance of exploration programs has been suspended in the territory of JSC TATNEFT license blocks in Libya and Syria due to the political situation. On February 7, 2013 the force majeure period for implementation of contractual obligations in Libya was announced to be terminated. Currently, the negotiations are underway to resume the works of the JSC Tatneft Branch in Libya. OPERATIONS IN THE EXTRA-VISCOUS OIL FIELDS In 2013 the pilot operations were carried out in the Sheshminsky horizon of the Ashalchi EVO ﬁ eld within the framework of the Company’s plans for development of extra-viscous oil ﬁ elds. 56 horizontal wells were drilled in the Ashalchi EVO ﬁ eld, including 5 single horizontal wells for huff-and-puff technology. 19 wells were completed in 2013. 19 well pairs are in operation at present. The daily oil production reached 480 tons by the end of the year. 145,616 thousand tons of oil is produced in 2013 which is 2 times more than in the previous year. EVO total production from the beginning of commercial development amounted to 325,683 thousand tons. Achievement of these results is supported by a broad range of administrative and technical measures on setting-up additional capacities for water and gas supply, steam generation, EVO production and processing, produced water injection. The boiler house was reconstructed with the increased capacity up to 150 tons of steam per hour, a new gas pipeline and water pipeline were put into operation. ENHANCEMENT OF OIL & GAS RECOVERY AND ENERGY SAVING The Company implements targeted program activities aimed at enhancing effectiveness of performance indicators and monitoring production proﬁ tability through application of modern technologies for optimization of the wells stock and ﬁ eld development systems. Improving the data processing performance in the search of new deposits is provided by new technologies applied along with traditional seismic methods. Prediction of oil prospective targets is made with application of the artiﬁ cial intelligence method, identiﬁ cation of prospective targets with application of ﬁ eld geophysics and geochemistry using a complex probability parameter for deﬁ ning oil bearing prospectivity. Passive adsorption of hydrocarbons; low-frequency seismic sounding; geological and geophysical technology for optimization of well drilling location selection; electromagnetic sounding and a new 3D Stratimegic software package for processing 3D seismic data are used in application of geochemical method of oil and gas detection. NMR- tomography sounding method is applied for identiﬁ cation of extra- viscous oil saturated layers at small depths. 53 technologies were applied in drilling in 2013. The most effective technologies as related to cementing quality improvement are silicate-based mud treatment in the pay interval; application of grade G cement, collar cementing tools; and as related to high oil production rates – construction of horizontal and multilateral wells. 46 The technology of slim-hole drilling proved to be effective. 38 slim holes were drilled in JSC TATNEFT in 2013, among them 36 wells were put on oil production (produced oil volume amounted to 44.726 thousand tons). The average production rate was 6.2 tons per day. The total slim holes stock was 296 wells. Application of advanced methods of enhanced oil recovery provided for the Company’s incremental production of 6,192.5 thousand tons. The share of oil produced using EOR methods accounted for 23.7% of the total oil production in 2013. 59 horizontal holes and12 multilateral wells were drilled in this year, oil production on these wells amounted to 87.2 thousand tons. The total number of horizontal wells drilled from the beginning of activities amounted to 613 wells and the total number of multilateral wells amounted to104 wells. TATNEFT Company actively employs the dual completion technology and oil production from two or several layers of one well. The average increase in oil production per 1 well achieved 4.4 tons per day resulting from dual completion production/injection, and 1.9 tons per day resulting from dual injection. CRUDE OIL PRODUCTION OF JSC TATNEFT Including through tertiary EOR 6.192 MLN TONS (23.7%) DUAL INJECTION IN PAY BEDS Total 26.107 MLN TONS 1,350 1,150 950 750 550 350 150 0 Cumulative oil production (thousand tons) Well stock 0 7 1 7 2 1 3 0 61 6 01 1 22 1 6 8 8 1 8 5 2 1 6 6 1 3 5 2 4 4 8 3 6 2 2 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 7 4 1 , 1 47 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS RODUCTION ACTIVITY JSC TATNEFT CRUDE OIL PROCESSING AND SALES OF CRUDE OIL & PETROLEUM PRODUCTS The Company develops the block of crude oil processing and sales of crude oil and petroleum products, concentrating its efforts on creation of its own reﬁ ning base by the construction of the TANECO Complex of the reﬁ ning and petrochemical plants and modernization of the reﬁ nery facilities of «Yelkhovneft» in order to increase the production and sales volumes of highly competitive ﬁ nished products. The structure of the production facilities of the TANECO Complex consists of ﬁ ve core production units as of the end of 2013: 1. Production of primary oil reﬁ ning. 2. Production of base oils and hydrocracking. 3. Production of elementary sulfur. 4. Production of commercial and raw materials. 5. Production unit of the industrial wastewater treatment, energy supply, water supply and sewage facilities. Production of primary oil reﬁ ning • The CDU/VDU-7 unit is designed for crude oil processing of Devonian and Carboniferous and the blended crudes thereof to get the desired petroleum products and semi-ﬁ nished products, which are commercial products or raw materials for other installations. The design capacity of CDU-VDU-7 is 7 million tons of oil per year. • The Naphtha Stabilization unit is designed for stabilization of straight-run naphtha delivered from atmospheric distillation unit of CDU-VDU-7. The design capacity of the naphtha stabilization unit is 1.1 million tons of unstabilized naphtha per year. • The Visbreaking unit is designed for processing of vacuum residue delivered from CDU-VDU-7 by primary thermal cracking. The design capacity of the visbreaking unit is 2.4 million tons of vacuum residue per year. Production of base oils and hydrocracking • The Integrated Hydrocracking plant is designed for hydrocracking of sulfur-containing products (a mixture of vacuum gasoil and heavy coker gasoil) to produce gasoline, kerosene and diesel fractions puriﬁ ed from sulfur and nitrogen compounds, followed by separation of the products obtained in the fractionation sections and production of lighter fractions. • The design capacity is 2.9 million tons of raw materials per year. The base oil production unit is designed for output of base oils from the unconverted residue of the hydrocracker. The design capacity is 250 thousand tons of raw materials per year. • Three processing units for hydrogen production: two hydrogen production units of 100 and 22 tons per year capacity and a treatment unit of hydrogen-containing gas of 7 tons per year capacity. The production is intended to produce hydrogen of 99.9% purity of natural gas and hydrogen-containing gases. 48 Combined Sulfur Recovery Unit • The Dehydration & Amine Regeneration unit is designed for amine treatment and LPG dehydration, amine treatment of fuel gas and hydrogen-containing gas and hydrogen sulphide removal by MDEA solution. The amine saturated with hydrogen sulﬁ de is regenerated with sulfurous gas release and again routed to puriﬁ cation of gas ﬂ ows in a closed cycle. • The Sour Water Stripper is designed for hydrogen sulﬁ de stripping from sour water delivered the reﬁ nery installations. The stripped water is used by the Complex consumers for balance-of-plant needs, thus reducing the consumption of fresh river water. • The Sulfur recovery plant is designed for processing of sulfurous gas by thermal catalytic Claus process, with production of elementary sulfur and its transfer into the sulfur pellets commodity form. The design capacity of the elementary sulfur recovery unit is 278.8 thousand tons of sulfur per year. • The storage and liquid sulfur granulation facility is designed for block sulfur production, transportation and loading-unloading operations. • The sulfur storage and discharge facility is designed for sulfur pellets bagging in big bags of 1000 kg and/or 50 kg bags, shipment by road and rail transport. Operations of reception, storage of crude oil and petroleum products, pumping of raw materials and shipment of petroleum products are provided by the own infrastructure of the Complex. The TANECO Complex provides a major share of the Company’s reﬁ ning at the 108.8% level of capacity utilization in 2013. The ﬁ xed run of CDU / VDU -7, naphtha stabilization and visbreaking units at 115% of CDU / VDU -7 plant capacity allowed to increase the throughput of processed oil to 115% of design capacity. The reﬁ nery facilities of NGDU Yelkhovneft were provided with the steady material supply and high load of the production capacities in 2013. Within the framework of modernization they replaced the catalyst of the hydrotreating unit which provided the change-over to output of EURO-5 diesel fuel. Based on the results of 2013 the 180.4 tons of the petroleum products were sold, sales revenue amounted to 2.87 billion rubles with the cost of products sold - 2.65 billion rubles. GAS PROCESSING FACILITIES In 2013 the gas processing facilities of Tatneftegazpererabotka Administration collected 864.8 mln. m3 of associated petroleum gas, which was 21.2 mln. m3 more than in 2012. Utilization coefﬁ cient of associated gas for the reporting period amounted to 95.1 %. In 2013 there was about 773.9 mln. m3 of associated gas accepted for processing, that was 14.2 mln. m3 more than the associated gas throughput in the same period of the previous year. Processing of Liqueﬁ ed Petroleum Gas from UKPN amounted to 276.0 thousand tons that was 9.6 thousand tons less than in 2012, which was connected with the growth of gas processing volumes. TARGET INDICATORS OF THE COMPLEX DEVELOPMENT Achievement of the best technological parameters of the oil reﬁ ning depth, extraction of light petroleum products Ensuring compliance of the commercial products with the requirements of the modern world standards and statutory Russian quality standards and technical regulations; Minimization or complete exclusion of semi-ﬁ nished petroleum products; Ensuring minimum dependence on supplies of auxiliary raw materials required for the production of high-quality commercial petroleum products Ensuring optimum energy independence of the enterprise. OUTPUT OF FINISHED PRODUCTS BY TATNEFTEGAZPERERABOTKA ADMINISTRATION IN 2012-2013 TARGET INDICATORS OF THE COMPLEX DEVELOPMENT OUTPUT OF PETROLEUM PRODUCTS IN 2013 (TONS) PRODUCT DESCRIPTION TANECO COMPLEX 2013 Total volume of crude oil refining 7,621,631 Output of core products: Straight-run gasoline Stable gas naphta Middle distillates Vacuum gas oil Fuel oil. Mazut 100 Sulfur Output of light petroleum products, % PRODUCT DESCRIPTION Stripped gas 561,975 536,544 2,344,146 1,926,530 1,912,558 7,684 48.16 Liquid products, total Liquefied gas, including: propane fraction isobutane fraction normal butane fraction isopentane fraction stable gas naphtha Ethane Output of desired petroleum products, % 73.4 Sulfur REFINERY OF NPU YELKHOVNEFT Total output of main products Diesel fuel Gasoline Other middle distillates Sulfur Straight-run gasoline Nitrogen Oxygen 179,306 86,787 81,539 10,582 373 25 UOM million m3 thousand tons thousand tons thousand tons thousand tons thousand tons thousand tons thousand tons thousand tons thousand tons thousand m3 thousand m3 OUTPUT, 2013 275.4 642.8 414.4 245.7 46.3 122.5 22.4 205.9 160.7 4.9 804.8 306.8 49 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS RODUCTION ACTIVITY JSC TATNEFT SUPPLIES OF CRUDE OIL AND OIL-AND-GAS PRODUCTS SUPPLY DISTRIBUTION OF JSC TATNEFT RESOURCES BY BASIC LINES OF SHIPMENT IN 2012-2013 (THOUSAND TONS) In 2013 there were 25,638.2 thousand tons of resources treated and delivered to the transportation system, including the balance 25,762.6 thousand tons, which was by 166.1 thousand tons or 0.7% more than in 2012. NAME 2012 2013 Export to far-abroad countries 11,759.6 11,275.4 Export to near-abroad countries 618.1 1,053.8 The oil crude produced by the Company was sold in three markets: the Russian domestic market, far-abroad and near abroad countries. One of the top delivery priorities in terms of efﬁ ciency remains the oil export to far-abroad countries, which amounted to 43.8% of the total oil sales of the Company. In the domestic market the oil was supplied to the Russian reﬁ neries, the bulk was delivered to the reﬁ neries of TANECO and TAIF-NK to ensure raw materials input and optimal loading of the production facilities. Oil refineries in Russia: including: JSC TAIF-NK Refinery OJSC TANECO JSC Moscow Refinery ZAO Ryazan Refinery JSC Slavneft-YANOS JSC LUKOIL-NORSI In addition to its own resources the Company sold 1,106.0 thousand tons of oil to the independent oil companies, including: for export (far-abroad and near-abroad countries) - 734.7 thousand tons; domestic market - 371.3 thousand tons. JSC Novoshakhtinsk Refinery Other supplies 13,184.7 13,408.9 5,789.0 7,000.0 5,367.0 7,674.8 50.0 99.9 79.9 99.3 64.1 2.6 81.0 23.5 – 173.4 52.7 36.4 Outside the Republic of Tatarstan the resources of oil-production enterprises with participation of JSC TATNEFT in Orenburg region were sold in the amount of 16.9 thousand tons by-passing the AK Transneft system in 2013. The following volumes of gas products were shipped to the enterprise of the gas-petrochemical complex of the Republic of Tatarstan in 2013: 24.5 tons of liqueﬁ ed gas was delivered for the needs of the population. CRUDE OIL SUPPLY OF JSC TATNEFT PRODUCT DESCRIPTION THOUSAND TONS Isobutane NGL from UTNGP Ethane LPG from OJSC TANECO Propane 21.2 6.2 160.7 104.7 11.8 SALES OF PETROLEUM PRODUCTS OF THE TANECO REFINERY (THOUSAND TONS) PRODUCT DESCRIPTION Liquefied Petroleum Gas Straight-run gasoline Stable gas naphtha Visbreaking naphtha Middle distillates Vacuum gas oil Furnace oil Granulated sulfur EXPORT (NEAR- ABROAD, FAR-ABROAD COUNTRIES) DOMESTIC MARKET – 104.7 564.7 522.6 83.5 – – – 144.4 2,250.2 1,943.4 1,759.8 5.0 – 229.5 3.2 SUPPLIES OF PETROLEUM PRODUCTS OF THE TANECO COMPLEX Export (near abroad & far abroad countries) (66.1%) Domestic market (33.9%) Supply to the domestic market (52.11%) Export to near-abroad countries (4.09%) Export to far-abroad countries (43.80%) 50 RETAIL NETWORK OF FILLING STATION COMPLEXES The development program of the own retail network is realized by the construction of new ﬁ lling stations, acquisition, modernization and reconstruction of the current ﬁ ling stations. The TATNEFT retail network of ﬁ lling stations sells all the grades of gasoline and diesel fuels. Guaranteed quality of the petroleum products at JSC TATNEFT ﬁ lling stations is ensured by the multilevel control system. To keeping in pace with the current trend of vehicle conversion to gas fuel the Com- pany annually put into operation 10-15 gas units or install additional gas station dispensers at the gas ﬁ lling stations. The modern technologies and equipment (double-walled tanks, imported fuel dispensers, automated systems for parameter measure- ment of light petroleum products etc.) are applied during construction and reconstruction of ﬁ lling station. Automatic ﬁ lling stations are also put into operation. Costs reduction of the retail distribution network is provided through introduction of energy-saving technologies at the retail network facili- ties. The pilot projects of vapor recovery units (VRU) are implemented the ﬁ lling stations with application of engineering developments that will allow reducing the loss of petroleum products as a result of «natural in and out breathing» in the tanks and signiﬁ cantly improve the environmental friendliness of the ﬁ lling stations. The TATNEFT retail network of ﬁ lling stations complexes includes 648 stations in the territory of the Russian Federation and CIS countries, 524 of them are located in Russia, 114 - in Ukraine, 10 - in Byelorussia. SALES OF OIL-AND-GAS PRODUCTS THROUGH THE FILLING STATIONS NETWORK DESCRIPTION TONS THOUS.RUBLES* 2013 Russian Federation, including: oil products gas products Ukraine, including: oil products gas products Byelorussia, including oil products gas products Total * including taxes 1,590,321 57,755,966 1,454,099 55,161,430 136,222 2,594,536 61,796 53,068 8,728 12,367 11,668 699 2,965,557 2,622,655 342,902 425,215 403,129 22,086 1,664,484 61,146,739 51 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS RODUCTION ACTIVITY JSC TATNEFT PETROCHEMICALS PRODUCTION The segment of the petrochemical production activity of the Company is formed by «Tatneft-Neftekhim» Management Company and a complex of enterprises: «Nizhnekamskshina», Nizhnekamsk Truck Tire Factory, Nizhnekamsk SSC Tire Factory, «Tatneft - Neftekhimsnab», «Nizhnekamsktekhuglerod», Nizhnekamsk Mechanical Plant, «Yarpolimermash - Tatneft», «Energoshinservis», «Kama» Research & Development Center and «Kama» Trading House. KEY PERFORMANCE INDICATORS OF PETROCHEMICAL COMPLEX ENTERPRISES OF JSC TATNEFT PERFORMANCE INDICATORS Total Tire Production, thousand pieces Carbon black output, thousand tons Proceeds from sales, RUR bln 2013 12,511.52 108.9 33.7 The Tire Manufacturing Complex of the Company covers 26% of this Russian industry segment in terms of production volumes; it is a supplier of the domestic car manufacturers KAMAZ, GAS, AVTOVAZ, as well as the car assembly plants of Volkswagen, Fiat and other foreign manufacturers. JSC “Nizhnekamskshina” completed the project realization on increased production capacities of KAMA EURO and Viatti up to 1.3 mln pieces per year In 2013. The Nizhnekamsk Truck Tire Factory reconstructed the electric drive of the MX-7 rubber mixing line. The KAMA Scientiﬁ c & Technological Centre developed 97 designs of new tire sizes. The enterprise mastered the serial production of 30 sizes of tires. In 2014 it is planned to master the production of 78 tires. One of the top priorities of JSC TATNEFT tire business is an environmental responsibility and environmental protection. The operating efﬁ ciency in the ﬁ eld of environmental safety of the production is certiﬁ ed by the results of the inspection environmental audits carried out in all the three tire plants: “Nizhnekamskshina», Nizhnekamsk Truck Tire Factory, Nizhnekamsk SSC Tire Factory, THERMOELECTRIC POWER INDUSTRY NIZHNEKAMSK COMBINED HEAT & POWER PLANT (CHP) The Nizhnekamsk Combined Heat & Power Plant is one of the largest generating companies of electric and thermal energy in the Republic of Tatarstan. The current installed capacity is 380 MW for electricity and 1,580 Gcal/h for heat. The thermal energy consumers are as follows: JSC «Nizhnekamskneftekhim», JSC TANECO and the city of Nizhnekamsk. The Nizhnekamsk CHP produced 1,323 million kWh of electric power in 2013. The internal electric power consumption amounted to 169 million kWh, while the power supply network released 1,154 million kWh of electric power. The thermal energy was sold in the amount of 4,140 thousand Gcal in 2013. The total delivery of thermal energy increased by 15% as compared to 2012. The enterprise achieved effective results on speciﬁ c indicators in 2013: • speciﬁ c fuel consumption for the supplied electricity was 288.3 g/ kWh, which was 1.3 g/kWh below the standard; • speciﬁ c fuel consumption for the supplied heat power was 140.4 kg/Gcal, which was 0.7 kg/Gcal below the standard. The enterprise saved 2,740 TFOE owing to reduction of speciﬁ c fuel consumption against the regulatory values of 2013. Proceeds from sales of the core products amounted to 4,145.5 million rubles in 2013. Gross proceeds of thermal power sales amounted to 2,546.6 million rubles (61.4 % of core products sales), including: • sales proceeds of thermal power – 2,293.1 million rubles. • sales proceeds of heat-carrying agent – 253.5 million rubles. Gross sales of electric energy and power exercised at the wholesale electricity and power market totalled 1,598.9 million rubles (38.6 % of the core product sales) including sales of the purchased electric power for securing execution of free contracts. Including: • sales proceeds of electric energy —1,426.4 million rubles, • sales proceeds of power —172.5 million rubles. In 2013 OOO “Nizhnekamsk CHP” supplied to OJSC TANECO over 13 ata (technical atmosphere) steam – 578,126 Gcal, 140 ata (technical atmosphere) steam – 518,953 Gcal. ALMETYEVSK HEAT SUPPLY NETWORKS (APTS) The thermal power output amounted to 714.3 thousand Gcal as of the end of 2013. Sales of thermal power amounted to 603.0 thousand Gcal. To improve the energy security the enterprise plans to commission independent power supply units (mini heat & power plants or co- generating plants) which will allow to improve energy efﬁ ciency and reduce the rise in tariffs of thermal energy. In order to reduce thermal energy costs, reduce energy losses the frequency-regulated drives are installed on the draft equipment and pumping systems, and non-metallic pipes are actively applied to increase the service life and reduce energy losses in case of ruptures. In 2013 the air emissions were reduced from 1,115 tons to 867 tons. The current installed capacity is 537.79 Gcal/h. In the current year: • output of thermal energy – 714.3 thousand Gcal, • supply of thermal energy to the network amounted to – 694.1 thousand Gcal, • speciﬁ c fuel consumption per supplied thermal energy amounted to 161.52 kg/ Gcal. Pursuant to Federal Law No.261-FZ dtd 11.11.2009 «On Energy Saving and Improving Energy Efﬁ ciency» and for the purpose of implementing the uniform technological policy in the ﬁ eld of energy efﬁ ciency improvement of energy resources utilization the energy saving and energy efﬁ ciency improving program for 2010-2013 years was developed at OJSC «APTS». Business event costs of this program amounted to 7.7 million rubles in 2013. The economic effect of the realized program totalled to 10.8 million rubles. THE REVENUE MIX FROM SALES OF CORE PRODUCTS OF THE NIZHNEKAMSK CHP Gross sales of electric energy and power 1,598.9 million rubles (38.6%) Sales proceeds of heat-carrying agent 253.5 million rubles (9.95%) Sales proceeds of thermal power 2,293.1 million rubles (90.05%) Sales proceeds of power 172.5 million rubles (10.78%) Sales proceeds of electric energy 1,426.4 million rubles (89.21%) Gross proceeds of thermal power sales 2,546.6 million rubles (61.4%) 52 53 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT CORPORATE MANAGEMENT THE COMPANY’S MANAGEMENT SYSTEM The organizational structure of the Company integrates business-processes, resources and production facilities for oil exploration and production, reﬁ ning, petrochemicals production, heat and power generation, as well as crude oil and petroleum products sale, providing for diversiﬁ cation and qualitative interaction of all business segments from recovering the reserves to obtaining an sale of desired petrochemical products. The Company carries out its business in a capital-intensive industry of subsoil usage and reproduction of energy resources requiring greater corporate responsibility in all areas of activity, including social aspects. The Company follows the highest standards of corporate management and consistently introduces all newly generated requirements and recommendations on corporate management, including the ones in the frame conditions integrating the Russian equity capital in the international ﬁ nancial and stock markets. The Company’s corporate management is based on the constructive interaction of shareholders, the Board of Directors and executive bodies and are supported by appropriate distribution mechanisms of competence, authority and responsibility among the responsible ofﬁ cials. The management principles are deﬁ ned by the Articles of JSC TATNEFT, as well as regulated by the internal documents: Provision on the General Meeting of the Company’s Shareholders, Provision on the Board of Directors, Provision on the Management Board, Provision on the General Director, Provision on the Audit Commission and Provisions on the Committees of the Board of Directors, as well as the Corporate Governance Code. The sole executive body (Chief Executive Ofﬁ cer) of the Company is General Director, who is. The colle- gial executive body of the Company is the Management Board headed by General Director. The General Director and the Management Board are accountable to the Board of Directors and the General Meeting of Shareholders. The Control of ﬁ nancial and economic activities of the Company is performed by the Audit Commission. There are Committees under the Board of Directors on Corporate Management, Human Resources and Remuneration, Audit Committee and Information Disclosure. The Board of Directors also established the Insider Information Protection Committee in 2012. The Committees carry out their activities in close cooperation with the Board of Directors, Director General and the Company’s executive bodies: Management Board, Executive Directorate, Internal Audit, Department, Corporate Control and other departments and divisions of the Company. JSC TATNEFT GROUP MANAGEMENT JSC TATNEFT is a parent company of TATNEFT Group. Organization of the management of subsidiaries and afﬁ liated companies is carried out with prevailing participation in the authorized and other capitals of the mentioned companies through managing bodies of the subsidiary with an appropriate indication in the founding documents; the Management Companies within the Group through the conclusion of agreements between these companies and other economic entities - members of the Group on the transfer of the Executive Management Board functions to the Management Companies, as well as through other ways provided by the legislation of the Russian Federation subject to equitable interests of all participants of the Group. The planning and control of business processes by segment of activities are provided for through uniform standards and regulations. The Company publishes annual and quarterly consolidated ﬁ nancial statements in accordance with the international ﬁ nancial reporting standards (IFRS). INFORMATION POLICY JSC TATNEFT is in the top 10 highest ranking information openness Russian energy sector companies. The Company complies with all legal requirements and regulations on information disclosure, and ensures timely and complete information provision to all interested parties on all aspects of its activities (except when the information is commercially classiﬁ ed). Furthermore to ensure better understanding of the current situation and prospects by all stakeholders the Company additionally provides on a voluntary basis complete information in the format of press conferences, corporate media, and also through distribution of press releases via Russian and republican news agencies and the media. The Company provides full and timely disclosure of information to the shareholders about all aspects of its business (except when the information is commercially classiﬁ ed). The main channel of information disclosure is the site of JSC TATNEFT, which contains information about essential facts, events, the Company’s management structure, ﬁ nancial and economic activity. The portal displays founding documents, the Articles, provisions on the Company’s activities, annual reports and reports on sustainable development and social liability of the Company, quarterly reports, quarterly ﬁ nancial statements under IFRS, press releases about afﬁ liates and other information that may essentially affect the value of securities, as well as other information. The Company regularly organizes meetings of analysts and investors with top managers and specialists, as well as offering the opportunity to visit the facilities. The systematic meetings with shareholders and investors are arranged at international stock grounds. 54 55 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT JSC TATNEFT BOARD OF DIRECTORS IN 2013 Rustam N. MINNIKHANOV, born in 1957. 1978 – graduated from Kazan Agricultural Institute, specialty – mechanical engineer. 1986 – graduated from the correspondence Institute of Soviet Trade. 1996-1998 – Minister of Finance of the Republic of Tatarstan. From July 1998 till March 2010 headed the Government of the Republic of Tatarstan. President of the Republic of Tatarstan since March 2010. Doctor of Science, Economics. Share in the Authorized Capital of the Company, % – none Portion of ordinary shares of the Company, % – none David W. WAYGOOD , born in 1950. He has an education certiﬁ cate issued in the United Kingdom of Great Britain and Northern Ireland; graduated from the banking courses of the Bank Institute. Director of ICDS Ltd. since August 2001. Share in the Authorized Capital of the Company, % – none Portion of ordinary shares of the Company, % – none Mariya L. VOSKRESENSKAYA, born in 1955. 1977 – graduated from Moscow Financial Academy. Has a US CPA certiﬁ cate, and she is a certiﬁ ed Russian auditor. Director of Brentcross Ltd. since 2004. Member of the Board of Association of Independent Directors of Russia. Share in the Authorized Capital of the Company, % – none Portion of ordinary shares of the Company, % – none Radik R. GAIZATULLIN, born in 1964. 1985 – graduated from Kazan Agricultural Institute, specialty – accounting and analysis of economic activity in agriculture. Head of the Ministry of Finance of the Republic of Tatarstan since June 2002. Doctor of Science, Economics. Share in the Authorized Capital of the Company, % – none Portion of ordinary shares of the Company, % – none Sushovan GOSH, born in 1957. Graduated from the college of Queen Maria, London University of Electric and Electronic Developments and Institute of Accountants-Experts in England and Wales. Managing Director of SGI Group Ltd. since 2002. Share in the Authorized Capital of the Company, % – none Portion of ordinary shares of the Company, % – none Nail G. IBRAGIMOV, born in 1955. 1977 – graduated with honors from Moscow Institute of Petrochemical and Gas Industry n.a. I.M. Gubkin. First Deputy General Director for Production – Chief Engineer of JSC TATNEFT since 2000. Doctor of Science, Engineering. Share in the Authorized Capital of the Company, % – 0.019586 Portion of ordinary shares of the Company, % – 0.020673 Vladimir P. LAVUSHCHENKO, born in 1949, graduated from Moscow Institute of Petrochemical and Gas Industry n.a. I. M. Gubkin in 1972, and the postgraduate course of VNIIOENG in 1984. 1997 – appointed Deputy General Director for Economics of JSC TATNEFT. Doctor of Science, Economics. Share in the Authorized Capital of the Company, % – 0.045465 Portion of ordinary shares of the Company, % – 0.048194 Nail U. MAGANOV, born in 1958. 1983 – graduated from Moscow Institute of Petrochemical and Gas Industry n.a. I.M. Gubkin. From July 2000 to November 2013 – the First Deputy General Director – Head of Crude Oil and Petroleum Products Sales Department of JSC TATNEFT. Appointed General Director of JSC TATNEFT in November 2013 Share in the Authorized Capital of the Company, % – 0.000176 Portion of ordinary shares of the Company, % – none Renat Kh. MUSLIMOV, born in 1934. 1957 – graduated from Kazan State University, specialty – geology and exploration of oil and gas ﬁ elds. From June 2007 – appointed State Consultant to President of the Republic of Tatarstan on development of crude oil and gas ﬁ elds, Professor of the Crude Oil and Gas Geology Chair of Kazan State University. Doctor of Geological and Mineralogical Sciences. Share in the Authorized Capital of the Company, % – 0.065734 Portion of ordinary shares of the Company % – 0.069624 Azat K. KHAMAEV, born in 1956. Graduated from Kazan Aviation Institute, specialty – mechanical engineer. 2000 – graduated from the Law Faculty of Kazan State University. Appointed First Deputy Minister of Land and Property Relations of the Republic of Tatarstan in December 2008. Appointed Head of the Ministry of Land and Property Relations of the Republic of Tatarstan in March 2009. Share in the Authorized Capital of the Company, % – none Portion of ordinary shares of the Company, % – none Rais S. KHISAMOV, born in 1950. 1978 – graduated from the evening department of Moscow Institute of Petrochemical and Gas Industry n.a. I.M. Gubkin. Appointed Chief Geologist – Deputy General Director of JSC TATNEFT in October 1997. Doctor of Geological and Mineralogical Sciences, Professor. Share in the Authorized Capital of the Company, % – 0.01876 Portion of ordinary shares of the Company, % – 0.019746. RENÉ STEINER, was born in 1964. He has a degree in economics and graduated from Technical High School in Zurich in 1989. Bachelor of Swiss Banking – Zurich, 1992. Since 2011, co-founder, Program Director of the Private Equity FIDES Business Partner AG, Switzerland. Share in the Authorized Capital of the Company, % – none Portion of ordinary shares of the Company, % – none Rinat K. SABIROV, born in 1967. 1991 – graduated from the physics faculty of Kazan State University; 1994 – graduated from the postgraduate course of Kazan State Technological University. 1998 – had a training course under the President’s program for managerial staff. In 2012 he completed the course in the program “Master of Business Administration” of Colorado State University (USA). Since 2006 headed the Division of Oil and Gas Complex of the Cabinet of Ministers of the Republic of Tatarstan. In June 2010 he was appointed Assistant to the President of the Republic of Tatarstan. PhD, Chemical Science. Share in the Authorized Capital of the Company, % – none Portion of ordinary shares of the Company, % – none Valery Yu. SOROKIN, born in 1964. 1986 – graduated from Kazan State University. General Director of JSC Svyazinvestneftekhim since 2003. Share in the Authorized Capital of the Company, % – none Portion of ordinary shares of the Company, % – none Mirgaziyan Z. TAZIYEV, born in 1947. 1972 – graduated from Moscow Institute of Petrochemical and Gas Industry n.a. I.M. Gubkin. Head of NGDU Almetyevneft since January 2005. PhD, Engineering. Share in the Authorized Capital of the Company, % – 0.006448 Portion of ordinary shares of the Company, % – 0.006541 Shafagat F. TAKHAUTDINOV, born in 1946. 1971 – graduated from Moscow Institute of Petrochemical and Gas Industry n.a. I.M. Gubkin. From 1999 to November 2013 – General Director of JSC TATNEFT. Starting November 2013 he performs the duties of Assistant to the President of the Republic of Tatarstan, Advisor to Chairman of JSC TATNEFT’s Board of Directors. Doctor of Science, Economics. Share in the Authorized Capital of the Company, % – 0.116503 Portion of ordinary shares of the Company, % – 0.123914 56 57 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT JSC TATNEFT MANAGEMENT BOARD IN 2013 Nail U. MAGANOV, born in 1958. 1983 – graduated from Moscow Institute of Petrochemical and Gas Industry n.a. I.M. Gubkin. From July 2000 to November 2013 – the First Deputy General Director – Head of Crude Oil and Petroleum Products Sales Department of JSC TATNEFT. Appointed General Director of JSC TATNEFT in November 2013 Share in the Authorized Capital of the Company, % – 0.000176 Portion of ordinary shares of the Company, % – none Victor I. GORODNY, born in1952. In 1978 he graduated from Moscow Institute of Petrochemical and Gas Industry n.a. I.M. Gubkin. 1995 to present time – Deputy General Director – Head of Property Department JSC TATNEFT. Doctor of Science, Economics. Share in the Authorized Capital of the Company, % – 0.000254%. Portion of ordinary shares of the Company, % – None. Shafagat F. TAKHAUTDINOV, born in 1946. 1971 – graduated from Moscow Institute of Petrochemical and Gas Industry n.a. I.M. Gubkin. From 1999 to November 2013 – General Director of JSC TATNEFT. Starting November 2013 he performs the duties of Assistant to the President of the Republic of Tatarstan, Advisor to Chairman of JSC TATNEFT’s Board of Directors. Doctor of Science, Economics. Share in the Authorized Capital of the Company, % – 0.116503 Portion of ordinary shares of the Company, % – 0.123914 Vladlen A. VOSKOBOYNIKOV, born in1965, in 1993 he graduated from the Technical Institute of Southern Alberta Calgary. From 2005 to present time – Head of Consolidated Financial Accenting of JSC TATNEFT. Share in the authorized capital of the Company% – none. Portion of ordinary shares of the Company% – none. Iskander G. GARIFULLIN, born in1960 . In 1981 he graduated from Kazan Financial and Economic Institute named after V.V. Kuibyshev. 1997 to present time – Chief Accountant – Head of Accounting and Reporting Department, JSC TATNEFT. Share in the Authorized Capital of the Company, % – 0.009806%. Portion of ordinary shares of the Company, % – 0.010396%. Nikolay M. GLAZKOV, Born in1960. In 1988 he graduated from Kazan Institute of Civil Engineering. 2008 to 2010 – Head of Capital Construction JSC TATNEFT. 2010 to present time – Deputy General Director for Capital Construction, JSC TATNEFT. Share in the Authorized Capital of the Company, % – None. Portion of ordinary shares of the Company, % – None . Valery D. ERSHOV, born in1949. In 1978 he graduated from Kazan State University named after V.I. Ulyanov-Lenin. 2002 to present time – Head of Legal Department, JSC TATNEFT. Share in the Authorized Capital of the Company, % – None. Portion of ordinary shares of the Company, % – None. Nail G. IBRAGIMOV, born in 1955. 1977 – graduated with honors from Moscow Institute of Petrochemical and Gas Industry n.a. I.M. Gubkin. First Deputy General Director for Production – Chief Engineer of JSC TATNEFT since 2000. Doctor of Science, Engineering. Share in the Authorized Capital of the Company, % – 0.019586 Portion of ordinary shares of the Company, % – 0.020673 Portion of ordinary shares of the Company, % – None. Vladimir P. LAVUSHCHENKO, born in 1949, graduated from Moscow Institute of Petrochemical and Gas Industry n.a. I. M. Gubkin in 1972, and the postgraduate course of VNIIOENG in 1984. 1997 – appointed Deputy General Director for Economics of JSC TATNEFT. Doctor of Science, Economics. Share in the Authorized Capital of the Company, % – 0.045465 Portion of ordinary shares of the Company, % – 0.048194 Zagit F. SHARAFEEV, born in1956. In 1980 he graduated from Kazan Chemical Technological Institute named after S.M. Kirov. In 1991 he graduated from the All-Union Correspondence Financial and Economic Institute. From 2010 to April 2014 – Deputy General Director of JSC TATNEFT for Petrochemicals Production – Director of OOO «Tatneft-Neftekhim», Phd, Economics. Share in the Authorized Capital of the Company, % – None. Portion of ordinary shares of the Company % – None . Fedor L. SHCHELKOV, born in1948. In 1972 he graduated from Moscow Institute of Petrochemical and Gas Industry n.a. I.M. Gubkin. 1996 to present time – Deputy General Director of JSC TATNEFT, General Issues. Share in the Authorized Capital of the Company, % – 0,029929%. Portion of ordinary shares of the Company, % – 0,031524%. Alexander T. YUKHIMETS, born in1949. In 1972 he graduated from Moscow Institute of Petrochemical and Gas Industry n.a. I.M. Gubkin. From 1995 to present time – Board of Directors Secretary, JSC TATNEFT. Share in the Authorized Capital of the Company, % – 0,000284%. Portion of ordinary shares of the Company, % – None. Rustam N. MUKHDMADEEV, born in1952. In 1977 he graduated from Moscow Institute of Petrochemical and Gas Industry n.a. I.M. Gubkin. 2001 to present time – Deputy General Director of JSC TATNEFT for HR and Social Development. Share in the Authorized Capital of the Company, % – 0.004204%. Portion of ordinary shares of the Company, % – 0.004264%. Rafael S. NURMUKHAMETOV, born in1949. In 1974 he graduated from Ufa Petroleum Institute. 1989 to present time – Head of NGDU «Leninogorskneft», JSC TATNEFT. Share in the Authorized Capital of the Company, % – 0.010465%. Portion of ordinary shares of the Company, % – 0.010107%. Rifkat M. RAKHMANOV, born in1948. In1970 he graduated from Ufa Petroleum Institute. 2010 to present time – Deputy General Director of JSC TATNEFT for Workover and EOR. Share in the Authorized Capital of the Company, % – 0.020604%. Portion of ordinary shares of the Company, % – 0.021678%. Yevgeny A. TIKHTUROV, born in1960. In 1982 he graduated from Moscow Institute of Management n.a. S. Ordzhonikidze. 1999 to present time – Head of Finance Department, JSC TATNEFT. Share in the Authorized Capital of the Company, % – None. 58 59 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT LIST OF MAIN ISSUES REVIEWED AT THE MEETINGS OF THE BOARD OF DIRECTORS IN 2013: LIST OF MAIN ISSUES REVIEWED AT THE MEETINGS OF THE MANAGEMENT BOARD IN 2013: 1. Financial performance of JSC TATNEFT in 2012. 2. Results of the Internal Audit Department operation for 2012 and approval of the Department work plan for 2013 3. Annual General Meeting of Shareholders of JSC TATNEFT on the results of 2012. 4. Candidates to the Board of Directors and the Audit Commission of JSC TATNEFT and proposals for the agenda of the annual general meeting of shareholders on the results of 2012. 5. Implementation of a business-project for development of Ashalchinskoye ﬁ eld. 6. About the program of improving reservoir pressure maintenance system in JSC TATNEFT. 7. Outcome of the labor collective conference of JSC TATNEFT in 2012 and the results of social programs implementation. 8. Results and objectives of the TATNEFT Production Group work on the growth of labor productivity. 9. Results of operations and development prospects of the «Heat Power» sector business enterprises of TATNEFT Group. 10. Progress in introducing new technologies for the development and production of JSC TATNEFT’s ﬁ elds. 11. Performance outcome of the JSC TATNEFT’s petrochemical complex enterprises. 12. Plans for crude oil production and geological/technical activities of JSC TATNEFT in 2014-2015. 13. About Environmental Control system at JSC TATNEFT. 14. About the current system of personnel management at JSC TATNEFT. 15. Implementation progress and strategy and of the «TANECO» project further development 16. Application of modern technologies and equipment to improve efﬁ ciency in the construction of wells at OOO «Tatburneft» Management Company. 17. Condition and development of the corporate media at JSC TATNEFT. 18. Effectiveness of ﬁ nancial and economic activities of subsidiaries and afﬁ liates of JSC TATNEFT. 19. Program of equipping ﬁ lling stations with petroleum products hydrocarbon vapor recovery systems. 20. Support of small and medium-sized businesses in the south-eastern part of the Republic of Tatarstan. 1. Crude oil production for December and twelve months of 2013. 2. Comparative evaluation of the JSC TATNEFT’s Oil and Gas Production Divisions’ operation for 2012. 3. On the status of using drilled wells stock by the Oil and Gas Production Divisions of JSC TATNEFT. 4. Implementation of the JSC TATNEFT’s investment program in crude oil production in the territory of the Republic of Tatarstan for 2012. 5. Analysis of energy consumption and energy costs for the year 2012. 6. Current ﬁ nancial and economic condition and results of JSC TATNEFT fulﬁ lling the indicators of Orders No. 1, 2 and 3 for 2012 and 9 months of 2013. 7. On the status of geological exploration works and reserves growth of the TATNEFT Group of Companies in 2012-2013. 8. Analysis of the formation pressure proﬁ le by the targets of operation. Measures aimed at improving the reservoir pressure maintenance system. 9. Progress in obtaining governmental authorities’ permission for construction and commissioning of wells completed. 10. Implementation progress of the «Ashalchinskoye extra-viscous oil ﬁ eld development» project. 11. Application of the bottom-hole cleaning technology through self-ﬂ owing method at NGDU «Leninogorskneft» and NGDU «Aznakaevskneft». 12. Implementation progress of the JSC TATNEFT’s program of chain drives operation. 13. Implementation progress of the «Reconstruction of OOO «Nizhnekamsk CHP» project with installation of low-grade steam turbines. 14. Operation results of NGDU «Nurlatlatneft» and NGDU «Prikamneft» to reduce the growth rate of individual tariffs for purchasing of electricity for the 1st quarter of 2013. 15. Organizing well repair and drilling at NGDU «Elkhovneft» and NGDU «Yamashneft» 16. Progress of the construction of «TANECO» facilities. 17. Progress of «TANECO» operation. 18. Implementation of the JSC TATNEFT’s investment program of crude oil production in the territory of the Republic of Tatarstan for the Ist half of 2013. 19. Outcome of labor collectives’ meetings and implementation progress of the Collective Agreement for the Ist half of 2013. 20. Status of reserves development and crude oil production rates from carbonate reservoirs. 21. Operation of intelligent wells at deposits 301-305 of NGDU «Leninogorskneft». 22. Work on improving the pipeline system reliability (oil and water pipelines) and increasing the period of their operation. 23. Financial and economic state of JSC TATNEFT and the credit market situation. 24. Work progress for the transfer of land areas from the category of agricultural land into the category of industrial land for well drilling. 25. Plans and norms of crude oil, liquid production and water injection for 2014 by the Oil and Gas Production Divisions. Results of selecting geological and technical measures to be included in the investment program. 26. Utilization of petroleum associated gas for electric power generation using Capstone microturbine plants at JSC TATNEFT’s facilities. 27. Current industrial safety situation at JSC TATNEFT. 28. Work results of clearing power line routes to exclude possible damage resulting from trees’ falling. 60 61 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT COMMITTEES OF THE BOARD OF DIRECTORS CORPORATE MANAGEMENT COMMITTEE The Corporate Management Committee has been a standing commit- tee of the Board of Directors since 2004 and it is authorized to render assistance to the Board of Directors of JSC TATNEFT in improving the Corporate Management system and mechanisms in the Company and provide for interaction of the concerned parties on the corporate issues. Composition of the Corporate Management Committee in 2013: CHAIRMAN Viktor I. Gorodny, member of the Management Board of JSC TATNEFT, Deputy General Director, - Head of Property Depart- ment of JSC TATNEFT, Deputy Chairman of the Information Disclosure Committee, Doctor of Economics. MEMBERS OF THE COMMITTEE Rais S. Khisamov, member of the Board of Directors of JSC TAT- NEFT, Deputy General Director – Chief Geologist of JSC TATNEFT, Doctor of Geological and Mineralogical Sciences; HR AND REMUNERATION COMMITTEE The HR and Remuneration Committee has been established since 2004 to assist the Board of Directors in creating conditions to attract highly skilled professionals to the management of the Company and ensure necessary incentives for their efﬁ cient work. The Committee carries out its activities in close cooperation with the Committees of the Board of Directors: Audit Committee, Corporate Management Committee, Information Disclosure Committee and the Company’s Executive Bodies: Management Board, Executive Directorate, Internal Audit Department, Corporate Control Department and others. Composition of the HR and Remuneration Committee in 2013: CHAIRMAN David William Waygood , member of the Board of Directors of JSC TATNEFT, Independent Director, Director of ICDS Ltd. (till June 2013). Rinat K. Sabirov, member of the Board of Directors of JSC TATNEFT, Assistant to President of the Republic of Tatarstan, member of the HR and Remuneration Committee, Candidate of Chemical Sciences; René Frederic STEINER, Member of the JSC TATNEFT’s Board of Directors, Independent Director, Program Director of the Private Equity FIDES Business Partner AG, Switzerland (headed the Committee since June 2013). MEMBERS OF THE COMMITTEE Sushovan Ghosh, member of the Board of Directors of JSC TAT- NEFT, Managing Director of SGI Group LTD. Rinat K. Sabirov, member of the Board of Directors of JSC TATNEFT, Assistant to President of the Republic of Tatarstan, member of the Corporate Management Committee. Main Activity Areas of the HR and Remuneration Committee in 2013: 1. Consideration of the work results aimed at strengthening labor and production discipline at structural divisions of JSC TATNEFT. 2. Consideration of the professional standards development, such as the formation of the Company’s personnel training and development, and the formation of the personnel reserve pool. 3. Preparation of recommendations on the personnel remuneration by the results of FY 2013. Valery D. Ershov, member of the Management Board, Head of Legal Department of JSC TATNEFT; Rustam M. Khisamov, Head of Securities Ofﬁ ce of the Property Department of JSC TATNEFT, PhD, Economics; Vasiliy A. Mozgovoy, Assistant to General Director of JSC TATNEFT, Corporate Finances; Denis V. Tsovma, Deputy Head of Securities Ofﬁ ce of the Property Department, JSC TATNEFT. Main Activity Areas of the Corporate Management Committee in 2013: 1. Stock market situation analysis. 2. Monitoring of JSC TATNEFT’s market capitalization and analysis of the capitalization proﬁ le key factors. 3. Formation and coordination of implementation of the plan of works with shareholders and investors for 2013. 4. Control of use of the Insider Information. 5. Assistance to the Insider Information Protection Committee. 6. Monitoring adherence to the rights and interests of shareholders. 7. Control of the information disclosure. 8. Assistance to the Board of Directors and interaction with the Information Disclosure Committee to ensure the information disclosure in accordance with applicable law and the stock market regulators requirements. 9. Formulation of proposals to the Executive Bodies to improve the system of corporate standards. 62 AUDIT COMMITTEE The Audit Committee has been a standing committee of the Board of Directors of JSC TATNEFT since 2004. The mission of the Committee is rendering assistance to the Board of Directors in exercising control of authenticity of JSC TATNEFT’s ﬁ nancial statements, providing independent audit, functioning of the internal audit system of the Company, as well as compliance with regulatory and legal requirements. Composition of the Audit Committee in 2013 INFORMATION DISCLOSURE COMMITTEE The Information Disclosure Committee has been a standing committee of the Board of Directors since 2004. Composition of the Information Disclosure Committee in 2013: CHAIRMAN Vladimir P. Lavushchenko, member of the Board of Directors, member of the Management Board, Deputy General Director of JSC TATNEFT on Economics, Doctor of Economics CHAIRMAN Sushovan Ghosh, member of the Board of Directors of JSC TATNEFT, Independent Director. Managing Director of SGI GROUP LTD. Member of the HR and Remuneration Committee of JSC TATNEFT. DEPUTY CHAIRMAN Viktor I. Gorodny, member of the Management Board, Deputy General Director, Head of the Property Department of JSC TATNEFT, Head of the Corporate Management Committee, Doctor of Science, Economics MEMBERS OF THE COMMITTEE René Frederic STEINER, Member of the JSC TATNEFT’s Board of Directors, Independent Director, Program Director of the Private Equity FIDES Business Partner AG, Switzerland member of the Committee since June 2013 Mariya L. Voskresenskaya, member of the Board of Directors of JSC TATNEFT, Independent Director, Director of Brent Cross Ltd. Radik R. Gayzatullin, member of the Board of Directors, Minister of Finance of the Republic of Tatarstan. David William Waygood, member of the Board of Directors, Independent Director, Director of ICDS Ltd (till June 2013); Main Activity Areas of the Audit Committee in 2013: 1. Activities coordination of external auditors and the Internal Audit Department, as well as regular review of their reports. 2. Review and analysis of quarterly ﬁ nancial statements. 3. Review and application of independent auditors’ reports on the condition of the JSC TATNEFT’s internal control systems. 4. Discussing the scope, areas of emphasis and timing of audits with the independent auditors and the Internal Audit Department. 5. Veriﬁ cation of the external auditors’ independence. 6. Provision of recommendations to the Board of Directors regarding selection of the JSC TATNEFT auditors. 7. Issue of ﬁ nancial statements by the external auditors in accordance with IFRS. MEMBERS OF THE COMMITTEE Vladlen A. Voskoboynikov, member of the Management Board, Head of Consolidated Financial Reporting Department of JSC TATNEFT Yevgeny A. Tikhturov, member of the Management Board, Head of the Financial Department of JSC TATNEFT Vasiliy A. Mozgovoy, Assistant to General Director of JSC TATNEFT, Corporate Finances Aleksander T. Yukhimets, member of the Management Board, Secretary of the Board of Directors of JSC TATNEFT Nuriya Z. Valeyeva, Head of Technical and Economic Information and Advanced Experience Extension Ofﬁ ce, JSC TATNEFT Denis V. Tsovma - Securities Ofﬁ ce Deputy Head, Property Department of JSC TATNEFT Main Activity Areas of the Information Disclosure Committee in 2013: 1. Control of the information disclosure procedures. 2. Coordination of the activities on formulation of essential facts, quarterly and annual reports of the Company, as well as consolidated ﬁ nancial statements and RAS reports. 3. Coordination of the activities for information support of the current Company’s activity 4. Control and coordination of the corporate mass media activity on development of web-resources of TATNEFT Group. 5. Ensuring a uniﬁ ed information policy of TATNEFT Group. 63 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT CORPORATE PRINCIPLES OF INTERACTION WITH SHAREHOLDERS AND INVESTORS Guaranteed equal ensuring and observance of legal rights and interests of all the the Company’s shareholders regardless of the number of shares they own, as set out by applicable laws of the Russian Federation, requirements and recommendations of stock markets regulators, where the shares of the Company circulate. The Company’s shareholders exercise their rights and responsibilities and participate in the activities of the Company under the applicable law, as well as on the basis of voluntary initiatives aimed at improving the management and operations of the Company. The shareholders should proceed in their actions taking into account the interests of the Company and shall not take any actions that are contrary to the interests of the Company. Execution of all their duties in a timely manner and in full volume by the shareholders will enable the Company to ensure implementation of all legal rights of the shareholders. CORPORATE INTERACTION WITH SHAREHOLDERS OF JSC TATNEFT IN 2013 The Company provides for prompt review of all the shareholders’ appeals received in the written or electronic form or made personally and respond in a timely and appropriate manner. In case of the shareholders’ problems identiﬁ cation (violations of the shareholders’ rights and conﬂ ict emergence), the Company shall take immediate measures to address these problems, analyze the circumstances that led to their emergence and organize efﬁ cient mechanisms to resolve them. The Company makes no exceptions in reviewing all facts regarding violations of the shareholders’ rights and taking necessary steps to address them, as well as measures to prevent re-emergence of such violations in the future. The Company has an authorized unit that coordinates the whole system of JSC TATNEFT’s interaction with its shareholders: the Securities Operation Ofﬁ ce of the Company’s Property Department. The Company strives to ensure the most reliable and effective methods and forms of communication, including advanced information technologies application for reaching the highest possible quality of interaction with the shareholders. The Company provides the shareholders with an access to documents in accordance with the applicable law. Continuous interaction of the Company’s management with all the shareholders in order to manage the Company effectively and ensure its sustainable and dynamic development. Continuous improvement of existing and development of new mechanisms and forms of interaction with the shareholders and potential investors, which would increase efﬁ ciency and quality of interaction with the shareholders, taking into account emergence of new shareholders and formulation of further goals by the shareholders. Identiﬁ cation and resolution of all possible general and speciﬁ c issues related to exercising of the shareholder rights. Taking all necessary and possible measures in case of a conﬂ ict between the Company’s bodies and its shareholder(s), as well as between the shareholders, if the conﬂ ict affects the interests of the Company, to fully settle the conﬂ ict and to create an environment that would prevent the conﬂ ict arising in the future. PROCEDURE OF ENSURING INTERACTION WITH SHAREHOLDERS The Company provides equal opportunities for shareholders through: 1. Procedure of holding the General Meeting of Shareholders, which guarantees equal opportunities to all the participants of the meeting to take part in discussing the meeting issues and expressing their opinions. 2. Developing and improving corporate mechanisms aimed at informing the shareholders of all signiﬁ cant events of the Company in full volume in accordance with all applicable requirements of the information disclosure. 3. Election of the Board of Directors members, General Director and the Company’s Management Board members in accordance with the transparency policy stipulating provision of the relevant information on each nominee to the shareholders. 4. Prohibition of transactions with the use of insider and conﬁ dential information. 5. Providing the information to the Board of Directors members, General Director and members of the Management Board on transactions in which can be recognized as related party transactions. 6. Application of all available modern communicative means to ensure the most effective and efﬁ cient communication with all the shareholders, regardless of any remoteness of the shareholders from the Company’s location. 64 CORPORATE CENTER FOR OPERATION WITH SECURITIES AND INTERACTION WITH SHAREHOLDERS OF JSC «TATNEFT» GUARANTEED EQUAL ENSURING AND OBSERVANCE OF LEGAL RIGHTS AND INTERESTS OF ALL SHAREHOLDERS PROMP REVIEW OF APPEALS OF THE SHAREHOLDERS PAYMENT OF DIVIDENDS BY THE DECISION OF THE GENERAL MEETING OF THE SHAREHOLDERS STRICT COMPLIANCE WITH ALL STANDARDS AND REQUIREMENTS OF STOCK EXCHANGES THE STABLE STRUCTURE OF JSC TATNEFT SHAREHOLDERS REFLECTS HIGH CONFIDENCE LEVEL OF THE KEY INVESTORS TO LONG-TERM DEVELOPMENT OF THE COMPANY 65 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT CORPORATE RESPONSIBILITY OF THE COMPANY ON THE STOCK MARKET COMPANY’S COMMITMENTS ENSURING THE INSIDER INFORMATION PROTECTION CORPORATE MANAGEMENT STANDARDS The Company provides all the necessary procedures to protect the insider information by relevant internal regulatory documents, including the Rules of compliance monitoring on the insider information of JSC TATNEFT, the Practices governing access to the insider information and control rules of protection of its conﬁ dentiality based on the List of the information related to the insider information. The most important component of the TATNEFT Company’s corporate management is a system of uniform corporate standards aimed at ensuring the efﬁ ciency of business processes, their quality control, minimizing all types of corporate risks and generally maintaining transparent corporate relations between the parent Company, structural divisions, subsidiaries and afﬁ liates. STATUTORY REQUIREMENTS STOCK EXCHANGE REQUIREMENTS ON GROUP A1 LISTING FOR THE LARGEST ISSUERS 2,349 notiﬁ cations of transactions with the Company’s securities were received from the insiders during 2013. The system of corporate standards includes 22 areas covering all components of the Company’s activity, and applies to the parent Company, as well as its subsidiaries and afﬁ liates. Preparation and holding of the General Meeting of the Shareholders Governmental authorities Availability of independent directors in the Board of Directors of the Company Central Bank of Russia Activities of the Committees of the Board of Directors Stock Exchanges Availability of Collegial Executive Body (Management Board) Preparation and disclosure of the annual reports of the Company Provision of annual and quarterly ﬁ nancial statements according to the international standards Submission of the quarterly reports of the Issuer Prompt disclosure of essential facts Maintenance and disclosure of the list of afﬁ liated entities Informing the company management about transactions with interested parties Ensuring the order of protection of the insider information Availability of the internal audit department accountable to the Audit Committee Reporting on the compliance with the requirements for maintaining the listing VOLUNTARY COMMITMENTS Press releases and other information Investment companies Rating Agencies Corporate institutes and associations of independent directors PROTECTION OF THE CORPORATE INTERESTS INSIDER INFORMATION PROTECTION COMMITTEE CHAIRMAN Denis V. Tsovma, Deputy Head of Securities Ofﬁ ce of the Property Department: person overseeing the implementation of the Law on the Prevention of Unlawful Use of Insider Information. MEMBERS OF THE COMMITTEE Valery D. Ershov, member of the Management Board, Head of Legal Department of JSC TATNEFT; Alexey P. Bespalov, Head of the Information Technologies Department – Deputy Chief Engineer; Ildar A. Rakhmatullin, Head of Internal Control Department; Rustam M. Khisamov, Head of the Property Department Securities Ofﬁ ce of JSC TATNEFT, PhD, Economics; Rimaz Sh. Yamilov, Head of New Structures Ofﬁ ce, Property Department of JSC TATNEFT; Vasily A. Mozgovoy, Assistant to General Director of JSC TATNEFT, Corporate Finance; Petr A. Glushkov, Head of International Law Ofﬁ ce, Consolidated Statements Department; The corporate standards are approved by General Director of JSC TATNEFT and registered under individual serial numbers in a special register. The register is updated annually. As of January 1, 2014 the register of corporate management standards included 77 entrees. The current standards’ performance is supported by taking appropriate management decisions and approval of additional regulations. For the purpose of maintaining and developing a uniﬁ ed regulatory base of JSC TATNEFT there was a corporate information system of the uniﬁ ed regulatory base (KIS ERB) implemented. By the end of 2013 there were 2,024 internal regulatory documents and 35,584 external documents placed in the KIS ERB. The major new corporate management standards of TATNEFT Group formed in 2013: • Corporate management standard «On registration procedure of suppliers of goods (works, services) at JSC TATNEFT • Tender regulations of for procurement of goods, works and services by the branch of JSC TATNEFT in Libya required for the implementation of agreements on exploration and production sharing between the National Oil Corporation of Libya and JSC TATNEFT • Regulations of the contractual work organization at JSC TATNEFT n.a. V.D. Shashin • Standard to ensure the performance efﬁ ciency of associated petroleum gas driven power generating plants at JSC TATNEFT Corporate Governance Code Rifdar R. Khamadyarov, Head of Personnel Ofﬁ ce. 66 67 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT COMPANY’S INVESTMENT POLICY IN 2013 The investment activity of the Company is carried out in accordance with the development strategic plans and current priorities of decision of production and social tasks based on the principle of the maximum investment efﬁ ciency and increased proﬁ tability in each areas of the Company’s activity. MAIN INVESTMENT PROJECTS OF 2013 Crude Oil Production Program The actual performance of investments was 22% higher than the planned ﬁ gure. In order to enhance oil recovery the amount of RUR 637 million was invested in the technology of dual completion/operation and injection with development of various equipment modiﬁ cations and combinations of installations. The pilot project was continued at Ashalchinskoye natural bitumen ﬁ eld. Total investments for the project amounted to RUR 5.7 billion including RUR 2.8 billion in the reporting year. There were projects implemented in the Company on the use of gas turbines to increase useful utilization of associated petroleum gas, as well as increase energy independence of production facilities at the expense of generating their own energy. The government support in the form of tax property tax exemptions was granted under these projects. In 2013, in the frame of associated petroleum gas utilization project the Company started to operate Capstone microturbine based power plants at four sites of JSC TATNEFT: UPS- 102k of Tat- Kandyzskoye oilﬁ eld, NGDU «Bavlyneft»; DNS-21 of Sokolkinskoye oilﬁ eld, NGDU «Elkhovneft»; GZNU-1331 of Yamashinskoye oilﬁ eld, NGDU «Yamashneft» and GZNU 206 Shegurchinskoye oilﬁ eld, NGDU «Yamashneft». A strategic area for JSC TATNEFT is expansion of the resource base and crude oil production outside the Republic of Tatarstan. Assimilation of investment by companies and own areas of JSC TATNEFT, located outside the Russian Federation in the Republic of Tatarstan amounted to RUR 3.1 billion in 2013 with 70 % of this amount invested in drilling of production and exploration wells, 3% in capital construction, about 20% were spent for seismic exploration methods and case works under the ﬁ eld geological exploration program, while 4% of the amount were spent for geological production enhancement operations. Construction of the TANECO Reﬁ ning and Petrochemical Plants Complex in Nizhnekamsk The investments in OJSC TANECO amounted to RUR 9.5 billion in 2013, including RUR 1.3 billion spent for engineering design, construction, commissioning and other works. RUR 8.2 billion was spent for acquisition of Phase 1B facilities. OJSC «TANECO» received the opinions of Rostekhnadzor of the Russian Federation on compliance with requirements and the following process facilities were commissioned: the visbreaking unit, combined sulfur recovery unit and sour gas ﬂ are. 68 During the reporting year, the construction projects management department carried out a signiﬁ cant amount of construction works at the hydrocracking installation site, completed delivery of basic technological equipment, including long lead items. Currently there are commissioning operations underway at the combined hydrocracking installation. The investments for the construction management department project totaled RUR 33.2 billion during 2013. Reconstruction of Nizhnekamsk CHP with installation of Low- Grade Steam Turbines Investments for reconstruction amounted to RUR 973 million in 2013. A signiﬁ cant amount of R&D and construction and installation works was performed. The infrastructure improvement of the new facility was completed, communications arrangement were made with laying new underground network. The works on sealing the main building were completed as well as the force plate and foundations for two new turbine units were also completed. Delivery of the turbine and generator for the ﬁ rst starting block was made. Development of Petrochemical Complex The amount of RUR 861 million was invested in 2013 for the development of the petrochemical complex. The project «Increasing the production of high-performance tires by 1.3 mln pieces per year» was completed at JSC «Nizhnekamskshina». This project is the ﬁ rst stage (stage 1A) of the project «Bringing production capacity to 18 million tires per year”. As a result of this project implementation the high-performance tires production volume will increase to 4.5 million tires per year. The project cost amounted to RUR 1.1 billion. The project «Modernization of carbon black production» is still underway at JSC “Nizhnekamsktekhuglerod». Implementation of the whole project will allow increasing the output volume to 134.0 thousand tons. Glass Fiber and Glass Fiber Based Products Manufacturing Implementation of the project is carried out on the basis of «PD Tatneft-Alabuga Steklovolokno» established by OOO «Tatneft-Aktiv» and German company PD Glasseiden GmbH Ochatz. In 2013, the company smelted 26.1 thousand tons of glass, produced 21.3 thousand tons of marketable products, including 54.2% of direct roving and multiﬁ lament yarn, 17.3% of the assembled roving, 13.7% - glass ﬁ ber mats, 4.1% - glass ﬁ ber mesh, 4.0% - roving fabrics and 6.7% - chopped glass ﬁ ber. Retail Business Development The JSC TATNEFT’s distribution infrastructure investment program amounted to RUR 1.3 billion. Sales of petroleum products in the Russian Federation for 2013 amounted to 1.59 million tons. 2013 witnessed commissioning of 18 ﬁ lling stations, 1 automatic ﬁ lling station, 7 automatic gas ﬁ lling stations and 7 gas terminals at existing stations on the territory of the Russian Federation. In 2013, the works were continued on the implementation of energy saving technologies. Pellet boilers were installed at 36 ﬁ lling stations. INVESTMENT PORTFOLIO STRUCTURE In 2013, the total investment for the Group TATNEFT totaled RUR 84,813 million. In accordance with the investment strategy of the Company: • 50.3% of investments were sent to the construction of Reﬁ ning and Petrochemical Complex in Nizhnekamsk; • 39.8% of investments were sent to the maintenance and expan- sion of the production capacity in the oil ﬁ elds of the Republic of Tatarstan; • 4.3% of investments were sent to oil production outside the Republic of Tatarstan and Russia; • 4.7% of investments were sent to the development of petrochemi- cal complex, heat and power generation and retail business; • 0.9% of investments were sent to social projects. INVESTMENT COMMITTEE The Investment Committee works under the leadership of the General Director of JSC TATNEFT and provides the procedures for the review, veriﬁ cation, risk assessment and decision-making on investment projects. According to the decision of the Investment Committee it appoints the leader, responsible for the effective execution of the project and the achievement of stated targets. During the reporting year the Company’s investment committee reviewed more than 100 investment issues and assessed the results of 13 projects implementation. STRUCTURE OF INVESTMENT PORTFOLIO IN 2013 (%) MAIN FIELDS OF INVESTMENT ACTIVITIES IN 2013 TANECO Complex (50.3%) Oil production in the territory of Tatarstan (36.5%) Petrochemicals (1.0%) Foreign projects (0.6%) Oil production outside Tatarstan (3.7%) Retail business (1.5%) Oil service (3.3%) Funding for Nizhnekamsk CHP (2.2%) Non-industrial activities (0.9%) NO. DESCRIPTION 1. Investments into crude oil production in the territory of Tatarstan Drilling Capital construction Equipment not included in construction estimate-sheets Geological engineering activities Redemption of property, land, etc. Investments into crude oil production outside the Republic of Tatarstan Investments into construction of the Oil Refining and Petrochemical Complex in Nizhnekamsk Investments of the Petroleum Chemical Complex enterprises Investments into development of the retail business Investments of service companies and other enterprises 2. 3. 4. 5. 6. 6.1 Funding for reconstruction of Nizhnekamsk CHP (net of VAT) 7. 8. Financing of the foreign projects Investments into development of the social area RUR MLN 30,937 12,996 7,477 2,485 7,699 280 3,112 42,694 861 1,303 4,682 1,837 470 754 TOTAL for the Company 84,813 69 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT FINANCIAL MANAGEMENT The corporate policy priorities in ﬁ nancial management have to ensure ﬁ nancing of production, investment, and social activities of the Company and the effective use of ﬁ nancial resources. All obligations to pay for works and services for the delivered products, payment of taxes and payments to non-budgetary funds were performed by JSC TATNEFT in full and in a timely manner. Activities of the Company in 2013 were carried out under conditions of considerable instability expressed by drastic ﬂ uctuations in oil prices and changes in the national currency exchange rate. In 2013 JSC TATNEFT placed temporarily idle funds in the ﬁ nancial market. When placing the funds the Company prefers reliability, so investments are made only in the largest banks. Such placements resulted in the income from deposits and other placements in the amount of RUR 2.3 billion. The work to reduce rates on loans raised, reduction of loans debt level, optimal placement of temporarily free funds, ﬂ exible policy of short-term debt management allowed the interest income exceed the interest expense by the results of work in 2013. In 2013, the Company operated in the mode of repayment loans raised earlier. As a result, the debt was decreased by USD 522.4 million and three-year exchange bonds were promptly repaid in the amount of RUR 5.0 billion. Taking into account the uneven nature of revenues and expenses during the month the Company, when it necessary to cover cash gaps uses short-term loan mechanism (1 to 30 days) with SDBO (e-banking system) with VTB Bank, Unicredit, Bank of Moscow, Rosbank and ZENIT Banking Group. In 2013, this group also included Sberbank with a limit of RUR 20 billion, while VTB increased the amount of the limit from RUR 10 to 20 billion and the period from 30 days to 1 year. A contract was concluded with the Agricultural Bank. Such a wide choice range of banks allows obtaining short ﬁ nancing at the best rates. In November 2013, the Moody’s Investor Services rating agency announced that it upgraded the corporate group rating and the default probability of JSC TATNEFT n.a. V.D. Shashin to “Baa3” investment grade, forecast - “stable”. It was for the ﬁ rst time in history that JSC TATNEFT n.a. V.D. Shashin received an investment grade rating from a leading rating agency. To prevent diversion of funds the Company actively uses bank guarantees for excise tax payments to the budget. During the year, the cost of providing guarantees was reduced from 0.15% to 0.12%. To solve the problem of funds shortage the Financial Department carried out a large amount of work on optimizing payments to counterparties. This will be continued in future. In view of reducing distractions from the Company’s turnover and accelerating settlements with permanent counterparties reciprocal obligations are redeemed through the Mutual Claims Set-Off Center (MCSC). BUDGET PLANNING SYSTEM BUDGET ALLOCATION BY CCAS (CENTERS OF CONTROL AND ACCOUNTABILITY) Great importance is attached to improving the methodological framework. In order to improve the management of the Company’s cash ﬂ ows new documents have developed and amendments have been introduce into the existing regulatory documentation. The JSC TATNEFT’s balanced budget of payment means movement was executed in 2013. The budget funds of the Company are planned and distributed between 13 Control and Accountability Centers. Each CCA is guided by a Deputy General Director or Head of Department for respective activity, which provides operative ﬁ nancial management and responsibility for purposeful and effective use of funds. 70 ALLOCATION OF THE COMPANY’S COSTS BY CENTERS OF CONTROL AND ACCOUNTABILITY (2012-2013) NO. CCA ADMINISTRATOR AREAS OF FUNDS SPENDING 2012,% 2013,% Tax payments 19 19 1. 2. URNiN (Oil and Oil Products Sales Department) Service of Deputy General Director, Economics Head of URNiN (Oil and Oil Products Sales Department) Business expenses related to sale of oil, petroleum products, gas products and petrochemical products; funding of the investment program for development of selling infrastructure Deputy General Director, Economics Expenses for salaries; travel allowance; expenses for introduction of SAP R/3 and other information systems; expenses from profit 3. Financial Department Head of Financial Department 4. Accounting & Reporting Department Head of Accounting and Reporting Department – Chief Accountant 5. Production Department Head of Production Department Capital Construction Department Deputy General Director for Capital Construction Repayment of credits and interests on credits, granting of loans, redemption of own bills, commissions of banks, expenses for investment activity (in terms of financing construction and revamping of the Petrochemical Complex, foreign projects and projects outside the Republic of Tatarstan), payments for services of monopolists in the power sector and other services Expenses for the main production (in terms of capital repair of other fixed assets and services of production nature); other production payments (in terms of communication services, software, rational proposals and inventions, participation in exhibitions, etc.); research and development; ecological payments Expenses for capital construction of production and non- production facilities, capital repair, liquidation of facilities, landfill operations for temporary access roads, water lines and power lines (during drilling) Service of Logistics and Transport Deputy General Director for General Issues Purchase of materials and equipment; payment for transport services, maintenance of roads and roadsides Service of Chief Geologist Deputy General Director – Chief Geologist Geophysical services and hydrodynamic survey of wells, topographic and geodetic works, scientific and technical services and exploration works 9. Property Department 10. Service of Deputy General Director for HR and Social Development Deputy General Director, Head of Property Department Expenses for property matters, lease payments, securities servicing, participation in other organizations: contributions to authorized capitals of third companies, acquisition of shares Deputy General Director for HR and Social Development Expenses for social area issues and HR, expenses for mass media, image of the Company, advertizing 11. Reserve of General Director General Director Distributed between other Centers of Control and Accountability acc. to the results of actual application of budget funds 12. Structural Divisions 13. Service of Deputy General Director for Well Workover, Drilling and EOR Managers of Structural Divisions Decentralized expenses for current activities of structural divisions R.M. Rakhmanov, Deputy General Director for Well Workover, Drilling and EOR Expenses for well workover and drilling and oil recovery enhancement, production services during well workover 6. 7. 8. 42 42 2 2 15 14 3 2 2 1 4 1 1 5 3 4 2 2 1 4 1 1 4 4 100 100 71 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT ASSETS MANAGEMENT Formation of the Company’s assets structure is made in accordance with the Company’s development strategy in its capacity as a vertically integrated oil and heat/power generating holding with the priorities of consolidating production assets (expansion of the resource base), crude oil reﬁ ning, petrochemical production and heat/power generating capacities. There is a uniﬁ ed corporate center functioning in the Company to consolidate the assets and manage the property within the Property Department of JSC TATNEFT, which ensures the functions of maintaining records, legal protection and control of movable and immovable property. Ownership of registered immovable property was registered for 464 items amounting to RUR 8.1 billion in 2013. In accordance with the corporate program of increasing the efﬁ ciency of the Company’s assets package the structural divisions sold (including deferred payment deals) unclaimed property valued at RUR 690 million in the reporting year. Selling of little used and non-used property provides for additional cash ﬂ ow, helps reducing the cost of maintaining the property complex, and as a result reduces the production cost of products sold by JSC TATNEFT. JSC TATNEFT has built a single, integral, ﬂ exible lease relations system that allows responding to the changing dynamics of the rent payments taking into account the economic situation and solvency of entities taking the property on lease. The rent payments in the amount of RUR 1.15 billion were received in 2013. INTANGIBLE ASSETS, INTELLECTUAL PROPERTY Intangible Assets Management System As part of long-term corporate priorities for managing intangible assets and intellectual property of JSC TATNEFT the work was continued in the reporting year on the procedures for commercialization of intellectual property items, a commercial portfolio of the JSC TATNEFT’s intellectual property and the most promising patents was built up to identify opportunities for their promotion on the Russian and international markets. During the period since 2004 the share of intangible assets in the currency balance sheet of the Company doubled. The inventory of inventions and utility models useful service life, which are on the balance of the JSC TATNEFT’s structural divisions is annually made according to the provisions of the accounting standard (PBU 14/2007) in order to optimize and reduce costs in the production area. Revision of useful service life and depreciation rates of intangible assets is related to the duration of the future proﬁ ts receiving period and increasing the proﬁ tability of JSC TATNEFT in general. To ensure efﬁ cient use of the intellectual property items the Company maintains on an ongoing basis a single register of intangible assets, the basis of which are technological assets that are essential for current operations. Over 5,000 intellectual property items are in the register of intangible assets of the Company as of the end of 2013 Being a high-tech company, JSC TATNEFT provides its research and development works and production technologies to outside companies on a commercial basis, and also makes the contribution of intangible assets to the authorized capital of the newly established enterprises. The work was continued in 2013 on the management of the Company’s trademark, as one of the property assets involved in production activities (crude oil production, processing, sale, promotion of technologies) that provide for additional income and strengthens the image of the Company. The major component of the program is the management the corporate brand (trademark) of TATNEFT registered in all areas of the Company’s activity, including registration under the Madrid Agreement, and it is included in the international ranking of the most expensive brands. The program of strengthening the TATNEFT corporate brand is aimed at increasing its market value. As a result of this work TATNEFT brand joined the top 10 most valuable brands in the Russian rating of 2013 published by the International Agency, which is an authoritative expert in the management and evaluation of brands. The TATNEFT brand value was RUR 53.8 billion (RUR 17.6 billion in 2006). 2013 witnessed completion of the work to create a single intellectual property register of the JSC TATNEFT’s subsidiaries. CORPORATE CONTROL AND INTERNAL AUDIT The Uniﬁ ed Intellectual Property Register of TATNEFT Group is designed to consolidate intellectual property data at the disposal of the subsidiaries and afﬁ liates of JSC TATNEFT, created and registered objects, their current use and the economic effect. Application of the uniﬁ ed register will allow the Company to handle the intellectual property in the most efﬁ cient way through intensive involvement in the internal economic turnover, as well as through its commercialization. The greater part of the TATNEFT Group intellectual property refers to segments of crude oil production, reﬁ ning and related activities and is subject to protection under the patent law, copyright and conﬁ dentiality provisions (commercial conﬁ dentiality). In the course of forming the uniﬁ ed intellectual property register of TATNEFT Group speciﬁ cally selected items potentially attractive in terms of commercialization, i.e. possibility of rights transfer for their use. Their number amounted to 43% of the total number of scientiﬁ c/ technical activity results. 11,635 rationalization proposals, inventions, utility models were put into production in 2013 with the economic effect of introducing the inventions, utility models and rationalization proposals amounting to RUR 5,665.1 million and 200 patent applications were ﬁ led for inventions. The operational system of the internal control audit of the Company provides for submission of independent and objective information aimed at improving economic activity to the Board of Directors and the Executive Directorate. The internal audit function helps achieving targets through application of a systematic and consistent approach to evaluating and improving the effectiveness of the risks management, control and the corporate management systems. The audit is performed within the frame of the annual plan approved by the Board of Directors. The internal control system for operational effectiveness of processes, legal compliance and property security are focus areas of the audit. The audit is performed based on the risk-oriented approach. Report on results of the internal audit is directed to the Company’s management and to the Audit Committee. Further on the Internal Audit Department monitors performance of all measures and informs the Company’s management and the Audit Committee on the progress of revealed shortcomings elimination. Main functions of the internal audit are as follows: • Evaluating the effectiveness of the internal control and the corporate management systems; The Company carries out extensive work to ensure availability of advanced methods and equipment for the overall production, as well as high-performance information technologies of the Companies management and control processes. The company resorts to the world’s best practices in technologies area, but the Company also is a supplier of technological services with high market demand for. • Advising the management of the Company on internal control, risk management and corporate management. • Evaluating the effectiveness of control over the completeness and authenticity of ﬁ nancial and managerial information. • Evaluating abidance by internal policies and procedures of the Company, as well as the ones of the legislation. The corporate TatNIPIneft based Research Center is one of the most competent in the industry. The Company develops its own base of intangible assets, which include advanced technologies and know-how to strengthen the production/technology and information platforms of the Company and qualitatively involved in shaping the Company’s value. • Elaboration of recommendations for improving the systems of internal control, risk management and corporate management. • Monitoring implementation of measures (corrective steps) elaborated by the management on the basis of the audit results. 11 audits were performed in 2013 as scheduled. In addition to this, as per the orders of the Company’s management, 15 non-planned internal audits were carried out on various aspects of ﬁ nancial and economic activities. In 2013, monitoring of the planned events execution was performed on the audit results of 2009-2013. The information on the implemen- tation of the action plan was presented to the Audit Committee. 72 73 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT PROGRAM OF INCREASING PRODUCTION MANAGEMENT EFFICIENCY AND STRENGTHENING OF JSC TATNEFT FINANCIAL AND ECONOMIC STATUS FOR THE PERIOD OF 2008-2015 DESCRIPTION RESULTS OF 2013 1. SOLVING THE TASK OF CRUDE OIL PRODUCTION INCREASE AND RESERVES STOCK GROWTH WAS ACHIEVED THROUGH THE FOLLOWING ACTIVITIES Maintaining the achieved crude oil production level Volume of crude oil produced by JSC TATNEFT in 2013 amounted to 26,107 thousand tons accounting for an increase in the amount of 102 thousand tons versus the level of 2012. Maintaining the annual meterage drilled Volume of production and exploration drilling amounted to 450.1 thousand meters. Geological survey and field development in new territories outside the Republic of Tatarstan Production of bituminous oil (development of extra-viscous oil fields) Volumes of crude oil production from deposits outside the Republic of Tatarstan in the Russian Federation amounted to 312 thousand tons in 2013, which was 3.4% above the level of 2012. 18 new wells were drilled. Crude oil production from new wells amounted to 410.8 thousand tons. The amount of 145.6 thousand tons of extra-viscous oil was produced from Ashalchinskoye field in 2012. Total production rate for the area amounted to 480 tons of oil per day by the end of 2013. 325.7 thousand tons of oil were produced from the beginning of the pilot field development operations. 2. IMPLEMENTATION OF THE COMPLEX PROGRAM TO FURTHER INCREASE ASSOCIATED PETROLEUM GAS UTILIZATION Engineering design of associated petroleum gas gathering and utilization facilities The volume of associated petroleum gas in the reporting period amounted to 865 million cubic meters. Reconstruction of the Minnibaevo Gas Refinery for the purpose of increasing the ethane production to 140 thousand tons per year According to the «Action Program” of JSC TATNEFT for utilization of associated petroleum gas in 2009-2013» the following projects were implemented: • putting in operation crude oil heating furnaces operated with associated petroleum gas at Bastryk and Novo-Suksinskaya crude oil treatment. • construction of gas engine generator plant at the Yelabuga crude oil treatment plant of NGDU Prikamneft. • reconstruction of Minibaevo sulfur removal unit for expanding gas purification capacity • construction of the associated petroleum gas gathering system from the facilities of NGDU Almetyevneft and NGDU Aznakaevskneft and NGDU Bavlyneft. 3. DEVELOPMENT AND APPLICATION OF NEW EQUIPMENT AND TECHNOLOGIES IN DRILLING AND CRUDE OIL PRODUCTION Drilling of horizontal wells, downhole splitters, side tracking jobs with drilling of laterals and horizontal wellbores, drilling of slim hole wells Implementation of sucker-rod pumps chain drives and implementation of dual production of two and more layers system, implementation of M1-X packers, etc. 266 new production wells were commissioned with an average rate of 9.3 tons/day. 73 side tracking jobs and horizontal wellbore side tracking jobs were performed with the average production rate amounting to 7.4 tons per day. 38 slim holes with an average production rate of 6.2 tons per day were drilled. 59 horizontal and 12 multilateral wells were commissioned. 16 horizontal wells were drilled in the target horizons «D0» and «D1A» with an average rate of 11.3 tons per day. 103 water/oil swellable TAM packers were installed in 68 wells. Well stock equipped with chain drives amounted to 1,786 wells as of the end of 2013. Over 1,900 wells are equipped with dual production systems. Additional oil production from the beginning of dual completion, production and injection units operation amounted to 7.7 million tons, the average increase in oil production per 1 well achieved 4.4 tons per day resulting from dual completion production/injection, and 1.9 tons per day resulting from dual injection. М1-X packers were installed in more than 4,000 injection wells. Hydraulic fracturing operations were performed in 605 wells. 20 hydraulic fracturing operations were performed at new wells just after drilling. 274 operations were performed using the new hydrofracking fleet. Resulting production rate increase from hydrofracking operations amounted to 4.9 tons per day. Well MTBF index reached 1,198 days. 4. STRATEGY OF MANAGING VERTICAL INTEGRATION AND DEVELOPMENT OF CRUDE OIL REFINING AND JSC TATNEFT’S FILLING STATIONS NETWORK Construction of the Refining and Petrochemical Plants Complex The amount of 7.6 million tons of crude oil was refined at TANECO. The refining depth amounted to 73.5%, which is higher than the average all-Russia value (71.5 %). Development of the filling stations network Total number of filling stations amounted to 648 units. DESCRIPTION RESULTS OF 2013 5. PETROCHEMICALS PRODUCTION DEVELOPMENT PROGRAM Organization of the tire production Total output is 12.5 million tires, including SSC tires – 653.7 thousand pieces. The production of 39 tire models were developed and accepted for serial production. Carbon black production Output of carbon black is 108.9 thousand tons, 14 grades. 6. INTRODUCTION OF INFORMATION TECHNOLOGIES Improvement of the integrated control system on the basis of SAP products Development of the motor transport navigation system 7. RESOURCE SAVING PROGRAM “Energy saving» program The following SAP product based systems were put into commercial operation in 2013: • system of planning, adjusting and monitoring expenditures of JSC TATNEFT in all structural divisions; • program of structural divisions switchover to the integrated SAP system was completed as part of the TATNEFT’s consolidated accounting statements system formation; • use of the electronic digital signature technology in the electronic system of planning applications for payment. Put to pilot operation: • Generation of JSC TATNEFT’s consolidated financial statements; • «Investment Management» system by activity areas; • TATNEFT’s subsystem of projects monitoring and analysis for capital construction. Over 8.6 thousand motor transport vehicles were equipped with the satellite navigation system. Implementation of the navigation system on the motor transport provided for reducing the number of groundless machinery orders and reducing the average daily machinery run by 9%. Fulfillment of the “Energy saving program” in 2013 allowed saving about 56 thousand tons of reference fuel. Capstone microturbine plants operated with APG generated over 29 million kWh electricity. Optimization of the electricity payment expenses resulting from switchover to hourly planning Economic effect resulting from implementation of the hourly planning system for a day ahead amounted to RUR 385 million in 2013. Implementation of corrosion-resistant tubing 8. ENVIRONMENTAL SAFETY Corrosion protected tubing with polymer coating was installed in 382 injection wells in 2013. Corrosion protection of injection wells since the tubing protection program start was implemented in 6,656 injection wells. Protection of the active well stock operating with effluent water reached the level of 87.4%. Air protection Emissions of harmful (polluting) substances into the air are within admissible limits. Protection and rational use of land and water resources, conservation of mineral resources 923.9 km of corrosion protected pipes were manufactured. 25.9 thousand m2 of the vertical tanks and horizontal settlers internal surface were protected with application of paint and varnish. Casing string cathode protection was applied in 986 wells. The environment condition in the areas of new deposits development is consistently maintained at the standard acceptable level. 9. CAPITALIZATION INCREASE AND STRENGTHENING OF THE TRADEMARK Capitalization increase and strengthening of the trademark The Company’s market capitalization amounted to RUR 471.6 billion by the results of 2013. According to the Interbrand International Agency TATNEFT joined the TOP-10 most expensive brands. The Company’s brand value amounted to RUR 53.8 billion. 10. INVESTMENT BUSINESS PROJECTS Implementation of projects in OEZ “Alabuga“. The joint Russian-German venture “P-D TATNEFT-Alabuga Steklovolokno“ produced 26.1 thousand tons of liquid glass melts, which was 12% above the level of 2012. 21.3 thousand tons of commercial products were produced. Expertise of individual design and construction documents for well drilling and construction Since 2012 the transition has been made to the contractual pricing of well construction on the basis of individual cost estimates for all areas. Such a transition allowed making settlements with drilling companies at a fixed price. 11. SOCIAL DEVELOPMENT PROGRAM Program of mortgage crediting Implementation of social projects 638 apartments with total area of 45.25 thousand square meters were built under the mortgage crediting system for the employees of TATNEFT Group of Companies in 2013. The seventh stage of the ponds cascade was commissioned in Almetyevsk and a new school n.a. the 70th anniversary of oil in Tatarstan was opened in Almetyevsk in 2013, as well a kindergarten and a «Tennis Hall» sports complex in Leninogorsk. Water tower was built and water lines were repaired in Almetyevsk and Leninogorsk areas. 74 75 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT ENERGY AND RESOURCE EFFICIENCY PROGRAM OF JSC TATNEFT FOR THE PERIOD TILL 2020 JSC TATNEFT attaches particular importance to resource saving. In order to reduce production costs and, accordingly, the product cost, improve competitiveness in the situation of permanently escalating tariffs of natural monopolies (for energy resources, transport services) and increase hydrocarbon production costs resulting from complicat- ing subsurface usage conditions the Company is taking integrated efforts to create a maximum allowance savings in all business areas, including energy conservation. In 2011 the Company started the third phase execution of the resource saving program, which involved 25 entities of the TATNEFT Production Group of Companies. The main objective of the program is to reduce the absolute consumption of energy resources through the implemen- tation of program activities by at least 7.4 % in the ﬁ rst stage (2015) and by 13.5% in the second stage (2020) versus 2007. In accordance with the approved resource conservation program there were 594 activities executed during the period considered with 232 of them aimed at sav- ing electric energy. Implementation of the resource conservation pro- gram activities resulted saving more than 55,600 tons of reference fuel in 2013, which accounted for 4.9 % reduction in the Company’s need for fuel and energy resources. The major part of the energy resources savings falls on the electric power consumption savings. The savings from measures aimed at reducing the consumption and ra- tional use of material and natural resources amounted to RUR 4.7 billion in 2013. These funds were spent for compensation of additional costs associated with maintaining economic Company’s crude oil production under the conditions of high ﬁ elds’ depletion. Successful performance of TATNEFT Company in the ﬁ eld of resource saving and environment protection were distinguished by multiple awards of Republican «Re- source Efﬁ ciency. Energy Saving» and «ECOleader» contests. 594 ACTIVITIES were executed in accordance with the resource conservation program from 2011, among them 232 ACTIVITIES aimed at saving electric energy 76 LOGISTICS AND PROCUREMENT DEPARTMENT (MTO) The Logistics and Procurement Department to support production operates on the principles of transparency and maximum efﬁ ciency. In 2013, the Group continued centralization and further development of the consignment warehouses network, implementation of the Electronic Store project, and automation of procurement and supply processes. CONSIGNMENT WAREHOUSING Smooth logistics for the Companies and service entities is provided through consignment warehouses. JSC TATNEFT operates 63 consignment warehouses. The volume of inventory items (inventory holdings) sales through consignment warehouses amounted to RUR 2,485 million in 2013 (2,315 million in 2012). The inventory holdings cost at the Tatneftesnab storage remaining in the ownership of the consignee until the delivery of goods to a structural unit amounted to RUR 270 million in the reporting year (RUR 233 million in 2012), which prevented diversion of working capital for creation and storage of the Company’s own reserves for this amount. ELECTRONIC TRADING PLATFORM In order to improve procurement activities of the TATNEFT Group of Companies, a complex electronic trading platform has been in operation since December 2009. Performance of procurement in the electronic form allows complying with fundamental principles of openness, transparency and equal competitive opportunities for suppliers, and selecting the winner for the best combined performance (quality, delivery terms and price). Starting from the second half of 2010, virtually all service subsidiaries of the TATNEFT Group of Companies carried out competitive bidding procedures through the electronic trading platform in terms of procurement. In future, the electronic trading platform will integrate all enterprises of the TATNEFT Group of Companies. The Procurement and Logistics Department held 1,897 two-stage procurement procedures for a total of RUR 9,486 million in 2013 (1,508 procedures for RUR 8,779 in 2012). The ﬁ rst stage was the request for quotations, while the second stage was the auction for price reduction among participants who put the price on the whole lot. 1,237 auctions were held successfully for the amount of RUR 4,409 million (865 procedures for RUR 3,660 million in 2012) with additional savings on the price determined at the ﬁ rst stage in the amount of RUR 285.8 million (RUR 231 million in 2012). During 2013 the Company’s subsidiaries and oil service enterprises performed 2,678 procurement procedures in the amount of RUR 6,858 million (1,750 procedures for RUR 3,760 in 2012). E-STORE The fundamental solution for the Company’s logistics management was establishment of the E-Store, which is a tool of implementing the corporate technological policy in organizing procurement within the allocated budgets and funding in accordance with the supply calendar. More than 80,000 applications (goods’ items) were placed through the E-Store from the structural divisions of the Company, its subsidiaries and afﬁ liated companies in 2013. CENTRALIZED SHIPMENT The inventory worth RUR 19.5 billion (RUR 18.4 billion in 2012) was shipped according to the scheme of centralization in 2013, which was 6% more than in 2012. The share of transport costs for centralized delivery in the cost of goods was reduced from 1.11% to 1.06%. TRADE & TECHNICAL HOUSE OF JSC TATNEFT The Company sells its production for external consumers via the TATNEFT Trade and Technical House. In 2013, these sales amounted to RUR 2,423 million, which was RUR 807 million more than in 2012. Out of the total sales volume external companies purchased inventory for RUR 1,705 million (RUR 1,073 million in 2012), whereas “internal” group deliveries accounted for RUR 718 million (RUR 543 million in 2012). In the bulk sales structure the main areas were as follows: • Pipes for various purposes: in the amount of RUR 804 million (RUR 421 million in 2012); • Chain drives: in the amount of RUR 378 million (RUR 382 million in 2012); • Oilﬁ eld equipment: in the amount of RUR 929 million (RUR 382 million in 2012); • Other products: in the amount of RUR 312 million. TATNEFTESNAB ADMINISTRATION In 2013, it concluded more than 4.34 thousand of contracts and speciﬁ cations in the amount of RUR 25.7 billion. 42 % of all orders were placed in the enterprises of the Republic of Tatarstan. During 2013, work was conducted on the operational performance of the contract terms. Tatneftesnab Administration brought 422 claims against contractors for non-compliance with contractual obligations in the amount of RUR 1,802 million. RUR 1,536 million worth of products was collected or delivered as a result of the claiming procedure (including the remaining claims as of January 01.2014). ACCUMULATED DYNAMICS OF VOLUMESPRESENTED FOR TENDERS AND EFFECT FROM ADDITIONAL REDUCTION (RUR MILLION) 9 0 4 , 4 8 . 5 8 2 8 9 3 , 3 3 . 0 2 2 7 2 2 , 3 8 . 3 0 2 3 9 5 , 3 2 . 4 3 2 4 9 9 , 2 5 . 3 5 1 3 5 4 , 2 9 . 4 2 1 5,000 4,000 3,000 2,000 1,000 0 0 6 9 , 1 6 . 3 0 1 3 9 7 , 1 1 . 2 9 6 2 3 , 1 2 . 4 7 3 6 0 , 1 0 . 2 6 0 3 6 0 . 2 4 5 1 2 2 . 4 1 jan feb march apr may june july aug sep oct nov dec 350 300 250 200 150 100 50 0 77 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT RISK MANAGEMENT There is an integrated system of risk management operating in the Company based on the analysis and evaluation of possible factors that could affect indicators of production, ﬁ nancial and economic activities of JSC TATNEFT and the Group’s enterprises, as well as cause direct or indirect impact on the current activity and/or strategic plans of the Company. The risk management also includes control over compli- ance with uniform corporate standards regulating the main processes of production and ﬁ nancial and economic activity of JSC TATNEFT and the Group’s enterprises The corporate risk management system is designed to identify potential risks in order to take prompt measures to eliminate or minimize them, which allows adjusting business planning, investment activity and social policy of the Company. External, as well as internal factors are taken into account, when analyzing the risks. The internal corporate factors include management, production, HR, social, environmental and other aspects. The external factors include market, industry, socio-economic, political, ﬁ nancial, as well as competitive and other environment of the Company, its subsidiaries and afﬁ liates activity INDUSTRY RISKS The Company has a comprehensive program of measures to over- come adverse situations related to industry risks. This program pro- vides for continuous monitoring, analysis and forecasting of oil prices with an appropriate adjustment of the strategic development plans, as well as it contains a range of technical and organizational measures that minimize the impact of technical and environmental risks. Risk of oil and oil products prices: Revenues, proﬁ tability and future growth rates largely depend on existing prices for crude petroleum products. In the past year, oil prices varied widely with respect to changes of many factors. The factors causing this swing in particular include: • international and regional supply and demand (as well as expectations about future supply and demand) for oil and petroleum products; • uncertainty of the market; • weather conditions; • macroeconomic policy; • international and regional economic situation; • national and foreign governmental regulation; • prices and availability of alternative fuels; • prices and availability of new technologies; • ability of members of the Organization of Petroleum Exporting Countries (OPEC) and other oil-producing countries to establish and maintain certain levels of crude oil production and prices; • political and economic developments in the oil producing regions and in particular in the Middle East; • normative acts and actions of the governments of Russia and other countries and international organizations, including export restrictions and taxes; Technical risks: Exploration, development and equipping of new ﬁ elds, maintenance of existing wells operational condition, drilling of new wells, as well as oil transportation are a very complex and capital-intensive processes. Enhanced oil recovery also requires additional investments. In the future, as the depletion of the old ﬁ elds grows, the role of special methods of oil recovery will increase. Accordingly, the cost of the ﬁ elds’ development material and technical base the will also increase. The Company’s capability to maintain and increase crude oil production in the license areas are is dependent on the access to the technologies of oil recovery and technologies of enhanced oil recovery as well as success in their application. There is a Tatar Research and Design Institute of Oil (TatNIPIneft) in the composition of the Company, which is one of the leading scientiﬁ c centers of Russia in the ﬁ eld of prospecting and exploration, technology development for oil and gas exploration, production, oil treatment, oil facilities protection against corrosion, design and construction of oil ﬁ elds, as well as construction of wells. TatNIPIneft activity allows the Company maintaining and strengthening the Company’s technological potential in the ﬁ eld of crude oil production. Environmental Risks: The oil and gas sector of the economy is subject to a high degree of environmental risks. Even when operating under current environmental standards of the Russian Federation and the Republic of Tatarstan there is a risk of penalties due to their violation. In addition, there is a risk of possible revision of the federal and regional environmental standards in the direction of further tightening. The Company has a comprehensive program of measures to overcome adverse situations related to industry risks. The Company successfully implements a set of environmental measures aimed at minimizing the impact of industrial activity on the environment, and is one of the recognized leaders in Russia in this area. COUNTRY AND REGIONAL RISKS The Company has been registered as a taxpayer and conducts its main business activity in the Russian Federation. The main production assets of the Company are located in and the main production activities are carried out in the territory of the Republic of Tatarstan, which is a constituent of the Russian Federation. The political situation in the Russian Federation and the Republic of Tatarstan in particular is stable. The risks of a possible military conﬂ ict, a state of emergency or a major strike in the region of the Company are rated as low. At the same time, the Company approved procedures that may be applied in the case of an emergency to reduce the impact of this situation on the life, health and safety of workers as well as the production activity of the Company. Effects of Inﬂ ation: The current inﬂ ation rate has no signiﬁ cant effect on the ﬁ nancial position of the Company. In line with predicted inﬂ ation, it should not have a material impact on the solvency of the Company, in particular, payments on the securities. It is not possible to predict the critical rate of inﬂ ation for the Company since in addition to the consumer price level it is necessary to take into account changes in the real purchasing power of the ruble, the situation on the Russian and international oil markets and future government policy on tariffs. In recent years, the prices of crude oil and petroleum products used to remain continuously high. Prices for crude oil and petroleum products may not further increase and even might decrease. Falling prices for oil and peroleum products could adversely affect the results of operations and ﬁ nancial condition of the Company. Falling prices may lead to a decrease in the volume of commercial oil produced by the Company, which will lead to a decrease in the effective development of the Company’s reserves and will reduce the cost-effectiveness of exploration programs. It should be noted that at the moment, in the opinion of the Company, a signiﬁ cant deterioration of the situation in the industry is not expected, given the stable level of oil consumption and the lack of alternative fuel sources on a mid-term horizon that could replace crue oil and petroleum products to any signiﬁ cant extent. Therefore, the effect of possible deterioration of the situation in the industry on the ﬁ nancial statements of the Company and the fulﬁ llment of obligations under the Company’s securities is unlikely. LEGAL RISKS The main activities of TATNEFT Group are performed within the Russian Federation. The legislation of the Russian Federation (including tax, corporate and use of natural resources) is undergoing changes, some of which may cause additional costs, diversion of resources, changes in the procedure of the Company’s and its divisions’ managing bodies formation and functioning. Responsible services of the Company carry out continuous monitoring of changes in the legislation, and take steps to comply with regulations and requirements, as well as take part in the consultative councils and other associations on legislative changes affecting the operations of TATNEFT Group of Companies. The Company is not a defendant in any action or claims, which proceedings could cause the Company to incur liability, which could have a material impact on the Company’s ﬁ nancial position or performance Geographical features of the region, major activities of the Company are not characterized by increased risk of natural disasters, which may have a signiﬁ cant impact on normal production activities. In planning and execution of production, treatment, transportation and storage of crude oil and gas production, oil and gas products, as well as the materials involved in the production thereof, the Company takes into account geographical, including climate, speciﬁ cs in the region of activity. In case of a negative impact on the activities of the Company, which may be caused by natural disasters, such as ﬂ oods, earthquakes, mudslides, etc., the Company approved procedures and policies aimed at the prompt remedy of such effects. The Company has established procedures for monitoring with the use of modern technologies to prevent the possibility of adverse effects of natural phenomena and to inform people of the Company’s region of activity about the possibility of such damages. The Company’s region of core business is not remote from the viewpoint of transport and other infrastructure. FINANCIAL RISKS Signiﬁ cant changes of the foreign currency exchange rates affect the Company’s liabilities denominated in such foreign currency. Signiﬁ cant ﬂ uctuations in the foreign currency exchange rates may cause changes, including unfavorable ones, in the Company’s liquidity ratio. The macroeconomic situation deterioration and the increase in interest rates may result in changing the value of the Company’s interest expense on debt obligations. In particular, in the case of borrowings in the form of bank loans with a «ﬂ oating» interest the rate rise in the general level of interest rates at the international market will increase the amount of funds to be paid as the interest that will adversely affect the Company’s ﬁ nancial standing. Reduction of the interest rates, ceteris paribus, may reduce the effectiveness of the Company’s current borrowings at a ﬁ xed interest rate. The Company continuously monitors the macroeconomic situation and takes necessary decisions to reduce the adverse macroeconomic developments impact on the Company’s activity and ﬁ nancial standing. Currency Risk: The Company is exposed to risks of adverse changes in exchange rates, the main of which is the strengthening of the ruble ﬂ uctuation against the U.S. dollar. This is due to the fact that a signiﬁ cant share of the Company’s revenues is denominated in U.S. dollars, while most of its expenses are denominated in RUR. Therefore, strengthening of the ruble against the dollar leads to a decrease in revenues of the Company in ruble terms, while the RUR weakening with maintaining other macroeconomic parameters, implies an increase in revenues in ruble terms. As a whole the Company’s currency ineptness structure reﬂ ects the structure of the Company’s revenues, which also reduces the dependence on the currency ﬂ uctuations. 78 79 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT INFORMATION TECHNOLOGY MANAGEMENT The strategy of JSC TATNEFT in ﬁ eld of IT is aimed at creating competitive advantages of the Company in the production, sales, administrative, economic, social and other Company’s activities. As of today there are information systems at JSC TATNEFT provided for virtually at all levels and stages of production, starting with automation systems at the level of a crew and production shop to the Company’s corporate top management level. The existing complexes have been integrated into a uniﬁ ed information space. The information systems provide for real time recording, acquisition and analysis of tens of thousands readings, including information for decision making at the highest level, as well as generation of accounting documents. Information/analytical and situational centers have been created to provide for such working conditions, having in its composition competitive telecommunications, high- quality information display facilities, multiple integrated data sources: from the remote control systems to analytical systems. Such centers have been established under the motto: Accurate information at the right time in the right place and in a convenient format. The information technologies development level at JSC TATNEFT and the business maturity level allow speaking about an «intellectual ﬁ eld». Attributes of such a ﬁ eld include sufﬁ cient automation of oilﬁ eld equipment, real time acquisition and delivery of telemetry data, as well as complex of automated systems to maintain control over the ﬁ eld development based on monitoring key indicators and manage ﬁ eld development processes. The «intellectual ﬁ eld» development is always based on the ongoing hydrodynamic model. Currently, there is a unique large-scale software and hardware solution applied at TATNEFT Group of Companies that provide for satellite technology based system of transport movement control. The problem was solved within this solution of monitoring the path, speed, mileage of vehicles. CORPORATE INFORMATION SYSTEMS IN ENSURING PRODUCTION AND MANAGEMENT SYSTEM: Information Analysis Portal of Well Construction The system ensures a single information space providing for consolidation of data required in the process of wells construction from different information systems used in production activities for the well construction ordering customer. The data provided from the corporate information and telemetry systems allow the monitoring of the well drilling process general parameters, drilling direction control (geonavigation), control of technological surface drilling parameters and cementation process control. ASU «Production Drilling Performance» Processes of preparing main sections in elaborating the design of cluster projects for well construction, supervision of implementing design solutions for drilling ﬂ uids, schedule maintenance for the preparation of design estimates, engineering calculations for bituminous and multilateral wells were automated last year. Functionality of components «terms of reference», «well construction program”, “drilling work order”, «well construction cost estimates», «construction timing control», «cost estimate element administration standards» was extended and that allowed reducing the time of preparation of the design estimates and calculations, as well as the integration support. The component «schedule for the preparation of drilling units” as well as the tool of preparing the actual order were upgraded. Integration with CIS «ARMITS» was made in terms of the actual operation data, structuring and systematizing data for NGDU «Almetyevneft» were carried in terms of «well case» component The TEP tool was developed for the comparative analysis of drilling during a period of time. Intellectual Management Tools for Development of the Berezovskaya Area 3rd Block The expert-analytical system based on the data analysis of the satellite monitoring system, geographic information systems, waybill data and the video surveillance system allowed solving the problem of misusing electronic fuel cards. Development of an analytical tool capable of identifying abnormal objects’ functionality of measurement systems and crude oil production facilities, as well as obtaining statistical similarity coefﬁ cient of processes at the well sites in order to increase the measurement coefﬁ cient accuracy. The information community and the current dynamics of business lead to hyper-growth of data volumes that are very difﬁ cult to process. Thousands of patents and hundreds of pilot projects lead to knowledge acquisition. The Company has started a project of generating a knowledge bank implementing the concept of «from data to knowledge». Procedures of statistical and neural network analysis were implemented in 2013. The system web portal is capable of identifying substandard performance of measurement systems and oil facilities, calculate statistical similarity of measurement coefﬁ cients by wells and identify phenomena of date streams interrelation and interference on the basis of their analysis. ARM «APG Accounting and Control» An accounting system “APG Control” was developed and implemented for monitoring and reporting on APG with the possibility of obtaining an automated report for accounting and control the APG utilization with regard to payments for emissions of harmful substances formed during APG ﬂ aring at structural divisions’ installations of JSC TATNEFT. The sys- tem adaptation was carried out in accordance with the RF Government Decree No. 1154 in terms of calculation methods and algorithms applied. Information Support and Automated Control of Ashalchinskoye Field Process Facilities for Optimal Development of Extra-Viscous Oil An integrated information environment (IIE) was developed and put into commercial operation for the Ashalchinskoye extra-viscous oil project. Flowsheets presentation (web SCADA) were implemented for targets of Ashalchinskoye ﬁ eld allowing for process monitoring with display of operational information on wells and boiler rooms, as well as matrix information representation was implemented on daily production of the wells with indication of a well production share in the total production of by the wells according to the ICC USOI data and the telemetry system data. A spread of specialized graphical modules and representations was developed to display production processes information in the ﬁ eld to ensure prompt information for the interaction organization of the project participants. Automation System Development for Engineering Design Projects Expansion of “SAPP” information system functionality intended for automation, accounting and control of the process of creation, execution and completion of the project development works carried out by structural divisions and external contractors. In 2013, integration of «SAPP» with the CIS «Tatneft-Oil Production» completed in terms of implementing the possibility of transferring to «SAPP» the project status change information and project support of the wells, as well as a mechanism was worked out to connect to the «SAPP» third party general contractors and sub- project organizations. File storage was organized with access rights restriction and possibility to distribute by sections (projects). SAP Products Based Integrated Corporate Management System of JSC TATNEFT Creation of a fully functional and integrated management SAP products based system is being carried out in accordance with the strategic initiatives and objectives of JSC TATNEFT. Active development and implementation of solutions is designed to provide the Company’s management with complete and reliable information to make effective management decisions, improve the planning quality, optimize and reduce operating costs, provide for reduce time required for data acquisition, processing, retrieval and transmission and minimize errors mobile access to corporate systems’ data. In 2013, the works were completed on standardization of the system operation in all business units of the Company, including planning, monitoring and adjustment expenses of JSC TATNEFT, uniﬁ cation and standardization of reporting forms, variability of forecasting calculations for rapid response to changes in the internal and external factors. In 2013, in order to implement recommendations for the formation of direct costs of production and sale of crude oil, associated gas, petroleum products, other ﬁ nished goods (works, services) of JSC TATNEFT in the tax records in accordance with the Tax Code requirements changes were introduced into existing SAP solutions in terms of tax accounting. Cost calculations of ﬁ nished products, works (services) taking into account the new scheme of closing of for tax purposes were made in the test system. As part of automating labor protection processes and their integration with the process of maintaining the employment contract the solutions of medical examinations, accidents registration and occupational diseases were transferred in pilot operation category with arrangement of training activities on labor protection and industrial safety. ENSURING INFORMATION SECURITY Information security of all kinds of the Company’s resources is one of the main factors of stability and minimization of the various corporate risks. Information systems’ security updates were incorporated in 2013. Digital certiﬁ cates of 287 users of information resources were reissued. «Information Security Policy» document was updated. Monthly monitoring of TATNEFT KSPD end-user workstation anti- virus software media coverage was provided. From 69 to 123 million requests over HTTP are processed every month with 11 to 23 million queries locked, as the ones violating the information security policy. 10 to 21 thousand spam emails are monthly blocked. Following the action plan the work was carried out in TATNEFT to maintain the protection level of personal data in accordance with the legislation requirements. The work was carried out on the protection of JSC TATNEFT’s portal solution from threats in the form of cross-site scripting. The works were carried out to improve the information security level of network printers located in the structural divisions of JSC TATNEFT. The works were also carried out to improve the security level of certain JSC TATNEFT’s portal solutions. 80 81 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT Training of the top management staff is performed by the non-state educational Institute of Oil and Gas Business (Moscow), where JSC TATNEFT annually sends prospective employees of TATNEFT Group Companies for training after competitive selection. In 2013, the training at the TATNEFT Personnel Training Center and its branches was arranged for 307 occupations, including 140 occupations controlled by Rostekhnadzor of Russia. Experts of the Company have been for 15 years participating in the program of the management staff training for national economy of Russia («Presidential Program»). More than 150 persons got training during this time period. CORPORATE UNIVERSITY The Company continues developing an innovative resource in the ﬁ eld of personnel training and development: the Electronic Corporate University of JSC TATNEFT, which simulator trainings were attended by more than 7 thousand persons during the past year. The «Lean Production» course was attended by 3,476 persons: heads of enterprises, their deputies, as well as heads of departments’ ofﬁ ces and foremen. The «Young Specialist Course» was attended by 895 newly hired workers, allowing them to adapt faster to the production process. The courses «Corporate Culture» and «Internal Labor Regulations for Employees of JSC TATNEFT” were attended and tested by 621 employees of the JSC TATNEFT’s Executive Ofﬁ ce. In 2013, JSC TATNEFT commissioned the «Center of Excellence» simulator, which was used by 1,000 employees to train for working with the website. An important event in the development of the ECU was launching of “V-FRD» training simulator, which may help the workers learning the techniques of safe work practices in the workplace, as well as to identify errors entailing loss of working time. The project “Students’ Labor Exchange” was actively developing in 2013. The “Students’ Labor Exchange” site was visited by 47,069 persons, while 2,620 of them registered as job seekers, including 1,374 graduates with full higher education. 114 companies placed their vacancies with a total number of published vacancies amounting to 573. 553 applicants got employment based on the results of interviews with employers. A large scope of work carried out by the Company in the ﬁ eld of personnel management has been highly commended by the Government of the Republic of Tatarstan. HR MANAGEMENT Ensuring a highly professional level of specialists and workers at all levels of the production and management personnel is realized by the HR policy of training, professional development and motivation of the employees. The social programs are aimed at improving the quality of life of the employees, as well as their families. In total this allows to provide the personnel responsibility and interest in high performance of the Company. The Company has a comprehensive system of personnel management aimed at maintaining a high professional level of workers and professionals involved in all areas of the Company activities, including: maximally efﬁ cient involvement of human resources, development of the employees’ skills on an ongoing basis, as well as strengthening motivation of the Company’s employees in general and ensuring a decent standard of living of each employee. The Company’s personnel management policy is aimed at maintaining the status of the best employer of choice at the regional market for workers with the skills and motivation to bring the maximum beneﬁ t to the Company. STAFF HEADCOUNT The average headcount of staff working in JSC TATNEFT amounted to 20.8 thousand persons in 2013. Total number of personnel for the Group amounted to 77 thousand persons. The main income gained by the staff is formed by the salary and employment beneﬁ ts. The salary includes a rated (permanent) part according to the uniform wage rate schedule, and a bonus (variable) part. The employment beneﬁ ts provide workers with an appropriate volume of medical and other social guarantees. Social payments accounted for 11% in the structure of the personnel’s aggregate income in 2011. RECRUITMENT, TRAINING, SKILL DEVELOPMENT AND RETRAINING OF STAFF The Company considers its employees as a key resource in the implementation of the corporate strategy, therefore their development and training is the most important area of the personnel management policy aimed at creating an integrated system of ongoing education with continuous improvement and development of employees. Training of workers for JSC TATNEFT is performed by the non- governmental educational institution TATNEFT Personnel Training Center and its eight branches located in the south-eastern part of the Republic of Tatarstan. Training and professional development for mid-level managers is arranged in accordance with the program of training managers and professionals of JSC TATNEFT approved by General Director of JSC TATNEFT, as well as with skill development programs for divisions and it are conducted on the basis of specialized universities in the region and in the Russian Federation. 82 SOCIAL POLICY The corporate social policy is based on the principles of creating together with all the stakeholders the environment of the Company for maintaining favorable living conditions and development of the social infrastructure in the regions of the subsoil use and business activities of TATNEFT Group enterprises and implementation of targeted corporate programs to improve the quality of life of the local population, including support for health, education, culture, sports and children’s creativity. THE COLLECTIVE AGREEMENT The Company’s obligations to the staff are put on paper in the Collective Agreement of JSC TATNEFT. The Collective Agreement signiﬁ cantly expands safeguards established by law, and provides additional beneﬁ ts for employees, social protection of young workers, and support for veterans and retirees. In 2013, all commitments stipulated by the Collective Agreement were completed. Salaries were paid on time twice a month in the full amount. INFORMATION ABOUT THE STRUCTURE OF JSC TATNEFT’S EMPLOYEES’ INCOME FOR 2013 DESCRIPTION JSC TATNEFT - for 2013 Salary share including: permanent part variable part Share of social payments VALUE 100% 89% 60% 40% 11% 14.7 thousand EMPLOYEES OF THE COMPANY went through professional training and skills development in 2013 Over 149 MILLION RUBLES were spent for professional development of the Company’ employees. NON-GOVERNMENTAL PENSION FUND One of the most important areas of the Company’s social policy is provision of the non-governmental pension for its employees. A Non-Governmental Pension Provision Program has been run at the Company for more than 16 years covering practically all employees through application of various pension provision schemes. VOLUNTARY HEALTH INSURANCE The VHI program for the staff of JSC TATNEFT includes four areas: Outpatient Services, Inpatient Services, Rehabilitation and Remedial Treatment, and Integrated Health Care. In accordance with the Voluntary Health Insurance of Employees Agreement concluded with “Chulpan” Insurance Company the number of insured employees amounted to 21,474.The total amount of the VHI contracts was RUR 223.9 million. The Company’s employees are entitled to receive free medical care and spa vouchers through implementation of VHI programs. 3,898 employees improved their health during 2013, including 410 persons in spas and resorts of RT and RF. The amount of RUR 69.9 million was allocated in 2013 for the sanatorium rehabilitation of retired pensioners of the Group of Companies divisions and enterprises. 2,741 non-working pensioners improved their health in the spas of JSC TATNEFT. MORTGAGE CREDITING The Company operates a social mortgage program aimed at improving living conditions through providing access to housing by purchasing housing units on the installment payment basis. Support is also provided for young families in obtaining housing. In 2013, ten residential buildings were commissioned as part of this program in the cities of Almetyevsk, Nurlat, Nizhnekamsk and Yelabuga. Employees of the Company received 638 apartments with the total area of 45.2 thousand square meters, with young families receiving 30% of the commissioned apartments. TATNEFT allocated RUR 6.1 million for acquisition of furniture in these residential units. In the year viewed JSC TATNEFT made the initial payment in the amount of RUR 89.7 million for the employees of structural divisions, which was 24.3% of the cost of allocated housing. The size of the lump-sum loan for young families was 30%. SMALL AND MEDIUM-SIZED BUSINESS DEVELOPMENT SUPPORT PROGRAM JSC TATNEFT continued implementation of a special corporate project of to support the development of small and medium sized businesses in the south-eastern part of the Republic of Tatarstan. This project aims at developing prospective production facilities and creating new jobs in the regions of TATNEFT activity. 83 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT INDUSTRIAL SAFETY AND LABOR PROTECTION The industrial and ecological safety activities and the activities on the labor protection were performed at JSC TATNEFT according to ISO 14001:2004 international ecological safety standard and the standard of industrial safety and health OHSAS 18001:2007 under the integrated management system of industrial safety, labor and environmental protection. The Company’s integrated system of industrial safety, labor and environmental protection management successfully passed the regular re-certiﬁ cation audit in August (September) of 2012 of and received new certiﬁ cates and the Company successfully passed supervisory audit in 2013 for compliance with the international standards ISO 14001 and OHSAS 18001. The Company continued elaboration of relevant industrial safety standards in 2013 for the purpose of establishing uniﬁ ed requirements to the components of the integrated management system of industrial, ﬁ re, electric power, radiation safety and labor protection such as «The system of personal liability of JSC TATNEFT’s employees for safety», «Regulation on industrial safety management at JSC TATNEFT”, “Procedure for participation in a panel of the scientiﬁ c and technical council of the Federal Service for Ecological, Technological and Nuclear Supervision development and revision of normative-technical documents used in the ﬁ eld of industrial safety of the oil and gas industry», corporate management standard «Programs and lectures of induction training for workers and professionals coming to work in the divisions and subsidiaries of JSC TATNEFT. In order to meet requirements of the international standard OHSAS 18001 the Company developed a «Program (action plan) of JSC TATNEFT in the ﬁ eld of industrial safety and labor protection to prevent injuries, reduce the risk of accidents and unplanned losses for 2013-2015», which aims at preserving life and health, as well as improving working conditions, reducing accidents, signiﬁ cant production risks, increasing equipment operation safety, improving the facilities ﬁ re safety. The plans provide for spending about RUR 7 billion to implement activities under the mentioned program. In 2013, structural divisions of TATNEFT spent over RUR 3.7 billion. The Labor Safety Committee works in order to maintain the labor safety and preventive measures to reduce industrial accidents and injuries in the Company, its structural business units and subsidiaries. This Committee controls the compliance with the labor protection requirements, prevention of occupational accidents and diseases. INDUSTRIAL INJURIES PROFILE IN 2006-2013 YEAR 2006 2007 2008 2009 2010 2011 2012 2013 NUMBER OF ACCIDENTS 18 9 5 7 2 5 4 1 PROFILE OF LABOR PROTECTION COST INCLUDING PER EMPLOYEE YEAR 2006 2007 2008 2009 2010 2011 2012 2013 AMOUNTS SPENT FOR LABOR PROTECTION, RUR MILLION SPENDING FOR LABOR PROTECTION ACTIVITIES PER EMPLOYEE, RUR THOUSAND 313.7 298.7 212.4 200.5 207.1 265.8 319.8 329.7 7.4 7.5 8.0 8.6 9.7 12.6 15.1 15.9 PROFILE OF INDUSTRIAL ACCIDENTS 29 23 5 3 18 1 30 25 20 15 10 5 0 Total Injuries Fatalities 9 2 5 1 7 0 5 1 4 1 2 0 1 0 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ENVIRONMENTAL ACTIVITY The environmental activities of the Company are performed in accordance with current laws and they meet all environmental regulations, and take into account international, federal and regional environmental standards. The Company passed certiﬁ cation of management systems ensuring environmental safety, labor protection and industrial safety in accordance with the requirements of ISO14001:2004 and OHSAS 18001:2007 international standards. Environmental activities are based on: • careful handling of natural resources and ensuring industrial and environmental safety; • complying with all requirements and standards in the area of subsoil use, process safety of reﬁ ning and petrochemical industries and control of possible risks associated with these activities, ensuring protection measures of water, land and atmospheric air resources in the Company’s activities territory; • contributing to the preservation of the natural balance and strengthening of the eco system through reproduction and improving the quality of and natural resources: forests, water bodies, land areas and atmosphere protection; • applying resource saving and environmentally friendly technologies, including sources of solar energy; • expanding limits of the corporate environmental management at the level of interaction with partners, governmental agencies and public institutions, as well as with local communities. INDICES OF ECOLOGICAL SAFETY AND ENVIRONMENTAL IMPACT Air protection 39.4 km of gas pipelines were replaced in 2013, including 25.7 km after major repair and 23.7 km after patch repair. Diagnostics of 253 km of pipelines was performed. The following works were performed at the facilities of crude oil gathering and crude oil treatment of the Oil and Gas Production Divisions: major repair of 29 tanks, 28 vessels, 13 heat exchangers, 1 process furnace, 13 km of process pipelines were renovated, 91 vertical steel tanks and 1 concrete tank were diagnosed were subjected to diagnostics/ as well as 148 horizontal settlers and vessels and 6 process furnaces. As a result of carrying out air protection measures the total emissions in the Company over the last 20 years were reduced by 1.6 times. Speciﬁ c emissions per one ton of produced oil amounted to 3.557 kg in 2013. The introduction of the technology to trap light hydrocarbon fractions (LHF) allowed to reduce carbon emissions by more than 3.5 times in comparison with 1991. At present, the number of active LHF capturing units at JSC TATNEFT facilities is 44 units. In order to comply with established standards of maximum permissible emissions (MPE) of pollutants into the air 1,281 tests were performed in 2013. The Company performs its activity in accordance with the JSC TATNEFT policy of industrial, occupational and environmental safety and in the framework of the special Environmental Corporate Program of JSC TATNEFT designed for the period from 2000 to 2015. Monitoring of the air condition was done in 110 communities located in the area of the Company’s operations and buffer zones of 53 production facilities. When performing these tests, 11,749 analyses were made to determine the current condition of the atmospheric air. The program is aimed at supporting the environment of the TATNEFT region of activity at the regulatory acceptable level consistent with self-healing potential of natural ecosystems. The program envisages further improvement of process equipment reliability and reduction of production activities’ negative impact on the environment, lowering of stress based on the continuing renovation of the main assets, as well as construction of special nature protection facilities. As part of this program the Company provides for performance of complex organizational and technical measures, including introduction of a broad industrial environmental control in the area of the Company’s divisions operation. Survey of the air basin was carried out for 33 ingredients (hydrocarbons, hydrogen sulﬁ de, nitrogen dioxide, carbon monoxide, etc.) along with meteorological observations, such as measurements of wind speed and direction, temperature, and relative humidity. 84 85 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT Protection and Management of Water Resources In 2013 the Company to ensure stable and uninterrupted operation of the oilﬁ eld facilities, and increase their industrial and environmental safety produced 923.9 km of corrosion resistant pipes (metal/plastic, polymer coated), 5,934.17 tons of corrosion inhibitors, 986 wells are equipped with cathodic casing protection and electrochemical protection (ECP) is provided for 662.17 km of oil pipelines and waterlines. Diagnostics of 2,915 km of pipelines and water conduits were performed. Diagnostic survey of 2,984.885 km of pipelines was carried out. The inner surface of 22 process vessels (vertical steel tanks and horizontal settlers) were protected with application of paint/varnish coating at the facilities of crude oil gathering and crude oil treatment of the Oil and Gas Production Divisions with the total area of paint/ varnish coating amounting to 25.9 thousand. According to the results of laboratory chemical analysis in 2013 the water quality in major rivers of the Company’s operations area was stable. Chloride content, crude oil and petroleum products in the dissolved and emulsiﬁ ed condition in rivers and springs in the vast majority of cases did not exceed the approved standards of maximum permissible concentrations of harmful substances in the waters of ﬁ shery water bodies and sanitary standards for the maximum permissible concentration (MPC). Currently, there is a process of steady decline of their concentration in the groundwater. Protection and Management of Land Resources Optimal placement of oil facilities and prevention of violations in soil fertility are the top priorities for land conservation. The Company performs scientiﬁ c research, develops regulatory documentation, improves its equipment and technology, and takes special actions to reduce the anthropogenic impact on the soil. 168.1 km of oil pipelines and 95.8 km of waterlines were overhauled with the purpose of protecting the land, surface water and groundwater. Works were carried out using corrosion resistant pipes. During the year the Company applied extensive efforts to reduce the areas of agricultural land allocation for the construction of oil facilities and restore fertility of disturbed land that has been achieved through the introduction of cluster drilling and well construction Treatment of Industrial Waste The Company continuously applies a lot of effort to reduce and utilize the waste generated during oil production processes through recycling, reuse and disposal. The total amount of waste generated by the production decreased by 11.9 thousand tons versus 2012 and amounted to 69.5 thousand tons. The speciﬁ c waste generation per 1 ton of oil was 2.66 kg in 2013. In 2013, JSC TATNEFT collected and sent for recycling 40.55 tons of metal scrap / which was 14.7 thousand tons more than in 2012. A network of local observation points over water bodies operates within JSC TATNEFT’s license areas. The observation system currently consists of 2,688 sampling points. This includes 564 observation points of surface bodies (springs, rivers, water pools) and 2,124 observation points of underground water bodies (artesian boreholes and wells). Water analysis is performed for the following parameters, which are characteristic for crude oil production: chloride ions, sulfate ions, total hardness, hydro-carbonates, pH, calcium, anionic surface- active agents (surfactants), oil and oil products in the dissolved and emulsiﬁ ed condition. In 2013, the central chemical analytical laboratory of the Administration for Preparation of Process Liquid performed 11,094 tests of selected water samples. Total number of natural water analyses performed in the Company amounted to more than 120,000 of in 2013. 86 KEY PERFORMANCE INDICATORS OF THE COMPANY FOR ECOLOGICAL SAFETY AND REDUCTION OF ENVIRONMENTAL IMPACT DESCRIPTION Production volume Gross emission of harmful substances into the air Total harmful substances recovered and neutralized Associated petroleum gas utilization Associated petroleum gas utilization level Fresh water intake for own needs Contaminated land area Failure induced ecological damage Commissioning of facilities for recovery and neutralization of waste gas harmful substances Investments into the main capital, used for environmental protection purposes: Planned Actual, total: including water bodies protection atmospheric air protection land resources protection from production waste and consumption land recultivation Current environmental protection expenses Repair costs of fixed assets used for environmental protection, total MEASUREMENT UNIT thousand tons thousand tons tons million cubic meters % million cubic meters hectare thousand RUR thous.cub.m/hour million RUR million RUR million RUR million RUR million RUR million RUR million RUR million RUR million RUR 2013 26,107 92.9 210.5 864.8 95.1 28.1 0 0 0.4 404.6 407.4 407.4 3.5 289.4 0 114.5 4,338.2 1,677.6 87 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT INFORMATION ABOUT COMPLIANCE WITH THE CODE OF CORPORATE CONDUCT IN 2013 COMPLIANCE OR NON-COMPLIANCE NOTE CORPORATE CONDUCT CODE PROVISIONS NO. COMPLIANCE OR NON-COMPLIANCE NOTE CORPORATE CONDUCT CODE PROVISIONS NO. GENERAL SHAREHOLDERS MEETING 1 2 3 4 5 6 7 Informing shareholders on holding the General shareholders meeting at least 30 days prior to the meeting holding date regardless of the issues included in the agenda, unless the law provides for a longer period Compliance Section 5, i.i. 5.1, 5.3 of Provision on General Shareholders Meeting art.7 i.7.1 of Articles Availability of the opportunity for shareholders to get familiarized with the list of persons entitled to participate in the General meeting of shareholders, starting from the notice date of the General shareholders meeting holding until closing of the General shareholders meeting, and in the case of an absentee General shareholders meeting: until the ballots acceptance deadline Availability of the opportunity for shareholders to get familiarized with the information (materials) to be provided in preparation for the General shareholders meeting through electronic communication means, including the Internet Availability of the opportunity for shareholders to add an issue to the agenda of the General shareholders meeting or demand calling the General shareholders meeting without an extract from the shareholder register, if the shareholder’s rights to shares are maintained in the register of shareholders, and if the mentioned rights to shares are maintained in the custody account, then the custody account extract is sufficient for the above rights execution Compliance Section 4, i. 4.3 of Provision on General Shareholders Meeting Compliance Section 5, i.i. 5.1, 5.4-5.8 of Provision on General Shareholders Meeting Compliance Availability of the requirement in the Articles or internal documents of the Joint Stock Company about obligatory attendance of General Director, Management Board members, Board of Directors members, members of the Audit Committee and the Company's Auditor at the General meeting of shareholders Compliance Section 9, i. 9.2 of Provision on General Shareholders Meeting Obligatory attendance of the candidates at the General meeting of shareholders when considering the issues about election of Board of Directors members, General Director, Management Board members, Audit Committee members, as well as the issue of approving the Company's Auditor Compliance Section 9, i. 9.2 of Provision on General Shareholders Meeting Availability in the internal documents of the Company of the registration procedure for the participants of the General shareholders meeting Compliance art. 10 i. 10.3 of Provision on General Shareholders Meeting of JSC TATNEFT BOARD OF DIRECTORS Availability in the Articles of the Joint Stock Company of the Board of Directors authority to approve the annual financial and business plan of the Joint Stock Company Compliance art. 8.4, i. 25 of Articles Availability in the Joint Stock Company of the risk management procedure approved by the Board of Directors Availability of the provision in the Company’s Articles on the Board of Directors’ right to decide on suspending the powers of General Director appointed by the General shareholders meeting Compliance Availability of the provision in the Company’s Articles on the Board of Directors’ right to establish the requirements for qualification and the remuneration amount of General Director, Management Board members and heads of the main divisions of the Joint Stock Company Compliance Being formed art.8.4, i. 9 art.9, i. 9.2 of Articles art.8.4, i.23 of Articles 8 9 10 11 88 12 13 18 19 20 21 22 23 Availability in the Articles of the Joint Stock Company of the Board of Directors’ right to approve terms of the contracts with General Director and Management Board members Compliance art. 9 i. 9.1. of Articles Availability of the requirement in the Articles or internal documents of the Joint Stock Company that when approving the contracts with General Director (managing organization, manager) and Management Board members the votes of the Board of Directors members, who are General Director and Management Board members shall not be taken into consideration when counted 14 Availability of at least three independent directors in the composition of the Company’s Board of Directors, who meet the requirements of the Corporate Conduct Code Compliance Absence of the persons in the composition of the Board of Directors of the Joint Stock Company, who were found guilty for committing economic crimes or crimes against the State, interests of public service and local government service or persons subjected to administrative penalties for offenses in the field of entrepreneurial business or in the field of finance, taxes and dues and securities market Absence of the persons in the composition of the Board of Directors of the Joint Stock Company, who are participants, General Director (manager), members of the managing body or employees of a legal entity competing with the Joint Stock Company 15 16 Compliance Compliance 17 Availability of the requirement in the Joint Stock Company’s Articles on the election of the Board of Directors by cumulative vote Compliance Availability of the provision in the internal documents of the Joint Stock Company on the members of the Board of Directors obligation to refrain from any action that will or may result in a conflict between their interests and those of the Company, and in the case of such a conflict arising the obligation to disclose information about this conflict to the Board of Directors Compliance The relevant supplement to the Articles of Association is being prepared art. 4.2 of Provision on the Board of Directors, art. 2.3, i.i. 2.3.9, 2.3.9.1, 2.3.9.2 of JSC TATNEFT Corporate Governance Code art. 8, i. 8.2, 8.3 of Articles art. 3, i. 3.7 of Provision on the Board of Directors art.3, i. 3.1.10, i. 3.1.11, art. 5, i. 5.2 of Provision on the Corporate Management Committee of JSC TATNEFT Board of Directors Ch. 4, i. 4.8 of JSC TATNEFT Corporate Governance Code Availability of the provision in the internal documents of the Joint Stock Company about the members of the Board of Directors obligation to notify the Board of Directors in writing of their intention to perform transactions with the Company’s securities, which members of the Board of Directors they are, or its subsidiary (affiliate) companies, and to disclose the information on transactions with such securities Compliance art. 4, i.4.1of Provision on the Board of Directors, art. 2.3, i. 2.3.11 of JSC TATNEFT Corporate Governance Code Availability of the requirement in the Company’s internal documents for holding meetings of the Board of Directors at least once every six weeks Compliance art. 8.5 of Articles, art. 5, i. 5.1 of Provision on the Board of Directors Holding meetings of the Board of Directors of the Joint Stock Company during the year, for which the annual report of the Joint Stock Company is made, with frequency of at least once every six weeks Compliance art. 8.5of Articles, art. 5, i. 5.1 of Provision on the Board of Directors Availability of the procedure for holding meetings of the Board of Directors in the internal documents of the Joint Stock Company Compliance art. 5 of Provision on the Board of Directors Availability of the provision in the internal Company’s documents on the necessity for approval by the Board of Directors of the Joint Stock Company the transactions in the amount of 10 or more percent of the Company's assets, except the transactions made in the normal course of business Compliance art. 8 i. 8.4, of i. 14 of Articles 89 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT CORPORATE CONDUCT CODE PROVISIONS NO. COMPLIANCE OR NON-COMPLIANCE NOTE Availability of the provisions in the Company’s internal documents on the Board of Directors members’ right to receive information from the Executive Bodies and heads of the main divisions of the Joint Stock Company needed to perform their functions, as well as the responsibility for the failure to provide such information Compliance Availability of the Board of Directors’ Committee on Strategic Planning or imposition of the mentioned Committee’s functions on another Committee (except the Audit Committee and HR and Remuneration Committee) Availability of the Board of Directors’ committee (Audit Committee), which recommends to the Board of Directors the Auditor of the Joint Stock Company and interacts with the Auditor and the Audit Commission of the Joint Stock Company Compliance Availability of independent and non-executive directors only in the composition of the Audit Committee Compliance Management of the Audit Committee shall be performed by an independent director Compliance Availability of the provision in the Company’s internal documents on the Audit Committee’s all the members right of access to any documents and information of the Joint Stock Company provided that they shall not disclose confidential information Compliance Establishment of the Board of Directors’ Committee (HR and Remuneration Committee), which function shall be to determine the criteria for selecting candidates for the members of the Board of Directors and elaboration of the Joint Stock Company's remuneration policy Compliance Management of the HR and Remuneration Committee shall be performed by an independent director Compliance Absence of the Joint Stock Company’s officials in the composition of the HR and Remuneration Committee Compliance Establishment of the Board of Directors’ Committee for risks management or delegation of the mentioned Committee’s functions to another Committee (except the Audit Committee and the HR and Remuneration Committee) The functions are exercised by the Strategic Planning Department art. 8 i. 8.4 of Articles, art. 5, i.5.1 of Provision on the Board of Directors art. 2.4 of JSC TATNEFT Corporate Governance Code art. 2 of Provision on the Audit Committee of the JSC TATNEFT Board of Directors art. 2 of Provision on the Audit Committee of the JSC TATNEFT Board of Directors art. 8. i. 8.4 of Articles, art. 5, i.5.1 of Provision on the Board of Directors art. 3 i. 3.1 of Provision on the HR and Remuneration Committee of the JSC TATNEFT Board of Directors art. 4 i. 4.2 of Provision on the HR and Remuneration Committee of the JSC TATNEFT Board of Directors art. 4 i. 4.2 of Provision on the HR and Remuneration Committee of the JSC TATNEFT Board of Directors The functions are exercised by the Corporate Management Committee Establishment of the Board of Directors Committee for corporate conflicts settlement or delegation of the mentioned Committee’s functions to another Committee (except Audit Committee and HR and Remuneration Committee) Compliance art. 3 i.i. 3.1.10, 3.1.11 of Provision on the Corporate Management Committee of the JSC TATNEFT Board of Directors Absence of the Joint Stock Company’s officials in the composition of the Corporate Conflicts Settlement Committee Compliance art. 4 i.i. 4.2 of Provision on the Corporate Management Committee of the JSC TATNEFT Board of Directors Management of the Corporate Conflicts Settlement Committee shall be performed by an independent director Availability of the approved by the Board of Directors internal documents of the Joint Stock Company covering the procedure of establishment and function of the Board of Directors’ Committees Compliance art. 2 of Provision on the Board of Directors, art. 8, i. 8.14 of Articles, Provision on Committees Availability in the Joint Stock Company’s Articles of the procedure for determining a quorum of the Board of Directors allowing for ensuring mandatory participation of independent directors in the Board of Directors meetings Compliance 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 90 CORPORATE CONDUCT CODE PROVISIONS NO. EXECUTIVE BODIES COMPLIANCE OR NON-COMPLIANCE NOTE 39 Availability of the collegial executive body (Management Board) of the Joint Stock Company Compliance art. 9, i. 9.1 of Articles, art. 2.5 of the JSC TATNEFT Corporate Governance Code 40 41 42 43 44 45 46 47 48 Availability in the Articles or internal documents of the Joint Stock Company of provisions requiring the Management Board approval of real estate transactions, loans raised by the Joint Stock Company, if such trans- actions are not major transactions and they are not part of normal business activities of the Joint Stock Company Availability in the internal documents of the Joint Stock Company of proce- dures for approval of transactions that are beyond the financial and busi- ness plan of the Joint Stock Company Compliance It is provided by the internal regulations Compliance It is provided by the internal regulations Absence of the persons in the composition of the Executive Bodies, who are participants, General Director (manager), members of the Management Board or an employee of a legal entity competing with the Company Compliance Absence in the composition of the Executive Bodies of the Joint Stock Company of the persons who were found guilty of committing economic crimes or crimes against the State, interests of public service and local government service or persons subjected to administrative penalties for offenses in the field of entrepreneurial business or in the field of finance, taxes and dues and securities market. If the functions of the sole executive body are performed by the managing organization or manager, then the General Director and the Management Board members of the managing organization or the manager shall comply with the requirements specified to General Director and members of the Management Board of the Joint Stock Company Compliance Availability in the Company’s Articles or internal documents of prohibition for the managing organization (manager) to perform similar functions in a competing joint stock company or to be in any other property relations with the Joint Stock Company, except providing services of the managing organization (manager) Compliance Availability of the obligation in the Company’s internal documents for the Executive Bodies to refrain from any actions that will or may result in a conflict between their interests and those of the Joint Stock Company, and in the event of such conflict arising the obligation to inform the Board of Directors Compliance art. 3, i. 3.1.10, i. 3.1.11, art. 5, i. 5.2 of Provision on the Corporate Management Committee of the JSC TATNEFT Board of Directors, Ch. 4 of JSC TATNEFT Corporate Governance Code Availability of the eligibility criteria for the managing organization (manager) in the Articles or internal documents of the Company Compliance It is provided by the internal regulations Presentation by the Executive Bodies of monthly reports on the work car- ried out by them to the Company’s Board of Directors Compliance Determination of the liability for breach of the provisions on the use of confidential and proprietary information in the contracts concluded by the Company with General Director (managing organization, manager) and the Management Board members Compliance art. 2.5, i. 2.5.2 of JSC TATNEFT Corporate Governance Code art. 3.9, art. 3.10 of JSC TATNEFT Corporate Governance Code SECRETARY OF THE JOINT STOCK COMPANY Availability of a special officer (Joint Stock Company Secretary) in the Company, whose task is to ensure that Executive Bodies and officials of the Joint Stock Company comply with the procedural requirements guar- anteeing the rights and legitimate interests of the Company’s shareholders Availability of the procedure for appointment (election) of the Joint Stock Company’s Secretary and the Secretary's duties in the Company’s Articles or internal documents Availability of the requirements to the candidate for the Company’s Secretary position in the Articles of the Joint Stock Company 49 50 51 It is provided by the interaction of the Secretary of the Board of Directors and Securities Office of the property Department It is provided by the interaction of the Secretary of the Board of Directors and Securities Office of the property Department It is provided by the interaction of the Secretary of the Board of Directors and Securities Office of the property Department 91 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT CORPORATE CONDUCT CODE PROVISIONS NO. ESSENTIAL CORPORATE ACTIONS COMPLIANCE OR NON-COMPLIANCE NOTE CORPORATE CONDUCT CODE PROVISIONS NO. COMPLIANCE OR NON-COMPLIANCE NOTE CONTROL OVER FINANCIAL AND ECONOMIC ACTIVITIES 52 53 54 55 56 57 Availability of the requirement to approve any major transaction prior to its carrying out in the Company’s Articles or internal documents Compliance art. 7 i. 7.3 of Articles Mandatory involvement of an independent appraiser to determine the market value of the property that is the subject of a major transaction Compliance Availability in the Articles of the Joint Stock Company of the ban to take any actions during acquisition of large blocks of shares of the Joint Stock Company (takeover), aimed at protecting the interests of the Executive Bodies ( their members) and members of the Board of Directors of the Joint stock Company, as well as worsening the position of the shareholders as compared to the existing one (in particular, the prohibition for the Board of Directors to make a decision to issue additional shares and to issue securities convertible into shares or securities granting the right to acquire the Company’s shares before the end of the expected deadline of the shares acquisition, even if such right of making a decision is granted by the Articles) Availability of the requirement in the Articles of the Company for mandatory involvement of an independent appraiser to determine the current market value of shares and possible changes in their market value as a result of a take-over Compliance Lack of the provision in the Company’s Articles to release the purchaser from the obligation of proposing to the shareholders to sell their ordinary shares of the Company (issuance securities convertible into ordinary shares) in event of a take-over Availability of the requirement in the Articles or internal documents of the Joint Stock Company for mandatory involvement of an independent appraiser to determine the share conversion ratio in the event of reorganization Compliance Compliance The relevant supplement to the Articles of Association is being prepared INFORMATION DISCLOSURE Availability of the internal document approved by the Board of Directors determining the policies and procedures of the information disclosure by the Joint Stock Company (Provisions on Information Policy) Compliance Ch. 3 of JSC TATNEFT Corporate Management Code Availability of the requirement in the internal documents of the Company to disclose the information about the purpose of placing shares and the persons who are going to buy these shares, including a large parcel of shares, as well as whether senior officials of the Joint Stock Company will participate in the acquisition of the shares being placed Compliance Ch. 3 of JSC TATNEFT Corporate Management Code Availability in the internal documents of the Joint Stock Company of the list of information, documents and materials that must be provided to the shareholders to address the issues brought to the General shareholders meeting Compliance 61 Availability of the Joint Stock Company’s Internet web site and regular information disclosure about the Joint Stock Company on this website Compliance art. 5, i.i. 5.1, 5.2., 5.4 of Provision on JSC TATNEFT General Shareholders Meeting, art. 5.4 of Provision on JSC TATNEFT Information Policy http://www.tatneft.ru, http://disclosure.skrin.ru/ disclosure/1644003838 Availability of the requirement in the Company’s internal documents to disclose the information about the transactions of the Joint Stock Company with persons that are in accordance with the Articles top officials of the Joint Stock Company, as well as the transactions of the Joint Stock Company with organizations, in which top officials of the Joint Stock Company directly or indirectly own 20 percent and more of the Company’s authorized capital or which such persons may otherwise have a material impact on Compliance art. 4, i. 4.1, 4.2 of Provision on the JSC TATNEFT Board of Directors Availability of the requirement in the internal documents of the Company to disclose the information about all the transactions that may affect the market value of the Joint Stock Company’s shares Compliance art. 3, of JSC TATNEFT Information Policy Provision, Order No. 70 of Feb. 27, 2012 62 63 92 58 59 60 65 66 67 68 69 70 71 72 73 74 75 Availability of the approved by the Board of Directors the procedures of internal control over the financial and economic activities of the Joint Stock Company Compliance art. 12, i.i. 12.1 of Articles Availability of the Joint Stock Company’s special division ensuring compli- ance with the internal control procedures (supervision and auditing service) Compliance art. 12, i.i. 12.1 of Articles Availability of the requirement in the internal documents of the Joint Stock Company that the structure and composition of the supervision and audit- ing service of the Joint Stock Company shall be defined by the Board of Directors Absence in the composition of the supervision and auditing service of the persons who were found guilty of committing economic crimes or crimes against the State, interests of public service and local government service or persons subjected to administrative penalties for offenses in the field of entrepreneurial business or in the field of finance, taxes and dues and securities market Absence in the composition of the supervision and auditing service of the persons, who are members of the Company’s Executive Bodies, as well as the persons, who are participants, General Director (manager), members of the Management Board or employees of the entity competing with the Joint Stock Company Availability in the internal documents of the Joint Stock Company of the deadline for submission of documents and materials for assessment of the financial and business operations to the supervision and auditing service, as well as the liability of the officers and employees of the Joint Stock Company for failure to submit them within the specified period Availability in the internal documents of the Joint Stock Company of the duty of the supervision and auditing service to report the detected viola- tions to the Audit Committee, and in case of its absence, to the Board of Directors of the Joint Stock Company Availability in the Articles of the Joint Stock Company of the requirement for preliminary assessment by the supervision and auditing service of the practicality of performing operations not envisaged by the financial and economic plan of the Joint Stock Company (non-standard transactions) Availability in the internal documents of the Joint Stock Company of the procedure of coordinating non-standard transactions with the Board of Directors Availability of the internal document approved by the Board of Directors describing the procedure of performing audits of the Company’s financial and economic activities by the Audit Commission Compliance art. 12, 12.2. of Articles Compliance art. 12, 12.3. of Articles Compliance art. 12, 12.2. of Articles Compliance art. 12, 12.5. of Articles Compliance art. 12, 12.5. of Articles Compliance Compliance Compliance Assessment of the Auditors' Opinion by the Audit Committee prior to its presentation to the shareholders at the General shareholders meeting Compliance DIVIDENDS 76 77 78 Availability of the internal document approved by the Board of Directors, which the Board of Directors is guided by in accepting recommendations on the amount of dividends (Dividend Policy Provision) Compliance Ch. 2, i. 2.1.6, Ch. 6. of TATNEFT Company Corporate Governance Code Availability in the Dividend Policy Provision of the procedure for determining the minimum portion of the net profit of the Joint Stock Company, allocated to the payment of dividends, and the conditions under which the dividends are not paid or not paid in full on the preferred shares with the amount of dividends thereon determined in the Articles of the Joint Stock Company Partial Compliance Ch. 6. of TATNEFT Company Corporate Governance Code Publication of the information on the dividend policy of the Joint Stock Company and any amendments thereto in a periodical prescribed by the Articles of the Joint Stock Company for publication of the notices on hold- ing general meetings of shareholders, as well as placing this information on the Joint Stock Company’s Internet website Compliance 93 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT CRITERIA FOR DETERMINING THE AMOUNT OF REMUNERATION PAID TO THE MEMBERS OF THE COMPANY’S MANAGEMENT BODIES IN 2013 The remuneration to the members of the Board of Directors of JSC TATNEFT is paid on the basis of «Regulations on payment of remuneration to members of the Board of Directors and the Audit Commission of JSC TATNEFT”. The remuneration amount is formed of a ﬁ xed and a variable part. The ﬁ xed part of the remuneration is deﬁ ned by the Regulations and indexed simultaneously with the change in tariffs and salaries of JSC TATNEFT employees. The variable part of the remuneration of the Board of Directors members is formed according to the following key indicators: the ratio of the Company’s capitalization level by the year end results versus the previous year, the ratio of the expenses for dividends to net income (as compared to the previous year) and the additional proﬁ t margin amount in relation to the baseline proﬁ tability. The total remuneration amount paid out by the results of the reporting year to the Members of the Company’s Collegial Executive Body and to the Board of Directors Members paid out by the results of the year under review* The total remuneration amount of all members of the Board of Directors for 2013 was RUR 522,529,119.53. Remuneration of all other persons belonging to the Board of Directors and the Collegial Executive Body (Management Board) is taken into account in the amount of remuneration of all members of the Board of Directors. The total remuneration sum paid out to all the members of the Collegial Executive Body for 2013 amounted to RUR 201,512,503.66. REGISTER OF COMPULSORILY DISCLOSED INFORMATION IN 2013* ITEM # CONTENT OF MESSAGE DATE OF DISCLOSED INFORMATION ACCORDING TO RUSSIAN STANDARDS(IN THE FORM OF A MESSAGE ABOUT AN ESSENTIAL FACT OR MESSAGES ABOUT THE INFORMATION WHICH CAN ESSENTIALLY AFFECT THE COST OF THE JOINT-STOCK COMPANY’S SECURITIES) ACCORDING TO ORDER OF FFMS OF RUSSIA 11-46/PZ-N DTD OCTOBER 04, 2011 1. Notice of the date of preparing a list of holders of Issuer’s equity securities or documentary Company's equity securities with mandatory centralized custody for the purposes of implementation (realization) of the rights vested by such equity securities 2. Message about the procedure of accessing the information contained in the quarterly report. 3. Message about disclosure of affiliated entities list of the Joint Stock Company on the Internet site. 4. 5. 6. Notice on the meeting of the Board of Directors (Supervisory Board) of the Company and its agenda, as well as about individual decisions taken by the Board of Directors (Supervisory Board) of the Company. On the General Meeting of Participants (Shareholders) of the Company and its agenda, as well as on decisions taken by the General Meeting of Participants (Shareholders) of the Company. Notice of the date of compiling a list of holders of equity securities of the Company or documentary Company's equity securities with mandatory centralized custody for the purposes of implementation (realization) of the rights vested by such equity securities 7. Notice on accrued and/or paid revenues for the Company’s securities 8. Notice of disclosure of the annual (interim) accounting (financial) reporting of the Joint-Stock Company 9. Notice of making an interested party transaction by the issuer 10. Notice on decisions taken by the General Meeting of participants (shareholders) of the Issuer 11. Notice on the procedure of accessing information contained in the Annual Report for 2012. 12. Notice of the quarterly report text changes 13. Information about redemption of the issuer’s securities 14. Notice on paid revenues for the Company’s securities 15. Notice on default of the Issuer fulfilling the commitments to the Issuer’s securities holders 16. On refutation or correction of information previously published in the News Line 17. 19. Notice on awarding the rating for the Company’s securities and (or) for the Company or on changes of the rating by a rating agency based on the contract signed with the Company Notice of the Joint Stock Company’s acquisition of more than 20 percent of the voting stock belonging to another joint stock company ACCORDING TO INTERNATIONAL STANDARDS (IN THE FORM OF PRESS RELEASES AND PUBLICATION OF REPORTS AS PER THE LONDON STOCK EXCHANGE REGULATIONS) February 28, 2013 By the 15-th day of the month following the quarter under review By the 2-nd day of the month following the quarter under review Monthly February 28, 2013 March 13, 2013, September 11, 2013 March 22, 2013 September, 20, 2013 March 28, 2013, April 30, 2013 July 29, 2013, October 30, 2013 April 30, 2013, May 30, 2013, September 02, 2013, October 01, 2013, November 01, 2013, July 02, 2013 July 02, 2013 August 15, 2013 September 20, 2013 September 25, 2013 September 25, 2013 October 01, 2013 November 25, 2013, December 27, 2013 19. Publication of the annual consolidated financial statements of JSC TATNEFT in accordance with IFRS for 2012. April 08, 2013 20. 21. 22. Publication of the consolidated interim financial statements of JSC TATNEFT in accordance with IFRS for the first quarter of 2013 (unaudited). Publication of consolidated interim financial statements of JSC TATNEFT in accordance with IFRS for the six months of 2013 (unaudited). Publication of the consolidated interim financial statements of JSC TATNEFT in accordance with IFRS for the nine months of 2013 (unaudited). * main facts and events, including major interested party transactions performed by the Company during the year June 25, 2013 September 09, 2013 November 29, 2013 As part of the voluntary provision of information the Company published on a systematic and regular basis the detailed information of the current production, corporate and social activity of enterprises of JSC TATNEFT and the Group in 2013. Total number of press releases on the ongoing activities of the Company distributed as voluntarily disclosed information amounted to 225 messages in 2013. 94 95 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT MAIN CORPORATE EVENTS OF 2013 The TANECO Reﬁ ning and Petrochemical Plants Complex received certiﬁ cates of the integrated management system compliance with requirements of international standards ISO 9001:2008, ISO 14001:2004 and OHSAS 18001:2007. JANUARY JSC TATNEFT’s labour collective conference summed up the results of ﬁ nancial and economic activities of the TATNEFT Production Group in 2012. The Tire manufacturers of TATNEFT supplied the millionth KAMA EURO tire to the assembly conveyor of Volkswagen Group factory in Kaluga. The Collective Agreement was signed between the Company’s management and employees of JSC TATNEFT for 2013. The tire manufacturing plants of JSC TATNEFT successfully passed the compliance audit with requirements of ISO 9001 and ISO/TS 16949. Active implementation of the program to improve environmental safety at oil production facilities is continued at JSC TATNEFT. The 13 millionth tire rolled off the conveyor of JSC «Nizhnekamskshina» . FEBRUARY The Research and Development Center of JSC TATNEFT was assigned the full-ﬂ edged resident status of the «Skolkovo» Innovation Center. APRIL Rustam Minnikhanov, President of the Republic of Tatarstan, visited entities of JSC TATNEFT Production Group of Companies in Nizhnekamsk Scientiﬁ c and practical conference «History and prospects of oil ﬁ elds development in Tatarstan» was held. A meeting of RAN (Russian Academy of Natural Science) discussing prospects of extra-viscous oil (EVO) development was held at the premises of NGDU «Aznakaevskneft». MAY NGDU «Almetyevneft» of JSC TATNEFT was visited by representatives of Accenture International Company providing services to companies in the area of managerial consulting and information technologies implementation. The specialists of JSC TATNEFT took part in the end-of-year board meeting of the Ministry of Ecology and Natural Resources of the Republic of Tatarstan. NGDU «Almetyevneft» of JSC TATNEFT produced the 600 millionth ton of oil. Two new models of solid steel cord tires for long-haul tractors and buses were brought to the market by Nizhnekamsk SSC Tire Factory. The representatives of the Committee on Environment, Natural Resources and Agrarian Affairs of the RT State Council visited the Company’s sites. The specialists of JSC TATNEFT were named winners of the XIIth «Engineer of the Year” All-Russian contest. The ﬁ rst in the Company’s history multistage interval acid fracturing in the horizontal section of Yaurkinskoye ﬁ eld well No.15 was performed. MARCH Shafagat Takhautdinov, General Director of JSC TATNEFT (current Adviser to the Chairman of the Board of Directors of JSC TATNEFT), and Nikolay Merkushkin, Governor of the Samara Region, signed an additional agreement on close cooperation development. JUNE TatNIPIneft innovative project «Method of oilﬁ elds development via wells communicating through the producing formation» was included in the state order of the Republic of Tatarstan. The Company completed a project to modernize the corporate information system (ARMITS) architecture based on Microsoft SQL Server. The training seminar on new drilling technologies and workover was held. 200,000 tons of extra-viscous oil (EVO) were produced at Ashalchinskoye ﬁ eld. The on-site meeting of JSC TATNEFT’s Council of Veterans was held. Representatives of the production enterprises of JSC TATNEFT Group took part in the Olympic torch relay in Almetyevsk. The Bugulma Mechanical Plant started coating works on 73»E»-tubing intended for delivery to Turkmenistan, at the corrosion–resistance coating shop No. 2. Unique multilevel «Tatneft-Ak Bars” Euro-class car parking was opened in Kazan. JULY JSC TATNEFT hosted the Traditional Oil Summit in the Karabash working township. OCTOBER XIIth Annual International Exhibition «Oil. Gas. Energy. Ecology» and «Industrial safety» was held in Almetyevsk. The delegation of the Ministry of Energy of the Russian Federation visited the production facilities of JSC TATNEFT. Meeting of the JSC TATNEFT’s Board of Directors and meeting with heads of small oil companies with participation of Rustam Minnikhanov, President of Tatarstan, were held in Almetyevsk. The Supervisory audit of the integrated industrial safety, labor and environmental management system for compliance with international standards ISO 14001:2004 and OHSAS 18001:2007 was started at JSC TATNEFT. AUGUST Integrated industrial safety, labor and environmental management system audit for compliance with international standards ISO 14001:2004 and OHSAS 18001:2007 was completed at JSC TATNEFT. The ﬁ rst professional Tyre & Service Center was opened in Tatarstan. The Rostechnadzor carried out a comprehensive scheduled inspection of particularly hazardous production facilities of the Company. NOVEMBER Workers of the Kazan Branch of OOO «Tatneft-AZS Center» and NGDU «Almetyevneft» took part in the Republican «Green record» environmental action. 300,000 tons of extra-viscous oil were produced at Ashalchinskoye heavy oil ﬁ eld. The Delegation of leading experts from JSC «Ozemunaygas» visited JSC TATNEFT. Results of springs’ contest were summed up. The winners among the structural steel divisions were NGDU «Jalilneft», NGDU «Elkhovneft» and NGDU «Aznakaevskneft». Traditional professional skills contest was held at JSC TATNEFT. Bugulma mechanical plant started manufacturing a new product: scrubber unit (DK1007). SEPTEMBER The Delegation of the Ministry of Energy of the Russian Federation headed by the Kirill Molodtsov, Deputy Minister, visited the production facilities of JSC TATNEFT. The Environmental audit was successfully completed at Nizhnekamsk Truck Tire Plant. The Environmental management system was declared compliant with the requirements of GOST R ISO 14001-2007. The ninth ﬁ lling station under the brand of JSC TATNEFT was open in the Republic of Belarus. JSC TATNEFT participated in the XVIIIth International Specialized Exhibition «Oil & Gas of Turkmenistan-2013». The Government delegation of the Republic of Tatarstan visited the Petrochemical and Reﬁ ning facilities of JSC TATNEFT in Nizhnekamsk. JSC TATNEFT presented a large-scale composition dedicated to the 70th anniversary of Tatarstan oil at the Tatarstan Petrochemical Forum. DECEMBER The specialists of the Normative Research Station of JSC TATNEFT actively participated in the conference «Process Management: Today and Tomorrow» (Moscow). There was a press brieﬁ ng held at the Cabinet of Ministers of the Republic of Tatarstan on implementation of the comprehensive action plan timed to the 70th anniversary since the beginning of the commercial oil ﬁ elds development in the Republic of Tatarstan. The professionals of JSC TATNEFT participated in the IVth All- Russian Congress of Environmental Protection at the «Crocus City Hall» International Exhibition Centre in Moscow. XIVth Report and Election Conference of JSC TATNEFT’s young employees was held. 96 97 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT AWARDS AND NOMINATIONS OF JSC TATNEFT IN 2013 7. «Nizhnekamskshina» was named an excellent manufacturer and OOO «Trade House» - an excellent supplier in the ranking of suppliers and manufacturers in Togliatti. INTERNATIONAL AWARDS AND NOMINATIONS 1. The International Conference of students, post-graduates and scientists «Lomonosov-2013» awarded the silver medals for engineering developments: «Well construction method» (NGDU «Almetyevneft»), «Method of monitoring the oil ﬁ eld through listening to inter-well intervals» NGDU «Aznakaevskneft»), «Method of developing a multi-target oil ﬁ eld» (NGDU «Jalilneft»), «Method of well operation» (NGDU «Nurlatneft»), «Method of controlling oil reservoirs ﬂ ood front» (TatNIPIneft). Bronze medals were awarded for engineer- ing developments «Method of well cluster construction» (NGDU «Almetyevneft»), «Process of limiting the formation water ﬂ ow to the production well» NGDU «Aznakaevskneft»), «Well development with application of «OSMUD» controlled depression method” NGDU «Bavlyneft») «Method of equipment delivery to horizon- tal or inclined wellbores» (NGDU «Nurlatneft»), «Solid-phase composition to neutralize hydrogen sulﬁ de» (NGDU «Yamashneft») and «Water separation and treatment unit for water produced with oil» (TatNIPIneft). 2. TATNEFT Company was honored appreciation of the organizing committee and diplomas for relevancy and professionalism of the provided exposure at the exhibition «Oil and Gas” MIOGE in Moscow. 3. TATNEFT Company was awarded the Grand Prix at the XXth International Exhibition “Oil, Gas, Petrochemicals - 2013”: • for development and introduction into production of acid stimulation compositions «KSK-Tatneft» in the category «Enhanced Oil recovery»; • for development and introduction into production of technologies to improve production of oil reservoirs through application of silica gel based compositions (SSG-VUKSZHS technology) in the category of “Innovative environmentally sound technologies”. 4. The ﬁ rst prize of the «PEGAZ» International Media Contest Moscow in the category «Internet edition premium» was awarded to the electronic publication «Oil newspaper», Honorary Diploma in the nomination «A series of TV programs/ﬁ lms» was conferred to the «Time of TATNEFT» studio. ALL-RUSSIAN AWARDS AND NOMINATIONS 1. Awards named after Academician I.M. Gubkin were presented to TATNEFT Company for four engineering developments in the ﬁ eld of oil and gas industry. 2. Honorary badge «Environmentalist of the Year» was awarded to R.F. Burganov, Executive Director of «Nizhnekamskshina», A.S. Belyaev, Head of Environmental Service of «Nizhnekamskshina», was recognized as the best environmental service manager in the category and A.M. Akhmetzyanova, environmental practices expert engineer of «Nizhnekamskshina» was recognized the best in the contest «100 Best Russian organizations. Ecology and Environmental Management». Diploma of the contest winner in the additional category was awarded «For disposal and processing of accumulated waste and achievements in the ﬁ eld of production and consumption wastes handling» was received by OOO «Nizhnekamsk Truck Tire Factory» in the contest «100 Best Russian organizations. Ecology and Environmental Management»,. 3. N.G. Ibragimov, First General Director Deputy for Production - Chief Engineer of JSC TATNEFT, joined “Top 100 industrial managers - 2013» in the «Top 100» ranking in the «Industrial Elite of Russia: top 100 industrial managers in 2013». 4. High level of JSC TATNEFT’s information transparency in April 2013 was marked by the information openness rating of the Russian fuel and energy sector companies. 5. Corporate electronic publication «Oil newspaper» ranked the third in the VIth All-Russian contest BEST INTRANET RUSSIA - 2013. 8. Managers of JSC TATNEFT were included in the list of the top managers of Russia in the XIVth annual ranking «Top - 1000 Russian Managers». Shafagat Takhautdinov, General Director of JSC TATNEFT (from November, 2013 - Advisor to the Chairman of the JSC TATNEFT’s Board of Directors) joined the Top Ten business leaders of the fuel sector. Nail Maganov, First Deputy General Director of JSC TATNEFT - Head of Crude Oil and Petroleum Products Sales Department (from November, 2013 - General Director of JSC TATNEFT) was named among the Top Three Commercial Directors of energy and fuel sector. Vladimir Lavushchenko, Deputy General Director of JSC TATNEFT for Economics was named the Best CFO of the rating. Victor Gorodny, Deputy General Director - Head of JSC TATNEFT Property Department: the Best Corporate Management Director of the energy and fuel sector. Fedor Schelkov, Deputy General Director for General Affairs, joined the Top Three Marketing Directors. Rustam Mukhamadeyev, Deputy General Director for Human Resources and Social Development: the Best HR Director. Azat Yagafarov, Deputy General Director - Director of JSC TATNEFT Representation Ofﬁ ce in Moscow was among the Best Directors of the energy and fuel sector for interaction with authorities. 9. JSC TATNEFT Annual Report for 2012 was awarded a diploma of the «Sochi - 2013» at the XIIth International Investment Forum. JSC TATNEFT Annual Report for 2012 was the winner of the contest in the nomination «For contribution to the development and implementation of best practices in corporate management and accountability» of the XVth Annual Reports’ contest. 10. JSC TATNEFT was a prize winner of the «Leader of competitive procurement - 2013». JSC TATNEFT was awarded a diploma and commemorative sign in the nomination «The Best system of working with suppliers» at the Second Annual Conference «Corporate procurement». 11. OJSC TANECO was awarded the honorary title of the environmentally responsible company in the region of the All-Russia contest «The Best Environmentally Responsible Company of the region». 12. JSC TATNEFT was awarded the Certiﬁ cate of Merit for the contribution to the sustainable development of the country and the high social and environmental responsibility in the environment protection (The National Environmental Prize of Russia). Vladimir Fadeev, Head of Production Department - Deputy Chief Engineer of JSC TATNEFT, was awarded the badge of «V.I. Vernadsky Order». Ravil Gareev, Head of Technical Corrosion and Nature Protection Ofﬁ ce of the Production Department of JSC TATNEFT; Radik Mukhametgaleev, Chief Technologist - Head of Oil and Gas Treatment Ofﬁ ce; Ravil Ibatullin, Director of «TatNIPIneft»; Z. Valisheva, Head of «TANECO» Environment Ofﬁ ce, and Renat Nugaybekov, Director of OOO «TMS Group», were awarded commemorative medals for the 150th anniversary of V.I. Vernadsky. 6. TATNEFT Brand joined the top 10 valuable Russian 2013 brands of the rating of the International INTERBRAND agency. 13. The Collective Agreement of JSC TATNEFT named among the Top Ten Best Collective Agreements of Neftegazstroy Trade Union of Russia in the contest «Best NGCP of Russian Collective Agreement». 98 99 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS CORPORATE MANAGEMENT JSC TATNEFT AWARDS AND NOMINATIONS OF THE REPUBLIC OF TATARSTAN 1. Ten projects of JSC TATNEFT were recognized as the best at the VIIIth Republican contest «50 best innovative ideas for the Republic of Tatarstan». 2. Specialists of JSC TATNEFT were awarded the Ist degree diploma for technology of water dumping and cleaning water produced at the well cluster and the IInd degree diploma in the category «Energy efﬁ cient production» for the hot separation technology providing fuel gas for own installations of the contest «Resource Efﬁ ciency. Energy saving» in the nomination «Fuel industry», Kazan. 3. Collectives of NGDU «Almetyevneft» and TatNIPIneft were awarded small cups of the Innovators and Inventors Society of the Republic of Tatarstan of the review contest for the best arrangement of invention, rationalization and patent/licensing work among enterprises, organizations and institutions of the Republic of Tatarstan. 4. Nine projects of JSC TATNEFT became winners of the VIIIth Republican contest «50 Best Innovative ideas for the Republic of Tatarstan». GOVERNMENT AWARDS OF TOP MANAGERS AND PROFESSIONALS OF JSC TATNEFT 1. In accordance with the RF Government Decree the following top managers of JSC TATNEFT were awarded the Prize of the Russian Federation Government in the ﬁ eld of science and technology and «RF Government Prize Laureate in Science and Technology» titles for creation and implementation commercial of the integrated technology for development of extra-viscous oil ﬁ elds: • Shafagat Takhautdinov, General Director (from November, 2013 - Adviser to the Chairman of the JSC TATNEFT’s Board of Directors); • Nail Ibragimov, First Deputy General Director for Production - Chief Engineer; • Rais Khisamov, Chief Geologist - Deputy General Director; • Ravil Ibatullin, Director of TatNIPIneft; • Nakip Gatiyatullin, Head of TGRU, JSC TATNEFT; • Ilgiz Salikhov, Head of NGDU «Nurlatneft»; • Azat Zaripov, Deputy Ofﬁ ce Head - Head of the Laboratory, TatNIPIneft, • Rinat Sabirov, Assistant to President of the Republic of Tatarstan. 2. Raphael Nurmukhametov, Head of NGDU «Leninogorskneft» was awarded the Badge of Honor Order. 6. Shafagat Takhautdinov, General Director of JSC TATNEFT (from November, 2013 - Advisor to the Chairman of the JSC TATNEFT’s Board of Directors) topped the rating of the business elite of the Republic of Tatarstan. 3. The group of authors of JSC TATNEFT was awarded the Government of the Russian Federation prize in the ﬁ eld of science and technology for the work «Creation and commercial implementation of the integrated technology for development of extra-viscous oil ﬁ elds». 7. OOO CHOP «Tatneft-Security» was awarded prizes in the Republican contest «Territory of the Law». 8. The specialists of JSC TATNEFT won the ﬁ rst place in invention and 12 winning places for innovative activities in the contest «Young Innovator and Inventor of the Republic of Tatarstan». 9. 13 employees of JSC TATNEFT became winners in the nominations of the 50 Best innovative ideas for the Republic of Tatarstan» in the Annual Republican contest. 10. OOO «Tatneft-AZS Center», OOO «Tatspetstransport” Management Company, «NOU «CPC - Tatneft» were named the prize winners of the IXth Republican contest for the quality award of the Government of Tatarstan. 11. The following representatives of JSC TATNEFT were recognized as winners of the «Manager of the Year - 2013» contest: • Nail Ibragimov, First Deputy General Director for Production - Chief Engineer of JSC TATNEFT in the category «High Competitiveness»; • Rustam Khalimov, Head of NGDU «Elkhovneft» in the nomination «For high social responsibility»; I. Sattarov, Director of «PD Tatneft - AlabugaSteklovolokno» in the nomination «For achievements in innovation activities». Shafagat Takhautdinov, President of «Ak Bars» Hockey Club, was awarded the title «The Honored Physical Culture Worker of the Republic of Tatarstan» for public activities and support. 12. «Oil News» Newspaper was awarded the ﬁ rst place in the nomination «The Best Publication in periodicals» of the “Companies’ media group”, «Time of Tatneft» TV studio was awarded the second place in the category «Best TV story» of the “Companies’ media” group of the Republican «Man and Nature» journalist contest. 13. «Oil and Life» corporate magazine joined the top 10 in the rating of corporate industrial companies in Russia and ranked No. 7 in the rating of «Production Management» Business Portal. 4. Boris Kashcheev, oil & gas production foreman of NGDU «Jalilneft» was awarded the Order of Friendship by the Presidential Decree. 5. Ramil Magasumov, oil, gas & condensate production foreman was conferred Gratitude of the Government of the Russian Federation. 6. TATNEFT awarded the Top departmental awards of the building complex of the Russian Federation instituted by the Russian Union of Builders. JSC TATNEFT was awarded a diploma of the Russian Union of Builders. Shafagat Takhautdinov, General Director (from November, 2013 - Advisor to the JSC TATNEFT’s Chairman of the Board of Directors), Mirgaziyan Taziev, Head of NGDU «Almetyevneft», Ghali Ganiev, General Director of OOO «TagraS Holding» were awarded the Order «For Merit in construction». 7. Sirin Gubaidullin, manual electric welder was awarded the medal «For Valorous Labor». 8. The collective of authors-oilmen was awarded the State Prize of the Republic of Tatarstan in the ﬁ eld of science and technology for the work «Scientiﬁ c basis and commercial implementation of methods and technologies complex for the development of the resource base of JSC TATNEFT”. 100 101 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT FINANCIAL RESULTS AUDIT OPINION AUDIT OPINION OF ACCOUNTING (FINANCIAL) STATEMENTS for the period from January 01 till December 31, 2013 AUDIT OPINION OF ACCOUNTING (FINANCIAL) STATEMENTS for the period from January 01 till December 31, 2013 AUDIT OPINION To Shareholders of Open Joint Stock CompanyTATNEFT named after V.D.Shashin Audited Entity Full name: Open Joint Stock Company TATNEFT named after V.D. Shashin (hereinafter referred to as the Company). Abbreviated name: JSC TATNEFT n.a. V.D. Shashin. State Registration Number 1021601623702. Location: 75, Lenin Street, Almetyevsk 423450, Republic of Tatarstan, Russian Federation Auditor Name: ZAO ENERGY CONSULTING/Audit State Registration Number: 1047717034640. Location: 7 Pavlovskaya Street, Moscow 115093, Russia. Postal address: 7 Pavlovskaya Street, Moscow 115093, Russia. Member of NP “Institute of Professional Auditors of Russia” (IPAR) Basic State Registration Number: 10202014620. We have audited the enclosed financial statements of the Company comprising the balance sheet as of December 31, 2013, profit and loss statement, attachments to the balance sheet and profit and loss statement (the statement of changes in equity and cash flow statement for the year of 2013), other attachments to the balance sheet and profit and loss statement (notes to the accounts) for 2013. Responsibility of the Audited Entity for Financial Statement The Company management is responsible for accounting and authenticity of the specified financial statements in accordance with the accounting rules in the Russian Federation and for the internal control system necessary for preparation of financial statements free of material misstatement due to fraud or errors. Responsibility of the Auditor Our responsibility is to express an opinion on authenticity of the financial statements based on our audit results. We have carried out the audit in accordance with the federal auditing standards of the Russian Federation. These standards require that we comply with relevant ethical requirements and perform the audit to obtain reasonable assurance that the financial statements are free of any material misstatement. The audit included performance of audit procedures aimed at obtaining audit evidence supporting the numerical indicators of the financial statements and disclosure of the information contained therein. The choice of the audit procedures is the subject of our judgment, which is based on the assessment of the risk of material misstatements, made due to fraud or errors. In assessing this risk, we considered the system of internal control, providing for compiling and authenticity of the financial statements in order to select the relevant conditions for setting the auditing procedures, but not for the purpose of expressing an opinion on the effectiveness of the internal control system. The audit also included the assessment of appropriateness of the accounting policies applied and the reasonableness of the estimated figures received by the management of the audited entity as well as the overall assessment of the financial statements presentation in general. We believe that the audit evidence provides a reasonable basis for expressing an opinion on the authenticity of the financial statements. Opinion In our opinion, the financial statements authentically present in all material respects the financial position of JSC TATNEFT named after V.D. Shashin as of December 31, 2013, the results of its financial and business performance and cash flows for the year 2013 in accordance with the established rules of compiling financial statements in the Russian Federation. March 28, 2014 General Director ZAO ENERGY CONSULTING/Audit L.A. Antonenko Auditor’s qualification certificate of Sept.08, 2011 No. 02-000014, ORNZ 29702011544 102 103 JSC TATNEFT named after V.D. Shashin JSC TATNEFT named after V.D. Shashin ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT BALANCE SHEET INDICATOR DESCRIPTION ASSETS I. FIXED ASSETS Intangible assets Research and development results Intangible exploration assets Tangible exploration assets Fixed assets incl. incomplete capital investments Income-bearing investments in tangible assets Financial investments Deferred tax assets Other non-current assets incl. advance payments given for procurement and construction of fixed assets Assets retirement obligations TOTAL for section I II.CURRENT ASSETS Reserves incl. raw materials and supplies Work in progress costs Finished products and goods for resale Goods shipped Other reserves and expenses Input value added tax on acquired assets Accounts receivable incl. noncurrent nondelinquent accountsreceivable(that are due beyond 12 monthsafter the reporting date) incl. buyers and customers Advances paid Other debtors incl. current nondelinquent accounts receivable (that are due in the next 12 months after the reporting date) incl. buyers and customers Advances paid Other debtors Financial assets (except for cash equivalents) Cash and cash equivalents Other current assets TOTAL for section II BALANCE (RUR THOUSAND) BALANCE SHEET (RUR THOUSAND) LINE CODE AS OF DECEMBER 31, 2013 AS OF DECEMBER 31, 2012 AS OF DECEMBER 31, 2011 1110 1120 1130 1140 1150 1151 1160 1170 1180 1190 1191 1192 1100 1210 1211 1212 1213 1214 1215 1220 1230 1231 1232 1233 1234 1235 1236 1237 1238 1240 1250 1260 1200 1600 209,755 183168 199,857 140,440 201,468 90,875 4,254,890 4,239,122 4,275,474 749,309 765,985 868,591 105,623,595 84,545,165 71,612,606 24,089,675 13,059177 2,346,536 6,170,187 6,344,080 6,418,316 52,026,776 41,341,354 41,567,542 – – – 66,517,371 58,667,903 41,518,025 12,236,117 17,222,336 7,063,062 29,507,230 30,057,677 30,624,585 231,911400 196,070,013 166,552,897 27,532,219 25,967,668 20,095,622 1,691,393 7,124,819 1,196,405 7,038,008 1,379,951 6,836,399 15,449,610 15,259,334 10,003,092 2,546,366 1,673,416 720,031 800,505 986,580 889,600 4,209,301 3,667,200 3,830,658 78,283,414 75,807,078 85,864,316 3,500,446 5,091,597 9,700,501 1,535,471 2,952,290 6,276,669 – 539 2,825 1,964,975 2,138,768 3,421,007 74,782,968 70,715,481 76,163,815 51,062,327 44,701,410 53,598,749 13,427,574 14,980,295 12,368,493 10,293,067 11,033,776 10,196,573 170,528,846 195,409,775 208,374,862 20,649,731 7,396,963 7,817,038 202,354 301,640 332,158 301,405,865 308,550,324 326,314,654 533,317,265 504,620,337 492,867,551 INDICATOR DESCRIPTION LIABILITIES III. CAPITAL AND RESERVES Authorized capital (share capital, registered fund, contributions of partners) Repurchased shares Revaluation of noncurrent assets Capital surplus (without revaluation) Reserve capital Undistributed profit (uncovered loss) TOTAL for Section III IV.LONG-TERM LIABILITIES Borrowings Deferred tax liabilities Estimated liabilities Other liabilities TOTAL for Section IV V. SHORT-TERM LIABILITIES Borrowings Accounts payable incl. suppliers and contractors Liabilities to the state non-budgetary fund Taxes and dues payable Advances received Dividends payable Other creditors Deferred revenues Estimated liabilities Other liabilities TOTAL for Section V BALANCE LINE CODE AS OF DECEMBER31, 2013 AS OF DECEMBER 31, 2012 AS OF DECEMBER 31, 2011 1310 1320 1340 1350 1360 1370 1300 1410 1420 1430 1450 1400 1510 1520 1521 1522 1523 1524 1525 1526 1530 1540 1550 1500 1700 2,326,199 2,326,199 2,326,199 ( ) ( ) ( ) 8,753,243 9,548,876 9,638,151 30,813 10,353 (9,231) 1,144,326 1,265,940 1,197,142 409,441,456 365,305,770 315,721,541 421,696,037 378,457,138 328,873,802 7,067,728 34,026,859 58,831,609 7,808,535 7,433,542 6,865,859 29,554,090 29,854,065 30,409,912 – 17,931 121,813 44,430,353 71,332,397 96,229,193 29,855,108 25,831,964 37,977,561 33,729,497 25,390,863 27,947,958 11,027,550 9,903,302 8,138,832 294,098 11,295,169 3,222,161 102,707 276,771 9,106,492 1,859,202 101,477 220,044 9,657,722 3,727,482 95,551 7,787,812 4,143,619 6,108,327 5,389 1,494,557 2,106,324 6,433 1,625,372 1,976,170 7,714 1,439,204 392,119 67,190,875 54,830,802 67,764,556 533,317,265 504,620,337 492,867,551 104 105 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT PROFIT AND LOSS STATEMENT FY 2013 (THOUSAND RUR) INDICATOR DESCRIPTION Revenues Cost of goods sold Gross profit (loss) Selling expenses Administrative expenses Mineral exploration and evaluation expenses Profit (loss) on sales Participation capital Interest receivable Interest payable Other income Other expenses Profit (loss) before taxation Current income tax incl. permanent tax liabilities (assets) Changes in deferred tax liabilities Changes in deferred tax assets Miscellaneous Adjusted tax on the profit for the consolidated group of taxpayers Net profit (loss) INFORMATIONAL Surplus on revaluation of fixed assets not included in the net income (loss) for the period Result from other operations not included in the net income (loss) for theperiod Total profit/loss for the period Basic earnings (loss) per share Diluted earnings (loss) per share LINE CODE JANUARY-DECEMBER 2013 JANUARY-DECEMBER 2012 2110 2120 2100 2210 2220 2230 2200 2310 2320 2330 2340 2350 2300 2410 2421 2430 2450 2460 2465 2400 2510 2520 2500 2900 2910 363,531,273 344,563,268 (228,539,354) (208,369,224) 134,991,919 136,194,044 (37,252,177) (35,083,893) – (2,026) – (59,806) 97,737,716 101,050,345 179,295 3,282,143 214,560 3,891,121 (4,337,004) (5,386,623) 26,372,397 10,489,195 (39,749,600) (23,367,851) 83,484,947 86,890,747 (19,712,285) (20,606,585) (3,390,289) (3,796,119) (374,993) (567,683) (117,095) 569,566 693,426 254,783 63,850,140 66,664,688 423,247 20,460 405,484 19,584 64,293,847 67,089,756 28.75 – 30.02 – ESSENTIAL ASPECTS OF THE ACCOUNTING POLICY AND PRESENTATION OF FINANCIAL STATEMENTS FOR 2013 MAIN APPROACHES TO PREPARATION OF ANNUAL FINANCIAL STATEMENTS Financial accounting in the Company is performed in accordance withFederal Law No.402-FZ of December 06, 2011 “On Accounting”, Provision on Accounting and Reporting in the Russian Federation approved by Order of the Russian Federation Ministry of Finance No.34n dated July 29, 1998,current accounting regulations (RAS), as well as the accounting policy of the Company.Financial statements of the Company for 2013were prepared in compliance with mentioned Law, accounting regulations and policy, as well as the assumption of the organization activity continuity. Annual ﬁ nancial statements for 2013 were compiled according to the forms developed and approved by the Company in accordance with the Order of the Ministry of Finance No. 66n of July 02, 2010 «About formats for corporate ﬁ nancial statements». The data in ﬁ nancial statements is presented in thousands of rubles. ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCY Accounting for assets and liabilities denominated in foreign currencies is carried out in accordance withRAS 3/2006, «Accounting of Assets and Liabilities Denominated in Foreign Currencies», and approved by Order No. 154n of November 27, 2006of the FinanceMinistry of the Russian Federation. The exchange rate difference is reﬂ ected in the accounting and ﬁ nancial statements for the concerned reporting period with the due date of payment or which the ﬁ nancial statements were executed for. The exchange rate difference arising from conversion of the organization’s assets and liabilities denominated in foreign currency used for performing activities outside the Russian Federation into rubles is credited to the organization’s capital surplus. The exchange rate difference on other activitiesis credited to ﬁ nancial results of the organization as other income and expenses. The currency exchange rate gains and losses are recognized in the Proﬁ t and Loss account in the «Other income» or «Other expenses». For accounting business transactions in foreign currencies there was the ofﬁ cial exchange rateappliedof the foreign currency to the ruble valid on the date of transaction. Cash on foreign currency accounts in banks and on hand, ﬁ nancial investments (except shares), and settlement funds in foreign currencies (except the funds received and paid advances and pre-payment or earnest money) are reﬂ ected in the ﬁ nancial statements as amounts calculated on the basis of the currency ofﬁ cial exchange rates valid on December 31, 2013. The currency exchange rates on this date amounted to RUR 32.7292to USD 1.00 (RUR 30.3727 as of December 31, 2012;RUB 32.1961 as of December 31, 2011); RUR 44.9699to EURO1.00(RUR 40.2286 as of December 31, 2012, RUR 41.6714as of December 31, 2011). INTANGIBLE ASSETS As a part of intangible assets there are software programs for computersreﬂ ected; inventions; useful models; production secrets (know- how); trademarks and service marks, licenses for mineral geological exploration and production, and licenses for mineral production. Intangible assets are reﬂ ected in the accounting records at historic cost in that reporting period when received the documents conﬁ rming the Company’s exclusive rights to the results of intellectual activity or means of individualization irrespective of intangible assets used in production, performance of works or rendering of services, for administrative purposes. The original cost of intangible assets acquired under the contracts providing for execution of non-monetary obligations, is determined based on the value of the assets transferred or subject to transfer by the organization. The cost of the assets transferred or subject to transfer is set on the basis of the price, at which the value of similar assets is usually determined in comparable circumstances. If it is impossible to establish the value of assets transferred or subject to transfer by the organization, then the value of obtained intangible assets is determined based on the price, at which similar intangible assets are usually purchased. The value of intangible assets shall be repaid by the straight-line depreciation method at the rates speciﬁ ed on the basis of the due date of the useful life. Depreciation is not charged for intangible assets with an indeﬁ nite period of the useful life. Depreciation charging is performed through accumulation of appropriate amounts in a separate account. Depreciation on intangible assets is reﬂ ected in the accounting period, which they refer to and is charged regardless of the organization’soperating results in the reporting period. The useful life of intangible assets is annually veriﬁ ed for the purpose of clariﬁ cation. In case of substantial change of the period duration (by more than twenty percent) within which the asset is intended to be used, its useful life is deﬁ ned. The resulting adjustments are reﬂ ected in the accounting and ﬁ nancial reporting at the beginning of the year as changes in the estimated values. Value adjustment of intangible assets of homogeneous groups is not performed. EXPENSES FOR RESEARCH& DEVELOPMENT, DEVELOPMENT AND ENGINEERING WORKS Expenses for the research & development, development and engineering worksare accounted in the amount of actual expenses incurred during performance of these works. The expenses for the research & development, development and engineering works which have produced positive results and started to be used in the work are expensed written off as expenses of ordinary activities starting with the month following the month when the company started the actual application of the mentioned works results in the production manufacturing (work performance, service rendering) or for administrative needs of the organization. Writing off the costs of each performed research & development, development and engineering workwhich have produced positive results is made during the useful life of R & D results (which should not exceed 5 years). The expenses for the research & development, development and engineering workswhich have not produced positive results are written off to the ﬁ nancial result as miscellaneous expenses in the reporting period. 106 107 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT EXPLORATION ASSETS The Company considers the following to be exploration assets as a part of tangible exploration assets: • expenses for acquisition and construction of prospecting, exploration and When conﬁ rming the commercial feasibility of oil production in the licensed block of mineral resources the Company performs reclassiﬁ cation of exploration assets: • tangible exploration assets are included in the category of ﬁ xed assets at advance producing wells, as well as other oilﬁ eld facilities; residual value; • expenses for acquisition and rig-up of the equipment for prospecting, • intangible exploration assets are included in the category of intangible exploration and advance producing operation wells. assets at residual value. According to the Company the intangible exploration assets include the following types of exploration costs: • acquisition costs of licenses for geological study of subsurface, licenses for geological exploration and production of mineral resources; • costs of prospecting, evaluation and exploration of mineral resources: expenses for geological, geochemical, geophysical works, as well as expenses for acquiring geological information on the subsurface from the third parties, including state authorities, and expenses for drilling key, appraisal and structure wells. The Company considers the following exploration costs as expenses for regular types of activity: expenses for maintenance of the structural divisions organized solely for or performance and coordination of works on exploration, evaluation and prospecting of mineral resources, as well as expenses for maintenance and repair of tangible exploration assets. Tangible exploration assets are depreciated by straight-line depreciation method during the period of their useful life. Depreciation costs for targets of tangible exploratory assets are included in the costs of prospecting, evaluation and exploration of mineral resources for relevant license blocks. Intangible exploration assets as licenses for geological subsurface study are depreciated by straight-linemethod during the period of their useful application.Depreciation costs for aforementioned targets are included in the costs of prospecting, evaluation and exploration of mineral resources for relevant subsurface areas. Acquisition costs incurred for exploration and mininglicenses, as well as the costs of prospecting, evaluation and exploration of mineral resources are not depreciated until the commercial feasibility of oil production is conﬁ rmed in the relevant license block of mineral resources and approval of the order of commercialﬁ eld development. The commercial feasibility of oil production is considered to be conﬁ rmed at the moment of approval of the reservoir management plan in the license area of mineral resources. The Company performs annual veriﬁ cation of exploration assets depreciation as of December 31 of the calendar year, as well as in the case of cessation of their recognition when conﬁ rming commercial feasibility of oil production in the relevant license block. JSC TATNEFT writes off the exploration assets to other expenses,if they are not able to provide economic beneﬁ ts in the future. FIXED ASSETS Land plots, buildings, facilities, machinery, equipment, transport vehicles and other relevant assets of over 12 months asset life and cost over 40,000 rubles are reﬂ ected in the ﬁ xed assets. The Company annually revaluates ﬁ xed assets based on the current value (replacement asset value) at the end of the reporting period. Fixed assets put into operation before January 1, 2002 are depreciated at uniform depreciation rates approved by Decree No.1072 of the USSRCouncil of Ministers dated October 22, 1990 «On Uniform Depreciation Rates of Full Cost Recovery of Fixed Assets of the USSR National Economy»; and those assets put into operation from January 1, 2002 are depreciated at the rates calculated on the basis of useful life. The classiﬁ cation of ﬁ xed assets included in depreciation groups approved by the Order No. 1 of the Government of Russian Federation dated January 01, 2002 is used as one of the informationsources about the useful life periods. Forthispurposethe following usefullife periodsare speciﬁ ed forﬁ xedassets (put into operation starting from January 1, 2002) by depreciation groups: 1 group 2 group 3 group 4 group 5 group 6 group 7 group 8 group 9 group 10 group 13 months 30 months 48 months 72 months 96 months 132 months 192 months 252 months 312 months 372 months For the purposes of verifying exploration assets for depreciation the aforementioned assets are categorized by mineral resource blocks indicated in the licenses. The straight line depreciation method is used for depreciation calculations. Depreciation is not charged on land plots and natural resources sites. Impairment loss of exploration assetsis reﬂ ected in the proﬁ t-and-loss statement in line code «Other expenses». Furthermore the Company applies the reversal of impairment lossto exploration assets. Changingthe original value ofﬁ xed assets as they were included for accounting purposes is allowed in cases of completion, retroﬁ t, renovation, modernization, partial liquidation and revaluation of the ﬁ xed assets. The Company ceases recognition of exploration assets in relation to a certain licensed block of mineral resources when conﬁ rming commercial feasibility of oil production in the relevant licensed block or recognizing lack of prospects of mineral resources production in this area. In accordance with Article 11 of RAS 6/01 «Accounting of Fixed Assets» there are the following methods of estimation of objects of ﬁ xed assets received under contracts providing for execution of obligations (payment) by non-monetary assets: • at the cost of goods (values) transferred or transferable. The cost of goods (values) transferred or transferableis determined on the basis of the price, which under comparable circumstances usually determines the cost of similar goods (values); • if impossible to establish the cost of goods (values) transferred or transferable, then the cost of ﬁ xed assets received under contracts providingfor execution of obligations (payment) by non-monetary assetsis determined on the basis of the price, which is paid to acquire similar ﬁ xed assetsunder comparable circumstances. Repair expenses of ﬁ xed assets items are included at actual costs and referred to the reporting period in which they were done. The line of «Construction in progress» includes the costs of construction and erection works, acquisition of buildings, facilities, equipment and other tangible objects of long-term use, other capital works and expenses. This line reﬂ ects the cost of capital construction projects before their putting into operation, after which the structures are transferred into ﬁ xed assets. In addition to this, the «Construction in progress» line reﬂ ects the costs associated with the lease of land for construction of future wells. Leased ﬁ xed assets are reﬂ ected in the line «Income-bearing Investments in Tangible Assets». FINANCIAL INVESTMENTS Financial investments are accepted for accounting at original cost. Financial investments deﬁ ning the fair market value are reﬂ ected in the ﬁ nancial statements as of the end of the reporting year at current market value by adjusting their evaluation on the previous reporting date. Financial investments for which there is no deﬁ nition of the fair market value are reﬂ ected in ﬁ nancial statements as of the reporting date at original cost after deduction of the reserve amount formed for their depreciation. Financial investments are reﬂ ected as part of the current assets if the expected duration of their possession is less than 12 months after the reporting date. Other ﬁ nancial investments are included in ﬁ xed assets. The costs of information, advisory services, valuation services and other similar services related to taking a decision on acquisition of ﬁ nancial investments made prior to the acquisition of ﬁ nancial investments are recorded in the line of «Other Current Assets» (if the decision to acquire the investments is made within 12 months from the date of the expenditure). In other cases they are included in the line of «Other Non-Current Assets». On disposal of ﬁ nancial investments for which the current market value cannot be determined, their value is formed on the basis of the assessment determined by: • on disposal of shares or bonds - at original cost of the ﬁ rst-time ﬁ nancial investments acquisition (FIFO method); • on disposal of bills - at original cost of each unit of ﬁ nancial investments accounting. The cost of information, advisory services, valuation services and other similar services related to the disposal of ﬁ nancial investments made prior to the ﬁ nancial investments disposal are reﬂ ected in the line of «Other Current Assets». On disposal of ﬁ nancial investments, for which the current market value is not determined, their value is determined by the organization on the basis of the last assessment. Gains and losses of ﬁ nancial investments disposal are reﬂ ected in the proﬁ t and loss statement as part of other income and expenses. REPO transactions are reﬂ ected in the ﬁ nancial statements as giving or receiving a loan against securities. INVENTORIES «Raw Materials and Supplies» line of the balance sheet reﬂ ects raw materials, basic and auxiliary materials, purchased semi-ﬁ nished products and components, fuel, packaging, spare parts, construction and other materials. The line of the inventories also reﬂ ects the assets, which meet the conditions necessary for the recognizing them as ﬁ xed assets of the cost no more than 40,000 rubles per unit. The inventories are recorded at the actual cost of their acquisition with the exception of VAT and other recoverable taxes (except as provided by the legislation of the Russian Federation). Disposal of the inventories is carried at the average cost. The inventories, which are obsolete, wholly or partially have lost their original quality, or which current market value is decreased, are reﬂ ected in the balance sheet less the reserve provision for impairment of the material values. WORK IN PROGRESS, FINISHED PRODUCTS, GOODS AND SALES EXPENSES Expenditures incurred for performance of activities under the Agreement for the exploration and production sharing with Libya during the exploration period are reﬂ ected as part of the production in progress. The plans provide that the mentioned expenditures for petroleum operations will be offset through delivery of ﬁ nished products (crude oil, liquid hydrocarbon by- products and natural gas), which JSC TATNEFT will receive as a result of production sharing during the operational period. Finished products are reﬂ ected in the balance-sheet at the full actual production cost (including management expenses). In shipment of oil, petroleum products and gas products assessment is carried out by the average cost method for each group of products. Sales expenditures are written off to the results of the Company’s ﬁ nancial and economic activities without differentiating between the sold and unsold products. 108 109 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT GOODS SHIPPED The accounting item “Goods Shipped” reﬂ ects shipped products, the title for which was not transferred to buyers. This line also reﬂ ects the real estate property transferred to the buyer by the delivery-acceptance act before the moment of state registration of the transfer ownership. ACCOUNTS RECEIVABLES Indebtedness of buyers and customers is determined on the ground of prices established by contracts concluded between the Company and buyers (customers) taking into account all discounts (extra charges). Indebtedness unrealistic to be recovered is written off from the balance if it is proved to be such. The indebtedness not paid within the time limits stipulated in contracts and not secured with respective guarantees is shown after deduction of accrued reserves for bad debts. These reserves constitute a conservative assessment carried out by the Company with regard to the part of debts which is likely not to be paid. The reserve is created for each doubtful debt outstanding (depending on the financial condition (solvency) of the debtor and an estimated probability of debt repayment in whole or in part) on the basis of the receivables inventory, made for the last day of the reporting month. Income and expenses generated in the creation and recovery of allowance for doubtful debts in one financial year are reflected in the profit and loss statement in the lines «Other Income» or «Other Expenses». CASH AND CASH EQUIVALENTS In accordance with the regulations on accounting, «Report of Cash Flows,» approved by Order No. 11n of the Ministry of Finance of Russia dated February 02, 2011 the cash equivalents include highly liquid investments that can easily be converted into the known in advance amount of cash and are subject to an insigniﬁ cant risk of value change. In accordance with the legislation the Company established a reserve fund in the amount to 5% of the authorized capital formed out of net proﬁ ts of the Company. The reserve fund is intended to cover the losses of the Company for bonds redemption and repurchase of the Company’s shares if unavailable other funds. In accordance with the constituent documents the Company establishes the Employee share ownership fund which is formed out of net proﬁ ts of the. Contributions to this fund are made in accordance with the methodology approved by “Regulations on Bonus Certiﬁ cates of JSC TATNEFT”. ESTIMATED LIABILITIES The Company acknowledges its estimated liability for remuneration payment based on the results of the year. The amount of monthly payments under the estimated liability is determined based on the monthly deduction payments and the actual expenses amount of the labor costs. Percentage of contributions under the estimated liability is calculated by the ratio of the annual planned expenditure for the labor payment to the planned total labor costs. Based on the Provision «Estimated Liabilities, Contingent Liabilities and Contingent Assets (RAS 8/2010)» becoming effective the Company introduced amendments in terms of recognizing estimated liabilities to the employees for unused vacations. The estimated liability value of unused employees’ vacation for accrual of relevant allowance is determined based on the total number of days of the unused vacation for each employee of the average daily earnings and insurance premiums accrued on the speciﬁ ed reserve. The actual amount of the vacation allowance (including the compensation amount for unused vacation) accrued to the employee in the accounting is ascribed due to the acknowledged amount of the estimated liability to the unused vacation payment. The Company refers the bank deposits placed for maximum 3 months period under the contracts the terms of which provide for acceleration possibility to the cash equivalents. An inventory of the estimated liability for unused vacation payment is carried out as of the last day of each quarter, which results are reﬂ ected by the estimated liability adjustments. In the Statement of Cash Flows: • cash balances and cash equivalent balances in a foreign currency at the beginning and at the end of the reporting period are reﬂ ected in the rubles amount, which is determined in accordance with RAS 3/2006. Differences arising in connection with the conversion of the organization’s cash ﬂ ows and cash equivalents in foreign currency exchange rates on different dates are reﬂ ected in the cash ﬂ ows statement as the impact of foreign currency exchange rate changes against the ruble. • indirect taxes (VAT and excise duties) as part of the proceeds from buyers and customers, payments to suppliers and contractors and payments to the budget system of the Russian Federation or reimbursement of out of it are reﬂ ected as balanced result in the line of «Other Income» («Other Payments»). AUTHORIZED CAPITAL AND CAPITAL SURPLUS The authorized capital is reﬂ ected in the amount of the face value of ordinary and preferred shares purchased by the shareholders. The surplus capital of the Company includes exchange differences arising from the conversion of the organization’s assets and liabilities value expressed in foreign currency used to perform activities outside the Russian Federation into rubles. In addition, the revaluation surplus of ﬁ xed assets resulting from revaluation classiﬁ ed in the additional capital is reﬂ ected in the «Revaluation of Fixed Assets» line. Revaluation surplus in case of the ﬁ xed asset item disposal is transferred from the capital surplus to the undistributed proﬁ t of the Company. LOANS AND BORROWINGS In accordance with RAS 15/01 «Accounting of expenses on loans and borrowings» approved by Order No.107n of the Ministry of Finance of Russia dated October 06, 2008 the principal amount of the loan (credit) received from the lender is accounted in accordance with the terms of the loan agreement (credit agreement) in the amount of actually received monetary assets or in cost estimate of other items stipulated by the contract. Indebtedness under received loans and borrowings as well as accrued interest is reﬂ ected in the balance sheet line of «Borrowings». Indebtedness under received loans and borrowings as well as accrued interest for accounting is divided into short-term indebtedness (which repayment period does not exceed 12 months under the terms of contract) and long-term indebtedness (the repayment period of which is over 12 months under the terms of contract). The long-term indebtedness is transferred to short-term indebtedness at the moment when there are 365 days left before repayment of the principal amount. Interest on received loans and borrowings is recognized as other expenses of that period in which they were made, except for the part to be included in the value of the investment asset. Expenses of received loans and credits directly attributable to acquisition and/or creation of the investment asset are included in the cost of the asset and are repaid through depreciation except where charging of the asset depreciation is not provided by the accounting rules. Inclusion of expenses on received loans and borrowings in the original value of the investment asset is terminated on the ﬁ rst day of the month following the month of accepting the asset for accounting as a ﬁ xed asset, intangible asset or R & D expenses. SALES REVENUE RECOGNITION Revenue from sales of goods, products and service rendering (execution of works) is recognized when the products are shipped to the buyers (services are rendered to customers). Revenue from the sales under contracts providing for fulﬁ llment of obligations (payment) by non-monetary assets is determined at the cost of the values received or receivable by the Company calculated on the basis of the prices which are usually used by the Company in comparable circumstances to determine the cost of similar values. According to hydrocarbons sales contracts the settlement documents should be mainly submitted to the buyers no later than 15 days after the month of shipment, while the price of raw materials is determined by the settlement method based on the market quotations or it is ﬁ xed in the contract as agreed by the parties. EXPENSES Administrative expenses are written off for production in full on a monthly basis. Administrative expenses in the oil-and-gas production divisions are distributed between the calculation items for production of oil, associated petroleum gas, production of other goods (works, services) on a pro rata basis to their total production expenses net of deductions, taxes and other obligatory payments. Administrative expenses in other structural divisions are distributed on a pro rata basis to the actual expenses of the direct labor costs. ACCOUNTING OF PROFIT TAX CALCULATIONS In preparation of the ﬁ nancial statements the balanced (net) amounts of deferred tax asset and deferred tax liability are reﬂ ected in the balance sheet reﬂ ects. CORRECTION OF ERRORS IN THE ACCOUNTING AND REPORTING An error identiﬁ ed in the accounting and ﬁ nancial statements is recognized to be essential if the ratio of the error to the numerical indicator of the relevant group of balance sheet items of JSC TATNEFT, or item of the ﬁ nancial statement of JSC TATNEFT for the reporting period is minimum ﬁ ve percent. Otherwise the error is insigniﬁ cant. 110 111 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT IFRS CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2013 112 113 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IN MILLIONS OF RUSSIAN ROUBLES) CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME NOTE 31 DECEMBER 2013 31 DECEMBER 2012 ASSETS Cash and cash equivalents Restricted cash Accounts receivable, net Short-term financial assets Inventories Prepaid expenses and other current assets Total current assets Long-term accounts receivable, net Long-term financial assets Investments in associates and joint ventures Property, plant and equipment, net Deferred income tax assets Other long-term assets Total non-current assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Short-term debt and current portion of long-term debt Accounts payable and accrued liabilities Taxes payable Income tax payable Total current liabilities Long-term debt, net of current portion Other long-term liabilities Decommissioning provision, net of current portion Deferred income tax liability Total non-current liabilities Total liabilities SHAREHOLDERS’ EQUITY Preferred shares (authorized and issued at 31 December 2013 and 2012 – 147,508,500 shares; nominal value at 31 December 2013 and 2012 – RR1.00) Common shares (authorized and issued at 31 December 2013 and 2012 – 2,178,690,700 shares; nominal value at 31 December 2013 and 2012 – RR1.00) Additional paid-in capital Accumulated other comprehensive income Retained earnings Less: Common shares held in treasury, at cost (55,592,000 shares and 55,543,000 shares at 31 December 2013 and 2012, respectively) Total Group shareholders’ equity Non-controlling interest Total shareholders’ equity Total liabilities and equity 114 6 7 8 9 10 7 11 12 13 18 14 15 16 18 15 17 13 18 19 19 19 29,535 917 52,098 16,693 29,538 23,217 151,998 1,016 25,814 7,778 481,883 2,049 3,551 522,091 674,089 36,561 28,444 16,706 1,462 83,173 12,785 3,839 54,511 15,799 86,934 170,107 13,083 1,369 53,553 14,931 28,590 28,806 140,332 1,530 25,782 6,711 448,903 2,633 4,716 490,275 630,607 32,096 31,019 13,234 201 76,550 37,991 3,710 51,089 15,034 107,824 184,374 746 746 11,021 87,482 889 384,376 (3,102) 481,412 22,570 503,982 674,089 11,021 87,482 726 333,072 (3,093) 429,954 16,279 446,233 630,607 Sales and other operating revenues, net COSTS AND OTHER DEDUCTIONS Operating Purchased oil and refined products Exploration Transportation Selling, general and administrative Depreciation, depletion and amortization Gain/(loss) on disposals of property, plant and equipment, investments and impairments Taxes other than income taxes Maintenance of social infrastructure and transfer of social assets Total costs and other deductions OTHER INCOME/(EXPENSES) Foreign exchange (loss)/gain Interest income Interest expense, net of amounts capitalized Earnings from equity investments Other income, net Total other (expenses)/income Profit before income taxes INCOME TAXES Current income tax expense Deferred income tax expense Total income tax expense Profit for the year OTHER COMPREHENSIVE INCOME: Items to be reclassified subsequently to profit or loss: Foreign currency translation adjustments Unrealized holding (losses)/gains on available-for-sale securities, including share of associates, net of tax Items that will not be reclassified to profit or loss: Actuarial loss on employee benefit plans Other comprehensive income/(expenses) Total comprehensive income for the year Profit attributable to: Group shareholders Non-controlling interest Total comprehensive income is attributable to: Group shareholders Non-controlling interest Basic and diluted net earnings per share (RR) Common Preferred Weighted average shares outstanding (millions of shares) Common Preferred (IN MILLIONS OF RUSSIAN ROUBLES) NOTE 22 YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 454,983 444,099 20 20 13 18 21 21 12 18 19 (89,634) (50,312) (1,839) (30,388) (44,123) (19,323) 1,209 (111,336) (4,828) (350,574) (438) 3,365 (6,924) 350 529 (3,118) 101,291 (21,645) (1,302) (22,947) 78,344 530 (43) (324) 163 78,507 70,832 7,512 78,344 70,995 7,512 78,507 31.19 31.16 2,123 148 (86,675) (53,900) (1,740) (29,108) (40,910) (17,770) (1,997) (106,293) (4,031) (342,424) 1,665 3,872 (6,978) 739 845 143 101,818 (21,816) (1,554) (23,370) 78,448 (430) 151 (990) (1,269) 77,179 73,473 4,975 78,448 72,204 4,975 77,179 32.35 32.33 2,123 148 115 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (IN MILLIONS OF RUSSIAN ROUBLES) CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS OF RUSSIAN ROUBLES) ATTRIBUTABLE TO GROUP SHAREHOLDERS UNREALIZED HOLD- ING GAIN/ (LOSSES) ON AVAILABLE- FOR- SALE SECURITIES, INCLUDING SHARE OF ASSOCI- ATES, NET OF TAX FOREIGN CURRENCY TRANSLA- TION AD- JUSTMENTS TOTAL SHARE- HOLDERS’ EQUITY NON-CON- TROLLING INTEREST RETAINED EARNINGS TOTAL EQUITY NUMBER OF SHARES (THOU- SANDS) SHARE CAPITAL ADDITIONAL PAID-IN CAPITAL TREASURY SHARES ACTUARIAL LOSS ON EMPLOYEE BENEFIT PLANS 2,270,643 11,767 87,482 (3,094) 496 1,184 315 275,675 373,825 11,602 385,427 – – – 73,473 73,473 4,975 78,448 (990) (430) 151 – (1,269) – (1,269) – – – 13 (80) 93 – – – – – – – – – – – – – – – – – – – – – 1 (15) 16 – – – – – (49) (175) 126 – – – – – – – – – – – – – – – – – – – – – (9) (36) 27 – – (990) (430) 151 73,473 72,204 4,975 77,179 Changes in operational working capital, excluding cash: – – – – – – – – – – – – – – – – – – – 1 (15) 16 – – – 1 (15) 16 – 267 267 (16,076) (16,076) (565) (16,641) 2,270,656 11,767 87,482 (3,093) (494) 754 466 333,072 429,954 16,279 446,233 – – – 70,832 70,832 7,512 78,344 (324) 530 (43) – 163 – 163 Net cash provided by operating activities (324) 530 (43) 70,832 70,995 7,512 78,507 – – – – – – – – – – – – – – – – – – – (9) (36) 27 – – – (9) (36) 27 (19,528) (19,528) (984) (20,512) – (237) (237) Change in restricted cash 2,270,607 11,767 87,482 (3,102) (818) 1,284 423 384,376 481,412 22,570 503,982 OPERATING ACTIVITIES Profit for the year Adjustments: Depreciation, depletion and amortization Income tax expense (Gain)/loss on disposals of property, plant and equipment, investments and impairments Transfer of social assets Effects of foreign exchange Equity investments earnings net of dividends received Change in provision for impairment of financial assets Change in fair value of trading securities Interest income Interest expense Other Accounts receivable Inventories Prepaid expenses and other current assets Trading securities Accounts payable and accrued liabilities Taxes payable Notes payable Other non-current assets Net cash provided by operating activities before income tax and interest Income taxes paid Interest paid Interest received INVESTING ACTIVITIES Additions to property, plant and equipment Proceeds from disposal of property, plant and equipment Proceeds from disposal of investments Purchase of investments (Purchase)/proceeds from certificates of deposit, net Repayment/(issuance) of loans and notes receivable, net YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 78,344 78,448 19,323 22,947 (1,209) 23 3,282 (350) 633 (351) (3,365) 6,924 736 1,094 (1,630) 4,733 3,159 (1,659) 3,490 256 674 137,054 (19,634) (2,636) 3,365 118,149 (56,827) 1,539 564 (17) (5,034) 1,457 452 17,770 23,370 1,997 4 (4,830) (724) 655 (392) (3,872) 6,978 461 8,550 (6,929) (684) 37 (6,397) (439) (78) (399) 113,526 (23,503) (3,258) 3,872 90,637 (50,795) 1,798 1,809 (2,192) 1,554 (502) (191) Net cash used in investing activities (57,866) (48,519) FINANCING ACTIVITIES Proceeds from issuance of debt Repayment of debt Dividends paid to shareholders Dividends paid to non-controlling shareholders Purchase of treasury shares Proceeds from sale of treasury shares Proceeds from issuance of shares by subsidiaries Net cash used in financing activities Net change in cash and cash equivalents Effect of foreign exchange on cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period 30,258 (53,820) (19,526) (984) (27) 27 – (44,072) 16,211 241 13,083 29,535 42,278 (71,458) (16,070) (565) (15) 16 9 (45,805) (3,687) (131) 16,901 13,083 117 Balance at 1 January 2012 Profit for the year Other comprehensive (loss)/income for the year Total comprehensive (loss)/income for the year Treasury shares Acquisitions Disposals Acquisition of non- controlling interest in subsidiaries Dividends declared Balance at 31 December 2012 Profit for the year Other comprehensive (loss)/income for the year Total comprehensive (loss)/income for the year Treasury shares Acquisitions Disposals Disposal of non- controlling interest in subsidiaries Dividends declared Balance at 31 December 2013 116 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of Russian Roubles) NOTE 1: ORGANISATION OAO Tatneft (the “Company”) and its subsidiaries (jointly referred to as “the Group”) are engaged in crude oil exploration, development and production principally in the Republic of Tatarstan (“Tatarstan”), a republic within the Russian Federation. The Group also engages in reﬁ ning and marketing of crude oil and reﬁ ned products as well as production and marketing of petrochemicals (see Note 22). The Company was incorporated as an open joint stock company effective 1 January 1994 (the “privatization date”) pursuant to the approval of the State Property Management Committee of the Republic of Tatarstan (the “Government”). All assets and liabilities previously managed by the production association Tatneft, Bugulminsky Mechanical Plant, Menzelinsky Exploratory Drilling Department and Bavlinsky Drilling Department were transferred to the Company at their book value at the privatization date in accordance with Decree No. 1403 on Privatization and Restructuring of Enterprises and Corporations into Joint-Stock Companies. Such transfers were considered transfers between entities under common control at the privatization date, and were recorded at book value. The Group does not have an ultimate controlling party. As of 31 December 2013 and 2012 OAO Svyazinvestneftekhim, a company wholly owned by the government of Tatarstan, together with its subsidiary, holds approximately 36% of the Company’s voting stock. These shares were contributed to OAO Svyazinvestneftekhim by the Ministry of Land and Property Relations of Tatarstan in 2003. Tatarstan also holds a “Golden Share”, a special governmental right, in the Company (see Note 19). The exercise of its powers under the Golden Share enables the Tatarstan government to appoint one representative to the Board of Directors and one representative to the Revision Committee of the Company as well as to veto certain major decisions, including those relating to changes in the share capital, amendments to the Charter, liquidation or reorganization of the Company and “major” and “interested party” transactions as deﬁ ned under Russian law. The Golden Share currently has an indeﬁ nite term. The Tatarstan government, including through OAO Svyazinvestneftekhim, also controls or exercises signiﬁ cant inﬂ uence over a number of the Company’s suppliers and contractors. The Company is domiciled in the Russian Federation. The address of its registered ofﬁ ce is Lenina St., 75, Almet’evsk, Tatarstan Republic, Russian Federation. NOTE 2: BASIS OF PRESENTATION The accompanying consolidated ﬁ nancial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The Group ﬁ rst adopted IFRS for the ﬁ scal year ended 31 December 2012, with a date of transition to IFRS on 1 January 2011. These consolidated ﬁ nancial statements have been prepared on a historical cost basis, except certain ﬁ nancial assets and liabilities measured at fair value. The entities of the Group maintain their accounting records and prepare their statutory ﬁ nancial statements principally in accordance with the Regulations on Accounting and Reporting of the Russian Federation (“RAR”). The accompanying consolidated ﬁ nancial statements have been prepared from these accounting records and adjusted as necessary to comply with IFRS. The principal differences between RAR and IFRS relate to: (1) valuation (including indexation for the effect of hyperinﬂ ation in the Russian Federation through 2002) and depreciation of property, plant and equipment; (2) foreign currency translation; (3) deferred income taxes; (4) valuation allowances for unrecoverable assets; (5) consolidation; (6) share based payment; (7) accounting for oil and gas properties; (8) recognition and disclosure of guarantees, contingencies and commitments; (9) accounting for decommissioning provision; (10) pensions and other post retirement beneﬁ ts and (11) business combinations and goodwill. The preparation of ﬁ nancial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are signiﬁ cant to the consolidated ﬁ nancial statements are disclosed in Note 4. RECLASSIFICATIONS Certain reclassiﬁ cations have been made to previously reported balances to conform to the current year presentation; such reclassiﬁ cations had no effect on net income proﬁ t for the year, shareholders’ equity or cash ﬂ ows. NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FUNCTIONAL AND PRESENTATION CURRENCY. The presentation currency of the Group is the Russian rouble. Management has determined the functional currency for each consolidated subsidiary of the Group, except for subsidiaries located outside of the Russian Federation, is the Russian Rouble because the majority of its revenues, costs, property and equipment purchased, debt and trade liabilities are either priced, incurred, payable or otherwise measured in Russian Roubles. Accordingly, transactions and balances not already measured in Russian Roubles (primarily US Dollars) have been re- measured into Russian Roubles in accordance with the relevant provisions of IAS 21 The Effects of Changes in Foreign Exchange Rates. Under IAS 21 revenues, costs, capital and non-monetary assets and liabilities are translated at historical exchange rates prevailing on the transaction dates. Monetary assets and liabilities are translated at exchange rates prevailing on the reporting date. Exchange gains and losses arising from re-measurement of monetary assets and liabilities that are not denominated in Russian Roubles are recognized in the proﬁ t or loss for the year. For operations of subsidiaries located outside of the Russian Federation, that primarily use US Dollar as the functional currency, adjustments resulting from translating foreign functional currency assets and liabilities into Russian Roubles are recorded in a separate component of shareholders’ equity entitled foreign currency translation adjustments. Revenues, expenses and cash ﬂ ows are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions). The ofﬁ cial rate of exchange, as published by the Central Bank of Russia (“CBR”), of the Russian Rouble (“RR”) to the US Dollar (“US $”) at 31 December 2013 and 2012 was RR 32.73 and RR 30.37 to US $, respectively. Average rate of exchange for the years ended 31 December 2013 and 2012 were RR 31.85 and RR 31.09 per US $, respectively. CONSOLIDATION Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group has the power to direct relevant activities of the investee that signiﬁ cantly affect their returns, exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition – related costs are expensed as incurred. Identiﬁ able assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis at the non-controlling interest’s proportionate share of the acquiree’s net assets. The excess of the consideration transferred, the amount of any non- controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identiﬁ able net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the proﬁ t and loss for the year. Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated. ASSOCIATES AND JOINT VENTURES Associates and joint ventures are entities over which the Group has signiﬁ cant inﬂ uence (directly or indirectly), but not control, generally accompanying a shareholding of between 20 and 50 percent of the voting rights. Investments in associates and joint ventures are accounted for using the equity method of accounting and are initially recognised at cost. Dividends received from associates and joint ventures reduce the carrying value of the investment in associates and joint ventures. Other post- acquisition changes in Group’s share of net assets of an associate and joint ventures are recognised as follows: (i) the Group’s share of proﬁ ts or losses of associates or joint ventures is recorded in the consolidated proﬁ t or loss for the year as share of result of associates or joint ventures, (ii) the Group’s share of other comprehensive income is recognised in other comprehensive income and presented separately, (iii); all other changes in the Group’s share of the carrying value of net assets of associates or joint ventures are recognised in proﬁ t or loss within the share of result of associates or joint ventures. However, when the Group’s share of losses in an associate or joint venture equals or exceeds its interest in the associate or joint venture, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate or joint venture. Unrealised gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in the associates and joint ventures; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The Group reviews equity method investments for impairment on an annual basis, and records impairment when circumstances indicate that the carrying value exceeds the recoverable amount. CURRENT/NON-CURRENT PRESENTATION Group presents current and non-current assets, and current and non- current liabilities, as separate classiﬁ cations in its Consolidated Statement of Financial Position. Group discloses for each asset and liability line item that combines amounts expected to be recovered or settled in period no more than 12 months after the reporting period are disclosed as current; and more than 12 months after the reporting period as non-current. CASH AND CASH EQUIVALENTS Cash represents cash on hand and in bank accounts, which can be effectively withdrawn at any time without prior notice. Cash equivalents include highly liquid short-term investments that can be converted to a certain cash amount and mature within three months or less from the date of purchase. They are recognized based on the cost of acquisition which approximates fair value. 118 119 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT RESTRICTED CASH Restricted cash represents cash deposited under letter of credit arrangements, which are restricted under various contractual agreements. Letters of credit are used to pay contractors for materials, equipment and services provided. Restricted balances are excluded from cash and cash equivalents for the purposes of the consolidated statements of ﬁ nancial position and of the consolidated statement of cash ﬂ ows and disclosed separately. FINANCIAL ASSETS All ﬁ nancial assets are initially recognised when an entity becomes a party to the contract, they recognised at fair value plus, in the case of investments not at fair value through proﬁ t or loss, directly attributable transaction costs. The Group‘s ﬁ nancial assets include cash and cash equivalents, deposits, securities, trade and other receivables, loans issued. Financial assets have the following categories: (a) loans and receivables; (b) available-for-sale ﬁ nancial assets; (c) ﬁ nancial assets at fair value through proﬁ t or loss. LOANS AND RECEIVABLES Loans and receivables is a category of ﬁ nancial assets with ﬁ xed or deter- minable payments that are not quoted in an active market. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. The accrued interest is included in the proﬁ t and losses for the year. Allowances are provided for estimated losses and for doubtful debts based on estimates of uncollectible amounts. These estimates require the exercise of judgment and the use of assumptions. The losses arising from impairment are recognized as selling, general and administrative expenses in the consolidated statements of proﬁ t or loss and other comprehensive income. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS A ﬁ nancial asset is classiﬁ ed at fair value through proﬁ t or loss category if it is classiﬁ ed as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through proﬁ t or loss if the Group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Group’s documented risk management or investment strategy. Financial assets at fair value through proﬁ t or loss are measured at fair value, and changes therein are recognized in proﬁ t and loss for the year. AVAILABLE-FOR-SALE FINANCIAL ASSETS Available-for-sale ﬁ nancial assets are non-derivative ﬁ nancial assets that are designated as available-for-sale or are not classiﬁ ed in any of the above categories of ﬁ nancial assets. Available-for-sale ﬁ nancial assets include investment securities which the Group intends to hold for an indeﬁ nite period of time and which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Subsequent to initial recognition, they are measured at fair value and chang- es therein, other than impairment losses and foreign currency differences on available-for-sale debt instruments, are recognized in other comprehensive income and presented within equity. Unquoted equity instruments whose fair value cannot be measured reliably are carried at cost less any impairment losses. When an investment is derecognized the cumulative gain or loss in equity is also reclassiﬁ ed to proﬁ t and loss for the year. The Group assesses at each reporting date whether there is objective evidence that a ﬁ nancial asset or a group of ﬁ nancial assets is impaired. Prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale ﬁ nancial assets, the cumulative loss (measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that ﬁ nancial asset previously recognized in the other comprehensive income) is recognized in the proﬁ t and loss for the year as a reclassiﬁ cation adjustment from other comprehensive income. 120 FINANCIAL LIABILITIES All ﬁ nancial liabilities are recognised initially at fair value and in the case of loans and borrowings, net of directly attributable transaction costs. The Group’s ﬁ nancial liabilities include trade and other payables, loans and borrowings. Financial liabilities are recognised initially at fair value. Subsequent to initial recognition, these ﬁ nancial liabilities are measured at amortised cost using the effective interest method. A ﬁ nancial liability is derecognised when the obligation under the liability is discharged or cancelled or expired. When an existing ﬁ nancial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modiﬁ ed, such an exchange or modiﬁ cation is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the proﬁ t and loss for the year. The Group does not use derivative ﬁ nancial instruments. The Group does not offset assets and liabilities unless required or permitted to by an IFRS. INVENTORIES Inventories of crude oil, reﬁ ned oil products, materials and supplies, and ﬁ nished goods are valued at the lower of cost or net realizable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and selling expenses. The Group uses the weighted-average-cost method. Costs include both direct and indirect expenditures incurred in bringing an item or product to its existing condition and location. PREPAID EXPENSES Prepaid expenses include advances for purchases of products and services, insurance fees, prepayments for export duties, VAT and other taxes. Prepayments are carried at cost less provision for impairment. Prepayments to acquire assets are transferred to the carrying amount of the asset once the Group has obtained control of the asset and it is probable that future economic beneﬁ ts associated with the asset will ﬂ ow to the Group. Prepayments for services such as insurance, transportation and others are written off to proﬁ t or loss when the goods or services relating to the prepayments are received. If there is an indication that the assets, goods or services relating to a prepayment will not be received, the carrying value of the prepayment is written down accordingly and a corresponding impairment loss is recognised in the proﬁ t or loss for the year. MINERAL EXTRACTION TAX Mineral extraction tax (MET) on crude oil is deﬁ ned monthly as an amount of volume produced per ﬁ xed tax rate (RR 470 and RR 446 per ton in 2013 and 2012, respectively) adjusted depending on the monthly average market prices of the Urals blend and the RR/US $ exchange rate for the preceding month. The base tax rate formula for MET is modiﬁ ed by beneﬁ t for ﬁ elds whose depletion rate exceeds 80% of proved reserves as determined under Russian resource classiﬁ cation. The Company receives a beneﬁ t of 3.5% per ﬁ eld for each percent of depletion in excess of the 80% threshold. The ultimate amount of the MET on crude oil depends also on geographic location of the oil ﬁ eld (for certain regions zero tax rate may be applied depending on the volume of crude oil produced and period of ﬁ eld development). Also a zero MET tax rate applies to the production of highly viscous crude oil (deﬁ ned as crude oil of more than 200 Megapascal second in reservoir conditions). MET is recorded within Taxes other than income tax in the Consolidated Statements of Proﬁ t or Loss and Other Comprehensive Income. VALUE ADDED TAX Value added tax (VAT) at a standard rate of 18% is payable on the difference between output VAT on sales of goods and services and recoverable input VAT charged by suppliers. Output VAT is charged on the earliest of the dates: either the date of the shipment of goods (works, services) or the date of advance payment by the buyer. Input VAT can be recovered when purchased goods (works, services) are accounted for and other necessary requirements provided by the tax legislation are met. Export of goods and rendering certain services related to exported goods are subject to 0% VAT rate upon the submission of conﬁ rmation documents to the tax authorities. VAT related to sales and purchases is recognized in the Consolidated Statements of Financial Position on a gross basis and disclosed separately as Prepaid expenses and other current assets and Taxes payable. OIL AND GAS EXPLORATION AND DEVELOPMENT COST Oil and gas exploration and development activities are accounted for using the successful efforts method whereby costs of acquiring unproved and proved oil and gas property as well as costs of drilling and equipping productive wells, including development dry holes, and related production facilities are capitalized. Other exploration expenses, including geological and geophysical expenses and the costs of carrying and retaining undeveloped properties, are expensed as incurred. The costs of exploratory wells that ﬁ nd oil and gas reserves are capitalized as exploration and evaluation assets on a “ﬁ eld by ﬁ eld” basis pending determination of whether proved reserves have been found. In an area requiring a major capital expenditure before production can begin, exploratory well remains capitalized if additional exploration drilling is underway or ﬁ rmly planned. Exploration costs not meeting these criteria are charged to expense. Individual assets are grouped for impairment purposes at the lowest level for which there are identiﬁ able cash ﬂ ows that are largely independent of the cash ﬂ ows of other groups of assets - generally on a ﬁ eld-by-ﬁ eld basis for exploration and production assets, at an entire complex level for reﬁ ning assets or at a site level for service stations. Impairment losses are recognised in the proﬁ t or loss for the year. Impairments are reversed as applicable to the extent that the events or circumstances that triggered the original impairment have changed. The reversal of impairment would be limited to the original carrying value less depreciation which would have been otherwise charged had the impairment not been recorded. Long-lived assets committed by management for disposal within one year, and meet the other criteria for held for sale, are accounted for at the lower of amortized cost or fair value, less cost to sell. Costs of unproved oil and gas properties are evaluated periodically and any impairment assessed is charged to expense. The Group calculates depreciation expense for oil and gas proved properties using the units-of-production method for each ﬁ eld based upon proved developed oil and gas reserves, except in the case of signiﬁ cant asset components whose useful life differs from the lifetime of the ﬁ eld, in which case the straight-line method is applied. Oil and gas licenses for exploration of unproved reserves are capitalised within property, plant and equipment; they are depreciated on straight-line basis over the period of each license validity. Depreciation of all other property, plant and equipment is determined on the straight-line method based on estimated useful lives which are as follows: Exploration and evaluation costs are subject to technical, commercial and management review as well as review for impairment at least once a year to conﬁ rm the continued intent to develop or otherwise extract value from the discovery. When indicators of impairment are present, resulting impairment loss is measured. Buildings and constructions Machinery and equipment YEARS 30-50 10-35 If subsequently commercial reserves are discovered, the carrying value, less losses from impairment of respective exploration and evaluation assets, is classiﬁ ed as development assets. However, if no commercial reserves are discovered, such costs are expensed after exploration and evaluation activities have been completed. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at historical cost of acquisition or construction less accumulated depreciation, depletion, amortization and impairment. Proved oil and gas properties include the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located. The cost of maintenance, repairs and replacement of minor items of property are expensed when incurred within operating expenses; renewals and improvements of assets are capitalised and depreciated during the remaining useful life. Cost of replacing major parts or components of property, plant and equipment items are capitalised and the replaced part is retired. Advances made on property, plant and equipment and construction in progress are accounted for within Construction in progress. Long-lived assets, including proved oil and gas properties at a ﬁ eld level, are assessed for possible impairment in accordance with IAS 36 Impairment of assets, which requires long-lived assets with recorded values that are not expected to be recovered through future cash ﬂ ows to be written down to their recoverable amount which is the higher of fair value less costs to sell and value-in-use. Gains and losses on disposals of property, plant and equipment are determined by comparing proceeds, if any, with the carrying amount. Gains and losses are recorded in Gain/(loss) on disposals of property, plant and equipment, investments and impairments in the Consolidated Statements of Proﬁ t or Loss and Other Comprehensive Income. CAPITALISATION OF BORROWING COSTS Borrowing costs directly attributable to the acquisition, construction or production of assets that necessarily take a substantial time to get ready for intended use or sale (qualifying assets) are capitalised as part of the costs of those assets. The Group capitalises borrowing costs that could have been avoided if it had not made capital expenditure on qualifying assets. Borrowing costs capitalised are calculated at the Group’s average funding cost (the weighted average interest cost is applied to the expenditures on the qualifying assets), except to the extent that funds are borrowed speciﬁ cally for the purpose of obtaining a qualifying asset. Where this occurs, actual borrowing costs incurred less any investment income on the temporary investment of those borrowings are capitalised. Capitalisation of borrowing costs includes capitalising foreign exchange differences relating to borrowings to the extent that they are regarded as an adjustment to interest costs. The gains and losses that are an adjustment to interest costs include the interest rate differential between borrowing costs that would be incurred if the entity borrowed funds in its functional currency, and borrowing costs actually incurred on foreign currency borrowings. 121 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT The portion of the foreign exchange movements is estimated based on interest rates on similar borrowing in the Group’s functional currency. The foreign exchange gains and losses eligible for capitalisation are assessed on a cumulative basis. Capitalisation of borrowing costs continues up to the date when the assets are substantially ready for their use or sale. EMPLOYEE BENEFITS, PENSION AND OTHER POST-RETIREMENT BENEFITS Wages, salaries, contributions to the social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary beneﬁ ts (such as health services and kindergarten services) are accrued in the year in which the associated services are rendered by the employees of the Group. The Group has various pension plans covering substantially all eligible employees and members of management. The pension liabilities are measured at the present value of the estimated future cash outﬂ ows using interest rates of government securities, which have the same currency and terms to maturity approximating the terms of the related liability. Pension costs are recognised using the projected unit credit method. The cost of providing pensions is accrued and charged to staff expense within operating expenses in the Consolidated Statements of Proﬁ t or Loss and Other Comprehensive Income reﬂ ecting the cost of beneﬁ ts as they are earned over the service lives of employees. Actuarial gains and losses with regard to post employment beneﬁ t plans are recognised immediately in other comprehensive income. Actuarial gains and losses related to other long-term beneﬁ ts are recognised immediately in the proﬁ t or loss for the year. Past service costs are recognised as an expense immediately. Plan assets are measured at fair value and are subject to certain limitations. Fair value of plan assets is based on market prices. When no market price is available the fair value of plan assets is estimated by different valuation techniques, including discounted expected future cash ﬂ ow using a discount rate that reﬂ ects both the risk associated with the plan assets and maturity or expected disposal date of these assets. In the normal course of business the Group contributes to the Russian Federation State Pension Fund on behalf of its employees. Mandatory contributions to the Fund are expensed when incurred and are included within staff costs in operating expenses. STOCK-BASED COMPENSATION The Company has a share-based compensation plan (the “Plan”) for senior management and directors of the Company. Under the provisions of the Plan, share-based bonus awards (“Awards”) are issued on an annual basis to the Company’s directors and senior management as approved by the Board of Directors. Each Award provides a cash payment at the settlement date equal to one of the Company’s common shares multiplied by the difference between the lowest share price for the preceding three years as of the grant date and the highest share price for the preceding three years as of each year-end. Share prices are measured based on the weighted average daily trading price as reported on the Moscow Exchange MICEX-RTS (MOEX). Awards are subject to individual annual performance conditions and are generally settled within 90 days after the Company’s Management Committee approval. The liability at 31 December 2013 and 2012 is determined based on the ﬁ nal expected bonus payments. The Awards are recognized as expense over the annual service period, net of forfeitures, with a corresponding liability to accounts payable and accrued liabilities. DECOMMISSIONING PROVISIONS The Group recognizes a liability for the fair value of legally required or constructive decommissioning provisions associated with long-lived assets in the period in which the retirement obligations are incurred. The Group has numerous asset removal obligations that it is required to perform under law or contract once an asset is permanently taken out of service. The Group’s ﬁ eld exploration, development, and production activities include assets related to: well bores and related equipment and operating sites, gathering and oil processing systems, oil storage facilities and gathering pipelines. Generally, the Group’s licenses and other operating permits require certain actions to be taken by the Group in the abandonment of these operations. Such actions include well abandonment activities, equipment dismantlement and other reclamation activities. The Group’s estimates of future abandonment costs consider present regulatory or license requirements, as well as actual dismantling and other related costs. These liabilities are measured by the Group using the present value of the estimated future costs of decommissioning of these assets. The discount rate is reviewed at each reporting date and reﬂ ects current market assessments of the time value of money and the risks speciﬁ c to the liability. Most of these costs are not expected to be incurred until several years, or decades, in the future and will be funded from general Group resources at the time of removal. The Group capitalizes the associated decommissioning costs as part of the carrying amount of the long-lived assets. Changes in obligation, reassessed regularly, related to new circumstances or changes in law or technology, or in the estimated amount of the obligation, or in the pre-tax discount rates, are recognised as an increase or decrease of the cost of the relevant asset to the extent of the carrying amount of the asset; the excess is recognised immediately in proﬁ t and loss. The Group’s petrochemical, reﬁ ning and marketing and distribution operations are carried out at large manufacturing facilities. The nature of these operations is such that the ultimate date of decommissioning of any sites or facilities is unclear. Current regulatory and licensing rules do not provide for liabilities related to the liquidation of such manufacturing facilities or of retail fuel outlets. Management therefore believes that there are no legal or contractual obligations related to decommissioning or other disposal of these assets. INCOME TAXES Income taxes have been provided for in the consolidated ﬁ nancial statements in accordance with legislation enacted or substantively enacted by the end of the reporting period. The income tax charge comprises current tax and deferred tax and is recognised in proﬁ t or loss for the year, except if it is recognised in other comprehensive income or directly in equity because it relates to transactions that are also recognised, 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 taxation authorities in respect of taxable proﬁ ts or losses for the current and prior periods. Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for ﬁ nancial reporting purposes. Deferred income tax assets and liabilities are recognised for all deductable or taxable temporary differences, except: • Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting nor taxable proﬁ t or loss; • In respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and • Where it is not probable that future taxable proﬁ t will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilised. Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of the reporting period, which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets and liabilities are netted only within the individual companies of the Group. Income tax penalties expense and income tax penalties payable are included in Taxes other than income tax in the Consolidated Statements of Proﬁ t or Loss and Other Comprehensive Income and Taxes payable in the Consolidated Statement of Financial Position, respectively. Income tax interest expense and payable are included in Interest expense in the Consolidated Statements of Proﬁ t or Loss and Other Comprehensive Income and other accounts payable and accrued expenses in the Consolidated Statement of Financial Position, respectively. SHARE CAPITAL Ordinary shares and non-redeemable preference shares with discretionary dividends are both classiﬁ ed as equity. Dividends paid to shareholders are determined by the Board of directors and approved at the annual shareholders’ meeting. TREASURY SHARES Common shares of the Company owned by the Group at the reporting date are designated as treasury shares and are recorded at cost using the weighted-average method. Gains on resale of treasury shares are credited to additional paid-in capital whereas losses are charged to additional paid-in capital to the extent that previous net gains from resale are included therein or otherwise to retained earnings. EARNINGS PER SHARE Preference shares are not redeemable and are considered to be participating shares. Basic and diluted earnings per share are calculated by dividing proﬁ t or loss attributable to ordinary and preference share holders by the weighted average number of ordinary and preferred shares outstanding during the period. Proﬁ t or loss attributed to equity holders is reduced by the amount of dividends declared in the current period for each class of shares. The remaining proﬁ t or loss is allocated to common and preferred shares to the extent that each class may share in earnings if all the earnings for the period had been distributed. Treasury shares are excluded from calculations. The total earnings allocated to each class of shares are determined by adding together the amount allocated for dividends and the amount allocated for a participation feature. REVENUE RECOGNITION Revenues from the production and sale of crude oil, petroleum and petrochemical products and other products are recognized when title has transferred and collectability is reasonably assured. Revenue is measured at the fair value of the consideration received or receivable taking into account the amount of any discounts and other incentives. Purchases and sales of inventory with the same counterparty that are entered into in contemplation of one another are combined, considered as a single arrangement and netted against each other in the Consolidated Statements of Proﬁ t or Loss and Other Comprehensive Income. Revenue includes only economic beneﬁ ts which ﬂ ow to the Group. Taxes and duties arising on the sale of goods to third parties do not form part of revenue. TRANSPORTATION EXPENSES Transportation expenses recognised in the Consolidated Statements of Proﬁ t or Loss and Other Comprehensive Income represent all expenses incurred by the Group to transport crude oil and other products to end customers (they may include pipeline tariffs and any additional railroad costs, handling costs, port fees, sea freight and other costs). Compounding fees are included in Selling, General and administrative expenses. NOTE 4: CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES The Group makes estimates and assumptions that affect the amounts recognised in the consolidated ﬁ nancial statements and the carrying amounts of assets and liabilities within the next ﬁ nancial year. Estimates and judgements are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management of the Group also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most signiﬁ cant effect on the amounts recognised in the consolidated ﬁ nancial statements and estimates that can cause a signiﬁ cant adjustment to the carrying amount of assets and liabilities within the next ﬁ nancial year include: • Estimation of oil and gas reserves; • Useful life of property, plant and equipment; • Decommissioning provisions; • Impairment of long-lived assets; • Consolidation. ESTIMATION OF OIL AND GAS RESERVES Oil and gas development and production assets are depreciated on a unit-of-production (UOP) basis for each ﬁ eld or group of ﬁ elds with similar characteristics at a rate calculated by reference to proved or proved developed reserves. Estimates of proved reserves are also used in the determination of whether impairments have arisen or should be reversed. Also, exploration drilling costs are capitalized pending the results of further exploration or appraisal activity, which may take several years to complete and before any related proved reserves can be booked. Proved and proved developed reserves are estimated by reference to available geological and engineering data and only include volumes for which access to market is assured with reasonable certainty. Estimates of oil and gas reserves are inherently imprecise, require the application of judgment and are subject to regular revision, either upward or downward, based on new information such as from the drilling of additional wells, observation of long-term reservoir performance under producing conditions and changes in economic factors, including product prices, contract terms or development plans. The Group estimates its oil and gas reserves in accordance with rules promulgated by the Oil and Gas Reserves Committee of the Society of Petroleum Engineers (SPE) for proved reserves. Changes to the Group’s estimates of proved and proved developed reserves affect prospectively the amounts of depreciation, depletion and amortization charged and, consequently, the carrying amounts of oil and gas properties. It is expected, however, that in the normal course of business the diversity of the Group’s portfolio will limit the effect of such revisions. The outcome of, or assessment of plans for, exploration or appraisal activity may result in the related capitalized exploration drilling costs being written off in the proﬁ t and loss for the year. USEFUL LIFE OF PROPERTY, PLANT AND EQUIPMENT Based on the terms included in the licenses and past experience, management believes hydrocarbon production licenses will be extended past their current expiration dates at insigniﬁ cant additional costs. As a result of the anticipated license extensions, the assets are depreciated over their useful lives beyond the end of the current license term. 122 123 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT Management assesses the useful life of an asset by considering the expected usage, estimated technical obsolescence, residual value, physical wear and tear and the operating environment in which the asset is located. Differences between such estimates and actual results may have a material impact on the amount of the carrying values of the property, plant and equipment and may result in adjustments to future depreciation rates and expenses for the period. Other property, plant and equipment are depreciated on a straight-line basis over their useful economic lives. Management periodically, at the end of each reporting period, reviews the appropriateness of the assets useful economic lives and residual values. The review is based on the current condition of the assets, the estimated period during which they will continue to bring economic beneﬁ t to the Group and the estimated residual value. DECOMMISSIONING PROVISIONS Management makes provision for the future costs of decommissioning oil and gas production facilities, wells, pipelines, and related support equipment and for site restoration based on the best estimates of future costs and economic lives of the oil and gas assets. Estimating future decommissioning provisions is complex and requires management to make estimates and judgments with respect to removal obligations that will occur many years in the future. Changes in the measurement of existing obligations can result from changes in estimated timing, future costs or discount rates used in valuation. The 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 in each jurisdiction where the Group‘s operating assets are located, and is also subject to change because of revisions and changes in laws and regulations and their interpretation. As a result of the subjectivity of these provisions there is uncertainty regarding both the amount and estimated timing of such costs. The Group’s petrochemical, reﬁ ning and marketing and distribution operations are carried out at large manufacturing facilities. The nature of these operations is such that the ultimate date of decommissioning of any sites or facilities is unclear. Current regulatory and licensing rules do not provide for liabilities related to the liquidation of such manufacturing facilities or of retail fuel outlets. Management therefore believes that there are no legal or contractual obligations related to decommissioning or other disposal of these assets. SENSITIVITY ANALYSIS FOR CHANGES IN RATES, AND OTHER ESTIMATES Discount rate CHANGE IN AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 +1% -1% (11,436) (22,437) 15,384 4,814 Information about decommissioning provision is presented in Note 13. IMPAIRMENT OF LONG-LIVED ASSETS The recoverable amounts of cash-generating units and individual assets have been determined based on the higher of value-in-use calculations and fair values less costs to sell. These calculations require the use of estimates and assumptions, including future oil prices, expected production volumes and reﬁ ning margins appropriate to the local circumstances and environment. It is reasonably possible that these assumptions may change and may then require a material adjustment to the carrying value of the Group’s assets. CONSOLIDATION The Company made signiﬁ cant judgements related to signiﬁ cant subsidiaries which are controlled by the Group, even though the Group holds less than half of the voting rights of these subsidiaries. The Company considers that the Group has control over several entities even though it has less than 50% of the voting rights. This is because the Company has power over the investee, has rights to variable returns of the investee, and has the power to affect variable returns. Additional information is disclosed in Note 25. NOTE 5: ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS The following new standards and interpretations became effective for the Group from 1 January 2013: Amendments to IAS 1, Presentation of Financial Statements (issued June 2011, effective for annual periods beginning on or after 1 July 2012), changes the disclosure of items presented in other comprehensive income. The amendments require entities to separate items presented in other comprehensive income into two groups, based on whether or not they may be reclassiﬁ ed to proﬁ t or loss in the future. The suggested title used by IAS 1 has changed to “Statement of Proﬁ t or Loss and Other comprehensive income”. The following other new pronouncements did not have a material impact on these consolidated ﬁ nancial statements. • IFRS 13, Fair value measurement (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), aims to improve consistency and reduce complexity by providing a revised deﬁ nition of fair value, and a single source of fair value measurement and disclosure requirements for use across IFRSs. • Amended IAS 19, Employee Beneﬁ ts (issued in June 2011, effective for periods beginning on or after 1 January 2013), makes signiﬁ cant changes to the recognition and measurement of deﬁ ned beneﬁ t pension expense and termination beneﬁ ts, and to the disclosures for all employee beneﬁ ts. • Disclosures—Offsetting Financial Assets and Financial Liabilities - Amendments to IFRS 7, Financial Instruments: Disclosures (issued in December 2011 and effective for annual periods beginning on or after 1 January 2013). The amendment requires disclosures that will enable users of an entity’s consolidated ﬁ nancial statements to evaluate the effect or potential effect of netting arrangements, including rights of set- off. • Improvements to International Financial Reporting Standards (issued in May 2012 and effective for annual periods beginning 1 January 2013) - IAS 16, Property, Plant and Equipment, was amended to clarify that servicing equipment that is used for more than one period is classiﬁ ed as property, plant and equipment rather than inventory. Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2014 or later, and which the Group has not early adopted. IFRS 9 Financial Instruments: Classiﬁ cation and Measurement. Key features of the standard issued in November 2009 and amended in October 2010, December 2011 and November 2013 are: • Financial assets are required to be classiﬁ ed into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classiﬁ cation depends on the entity’s business model for managing its ﬁ nancial instruments and the contractual cash ﬂ ow characteristics of the instrument. • An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity’s business model is to hold the asset to collect the contractual cash ﬂ ows, and (ii) the asset’s contractual cash ﬂ ows represent payments of principal and interest only (that is, it has only “basic loan features”). All other debt instruments are to be measured at fair value through proﬁ t or loss. • All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through proﬁ t or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than proﬁ t or loss. There is to be no recycling of fair value gains and losses to proﬁ t or loss. This election may be made on an instrument-by-instrument basis. Dividends are to be presented in proﬁ t or loss, as long as they represent a return on investment. • Most of the requirements in IAS 39 for classiﬁ cation and measurement of ﬁ nancial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of ﬁ nancial liabilities designated at fair value through proﬁ t or loss in other comprehensive income. • Hedge accounting requirements were amended to align accounting more closely with risk management. The standard provides entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 and continuing to apply IAS 39 to all hedges because the standard currently does not address accounting for macro hedging. The amendments made to IFRS 9 in November 2013 removed its mandatory effective date, thus making application of the standard voluntary. The Group is considering the implications of the standard, the impact on the Group and the timing of its adoption by the Group. Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2014). The amendment added application guidance to IAS 32 to address inconsistencies identiﬁ ed in applying some of the offsetting criteria. This includes clarifying the meaning of “currently has a legally enforceable right of set-off” and that some gross settlement systems may be considered equivalent to net settlement. The Group is considering the implications of the standard, the impact on the Group and the timing of its adoption by the Group. IFRIC 21 - Levies (issued on 20 May 2013 and effective for annual periods beginning 1 January 2014). The interpretation clariﬁ es the accounting for an obligation to pay a levy that is not income tax. The obligating event that gives rise to a liability is the event identiﬁ ed by the legislation that triggers the obligation to pay the levy. The fact that an entity is economically compelled to continue operating in a future period, or prepares its ﬁ nancial statements under the going concern assumption, does not create an obligation. The same recognition principles apply in interim and annual ﬁ nancial statements. The application of the interpretation to liabilities arising from emissions trading schemes is optional. The Group is currently assessing the impact of the amendments on its consolidated ﬁ nancial statements. Amendments to IAS 36 - Recoverable amount disclosures for non- ﬁ nancial assets (issued on 29 May 2013 and effective for annual periods beginning 1 January 2014; earlier application is permitted if IFRS 13 is applied for the same accounting and comparative period). The amendments remove the requirement to disclose the recoverable amount when a CGU contains goodwill or indeﬁ nite lived intangible assets but there has been no impairment. The Group is currently assessing the impact of the amendments on the disclosures in its consolidated ﬁ nancial statements. Amendments to IAS 19 – Deﬁ ned beneﬁ t plans: Employee contributions (issued in November 2013 and effective for annual periods beginning 1 July 2014). The amendment allows entities to recognise employee contributions as a reduction in the service cost in the period in which the related employee service is rendered, instead of attributing the contributions to the periods of service, if the amount of the employee contributions is independent of the number of years of service. The Group is currently assessing the impact of the amendments on its consolidated ﬁ nancial statements. Annual Improvements to IFRSs 2012 (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014). The improvements consist of changes to standards: • IFRS 2 was amended to clarify the deﬁ nition of a “vesting condition” and to deﬁ ne separately “performance condition” and “service condition”; • IFRS 3 was amended to clarify that (1) an obligation to pay contingent consideration which meets the deﬁ nition of a ﬁ nancial instrument is classiﬁ ed as a ﬁ nancial liability or as equity, on the basis of the deﬁ nitions in IAS 32, and (2) all non-equity contingent consideration, both ﬁ nancial and non- ﬁ nancial, is measured at fair value at each reporting date, with changes in fair value recognised in proﬁ t and loss. • IFRS 8 was amended to require (1) disclosure of the judgments made by management in aggregating operating segments, including a description of the segments which have been aggregated and the economic indicators which have been assessed in determining that the aggregated segments share similar economic characteristics, and (2) a reconciliation of segment assets to the entity’s assets when segment assets are reported. • The basis for conclusions on IFRS 13 was amended to clarify that deletion of certain paragraphs in IAS 39 upon publishing of IFRS 13 was not made with an intention to remove the ability to measure short-term receivables and payables at invoice amount where the impact of discounting is immaterial. • IAS 24 was amended to include, as a related party, an entity that provides key management personnel services to the reporting entity or to the parent of the reporting entity (“the management entity”), and to require to disclose the amounts charged to the reporting entity by the management entity for services provided. The Group is currently assessing the impact of the amendments on its consolidated ﬁ nancial statements. Annual Improvements to IFRSs 2013 (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014). The improvements consist of changes to standards: • IFRS 3 was amended to clarify that it does not apply to the accounting for the formation of any joint arrangement under IFRS 11. The amendment also clariﬁ es that the scope exemption only applies in the ﬁ nancial statements of the joint arrangement itself. • The amendment of IFRS 13 clariﬁ es that the portfolio exception in IFRS 13, which allows an entity to measure the fair value of a group of ﬁ nancial assets and ﬁ nancial liabilities on a net basis, applies to all contracts (including contracts to buy or sell non-ﬁ nancial items) that are within the scope of IAS 39 or IFRS 9. • IAS 40 was amended to clarify that IAS 40 and IFRS 3 are not mutually exclusive. The guidance in IAS 40 assists preparers to distinguish between investment property and owner-occupied property. Preparers also need to refer to the guidance in IFRS 3 to determine whether the acquisition of an investment property is a business combination. The Group is currently assessing the impact of the amendments on its consolidated ﬁ nancial statements. Unless otherwise described above, the new standards and interpretations are not expected to affect signiﬁ cantly the Group’s consolidated ﬁ nancial statements. 124 125 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT NOTE 6: CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise the following: Cash on hand and in banks Term deposits with original maturity of less than three months Total cash and cash equivalents AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 8,012 21,523 29,535 7,814 5,269 13,083 As of 31 December 2013 the majority of cash and cash equivalents are held in Bank Zenit and its subsidiaries, Ak Bars Bank, Credit Europe Bank and Sberbank. As of 31 December 2012 the majority of cash and cash equivalents are held in Bank Zenit and its subsidiaries. Bank deposits represent deposits with original maturities of less than three months. The fair value of cash and term deposits approximates their carrying value. The credit quality of cash and cash equivalents balances may be summarised as follows: Investment grade rating Non-investment grade rating No external rating Total AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 CASH ON HAND AND IN BANKS TERM DEPOSITS CASH ON HAND AND IN BANKS TERM DEPOSITS 1,056 5,026 1,930 8,012 4,825 15,537 1,161 21,523 496 4,470 2,848 7,814 2,862 2,039 368 5,269 Investment grade ratings classiﬁ cation referred to as Aaa to Baa3 for Moody’s Investment Services, as AAA to BBB- for Fitch Rating and as AAA to BBB for Standard and Poor’s Rating, respectively. NOTE 7: ACCOUNTS RECEIVABLE Short-term and long-term accounts receivable comprise the following: SHORT-TERM ACCOUNTS RECEIVABLE: Trade receivables Other financial receivables Less provision for impairment Total short-term accounts receivable LONG-TERM ACCOUNTS RECEIVABLE: Trade receivables Other financial receivables Less provision for impairment Total long-term accounts receivable Total financial assets within trade and other receivables AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 Provision for impairment at 1 January 60,395 4,259 (12,556) 52,098 251 835 (70) 1,016 53,114 60,940 3,813 (11,200) 53,553 757 777 (4) 1,530 55,083 In accordance with the Group’s policies for recorded provision for impairment the Group fully provided for receivables from ChMPKP Avto of US $334 million as of 31 December 2013 and 2012, relating to the sale of crude oil to Ukraine (Kremenchug reﬁ nery) (Note 24). The estimated fair value of short-term and long-term accounts receivable approximates their carrying value. Analysis by credit quality of trade and other receivables is as follows: Not over due and not impaired 46,686 4,484 50,582 3,714 AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 TRADE RECEIVABLES OTHER FINANCIAL RECEIVABLES TRADE RECEIVABLES OTHER FINANCIAL RECEIVABLES PAST DUE BUT NOT IMPAIRED less than 90 days overdue 91 to 180 days overdue over 180 days overdue Total past due but not impaired INDIVIDUALLY DETERMINED TO BE IMPAIRED (GROSS) less than 90 days overdue 91 to 180 days overdue over 180 days overdue Total individually impaired Less provision for impairment Total 1,652 200 – 1,852 – – 12,110 12,110 (12,110) 48,538 19 26 47 92 – – 517 517 (517) 4,576 296 156 13 465 – – 10,637 10,637 (10,637) 51,047 158 106 58 322 – – 567 567 (567) 4,036 Movements in the provision for impairment for trade and other receivables are as follows: Provision for impairment Amounts written off during the year as uncollectible Foreign exchange (loss)/gain Change in Group structure TRADE RECEIVABLES (10,637) (850) – (788) 165 2013 2012 OTHER FINANCIAL RECEIVABLES TRADE RECEIVABLES OTHER FINANCIAL RECEIVABLES (567) (13) – – 63 (10,998) (358) 109 610 – (161) (431) 25 – – Provision for impairment at 31 December (12,110) (517) (10,637) (567) 126 127 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT NOTE 8: SHORT-TERM FINANCIAL ASSETS Short-term ﬁ nancial assets comprise the following: NOTE 10: PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets are as follows: AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 LOANS AND RECEIVABLES: Notes receivable Other loans (net of provision for impairment of RR 18 million and RR 24 million as of 31 December 2013 and 2012) Certificates of deposit FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS: Held-for-trading Total short-term financial assets 2,178 2,026 8,973 3,516 16,693 2,564 1,752 4,251 6,364 14,931 During the year ended 31 December 2013 purchases of certiﬁ cates of deposit and cash proceeds from certiﬁ cates of deposit were RR 13,024 million and RR 8,302 million, respectively. During the year ended 31 December 2012 purchases of certiﬁ cates of deposit and cash proceeds from certiﬁ cates of deposit were RR 21,542 million and RR 29,738 million, respectively. During the year ended 31 December 2013 cash issuance of notes receivable and other loans and cash proceeds from notes receivable and other loans were RR 2,569 million and RR 5,213 million, respectively. During the year ended 31 December 2012 cash issuance of notes receivable and other loans and cash proceeds from notes receivable and other loans were RR 1,878 million and RR 2,954 million, respectively. The estimated fair value of loans and receivables approximates their carrying value. Financial assets at fair value through proﬁ t and loss comprise the following: HELD-FOR-TRADING Russian government debt securities Corporate debt securities Equity securities Total financial assets at fair value through profit and loss Information on trading securities issued by related parties is disclosed in Note 23. AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 18 1,762 1,736 3,516 185 2,315 3,864 6,364 Prepaid export duties VAT recoverable Advances Prepaid transportation expenses Other Prepaid expenses and other current assets NOTE 11: LONG-TERM FINANCIAL ASSETS Long-term ﬁ nancial assets comprise the following: LOANS AND RECEIVABLES Notes receivable (net of provision for impairment of RR 318 million as of 31 December 2013 and 2012) Loans to employees Other loans Certificates of deposit Available-for-sale investments Total long-term financial assets 8,311 5,728 5,626 668 2,884 23,217 11,729 7,536 5,613 551 3,377 28,806 AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 1,019 2,493 3,197 14,445 4,660 25,814 1,909 2,305 2,749 14,133 4,686 25,782 The fair value of long-term ﬁ nancial assets is estimated by discounting the future contractual cash outﬂ ows at the market interest rate available to the Group at the end of the reporting period. The carrying amounts and fair values of long-term ﬁ nancial assets are as follows: Notes receivable Loans to employees Other loans Certificates of deposit Total long-term financial assets CARRYING AMOUNTS FAIR VALUES AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 1,019 2,493 3,197 14,445 21,154 1,909 2,305 2,749 14,133 21,096 1,122 2,493 3,156 15,163 21,934 2,100 2,305 2,713 14,835 21,953 NOTE 9: INVENTORIES Materials and supplies Crude oil Refined oil products Petrochemical supplies and finished goods Total inventories 128 AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 During the year ended 31 December 2013 purchases of long-term certiﬁ cates of deposit were RR 312 million. 11,354 5,657 6,495 6,032 29,538 12,152 5,332 6,291 4,815 28,590 During the year ended 31 December 2012 purchases of long-term certiﬁ cates of deposit were RR 6,642 million. During the year ended 31 December 2013 cash issuance of long-term notes receivable and other loans and cash proceeds from long-term notes receivable and other loans were RR 2,582 million and RR 1,395 million, respectively. During the year ended 31 December 2012 cash issuance of long-term notes receivable and other loans and cash proceeds from long-term notes receivable and other loans were RR 2,077 million and RR 499 million, respectively. 129 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT NOTE 12: INVESTMENTS IN ASSOCIATES AND JOINT VENTURES Investments in associates and joint ventures comprise the following: NOTE 13: PROPERTY, PLANT AND EQUIPMENT OIL AND GAS PROPERTIES BUILDINGS AND CONSTRUCTIONS MACHINERY AND EQUIPMENT CONSTRUC-TION IN PROGRESS TOTAL NAME OF AN INVESTEE 2013 2012 2013 2012 2013 2012 OWNERSHIP PERCENTAGE AT NET BOOK VALUE AS 31 DECEMBER 31 DECEMBER GROUP’S SHARE OF PROFIT/(LOSS) FOR ASSOCIATES AND JOINT VENTURES Bank Zenit Other Total 25 20-75 25 20-50 6,984 794 7,778 6,455 256 6,711 555 (205) 350 653 86 739 The country of incorporation or registration is also their principal place of business. For all major associates and joint ventures the country of incorporation is the Russian Federation. The table below summarises the movements in the carrying amount of the Group’s investment in associates and joint ventures: Net book value at 1 January Share of profit of associates and joint ventures Share of result of associates and joint ventures Share of other comprehensive income of associates and joint ventures Dividends received from associates and joint ventures Reclassification on loss of control/disposal of associates (reclassification on obtaining control) Others Net book value at 31 December The condensed ﬁ nancial information of the Group’s equity basis investments is as follows: 2013 6,711 350 350 (21) – 801 (63) 7,778 2012 7,419 739 739 106 (15) (1,660) 122 6,711 Sales/interest income Net income Total assets Total liabilities YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 BANK ZENIT 23,425 2,258 299,856 270,685 OTHER 3,107 (473) 7,736 7,060 BANK ZENIT 20,738 2,659 260,902 233,918 OTHER 3,412 (208) 3,028 966 COST As of 31 December 2011 Additions Disposals Changes in Group structure Transfers Changes in decommissioning provision As of 31 December 2012 DEPRECIATION, DEPLETION AND AMORTISATION As of 31 December 2011 Depreciation charge Disposals As of 31 December 2012 NET BOOK VALUE As of 31 December 2011 As of 31 December 2012 COST As of 31 December 2012 Additions Disposals Changes in Group structure Transfers Changes in decommissioning provision As of 31 December 2013 DEPRECIATION, DEPLETION AND AMORTISATION As of 31 December 2012 Depreciation charge Disposals Changes in Group structure As of 31 December 2013 NET BOOK VALUE As of 31 December 2012 As of 31 December 2013 311,999 51 (2,143) – 18,717 (5,995) 322,629 146,013 7,763 (2,053) 151,723 322,629 163 (1,990) – 21,674 (1,751) 340,725 151,723 8,437 (1,633) – 158,527 134,582 315 (829) 1,176 12,926 – 95,842 386 (2,776) 1,949 12,815 – 148,170 108,216 16,089 4,640 (252) 20,477 20,477 3,898 (355) (361) 23,659 45,418 5,367 (707) 50,078 50,424 58,138 50,078 7,164 (1,045) (448) 55,749 58,138 62,765 165,986 170,906 118,493 127,693 148,170 108,216 1 (596) (1,574) 7,769 – 1 (1,078) (2,193) 13,568 – 92,166 59,730 (1,835) (241) (43,011) – 153,770 118,514 106,809 82,970 56,396 (2,742) – (44,458) – 92,166 – – – – 625,393 57,148 (8,490) 3,125 – (5,995) 671,181 207,520 17,770 (3,012) 222,278 82,970 92,166 417,873 448,903 671,181 59,895 (5,499) (4,008) – (1,751) 719,818 222,278 19,499 (3,033) (809) 237,935 – – – – – 170,906 182,198 127,693 130,111 92,166 106,809 448,903 481,883 130 131 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT For the years ended 31 December 2013 and 2012 the Group recorded RR 1,248 million and RR 606 million of capitalized borrowing cost as property, plant and equipment additions, respectively. The capitalisation rate was 3.5% (2012: 3.5%). As stated in Note 3, the Group calculates depreciation, depletion and amortization for oil and gas properties using the units-of-production method over proved or proved developed oil and gas reserves depending on the nature of the costs involved. The proved or proved developed reserves used in the units-of- production method assume the extension of the Group’s production license beyond their current expiration dates until the end of the economic lives of the ﬁ elds as discussed below in further detail. The Group’s oil and gas ﬁ elds are located principally on the territory of Tatarstan. The Group obtains licenses from the governmental authorities to explore and produce oil and gas from these ﬁ elds. The Group’s existing production licenses for its major ﬁ elds expire, after their recent extension, between 2026 and 2038, with other production licenses expiring between 2014 and 2043. The economic lives of many of the Group’s licensed ﬁ elds extend beyond these dates. Under Russian law, the Group is entitled to renew the licenses to the end of the economic lives of the ﬁ elds, provided certain conditions are met. Article 10 of the Subsoil Law provides that a license to use a ﬁ eld “shall be” extended at its scheduled termination at the initiative of the subsoil user if necessary to ﬁ nish production in the ﬁ eld, provided that there are no violations of the conditions of the license. The legislative history of Article 10 indicates that the term “shall” replaced the term “may” in August 2004, clarifying that the subsoil user has the right to extend the license term so long as it has not violated the conditions of the license. In August 2006, the term of the Group’s license to produce oil and gas from the Group’s largest ﬁ eld, Romashkinskoye, was extended through 2038. And the license to produce oil and gas from the Group’s second largest ﬁ eld, Novo-Elkhovskoe, was extended through 2026. The Group’s right to extend licenses is, however, dependent on the Group continuing to comply with the terms of the licenses, and management has the ability and intent to do so. Management plans to request the extension of the licenses that have not yet been extended. The Group’s current production plans are based on the assumption, which management considers to be reasonably certain, that the Group will be able to extend all existing licenses. These plans have been designed on the basis that the Group will be producing crude oil through the economic lives of the ﬁ elds and not with a view to exploiting the Group’s reserves to maximum effect only through the license expiration dates. Management is reasonably certain that the Group will be allowed to produce oil from the Group’s reserves after the expiration of existing production licenses and until the end of the economic lives of the ﬁ elds. “Reasonable certainty” is the applicable standard for deﬁ ning proved reserves under the SEC’s Regulation S-X, Rule 4-10. SOCIAL ASSETS During the years ended 31 December 2013 and 2012 the Group transferred social assets with a net book value of RR 23 million and RR 4 million, respectively, to local authorities. At 31 December 2013 and 2012 the Group held social assets with a net book value of RR 5,276 million and RR 3,700 million, respectively, all of which were constructed after the privatization date. The social assets comprise mainly dormitories, hotels, gyms and other facilities. The Group may transfer some of these social assets to local authorities in the future, but does not expect these to be signiﬁ cant. The Group incurred social infrastructure expenses of RR 4,805 million and RR 4,027 million for the years ended 31 December 2013 and 2012, respectively, for maintenance that mainly relates to housing, schools and cultural buildings. DECOMMISSIONING PROVISIONS. The following tables summarize the Group’s decommissioning provisions and decommissioning costs activities: Balance, beginning of period Unwinding discount New obligations Release of existing obligations Changes in estimates Balance, end of period Less: current portion of decommissioning provisions (Note 16) Long-term balance, end of period 2013 52,450 4,503 350 (166) (2,100) 55,037 (526) 54,511 2012 55,098 4,790 439 (1,443) (6,434) 52,450 (1,361) 51,089 Exploration and evaluation assets included in Oil and Gas assets above, net book value: Key assumptions used for evaluation of decommissioning provision were as follows: At 31 December 2013 Additions Reclassification to development assets Charged to expense At 31 December 2012 Additions Reclassification to development assets At 1 January 2012 For the years ended 31 December 2013 and 2012, operating and investing cash ﬂ ows used for exploration and evaluation activities amounted to RR 1,839 million and RR 1,363 million and RR 1,740 million and RR 1,764 million, respectively. 12,230 1,363 (351) (67) 11,285 1,764 (1,108) 10,629 Discount rate Inflation rate AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 7.99% 4.70% 7.88% 4.83% NOTE 14: OTHER LONG-TERM ASSETS Other long-term assets are as follows: Prepaid computer programs Prepaid license agreements Other long-term assets Total other long-term assets AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 2,347 124 1,080 3,551 2,544 379 1,793 4,716 132 133 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT NOTE 15: DEBT SHORT-TERM DEBT Foreign currency denominated debt Current portion of long-term debt Other foreign currency denominated debt Rouble denominated debt Current portion of long-term debt Other rouble denominated debt Total short-term debt LONG-TERM DEBT Foreign currency denominated debt US $2.0 bln 2010 credit facility US $1.5 bln 2009 credit facility US $550 mln 2011 credit facility US $75 mln 2011 credit facility US $144.5 mln 2011 credit facility EUR 55 mln 2013 credit facility Other foreign currency denominated debt Rouble denominated debt Bonds Other rouble denominated debt Total long-term debt Less: current portion of long-term debt Total long-term debt, net of current portion Foreign currency debts are primarily denominated in US Dollars. Long-term debt had the following maturity proﬁ le (based on the discounted contractual cash ﬂ ows): AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 31,595 – 36 4,930 36,561 14,771 2,328 17,961 1,529 2,762 2,018 2,122 – 925 44,416 (31,631) 12,785 18,259 2,328 5,002 6,507 32,096 27,619 4,551 16,582 1,562 2,165 – 3,167 4,941 665 61,252 (23,261) 37,991 LONG-TERM FOREIGN CURRENCY DENOMINATED DEBT In October 2009, the Company entered into a dual (3 and 5 year) tranches secured syndicated pre-export facility for up to US $1.5 billion arranged by WestLB AG, Bayerische Hypo-und Vereinsbank AG, ABN AMRO Bank N.V., OJSC Gazprombank, Bank of Moscow and Nordea Bank. This credit facility is collateralized with the contractual rights and receivables under an oil export contract between Tatneft and Tavit B.V. under which Tatneft supplies no less than 360,000 metric tons of oil and reﬁ ned products in a calendar quarter. The loan agreement requires compliance with certain ﬁ nancial covenants including, but not limited to, minimum levels of consolidated tangible net worth and interest coverage ratios. The 3-year tranche was fully repaid. The 5-year tranche bears interest at LIBOR plus 4.10%. In June 2010, the Company entered into a triple (3, 5 and 7 year) tranches secured credit facility for up to US $2 billion arranged by Barclays Bank PLS, BNP Paribas (Suisse) SA, Bank of Moscow, Bank of Tokyo-Mitsubishi UFJ LTD Citibank N.A., Commerzbank Aktiengesellschaft, ING Bank N.V., Natixis SA, Nordea Bank, The Royal Bank of Scotland N.V., Sberbank, Société Générale, Sumitomo Mitsui Finance Dublin LTD, Unicredit Bank AG, VTB Bank and WestLB AG. The loan is collateralized with the contractual rights and receivables under an export contract between Tatneft and Tatneft Europe AG under which Tatneft supplies no less than 750,000 metric tons of oil in a calendar quarter. The loan agreement requires compliance with certain ﬁ nancial covenants including, but not limited to, minimum levels of consolidated tangible net worth and interest coverage ratios. The 3-year tranche was fully repaid. The 5-year tranche has the margin of LIBOR plus 3.40%, while the 7-year tranche bears the interest of LIBOR plus 5%. In June 2011, the Company entered into a US $550 million unsecured ﬁ nancing with a ﬁ xed rate of 3.50% per annum with bullet repayment in three years. The loan was arranged by BNP Paribas (Suisse) SA, The Bank of Tokyo Mitsubishi UFJ LTD., Commerzbank Aktiengesellschaft, ING Bank N.V., Natixis, Open Joint Stock Company Nordea Bank, Sumitomo Mitsui Banking Corporation and WestLB AG London Branch. The loan agreement requires compliance with certain ﬁ nancial covenants including, but not limited to, minimum levels of consolidated tangible net worth and interest coverage ratios. In November 2011, TANECO entered into a US $75 million credit facility with equal semi-annual repayments during ten years. The loan was arranged by Nordea Bank AB (Publ), Société Générale and Sumitomo Mitsui Banking Corporation Europe Limited. The loan bears interest at LIBOR plus 1.1% per annum. The loan agreement requires compliance with certain ﬁ nancial covenants including, but not limited to, minimum levels of consolidated tangible net worth and interest coverage ratios. In November 2011, TANECO entered into a US $144.5 million credit facility with equal semi-annual repayments during ten years with the ﬁ rst repayment date on 15 May, 2014. The loan was arranged by Société Générale, Sumitomo Mitsui Banking Corporation Europe Limited and the Bank of Tokyo-Mitsubishi UFJ LTD. The loan bears interest at LIBOR plus 1.25% per annum. The loan agreement requires compliance with certain ﬁ nancial covenants including, but not limited to, minimum levels of consolidated tangible net worth and interest coverage ratios. In May 2013, TANECO entered into a EUR 55 million credit facility with equal semi-annual repayment during ten years. The loan was arranged by The Royal Bank of Scotland plc and Sumitomo Mitsui Banking Corporation Europe Limited. The loan bears interest at LIBOR plus 1.5% per annum. The loan agreement requires compliance with certain ﬁ nancial covenants including, but not limited to, minimum levels of consolidated tangible net worth and interest coverage ratios. LONG-TERM RUSSIAN ROUBLE DENOMINATED DEBT In September 2010, the Group issued Rouble exchange bonds in the amount of RR 5,000 million due in September 2013 at an interest rate of 7.25% per annum. The bonds were fully repaid in September 2013. Management believes that for the year ended 31 December 2013 and 2012 the Group was in compliance with all covenants required by the above loan agreements. Loan arrangements on short-term and long-term debt have both ﬁ xed and variable interest rates that reﬂ ect the currently available terms for similar debt. The carrying value of debt is a reasonable approximation of its fair value. The carrying amounts of long-term debt are as follows: Due for repayment: Between one and two years Between two and five years After five years Total long-term debt, net of current portion AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 5,535 3,554 3,696 12,785 27,728 7,486 2,777 37,991 US$ denominated fixed rate US$ denominated floating rate EUR denominated floating rate RR denominated fixed rate Total long-term debt The Group does not apply hedge accounting and has not entered into any hedging arrangements in respect of its foreign currency obligations or interest rate exposures. SHORT-TERM FOREIGN CURRENCY DENOMINATED DEBT In December 2003 the Group entered into a US $35 million one month revolving credit facility with Credit Suisse Zurich. In December 2011 this agreement was replaced with a new loan agreement totalling up to the US $70 million under the same conditions. The monthly revolving loan bears interest at one month LIBOR plus varying margin of about 1.8% per annum and is collateralized by crude oil sales. SHORT-TERM RUSSIAN ROUBLE DENOMINATED DEBT Russian Rouble denominated short-term debt is primarily comprised of loans with Russian banks. Short-term Rouble denominated loans of RR 4,930 million and RR 6,507 million bear contractual interest rates of 1.1% to 9.25% per annum as of 31 December 2013 and 2012. 134 CARRYING AMOUNTS AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 20,083 21,390 2,018 925 44,416 20,350 35,296 – 5,606 61,252 135 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT NOTE 16: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Trade payables Dividends payable Other payables Total financial liabilities within trade and other payables Salaries and wages payable Advances received from customers Current portion of decommissioning provisions (Note 13) Other accounts payable and accrued liabilities Total non-financial liabilities Accounts payable and accrued liabilities NOTE 17: OTHER LONG-TERM LIABILITIES Other long-term liabilities are as follows: AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 Present value of defined benefit obligation (DBO) 14,260 103 980 15,343 4,109 1,045 526 7,421 13,101 28,444 16,715 101 1,071 17,887 4,093 1,109 1,361 6,569 13,132 31,019 Management has assessed that reasonable changes in the principal signiﬁ cant actuarial assumptions will not have a signiﬁ cant impact on the consolidated statements of proﬁ t of loss and other comprehensive income or the liability recognized in the consolidated statement of ﬁ nancial position. Amounts recognized in the consolidated statement of ﬁ nancial position: Less: Fair value of plan assets Net defined benefit liability Change in the deﬁ ned beneﬁ t obligation amount: Defined benefit obligation (DBO) at beginning year Effect of exchange rate changes Current service cost Interest cost Benefits paid Remeasurement (gains)/losses: Actuarial losses arising from changes in financial assumptions Actuarial losses/(gains) arising from changes in demographic assumptions Actuarial (gains)/losses - Experience Past service cost Curtailment/settlement gain Other AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 5,598 (1,830) 3,768 5,441 (1,819) 3,622 2013 5,441 8 181 392 (487) 58 6 (3) - - 2 2012 4,054 (7) 128 342 (399) 328 (6) 744 47 (5) 215 The fair value of each class of ﬁ nancial liabilities included in short-term trade and other payables at 31 December 2013 and 2012 approximates their carrying value. AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 The amounts recognized in proﬁ t or loss are as follows: Defined benefit obligation at the end of the year 5,598 5,441 Pension liability Other long-term liabilities Total other long-term liabilities 3,768 71 3,839 3,622 88 3,710 PENSION LIABILITIES The Group has various pension plans covering substantially all eligible employees and members of management. The amount of contributions, frequency of beneﬁ t payments and other conditions of these plans are regulated by the “Statement of Organization of Non-Governmental Pension Beneﬁ ts for OAO Tatneft Employees” and the contracts concluded between the Company or its subsidiaries, management, and the non-proﬁ t organization “National Non- Governmental Pension Fund”. In accordance with these contracts the Group is committed to make certain contributions on behalf of all employees and guarantees a minimum beneﬁ t upon retirement. Contributions or beneﬁ ts are generally based upon grade and years until ofﬁ cial retirement age (age 60 for men and 55 for women), and in the case of management are based upon years of service. In accordance with the provisions of collective agreements concluded on an annual basis between the Company or its subsidiaries and their employees, the Group is obligated to pay certain post-employment beneﬁ ts, the amounts of which are generally based on salary grade and years of service at the time of retirement. Service cost Net interest expense Remeasurement (gains)/losses: Actuarial losses arising from changes in financial assumptions Actuarial losses arising from changes in demographic assumptions Actuarial gains – Experience Other Total included in ‘employee benefits expense’ Principal actuarial assumptions (expressed as weighted averages) are as follows: The amounts recognized in other comprehensive income are as follows: Discount rate Rate of increase in salary levels Actuarial rate of NPF Statutory insurance contributions rate 136 AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 8.0% 7.2% 3.0% 7.2% 6.2% 3.0% 30.85% 30.20% Remeasurement losses: Actuarial losses arising from changes in financial assumptions Actuarial losses/(gains) arising from changes in demographic assumptions Actuarial losses – Experience Effect of exchange rate changes Total included in other comprehensive income 2013 181 261 17 2 (91) 2 372 2013 224 4 88 8 324 2012 175 227 - - - 207 609 2012 252 (6) 744 - 990 137 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT Reconciliation of the opening and closing balances of plan assets’ fair value: Deferred income taxes reﬂ ect the impact of temporary differences between the amount of assets and liabilities recognized for ﬁ nancial reporting purposes and such amounts recognized for statutory tax purposes. Deferred tax assets (liabilities) are comprised of the following: Plan assets at beginning of year Interest income Contributions Benefits paid Actuarial (loss)/gain Other Plan assets at year end 2013 1,819 131 230 (167) (183) - 1,830 2012 1,531 115 220 (131) 76 8 1,819 The annual contributions made by the Group are managed by the Fund. The primary investment objectives of the Fund are to achieve the highest rate of total return within prudent levels of risk and liquidity, to diversify and mitigate potential downside risk associated with the investments, and to provide adequate liquidity for beneﬁ t payments and portfolio management. Plan assets structure: Russian corporate bonds and equity securities of Russian issuers Russian government and regions bonds Bank deposits Other Total plan assets Expected contributions to be paid during the next annual reporting period are RR 434 million. AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 51.74% 11.61% 33.12% 3.53% 100% 46.22% 19.01% 30.91% 3.86% 100% Accounts receivable Tax loss carry forward Decommissioning provision Other Deferred income tax assets Property, plant and equipment Inventories Accounts receivable Long-term investments Undistributed Earnings Other liabilities Deferred income tax liabilities Net deferred tax liability Deferred income taxes are reﬂ ected in the consolidated statement of ﬁ nancial position as follows: Deferred income tax asset Deferred income tax liability Net deferred tax liability AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 - 3,824 11,007 624 15,455 (24,146) (1,847) (152) (95) (1,044) (1,921) (29,205) (13,750) 155 3,924 10,490 547 15,116 (22,690) (2,152) - (238) (862) (1,575) (27,517) (12,401) AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 2,049 (15,799) (13,750) 2,633 (15,034) (12,401) NOTE 18: TAXES Income tax expense comprises the following: Current income tax expense Deferred income tax expense Income tax expense for the year YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 21,645 1,302 22,947 21,816 1,554 23,370 Deferred tax assets are recognized for the carry-forward of unused tax losses and unused tax credits to the extent that it is probable that taxable proﬁ ts will be available against which the unused tax losses/credits can be utilized. TAX LOSSES CARRY FORWARD At 31 December 2013, the Group had recognized deferred income tax assets of RR 3,824 million (RR 3,924 million at 31 December 2012) in respect of unused tax loss carry forwards of RR 19,119 million (RR 19,620 million at 31 December 2012). Tax losses can be carried forward for relief against taxable proﬁ ts for 10 years after they are incurred, subject to certain limitations. In determining future taxable proﬁ ts and the amount of tax beneﬁ ts that are probable in the future management makes judgments including expectations regarding the Group’s ability to generate sufﬁ cient future taxable income and the projected time period over which deferred tax beneﬁ ts will be realized. The Group doesn’t have any unrecognised potential deferred tax assets in respect of deductible temporary differences. The Group is subject to a number of taxes other than income taxes, which are detailed as follows: Presented below is reconciliation between the provision for income taxes and taxes determined by applying the statutory tax rate 20% (for the year ended 31 December 2012: 20%) to income before income taxes: Profit before income taxes and non-controlling interest Theoretical income tax expense at statutory rate Increase due to: Non-deductible expenses, net Income tax expense YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 101,291 20,258 2,689 22,947 101,818 20,364 3,006 23,370 No provision has been made for additional income taxes of RR 17,958 million on undistributed earnings of certain subsidiaries. These earnings have been and will continue to be reinvested. These earnings could become subject to additional tax of approximately RR 1,161 million if they were remitted as dividends. Mineral extraction tax Property tax Penalties and interest Other YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 105,302 102,813 4,518 40 1,476 2,248 (214) 1,446 Total taxes other than income taxes 111,336 106,293 138 139 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT For mineral extraction tax for ﬁ elds whose depletion rate exceeds a certain threshold the Group received a beneﬁ t of approximately RR 24.4 billion and RR 21.4 billion for the years ended 31 December 2013 and 2012, respectively. EARNINGS PER SHARE Preference shares are not redeemable and are considered to be participating shares. At 31 December 2013 and 2012 taxes payable were as follows: Mineral extraction tax Value Added Tax on goods sold Other Total taxes payable NOTE 19: SHAREHOLDERS’ EQUITY AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 9,485 2,205 5,016 16,706 8,457 2,107 2,670 13,234 AUTHORIZED SHARE CAPITAL At 31 December 2013 the authorized share capital consists of 2,178,690,700 voting common shares and 147,508,500 non-voting preferred shares; both classes of shares have a nominal value of RR 1.00 per share. The nominal value of authorised share capital differs from its carrying value due to effect of the hyperinﬂ ation of capital contributions made before 2003. GOLDEN SHARE OAO Svyazinvestneftekhim, a company wholly owned by the government of Tatarstan, as of 31 December 2013 holds approximately 33.59% of the Company’s capital stock (approximately 36% of voting stock). These shares were contributed to Svyazinvestneftekhim by the Ministry of Land and Property Relations of Tatarstan in 2003. Tatarstan also holds a “Golden Share” – a special governmental right – in the Company. The exercise of its powers under the Golden Share enables the Tatarstan government to appoint one representative to the Board of Directors and Revision Commission of the Company and to veto certain major decisions, including those relating to changes in the share capital, amendments to the Charter, liquidation or reorganization and “major” and “interested party” transactions as deﬁ ned under Russian law. The Golden Share currently has an indeﬁ nite term. The Tatarstan government also controls or exercises signiﬁ cant inﬂ uence over a number of the Company’s suppliers, contractors and customers (see also Note 1). RIGHTS ATTRIBUTABLE TO PREFERRED SHARES Unless a different amount is approved at the annual shareholders meeting, preferred shares earn dividends equal to their nominal value. The amount of a dividend for a preferred share may not be less than the amount of a dividend for a common share. Preferred shareholders may vote at meetings only on the following decisions: • the amendment of the dividends payable per preferred share; • the issuance of additional shares with rights greater than the current rights of preferred shareholders; and • the liquidation or reorganization of the Company. The decisions listed above can be made only if approved by 75% of preferred shareholders. Holders of preferred shares acquire the same voting rights as holders of common shares in the event that dividends are either not declared, or declared but not paid, on preferred shares. On liquidation, the shareholders are entitled to receive a distribution of net assets. Under Russian Joint Stock Companies Law and the Company’s charter in case of liquidation, preferred shareholders have priority over shareholders holding common shares to be paid declared but unpaid dividends on preferred shares and the liquidation value of preferred shares, if any. AMOUNTS AVAILABLE FOR DISTRIBUTION TO SHAREHOLDERS Amounts available for distribution to shareholders are based on the Company’s non-consolidated statutory accounts prepared in accordance with RAR, which differ signiﬁ cantly from IFRS (see Note 2). The statutory accounts are the basis for proﬁ t distribution and other appropriations. Russian legislation identiﬁ es the basis of distribution as the current period net proﬁ t calculated in accordance with RAR. However, this legislation and other statutory laws and regulations dealing with distribution rights are open to legal interpretation. For the years ended 31 December 2013 and 2012, the Company had a statutory current proﬁ t of RR 63,850 million and RR 66,707 million, respectively. Basic and diluted earnings per share are calculated by dividing proﬁ t or loss attributable to ordinary and preference shareholders by the weighted average number of ordinary and preferred shares outstanding during the period. Proﬁ t or loss attributed to equity holders is reduced by the amount of dividends declared in the current period for each class of shares. The remaining proﬁ t or loss is allocated to common and preferred shares to the extent that each class may share in earnings if all the earnings for the period had been distributed. Treasury shares are excluded from calculations. The total earnings allocated to each class of shares are determined by adding together the amount allocated for dividends and the amount allocated for a participation feature. Profit attributable to Group shareholders Common share dividends Preferred share dividends Income available to common and preferred shareholders, net of dividends Basic and diluted: Weighted average number of shares outstanding (millions of shares): Common Preferred Combined weighted average number of common and preferred shares outstanding Basic and diluted earnings per share (RR) Common Preferred YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 70,832 (18,260) (1,268) 51,304 2,123 148 2,271 31.19 31.16 73,473 (15,032) (1,044) 57,397 2,123 148 2,271 32.35 32.33 NON-CONTROLLING INTEREST Non-controlling interest is adjusted by dividends paid by the Group’s subsidiaries amounting to RR 984 million and RR 565 million at 31 December 2013 and 2012, respectively. NOTE 20: EMPLOYEE BENEFIT EXPENSES Wages and salaries Statutory insurance contributions Bonus certificates granted to directors and employees Pension costs – defined benefit plans (Note 17) Other employee benefits Total employee benefit expense YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 32,479 9,045 1,038 372 2,655 45,589 28,635 8,142 1,107 609 2,257 40,750 Employee beneﬁ t expenses are included in operating expenses, selling, general and administrative expenses and Maintenance of social infrastructure and transfer of social assets and other expenses in the Consolidated Statements of Proﬁ t or Loss and Other Comprehensive Income. 140 141 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT For the year ended 31 December 2013, revenues of RR 88,807 million or 20% and RR 51,424 million or 11% of the Group’s total sales and operating revenues are derived from two external customers, respectively. For the year ended 31 December 2012, revenues of RR 93,877 million or 21% and RR 55,960 million or 13% of the Group’s total sales and operating revenues are derived from two external customers, respectively. These revenues represent sales of crude oil and are attributable to the exploration and production segment and reﬁ ning and marketing segment. Management does not believe the Group is dependent on any particular customer. SEGMENT SALES AND OTHER OPERATING REVENUES Reportable operating segment sales and other operating revenues are stated in the following table: YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 NOTE 21: INTEREST INCOME AND INTEREST EXPENSE Interest income comprises the following: Interest income from loans and receivables Unwinding of the present value discount of long-term financial assets Total interest income Interest expense comprises the following: Bank loans RR denominated non-convertible bonds Unwinding of the present value discount of decommissioning provision Unwinding of the present value discount of long-term financial assets Total interest expense Less capitalised interest costs Total interest costs recognised in profit or loss NOTE 22: SEGMENT INFORMATION YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 3,315 50 3,365 3,807 65 3,872 YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 2,204 261 4,494 590 7,549 (625) 6,924 3,063 362 4,159 - 7,584 (606) 6,978 Operating segments are components that engage in business activities that may earn revenues or incur expenses, whose operating results are regularly reviewed by the Board of Directors and the Management Committee and for which discrete ﬁ nancial information is available. Segments whose revenue, result or assets are ten percent or more of all the segments are reported separately. The Group’s business activities are conducted predominantly through three main operating segments: • Exploration and production consists of exploration, development, extraction and sale of own crude oil. Intersegment sales consist of transfer of crude oil to reﬁ nery and other goods and services provided to other operating segments, • Reﬁ ning and marketing comprises purchases and sales of crude oil and reﬁ ned products from third parties, own reﬁ ning activities and retailing operations, • Petrochemical products include production and sales of tires and petrochemical raw materials and reﬁ ned products, which are used in production of tires. Other sales include revenues from ancillary services provided by the specialized subdivisions and subsidiaries of the Group, such as sales of oilﬁ eld equipment and drilling services provided to other companies in Tatarstan, revenues from the sale of auxiliary petrochemical related services and materials as well as other business activities, which do not constitute reportable business segments. The Group evaluates performance of its reportable operating segments and allocates resources based on segment earnings, deﬁ ned as proﬁ t before income taxes and non-controlling interest not including interest income, expense, and earnings from equity investments, other income (expenses) and foreign exchange loss or gain. Intersegment sales are at prices that approximate market. Group ﬁ nancing (including interest expense and interest income) and income taxes are managed on a Group basis and are not allocated to operating segments. EXPLORATION AND PRODUCTION Domestic own crude oil CIS own crude oil Non – CIS own crude oil Other Intersegment sales Total exploration and production REFINING AND MARKETING Domestic sales Crude oil purchased for resale Refined products Total Domestic sales CIS sales Crude oil purchased for resale Refined products Total CIS sales(1) Non – CIS sales Crude oil purchased for resale Refined products Total Non – CIS sales(2) Other Intersegment sales Total refining and marketing PETROCHEMICALS Tires - domestic sales Tires - CIS sales Tires - non-CIS sales Petrochemical products and other Intersegment sales Total petrochemicals Total segment sales Corporate and other sales Elimination of intersegment sales Total sales and other operating revenues 142 (1) - CIS is an abbreviation for Commonwealth of Independent States (excluding the Russian Federation). (2) - Non-CIS sales of crude oil and refined products are mainly made to Germany, Switzerland, the Netherlands and the United Kingdom based traders. 57,262 7,057 137,495 4,300 90,628 296,742 394 98,623 99,017 - 7,176 7,176 14,999 73,542 88,541 3,496 3,487 61,748 6,783 141,743 3,952 77,189 291,415 1,313 73,637 74,950 - 28,114 28,114 17,578 51,473 69,051 4,058 3,547 201,717 179,720 24,395 6,714 1,321 2,359 846 35,635 534,094 15,850 (94,961) 454,983 27,910 7,388 1,185 2,412 880 39,775 510,910 14,804 (81,615) 444,099 143 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT SEGMENT EARNINGS SEGMENT EARNINGS Exploration and production Refining and marketing Petrochemicals Total segment earnings Corporate and other Other (expenses)/income Profit before income tax SEGMENT ASSETS ASSETS Exploration and production Refining and marketing Petrochemicals Corporate and other Total assets YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 92,746 16,321 338 109,405 (4,996) (3,118) 101,291 96,955 9,110 2,105 108,170 (6,495) 143 101,818 AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 281,384 259,879 29,830 102,996 674,089 271,998 233,994 29,912 94,703 630,607 As of 31 December 2013 and 2012 corporate and other segment comprised RR 7,778 million and RR 6,711 million, respectively, investments in associates and joint ventures. The Group’s assets and operations are primarily located and conducted in the Russian Federation. SEGMENT DEPRECIATION, DEPLETION AND AMORTISATION AND ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT. DEPRECIATION, DEPLETION AND AMORTIZATION Exploration and production Refining and marketing Petrochemicals Corporate and other Total segment depreciation, depletion and amortization ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT Exploration and production Refining and marketing Petrochemicals Corporate and other Total additions to property, plant and equipment YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 11,424 4,203 1,682 2,014 19,323 25,696 23,791 942 7,715 58,144 11,022 3,397 1,300 2,051 17,770 19,689 24,428 317 6,719 51,153 For the years ended 31 December 2013 and 2012 additions to property, plant and equipment of exploration and production segment include a reduction of RR 1,751 million and RR 5,995 million, respectively, associated with changes in the decommissioning provision. 144 NOTE 23: RELATED PARTY TRANSACTIONS Parties are generally considered to be related if the parties are under common control or if one party has the ability to control the other party or can exercise signiﬁ cant inﬂ uence or joint control over the other party in making ﬁ nancial and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. Transactions are entered into in the normal course of business with afﬁ liates, joint ventures, government related companies, key management personnel and other related parties. These transactions include sales of crude oil and reﬁ ned products, purchases of electricity and banking transactions. ASSOCIATES, JOINT VENTURES AND OTHER RELATED PARTIES The amounts of transactions for each year and the outstanding balances at each year end with afﬁ liates and other related parties are as follows: REVENUES AND INCOME Sales of refined products Other sales COSTS AND EXPENSES Purchases of crude oil Other services Other purchases YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 15 226 124 629 1,105 17 461 4,687 1,194 1,567 For the years ended 31 December 2013 and 2012, the Group sold crude oil on a commission basis from related parties for RR 124 million and RR 5,075 million, respectively. For the year ended 31 December 2013 and 2012 the Group has entered into transactions with related parties for purchases of equipment in the amount of RR 1,986 million and RR 0 million, respectively, which is included in our property, plant and equipment. At 31 December 2013 and 2012 the outstanding balances with related parties were as follows: ASSETS Cash and cash equivalents Accounts receivable Notes receivable Short-term certificates of deposit Trading securities Loans receivable Prepaid expenses and other current assets Due from related parties short-term Long-term accounts receivable Long-term certificates of deposit Long-term loans receivable Due from related parties long-term LIABILITIES Accounts payable and accrued liabilities Short-term debt Due to related parties short-term Long-term debt Due to related parties long-term YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 11,342 332 2,164 4,300 7 310 107 18,562 - 14,341 2,366 16,707 (162) (1,991) (2,153) (66) (66) 8,605 222 1,973 550 307 8 83 11,748 2 14,132 2,569 16,703 (503) (2,130) (2,633) (23) (23) 145 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT As of 31 December 2013 and 2012, the Group had RR 3,879 million and RR 4,542 million, respectively, in loans and notes receivable due from Bank Zenit or its wholly-owned subsidiary Bank Devon Credit. These loans and notes mature between 2014 and 2017, bearing interest between 2.9% and 8.5%. As of 31 December 2013 and 2012, the Group has short and long-term certiﬁ cates of deposit of RR 18,641 million and RR 14,682 million, respectively, held with Bank Zenit or its wholly-owned subsidiary Bank Devon Credit. In March 2009 the Group placed a long-term deposit with Bank Zenit for RR 2,140 million payable in 10 years bearing interest 10.85%. The Group entered into a subordinated deposit agreement with Bank Zenit in January 2013 in the amount of RR 3,600 million payable in 10 years bearing interest of 9% per year. RUSSIAN GOVERNMENT BODIES AND STATE ORGANIZATIONS The amounts of transactions for each year with Government bodies and state organizations are as follows: Sales of refined products Other sales Purchases of refined products Purchases of electricity Purchases of transportation services Other services Other purchases YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 1,848 304 8,771 10,115 22,489 4,067 136 3,486 267 8,349 9,232 21,623 3,271 - COMPENSATION TO KEY MANAGEMENT PERSONNEL As of 31 December 2013 and 2012 total remuneration, including pension cost, for key management personnel was RR 1,625 million and RR 1,339 million, respectively. CAPITAL COMMITMENTS As of 31 December 2013 and 2012 the Group has outstanding capital commitments of approximately RR 23,180 million and RR 16,823 million, respectively, for the construction of the TANECO reﬁ nery complex. These commitments are expected to be paid between 2014 and 2016. For the year ended 31 December 2013, the Company issued 10,138,230 Awards to senior management and directors, all of which are expected to be settled at a price of RR 102.4 per Award. Final settlement is subject to approval at the Company’s Management Committee meeting in July- September 2014. For the year ended 31 December 2012, the Company issued 6,740,800 Awards to senior management and directors, all of which were settled at a price of RR 168.19 per Award. The amount of related compensation expense recognized in Selling, General and administrative expenses of the Consolidated Statements of Proﬁ t or Loss and Other Comprehensive Income for the years ended 31 December 2013 and 2012 was RR 1,038 million and RR 1,107 million, respectively. Management believes the Group’s current and long-term capital expenditures program can be funded through cash ﬂ ows generated from existing operations as well as lines of credit available to the Company. The TANECO reﬁ nery project has been funded from the Company’s cash ﬂ ow with the support of the bank facilities (Note 15). Management believes the Company has the ability to obtain syndicated loans and other ﬁ nancings as needed to continue funding the TANECO reﬁ nery project, reﬁ nance any maturing debts as well as ﬁ nance business acquisitions and other transactions that may arise in the future. TAXATION NOTE 24: CONTINGENCIES AND COMMITMENTS OPERATING ENVIRONMENT OF THE GROUP The Russian Federation displays certain characteristics of an emerging market. Tax, currency and customs legislation is sometimes subject to varying interpretations and contributes to the challenges faced by companies operating in the Russian Federation. The ongoing uncertainty and volatility of the ﬁ nancial markets and other risks could have signiﬁ cant negative effects on the Russian ﬁ nancial and corporate sectors. Management determined provisions for impairment by considering the economic situation and outlook at the end of the reporting period. The future economic development of the Russian Federation is dependent upon external factors and internal measures undertaken by the government to sustain growth, and to change the tax, legal and regulatory environment. Management believes it is taking all necessary measures to support the sustainability and development of the Group’s business in the current business and economic environment. 146 Russian tax and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant authorities. The Russian tax authorities may be taking a more assertive position in their 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. Tax authorities are currently reviewing the operations of the Company and its subsidiaries for the years ended December 31, 2011 and 2012. While the results of that review have not been ﬁ nalized, management expects the ultimate outcome will not have a material effect on the Group’s results of operations or cash ﬂ ows. Amended Russian transfer pricing legislation took effect from 1 January 2012. The new transfer pricing rules appear to be more technically elaborate and, to a certain extent, better aligned with the international transfer pricing principles developed by the Organisation for Economic Cooperation and Development (OECD). The new legislation provides the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of controlled transactions (transactions with related parties and some types of transactions with unrelated parties), provided that the transaction price is not arm’s length. Management believes that its pricing policy is arm’s length and it has implemented internal processes to be in compliance with the new transfer pricing legislation. Given that the practice of implementation of the new Russian transfer pricing rules has not yet developed, the impact of any challenge of the Group’s transfer prices cannot be reliably estimated; however, it may be signiﬁ cant to the ﬁ nancial conditions and/or the overall operations of the Group. ENVIRONMENTAL CONTINGENCIES The Group, through its predecessor entities, has operated in Tatarstan for many years without developed environmental laws, regulations and the Group’s policies. Environmental regulations and their enforcement are currently being considered in the Russian Federation and the Group is monitoring its potential obligations related thereto. The outcome of environmental liabilities under proposed or any future environmental legislation cannot reasonably be estimated at present, but could be material. Under existing legislation, however, management believes that there are no probable liabilities, which would have a material adverse effect on the operating results or ﬁ nancial position of the Group. LEGAL CONTINGENCIES The Group is subject to various lawsuits and claims arising in the ordinary course of business. The outcomes of such contingencies, lawsuits or other proceedings cannot be determined at present. In the case of all known contingencies the Group accrues a liability when the loss is probable and the amount is reasonably estimable. Based on currently available information, management believes that it is remote that future costs related to known contingent liability exposures would have a material adverse impact on the Group’s consolidated ﬁ nancial statements. SOCIAL COMMITMENTS The Group contributes signiﬁ cantly to the maintenance of local infrastructure and the welfare of its employees within Tatarstan, which includes contributions towards the construction, development and maintenance of housing, hospitals and transport services, recreation and other social needs. Such funding is periodically determined by the Board of Directors after consultation with governmental authorities and recorded as expenditures when incurred. GUARANTEES The Group has no outstanding guarantees at 31 December 2013 and 2012. TRANSPORTATION OF CRUDE OIL The Group beneﬁ ts from the blending of its crude oil in the Transneft pipeline system since the Group’s crude oil production is generally of a lower quality than that produced by some other regions of the Russian Federation (mainly Western Siberia) which supply through the same pipeline system. There is currently no equalization scheme for differences in crude oil quality within the Transneft pipeline system and the implementation of any such scheme is not determinable at present. However, if this practice were to change, the Group’s business could be materially and adversely affected. UKRTATNAFTA The Group holds 49.6% investment in AmRUZ Trading AG (“AmRUZ”) and 100% investment in Seagroup International Inc. (“Seagroup”). These entities primary activities are ownership interests in Closed Joint Stock Company Ukrtatnafta (“Ukrtatnafta”), the owner of the Kremenchug reﬁ nery, and their holdings constitute 8.34% and 9.96% of the outstanding common shares in Ukrtatnafta, respectively. Historically, and in particular during the course of 2007, there have been a number of attempts by Ukraine to challenge AmRUZ and Seagroup’s acquisition of shares in Ukrtatnafta, and in particular, by the State Property Fund and NJSC Naftogaz of Ukraine (“Naftogaz”). Naftogaz is 100% owned by the Ukrainian Government and also owner of record of 43% Ukrtatnafta’s common shares. The challenges were suspended in April 2006 when the Supreme Court of Ukraine ruled the payment for Ukrtatnafta shares made with promissory notes issued by AmRUZ and Seagroup was lawful. However, in May 2007 the Ministry of Fuel and Energy of Ukraine (“MFEU”) resumed its attempts and, as a result, succeeded in obtaining alleged and doubtful court decisions, after which it announced the transfer into Naftogaz’s custody the 18.3% of Ukrtatnafta’s shares, representing the entire holdings of AmRUZ and Seagroup in Ukrtatnafta. Subsequent to these actions, MFEU effectively began to exclude the Group from exercising their shareholder rights related to Ukrtatnafta. In October 2007 the existing management of Ukrtatnafta, as appointed by its shareholders, was forcibly removed based on an alleged court order. Subsequently, individuals who obtained the ability to manage Ukrtatnafta took certain actions effectively assisting MFEU in taking control over the shares in Ukrtatnafta owned by SeaGroup and AmRUZ. In addition, Ukrtatnafta subsequently refused to settle its payables to ChMPKP Avto (Note 3), a Ukrainian intermediary that previously purchased crude from the Group for deliveries to Ukrtatnafta. Following this forced change of control of Ukrtatnafta, the Company (originally the key crude supplier to the Kremenchug reﬁ nery) suspended its crude oil deliveries to Ukrtatnafta. Subsequently, the Ukrainian courts also invalided direct purchase of the shares in Ukrtatnafta by Tatneft. In May 2008, Tatneft commenced international arbitration against Ukraine on the basis of the agreement between the Government of the Russian Federation and the Cabinet of Ministries of Ukraine on the Encouragement and Mutual Protection of Investments of November 27, 1998 (“Russia- Ukraine BIT”). The arbitration concerns losses suffered by Tatneft as a consequence of the forcible takeover of Ukrtatnafta and seizure of shares of the Group in Ukrtatnafta. Tatneft requested the arbitral tribunal declare Ukraine has breached the Russian-Ukraine BIT and to order Ukraine to pay compensation in excess of US$ 2.4 billion. In March 2013 the arbitral tribunal held the hearing on the merits with the award expected in the course of 2014. As a result of the ongoing legal dispute over shareholding interests, as of 31 December 2013 the Company has fully provided for its investments in Ukrtatnafta. LIBYA As a result of the political situation in Libya, in February 2011 the Group had to entirely suspend its operations there and evacuate all its personnel. From February 2013 the Group has started the process of resuming its activities in Libya, including the return of some of its personnel to a branch in Tripoli and carrying out negotiations with subcontractors. As of the date of this report the Group expects to return to operational activity in Libya in the course of 2014. As of 31 December 2013 the company had approximately RR 5,673 million of assets associated with its Libyan operations of which RR 5,455 million is related to capitalized exploration costs, RR 210 million of inventories and RR 8 million of cash. As of 31 December 2012 the company had approximately RR 5,681 million of assets associated with its Libyan operations, correspondingly, of which RR 5,451 million are related to capitalized exploration costs, RR 208 million of inventories and RR 22 million of cash. 147 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT NOTE 26: FINANCIAL RISK MANAGEMENT FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The accounting policies for ﬁ nancial instruments, as described in Note 3, have been applied to the ﬁ nancial statements line items below: NOTE 25: PRINCIPAL SUBSIDIARIES Set out below are the Group’s principal subsidiaries at 31 December 2013. Unless otherwise stated, the subsidiaries as listed below have share capital consisting solely of ordinary shares, which are held directly by the Group and the proportion of ownership interests held equals to the voting rights held by Group. The country of incorporation or registration is also their principal place of business. For all principal subsidiaries the country of incorporation is the Russian Federation, except for Tatneft Europe AG, which is incorporated in Switzerland. NAME OF ENTITY Tatneft Europe AG Taneco OAO TMS group UK OOO Burenie OOO Nizhnekamskshina OAO PRINCIPAL ACTIVITY Export oil sales Oil refinery Oil lifting services Drilling services Tires production Nizhnekamskiy zavod shin CMK OOO Tires production Trade House Kama OOO Tatneft AZS-Centr OOO Tatneft AZS-Zapad OOO Tires sales Oil products sales Oil products sales AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 % OF OWNERSHIP INTEREST HELD BY THE GROUP % OF OWNERSHIP INTEREST HELD BY THE NCI % OF OWNERSHIP INTEREST HELD BY THE GROUP % OF OWNERSHIP INTEREST HELD BY THE NCI 100 91 - - 61 100 100 100 100 - 9 100 100 39 - - - - 100 91 - - 76 100 100 100 100 - 9 100 100 24 - - - - FINANCIAL ASSETS Current Cash and cash equivalents Restricted cash Accounts receivable Short-term financial assets Non-current Long-term accounts receivable Long-term financial assets Total financial assets FINANCIAL LIABILITIES Current The total non-controlling interest for the year ended 31 December 2013 is RR 7,512 million, of which RR 3,167 million is attributed to TMS group UK OOO and Burenie OOO. The total non-controlling interest for the year ended 31 December 2012 is RR 4,975 million, of which RR 2,091 million is attributed to TMS group UK OOO and Burenie OOO. As of 31 December 2013 and 2012 accumulated non-controlling interest in TMS group UK OOO and Burenie OOO was RR 8,571 million and RR 5,770 million, respectively. The summarised ﬁ nancial information relating to the subsidiaries with material non-controlling interest was as follows: Trade and other payable Short-term debt and current portion of long-term debt Non-current Long-term debt, net of current portion Total financial liabilities Year ended 31 December 2013 Taneco OAO TMS group UK OOO Nizhnekamskshina OAO Burenie OOO Total Year ended 31 December 2012 Taneco OAO TMS group UK OOO Nizhnekamskshina OAO Burenie OOO Total CURRENT ASSETS ASSETS CURRENT LIABILITIES NON-CURRENT NON-CURRENT LIABILITIES REVENUE PROFIT/ LOSS 8,920 380 2,500 499 144,521 28,302 2,891 797 148,193 1,384 5,692 1,144 6,779 4,225 751 1 12,299 176,511 156,413 11,756 9,617 3,537 2,112 2,808 149,888 27,121 2,479 1,227 160,905 5,026 5,451 5,205 18,074 180,715 176,587 4,464 3,470 329 - 8,263 20,620 23,862 16,256 14,943 75,681 16,217 21,952 17,763 13,403 69,335 3,607 2,060 218 1,329 7,214 703 1,274 200 1,014 3,191 The Group‘s activities expose it to a variety of ﬁ nancial risks: market risk (including foreign currency risk, interest rate risk and commodity price risk), credit risk and liquidity risk. The Group‘s overall risk management program focuses on the unpredictability of ﬁ nancial markets and seeks to minimize potential adverse effects on the Group‘s ﬁ nancial performance. The Group has introduced a risk management system and developed a number of procedures to measure, assess and monitor risks and select the relevant risk management techniques. MARKET RISK Market risk is the risk or uncertainty arising from possible market price movements and their impact on the future performance of a business. The Group takes on exposure to market risks. Market risks arise from open positions in (a) foreign currencies, (b) interest rate risk and (c) commodity price risk. a) Currency risk The Group operates internationally and is exposed to currency risk arising from various currency exposures primarily with respect to the US dollar and the Euro. Foreign exchange risk arises from assets, liabilities, commercial transactions and ﬁ nancing denominated in foreign currencies. 148 149 AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 29,535 917 52,098 16,693 1,016 25,814 126,073 (15,343) (36,561) (12,785) (64,689) 13,083 1,369 53,553 14,931 1,530 25,782 110,248 (17,887) (32,096) (37,991) (87,974) ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT The table below summarises the Group’s exposure to foreign currency exchange rate risk at the end of the reporting period: AT 31 DECEMBER 2013 FINANCIAL ASSETS Current Cash and cash equivalents Restricted cash Accounts receivable Short-term financial assets Non-current Long-term accounts receivable Long-term financial assets Total financial assets FINANCIAL LIABILITIES Current Trade and other payable Short-term debt and current portion of long-term debt Non-current Long-term debt, net of current portion Total financial liabilities AT 31 DECEMBER 2012 FINANCIAL ASSETS Current Cash and cash equivalents Restricted cash Accounts receivable Short-term financial assets Non-current Long-term accounts receivable Long-term financial assets Total financial assets FINANCIAL LIABILITIES Current Trade and other payable Short-term debt and current portion of long-term debt Non-current Long-term debt, net of current portion Total financial liabilities EFFECT ON PRE-TAX PROFIT US $/RR loss US $/RR gain 150 RUSSIAN ROUBLE US DOLLAR OTHER TOTAL 26,121 20 24,443 13,934 1,016 22,305 87,839 (13,450) (4,966) (890) (19,306) 3,346 106 25,841 2,759 - 3,509 35,561 (1,798) (31,387) (10,086) (43,271) 68 791 1,814 - - - 2,673 (95) (208) (1,809) (2,112) 29,535 917 52,098 16,693 1,016 25,814 126,073 (15,343) (36,561) (12,785) (64,689) RUSSIAN ROUBLE US DOLLAR OTHER TOTAL 9,400 941 19,729 12,389 1,052 22,755 66,266 (14,096) (11,509) (605) (26,210) 3,585 113 33,091 2,542 - 3,027 42,358 (3,549) (20,355) (36,150) (60,054) 98 315 733 - 478 - 1,624 (242) (232) (1,236) (1,710) 13,083 1,369 53,553 14,931 1,530 25,782 110,248 (17,887) (32,096) (37,991) (87,974) INCREASE/DECREASE IN EXCHANGE RATE YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 +10% -10% (771) 771 (1,770) 1,770 b) Interest rate risk The majority of the Group’s borrowings is at variable interest rates (linked to the LIBOR rate). To mitigate the risk of signiﬁ cant changes in the LIBOR rate, the Group’s treasury function performs periodic analysis of the interest rate environment. The Group does not have a formal policy of determining how much of the Group’s exposure should be to ﬁ xed or variable rates. However, the Group performs periodic analysis of the current interest rate environment and depending on that analysis at the time of raising new debts management makes decisions whether to obtain ﬁ nancing on ﬁ xed-rate or variable-rate basis would be more beneﬁ cial to the Group over the expected period until maturity. EFFECT ON PRE-TAX PROFIT Increase by 100 basis points Decrease by 100 basis points* * - floating rate decrease capped at zero. YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 (372) 25 (617) 115 The sensitivity analysis is limited only to variable rate loans and borrowings and is conducted with all other variables held constant. The analysis is prepared assuming the amount of variable rate liability outstanding at the reporting date was outstanding for the whole year. Interest rate on variable rate loans and borrowings will effectively change throughout the year in response to ﬂ uctuations in market interest rates. of credit and prepayments are used, especially with respect to accounts receivables from non-CIS sales of crude oil. The Group operates with various customers and a substantial part of its sales relate to major customers. Although collection of accounts receivable could be inﬂ uenced by economic factors affecting these customers, management believes there is no signiﬁ cant risk of loss to the Group beyond the provisions already recorded. The impact measured through the sensitivity analysis does not take into account other potential changes in economic conditions, which may accompany the relevant changes in market interest rates. c) Commodity price risk Commodity price risk is the risk or uncertainty arising from possible movements in prices for crude oil and related products, and their impact on the Group’s future performance and results of the Group’s operations. A decline in the prices could result in a decrease in net income and cash ﬂ ows. The Group’s overall strategy in production and sales of crude oil and related products is centrally managed. Substantially all the Group’s crude oil export sales to Europe are sold under long-term contracts. The Group assesses on a regular basis potential scenarios for future ﬂ uctuation in commodity prices and their impacts on operational and investment decisions. However, in the current environment management estimates may materially differ from actual future impact on the Group’s ﬁ nancial position. Actual results, and the impact on the Group’s operations and ﬁ nancial position, may differ from management’s estimates of potential scenarios. CREDIT RISK Credit risk refers to the risk exposure that a potential ﬁ nancial loss to the Group may occur if a counterparty defaults on its contractual obligations. The Group’s exposure to credit risk is limited to the carrying amount of ﬁ nancial assets recognized in the Consolidated Statement of Financial Position. Credit risk arises from cash and cash equivalents, certiﬁ cates of deposits, loans and notes receivables, as well as credit exposures to customers including outstanding trade and other receivables. Credit risks related to accounts receivable are systematically monitored taking into account the customer’s ﬁ nancial position, past experience and other factors. Management systematically reviews ageing analysis of receivables and uses this information for calculation of provision for impairment. A signiﬁ cant portion of the Group’s accounts receivable is due from domestic and export trading companies. The Group does not always require collateral to limit the exposure to loss; however, in most cases letters The Company performs an ongoing assessment and monitoring of the risk of default. In addition, as part of its cash management and credit risk function, the Company regularly evaluates the creditworthiness of ﬁ nancial and banking institutions where it deposits cash. The Group deposits available cash mostly with ﬁ nancial institutions in the Russian Federation. To manage this credit risk, the Group allocates its available cash to a variety of Russian banks. Management periodically reviews the credit worthiness of the banks in which it deposits cash. As of 31 December 2013 and 2012 the majority of loans and receivables (Note 8, Note 11) are held in Bank Zenit which is related party to the Group (Note 23) and other non-investment grade entities with credit rating not less than BB- according to Standard and Poor’s. LIQUIDITY RISK Liquidity risk is the risk that the Group will not be able to meet its ﬁ nancial obligations as they fall due. The Group’s approach to managing liquidity is to ensure that it will always have sufﬁ cient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group‘s reputation. In managing its liquidity risk, the Group maintains adequate cash reserves and debt facilities, continuously monitors forecast and actual cash ﬂ ows and matches the maturity proﬁ les of ﬁ nancial assets and liabilities. The Group prepares various ﬁ nancial plans (monthly, quarterly and annually) which ensures that the Group has sufﬁ cient cash on demand to meet expected operational expenses, ﬁ nancial obligations and investing activities for a period of 30 days or more. To fund cash requirements of a more permanent nature, the Group will normally raise long-term debt in available international and domestic markets. All of the Group’s ﬁ nancial liabilities represent non-derivative ﬁ nancial instruments. 151 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS FINANCIAL RESULTS JSC TATNEFT The following tables summarise the maturity proﬁ le of the Group‘s ﬁ nancial liabilities based on contractual undiscounted payments, including interest payments: Available-for-sale ﬁ nancial assets, comprise of RR 3,677 million (11.661%) AK Bars Bank shares which are not quoted in any Stock Exchange and the fair value are measured on AK Bars Bank Group per IFRS Financial Statements (Net assets value). AT 31 DECEMBER 2013 Short-term debt, current portion of long-term and long-term debt Trade and other payable LESS THAN 1 YEAR BETWEEN 1 AND 2 YEARS BETWEEN 2 AND 5 YEARS OVER 5 YEARS 37,971 15,343 6,174 - 4,506 - 4,271 - AT 31 DECEMBER 2012 Short-term debt, current portion of long-term and long-term debt Trade and other payable LESS THAN 1 YEAR BETWEEN 1 AND 2 YEARS BETWEEN 2 AND 5 YEARS OVER 5 YEARS 34,509 17,887 29,001 - 8,654 - 3,643 - TOTAL 52,922 15,343 TOTAL 75,807 17,887 As the amounts included in the table are contractual undiscounted cash ﬂ ows which include future interest payments, these amounts will not reconcile to the amounts disclosed in the consolidated statement of ﬁ nancial position for borrowings. FAIR VALUE HIERARCHY Fair values Fair value is the price that would be received to sell an asset or paid to transfer a liability in an ordinary transaction between market participants at the measurement date. The estimated fair values of ﬁ nancial instruments are determined with reference to various market information and other valuation techniques as considered appropriate. The different levels of fair value hierarchy have been deﬁ ned as follows: Level 1 – Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to assess at the measurement date. For the Group, Level 1 inputs include held-for-trading ﬁ nancial assets that are actively traded on the Russian domestic markets. Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. For the Group, Level 2 inputs include observable market value measures applied to available for sale securities. Level 3 – Unobservable inputs for the asset or liability. These inputs reﬂ ect the Company‘s own assumptions about the assumptions a market participant would use in pricing the asset or liability. RECURRING FAIR VALUE MEASUREMENTS The levels in the fair value hierarchy into which the recurring fair value measurements are categorised are as follows: Held-for-trading investments Available-for-sale investments Total AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 LEVEL 1 LEVEL 2 LEVEL 3 2,522 - 2,522 - 4,660 4,660 994 - 994 TOTAL CARRYING VALUE 3,516 4,660 8,176 LEVEL 1 LEVEL 2 LEVEL 3 6,067 - 6,067 - 4,686 4,686 297 - 297 TOTAL CARRYING VALUE 6,364 4,686 11,050 The description of valuation technique and description of inputs used in the fair value measurement for Level 2 and Level 3 measurements at 31 December 2013: Held-for-trading investments 994 Net assets valuation Available-for-sale investments 4,660 Net assets valuation Publicly available IFRS Financial statements Publicly available IFRS Financial statements FAIR VALUE VALUATION TECHNIQUE INPUTS USED Total 152 5,654 There were no changes in valuation technique for Level 2 and Level 3 recurring fair value measurements during the year ended 31 December 2013 (2012: none). There have been no transfers between Level 1, Level 2 and Level 3 during the period. ASSETS AND LIABILITIES NOT MEASURED AT FAIR VALUE BUT FOR WHICH FAIR VALUE IS DISCLOSED Fair values analysed by level in the fair value hierarchy and carrying value of assets and liabilities not measured at fair value are as follows: AT 31 DECEMBER 2013 AT 31 DECEMBER 2012 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL CARRYING VALUE LEVEL 1 LEVEL 2 LEVEL 3 ASSETS Cash and cash equivalents Restricted cash Accounts receivable Financial assets Total assets LIABILITIES Debt Trade and other payable Total liabilities 29,535 917 - - 30,452 - - - - - - - - - - - - - 53,114 35,112 29,535 917 53,114 34,332 13,083 1,369 - - 88,226 117,898 14,452 (49,346) (49,346) (15,343) (15,343) (64,689) (64,689) - - - - - - - - - - - TOTAL CARRYING VALUE 13,083 1,369 55,083 29,663 99,198 - - 55,083 30,521 85,604 (70,087) (70,087) (17,887) (17,887) (87,974) (87,974) The fair values in Level 3 of fair value hierarchy were estimated using the discounted cash ﬂ ows valuation technique. The fair value of ﬂ oating rate instruments that are not quoted in an active market was estimated to be equal to their carrying amount. The fair value of unquoted ﬁ xed interest rate instruments was estimated based on estimated future cash ﬂ ows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. MANAGEMENT OF CAPITAL The primary objective of the Group‘s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and increase shareholder value. The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. The Group considers equity and debt to be the principal elements of capital management. In order to maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, revise its investment program, attract new or settle existing debt or sell certain non-core businesses. The Group monitors capital on the basis of its gearing ratio. DESCRIPTION Consolidated total borrowings: Short-term debt and current portion of long-term debt Long-term debt, net of current portion Notes payable Consolidated shareholders’ equity Debt to capital employed ratio, % (Consolidated total borrowings / Consolidated shareholders’ equity) YEAR ENDED 31 DECEMBER 2013 YEAR ENDED 31 DECEMBER 2012 49,607 36,561 12,785 261 481,412 10% 70,092 32,096 37,991 5 429,954 16% 153 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS ПРИЛОЖЕНИЯ JSC TATNEFT LIST OF ABBREVIATIONS JSC TATNEFT Open Joint Stock Company named after V. D. Shashin ZAO OOO NGDU PNP MUN GTM RNO EPU Close Joint Stock Company Limited Liability Company Oil and Gas Production Division (structural division of JSC TATNEFT) Oil recovery enhancement Oil recovery enhancement methods Geological and engineering measures Oil field equipment repair Electrical submergible unit NIOKR Scientific research and design works OPR PPD Pilot operations Reservoir pressure maintenance TatNIPIneft Tatar R&D Institute of Petroleum Industry (structural division of JSC TATNEFT) DZO UTT ST Subsidiaries and affiliated companies Technological transport administration Specialized vehicles UPTZh dlya PPD Administration of process liquid treatment for reservoir pressure maintenance (structural division of JSC TATNEFT) RTS MMVB UK NPZ NOU IT KIS BZ DZ Russian Trading System Moscow Inter-Banc Currency Exchange (MICEX) Management Company Crude oil refinery Non-governmental educational establishment Information technologies Corporate information system Near-abroad countries Far-abroad countries ONVSS Equipment not included in the construction estimate UTNS TMTs TTD NDPI NPU MPT NS GIS Tatneftesnab Administration Commodity stocks and supplies Trade and technical house of JSC TATNEFT Minerals extraction tax Crude oil refining plant Metal/plastic pipes Accidents Geological information systems Standardizing Research Station (structural division of JSC TATNEFT) ASU TP i PSP Automated process control system of delivery and acceptance point NIS TGRU ASK TNG Tatar geological exploration Administration Joint stock insurance Company Tatneftegeophizika Company TsDNG Oil and gas production shop BMZ UKPN AZS Bugulma Mechanical Plant Integrated crude oil treatment plant Filling station SPE LKS KPE TsOD Т.u.t TsKO TsZVT Society of Petroleum Engineers of the USA Local well casing equipment Key performance indicators Data processing center Ton of reference fuel Control and Accountability Center Claims Set-Off Center 154 155 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS ПРИЛОЖЕНИЯ JSC TATNEFT FORECAST COMMENTS All the statements, other than the actual data for the period reported in this document, are forward-looking statements with regard to the future results. Such forward-looking statements include: • statements of plans, goals and objectives of the Company • statements about future results of operations The forward looking statements may also include information on projected or anticipated income, proﬁ t (loss), net proﬁ t (loss) in respect of shares, dividends, capital structure and other ﬁ nancial matters. By its nature the forward-looking statements involve risks and uncertainties, both general and speciﬁ c. There is a risk that predictions, forecasts, plans and other forward-looking statements will not match the reality. It should be borne in mind that due to a number of important factors the actual results may materially differ from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. Such factors include the following: • inﬂ ation, ﬂ uctuation of interest rates and currency exchange rates; • price of oil; • impact of contest in the geographic territories and in the areas of the Company’s activities; • effects of changes in laws, standard-setting instruments, standards or taxation and accounting procedures; • technological changes; • weather conditions, etc. This list of factors is not an exhaustive one. Simultaneously with the above factors it is necessary to take into account political, economic, social and legal environment, which the Company operates in. The forward looking statements are relevant only as of the date, which they are made on and subject to any continuing obligations under the listing rules of the UK Listing Authority and other applicable laws. The Company assumes no obligation with regard to updating or introduction of amendments into any of these statements, whether on the basis of new information, future events or otherwise. The forward-looking statements presented in this document shall not be construed as inducement to engage in investment activity and as a basis for making investment decisions. ANNOTATION TO THE REPORT ON SUSTAINABLE DEVELOPMENT AND SOCIAL RESPONSIBILITY OF JSC TATNEFT FOR 2013 The Report on Sustainable Development and Social Responsibility of JSC TATNEFT for 2013 is the tenth report prepared in order to inform a wide range of stakeholders about the Company’s contribution to sustainable development. The Report provides information on the Company’s activities in the ﬁ eld of securing economic stability, improving environmental protection and maintaining of social welfare of the Company’s staff and residents of the Company’s activity regions. This Report of the Company has been prepared on the basis of the Guide to reporting on sustainable development of the Global Reporting Initiative (GRI), version G 3.1 and the Standard of interaction with concerned parties AA1000 taking into account the principles of International standard ISO 26000 «Guidance on social responsibility» and the Social Charter of Russia’s Business (RSPP). The report has been certiﬁ ed by an independent party ZAO «Bureau Veritas Certiﬁ cation Rus» and passed the procedure of public assurance by the RSPP Board of non-ﬁ nancial reporting. The Report on Sustainable Development and Social Responsibility complements the Company’s Annual Report detailing the Company’s social aspects and areas of its corporate activities. The Report on Sustainable Development and Social Responsibility and Annual Report offer to the interested parties complete information for in-depth and comprehensive analysis of the Company’s activities taking into account long-term prospects. Electronic versions of the Report on Sustainable Development and Social Responsibility are available on the Company’s Internet portal www.tatneft.ru. 156 157 ANNUAL REPORT 2013 EXPLORING NEW HORIZONS ПРИЛОЖЕНИЯ JSC TATNEFT REPORT CONCEPT V.P. Lavushchenko V.I Gorodny N.E. Dorpeko WORKING GROUP FOR REPORT PREPARATION I.G. Gariffulin E.A. Tikhturov V.A. Voskoboinikov R.M. Khisamov D.V. Tsovma V.A. Mozgovoy D.V. Kurochkin R.R. Gaifullina A.T.Yukhimets R.I. Khaziev O.A. Sharagina DESIGN AND GRAPHIC ART DDVB CONTACT INFORMATION OF JSC TATNEFT INFORMATION FOR SHAREHOLDERS 75, Lenin Street, Almetyevsk 423450, Tatarstan, Russia Phone: (+7 8553) 31 97 53 MOSCOW REPRESENTATIVE OFFICE 17, Tverskoy Boulevard, Moscow 123104, Russia Phone: (+ 7 495) 937 55 78 Fax: (+ 7 495) 937 55 79 OOO EUROASIAN REGISTRAR (THE COMPANY’S REGISTRAR) 10, Mira Street, Almetyevsk 423450, Tatarstan, Russia Phone: (+7 8553) 22 10 88 Fax: (+ 7 8553) 22 08 40 ZAO ENERGY CONSULTING/AUDIT (AUDITOR OF THE COMPANY’S REPORTS BY RSBU) 7, Pavlovskaya Street, Moscow 115093, Russia Phone: (+7 495) 980 90 81 Fax: (+ 7 495) 980 9082 www.ec-group.ru e-mail:info@energy-consulting.ru 159 www.tatneft.ru

Continue reading text version or see original annual report in PDF format above