PJSC Tatneft Annual Report 2016

Plain-text annual report

2016 STEADY DEVELOPMENT TATNEFT COMPANY ANNUAL REPORT The annual report of TATNEFT Company for 2016 was prepared on a single integrated basis, combining the requirements applied to annual reportы of public companies, and standards for the preparation of corporate reporting in the field of sustainable development. The integrated annual report takes into account Recommendations of the Corporate Governance Code approved by the Government the Russian Federation and the letter recommended by the Bank of Russia No. 06-52/2463 of 10/04/2014. In terms of the information disclosure, the annual report corresponds to: – Federal Law No. 208-FZ of 26.12.1995 «On Joint Stock Companies»; – Federal Law No. 39-FZ of April 22, 1996 «On the Securities Market»; – Regulations of the Central Bank of the Russian Federation «On disclosure of information by issuers of securities» No. 454-P, approved on December 30, 2014, registered by the Ministry of Justice of the Russian Federation on February 12, 2015; – Information letter of the Bank of Russia dated February 17, 2016 No. IN-06-52/8 «On disclosure of the compliance report with principles and recommendations of the Corporate Governance Code in the annual report of the Public Joint Stock Company». In terms of sustainability aspects, the Company’s integrated annual report is designed to meet the following standards: – Guidelines for reporting on sustainable development of the Global Reporting Initiative for GRI G4; – AA 1000 Stakeholder Engagement Standard; – ISO Standard: 26000 «Guide to Social Responsibility»; – Social Charter of Russian Business; – International Standard of Integrated Reporting (Www.theiirc.org/international-ir- framework/). The Annual Report of the Public Joint-Stock Company TATNEFT for 2016 was preliminarily approved by the Board of Directors of PJSC TATNEFT. Protocol No. 13 of May 27, 2017. STATEMENTS ON FUTURE DEVELOPMENT In addition to actual data for the past period, this report present some statements concerning the future. Such statements include, in particular, statements of the production plans’ future results, plans and / or forward-looking statements with respect to future economic and financial indicators, the goals and objectives of the Company regarding development plans, including those relating to products and services. The statements regarding future results may also include the information about the projected or anticipated revenues, profit (loss), net profit (loss) in respect of shares, dividends, capital structure and other financial matters. The content of such statements is of a predictive nature and it is accompanied by the words «expected», “assumed», «planned», «intended», etc. By their nature, the statements about the future involve risks and uncertainties, both general and private. There is a risk that future actual results may differ materially from plans, objectives, expectations, estimates and intentions expressed in such statements or may not be realized. CONTENT Joint Address to Shareholders, Investors and Partners ......................................................................................................................... 02 ABOUT COMPANY 04 Steady Development .............................................................................................................................................................. 04 Business Model .................................................................................................................................................................... 08 Strategy 2025 ....................................................................................................................................................................... 10 Strategy by Business Segments.............................................................................................................................................. 12 Sustainability ......................................................................................................................................................................... 24 TATNEFT Group Structure ...................................................................................................................................................... 26 General Industrial Trends ....................................................................................................................................................... 28 BOARD OF DIRECTORS’ REPORT 30 Investment Policy .................................................................................................................................................................. 34 Financial Policy ...................................................................................................................................................................... 35 Operations ........................................................................................................................................................................... 36 Energy and Resource Efficiency Program ................................................................................................................................ 52 Technology and Innovation ..................................................................................................................................................... 54 CORPORATE MANAGEMENT 62 Company Management System .............................................................................................................................................. 64 General Shareholders’ Meeting .............................................................................................................................................. 66 Board of Directors ................................................................................................................................................................. 67 Corporate Secretary .............................................................................................................................................................. 76 PJSC TATNEFT Board of Director’s Committees ...................................................................................................................... 77 General Director .................................................................................................................................................................... 80 Management Board ............................................................................................................................................................... 81 Commitment to the Best Practice of Corporate Management .................................................................................................... 88 Interaction with Shareholders. Ensuring Sharehoders’ Rights .................................................................................................... 90 Ensuring the Rights of Shareholders for Receiving Income As Dividends .................................................................................... 92 Principles and the Information Disclosure Procedure ................................................................................................................ 94 Protection of Insider Information ............................................................................................................................................ 97 Management of Risks ............................................................................................................................................................ 98 System of Corporate Control and Internal Audit .......................................................................................................................104 Anti-Corruption Policy of PJSC TATNEFT ................................................................................................................................106 PJSC TATNEFT’s Report on Compliance with Principles and Recommendations of Corporate Governance Code .........................108 Information on Related Party Transactions Concluded by PJSC TATNEFT n.a. V.D. Shashin in 2016 ............................................126 Personnel Management ........................................................................................................................................................136 FINANCIAL RESULTS 142 Accounting Statements Prepared in Accordance with Russian Accounting Standards ................................................................144 Auditor’s Opinion .................................................................................................................................................................144 Accounting Reports of PJSC TATNEFT, FY 2016 ......................................................................................................................151 Balance Sheet Report ...........................................................................................................................................................152 Report on Financial Results in 2016 .......................................................................................................................................153 Essential Aspects of the Accounting Policy and Presentation of the Accounting Statements........................................................154 Consolidated Financial Statements in Accordance with International Financial Reporting Standards as of and for the Year Ended December 31, 2016. ...................................................................................................164 Independent Auditor’s Report ................................................................................................................................................164 Consolidated Statements of Financial Position ........................................................................................................................172 Consolidated Statements of Profit or Loss and Other Comprehensive Income ...........................................................................174 Consolidated Statements of Changes in Equity .......................................................................................................................176 Consolidated Statements of Cash Flows .................................................................................................................................177 Notes to the Consolidated Financial Statements ......................................................................................................................179 SOCIAL RESPONSIBILITY 254 Social Investment ................................................................................................................................................................256 Informing on the Activity Related to Sustainable Development and Corporate Social Responsibility .............................................257 Corporate Standards and Regulations for Interaction with Stakeholders ...................................................................................258 Interaction with Stakeholders ................................................................................................................................................260 Social Responsibility .............................................................................................................................................................261 Collective Agreement ............................................................................................................................................................264 Charitable Activity .................................................................................................................................................................274 INDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY 276 PJSC TATNEFT Environmental Activity ....................................................................................................................................278 List of Acronyms ..............................................................................................................................................................................290 Contact Information .........................................................................................................................................................................292 02 01 PJSC TATNEFT ANNUAL REPORT 2016ABOUT COMPANYBOARD OF DIRECTORS’ REPORTJOINT ADDRESS TO SHAREHOLDERS, INVESTORS AND PARTNERS DEAR SHAREHOLDERS, INVESTORS AND PARTNERS! 2016 was a qualitatively new stage in the Company’s activi- ties. We started implementation of the Development Strate- gy for the period until 2025. In the conditions of the industrial market-changing environment and generally unstable world macro economy, we had to assess our potential, identify key tasks and growth points and focus on them. Maintaining the continuity with the previous stages of devel- opment, Strategy 2025 focuses on creating high added val- ue on the capital invested by the shareholders and doubling the shareholder value of the Company. The launch of the Strategy demonstrated its timeliness and relevance for a confident move forward and avoidance of critical risks for the Company in the period of low oil prices. In the difficult economic conditions of the reporting year, the Company made successful steps to strengthen the resource base, increase profitable oil and gas production, develop its own refining and petrochemicals works, while maintaining high financial stability. The Company’s business model, based on vertical integra- tion and the diversified structure of the assets, has proved its effectiveness, demonstrating the ability to control opera- tional and financial factors against the backdrop of the mar- ket volatility. Our well-considered actions in the reporting year resulted in the Company’s rise to a new level of efficiency. High production and financial indicators were achieved. The net profit of the Group’s shareholders received amounted to RUB 107.4 billion, which was RUB 8.5 billion more than the level of the previous year. The Company’s capitalization grew by 35% and reached a his- toric high of RUB 965 billion (US $16 billion) by the end of 2016. This is another point of growth of the Company’s shareholder capital value within the framework of our Strategy. Following the results of 2016, the Board of Directors will rec- ommend the Annual General Meeting of the Shareholders of PJSC TATNEFT to take a decision on dividend payment on common and preference shares in the amount of RUB 22.81 per share, which exceeds the dividends for the last year by more than 2 times. The Company increased production by 5.3% compared to the last year up to 28.7 million tonnes of crude oil. We im- prove the technologies and introduce innovative methods and equipment to ensure the crude oil production profitabil- ity. More than 40% of crude oil was produced through appli- cation of tertiary and hydrodynamic methods of oil recovery enhancement. The successful implementation of measures to optimize costs in the reporting year resulted in decreasing the cost of producing a barrel of oil by 4.2%. The Company continues the successful development of high-viscosity oil fields, considering this development area as one of the strategically important in strengthening and di- versifying the resource base. Implementation of major investment projects was provided at the expense of the Company’s own funds, as well as of bor- rowed ones. The total volume of the investments in the TAT- NEFT Group companies amounted to RUB 97.2 billion in 2016. The key strategic project in the field of the Company’s own re- fining is the TANECO Complex. In the reporting year, the TANE- CO facilities yielded 9.1 million tonnes of oil products. A signifi- cant event of the year was the launch of a delayed coking unit, which allowed increasing the processing depth to 99.2% by the end of the year, while the yield of light oil products reached 87%. Commissioning of the Complex in full capacity will enable the transition to the maximum output of light oil products. Con- currently with the stable operation of the existing facilities, the construction of new production facilities was continued, as well as a comprehensive testing of the already constructed facilities of the Complex. The success of the TANECO Project reliably strengthens the Company’s strategic position in the oil prod- ucts market in Russia. The geographically well-diversified TATNEFT’s retail sales network is the fourth largest in the Russian Federation and it is also represented in the Republics of Belarus and Ukraine. Despite the overall decrease in the domestic market of pe- troleum products retail consumption in the reporting year, the total retail sales increased by 6% compared to the previ- ous year, while the average daily sales per one filling station increased by 9%. Thanks to strong competitive advantages, we managed to maintain key positions in the tire products market. The rev- enues from sales of products and services of the Company’s Petrochemical Complex in 2016 were generally higher than in 2015 by 17%. In the reporting year, the Company continued developing its own heat and power generation complex, implementing a program for modernization of generating capacities. This is one of the key vectors of our Strategy. The Company renders significant assistance to the develop- ment of the social infrastructure within the territory of its core activities and supporting health-care, education, culture and sports. In 2017, the Company shall implement the scheduled produc- tion plans, paying special attention to reducing operational costs for all production processes, optimizing working capital, improving the efficiency at each site and workplace, as well as to import substitution of technologies and equipment. The sys- tem of interaction between the Company’s Corporate Center and business blocks is in the process of improvement in ac- cordance with the strategic goals and KPIs. The accumulated production experience, development of the technological base with application of modern methods of the business process management and the advanced corporate practice are the basis for ensuring the progres- sive development of the Company as one of the largest ver- tically integrated Russian oil and gas producers, oil refiners and petrochemical products manufacturers. The Company entered the year 2017 with a robust program of action. Our strategy is built on the fundamental business basis. All the key promising projects are provided with the appropriate resources and competencies for further sus- tainable growth of the Company’s shareholder value! Dear shareholders and investors! Thank you for your trust and fruitful cooperation! The successes and achievements of the Company are our joint result! R.N. Minnikhanov President of the Republic of Tatarstan, Chairman of the Board of Directors of PJSC TATNEFT N.U. Maganov General Director, Chairman of the Management Board of PJSC TATNEFT 02 03 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RU STEADY DEVELOPMENT OPERATIONAL EFFICIENCY TATNEFT IS A MAJOR RUSSIAN VERTICAL-INTEGRATED OIL AND GAS PRODUCING COMPANY wITH OVER 65-YEAR ExPERIENCE IN THE INDUSTRY. THE BUSINESS PROJECTS ARE CARRIED OUT IN THE DOMESTIC AND FOREIGN MARkETS. reSource baSe expanSion and replacement Strong growth of oil and gaS production Strengthening of own oil refining buSineSS retail buSineSS efficiency itS own generating capacitieS petrochemical blocK profitability growth balanced SaleS of crude oil and petroleum productS Crude oil sales: 22.1 mln tonnes Petroleum product sales: 10.9 mln tonnes Proved reserves: 872.3 mln tonnes of oil Current proved oil reserve replacement ratio 109% Total oil production: Oil product output: 28.7 mln tonnes +5.3% against last year’s level 9.3 mln tonnes +2.1% against last year’s level Total gas production: Gas product output: 12 mln m3 +4.0% against last year’s level 1.2 mln tonnes +1.4% against last year’s level Oil conversion rate at TANECO: 99.2% +33.3% against last year’s level Light product yield: 87.0% +21.1% against last year’s level Retail distribution network: 689 fuel filling stations 16 tank farms Sales volume: 2.6 mln tonnes +6.0% against last year’s level Electric power generation: 2.2 bln kwh +74.9% against last year’s level Thermal energy supply: 3.95 mln gcal +20.1% against last year’s level Tire sales: 12 mln pcs +1.2% against last year’s level Carbon black sales: 118.0 thous tonnes +0.8% against last year’s level INVESTMENT APPEAL GEOGRAPHICAL REACH BALANCED BUSINESS MODEL BASED ON DIVERSIFIED ASSET STRUCTURE AND A STRICTLY ALIGNED STRATEGY ENSURES HIGHY OPERATIONAL AND FINANCIAL EFFICIENCY OF THE COMPANY. The PJSC TATNEFT’S securities are listed in the Russian and international stock markets. The Company’s ordinary and preferred shares are traded on the Moscow Stock Exchange and are quoted on the highest list of the first (I) level. 28.5% of the voting shares were deposited to be converted to global American Depository Receipts (ADR). The Company’s depositary receipts are included in the listing of the London Stock Exchange (ATAD). The company pursues a progressive dividend policy distributing at least 30% of the net profit based on RAS (Russian Accounting Standards) as dividend payments. According to the results of 2016, the Board of Directors recommends that the annual general shareholders’ meeting determine the dividends to be paid for the ordinary and preferred shares of the Company in the amount of 22.81 rubles per share (2 281% of their nominal value), which altogether amounts to 50.62% of the net profit based on RAS or about 50% of the net profit based on IFRS. 322.1 299.8 263.2 201.7 114.6 Company capitalization, bln rub 0.5 5.5 18.5 3.6 22.1 22.1 34.1 53.3 70.6 85.9 965.0 +35% 716.6 513.4 475.0 471.6 344.6 307.6 aS at december 30, 2016 capitalization of the company amounted to 964.965 bln rubleS 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 The company holds licenses for geological prospecting, exploration and production of oil and gas within the Russian Federation. The main resource base is concentrated in the Republic of Tatarstan, including one of the world’s largest Romashkinsky field. The business infrastructure is featured by the geographical proximity of oil production, its own refineries and power generating capacities, and the high quality crude oil and petroleum product marketing logistics. Exploration Oil and gas production Downstream Retail Network Petrochemicals Crude oil and petroleum product sales: Machinery Equipment and technology supply *To date, the TATNEFT’s exploration program has been suspended within its licensed areas in Libya and Syria since 2011 due to the political situation. libya ruSSia republic of tatarStan belaruS uKraine KazaKhStan turKey turKmeniStan china Syria iran 04 05 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY FINANCIAL SUSTAINABILITY CONSOLIDATED EQUITY CAPITAL REVENUE FROM NON-BANK OPERATIONS, NET, BLN RUBLES (AS PER IFRS) NET PROFIT PAYABLE TO THE GROUP’S SHAREHOLDERS, BLN RUBLES (AS PER IFRS) 2016 2015 2014 580.1 552.7 +5.0% 476.4 2016 2015 2014 107.4 98.9 92.2 +8.6% PROFITABILITY OF SALES, % EBITDA, BLN RUBLES (AS PER IFRS) 2016 2015 2014 +0.6 p.p. 18,5 17.9 19.4 2016 2015 2014 165.6 155.6 +6.4% 127.7 INVESTMENTS The accumulated potential of the financial sustainability ena- bles to make investments in all key business projects using the Company’s own funds as well as through borrowings. The TATNEFT Group’s total investments amounted to 97.2 bln rubles in 2016. A large proportion of investments was commit- ted to oil and gas exploration, development and production (more than 54 bln rubles) as well as to the construction of the Complex of refineries and petrochemical plants (more than 34 bln rubles). According to IFRS, EBITDA is defined as net revenue less costs and other deduc- tions plus depreciation, depletion, amortization TOTAL INVESTMENTS FOR THE TATNEFT GROUP, BLN RUBLES 2016 2015 2014 97.23 97.22 +0.01% 68.99 4 . 5 8 3 2 . 6 4 4 9 . 3 0 5 7 . 7 5 6 9 . 8 0 7 2 . 2 8 5 EQUITY CAPITAL AS PER IFRS 385 427 446 233 503 982 582 244 657 658 708 904 2011 2012 2013 2014 2015 2016 CONSOLIDATED ASSETS TATNEFT GROUP’S CONSOLIDATED ASSET COST AND STRUCTURE, BLN RUBLES 11.1% 27.5% 13.8% 4.3% 628 bln rubles 26.2% 47.4% 1 095 bln rubles Enterprises 2011 2016 Exploration and production 297.752 300.673 Refining and sale of crude oil and petroleum products 216.432 356.191 Petrochemicals 27.215 29.977 Banking 286.421 Corporate and other 86.424 121.335 34.5% 2.7% 32.5% Total assets at year-end, bln rubles 627.823 1 094.597 2011 2016 TAxES (OTHER THAN PROFIT TAx) EFFECIENCY TAXES AND OTHER MANDATORY PAYMENTS FOR THE TATNEFT GROUP, MLN RUB NET PROFIT PER BBL OF OIL PRODUCTION Mineral Resource Recovery Tax Property tax Other Total taxes other than profit tax For the year ended December 31, 2014 For the year ended December 31, 2015 For the year ended December 31, 2016 110 416 5 161 1 483 117 060 129 608 5 888 1 884 137 380 119 393 5 623 1 574 126 590 The lowered tax costs other than profit tax in 2016 as compared with 2015 are due to the lowered mineral recovery tax as a result of lowered market oil prices, which the tax rates are dependent upon, as well as due to the increased base tax rate. The Group gains savings from cutting down the amount of taxes per each percent of depletion of a particular subsoil area for the fields with the depletion rate ranging from 80% to 100%. Thus, the lowered mineral recovery tax generated 23.2 bln rubles in savings. The lowered mineral recovery tax savings gained for the production of super-viscous oil at Ashalchinsky field as well as at some other fields totaled 7.1 bln rubles. 06 333 9 5 . 6 8 1 4 0 1 2 6 2011 62 104 186.59 333 392 3 7 4 3 7 8 3 . 7 8 1 2012 73 473 187.38 392 376 8 1 . 8 8 1 2 3 8 0 7 2013 70 832 188.18 376 488 7 2 2 2 9 7 9 . 8 8 1 2014 92 227 188.97 488 510 526 0 3 9 8 9 9 0 . 4 9 1 2015 98 930 194.09 510 9 8 3 7 0 1 3 3 . 4 0 2 2016 107 389 204.33 526 07 Net profit, mln rubles Oil production, mln bbls Unit net profit, rubles per bbl Comparison for the period of 2011 is substantiated by its own refinery development on the basis of TANECO Сomplex. PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY BUSINESS MODEL THE BUSINESS MODEL OF THE COMPANY INTEGRATES, ON THE BASIS OF A UNIFIED STRATEGY, THE POTENTIAL OF THE DIVERSIFIED ASSETS IN ExPLORATION AND PRODUCTION, REFINING, PETROCHEMICALS, OIL AND PETROLEUM PRODUCT SALES, ENSURING VALUE CREATION AND CONDITIONS FOR LONG-TERM SUSTAINABLE DEVELOPMENT, TAkING INTO ACCOUNT ExTERNAL FACTORS AND RISk-MINIMIzATION MECHANISMS. PJSC TATNEFT IS THE TATNEFT GROUP’S CORPORATE CENTER RESOURCE BASE OIL PRODUCTION CRUDE OIL AND GAS REFINING CRUDE OIL AND PETROLEUM PRODUCT SALES: PETROLEUM PRODUCT RETAIL SALES NETWORK VALUE CREATION UPSTREAM Ensuring oil production addition and reserve replacement l Strengthening the resource base l Producing assets geographical expansion l Development hard-to-recover and super-viscous oil fields. DOWNSTREAM A qualitative strengthening of the profile asset structure and improved operational efficiency of business segments in the areas l Downstream l Petrochemicals l Crude oil and petroleum product sales: l Petroleum Product Retail Sales Network l Heat Power Energy MANAGEMENT PROCESSES The business structure enables the Company to make the most efficient use of its resource assets and production capacities through project and process management within a single investment policy l Consolidation of technological and intellectual capabilities; l Monitoring the performance and quality of all processes; l Creating business growth points and operating profit margin; l Lowering intersegmental costs; l Strengthening financial sustainability; l Risk control l Putting in place unified operating and corporate standards; l Coordination of interactions with the external business environment. EXTERNAL INFLUENCES l Global and domestic prices for crude oil and petroleum products l Global crude oil and petroleum product demand l Taxation and tariff policy l Supply marginality redistribution l Inflation rate l Exchange rates l Transport tariffs l Technological and environmental standards l Competitive environment RETAIL DISTRIBUTION NETWORK PETROCHEMICALS HEAT ENERGY 08 09 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYSTRATEGY 2025 THE CORPORATE STRATEGY IS FOCUSED ON LONG-TERM SUSTAINABLE DEVELOPMENT OF THE COMPANY — ensure the optimized balance of crude oil production, refining and petrochemicals, marketing and sales of crude oil and petroleum products on the domestic and export markets attaining the maximum operating profit margin of all business segments based on natural resource management, social and environmental responsibility. STRATEGY 2025 Defines the goals and objectives for each business segment Enables efficient planning of operational and financial activities Provides for the estimation of the investments needed to support and increase production output, develop human capital, improve governance efficiency, create sustainable development factors and implement all social commitments made by the Company IN 2016, THE BOARD OF DIRECTORS ADOPTED THE COMPANY STRATEGY UP TO 2025 The strategy continues to follow the previous stages of development strengthening the capacity of the Company to create a high added value for the shareholders’ capital. CORPORATE GOALS Company’s capitalization growth – focusing on doubling its shareholder value Financial sustainability and risk control High dividend yield Creating long-term business model benefits and key success factors for business segments Ensuring sustainability factors taking into account environmental and social aspects The initiation of the Strategy 2025 proved its high-priority and timeliness for steadfast moving ahead and avoiding critical risks for the Company in the current period of market volatility. In the challenging economic conditions during the year under report, the Company, in line with its strategic goals, had successfully taken the steps to strengthen its resource base, increase profitable oil and gas production, develop its own oil refining and petrochemical businesses, while maintaining high financial resilience. 10 11 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY STRATEGY BY BUSINESS SEGMENTS RESOURCE BASE Strategic goalS 2025 Expand and diversify the portfolio of hydrocarbon resources, including outside the Tatarstan through access to oil and gas reserves, including through establishing strategic alliances. Ensure proved reserve replacement at least 100 per cent annually Key prioritieS 1 2 3 Strengthening the resource base Replacement of hydrocarbon production with the commercial reserves Preparation of raw material resources base and full-fledged bringing reserves into development 4 Sustaining hydrocarbon production in mature fields through innovative technological solutions and ensuring projected production growth rates while reducing unit operating and investment costs reSultS 2016 competitive advantageS As at 31.12.2016, the Company’s proved reserves in ac- cordance with the PRMS-SPE classification were esti- mated at 6 214 mln barrels (872.3 mln tonnes of oil). The probable oil reserves were 2 518 mln barrels (353.5 mln tonnes of oil). The total proved gas reserves were 1 623 839 mln ft3. The proved hydrocarbon reserves were 910.3 mln tonnes of oil equivalent. As at the end of 2016, the license stock of the Company comprised ninety-six (96) licenses for mineral exploration and production, geological survey including prospecting and appraisal of mineral deposits, mineral exploration and production within the Russian Federation. Most of the reserves are conventional and historically lo- cated within Tatarstan, as well as the licensed hydrocar- bon fields are prospected, explored and developed in the Republic of Kalmykia, Orenburg, Samara, Ulyanovsk Re- gions, and the Nenets Autonomous District. See page 36 for details The hydrocarbon reserve life index (current annual pro- duction to reserves ratio) takes the Company to a lead- ing position not only in Russia but worldwide as well. The Company consistently offsets the production by adding reserves. The potential of hydrocarbon resources includes bitumen and non-conventional oil reserves. In the testing sites such as Domanik and Bitumen the Company are conduct- ing experimental researches and experimental and pilot test activities, starting from exploration to development and production of the fields. The Company considers un- conventional reserves as an opportunity for growth and will develop this category of the resource assets as an im- portant part of its portfolio. PROVED OIL RESERVES, MLN TONNES- 109% Current proved oil reserve replacement rate 30 years Proved reserve life at current produciton level 2016 2015 2014 872.3 869.8 851.5 +0.3% 43 years Reserve life including probable reserves at current production level 12 13 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY12OIL PRODUCTION Strategic goalS 2025 Focus on shifting from sustained oil production to production growth Increase annual oil output up to 30 mln tonnes Seek an upside potential up to 35 mln tonnes and higher in 2025 reSultS 2016 competitive advantageS In 2016, the total production across the Group grew by 5.3% against the last year and amounted to 28.7 mln tonnes of oil. More than 40 per cent of the total output is contributed by the tertiary and hydrodynamic enhanced oil recovery techniques. The superviscous oil (SVO) was produced in the amount of 843 thous.tonnes. The SVO production more than doubled as compared with last year. The Company ranked third among the Russian vertically integrated oil companies (VIOC) by incremental oil pro- duction as at the end 2016. In 2016, the production growth rate at mature fields was 4.0% against the 2015 level, which is the best perfor- mance among the Russian VIOCs. prioritieS 2016 1 The increased oil production and enhanced oil recovery in the licensed fields within the Republic of Tatarstan through deployment of new technologies 2 Development of super viscous oil deposits (SVO) in the Ashalchinsky field 3 Growth of profitable production outside the Republic of Tatarstan and the Russian Federation, including within new regions Realization of pilot program for shale oil production 4 5 Cutting unit operating costs and making investments in oil production more efficient prioritieS 2017 The target-oriented objectives of the year continue to be the strategic projects to improve oil production efficiency and develop super viscous oil fields. The company endeavours to maximize the produciton profitability with the current resource base through commercialization of innovative technologies and lowering costs of proven technologies. A significant result of the cost optimization activities as part of the Business Segment Development Strategy is 4.2% reduction in the cost to produce a barrel of oil. See page 38 for details TATNEFT GROUP OIL PRODUCTION, MLN TONNES 2016 2015 2014 28.7 27.2 26.5 +5.3% TERTIARY AND HYDRODYNAMIC EOR OIL PRODUCTION SHARE 100% >40% 2016 Total production output Tertiary and hydrodynamic eor oil production share eXternal FactorS and marKet conditionS OIL PRODUCTION IN RUSSIA (INCLUDING GAS CONDENSATE), MLN TONNES The energy demand and supply is still volatile on the global energy market and thus the oil prices. The global demand for oil is projected to increase in 2017 in the context of the OPEC agreement to curtail oil production. Since January 2017, subject to the agreement between Russia and OPEC, the Company has committed to cut down the current production output, while weighing all the economic and technological aspects to ensure stable operation of the oil fields and maintain the production balance. 2016 2015 2014 547.5 534.0 526.7 +2.5% With such an outpacing upward trend, the Company was able to show the largest reduction in the unit cost of oil production (in US Dollars) by 20 per cent against the 2015 level among the Russian VIOC. That was made it possible as a result of implementation of new approaches to field development in Tatarstan and of the SVO project intensifi- cation as well as through a qualitatively different approach to efficiency management, introduction of benchmark- ing tools, implementation of procurement strategies for goods and services. Over a long period of time since 2000, TATNEFT has been the only company among the Russian vertically inte- grated oil companies (VIOC) that avoided oil production decrease despite the fact that most of our oil fields are developed at mature stage. The Company’s operating stock of oil wells was account- ed for about 13% in the Russian overall structure. A significant advantage is the geographical proximity of the oil produciton hub to the main oil and petroleum prod- uct marketing and refining regions - the Company has the lowest weighted average tariff to transport oil to the Euro- pean markets among major Russia’s VIOC. In 2016, the total oil and condensate production in Russia in- creased by 2.5% to 547.5 mln tonnes. The crude oil exports to the far abroad countries increased by 5.1% as compared with 2015. In general, the current supply and demand trends in the global oil market and the changes in oil producers’ tactics help reduce the risk of dramatic oil price volatility in the short term. 14 15 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY12 DOwNSTREAM Strategic goalS 2025 Increased output and sales of highly com- petitive finished products based on the TANECO Complex’s capacities Increased oil refining throughput up to 14 million tonnes in 2018 with light product output of 90% and conversion rate not less than 97% prioritieS 2016 1 Increase refinery crude run through efficient operation of existing production facilities 2 Continue planned construction and testing of the Refinery Complex capacities Increase share of light oil products 4 Enhance petroleum feedstock conversion rate Production of high-quality oil products 3 5 prioritieS 2017 Startup of naphtha hydrotreatment, catalytic reforming, isomerization, heavy coker gasoil hydrotreatment, diesel fuel hydrotreatment, kerosene hydrotreatment plants Increase the Nelson index to 10.27 points. reSultS 2016 competitive advantageS Amid the sustained operation of the Complex, installation, integrated testing and commissioning of new processing fa- cilities continued at the TANECO Complex. The installation of primary equipment of DU-VDU-6 was completed: atmos- pheric, preflash and vacuum columns The work continued at hydrotreatment plant, naphtha splitter, light naphtha isomeri- zation and associated off-site facilities. A significant event of 2016 was the delayed coker unit startup, which made it pos- sible to increase the conversion depth by the end of the year to 99.2% and cease the fuel oil production completely. Once the rated capacity is reached the DCU will start producing 700 thous tonnes of petroleum coke per annum. New oil products were placed into production, particularly, the diesel technol- ogy fraction among them. See page 42 for details The key competitive advantage of TANECO Refining and Pet- rochemical Plants Complex is the high quality of petroleum products, satisfying the highest world environmental stand- ards, as well as promising market requirements. The potential of TANECO Complex: tion to demand difference; • optimization of oil products portfolio, flexible adapta- • refining cost reduction; • High flexibility of refinery on quality of processed oil; • Development of premium sales channels for petro- leum products. Commissioning of light naphtha isomerization unit, Catalytic reformer, kerosene and diesel hydro treating units will lead to double increase in the output of diesel fuel of Euro-5 class and the start of production of Euro-5 gasoline. PETROLEUM FEEDSTOCK REFINING AT TANECO, MLN TONNES PETROLEUM FEEDSTOCK CONVERSION RATE AT TANECO COMPLEX OPERATING CAPACITIES 2016 2015 2014 +0.5% 8.71 8.66 8.52 2016 2015 2014 99.2% 74.4% 74.0% Average for refineries in Russia 79.0% OIL PRODUCTS OUTPUT AT TANECO, MLN TONNES LIGHT OIL PRODUCT YIELD 2016 2015 2014 +2.2% 9.09 8.89 8.52 2016 2015 2014 87.0% 71.87% 68.00% Average for refineries in Russia 61.1% eXternal FactorS and marKet conditionS Over the last 5-year period from 2012 to 2016 the global refining throughput levels rose by 3 % from 3.6 mln tonnes to 3.8 mln tonnes, refining throughput in Russia as a whole grew by 5.2 per cent from 265 mln tonnes in 2012 to 279 mln tonnes in 2016. At the same time, there was a significant improvement in the quality of refined petroleum products which is related to the modernization of production facilities made by the Russian VIOC. The TATNEFT’s share in the primary crude oil processing structure in Russia is over 3%. By capacity utilization rate being 115% the TANECO Complex ranks first among refineries in Russia. PRIMARY PROCESSING OF PETROLEUM FEEDSTOCK IN RUSSIA, MLN TONNES 2016 2015 2014 -1.1% 279 282 289 An important advantage of the TANECO Refinery is its capability to process high sulphurous oil. Should an in- centive mechanism for processing high sulfurous oil be in place in Russia, this advantage will enable the TANE- CO Refinery to get adapted to the new conditions with minimum investments. 16 17 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY12 RETAIL DISTRIBUTION NETwORk Strategic goalS 2025 Improve efficiency and com- petitive advantage of the retail network in the long term Increase the sales by 2.3 times. Sales of gasoline and diesel fuel produced by the Company’s Refinery through filling stations and small wholesale over 50% prioritieS 2016 1 Modernization of existing fuel filling stations based on renewed format brand- concept 2 Expansion of fuel filling station network within geographic diversification potential 4 Increase fuel filling station network’s marginality based on quality of selling proposition and development of related services Increase daily flow capacity of fuel filling stations Create a new loyalty program 3 5 prioritieS 2017 Develop the Company’s network in accordance with the investment plan and priorities to improve profitability and marginality. Implementation of targeted loyalty programs. A strategic project to test key development tools to further replicate successful development tools across the network. reSultS 2016 competitive advantageS Increased profitability of the network through marginality growth, modernization of the fuel filling complex formats, efficiency of the marketing programs, and optimizing costs by siphoning off low-margin filling stations. The TATNEFT retailers demonstrate high performance and are leaders in many regional markets of the country. The Company’s filling stations use advanced energy saving and environmentally friendly technologies. Despite the lowered fuel sales in the Russian domestic market in total, where the large part of the TATNEFT retail network is located, by taking the effective measures the Company was able to increase retail sales by 6% against last year, exceeding 2.6 million tonnes, and revenue amounted to more than 97 bln rubles before VAT. The average daily sales per fuel station were up 9 % against last year. As part of the non-fuel supply develop- ment the income from related goods and services was up 2015 per cent as compared with 2015. High quality fuel is assured by a multi-level control system using advanced technologies and software packages. See page 46 for details PETROLEUM PRODUCT SALES THROUGH RETAIL NETWORK OF TATNEFT FUELING COMPLEXES, MLN TONNES 2016 2015 2014 2.575 2.435 +5.7% 2.059 The high quality of fuel and services are the major priorities of the TATNEFT-branded filling stations. The high quality oil products are guaranteed at the filling stations by selling mo- tor fuels of its own production such as TANECO diesel fuel, and by compliance with the technological discipline and re- quirements of regulatory documents when accepting, stor- ing, transporting and selling petroleum products. As alleged by specialists based on independent expert examination diesel fuel TANECO corresponds to the Euro-6 class. The filling stations are being reconstructed using new for- mats and interiors. It makes it possible to expand of the range of goods and services offered to customers and de- velop public catering. The filling stations offer full package of services and the line of additional services is constantly expanding as well. Customer relationship services are considered as a sig- nificant tool to improve competitiveness. The automated customer complaint management system helps promptly provide feedback to all requests. Sales representatives maintain communication with their customers on up-to-date and user-friendly communication sites, including through on-line activities in social media. eXternal FactorS and marKet conditionS The main trends for the Russian retail oil product market are: The continued consolidation of retail networks carried out by the vertically integrated oil companies, construction of new filling stations, tightening the state regulatory measures with regard to technical specifications and environmental requirements for the petroleum product quality, the ban on sale of motor fuel below the Euro-5 class from 1 July 2016. With this background, each and all the market players, including the TATNEFT Company, are upgrading on a large-scale the retail networks to improve the selling proposition, both fuel and non-fuel ones. At the end of 2016, there were 24 000 active filling stations in Russia. During the year, 170 filling stations were renovated including construction of new facilities and rebranding of existing ones. These were mainly the city filling stations (45%) and independent filling station networks (58 per cent). The highest share of reconstructed filling stations accounts for the Central Federal District - 34%, the Siberian Federal District - 26%, the Volga Federal District - 19%. Full-scale work was carried out in the Moscow Re- gion (25 facilities) as well as in the Tula Region (16 facilities). The changes took place in the Volga Federal District with respect to the Nizhni Novgorod Region and Samara Region. The count of mothballed filling stations at the end of 2016 was 640 (facilities) throughout Russia, most of which are concentrated in Siberian FD - 27%, Central FD - 21% and Volga FD -12%. These are mainly regional filling stations (43%) and facilities of the independent members (63%). Twenty-three (23) filling stations were disman- tled in 2016, and this figure has been the same for the last three years. (According to OMТ-CONSULT data) 18 19 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY12 PETROCHEMICALS Strategic goalS 2025 Develop new market niches through efficient marketing programs, improved quality and product line expansion Hold leadership positions on the Russian tire market, increased tire sales up to more than 16 mln pieces per year prioritieS 2017 Develop a brand- communication strategy 1 2 Increase marginality of sales through marketing activities and cost cutting 3 Introduction of Quality Extended Warranty Program in aftermarket Updating research base for R and D 4 5 Significant expansion of variety of B-segment tires for passenger cars and trucks prioritieS 2017 Develop a brand-communication strategy Complete renewal of the Tire Complex’s corporate brand. Procurement optimization. Improve the system efficiency for distribution and promotion of sales on the Russian aftermarket. Complete renovation of the PJSC Nizhnekamskshina preproduction. eXternal FactorS and marKet conditionS The Russian tire market is characterized by a high percentage of imported products. However, due to the devaluation of the Russian currency, foreign producers seek to localize their production within the Russian Federation. The barrier anti- dumping duties imposed on Chinese truck tires are positive points for the Russian tire market. For the time being, these factors curtain the return of Chinese products to the Russian market, but the stronger ruble trends might have a negative impact on sales plans, most of all that involves the all-steel tire market, where the more expensive Chinese brands have previously competed directly with Kama Tires. reSultS 2016 competitive advantageS Holding key positions in total domestic market output at last year’s level. In the reporting year, the Company’s Pet- rochemical Complex manufactured 11.5 mln tires, including more than 1 mln all- steel tires (more than 55% of the total Russian all-steel tire output). The Company’s tire products are mainly delivered to the largest automotive manufacturers on the domestic market The tire product exports span over 40 countries. The total tire output amounted to 12 mln pcs in the reporting year. See page 48 for details The tire business of the TATNEFT Group has a number of competitive advantages: sembly plants; • Proximity to the supply source of synthetic rubber; • own production of carbon black; • Large-scale production; • High-tech production facilities; • Geographical proximity to large clusters of car as- • Modern production lines satisfying the highest mar- • Its own established tire development centre “KAMA • Its own logistics and marketing center for tire product • Developed distribution network. Research and Development Center”; ket and technical requirements; sales; TIRE SALES, THOUS PCS 2016 2015 2014 +1.1% 11 955 11 820 12 083 Strong competitive advantages of the tire business are wide popularity and experience in operating the “KAMA” and “Viatti” branded tires, optimal tire product line and range, development of potential models based on coop- eration with automakers. COMPANY SHARE IN TOTAL TIRE OUTPUT IN RUSSIA IN 2016 100% 23% Total tire output in russia 2016 Company share DYNAMICS OF TIRE OUTPUT IN RUSSIA, MLN PCS 2016 2015 2014 50.1 46.0 +8.9% 41.9 At the end of 2016 there was a trend towards upsurge in pric- es of tire production feedstock (first of all for rubber - both in dollars and in rubles). This trend is likely to continue in 2017, which could have a negative impact on the financial perfor- mance of tire producers. 20 21 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY12 HEAT POwER ENERGY Strategic goalS 2025 Reliability growth of energy supply TATNEFT Group’s enterprises; Increase in the supply of Nizhnekamsk industrial hub Diversification of feedstock sources of Nizhnekamsk CHP prioritieS 2016 1 Complete the “Construction of electric power generation facilities using low- grade steam turbines in Nizhnekamsk” project. 2 Improve operational ef- ficiency of energy capacities by choosing the best fuel type according to market condi- tions 3 Diversify sources of feedstock for Nizhnekamsk CHP (natural gas, fuel oil, petroleum coke) 4 Implement corporate improved effeiciency programs 5 Reduce power and heat failure risks prioritieS 2017 Implement the reconstruction project to shift the power boilers to burning of petroleum coke produced at the TANECO refinery. Increase the competitiveness of Nizhnekamsk CHP in the electrical and thermal power market. reSultS 2016 competitive advantageS During the reporting year, the company continued to devel- op its own electricity and thermal power complex. The power energy was supplied to the TATNEFT Group’s en- terprises in quantity of 5 034 646 thous kWh, that was 338 842 thous kWh or 7.2% more than in the same period of last year. On average, the annual increase in electricity con- sumption by the Company’s enterprises was 7% over the period of 2011 to 2016. Nizhnekamsk CHP In the 1st Quarter of 2016 the project “Construction of power generation facilities using low-grade steam tur- bines in Nizhnekamsk” was completed, which made it possible to increase the installed capacity of the power plant from 380 to 730 MW and to bring the equipment back into operation which had been earlier taken out of the service and put on standby or in mothballs. See page 50 for details ELECTRICAL POWER PRODUCTION, BLN KWH 2016 2015 2014 1.28 1.33 2.24 +75% The Company has its own generating assets enabling to improve energy supply sustainability of the production divisions and TANECO as well as boosting competitive edges of the Group in general. Programs to diversify of raw material sources (natural gas, oil fuel, oil coke) for the Nizhnekamsk CHP are developed and implemented which will make it possible to improve operating efficiency of the plant through optimum fuel type selection according to the market situation as well as reduce power and heat delivery disruption risks. In addition, at the Company’s generating facilities carry out the activities under the relevant corporate programs to improve reliability and efficiency of heat and power pro- duction, as well as to reduce energy costs and losses. The reconstruction project was initiated to shift the pow- er boilers to burning of petroleum coke produced at the TANECO refinery. This will partially substitute natural gas with a new and cheaper fuel, thereby increasing the com- petitiveness of the station on the electrical and thermal energy market. Meanwhile, the Company has been de- veloping the Almetyevsk Heat Networks (APTS) to supply heat to the regional infrastructure facilities. It should be noted that the electricity market is weak amidst the Rus- sian economic growth slowdown. eXternal FactorS and marKet conditionS In 2016, there was a trend towards old generation decommissioning (3.75 GW was decommissioned). In previous years, on average no more than 1 GW power output was shut down per year. This is largely associated with critical overabun- dance of obsolete capacity in the system, as well as with complicated procedure to obtain the forced generator status and tightened minimum specifications for power take-off. The large-scale commissioning of new and upgraded generating capacities (4.6 GW in 2016) with lowered consumption trend has led to fiercer competition in the industry. No acceleration with regard to growth in electric power demand in Russia is expected in the coming years, which could eliminate power surplus, and as such, the power joint market will remain unfavourable. The electric power industry will be influenced by the principle of equal profitability of natural gas deliveries to the domestic and foreign markets, set out in the updated Energy Strategy of Russia up to 2035. Stepwise convergence of domestic gas prices with export parity means an accelerated rise in natural gas prices for Russian consumers, including for power generating capacities. Moreover, the electricity market is generally weak driven by an economic recession in Russia and Tatarstan and ongoing installation of generating capacities. All these factors are likely to hold back profitability of the Company’s energy generating business. 22 23 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY12 SUSTAINABILITY THE COMPANY’S STRATEGY IMPLEMENTATION INCLUDES SUSTAINABLE GROWTH AND A FAVOURABLE ECONOMIC AND SOCIAL ENVIRONMENT FOR BUSINESS DEVELOPMENT BASED ON MAXIMIzED USE OF ALL TYPES OF RESOURCES AND CREATING VALUE FOR STAKEHOLDERS AT EVERY STAGE OF THE BUSINESS ACTIVITY Corporate social responsibility is an integral part of the Company’s strategy. The social responsibility principles are integrated into business plans. The Company is looking to its long-term outlook and current plans for operating activities, such as devel- opment of its own resource and produciton capacity and growth of financial results, tied together with social and environmental dimensions. The Company realizes that long-term business sustainability cannot be developed in isolation from social progress and strong development of society as a whole, and it makes a significant contribution to the social and economic development of the re- gions of its operations and society in general. All key decisions are made taking into account social, environmental and other possible implications. The Company implements its targeted social, infrastructural and environmental programs through vol- untary corporate initiatives based on commitment to its employees, local community and the environment. Development and implementation of sustainability programs and activities are carried out with involvement of stakeholders including the Company’s staff, authorities, representatives of local communities and non-governmental organizations through an open dialogue. ADDED VALUE The value added output in the TATNEFT Group’s parent company taking into account production of petroleum products totaled 329.6 bln rubles in 2016, up 7.0% against 2015. In 2016, added value portion in overall output accounted for 71.8%. The added value has grown as high as 167.1% in the course of vertical integration consolidation and its own refinery development over the period since 2005. ADDED VALUE OUTPUT GROWTH, BLN RUBLES 2016 2015 2014 2005 123.4 329.6 308.1 +7.0% +167.1% 264.2 ADDED VALUE PORTION IN OVERALL PRODUCTION OUTPUT 100% 71.8% 2016 Comparison for the period from 2005 is substantiated by its own refinery project development (TANECO Complex) initiated in 2005. overall production output Added value portion 24 2016 330 bln rubles value added production economicS Added value creation Job creation Innovation development and implementation Supporting of local economies Contribution to social infrastructure development SuStainability 2016 1.2 mln rubles Investment in fixed assets committed to environmental protection and sustainable use of natural resources. iSo 14001:2004 ohSaS18001:2007 ecological Sphere Environmental protection Utilizaton of recycled materials Utilization of clean energy sources Energy savings Waste recycling iSo 26000 Social Law compliance Observance of human rights Positive public opinion Quality assurance of goods Good working conditions 2016 5.2 mln rubles Expenditures for social infrastructure maintenance, including construction and maintenance of housing, schools, cultural and recreational facilities. The Company is aware of its responsibility to shareholders, investors, partners, employees and society as a whole and seeks to maximize its potential for sustainable development. SOCIETY ECONOMICS ECOLOGY • Assistance in social and economic development of the regions of its business activity. sports. groups. • Assistance in education, culture and • Support for vulnerable social • Provision of high-quality goods and • Continuous improvement of product • Commitment to keep up with chang- • Reporting of true information about ing requirement of consumers. services. quality. the Company’s products. • Participation in domestic infra- structure development of fuel and energy complex. • Job creation • Added value creation • Supporting of local economies • Innovation • Ensuring financial stability and economic sustainability of the Group’s enterprises. • Development of its own research and production base integrated with leading industry research centers. • Ensuring safe working conditions, protection of health of personnel and people living in the Company’s operating areas. • Mitigation of technological environ- • Sustanable use of natural mental impact resources. The Company implements a set of meas- ures aimed at maintaining the state of the environment in the regions of its business activity at a regulatory-permissible level, corresponding to potential capabilities for self-recovery of natural ecosystems. 25 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY TATNEFT GROUP STRUCTURE TATNEFT GROUP MAIN SEGMENT-FORMING ENTERPRISES PJSC TATNEFT (hereinafter referred to as the “Company”) and its subsidiaries (collectively referred to as the “Group”) is one of the largest vertically integrated oil companies in Russia in terms of oil production and proved oil reserves. The Company is a public joint-stock company, established in accordance with the Russian Federation legislation, with the headquarters located in the city of Almetyevsk, Republic of Tatarstan. The main business activities of the Group are as follows: exploration and development of oil fields, crude oil production, of pe- troleum products and subsequent sales of crude oil and petroleum products. The Group is also engaged in production and sale of petrochemical products, mainly tires, in equipment manufacturing for oil production, oil and gas treatment and processing, as well as in engineering design, supply and construction services for oil, gas and petrochemical projects, and, from the fourth Quarter of 2016, in banking. MATERIAL OWNERSHIP STRUCTURE CHANGES IN 2016 On 1 January 2016, a number of companies the Group companies fall out of compliance with the control power existence criteria under IFRS 10 “Consolidated Financial Statements” and were deconsolidated at that date. Although the Group had no direct or indirect ownership interest the deconsolidated companies in previous years, it was able to contol their activities. The deconsolidation of these companies resulted in a one-time loss of 8 745 mln rubles recognized in profit/(loss) from disposal of subsidiaries and investments in associates and joint ventures in the consolidated statement of profit or loss and other comprehensive income for 2016. The non- controlling interest in the consolidated statement of financial position decreased by 29 878 mln rubles as compared with the non- controlling interest as at 31 December 2015. In June, 2016 The Group increased its ownership in PJSC Bank ZENIT through the repurchase of a portion of the issue of the Bank’s new shares in the amount of 6 700 mln rubles. As a result of the deal, the Group increased its interest in PJSC Bank ZENIT from 24.56% as at December 31, 2015 to 48.79% as at June 30, 2016. After the deal, the Group continued to account for its ownership interest in PJSC “Bank ZENIT” using the equity method. In October 2016, as a result of the mandatory offer procedure carried out by the Company in accordance with the Federal Law “On Joint Stock Companies”, the Group acquired an additional 1.64% stake in the authorized capital of PJSC Bank ZENIT for 327 mln rubles increasing its ownership to 50.43% and gaining control over PJSC Bank ZENIT. Realization of the additional issue, enhancement of the Bank’s reliability and providing an opportunity for the Bank’s business development in the crisis situation will allow TATNEFT to protect its investments in the Bank’s capital and to remove the risk of default of its obligations to a large number of enterprises and a significant number of individuals in the Republic of Tatarstan as well. The Bank’s business volumes are very significant for the economy of the Republic of Tatarstan as well as socially significant for its people. The additional capitalization of ZENIT Bank will help increase its value in the medium and long term, which will be possible for TATNEFT to gain a return on investment, incl. Through the payment of dividends. heat power energy OOO Nizhnekamsk TEC OOO Tatneft-Energosbyt AO Almetyevsk Heating Net- works petrochemical production OOO UK Tatneft-Neftekhim PJSC Nizhnekamskshina OOO Nizhnekamsk Truck Tire Factory OOO NZSh CMK JSC Nizhnekamsktehuglerod JSC Nizhnekamsk Mechanical Plant OOO Tatneft-Neftekhimsnab OOO Trading House KAMA JSC Yarpolimermash-Tatneft oil and gaS production NGDU Almetyevneft NGDU Aznakayevskneft NGDU Bavlyneft NGDU Jalilneft Ngdu Yelkhovneft NGDU Leninogorskneft NGDU Nurlatneft NGDU Prikamneft NGDU Yamashneft SubSidiarieS and affiliated oil- producing companieS OOO Tatneft-Abdulino OOO Tatneft-Severny OOO Tatneft-Samara OAO Kalmneftegaz ZAO Severgeologia ZAO Severgaznefteprom ZAO KalmTatneft* ZAO Yambuloil* oil and gaS refining and Sale of crude oil and petroleum productS Sale of crude oil and petroleum products Tatneftegazpererabotka Division Elkhovskoye NPU of JSC TANECO OOO Tatneft-AZS Center OOO Tatneft-AZS-Zapad OOO Tatneft-AZS-Siberia OOO Tatneft-AZS-Yug OOO Tatneft-AZS-Ukrain OOO Tatneft-Trans IOOO Tatbelnefteprodukt OOO Saimen OOO Kharkov-Capital OOO Poltava-Capital OOO Processing Center OOO Tatneft-Resurs Neft- eprodukt OOO Tatneft-Aviaservice pJSc tatneft iS the corporate center of the group pJSc tatneft board of directorS executive management committee Executive Office main production Support Tatneftesnab Department OOO UPTZh dlya PPD Tatar Geological Exploration Department Bugulma Mechanical Plant Automobile Transportation Enterprise OOO Tatneft-Samara OOO Trade-Technical House Tatneft OOO Tatneft-Neftekhimservice Science and technology and organizational Support TatNIPIneft Normative and Research Station Engineering Center Construction Project Delivery Department Business Service Center OOO NTC Tatneft (in Skolkovo) OOO NPC Oil and gas technologies AO TatNIIneftemash OOO TatITneft brancheS and repreSentation officeS Representation Office in Moscow Representation office in the Republic of Iraq Representation office in Ukraine Branch in Libya Branch in Turkmenistan 26 27 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYGENERAL INDUSTRIAL TRENDS In 2016, Brent crude had hit the lowest price over the last 12 years with average annual price as low as $US43.7 a barrel, or down 16.5% against the previous year, whereas average price of Urals had fallen to US$42.1 a barrel. Despite low oil prices, production of oil and condensate in the Russian Federation rose as high as 2.6% against 2015, up to 547.5 mln tonnes. Crude oil exports to the far abroad countries in- creased by 5.1%. A significant development of the year was the OPEC deci- sion to cut production by 1.2 mln barrels to 32.5 mln barrels per day beginning from January 2017. The deal was backed up by the major oil-producing countries (Saudi Arabia, Iraq and Qatar). The non-OPEC countries that joined the global deal agreed to cut production by 0.6 mln barrels per day. Russia expressed its readiness to curb its production by 300 thousand barrels per day in a phased manner according to schedule. Under this deal, OPEC will have to cut its produ- citon by 66% with the largest contribution in output curbs that will made by Saudi Arabia (0.5 mln barrels per day), Iraq (0.2 mln barrels per day) and UAE (0.1 mln barrels per day). Among the non-OPEC countries, the Russian oil produc- ers have pledged the maximum oil output reductions. The concerted actions of oil producing countries boosted crude oil prices amidst expected contraction of crude supply and progressive market balancing. In December of 2016, Brent crude oil quotes rose to a peak in the year, exceeding US$55 a barrel. The yearly average rubles/US dollar exchange rate that was affected by the crude price trends weakened by 9% to 67.0 rubles/US dollar, which favoured the oil prices in ru- ble equivalent. In the first half of 2017, the joint output curbs made it possible to balance the global oil market. In 2016, the primary crude oil processing in Russia fell by 1.2% against 2015, amounting to 279.4 mln tonnes as a re- sult of modernization of production facilities and improved quality structure of the output. The main trend of the past year in refining has been a significant decrease in the output and proportion of dark oil products in product lines of the Russian refineries. In 2016 fuel oil output was down 20% to 51.6 mln tonnes. In 2016 motor gasoline output rose as high as 2.5% against 2015 amounting to 39.9 mln tonnes. Diesel fuel output totaled 76.3 mln tonnes being in line with 2015. Jet kerosene was produced 9.6 mln tonnes in 2016 down 1.1% against last year. BRENT AND URALS OIL PRICE TRENDS FOR 2016, RUB PER BBL Brent Crude Oil Urals Crude Oil 60 Rub. 50 40 30 20 DEMAND AND SUPPLY BALANCE IN OIL MARKET IN 2015-2016, MLN BBL PER DAY 2016 0.38 Other -0.32 OPEC Produciton Growth +1.18 US Production Decline -0.47 Demand growth -1.62 2015 Deficit Surplus 1.61 Data source: International Energy Agency USD AND EUR EXCHANGE RATE TREND FOR 2016 100 rubles US Dollar Euro 90 80 70 60 y r a u n a J y r a u r b e F h c r a M l i r p A y a M e n u J y l u J t s u g u A r e b m e t p e S r e b o t c O r e b m e v o N r e b m e c e D y r a u n a J PRIMARY DRIVERS THAT INFLUENCED THE GLOBAL OIL MARKET IN 2016 1. Stable growth of consumption 2. Oil production decline in US 3. Oil production growth in Iran 4. Agreement of oil producers to cut oil production KEY ANTICIPATED FACTORS THAT MAY ADVERSELY AFFECT THE GROWTH PACE OF THE COMPANY IN THE COMING YEARS The main external force that will have an impact on the op- erations of the Company is crude oil price trends. With increased energy efficiency of the global economy, lag- ging working-age population and lowered total consumption while increasing oil production efficiency, the world has been challenged with a structural crisis of crude overproduction. A possibility to recover from the crisis in the short run is hin- dered by the following fundamental factors: 1. Shale oil production growth in North America; 2. Conventional oil production growth in the Middle East; 3. Economic slowdown in India and China (hence, oil de- mand contraction); 4. Decrease in able-bodied population growth rates (15- 64 years of age) all over the world - the main engine of economic growth 5. Global energy efficiency growth and development of al- ternative energy sources. The oil market is expected to start balancing (oil demand ex- ceeding its produciton output) no sooner than the beginning of 2018, as the commercial oil reserves, that have been stocked up over the last three years, start running out of slowly. Accord- ingly, taking into consideration all the above-mentioned con- straints the market will be very likely exposed to the short-term hikes in oil prices followed by price slump and stabilization at 30 to 50 dollars a barrel until a new market equilibrium is found. Another important driver for global oil prices is exchange-trad- ed oil futures. At the end of 2016, fluctuations in the number of open positions were gaining a higher amplitude, which could lead to another significant downward price movements. The successful development of the TATNEFT business and all the oil industry cannot be achieved without stable taxation rules. Given the raw material base specificity, it is the priority for the Company to continue the incentive tax treatments for the depleted fields as well as for the super viscous oil fields. Another factor that could adversely affect the Tatneft develop- ment pace in the near future may be a possibility of detaching a high-sulfurous crude stream towards the Ust-Luga port, where part of the Company’s export volumes may be directed to, which is considered by the Ministry of Energy. The main uncertainty for the refining block of the Company is the changing Russian legislation on taxation of crude oil and petro- leum product exports. There is a risk related to changes in tax leg- islation (the “large tax manoeuvre” adjustment) and alignment of export duties on crude oil and petroleum products (including light oil products), which complicates efficient planning of long-term investment projects in the Refinery, and increases the payback period (due to the increased discount rate). Currently, the Working Group including the TATNEFT repre- sentatives that was set up by the Ministry of Energy monitors the crude oil quality in the Transneft’s trunk oil pipeline system and the final decision on the feasibility of this project will be ac- cepted not until the second half of 2017. The lower quality feed- stock in Ust-Luga (about 2.5% of sulfur content) will inevitably lead to the Urals price discount, which may cause a decrease in the Company’s export earnings, and, as a consequence, a de- crease in tax proceeds to the budgets of the Russian Federa- tion and the Republic of Tatarstan. In order to avoid such losses TATNEFT was reviewing a number of scenarios to respond to possible implementation of this initiative liaising with respon- sible state authorities and other interested parties in order to completely eliminate or minimize possible losses. WORLD OIL CONSUMPTION, MLN. BARRELS PER DAY 2021 2016 2011 2006 2001 Data source: International Energy Agency 102,8 96,6 89,6 85,7 77,3 28 29 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYBOARD OF DIRECTORS’ REPORT 30 31 28.7 mln tonnes - Total oil production for TATNEFT Group in 2016 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYSTRATEGY IN ACTION In the reporting year, in the context of declining demand and low hydrocarbon prices, currency market volatility, the Company took well-targeted actions to strengthen financial stability and operating efficiency for the long term. While maintaining continuity with previous stages of development, the Strategy 2025 focuses on creating a high added value for the share capital and doubling the shareholder value of the Company. The targets have been set to secure a high-quality resource and production and engineering base, financial discipline, risk control, effective cash flow management and a sound investment policy. As a result of our committed activities during the year under report we managed to increase the total value of the Company’s consolidated assets by 295.9 bln rubles up to 1094.6 bln rubles. In the difficult circumstances of the volatile industry market conditions and unstable global macroeconomics in general, we have made a lot of efforts to accomplish the detailed analysis and assessment of our potential, and we identified key challenges and growth points for the business segments of the Company. TOTAL VALUE OF THE COMPANY’S CONSOLIDATED ASSETS, BLN RUBLES 2016 2015 2014 1094.6 +37.0% 798.7 732.9 UNIFORM EXTERNAL SCENARIO CONDITIONS FOR ALL BUSINESSES OF THE TATNEFT GROUP Analysis and monitoring of potential changes in market conditions at the global and country levels. The strategy is designed in three scenarios with assessing the risks of missing the targets and failing to meet the requirements for additional scenario initiatives. INTEGRATED FINANCIAL AND ECONOMIC MODEL The plans for all business activities are interlinked and synchronized. Business contributions to the Company’s value are evaluated on a fair market basis. TATNEFT GROUP CORPORATE STRATEGY UP TO 2025 TATNEFT GROUP BUSINESS STRATEGIES The Group’s business portfolio was analyzed (SWOT, value chain). The choice of strategy was based on an analysis of alternative development options. The key activities were developed for each business- block to implement the strategy objectives. ROAD MAPS A high level plan of activities of the Corporate Centre was formed to ensure the strategy implementation. OUR STRATEGY IS BUILT ON FUNDAMENTAL BUSINESS BASICS AND EFFECTIVE APPROACHES TO MANAGING ALL kINDS OF CORPORATE RESOURCES The internal strategic potential of the Company is based on the development and the consolidation of the vertical integration balance of the business model, high-quality asset addition, sustainable use of natural resources and corporate social responsibility. The Company’s management gives a high profile for improving the corporate governance and the interaction mechanisms of the Corporate center with the business segments in line with strategic objectives. In 2016, the Company’s businesses were formalized in the specialized blocks, the Development and Production Block and the Exploration Block underwent reorganizations, and the operating models were updated. As part of the improved reservoir management efficiency and improved well interventions the relevant competencies are combined in the specialized Centers. The work continued to build the complex of operating divisions based on the Business Servicing Center to provide a centralized support to the business-blocks of the Company. We use «road maps» for each segment of our business taking into account changes in the market conditions and price volatility of the industry market. The managers have the task to develop business and functional strategies. A balanced approach to investment program and continuous monitoring of their effectiveness, control of key operational factors enables us to monitor and minimize risks in both the short and long term periods. The Company keeps improving the efficiency of all operating processes through most advanced technologies, profitability control, benchmarking tools, qualitative development of goods and services procurement mechanisms. The projects, which are currently in its active phase, include the KPI system development and implementation for decision making personnel, improving management business processes, annual and medium-term business planning, further adjustment of the management accounting and monitoring system. STRATEGY IMPLEMENTATION TOOLS 2025 Further adjustment of the operational accounting and control system System of key performance indicators Corporate Strategy up to 2025 Road maps by directions Risk control Implemented Pending items Further adjustment of the Group management organizational structure Improved planning systems for 1 and 3 years Functional Strategies of the Group 32 33 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY INVESTMENT POLICY FINANCIAL POLICY In 2016, the Company carried out its investment activities in accordance with its strategic development plans and current priorities in meeting the production and social objectives. The Corporate investment policy is based on the principles of maximizing investment efficiency and increasing profitability of each of the Company’s business activities. INVESTMENT PORTFOLIO STRUCTURE FOR THE PERIOD OF 2010 THROUGH 2016. In 2016, the Company’s investments amounted to 97 230 mln rubles and 567 720 mln rubles for the period of 2010 through 2016. MAIN INVESTMENT ACTIVITIES DURING 2010 THROUGH 2016, MLN RUBLES Investment program Exploration and Production -Tatneft within Republic of Tatarstan -TATNEFT and subsidiaries within Russia - Foreign projects SVO field development Crude oil and gas refining Retail distribution network of fuel filling stations Heat and Power Generation Petrochemical Complex Machinery Service Subsidiaries Social sphere TOTAL 2016 54 175 29 609 3 891 240 20 435 36 071 791 2 908 1 553 15 700 1 017 97 230 2010 - 2016 258 369 177 688 18 307 6 611 55 763 251 179 11 961 14 547 10 079 617 14 802 6 167 567 720 TOTAL INVESTMENT FOR TATNEFT GROUP, BLN RUBLES 2016 2015 2014 97.23 97.22 +0.01% 68.99 3.0% 1.0% 3.2% 2.6% 1.1% 6.6% 37.1% 2016 55.7% 2010-2016 45.5% 44.2% Exploration and Production 2016 2010-2016 55.7% 45.5% Crude oil and gas refining 37.1% 44.2% Development of petrochemical complex, retail business, machinery and service subsidiaries 3.2% 6.6% Thermal power development Social projects 3.0% 2.6% 1.0% 1.1% The corporate policy priorities in financial management are focused on ensuring financing of the Company’s operational, investment and social activities as well as efficient use of financial resources. All the payment obligations for work, services, delivered goods, taxes and fees to the PJSC TATNEFT extra-budgetary funds were promptly and fully fulfilled. In 2016, The Company made several foreign currency hedging transactions using a currency forward. The deals closed yielded the revenue which compensated for the USD exchange rate depreciation in the given period. In 2016, in order to execute the TATNEFT Group’s treasury operations subject to efficient use of current liquidity ratio and minimization of operating risks the Corporate Finance Center of the TATNEFT Group was created. There are eleven (11) companies of the Group operating in the single treasury. The work was completed to optimize the number of settlement accounts and reduce the commission expenses of the TATNEFT Group with regard to banking services. The liquidity functionality centralization made it possible to cover the cash gaps of the entities without external borrowing, earn additional revenues through optimizing the amounts and timing of the free cash allocation and to reduce the bank guarantees commission charges. Over 2016, the bank deposits with the temporarily disposable monetary resources placed on and the interests accrued on the PJSC TATNEFT account balances generated the income in excess of 4 bln rubles. A well-balanced policy of the Company enables it to operate amid repaying the borrowed loans. In 2016, the loans were repaid in the amount of $32.9 million US dollars. In 2017, the debts owed to banking institutions are expected to be fully repaid. For the best use of funds the Finance Office fulfilled a great deal of work in optimizing the settlements with counterparties. This work will be done in the future. In order to reduce the Company’s working capital diversion and to expedite the settlement payments with permanent counterparties the cross liabilities are discharged through the Mutual Liability Offset Centre. The settlements made through the Mutual Liability Offset Centre amounted to over 25.2 bln rubles. BUDGET PLANNING SYSTEM The 2016 PJSC TATNEFT balanced cash flow budget had been executed. The Company’s budget structure comprises 14 Control and Responsibility Centers (CRC). Each CRC headed by Deputy General Director or the Company’s Department Head oversees the respective business activity and manages its funding as well as is responsible for a proper and efficient use of funds. FINANCIAL RESULTS At the end of 2016, the consolidated revenue increased to 580.1 bln rubles exceeding the 2015 level by 5.0%. The free cash flow amounted to 45.7 bln rubles. According to the results of the year under report the net profit of the Group’s shareholders amounted to 107.4 bln rubles that was up 8.5 bln rubles or 8.6% as compared with 2015. The EBITDA growth against the last year was 7% reaching 166.6 bln rubles in absolute value. EBITDA is not a financial indicator. However, we believe that this indicator provides investors with useful information, since it reflects the effectiveness of our activities including our ability to finance capital expenditure, make investments, raise and maintain credit and loans. It is also used by analysts to assess and forecast the efficiency and value of oil and gas companies. Over the recent period the Company’s EBITDA has shown a strong dynamic growth rate. The Company’s consolidated equity capital grew by 51.2 bln rubles in the reporting year and was valued at 708.9 bln rubles at the end of 2016. The net assets of the parent company increased by 14.5% to 624.5 bln rubles during the reporting period. In the reporting year, PJSC TATNEFT generated 486 bln rubles in sales revenue (excluding VAT, excise and export duties), which is above the 2015 target by 5%; the net profit amounted to 104.8 bln rubles. This reflects improved asset and capital profitability ratios. 34 35 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYOPERATIONS RESOURCE BASE The hydrocarbon reserve life index takes the Company to the leading positions not only in Russia but worldwide as well. The proved reserves of the Company make it possible to sustain the current production for more than 30 years and including the probable reserves – 43 years. As at 1 January 2017 according to the Miller and Lents’ independent evaluation the Company’s proved reserves were estimated at 6213.737 mln barrels (872.348 mln tonnes of oil). Most of the reserves are conventional and historically located within Tatarstan, where our main production volumes are concentrated. Creating the long-term high-quality producing asset portfolio, the Company, concurrently with producing the historical oil fields within the Republic of Tatarstan as well as developing the ultra-viscous oil reservoirs, has been expanding its geographic reach carrying out its oil search and exploration operations within the licensed areas in the Republic of Kalmykia, Orenburg, Samara and Ulyanovsk Regions, Nenets Autonomous District and beyond the Russian Federation. Our plans are aimed at expanding and diversifying the portfolio of hydrocarbon resources, including outside Tatarstan and Russia through access to oil and gas reserves, including through establishing strategic alliances. The activities are underway to define the Domanikovian oil production prospects. The strategic and current goals of operations are focused on strengthening the resource base, replacing hydrocarbon production with commercial reserves, creating a raw material base and efficient bringing into development, sustaining production reserves at mature fields through application of innovative technology solutions and ensuring planned rates of production growth while reducing specific operating and capital expenditures. The Company steadily offsets its oil production by oil reserves addition. The Company has been implementing the programs targeted at a rapid building up its producing assets and their diversification including exploration activities using advanced oil prospecting techniques as well as ensuring increased efficiency and improved practices to develop producing fields with cost control. 109% Current proved oil reserve replacement rate 109% TATNEFT GROUP RESOURCE POTENTIAL TATNEFT Group Resource Potential Unit of measure 2012 2013 2014 2015 2016 Proved oil reseves, incl. Probable oil reserves Possible oil reserves unconventional oil reserves mln tonnes mln tonnes mln tonnes mln tonnes 869.2 313.6 30.9 22.9 847.3 310.5 33.8 28.0 851.5 323.7 28.9 20.3 869.8 346.4 55.1 41.1 872.3 353.5 55.4 59.8 LICENSING The hydrocarbon exploration and production operations are carried out under the Russian Federation legislation in compliance with license for the right to use subsurface mineral resources. As at the end of 2016, the TATNEFT Group’s license stock incorporated 96 licenses granting the mineral exploration and production right, geological survey right, including prospecting and appraisal of mineral deposits and geological survey right, including prospecting and appraisal of mineral deposits, mineral exploration and production within the Russian Federation. In Tatarstan, the Company holds five (5) geological survey licenses for exploration areas including prospecting and appraisal of mineral deposits, mineral exploration and production in the north-eastern part of the Republic of Tatarstan on the western and northern slopes of the South Tatar Arch, on the south-eastern slope of the North Tatar Arch, on the eastern flank of the Melekessky Depression. In addition, one (1) Geological survey license including prospecting and appraisal of mineral deposits, mineral exploration and production for the Apastovsky area located in the west of the Republic of Tatarstan. Also, the Company holds one (1) geological prospecting license to explore for and appraise hydrocarbons within the Agbyazovsky area located in west of Tatarstan. In 2016, two new licenses were granted for testing sites particularly the geological survey license including prospecting and appraisal of mineral deposits, mineral exploration and production in the Elaursky area for the Bitumen Testing Site and another geological survey license including prospecting and appraisal of mineral deposits, mineral exploration and production in the Bulgarsky site for the Domanik Testing Site. LICENSE STOCK AS OF DECEMBER 31, 2011, LICENSE COUNT Total Development, exploration and production of minerals Geological survey including prospecting and assessment of mineral deposits «на геологическое изучение, включа- ющее поиск и оценку месторожде- ний полезных ископаемых, разведку и добычу полезных ископаемых» 2014 2015 2016 97 52 6 39 95 52 4 39 96 52 4 40 ExPLORATION In the reporting year, eight (8) structures were brought into deep drilling, and twenty-seven (27) structures were prepared for deep drilling. The Company’s exploration drilling (across the Group) accounted for 38.8 thous. m in the reporting year; the 2D and 3D seismic data were acquired for 135 running km and 717 sq. km, respectively. The production drilling meterage accross the Group exceeded 900 thous. m. In order to discover hydrocarbon fields, along with seismic, the Company applies the following technologies: • predicting hydrocarbon prospects using the artificial • defining leads using field seismic and geochemical intelligence techniques; methods using a complex probability parameter (CPP) for hydrocarbon potential; passive hydrocarbon adsorption. • Geochemical survey to search for oil and gas utilizing • low-frequency seismic sounding (LSS); • GTO LS geological-geophysical technology to optimize • electromagnetic sounding (EMS); • “Stratimegic” new software package for 3D seismic data selection of well drilling locations; processing. NMR tomographic logging tool is used to identify shallow reservoirs saturated with ultra-viscous oil. 36 37 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYDEVELOPMENT AND PRODUCTION TATNEFT GROUP OIL PRODUCTION, MLN TONNES OIL PRODUCTION BY LARGEST FIELDS WITHIN REPUBLIC OF TATARSTAN IN 2016 Pursuing its Strategy, the Company was ramping up its crude oil production in the reporting year. In 2016, the total production across the Group grew by 5.3% against the last year and amounted to 28.7 million tons of oil. It was the highest oil production level achieved over the last twenty-four 24 years. Over a long period since 2000, TATNEFT has been the only company among other Russian vertically integrated oil companies (VIOC) which avoided oil production decrease despite the fact that most of our oil fields are developed at mature stage. In 2016, the Company’s operating well stock included 22 626 oil wells (about 13% in the total Russian structure), and 515 new producing wells were put into operation during the reporting year. Average daily production rate across the Group was 9.1 tonnes per day, average daily production rate of active producing wells was 4.1 tonnes per day. Average recovery factor across the Company was > 0.43. 2016 2015 2014 28.7 27.2 26.5 +5.3% OIL PRODUCTION ACROSS GROUP, MLN TONNES Enterprises PJSC TATNEFT Oil companies within RF, controlled by the PJSC TATNEFT, including OOO Tatneft-Samara OOO Tatneft-Severny ZAO Severgaznefteprom 2014 2015 2016 26.223 26.927 28.333 0.307 0.322 0.353 0.287 0.020 0.304 0.018 0.338 0.015 0.00017 TATNEFT Group 26.529 27.249 28.686 257 thous. tonnes KAZAN Bonduzhskoye Pervomaiskoye NABEREZHNYE CHELNY Romashkinskoye Novo-Yelhovskoye ALMETYEVSK Sabanchinskoye Bavlinskoye 2 814 thous. tonnes 339 thous. tonnes 15 888 thous. tonnes 546 thous. tonnes 1 268 thous. tonnes TATNEFT GROUP OIL PRODUCTION, THOUS. BBLS GEOGRAPHIC REACH IN EXPLORATION AND PRODUCTION OUTSIDE REPUBLIC OF TATARSTAN 1.8 mln tonnes Total production of super viscous oil (SVO) at the end of 2016 since pilot development start 2016 2015 2014 204.3 194.1 189.0 +5.3% The Company’s investments in the Development and Production Business-Block amounted to 54.2 bln rubles, including 20.4 bln rubles invested in the SVO development, in 2016. NEW PRODUCING WELL COMMISSIONING, WELLS 2016 2015 2014 352 255 515 +46.6% AVERAGE DAILY OIL PRODUCTION RATE, THOUS. BBLS PER DAY 2016 2015 2014 558.3 531.8 517.7 +5.0% TATNEFT GROUP GAS PRODUCTION, MLN M3 2016 2015 2014 997.8 959.3 929.8 +4.0% WELL STOCK AS OF 1.01.2017 Well Category Active producing well stock Inactive producing well stock Testing or waiting on testing producing wells Operating producing well stock 38 Well Count 20 460 2 142 24 24 22 626 AVERAGE DAILY GAS PRODUCTION RATE, THOUS. BBLS PER DAY 2016 2015 2014 +3.2% 16.0 15.5 15.0 ZAO Severgaznefteprom, Nenets AD 0.17 thous. tonnes OOO Tatneft-Samara Samara Region 337.8 thous. tonnes OOO Tatneft-Severny Orenburg Region 15.4 thous. tonnes Republic of Tatarstan Total for Subsidiaries 353.4 thous. tonnes Since 2017, subject to the agreement between Russia and OPEC to cut down crude oil production, the Company has taken the commitments to reduce its oil production in the short-term period. The Company takes a balanced approach to this step action, thoroughly analyzing all economic and technological aspects to ensure stable operation of our fields as well as to sustain production balance in the conditions of the current crude oil output constraints. SVO FIELD DEVELOPMENT The Company continued to successfully develop the super viscous oil (SVO) fields (Sheshminsky horizon) considering that as a strategic priority in strengthening and diversifying its resource base. Over the reporting period the SVO production output totaled 843 thous.tonnes. As compared with the last year the SVO production more than doubled in 2016. By the end of the year the daily production had reached 3 361 tonnes. Overall, since the commercial field development start, production had reached 1 million 781.7 thousand tonnes. Currently, seven (7) super viscous oil deposits of Sheshminsky horizon (four (4) deposits of the Ashalchinsky field, one (1) deposit of Languevsky field, one (1) deposit of the Karmalinsky field and one (1) deposit of Lower Karmalinsky field) are being developed. M As at 01.01.2017 there were 601 horizontal wells drilled (including 159 wells in 2016) and 1 782 appraisal wells drilled (including 185 wells in 2016) in the SVO fields. 27 Cyclic-Steam Stimulation (CSS) wells and 213 Steam Assisted Gravity Drainage (SAGD) wells were in operation. 157 wells were operated in steam injection, including 220 steam injecting wells,17 CSS wells and 36 new pair wells and CSS wells (formation primary heating up). The Company gains savings from the reduced tax rate for super viscous oil production in some of its fields, as well as other certain tax incentives related to the production and sales of super viscous oil. The super viscous oil is treated with the process of «hard» thermo-chemical heat dehydration at the heating temperature of 90° C using coalescers and electrical dehydrators which ensures the super viscous oil upgrading to the 1-st quality group while reducing capital costs for sedimentation equipment. SUPER VISCOUS OIL PRODUCTION, THOUS. TONNES 2016 2015 2014 376 237 843 +124.2% 39 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYOIL PRODUCTION EFFICIENCY A significant result of the successful cost-optimization activities as part of the development strategy for the exploration and production business-segment in the reporting year as compared with 2015 became lowering the cost to produce a barrel of oil by 4.2%. The Company’s production costs (for the Group) consist of oil production costs incurred by the Company’s divisions and subsidiaries producing oil and gas, including costs associated with operated services, maintenance and insurance of equipment facilities, wages, formation stimulation costs to improve oil recovery, fuel and electric power costs, goods and materials used in production of crude oil, and other similar costs. The costs incurred by the oil producing divisions and subsidiaries of the Company associated with the purchase of goods and services that are not related to the main line of business activity, as well as changes to oil and petroleum product reserves are excluded from oil production costs and are included in other operating expenses. AVERAGE OIL PRODUCTION COSTS (ACROSS THE GROUP) 2016 2015 258.6 rubles per barrel 269.9 rubles per barrel -4.2% The production growth was attained mainly thanks to the ongoing improved oil production and enhanced oil recovery technologies. The tertiary and hydrodynamic EOR production accounted for more than 40% of the Company’s total oil output. Oil field exploration and production Petroleum prospects and leads are predicted by artificial intelligence, field seismic and geochemical methods using a complex probability parameter (CPP) for hydrocarbon potential; Geochemical survey to search for oil and gas utilizes passive hydrocarbon adsorption, low-frequency seismic sounding (LSS), geological-geophysical to optimize selection of well drilling locations (GTO LS), electromagnetic sounding (EMS), “Stratimegic” new software package for 3D seismic data processing. NMR tomographic logging tool is used to identify shallow reservoirs saturated with ultra- viscous oil. technology Reservoir characterization, modeling and simulation for development targets based on updated estimate of remaining reserves is the primary method to identify residual oil reserves for mature fields, which enable with the highest degree of accuracy to analyze and predict areas with unlocked reserves and calculate efficiency rate of planned activities. Drilling Application of new drilling technologies continues to be a matter of great consideration. In order to improve well cementing quality the Company utilize the silicate baths within the productive intervals as well as using G-grade cement and stage cementing collars. The horizontal and multilateral completions are constructed to achieve prolific oil flow rates. In 2016, 131 horizontal wells (horizontals) and 4 multilateral wells (multilaterals) were drilled with the oil production of 156.02 thousand tonnes. Altogether, since the beginning of the program the count of horizontals and multilaterals had reached 967 and 115 wells, respectively. In 2016, the tertiary EOR was the key driver in oil production, with the additional production amounting to 7.7 million tonnes (113.1 per cent of 2015), which represents more than 27 per cent of total production. 274 slim hole wells (slim holes) were brought into production, of which 269 producers were placed into operation with the average daily production rate of 6.2 tonnes per day. The cumulative oil production was 181.8 thous. tonnes. Along with conventional methods used to prospect and develop oil fields new technologies are applied which enhance productivity and profitability of all oil and gas production processes. ASSOCIATED PETROLEUM GAS UTILIzATION RATE The Company’s associated petroleum gas (APG) utilization rate exceeded 96% in the reporting year. This is one of the highest rate throughout the industry against 95% regulatory value set by the Russian Federation government. The Company intends to bring this level to 98% through the activities carried out under the project «Gas Gathering Network from NGDU Yamashneft and NGDU Yelkhovneft facilities». APG is a valuable feedstock for production of a wide range of gas products of the highest quality, which are further used in petrochemicals and power generation. ASSOCIATED PETROLEUM GAS UTILIzATION RATE, % 2016 2015 2014 96.44 95.17 95.17 +1.2 pp Well Workovers In 2016, well servicing operations performed in the Company’s licensed areas within and outside of the Republic of Tatarstan amounted to 10 198 and 71 jobs, respectively, with the workovers performed on 2 287 wells outside Tatarstan. 790 wells were hydrofractured. Hydraulic fracturing is an effective technology for oil well stimulation and well injection capacity increase. In total, 4 809 fracs had been performed since the frac method introduction. In 2016, 790 frac jobs were done with 54 new wells fractured immediately after drilling. As a result of fracturing the flow rate increased by 4.5 tonnes per day. The incremental oil production amounted to more than 13 mln tonnes. APRS-40N Workover Rigs are designed to perform workover jobs on ultra-viscous oil wells: running tubing for steam injection (1 and 2 lifting string assemblies), installation of downhole pumps (ESP and PCP units), conversion of CSS wells to production/steam injection, well servicing (ESP replacement, preparing for well logging). These workover rigs were purchased as part of import substitution program (as substitute for Canadian workover rigs К-54). The Company keeps showing one of the best Mean Time Between Repairs (MBTR) performance for well operations among large companies in Russia’s oil industry. The Mean Time Between Repair for well operation was 1 074 days. This high performance was attained thanks to implementing highly efficient and innovative technologies to provide high-quality and timely maintenance of oilfield equipment. 40 41 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYCRUDE OIL REFINING In order to increase the production and sales of highly competitive finished goods the Company is strengthening its own oil refining business-segment based on the TANECO Complex in Nizhnekamsk. This is the key strategic downstream project of the Company. The success of the TANECO project has solidly consolidated the Company’s strategic positions on the petroleum product market in Russia. A significant event of the year was the delayed coker unit commissioning, enabling to enhance the petroleum feedstock conversion rate at the TANECO refinery to 99.2% by the end of the year (the average conversion depth in 2016 was 84.7%). The Nelson index was 7.12 points in 2016. After the Complex has been put into commission on a full scale, the Nelson index will be no less than 12 which will ensure shifting to the maximum output of light oil products. In the reporting year, the TANECO Refinery processed more than 8.7 mln tonnes of petroleum feedstock, produced 9.1 mln tonnes of petroleum products, including 1.6 mln tonnes of Euro-5 diesel fuel and more than 130 thous. tonnes of jet kerosene. In 2016, the following new oil products were put into production at the TANECO Refinery: STO 78689379-02-2016; STO 78689379-03-2016; • Distillate of sulfurous gas condensate as per • Anode grade petroleum coke as per • Coking naphtha as per STO 00151638-006-2015; • Light and heavy coker gasoils as per • DTf (Diesel technology fraction) as per TU 38.401-58-423-2015; STO 78689379-04-2016. 42 All the international and Russian environmental standards and regulations are complied with in the course of the refinery construction process. In particular, the hydrogen sulfide that is recovered during crude oil refining process runs to the sulfur regeneration unit, the sulphur recovery rate reaches 99.6%. The investments of the Company in the TANECO Complex construction exceeded 34 bln. rubles in 2016. In December 2016 the TANECO Complex became the winner of the Republican competition «Ecoleader» in the nominated category «Oil Producing and Petrochemical Industry». In 2016, the TANECO Refinery products were awarded in the Russian competitions: • «All-Russian Mark (III Millennium). Quality Mark of XXI Century» - the products of the enterprise (TC- 1Jet Fuel , TATNEFT VHVI -4 and HVI-2 Isoparaffinic Base Oils, EURO Diesel fuel) were highly appraised by the expert commission and were awarded with the Golden Quality Marks «All-Russian Mark (III Millennium). Quality Mark of XXI Century»; • Jet A-1 Aviation Fuel produced by the TANECO Refinery was highly appreised at the International Air Transport Association (IATA) Forum in Prague. The management of the IATA Working Group on the basis of the submitted materials and the British Petroleum report that had been received earlier, sent the letter confirmation to PJSC TATNEFT with regard to the possibility of the Jet A-1 Aviation Fuel export sales. PJSC TATNEFT became the first oil company in Russia to hold such a certificate; • TS-1 aviation fuel for jet engines became a prize winner of the «Best Goods and Services of Tatarstan» and «100 Best Goods of Russia» competitions; • By the RF Government Decision of 15 November 2016, No. 1190 the JSC TANECO was awarded with for the 2016 RF Government Prize achieving the significant results in the quality of products and services, ensuring their safety, and for implementation of high effective quality management techniques. TANECO REFINERY PROCESS UNIT RATED AND ACHIEVED CAPACITIES Process Unit CDU-VDU-7 Naphtha Stabilization Unit (s.1300) Visbreaker Amine Regeneration Unit: LPG amine scrubbing assembly Fuel gas amine scrubbing assembly - Hydrogen-bearing gas scrubbing assembly Hydrogen-bearing gas scrubbing assembly Elemental Sulphur Recovery Unit Hydro cracker unit Hydrogen production unit Lube base oil production unit Delayed Coker Unit Naphtha Splitter Stabilization Unit (s.1700) Average daily gas production rate, thous. bbls per day Rated capacity, thous. tonnes per year Achieved capacity, thous. tonnes per year 7 000.0 1 101.6 2 400.0 170.5 121.6 35.9 139.4 2 900.0 99.77 250.0 2 000.0 600.0 15.0 8 710.1 1 321.8 1 039.4 93.8 141.9 24.7 81.8 2 974.6 87.9 246.9 947.6 167.5 16.0 PETROLEUM PRODUCT OUTPUT SINCE OPERATION START OF TANECO COMPLEX, TONNES Primary feedstock for processing 431 642 7 018 741 7 622 920 8 520 904 8 658 594 8 710 075 40 962 877 2011 2012 2013 2014 2015 2016 Since start Crude oil Gas condensate REFINED PETROLEUM PRODUCTS, TONNES 431 642 7 018 741 7 618 569 8 511 288 8 649 710 8 697 385 40 927 334 4 351 9 617 8 884 12 690 35 543 Derived from feedstock: Natural Gas Liquids (LNGs) Straight run gasoline Stable natural gasoline Diesel fuel Commercial kerosene Aviation Kerosene Household furnace oil Straight run kerosine-gasoil fraction Low-viscosity marine fuel Distillate of gas condensate middle (sulfurous), type I Distillate of gas condensate middle (sulfurous), type III DSf (Diesel technology fraction) Vacuum gasoil/hydrotreated oil fuel/ lubricant compound/unconverted hydrocracked residues Process-derived export-grade fuel Visbreaking naphtha Coking naphtha Heavy coker gasoil Isoparaffinic base oil TATNEFT HVI-2 Isoparaffinic base oil TATNEFT VHVI-4 49 985 104 672 169 039 108 870 114 851 547 418 57 435 980 563 561 975 1 599 973 536 544 1 672 467 1 826 518 1 789 992 5 825 522 1 027 767 1 378 345 1 583 342 3 989 454 12 337 38 890 199 500 146 529 99 079 115 588 2 250 309 836 427 328 171 8 248 45 441 51 918 47 935 136 984 431 542 14 499 1 179 548 2 603 089 2 537 588 496 335 197 150 3 727 242 328 171 6 334 724 1 864 299 1 864 299 416 814 171 660 416 814 171 660 58 577 1 642 332 1 926 530 515 750 367 438 425 033 4 935 661 36 637 84 525 61 396 5 350 6 135 83 952 13 841 9 400 51 784 55 544 102 445 80 250 22 795 135 736 251 943 102 445 80 250 37 545 12 608 113 661 132 403 Fuel oil/visbreaking residue/vacuum tower bottoms 195 131 1 919 212 1 920 693 2 152 966 2 250 430 1 270 106 9 708 537 Hydrogen B-grade anode petroleum coke Sulphur Hydrocarbon gas for furnaces 1 768 6 385 1 069 278 782 2 613 25 945 7 684 50 001 59 420 81 821 48 922 223 626 288 834 365 064 9 225 278 782 201 540 952 391 43 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY CRUDE OIL SALES GROUP’S CRUDE OIL SALES, THOUS. TONNES PETROLEUM PRODUCT SALES The total sales of petroleum products to the domestic and foreign markets in 2016 for the Tatneft Group amounted to 10.9 mln tonnes of petroleum products. 4.9 mln tonnes of petroleum products were exported (as compared with 5.4 mln tonnes in 2015). The total revenue from sales of petroleum products in the reporting year amounted to 212.3 bln rubles (excluding export duties and excises). In 2016, the Delayed Coker Unit came on stream, which resulted in a qualitatively new structure of petroleum product production at the TANECO Complex facilities. Shifting to the full refining of vacuum tower bottoms eliminated black oil fuel realization. The output of middle distillates, naphtha and gases was increased. The residual product such as coke was in demand across the industry on the domestic market. In 2016, there was a general decline in petroleum product exports from Russia by 10 per cent to 156 million tonnes against 2015 (172 mln tonnes). This is primarily related to the output structure changes and fuel oil production reduction in the Russian Federation. In 2016 the TATNEFT’s petroleum product sales accounted for 2.8% of the total Russian export of petroleum products (4.4 million tonnes). All that led to overall growth in the petroleum product deliveries to the domestic market. The revenue net of taxes was affected by the increased duties on the dark oil products up to 100% and excise indexation on light products taken place since January 1 and April 1, 2016. In the reporting year, crude oil sales totaled 22.1 million tonnes, which was 10.8% more than the sales in 2015. The delivery directions were distributed in the following ratio: far abroad export - 55.8%; near abroad export - 5.1%; domestic market deliveries - 39.1%. In 2016, the crude oil sale revenues (excluding export duties) were up 10.7% to 298.1 bln rubles as compared with 269,2 bln rubles in 2015. The crude production growth led to higher crude oil sales across the Group. In 2016 and 2015, The Group exported approximately 61% of all crude oil sold. The Group transports crude oil for export utilizing the services of the PJSC AK Transneft (Transneft), the state monopoly and the operator of the Russian trunk oil pipeline system. In 2016, The Company transported about 63% (46% in 2015) of all its oil for export through the Friendship pipeline owned by Transneft (mainly to Poland, Germany and Slovakia); 5% (14% in 2015) of exported oil was shipped through the Russian Black Sea ports (mainly Novorossiysk) and 32% (40% in 2015) of exported oil was shipped through the Russian Baltic Sea ports (mainly Primorsk). The export oil sale channel is significant for Russia. Over the period from 2012 through 2016 oil exports increased from 240 mln tonnes to 255 mln tonnes, respectively. The TATNEFT’s share in the Russian exports over 2012 to 2016 remained almost the same at about 5 % level. Crude oil deliveries to far abroad countries are a traditional sales market for the Russian oil companies due to the industry- wide balance of production and processing. For resources over 2015 to 2016 the overall structure of oil supplies by directions stayed balanced. Higher sales volumes resulted in oil sales revenue growth, respectively. Fall in the world oil prices in 2016 were offset by rise in the dollar exchange rate. The ratio of oil sale revenue shares for 2015 to 2016 is Identical to the share ratio of oil sales by directions, which confirms the TATNEFT’s formed oil sales structure balance. 2016 2015 2014 22 117 19 959 18 024 +10.8% SHARES OF CRUDE OIL SALES ACROSS THE GROUP BY DELIVERY DIRECTIONS 2016 2015 2014 39.1% 5.1% 38.9% 6.6% 46.9% 3.9% domestic market CIS countries export to far-abroad countries 55.8% 54.5% 49.2% REVENUES FROM CRUDE OIL SALES EXCLUDING EXPORT DUTIES AND EXCISE TAXES, BLN RUBLES 2016 2015 2014 298.1 269.2 +10.7% 212.1 SHARES OF REVENUES FROM CRUDE OIL SALES EXCLUDING EXPORT DUTIES AND EXCISE TAXES BY DELIVERY DIRECTIONS 2016 2015 2014 33.9% 5.5% 33.1% 7.2% 41.4% 4.2% domestic market CIS countries export to far-abroad countries CRUDE OIL DISTRIBUTION Produced Procured Total Realization (sales) Processing and NGL recovery Other (mainly oil residue increase) Total 60.6% 59.7% 54.4% Mln tonnes 28.7 2.8 31.4 22.1 9.2 0.1 31.4 GROUP’S PETROLEUM PRODUCT SALES, THOUS. TONNES 2016 2015 2014 -1.8% 10 940 11 135 11 087 SHARE OF PETROLEUM PRODUCT SALES BY DELIVERY DIRECTIONS 2016 2015 2014 55.1% 2.3% 51.4% 5.9% 55.0% 4.6% 42.6% 42.7% 40.4% domestic market CIS countries export to far-abroad countries SHARES OF REVENUES FROM PETROLEUM PRODUCT SALES EXCLUDING EXPORT DUTIES AND EXCISE TAXES, BLN RUBLES 2016 2015 2014 212.3 215.2 201.4 -1.3% SHARES OF REVENUES FROM PETROLEUM PRODUCT SALES EXCLUDING EXPORT DUTIES AND EXCISE TAXES BY DELIVERY DIRECTIONS 2016 2015 2014 58.3% 3.3% 59.3% 7.2% 63.0% 6.0% 38.4% 33.5% 31.0% domestic market CIS countries export to far-abroad countries The supply structure optimization had a positive impact on the financial results of the year 44 45 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYRETAIL DISTRIBUTION NETwORk The Company’s retail distribution network, operating under the TATNEFT corporate brand, at the end of 2016 included 689 fuel filling stations (FFS) and 16 tank farms, of which 567 FFS located in Russia, 105 FFS in Ukraine and 17 FFS in the Republic of Belarus. In 2016, three (3) new fuel stations were put into service within the RF as well as one (1) LPG autogas station and two (2) fuel stations were commissioned in the Republic of Belarus. Four LPG terminals are also installed in the existing fuel stations. It is the fourth largest fuel filling network in Russia encompassing 24 regions. About 50 % of the fuel stations are located in the Central, Northwestern and Volga Federal Districts, the Company’s main operating regions. In accordance with the retail business development strategy, the efforts are made to increase the fueling network profitability by increasing the fuel supply attractiveness and marginality of related services, modernizing the fuel filling station formats, the effectiveness of marketing programs, and optimizing costs through the disposal of low-efficiency fuel filling stations. As a result of these actions the Company succeeded in scaling up its retail sales despite the overall decline in retail petroleum product consumption in Russia. Total retail sales over the reporting year rose by 6% against last year and amounted to 2.6 million tonnes with more than 97 bln rubles in revenues. The average daily sales per fuel station were up 9 % against last year. As part of the non-fuel supply development the income from related goods and services was up 25 per cent as compared with 2015. High quality fuel is guaranteed by a multi-level control system using advanced technologies and software packages. As at the end of 2016, 398 stores were operated at the Company’s filling stations (2015 - 2424 stores) and 217 cafeterias (2015 - 53 cafeterias). Revenues from related goods and services significantly increased as compared with 2015. In 2016, high-potential roadside services provided at the Company’s filling stations continued to develop (at the year- end, the revenues from this business activity grew by 80% as compared to 2015), and a chain of self-service car washes was expanding as well. The Company intends to develop its related business by continually introducing new customer services to improve the quality of service and increase revenue. RETAIL SALES 2016 RF Ukraine Belarus Total 2015 RF Ukraine Belarus TOTAL 2014 RF Ukraine Belarus TOTAL 46 Qty., tonnes Retail Revenue, thous. rubles Qty., tonnes Small wholesale Revenue, thous. rubles Qty., tonnes Total Revenue, thous. rubles 1 440 003 61 584 650 1 044 662 30 395 468 2 484 665 91 980 119 34 773 30 490 2 269 881 1 504 451 24 313 939 1 338 311 41 550 59 086 31 429 3 608 192 1 546 001 1 505 266 65 358 982 1 069 914 31 775 329 2 575 180 97 134 312 1 325 395 55 545 909 1 030 508 28 384 530 2 355 903 83 930 438 33 599 17 319 2 223 402 872 845 28 014 1 573 704 - - 61 613 17 319 3 797 106 872 845 1 376 313 58 642 155 1 058 522 29 958 234 2 434 835 88 600 389 1 193 429 47 432 511 41 242 15 600 2 233 670 680 350 785 137 23 453 - 18 158 328 1 157 052 - 1 978 566 65 590 839 64 695 15 600 3 390 722 680 350 1 250 271 50 346 530 808 590 19 315 380 2 058 861 69 661 910 TATNEFT FUEL FILLING STATION COUNT, PCS. RELATED SERVICES FACILITIES, PCS. 2016 2015 2014 -0.4% 689 692 667 2016 2015 2014 860 753 684 +107 PETROLEUM PRODUCT SALES THROUGH RETAIL NETWORK OF TATNEFT FUELING COMPLEX, MLN TONNES RELATED SERVICE REVENUE SHARE IN TOTAL FUEL FILLING STATIONS REVENUE 2016 2015 2014 2,575 2,435 +5.7% 2,059 2016 2015 2014 4,7% +1.0 pp 3,7% 3,0% 47 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPETROCHEMICAL TIRE PRODUCTION The unstable economic situation on the domestic market in 2016 (locking of access to international credit resources, reduction in purchasing power, deferred demand as a result of continued economic crisis expectation) had affected the tire market. Overall, the Russian tire market shrank by 3% against the previous year. In spite all of that, the Company managed to retain its key positions at last year’s level that was 20% in the total domestic tire output. In the reporting year, the Company’s Petrochemical Complex manufactured 11.5 mln tires, including more than 1 mln all- steel tires (more than 55% of the total Russian all-steel tire output). The Company’s tires are mainly supplied on the domestic market and delivered to the largest manufacturers of the automotive vehicles such as AvtoVAZ, KAMAZ, UK GAZ Group, Volkswagen Group Rus, Ford Sollers Holding, and others. During 2016, our tires were supplied to 30 automobile manufacturers. Strong competitive advantages of the tire business are high-tech production facilities, wide popularity and experience in operating the «KAMA» and «Viatti» branded tires, optimal tire product line and range, development of potential models based on cooperation with automakers, a well-developed distribution network. Tire export supplies span over 40 countries. In the reporting year, total tires sales made about 12 mln pieces that was up 1.2% against 2015. TIRE PRODUCTION IN RUSSIA 11 522 Tire output Total for Russia, including: From PJSC TATNEFT: 50 099 thous. pcs. Share 50 099 100% 11 522 23.0% END MARKETS FOR PJSC TATNEFT’S TIRE PRODUCTS, THOUS. PCS. 23% 64% end market 11 955 3% 10% Aftermarket Component parts Far abroad CIS total thous. pcs. 7 688 1 181 306 2 780 11 955 TIRES SALES, THOUS. PCS. 2016 2015 2014 +1.1% 11 955 11 820 12 083 POSITIONS OF PETROCHEMICAL COMPLEX (PCC) PRODUCTS ON RUSSIAN TIRE MARKET BY SEPARATE GROUPS TIRES, TOTAL 8 869 43 709 Tire output 2014 2015 2016 PCC sales, thous. pcs. 9 447 9 164 8 869 Russian tire market, thous. pcs. 55 716 45 052 43 709 PCC's market share, % 17.0 20.3 20.3 PASSENGER CAR TIRES Tire output PCC Sales 5 707 32 096 Share 17.8 thous. pcs. 5 707 Russian passenger car tire market 32 096 100% CARBON BLACK PRODUCTION In addition to the tire business the Company’s Petrochemical Complex produced 118 thous. tonnes of carbon black. The carbon black products are on a par with high quality foreign counterparts and is highly demanded on both the internal and export markets 28% sales came from exports with the main markets of Turkey, Poland, Bulgaria and other countries. The carbon black export geography has expanded into 19 countries. CARBON BLACK PRODUCTION, THOUS. TONNES 2016 2015 2014 +0.8% 118.0 117.1 120.5 CARBON BLACK SALES BY YEARS, TONNES Carbon black sales 2014 2015 2016 In Russia Export Total sales 86 085 34 416 91 336 25 794 85 174 33 629 120 501 117 130 118 803 Revenue from the sales of products and services of the Company’s Petrochemical Complex in 2016 totaled 44.7 bln rubles that was more than in 2015 for 6.5 bln rubles (up 17.1%). LCV TIRES Tire output PCC Sales Russian LCV Tire Market HCV TIRES Tire output PCC Sales Russian HCV Tire Market ALL STEEL TIRES Tire output PCC Sales 1 206 4 408 Share 27.4 100% 1 057 2 075 Share 50.9 100% 791 3 447 Share 23.0 thous. pcs. 1 206 4 408 thous. pcs. 1 057 2 075 thous. pcs. 791 All Steel Tire Russian Market 3 447 100% AGRICULTURAL AND INDUSTRIAL TIRES Tire output PCC Sales Russian Agricultural And Industrial Tire Market 107 1 683 thous. pcs. Share 107 6.4 1 683 100% 48 49 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY ELECTRIC POWER GENERATION, BLN KWH SPECIFIC FUEL CONSUMPTION FOR THERMAL ENERGY SUPPLY, KGOE PER GCAL 2016 2015 2014 1.28 1.33 2.24 +74.9% 2016 2015 2014 +0.0% 160.89 160.89 161.41 HEAT SUPPLY, MLN GCAL 2016 2015 2014 3.95 +20.1% 3.29 3.93 SPECIFIC WATER CONSUMPTION FOR THERMAL ENERGY GENERATION, M3 PER GCAL 2016 2015 2014 0.88 0.92 0.95 -4.3% GENERATING ASSETS In the reporting year, the Company continued to develop its own heat and power complex implementing the program to modernize its generating capacities using cutting-edge technologies and advanced production equipment. This is one of the key vectors of our strategy. The Complex incorporates the following enterprises: Tatneft-Energosbyt Management Company, Nizhnekamsk CHP and Almetyevsk Heating Networks. Tatneft-Energosbyt Tatneft-Energosbyt is the PJSC TATNEFT’s wholly-owned subsidiary. The main activities of the subsidiary include: Purchase and sale of electricity in the wholesale and retail electrical energy and power markets, organization of supply of gaseous fuels transmitted through gas distribution networks, as well as carrying out other works and rendering other services which are not prohibited and do not contradict the current legislation. In 2016, Tatneft-Energosbyt supplied 5 034 646 thous kWh energy to the TATNEFT Group’s enterprises, that was 338 842 thous. kWh or 7.2% more than in the same period of last year. On average, the annual increase in electricity consumption by the Tatneft Group’s enterprises (in physical terms) was 7% over the period 2011 through 2016. Our own generating assets that we have ensure reliability of energy supply to oil refining and petrochemical capacities of the Company as well as to the main production facilities of the Nizhnekamsk industrial hub. The Nizhnekamsk CHP modernization made it possible to increase power energy supply and improve the operating efficiency of the plant. Our own generating assets that we have ensure reliability of energy supply to oil refining and petrochemical capacities of the Company as well as to the main production facilities of the Nizhnekamsk industrial hub. The Nizhnekamsk CHP modernization made it possible to increase power energy supply and improve the operating efficiency of the plant. Nizhnekamsk CHP The «Construction of electric power generation facilities using low-grade steam turbines in Nizhnekamsk» project was completed in the first quarter of 2016. Commissioning of the new power generation train enabled to increase the installed electrical capacity of the station to 730 MW, thanks to which the main production facilities of the Nizhnekamsk industrial hub would be supplied with electricity in the required quantities. The Nizhnekamsk CHP modernization allows to generate some part of the power energy in a condensing mode i.e. regardless of the amount of heat supplied to heat consumers. The reconstruction project was initiated to shift the power boilers to burning of petroleum coke produced at the TANECO refinery. This will partially substitute natural gas with a new and cheaper fuel, thereby increasing the competitiveness of the station on the electrical and thermal energy market. In 2016, the Company’s enterprises generated 2.24 bln kWh and delivered 3.95 million Gcal of thermal energy. Almetyevsk Heating Networks The Company has been developing the Almetyevsk Heat Networks (APTS) to supply heat to the regional infrastructure facilities. «APTS» operates three mini-CHP plants with 24 MW of total electric output, where the MWM TCG2020V20 gas piston generating units (GPGU) with 2.0 MW of single electric output are installed. The launching mini-CHP plants in 2016 made it possible to reduce the purchased electricity needed for the district boiler houses No. 2,3,1 and 4 by 24.17 mln kWh per year. The current programs are moving ahead with regard to capacity optimization, cost control, energy saving and efficiency, lean production and setting up of system monitoring of heat losses in the heat supply networks. 50 51 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ENERGY AND RESOURCE EFFICIENCY PROGRAM FOR PERIOD UP TO 2020 In the context of constantly growing tariffs of natural monopolies on energy resources, transportation services and increase of hydrocarbon production costs, the Company makes the comprehensive efforts to create maximum reserves for resource saving in all its business activities, including energy saving. Over the period from 2011 to 2016 as a result of the measures taken under Resource Saving Program the fuel and energy consumption relative to the base year was reduced by 35.2% with more than 380 thous. tonnes of fuel equivalent saved. This allowed to reduce the Company’s need for fuel and energy resources by 6.3% In 2011, the TATNEFT initiated the resource-saving program for the period up to 2020 was initiated as part of which the energy saving program is being implemented. In addition to the PJSC TATNEFT’s oil and gas production divisions (NGDU) the service companies are involved in the new program. Altogether 25 enterprises participate in the program. The goal of the energy saving program is saving the fuel and energy resources through their rational use and improved energy efficiency of the production. According to the program, by 2016, energy savings are expected to reach 8.6% (against baseline), and by 2020 - 13.5%. The program implements the measures aimed at reducing the absolute consumption of fuel and energy resources, saving material and natural resources and cutting down the Company’s energy costs. LOWER FUEL AND ENERGY CONSUMPTION AGAINST BASE YEAR 2016 2014 2015 2014 2014 2014 2013 2014 2012 2014 2011 2014 2010 35.2% 28.7% 20.1% 13.3% 8.6% 3.8% basic consumption FUEL AND ENERGY USE INFORMATION Energy Resource Electric power energy Including industrial consumption Thermal energy Including industrial consumption Gasoline Diesel fuel GAS Consumed in 2016 in physical terms in monetary terms, rubles (excluding VAT) 4 083 mln kWh 10 324 mln rubles 4 083 million kWh 10 051 mln rubles 4 077 thous. Gkal 4 644 mln rubles 4 031 thous. Gkal 4 578 mln rubles 2 937.4 tonnes 132 mln rubles 1 709.4 tonnes 68 mln rubles 48.2 tonnes 1.4 mln rubles 52 53 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYTECHNOLOGY AND INNOVATION IMPROVED OIL AND GAS OIL PRODUCTION TECHNOLOGIES 8. Application of PDC bits with enlarged nozzles to drill through lost circulation zones INNOVATIVE WELL CONSTRUCTION TECHNOLOGIES 1. Pumping high-viscosity pills at 100-150 m intervals during wellbore conditioning before running a casing in more than 50 degrees deviated borehole. Brief Summary Brief Technology Efficiency Brief Economic Efficiency, including in mln rubles per facility unit, or others. Deployment in 2016 Cuttings transport Cutting bed removal out of wellbore 0.121 13 wells 2. In horizontal wells with long horizontal sections or complex profiles before pulling a drilling tool out of hole for running liner in open hole, sweep a mud pill with mechanical lubricant in 5 kg/m3 concentration. Mud pill swept in balanced pressure condition. Brief Summary Brief Technology Efficiency Brief Economic Efficiency, including in mln rubles per facility unit, or others. Deployment in 2016 Mechanical lubricant Running liner to bottomhole 0.161 3 wells 3. Prepare a wellbore for primary completion in order to bring cement up to surface during production casing cementing without setting a packer and by injecting sealing and lost circulation materials, etc. into drilling pipe at closed BOP as the well is drilled deeper. Brief Summary Brief Technology Efficiency Brief Economic Efficiency, including in mln rubles per facility unit, or others. Deployment in 2016 Reduction of material time costs for wellbore preparation Reduction of material time costs for wellbore preparation 0.201 35 Wells 4. Application of high water-loss slurries to plug thief zones Brief Summary Brief Technology Efficiency Brief Economic Efficiency, including in mln rubles per facility unit, or others. Deployment in 2016 Lost-circulation zone elimination Lost-circulation zone elimination 0.255 10 Wells Brief Summary Brief Technology Efficiency Possibility to drill through thief zones with inactive filler injecting ROP increase Brief Economic Efficiency, including in mln rubles per facility unit, or others. Deployment in 2016 0.201 8 9. To optimize MWD costs we realized drilling of stabilization intervals under beneath of surface casing from the bottom of the Bashkirian horizon to the top of Tournaisian stage using stabilizing BHA without MWD system employed. Brief Summary Brief Technology Efficiency Brief Economic Efficiency, including in mln rubles per facility unit, or others. Deployment in 2016 Drilling of stabilization intervals using stabilizing BHA without MWD system employed. MWD cost saving 0.550 20 10. Using nipple centralizers to create an effective wellbore size and smooth running logging tools, production casing, core retrieving barrels in combination with screw bottomhole motors. Brief Summary Brief Technology Efficiency Brief Economic Efficiency, including in mln rubles per facility unit, or others. Deployment in 2016 Create an effective wellbore size No (less) borehole reaming trips due to nonpassage of logging tools, production casing, core retrieving barrels 0.161 4 11.Using dual stabilizer assembly for wellbore reaming in order to prepare wellbore for running liner with installed screens and packers, etc. Brief Summary Brief Technology Efficiency Brief Economic Efficiency, including in mln rubles per facility unit, or others. Deployment in 2016 Wellbore preparation for running liner with installed screens and packers, etc. Low risk of failure to run liner with installed screens and packers, etc. 0.141 8 INNOVATIVE OIL AND GAS PRODUCTION TECHNOLOGIES 5. Application of sealing solutions RTS Introduction of positive displacement pumps in oil gathering system Brief Summary Brief Technology Efficiency Brief Economic Efficiency, including in mln rubles per facility unit, or others. Deployment in 2016 Brief Summary Technology Challenge Description Brief Technology Efficiency Brief Economic Efficiency, including in mln rubles per facility unit, or others. Deployment in 2016 Lost-circulation zone elimination Lost-circulation zone elimination 0.189 11 Wells 6. Drilling with simultaneous borehole reaming to set expandable casing (local casing lining equipment) Brief Summary Brief Technology Efficiency Brief Economic Efficiency, including in mln rubles per facility unit, or others. Deployment in 2016 Lost-circulation zone elimination Lost-circulation zone elimination 0.34 6 wells 7. Gypsum-lime drilling mud application for directional well construction Brief Summary Brief Technology Efficiency Brief Economic Efficiency, including in mln rubles per facility unit, or others. Deployment in 2016 Lost-circulation zone elimination Lost-circulation zone elimination 0.213 3 Replacement of Sectional Centrifugal Pumps with Progressive Cavity Pumps at Booster Pump Stations (Group Metering Pump Stations) to reduce energy intensity in oil gathering system. High energy intensity of oilfield equipment Power consumption saving - 17 000 thous. kWh per year for deployment rate (40 Booster Pump Stations (Group Metering Pump Stations). NPV for project duration = 92 mln rubles for deployment rate (40 Booster Pump Stations (Group Metering Pump Stations) 6 pumps 54 55 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYINNOVATIVE TECHNOLOGIES AND EQUIPMENT FOR SVO PRODUCTION 3. Running metal-to-metal progressive cavity pumps manufactured by OOO Spectechnika-Almetyevsk in SVO cyclic steam stimulation (CSS) wells. 1. Borehole washing with aerated fluid drilling Brief Summary ESP units get stuck and fail because of presence of drilling mud in wellbore and deposition of calcium carbonate СаСО3 and solids on borehole walls during well operation. Technology Challenge Description Improved downhole pumping equipment reliability Brief Technology Efficiency Brief Economic Efficiency, including in mln rubles per facility unit, or others. Deployment in 2016 108 wells To solve this problem, a wellbore is flushed before installing pumping unit to ensure the circulation and transport of mechanical impurities and sediments with aerated fluid. Wellbore circulating with the aerated fluid helps avoid early failures of downhole pumping units due to it sticking with deposition of calcium carbonate, clay and solids. The economic benefit gained as a result of the idea implementation amounted to 0.620 million rubles per well. 2. Replacing 12 kW and 16 kw downhole motors (DHM) with 22 kW DHM results in less SVO well servicing jobs required. Brief Summary Currently, the cyclic steam stimulation (CSS) wells are produced at the SVO fields. The concept of the wells is cyclic steam injection after the wellbore temperature cool-down. It requires to pull out downhole pumping equipment and run injecting tubing. The high content of steam-gas mixture which is present in cyclic steam stimulation (CSS) well often causes pump starvations. It is also necessary to rig up a workover rig and pull out the downhole pumping equipment (DHPE) which entails additional costs. Technology Challenge Description Improved downhole pumping equipment reliability Brief Technology Efficiency Brief Economic Efficiency, including in mln rubles per facility unit, or others. Deployment in 2016 In order to reduce SVO well repair services to be performed to convert the wells to steam injectors it is recommended running the progressive cavity sucker- rod pumps manufactured by OOO Spectechnika- Almetyevsk in the SVO cyclic steam stimulation (CSS) wells and convert wells to steam injectors retrieving rotor from stator using a crane. 4 wells Implementation of this solution will help reduce SVO well repair services to convert wells to steam injectors, revise downhole units in a servicing company, number of well servicing crews The economic benefit gained as a result of the idea implementation amounted to 0.707 million rubles per well. Technology Challenge Description Improved downhole pumping equipment reliability Brief Summary Over 30% of all well services carried out on SVO wells are well repairs caused by pump clogging with solids which mainly consist of clay and carbonate particles. Fine particles getting in between pump moving elements cause pump shaft jamming and all kinds of pump shimming efforts (direct washing, rotation direction change, etc.) most often do not provide any good result. For this reason, a regular well servicing job usually includes a full range of costly and time-consuming efforts to clean a wellbore which do not ensure continued trouble-free. Almost all of the producing well stock using ESP-125 and 160 with pressure head of 300 and 400 meters, are equipped with 16 kw DHM. The practice shows that DHM load averages 80 per cent of its power capacity at the average frequency of 41.4 Hz. This value does not ensure a reliable operation when solids get into the pump. Brief Technology Efficiency Brief Economic Efficiency, including in mln rubles per facility unit, or others. Deployment in 2016 4. Application of thermal-gel composition for enhanced oil recovery in SVO reservoirs (setting of «gel plug») In order to reduce amount of SVO well repair services due to pump plugging with solids it is proposed to substitute 22 kW DHM for 12 kW and 16 kW DHM ensuring sustainable operation in harsh operating conditions. Implementation of this solution will help reduce SVO well repair services, revise downhole units in a servicing company, number of well servicing crews and down- hole pumping equipment costs. The economic benefit gained as a result of the idea implementation amounted to 0.498 million rubles per well. 43 wells Brief Summary Technology designed to block transitional (water-oil) zones of reservoir using thermal-gel compositions help prevent (reduce) cooling down the fluid produced from the wells and stimulate establishing pressure communication between steam injector and oil producer in the SVO field produced by SAGD method. *- 4 wells were stimulated repeatedly. EOR INNOVATIVE TECHNOLOGIES Technology Challenge Description Kazanian, Ufimian stages Brief Technology Efficiency Brief Economic Efficiency, including in mln rubles per facility unit, or others. Deployment in 2016 The technological effect is achieved thanks to establishing a quality pressure communication between a pair of SAGD wells and shutting off water-saturated zone. 0.6989 mln rubles per well 35 wells (39 well treat- ments*) 1. Enhanced Oil Recovery Technique using polymer-clay compositions and surfactants (PGK-M Technology) Brief Summary Technology Challenge Description Deployment in 2016 Better reservoir sweep efficiency to displace oil from lower permeable zones by applying sequential injection of polymer-clay compositions and surfactants. Recommended for zones with the highest watercut, medium and high injectivity at any salinity. Development of high- efficiency EOR for watered out reservoirs 50 well treatments 2.2. Enhanced Oil Recovery Technique using alkaline–polymer compositions (Technology ShchPK-N) Brief Summary Better reservoir sweep efficiency with alkaline–polymer compositions, improved wettability and oil displacement from lower permeable oil saturated zone. Recommended for reservoirs with high heterogeneity, for zones to be flooded with mineralized waters. Technology Challenge Description Development of high- efficiency EOR for watered out reservoirs Deployment in 2016 30 well treatments 56 57 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY3. Formation stimulation technology for terrigenous and carbonate reservoirs with modified biopolymer compositions (Technology RBK-M) 9. Technology for application of high-strength cross-linked compositions to enhance oil recovery efficiency of water-flooded heterogeneous reservoirs (VPSK Technology). Brief Summary Improved sweep and oil displacement efficiency by injecting alkaline solutions and biopolymer compositions with surfactants Gels are formed when using crosslinkers, which depending on the component concentrations can act as blocking and/or displacement agents. For terrigenous and carbonate reservoirs, at any salinity. Technology Challenge Description Development of high- efficiency EOR for watered out reservoirs Deployment in 2016 53 well-treatments Brief Summary Conformance control; eliminating water breakthrough into producing wells; shutting off of washed out zones and fractures; eliminating (control) injection water leak off in adjacent reservoirs; restricting water intake capacity of wells. Terrigenous and carbonate reservoirs with heterogeneous permeabilities with medium and high water intake capacities. Technology Challenge Description Terrigenous Devonian Strata Tula, Bobrikovian horizons Tournaisian stage (Kizelovian horizon) Bashkirian stage Deployment in 2016 29 6 8 1 4.Enhanced Oil Recovery Technique through complex reservoir stimulation based on microdispersed silica gel (MDC Technology) Brief Summary Technology Challenge Description Deployment in 2016 Better reservoir sweep efficiency to displace oil from lower permeable zones by applying sequential injection of microdispersed silica gel and surfactant solution. Silicate micron-size particles help isolate of water saturated intervals in remote zones of the reservoir. For terrigenous reservoirs, at any salinity. Development of high- efficiency EOR for watered out reservoirs 38 well treatments 5.Polymer gel-forming and micro-gel injection technology (MGS-K Technology) Brief Summary Technology Challenge Description Deployment in 2016 Improved sweep and oil displacement efficiency, main acting reagent is micro-gel Depending on application area conditions gel-forming and surfactant-polymer compositions can be pumped. For terrigenous reservoirs, at any salinity, for any field development stage. Development of high- efficiency EOR for watered out reservoirs 177 well treatments 6.Water-flooding control technology for highly permeable reservoirs using composition system based on cellulose-polymer complex (CPK technology) Brief Summary Technology is designed to improve reservoir sweep efficiency which is achieved by stimulating drainage of layers with lower permeability through changing local pressure gradients while reducing conductivity of layers with higher permeability by injecting composition system based on cellulose-polymer complex. For high and medium water-intake capacity wells, at any salinity and high heterogeneity. Technology Challenge Description Development of high- efficiency EOR for watered out reservoirs Deployment in 2016 10 well treatments 7.Improved technology for low concentrated polymer composition injection for low water intake capacity wells (NKPS-M technology) Brief Summary Technology Challenge Description Deployment in 2016 Improved oil displacement efficiency technology based on surfactant-polymer solutions for low-permeability reservoirs in low water intake capacity well conditions and low-thickness reservoirs. For terrigenous and carbonate reservoirs, at any salinity, for any field development stage. Development of high- efficiency EOR for watered out reservoirs 31 well treatments 8.Technology for application of hydrophobic (invert) emulsion systems to enhance oil recovery efficiency of water-flooded heterogeneous reservoirs (MGES-M technology). Brief Summary The technology is designed for water conformance control of wells. Terrigenous reservoirs with heterogeneous permeabilities with medium and high water intake capacities. Technology Challenge Description Tula, Bobrikovian horizons Terrigenous Devonian Strata Deployment in 2016 6 16 58 10.Technology for application of high-strength polymer systems to control water flow to producing wells (VPSD (APA) Technology version). Brief Summary Water flow control both injected to maintain reservoir pressure as well as invading into producing wells either from the bottom section of oil-saturated reservoir or from underlying water saturated reservoir that is directly adjacent to oil-saturated one. Near-wellbore area of terrigenous or carbonate reservoir with low, medium and high injectivities. Technology Challenge Description Terrigenous Devonian Strata Tula, Bobrikovian horizons Tournaisian stage (Kizelovian horizon) Deployment in 2016 22 71 2 11. Technology for application of high-strength cross-linked compositions to enhance oil recovery efficiency of water-flooded heterogeneous reservoirs (VPSK Technology). Brief Summary Water flow control both injected to maintain reservoir pressure as well as invading into producing wells either from the bottom section of oil-saturated reservoir or from underlying water saturated reservoir that is directly adjacent to oil-saturated one. Near-wellbore area of terrigenous or carbonate reservoir with low, medium and high injectivities. Technology Challenge Description Terrigenous Devonian Strata Tula, Bobrikovian horizons Tournaisian stage (Kizelovian horizon) Vereiskian horizon Bashkirian stage Protvino Deployment in 2016 2 7 2 1 3 11 12. Technology for application of high-strength polymer systems to restrict water flow to producing wells (VPSD (PAA+CM) Technology version). Brief Summary Water flow control both injected to maintain reservoir pressure as well as invading into producing wells either from the bottom section of oil-saturated reservoir or from underlying water saturated reservoir that is directly adjacent to oil-saturated one. Near-wellbore area of terrigenous or carbonate reservoir with high injectivity capacity. Deployment in 2016 Technology Challenge Description Tula Horizon Terrigenous Devonian Strata 5 10 59 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYINNOVATIVE TECHNOLOGIES FOR AUTOMATED TECHNOLOGICAL PROCESS CONTROL SYSTEM INTELLECTUAL PROPERTY 1.Using smartphones with the CIS ARMITC (Corporate Information System Automated Engineering and Technological Service Workplace) application to provide operational control oil well pumpers and receive work performance reports Brief Summary Technology Challenge Description Brief Technology Efficiency Furnishing oilfield pumpers with smartphones integrated with CIS ARMITC which enables to control a well site check-up route, promptly transmit photo and video information about any failures or breakdowns. Introduction of a system for determining the optimum quality and completeness of information to ensure a minimum risk in field development and production process - Monitoring oilfield pumper’s working time, location, movement according to well site check up maps; - Monitoring designated well-site check-ups according to the well-site check-up schemes; - Ensuring on-site safety and security - Prompt transmittal of tasks to oilfield pumpers Brief Economic Efficiency, including in mln rubles per facility unit, or others. Effect time, three (3) years NPV, thous. rubles 47 IDD, fr.unit 5. 000 Deployment in 2016 584 pcs. 2. Operational Control and Management System for oil metering units (OMU) in NGDU Brief Summary Technology Challenge Description Brief Technology Efficiency Operational Control and Management System for oil metering units enables to upgrade oil production measuring process in a quality manner, promptly receive and validate the data so that the NGDU's specialists could make adequate decisions. Introduction of a system for determining the optimum quality and completeness of information to ensure a minimum risk in field development and production process - On-line monitoring of oil production measuring units - Obtaining full information on mass flow- meters (breakdowns); - Obtaining live data on water and oil specific gravity inputs. - Automatically determine water specific gravity and enter this parameter in transmitter of mass flow meter; - Archive emergency signals with accident type decoding. Brief Economic Efficiency, including in mln rubles per facility unit, or others. Effect time - 5 years, NPV, thous. rubles 213 IDD, fr. unit 2.735 Deployment in 2016 Deployed at seven (7) Booster Pumping Stations RESERVOIR PRESSURE MAINTENANCE INNOVATIVE TECHNOLOGIES 1. Implementation of Russian-made positive displacement pumping units to optimize power consumption in Reservoir Pressure Maintenance System Brief Summary Technology Challenge Description Brief Technology Efficiency Utilization of Russian-made positive displacement pumps as an alternative for centrifugal ones will help reduce specific power consumption by 2 to 2.5 times (per pump) with the price which is half of that of foreign counterparts. Optimization of power consumption in Reservoir Pressure Maintenance System Optimization of specific consumption by 66 million kWh when implementing 54 pumps Brief Economic Efficiency, including in mln rubles per facility unit, or others. NPV - 248.2 million rubles as a result of implementation of 54 pumping units Deployment in 2016 7 pumping units, Plan for 2017 - 18 pumping units Since 2014, the «Procedures and Regulations for the EDISON+ Complex Automated System (CAS Edison+) users have been in place, incorporating the following modules: AIS «Innovator’s Study Room», AIS «Rationalization», AIS «Patents», AIS «R&D Agreements», AIS «Experimental and Pilot Operations», AIS «Best Practices». The CAS Edison+ is designed to meet the current production improve the cost-effectiveness of challenges and helps rationalization, inventive and experimental activities (pilot operations), R and D, best practices. Its use makes it possible to carry out continuous monitoring the introduction of new technology, rationalization proposals, best practices, maintain the commercial register of enterprise’s intangible assets, provide more objective assessment of the efficiency of investments in experimental and pilot operations, R and D activities and make substantiated and well-grounded management decisions. The system is a highly effective tool for managing the TATNEFT employees’ intellectual activity. inventions, TATNEFT RANKS AMONG TOP 10 LEADERS IN THE WORLD AND IT IS THE ABSOLUTE LEADER IN EUROPE AND IN THE MIDDLE EAST BY QUANTITY OF OIL AND GAS PRODUCTION INVENTIONS. (DATA SOURCE: THOMSON REUTERS). As part of the efforts made to reorganize the TATNEFT’s intellectual property and intangible asset management to increase their efficiency and to further improve the Company’s in asset management activities the Innovation Development Department was established at the Engineering Center with centralized management functions for the TATNEFT’s intellectual property, intangible assets and innovations. In order to set up the automated management of intellectual activity results the Integrated Automated system EDISON+ has been put in place and developed since 2004. In line with the approved concept of the Company’s strategy of doubling the value by 2025, one of the activity directions is the management of the Company’s intangible assets. At present, according to the external audit results the TATNEFT’s share of intellectual property in the total assets testifies to the available potential for its overall value increase. Enhancing the intangible asset (IA) share is one of the tools for growth of the Company’s credit rating and investment lure. The optimal model to increase the IA share in the TATNEFT’s asset total value is being created within the project. In 2016, 233 documents of title protecting the intellectual property items were granted and 179 applications for patents were filed. 13 250 rationalization proposals, 51 inventions, 25 useful models, 15 computer programs, 17 720 ideas for improvement (Kaizen proposals) have been introduced into production. The economic effect of the use of intellectual activity results (including rationalization proposals) amounted to 18 998 million rubles, including the use of inventions and useful models for 17 699 million rubles. improvement Centralization of corporate accounting and of effective use of intangible assets as the TATNEFT’s property complex objects are realized in accordance with the Corporate Governance Standard «TATNEFT Intangible Asset Management», «Regulations for Safeguarding and Legal Protection of Intellectual Property Objects» and «Regulations for relationship when transferring the IA use rights to TATNEFT’s subsidiaries and third-party legal entities». 60 61 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYCORPORATE MANAGEMENT 62 63 RUB 965 BLN is the Company’s Capitalization as of Dec. 30 2016 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYCOMPANY MANAGEMENT SYSTEM MANAGEMENT STRUCTURE GENERAL MEETING OF SHREHOLDERS Audit Commission Independent Auditor BOARD OF DIRECTORS Chairman of the Board of Directors Committees of the Board of Directors Corporate Secretary Corporate Management Committee Internal Audit Department Audit Committee A General Shareholders’ Meeting is a supreme managing body of the Company. The General Shareholders’ Meeting delegates overall management of the Company’s activities to the Company’s Board of Directors. There are three committees under the Board of Directors: the Corporate Management Committee, the Audit Commit- tee and the HR and Remuneration Committee. A position of the Corporate Secretary was introduced in 2016, and the Office of the Corporate Secretary was estab- lished. General Director of PJSC TATNEFT is the Company’s Chief Executive Officer. The collegial executive body of the Com- pany is the Management Board, headed by the General Director. General Director and Management Board are ac- countable to the Board of Directors and to the General Shareholders’ Meeting.. Areas of responsibility are distributed among members of the Board of Directors and the Management Board, includ- ing the Deputies of the General Director. HR & Remuneration Committee General control over the financial and economic activities of the Company is carried out by the Audit Commission. GENERAL DIRECTOR, Chairman of the Management Board MANAGEMENT BOARD Corporate Center for Business Segment Management Investment Committee Personnel Committee Committee for Ethics & Corporate Culture Development Current activities of the Company are provided by the services of the Executive Office services, structural subdivisions, curators of business segments, as well as by authorized representatives in the managing bod- ies of subsidiaries and affiliates. PJSC TATNEFT is the corporate center of the Group, which coordinates the activities of enterprises that form busi- ness segments of the Company. The status of the TATNEFT Group, the management forms and the procedure for the relationship of the parent company and the members of the Group are governed by the Regulations for the TATNEFT Group approved by the PJSC TATNEFT Board of Directors. The system of the officials’ authorities and responsibilities distribution by the areas of activity and ensuring the perfor- mance of business segments is based on KPI’s. There are the Investment Committee, the HR Committee, the Ethics and Corporate Culture Development Committee at the level of executive bodies in the Company. The management of the TATNEFT Group is based on a uni- fied mission and development priorities, while respecting fair interests of all the participants of the Group. In order to ensure unified management principles and transparency of the activities of subsidiaries and dependent companies, the Company develops appropriate policies and regulations that form the mechanisms of corporate relations, and there is also a system of unified corporate standards in operation. INTERNAL DOCUMENTS THAT DETERMINE THE SYSTEM OF CORPORATE MANAGEMENT • Articles of PJSC TATNEFT • Regulation on the General Meeting of Shareholders of PJSC TATNEFT • Regulation on the Board of Directors of PJSC TATNEFT • Regulation on the Corporate Management Committee of the Board of Directors of PJSC TATNEFT • Regulation on the Audit Committee of PJSC TATNEFT Board of Directors • Regulation on the HR and Remuneration Committee of the Board of Directors of PJSC TATNEFT • Regulation on the General Director of PJSC TATNEF • Regulation on the Management Board of PJSC TATNEFT • Regulation on the Corporate Secretary of PJSC TATNEFT • Regulation on the Internal Audit Department of PJSC TATNEFT • Corporate Management Code of PJSC TATNEFT • Regulation on the Information Policy of PJSC TATNEFT • Regulation on the Information Provision to shareholders of PJSC TATNEFT • Internal documents that determine the executive bodies’ distribution of the authority and responsibility of managers and employees by the areas of activity • Regulation on payment of remuneration to members of the PJSC TATNEFT Board of Directors • Regulation on payment of remuneration to members of the Audit Commission of PJSC TATNEFT • Register of unified corporate standards of PJSC TATNEFT • Remuneration policy for members of PJSC TATNEFT management bodies MAIN AREAS OF THE CORPORATE MANAGEMENTPOLICIES • Ensuring implementation of the Company’s strategy and current operations of the Company • Improvement of the organizational structure and introduction of unified corporate standards of the TATNEFT Group • Improvement of the motivation system and KPI of the Company’s management • Constructive interaction with investors, business partners, public authorities and public organizations interested in • Implementation of the information openness and transparency principles the Company’s activities THE TATNEFT COMPANY IS IN THE TOP FIVE WORLD LEADERS AMONG OIL COMPANIES in terms of creating shareholder profitability by the rating «Creating value through active management of Portfolio of assets» (according to The Boston Consulting Group version). TATNEFT BRAND IS INCLUDED IN THE TOP TEN MOST EXPENSIVE BRANDS IN RUSSIA WITH AA RATING (ACCORDING TO THE VERSION OF BREND FINANCE). The Company complies with the principles of information openness, ensuring the timely provision of material information to its shareholders, the investment community and other interested parties. TATNEFT IS INCLUDED IN THE TOP-10 RATING OF RUSSIAN ENTERPRISES OF THE FUEL AND ENERGY COMPLEX WITH THE HIGHEST LEVEL OF INFORMATION OPENNESS. 64 65 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYGENERAL SHAREHOLDERS’ MEETING BOARD OF DIRECTORS The General Meeting is a Supreme Management Body of PJSC TATNEFT and it operates in accordance with the regulatory legal acts of the Russian Federation, the Company’s Articles and this Regulation. The General Meeting of Shareholders delegates the overall management of the Company’s activities to the Board of Directors. The procedure for holding the General Meeting of Sharehold- ers fully ensures respect for the rights of shareholders. The procedure for preparing, convening, conducting and summarizing the results of the General Meeting of the Company Shareholders is defined by the Regulation on the General Meeting of Shareholders of PJSC TATNEFT. The Company holds the Annual General Meeting of Shareholders once a year not earlier than two and no later than six months after the end of the fiscal year. In addition to the General Meeting of the Shareholders, extraordinary meetings of share- holders may be convened. The Company provides to the shareholders the information on the issues on the agenda of the General Meeting of Shareholders in the amount and time that allows them choosing an informed position on the issues under consideration, as well as taking decisions on participation in the meeting and the manner of such participation. The annual General Meeting nec- essarily considers the of issues of electing members of the Board of Directors and the Audit Commission, approval of the auditor, approval of the annual report, annual financial statements, distribution of profits, including payment (declaration) of dividends, and losses based on the operation results of the reporting year. Each shareholder has the right to participate in the work of the meeting personally or through proxies. At the General Meeting of Shareholders, the shareholders receive from the Board of Directors and ex- ecutive bodies a detailed and reliable report on the Company’s corporate policy and the Company’s production and operations. The Board of Directors of the Company prepares reports for shareholders on each issue of the agenda reflecting his position, as well as special opinions of the members of the Board of Directors, if any. Shareholders make decisions on the most important issues of the Company’s activities. During the election of the Board of Directors, the Company provides shareholders with detailed information on the biography, experience and skills of each candidate, and seeks to ensure the personal presence of candidates. The decisions on the agenda of the General Meeting of Shareholders shall be made by ballot voting in the manner prescribed by the current legisla- tion and the Company’s Articles. When formulating the decisions of the meeting, it is necessary to indicate by what majority of votes the decisions were taken and special opinions were introduced. The authenticity of the Minutes is certified by the signatures of the Chairman of the meeting and the Secretary. The General Shareholders’ Meeting was held on June 24, 2016 in the reporting year. Decisions taken by the General Meeting of Shareholders: 1. Approve the Annual Report of the Joint Stock Company for 2015. 2. Approve the annual accounting (financial) statements, including the profit and loss account (profit and loss accounts) for 2015. 3. Approve distribution of profit based on financial year results. 4. Perform payment of dividends for 2015: а) for preferred shares of PJSC TATNEFT in the amount of 1096% of the shares’ face value; b) for ordinary shares of PJSC TATNEFT in the amount of 1096% to the shares face value. Set July 8, 2016 as the date on which the persons entitled to receive dividends shall be determined. Determine the divi- dends’ payment period in accordance with applicable law. Dividends shall be paid in cash. 5. Elect the composition of the Board of Directors of PJSC TATNEFT 6. Elect the members of the Audit Commission of the Company. 7. Approve JSC PricewaterhouseCoopers Audit as the auditor of PJSC TATNEFT for the implementation of the mandatory audit of the annual financial statements for 2016, prepared in accordance with Russian accounting rules, for a period of one year. 8. Approve a new version of the Articles of PJSC TATNEFT. 9. Approve a new version of the «Regulations on the General Meeting of Shareholders of the Public Joint-Stock Company TATNEFT n.a. V.D. Shashin. 10. Approve a new version of the «Regulations on the Board of Directors of the Public Joint Stock Company TATNEFT n.a. V.D. Shashin. 11. Approve a new version of the «Regulations on the General Director of the Public Joint-Stock Company TATNEFT n.a. V.D. Shashin. 12. Approve a new version of the «Regulations on the Management Board of the Public Joint Stock Company» TATNEFT n.a. V.D. Shashin. 66 The Board of Directors of PJSC TATNEFT carries out general management of the Company’s activities in order to increase the Company’s profits and ensure its stable financial and economic condition, as well as the risk management system, determines the main parameters of the budget and the control over its implementation, facilitate the timely disclosure of complete and reli- able information on the Company’s activities, as well as takes decisions on key projects and significant transactions. The procedure of forming, the status, composition, functions, goals and tasks and powers of the Board of Directors, as well as the procedure of the Board operation and interaction with other management bodies of the Company are defined by the Articles and the Regulation on the Board of Directors. The Board of Directors operates within the competence established by the current legislation, the Company’s Articles and in accordance with the Regulation. The competence of the Board of Directors of the Company includes resolving issues of general management of the Company’s activities, with the exception of issues that are referred to the competence of the General Meeting of Shareholders by the cur- rent legislation and the Company’s Articles. The main task of the Board of Directors is to determine the development strategy of the Company in order to increase its shareholder value, ensure the Company’s stable financial and economic condition and control the effective management of the Company. COMPOSITION OF THE BOARD OF DIRECTORS The Board of Directors includes 15 directors, including three independent directors*, seven non-executive directors and five executive directors. Participation of independent and non-executive directors the work of the Board of Directors ensures the maintenance of a bal- ance between the interests of different groups of shareholders, which contributes to the objectivity of the decisions made, as well as to strengthening the trust of investors and shareholders to the Company. The annual General Meeting of Shareholders held on June 24, 2016 elected the Board of Directors numbering of 15 persons. In June 2016, there were changes in the Board of Directors changed: R.S. Nurmukhametov was elected to the Board of Direc- tors replacing M.Z. Taziyev, a retired member of the Board of Directors. board of directorS number of the board of directorS memberS by the termS of Stay in the board of directorS 3 Independent Direc- tors 5 Executive Directors 7 Non-Executive Directors 1 Less than 4 From to seven years 10 Over seven years * Independence criteria have been defined by listing rules of ZAO «MICEX Stock Exchange» Quantitative compoSition of the committeeS of the board of directorS, perSonS: Yu.L Levin. was recognized by an independent director by the unanimous decision of the Board of Directors in con- nection with a formal relationship with a material counter- party (Minutes No. 2 of the Board of Directors Meeting of PJSC TATNEFT of June 24, 2016). 9 Corporate Manage- ment Committee 4 Audit Committee 4 HR and Remunera- tion Committee 67 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY COMPOSITION OF THE PJSC TATNEFT’S BOARD OF DIRECTORS Rustam N. MIN- NIKHANOV Nail U. MAGANOV Radik R. GAIzAT- ULLIN Laszlo GERECH Nail G. IBRAGI- MOV Yuri L. LEVIN Renat Kh. MUSLI- MOV Rinat K. SABIROV Chairman of the Board of Directors of PJSC TATNEFT General Director of PJSC TATNEFT PJSC TATNEFT’s Board of Directors’ Member Chairman of the PJSC TATNEFT’s Management Board PJSC TATNEFT’s Board of Directors’ Member Audit Committee Member of the PJSC TATNEFT’s Board of Directors. Independent member of the PJSC TATNEFT’s Board of Directors Member of the PJSC TATNEFT’s Board of Directors Audit Committee Member of the PJSC TATNEFT’s Board of Directors HR and Remuneration Committee Member of PJSC TATNEFT’s Board of Directors First Deputy General Direc- tor for Production – Chief Engineer of PJSC TATNEFT. PJSC TATNEFT’s Manage- ment Board Member. Independent member of the Board of Directors Chairman of the PJSC TATNEFT’s Board of Directors Audit Committee Member of the PJSC TATNEFT’s Board of Directors HR and Remuneration Committee Member of PJSC TATNEFT’s Board of Directors’ Member of PJSC TATNEFT’s Board of Directors Member of the PJSC TAT- NEFT’s Board of Directors Corporate Management Com- mittee. Member of the PJSC TATNEFT’s Board of Directors HR and Remuneration Com- mittee Non-executive director Executive Director Non-executive Director Independent Director Executive Director Independent Director Non-executive Director Non-executive Director Born in 1957. Born in 1958. Born in 1964. Born in 1953. Born in 1955. Born in 1953. Born in 1934. Born in 1967. 1978 – graduated from Kazan Agricultural Institute, specializing as a mechanical engineer. 1986 – Institute of Soviet Trade. 1996-1998 – Minister of Finance of the Republic of Tatarstan. From July 1998 until March 2010 headed the Government of the Republic of Tatarstan. President of the Republic of Tatarstan since March 2010. 1983 – graduated from Mos- cow Institute of Petrochemical and Gas Industry n.a. Acad- emician I.M.Gubkin. 1985 – graduated from Kazan Agricultural Institute special- izing in «Accounting and busi- ness analysis in agriculture”. Head of the Ministry of Finance of the Republic of Tatarstan since June 2002. From July 2000 to November 2013 – First Deputy General Director – Head of Crude Oil and Petroleum Products Sales Department of PJSC TATNEFT. He was appointed General Director of PJSC TATNEFT in November 2013. 1977 – graduated from the Moscow Institute of Petro- chemical and Gas Industry named after Academician I.M. Gubkin specializing in Development and Complex Mechanization of oil fields. 1995 – graduated from the Oxford Business University. Since 2015 – Managing Director of MOL Oman, Oman Branch Office in Muscat Since 01.01.2017 – Managing Director of G Petroconsulting Ltd 1977 – graduated from Mos- cow Institute of Petrochemical and Gas Industry n.a. Acad- emician I.M.Gubkin. First Deputy General Direc- tor for Production – Chief Engineer of PJSC TATNEFT since 2000. 1975 – graduated from the Moscow Finance Institute 1979 – post-graduate stud- ies at the Institute of World Economy and International Relations. Managing Partner of BVM Capital Partners Ltd since 2001. В 1957 – graduated from Kazan State University. State Consultant to President of the Republic of Tatarstan on development of crude oil and gas fields since June 2007, Professor of the Crude Oil and Gas Geology Chair of Kazan (Volga) State University. % share in the Joint Stock Company’s authorized capi- tal – none. % share of the Joint Stock Company’s ordinary shares owned by the person – none. % share in the Joint Stock Company’s authorized capi- tal – 0,000176. % share of the Joint Stock Company’s ordinary shares owned by the person – none. % share in the Joint Stock Company’s authorized capi- tal – none. % share of the Joint Stock Company’s ordinary shares owned by the person – none. % share in the Joint Stock Company’s authorized capi- tal – none. % share of the Joint Stock Company’s ordinary shares owned by the person – none. % share in the Joint Stock Company’s authorized capi- tal – 0,019831. % share of the Joint Stock Company’s ordinary shares owned by the person – 0,02873. % share in the Joint Stock Company’s authorized capi- tal – none. % share of the Joint Stock Company’s ordinary shares owned by the person – none. % share in the Joint Stock Company’s authorized capi- tal – 0,057136. % share of the Joint Stock Company’s ordinary shares owned by the person – 0,060445. 68 1991– graduated from the physics faculty of Kazan State University. 1994 – gradu- ated from the post-graduate course of the Kazan State Technological University. 1998 – had a training course under the President’s program for managerial staff. 2006 until June 2010 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. % share in the Joint Stock Company’s authorized capi- tal – none. % share of the Joint Stock Company’s ordinary shares owned by the person – none. 69 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY Valery Yu. SO- ROKIN Shafagat F. TAKHAUTDINOV Rustam Kh. KHAL- IMOV Azat K. KHAMAEV Rais S. KHISAMOV René STEINER Rafael S. NUR- MUKHAMETOV Alexander T. YUKHIMETS Member of the PJSC TATNEFT’s Board of Directors Member of the PJSC TATNEFT’s Board of Directors Advisor to Chairman of the PJSC TATNEFT’s Board of Directors Member of PJSC TATNEFT’s Board of Directors Deputy General Director of PJSC TATNEFT for Development and Production of Oil and Gas PJSC TATNEFT’s Board of Directors’ Member Member of the PJSC TATNEFT’s Board of Directors Deputy General Director – Chief Geologist of PJSC TATNEFT Member of the PJSC TATNEFT’s Board of Directors (since 24.06.16) Head of NGDU Leninogorskneft Independent Member of the PJSC TATNEFT’s Board of Directors. Chairman of the PJSC TATNEFT’s Board of Directors HR and Remuneration Committee Audit Committee Member of the PJSC TATNEFT’s Board of Directors Secretary of the PJSC TATNEFT’s Board of Directors (until 03.08.2016) Since 04.08.2016 the func- tions of the Secretary of the Board of Directors of PJSC TATNEFT were transferred to the competence of the Corpo- rate Secretary. Non-Executive Director Non-Executive Director Executive Director Non-Executive Director Executive Director Independent Director Executive Director Born in 1964. Born in 1946. Born in 1965. Born in 1956. Born in 1950. Born in 1964. Born in 1949. Born in 1949 1986 – graduated from the Kazan State University. General Director of JSC Svy- azinvestneftekhim since 2003 1971 – graduated from Mos- cow Institute of Petrochemical and Gas Industry n.a. Acad- emician I.M.Gubkin. 1987 – graduated Moscow Institute of Petrochemical and Gas Industry n.a. Academi- cian I.M. Gubkin. 1999 until November 2013 – General Director of PJSC TATNEFT. Starting November 2013 - Assistant to President of the Republic of Tatarstan on the oil industry issues, Advisor to Chairman of PJSC TATNEFT’s Board of Directors. 2010 to 2011 – Director of PJSC TATNEFT’s Branch in Libya. 2011- 2015 – Head of NGDU “Elkhovneft” of PJSC TAT- NEFT. Deputy General Director of PJSC TATNEFT for Develop- ment and Production of Oil and Gas since 2015. 1978 – graduated from Kazan Aviation Institute, specialty - mechanical engineer. 2000 – graduated from the Law Faculty of Kazan State University. Appointed the First Deputy Minister of Land and Property Relations of the Republic of Tatarstan in December 2008. Appointed Head of the Min- istry of Land and Property Relations of the Republic of Tatarstan in March 2009. 1978 – graduated from Mos- cow Institute of Petrochemical and Gas Industry n.a. Acad- emician I.M.Gubkin. Deputy General Director – Chief Geologist of PJSC TAT- NEFT since October 1997. 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. He graduated from the Ufa Petroleum Institute Since 1989 – he has been heading NGDU «Leninogor- skneft» 1972 graduated from Moscow Institute of Petrochemical and Gas Industry n.a. Academi- cian I.M. Gubkin. Since 1995 until 03.08.2016 – Secretary of the Board of Directors of PJSC TATNEFT % share in the Joint Stock Company’s authorized capi- tal – none. % share of the Joint Stock Company’s ordinary shares owned by the person – none. % share in the Joint Stock Company’s authorized capi- tal – 0,116503. % share of the Joint Stock Company’s ordinary shares owned by the person – 0,123914. % share in the Joint Stock Company’s authorized capi- tal – 0,000056. % share of the Joint Stock Company’s ordinary shares owned by the person – none. % share in the Joint Stock Company’s authorized capi- tal – none. % share of the Joint Stock Company’s ordinary shares owned by the person – none. % share in the Joint Stock Company’s authorized capi- tal – 0,01876. % share of the Joint Stock Company’s ordinary shares owned by the person – 0,019746. % share in the Joint Stock Company’s authorized capi- tal – none. % share of the Joint Stock Company’s ordinary shares owned by the person – none. % share in the Joint Stock Company’s authorized capi- tal – 0,010465. % share of the Joint Stock Company’s ordinary shares owned by the person – 0,010107. % share in the Joint Stock Company’s authorized capi- tal – 0,000284. % share of the Joint Stock Company’s ordinary shares owned by the person – none. 70 71 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY ATTENDANCE OF MEETINGS BY MEMBERS OF THE BOARD OF DIRECTORS There were 12 full-time and one absentee meeting of the Board of Directors the reporting year. Full name 29.01. 2016 25.02. 2016 23.03. 2016 25.04. 2016 25.05. 2016 24.06. 2016 03.08. 2016 26.08. 2016 29.09. 2016 03.11. 2016 24.11. 2016 26.12. 2016 Total Minnikhanov R.N.. Maganov N.U. Ibragimov N.G. Levin Yu.L. Gaizatullin R.R. Gerech L. Muslimov R.Kh. Sabirov R.K. Sorokin V.Yu. Nurmukhametov R.S (From 24.06.2016). Taziyev M.Z. (Until 24.06.2016) Takhautdinov Sh.F. Khamaev A.K. Khisamov R.S. Khalimov R.Kh.. (From 26.06.2015) Steiner R.F. All members of the Board of Directors participated in the absentee meeting held on June 24, 2016. 12/12 12/12 11/12 10/12 10/12 12/12 11/12 11/12 11/12 7/12 5/12 11/12 10/12 10/12 12/12 10/12 LIST OF MAIN ISSUES CONSIDERED AT THE MEETINGS OF THE BOARD OF DIRECTORS IN 2016 1. Results of the budget execution of PJSC TATNEFT. 2. Approval of a new version of the Regulation on the Internal Audit Department. 3. Results of the Internal Audit Department work and approval of the work plan of the UBA. 4. Composition of the Management Board of PJSC TATNEFT. 5. Annual General Meeting of Shareholders of PJSC TATNEFT. 6. Progress of construction and the strategy for the further development of the TANECO project. 7. Candidates to the Board of Directors, the Audit Commission of the Company and proposals to the agenda of the Annual General Meeting of shareholders. 8. Approval of the Regulation on the Corporate Secretary of PJSC TATNEFT. 9. Giving consent to the participation of the General Director and members of the PJSC TATNEFT Management Board in the management bodies of other companies. 10. Approval of related party transactions. 11. Crude oil production plans and geological and technical measures, the state of work to increase the oil recovery and the efficiency of the infill well drilling. 12. Recommendation of the auditing company to the annual General Meeting of shareholders of PJSC TATNEFT to audit the reporting of PJSC TATNEFT in accordance with IFRS and RAS. 13. The results of financial and economic activities of PJSC TATNEFT. 14. Main work areas of the PJSC TATNEFT’s Audit Committee of the Board of Directors. 15. About dividends on shares of PJSC TATNEFT. 16. Results of the consolidated financial statements under IFRS for the TATNEFT Group of Companies. 17. State of ecological monitoring of the bitumen oil fields operation. 18. Work plan of the Board of Directors of PJSC TATNEFT. 19. Statement of the Board of Directors of PJSC TATNEFT concerning independent directors. 20. The official of PJSC TATNEFT on monitoring compliance with the requirements of the Russian Federation legislation on combatting the misuse of insider information and market manipulation. 21. Establishment of Committees of the Board of Directors of PJSC TATNEFT. 22. Development strategy of the TATNEFT Group of Companies for the period until 2025. 23. Approval of Regulations on committees of the Board of Directors of PJSC TATNEFT. 24. Results of implementing the corporate small business support program in the south-eastern part of the Republic and results of activity and strategy of development. 25. Performance of PJSC TATNEFT’s subsidiaries. 26. The strategy and innovations in performance of exploration works at PJSC TATNEFT until 2025. 27. New approaches of PJSC TATNEFT in the field of well construction and repair. STRUCTURE OF ISSUES CONSIDERED BY THE BOARD OF DIRECTORS IN 2016 18.4% 14.3% TOTAL 98 ISSUES 30.6% 36.7% Budget Production Strategic area Related party trasactions 72 73 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYEVALUATION OF THE BOARD OF DIRECTORS ACTIVITIES REMUNERATION OF THE PJSC TATNEFT’S BOARD OF DIRECTORS’ MEMBERS The Code of Corporate Governance recommended by the Bank of Russia for public joint stock companies defines the pro- cedure for assessing the work of the Board of Directors, its committees and members of the Board of Directors. The evalu- ation procedure should be conducted annually in the form of a self-assessment and additionally once in three years with the involvement of an external expert. The self-assessment procedure was carried out on 5 key components: the competence and authority of the Board of Directors, the composition of the Board of Directors, committees of the Board of Directors, the work procedure of the Board of Directors, the Annual General Shareholders Meeting for compliance with the principles of the Code and with the level of the corporate management. The questionnaire has been made in full compliance with the Code. The self-assessment procedure and the content of the questionnaire are coordinated by the Board of Directors’ Corporate Man- agement Committee and independent directors. Completing the questionnaire provides for the principle of confidentiality. The results of the self-assessment were considered at the in-person meeting of the Board of Directors on May 27, 2017. Based on the results of the questionnaires preliminary analysis: the Company complies with the requirements of the Russian legislation in the field of corporate governance and fully follows the recommendations of the Russian Corporate Governance Code, and complies with a significant number of additional provisions of international best corporate governance practice. Simultaneously, the questionnaires reflect comments on further improvement of the mechanisms of work of committees of the Board of Directors and development of corporate practice. The summarized results of the self-assessment of the Board of Directors activities were transferred to the Corporate Management Committee. Remuneration to members of the Board of Directors of PJSC TATNEFT is paid on the basis of the “Regulation on payment of remuneration to members of the Board of Directors and the Audit Commission of PJSC TATNEFT. The remuneration of the Board of Directors is formed of fixed and variable portions. The fixed remuneration portion and it is defined by the Regulation and it is indexed simultaneously with the change of tariffs and salaries of the PJSC TATNEFT’s em- ployees. The variable part of the remuneration of the Board of Directors members is formed according to the following key performance indicators: • ratio of the Company’s capitalization level for the year compared with the previous year; • ratio of the cost of dividends to the net profit (compared with the previous year ); • amount of additional profitability versus the baseline profitability. The remuneration amount for the Board of Directors members is set by the decision of the General Shareholders’ Meeting and includes: • remuneration for the performing the duties of a member of the Board of Directors; • remuneration for the performing the functions of the Chairman of the Board of Directors Committee. In 2016, the total remuneration amount paid to the Joint Stock Company’s members of the Board of Directors amounted to RUB 148,842,246.68, including remuneration for participation in the work of the Board of Directors, salaries, bonuses and other forms of remuneration. Compensations to the Company’s Board of Directors members amounted to RUB 9,596,987.79. 74 75 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYCORPORATE SECRETARY OF PJSC TATNEFT PJSC TATNEFT BOARD OF DIRECTOR’S COMMITTEES Rustam M. KHISAMOV Corporate Secretary – Head of the Corporate Secretary Office of PJSC TATNEFT Born in 1959. He graduated from the Kazan Financial Economics Institute. He has been working at PJSC TATNEFT Since 1987. Since 1994 – Deputy Head of Securities Department of PJSC TATNEFT. Since 1998 – Securities Depart- ment Head of PJSC TATNEFT. Since 07.12.2015 – Deputy Cor- porate Secretary – Head of the Corporate Secretary’s Office. Since 26.12.2016 – Corporate Secretary – Head of the Cor- porate Secretary Office Staff of PJSC TATNEFT. CORPORATE SECRETARY THE PJSC TATNEFT’S CORPORATE SECRETARY’S OFFICE The staff of the PJSC TATNEFT’s Corporate Secretary Office ensures the procedure for prepar- ing and holding of the General Meeting of Shareholders, as well as the activities of the Board of Directors and Committees of the Board of Directors, compliance of the Company with require- ments of the current legislation, the Articles and internal documents of the Company guaran- teeing the exercise of the rights and legitimate interests of the shareholders. The Corporate Secretary – Head of the PJSC TATNEFT’s Corporate Secretary’s Office was ap- proved by the Board of Directors Meeting, Minutes No. 8 of December 26, 2016. Rustam M. Khisamov, who previously was in the position of the PJSC TATNEFT’s Securities Of- fice Head, was appointed Head of the Corporate Secretary Office on December 7, 2015, The competence of the Corporate Secretary Office includes maintaining an effective system of interaction among all participants of the corporate relations, including subsidiaries and affili- ates of the Joint Stock Company, and monitoring the abidance of the Joint Stock Company’s subsidiaries and affiliates to the corporate procedures related to the implementation of the of shareholders and other participants of corporate relations’ rights ensuring interaction of the Joint Stock Company with a specialized registrar, depositories, with public administration bod- ies authorized to carry out related party transactions of corporate relations and with the securi- ties market, as well as with other securities market participants. The Corporate Secretary’s Office provides for the organization and follow-up of the legal re- quirements with regard to public disclosure of information, including the preparation and disclo- sure of information in the form of the annual report, quarterly issuer’s reports, essential facts, as well as documents and information related to the issuance and circulation of securities on a stock exchange, Regulation of documents and information at the request of shareholders, proper storage of the Joint Stock Company’s corporate documents. In order to improve the corporate practice efficiency, the Corporate Secretary’s Office performs monitoring the Com- pany‘s existing procedures efficiency and prepares the annual report of the Board of Directors on the state of the Joint Stock Company’s corporate management and prospects for its devel- opment. The reports on the corporate management are formed in accordance with the Rules of exchange trading and disclosure requirements on the corporate management in the Company to all interested parties. The objectives pursued by the Corporate Secretary work are as follows: l ensuring compliance with the requirements of corporate legislation, the Articles and internal documents of the Company that guarantee the implementation and protection of the rights and legitimate interests of the shareholders; l ensuring effective corporate management system of the Company, as well as interaction of all participants in corporate relations, including subsidiaries and dependent companies, in order to increase the Company’s investment attractiveness, increase its capitalization; l development of the corporate management practices of the Company in accordance with the interests of its shareholders. CORPORATE MANAGEMENT COMMITTEE The Committee has been a permanent Committee under the Board of Directors since 2004. The main objective of the Committee is preliminary consideration and preparation of recommendations to the Board of Directors on the issues of development and improve- ment of the corporate management system in the Company. The Committee is guided in its activities by the laws of the Russian Federa- tion, the Articles of the Company, the Regulation on the Board of Directors of the Company, decisions of the Board of Directors of the Company, this Regulations and other internal documents of the Company, as well as the decisions of the Committee. COMMITTEE COMPOSITION Chairman: Nail U. Maganov – Member of the Board of Directors, Chairman of the Management Board, General Director of PJSC TATNEFT. Committee Members: Rinat K. Sabirov – member of the Board of Directors of PJSC TATNEFT, Assistant to President of the Republic of Tatarstan, Member of the Corporate Management Committee, Member of the HR and Remuneration Committee; Nurislam z. Syubaev – Member of the Management Board, Deputy General Director for Strategic Development of PJSC TATNEFT. Evgeny A. Tikhturov – Member of the Management Board, Head of the PJSC TATNEFT’s Financial Department Rustam M. Khisamov – Corporate Secretary - Head of the PJSC TATNEFT’s Corporate Secretary’s Office. Natalia E. Dorpeko – Corporate Consultant of the PJSC TATNEFT’s General Director. Vasiliy A. Mozgovoy – Assistant to General Director of PJSC TATNEFT, Corporate Finances. Valery D. Ershov – Member of the Management Board, Head of PJSC TATNEFT’s Legal Department. Nuriya z. Valeyeva – Head of Technical and Economic Information and Advanced Experience Extension Office, PJSC TATNEFT. MAIN FUNCTIONS • Regulation of relations between the shareholders, the Board of Directors and Executive Bodies of the Company, as well as the is- • Control over the reliability and effectiveness of the risk management system and the corporate governance system, including the sues of interaction with entities controlled by the Company and other interested parties. analysis of implementing risk management policies, the evaluation of the effectiveness of the risk management procedures, corpo- rate governance practices and preparation of proposals for their improvement. • Evaluation of the corporate management system in the Company, development of a methodology for evaluating the corporate management system and formation of recommendations to the Board of Directors on the activities necessary to improve the cor- porate governance practices in the Company. MAIN AREAS OF THE COMMITTEE WORK IN 2016 • Monitoring of the Company’s compliance with the requirements of legislation on joint stock companies, regulatory • Assistance to the Board of Directors of PJSC TATNEFT and the General Director in assessing the quality of corporate acts of regulatory bodies, legitimate interests and shareholders’ rights. relations and in the development of the corporate management system in the Company - regulating the relationship between shareholders, the Board of Directors and the Company’s management, as well as interaction with the Com- pany’s subsidiaries and other interested parties. • Development of recommendations on the preparation and conduct of the Annual General Meeting of Shareholders. • Development of recommendations for amending the Articles and other internal documents of the Company, which • Development of recommendations on draft internal documents aimed at improving the Company’s corporate man- approval falls within the competence of the General Meeting of Shareholders and the Board of Directors. agement. 76 77 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYAUDIT COMMITTEE HR AND REMUNERATION COMMITTEE The Committee has been a permanent Committee under the Board of Directors since 2004. The Committee is guided in its activities by the legislation of the Russian Federation, the requirements of stock exchanges applicable to the Company as an issuer of securities (including outside the Russian Federation), the Company’s Articles, the Regulation on the Board of Directors, decisions of the Board of Directors, Regulations on the Committee and other internal documents of the Company approved by the General Meeting of Shareholders of the Company and the Board of Directors, as well as by decisions of the Committee. The Committee acts in the interests of the Company’s shareholders. The Committee assists the Board of Directors in monitoring the reliability of the PJSC TATNEFT’s financial statements, compli- ance with the requirements of laws and regulations, the selection of independent auditors, the work of independent auditors and the internal audit system, monitoring of financial and business activities, and other responsibilities within its competence. COMMITTEE COMPOSITION Chairman Yuri L. Levin, Member of the PJSC TATNEFT’s Board of Directors, Independent Director, Managing Partner of BVM Capital Partners Ltd. Committee Members: Radik R. Gayzatullin, member of the Board of Directors, Minister of Finance of the Republic of Tatarstan. Laszlo Gerech, member of the Board of Directors of PJSC TATNEFT, Independent Director. Managing Director of G Petrocon- sultant Ltd., Member of the HR and Remuneration Committee . René Frederic STEINER, Member of the PJSC TATNEFT’s Board of Directors, Independent Director, Program Director of the Private Equity FIDES Business Partner AG, Switzerland, Chairman of the HR and Remuneration Committee. MAIN FUNCTIONS The main functions of the Committee are monitoring of the following aspects: • ensuring the completeness, accuracy and reliability of the Company’s accounting (financial) reporting; • reliability and efficiency of the internal control system and risk management of the Company; • ensuring independence and objectivity of the functions of the internal and external audit; • effectiveness of the notification system of potential cases of fraudulent actions of the Company’s and third parties’ employ- ees, as well as other violations in the activities of the Company, and monitoring the implementation of measures taken by the Company’s executive bodies within such a system. MAIN AREAS OF THE COMMITTEE WORK IN 2016: • Control over the completeness, accuracy and reliability of PJSC TATNEFT’s accounting (financial) statements. • Coordination of the external auditors and the Internal Audit Department work, as well as regular review of their reports. Organization of an independent evaluation of the internal audit function performance and making proposals for improving the work of the Internal Audit Department. Company’s external auditor. • Verification of the independence of the external auditor and implementation of the internal audit function. • Review and analysis of the quarterly, semi-annual and annual financial statements of PJSC TATNEFT, including the results of audits by the • Conducting an evaluation of candidates for auditors and making recommendations to the Board of Directors on the election of independ- • Assistance to the Board of Directors in monitoring the reliability and effectiveness of the internal control and risk management system of • Preliminary consideration of related-party transactions and transactions with PJSC TATNEFT-related parties submitted for approval by the ent auditors of PJSC TATNEFT’s financial statements in accordance with IFRS and RAS. PJSC TATNEFT. PJSC TATNEFT’s Board of Directors. The Committee is a body of the Board of Directors set up for preliminary consideration of issues referred by the Articles of the Company and the Regulations on the Board of Directors to the competence of the Board of Directors in the field of personnel policy and remuneration. The Committee has been a permanent Committee under the Board of Directors since 2004. The Committee assists the Board of Directors of PJSC TATNEFT in improving personnel policies and strengthening of mecha- nisms for motivating employees and managers of the Company. The Committee’s area of work is improving the quality of the Board of Directors operation through the preliminary review and preparation of recommendations on the issues of creating conditions for attraction of qualified professionals to the Joint Stock Company’s Management and the necessary incentives for their efficient operation. COMMITTEE COMPOSITION Chairman René Frederic STEINER, Member of the PJSC TATNEFT’s Board of Directors, Independent Director, Program Director of the Private Equity FIDES Business Partner AG, Member of the PJSC TATNEFT’s Audit Committee. Committee Members: Laszlo Gerech, member of the Board of Directors of PJSC TATNEFT, Independent Director. Managing Director of G Petrocon- sultant Ltd., Member of the HR and Remuneration Committee. Member of the PJSC TATNEFT’s Audit Committee. Yuri L. Levin, Member of the PJSC TATNEFT’s Board of Directors, Independent, Director Managing Partner of BVM Capital Partners Ltd., Chairman of the PJSC TATNEFT’s Audit Committee. Rinat K. Sabirov – Member of the Board of Directors of PJSC TATNEFT, Assistant to President of the Republic of Tatarstan, Member of the Corporate Management Committee; of the Board of Directors. MAIN FUNCTIONS • Drafting and periodic review of the Company’s policy on remuneration of the management bodies’ members. • Preliminary assessment of the Company’s management bodies work. • Conducting a self-assessment and/or an external evaluation of the performance of the Board of Directors and committees • Interaction with shareholders in order to form recommendations to the shareholders on election of candidates to the Board • Planning of personnel appointments in the Company, taking into account the continuity in the Company’s activities, mem- bers of the collegial executive body, making recommendations to the Board of Directors regarding candidates for the posi- tion of Corporate Secretary, members of the Company’s executive bodies and other key management officials. of Directors. MAIN AREAS OF THE COMMITTEE WORK IN 2016 • Facilitation of the effective performance of the Board of Directors functions in the implementation of personnel planning, attracting • Development and periodic review of the Company’s policy on remuneration of the Board of Directors members, members of the qualified professionals to the Company’s management and creation of the necessary incentives for their effective work. collegial executive body and the person acting as the sole executive body, overseeing its introduction and implementation. Consid- eration of the issue «Corporate social network as an instrument of intracorporate communications and organization of team work.» indicators and achievement of objectives. • Introduction of a motivation system for managers of oil and gas producing divisions based on performance of key performance • Consideration of the issue «Corporate University as an effective tool of the personnel development corporate system». • Consideration of the issue «Remuneration of the Company’s personnel following the results of 2016». 78 79 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYGENERAL DIRECTOR MANAGEMENT BOARD SOLE EXECUTIVE BODY COLLEGIAL EXECUTIVE BODY OF THE COMPANY General Director is appointed by the Board of Directors. N.U. Maganov has been General Director of PJSC TATNEFT since November 2013 until present time. The Management Board is formed by the Board of Directors and it is composed of the Chairman and members of the Manage- ment Board. General Director is Chairman of the Management Board of PJSC TATNEFT. Powers of the General Director are determined by the Joint Stock Company’s Articles and the “Regulation on General Director of PJSC TATNEFT”. General Director manages the ongoing activities in accordance with the corporate Company Development Strategy. General Director determines the organizational structure of the Company oversees the rational use of resources, solves organi- zational issues of the Company’s business structure management and social guarantees to personnel Regulation, including, without limitation: • ensuring execution of the General Shareholders’ Meeting decisions; • presentation of candidates for the Management Board members to the Board of Directors; • allocation of responsibilities among the Management Board members; • organization of the Management Board work, as Chairman of the Management Board meetings, • approval of the Joint Stock Company’ internal documents, except for internal documents, which approval is referred by the Joint Stock Company’s Articles to the competence of the General Shareholders’ Meeting, the Board of Directors and the Management Board; ning table, branches and representative offices, approval of job descriptions and salaries; • determination of the of the Joint Stock Company’s organizational structure, approval of the Joint Stock Company’s man- • introduction to the Board of Directors candidates for the position of the First Deputy General Director; • conclusion of employment contracts with employees of the Joint Stock Company; • ensuring the drafting, conclusion and execution of the Collective Agreement. The Management Board acts based on the laws of the Russian Federation, the Republic of Tatarstan, the Company’s Articles and the Regulation on the Management Board. The rights and duties of the members of the Management Board are determined by law, the Articles of the Company, these Regulations, as well as agreements concluded on behalf of the Company by the Chairman of the Board of Directors with each member of the Management Board. The quantitative composition of the Management Board is determined by the Board of Directors. The procedure for the for- mation, status, composition, functions, goals and tasks, powers of the Management Board, the procedure for its operation and interaction with other management bodies of the Company are determined by the Regulation on the Management Board. Meetings of the Board are held in accordance with the work plan of the Board. Core competencies of the Board: Plans to the Board of Directors, preparation of reports on their fulfillment; • participation in the development of prospective and current plans of the Joint Stock Company’s activity, representation of • Joint Stock Company’s participation in commercial and non-profit organizations; • implementation of the Joint Stock Company’s programs of financial and investment activity within the powers received from • coordination of production programs of subsidiaries; • Regular reporting to the Board of Directors on the financial condition of the Joint Stock Company, and transactions as well the Board of Directors; as decisions that can have a significant impact on the Joint Stock Company‘s condition. REMUNERATION OF THE MANAGEMENT BOARD MEMBERS Payments to members of the Management Board are made in accordance with basic conditions of the contracts concluded for the performance of duties of the Management Board members, including implementation of decisions of the General Share- holders’ Meeting, the Board of Directors, and participation in working out the Joint Stock Company’s development plans, as well as enhancing the effectiveness of the of Company and its subsidiaries work plans. In 2015, the total remuneration of the Joint Stock Company’s members of the Management Board amounted to RUB 223,668,388.2 including remuneration for participation in the work of the Management Board, salary, bonuses and other forms of remuneration. Compensation to the members of the Joint Stock Company’s Management Board members of amounted to RUB 1,336,925. no. of the management board memberS by the termS of Stay in the management board 0 Less than 1 year 3 From 1 to 7 years 8 Over 7 years 80 81 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYCOMPOSITION OF THE PJSC TATNEFT’S MANAGEMENT BOARD Nail U. MAGANOV Anvar V. VAKHI- TOV Vladlen A. VOSKOBOINIKOV Nikolay M. GLAz- KOV Victor I. GOROD- NY Valery D. YER- SHOV Nail G. IBRAGI- MOV Rustam N. MUKHAMADEEV General Director PJSC TATNEFT PJSC TATNEFT’s Board PJSC TATNEFT’s of Directors Member Chairman of the Management Board Director of OOO «TATNEFT- Neftekhim” Management Company. Head of PJSC TATNEFT’s Consolidated Financial Statements Department. Member of the PJSC TATNEFT’s Board of Directors Information Disclosure Committee Deputy General Director for Capital Construction of PJSC TATNEFT Deputy General Director – Head of Property Department of PJSC TATNEFT Chairman of the PJSC TATNEFT’s Board of Directors Management Committee Head of PJSC TATNEFT’s Legal Department. First Deputy General Director for Production - Chief Engineer of PJSC TATNEFT since 2000. PJSC TATNEFT’s Board of Directors Member. PJSC TATNEFT’s General Director Deputy for HR & Social Development Born in 1958. Born in 1951. Born in 1965. Born in 1960. Born in 1952. Born in 1949. Born in 1955. Born in 1952 1983 – graduated from Mos- cow Institute of Petrochemical and Gas Industry n.a. Acad- emician I.M.Gubkin. July 2000 to November 2013 – First Deputy General Director – Head of Crude Oil and Petroleum Products Sales Department of PJSC TATNEFT. Appointed General Director of PJSC TATNEFT in November 2013. 1980 – graduated from Kazan Institute of Chemical Technol- ogy. 1993 – graduated from the Southern Alberta Institute of Technology in Calgary. 1988 – graduated from Kazan Construction Engineering Institute. April 2014 until present time – Director of «TATNEFT- Neftekhim” Management Company. 2005 until present time Head of PJSC TATNEFT’s Consoli- dated Financial Statements Department 2008-2010 – Head of Con- struction Department of PJSC TATNEFT. 2010 until present time – Deputy General Director for Capital Construction of PJSC TATNEFT. 1978 – graduated from Mos- cow Institute of Petrochemical and Gas Industry n.a. Acad- emician I.M.Gubkin. 1995 until present time – Dep- uty General Director – Head of PJSC TATNEFT’s Property Department since. 1978 – graduated from Kazan State University named after V.I. Ulyanov-Lenin. 2002 until present time – Head of Legal Department of PJSC TATNEFT. 1977 – graduated from Mos- cow Institute of Petrochemical and Gas Industry n.a. Acad- emician I.M.Gubkin. 1977 – graduated from Mos- cow Institute of Petrochemical and Gas Industry n.a. Acad- emician I.M.Gubkin. 2000 until present time – First Deputy General Director for Production – Chief Engineer of PJSC TATNEFT. 2001 until present time – Deputy General Director for HR & Social Development. % share in the Joint Stock Company’s authorized capi- tal – 0.000176. % share of the Joint Stock Company’s ordinary shares owned by the person – none. % share in the Joint Stock Company’s authorized capi- tal – none. % share of the Joint Stock Company’s ordinary shares owned by the person – none. % share in the Joint Stock Company’s authorized capi- tal – none. % share of the Joint Stock Company’s ordinary shares owned by the person – none. % share in the Joint Stock Company’s authorized capi- tal – none. % share of the Joint Stock Company’s ordinary shares owned by the person – none. % share in the Joint Stock Company’s authorized capi- tal – 0,000254. % share of the Joint Stock Company’s ordinary shares owned by the person – none. % share in the Joint Stock Company’s authorized capi- tal – none. % share of the Joint Stock Company’s ordinary shares owned by the person – none. % share in the Joint Stock Company’s authorized capi- tal – 0.019831. % share of the Joint Stock Company’s ordinary shares owned by the person – 0,020873. % share in the Joint Stock Company’s authorized capi- tal – 0,004204. % share of the Joint Stock Company’s ordinary shares owned by the person – 0,004264. 82 83 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYRafael S. NUR- MUKHAMETOV Nurislam z. SY- UBAEV Evgeny A. TIKH- TUROV Vladimir P. LA- VUSHCHENKO Head of NGDU «Leninogor- skneft of PJSC TATNEFT. Deputy General Director for Strategic Development. Member of the Corporate Management Committee of the Board of Directors Head of the PJSC TATNEFT’s Finance Department Member of the PJSC TATNEFT’s Board of Directors Information Disclosure Committee PJSC TATNEFT’s General Director Deputy for Economics Member of the PJSC TATNEFT’s Management Board (until 03.08.2016) Alexander T. YUKHIMETS Secretary of the PJSC TATNEFT’s Board of Directors (until 03.08.2016) From 04.0.2016 the functions of the Secretary of the Board of Directors of PJSC TATNEFT passed into the competence of the Corporate Secretary. Born in 1949. Born in 1960. Born in 1960. Born in 1949. Born in 1949. 1974 – graduated from the Ufa Oil Institute. 1989 until present time – Head of the NGDU «Leninogor- skneft» of PJSC TATNEFT. 1982 – graduated from Moscow Institute of National Economy n.a, G.V. Plekhanov 2002 until present time – Deputy General Director for Strategic Development В 1982 – graduated from Moscow Institute of Man- agement named after S.Ordzhonikidze. 1972 – graduated from Mos- cow Institute of Petrochemical and Gas Industry n.a. Acad- emician I.M.Gubkin. 1999 – until present time Head of PJSC TATNEFT’s Depart- ment of Finance since. 1984 – graduated from post- graduate course of VNIIO- ENG. Doctor of Economics. 1997 until present time – Deputy General Director for economics of PJSC TATNEFT. 1972 – graduated from Mos- cow Institute of Petrochemical and Gas Industry n.a. I.M. Gubkin. Secretary of the PJSC TAT- NEFT’s Board of Directors since 1995 until 03.08.2016. % share in the Joint Stock Company’s authorized capi- tal – 0,010465. % share of the Joint Stock Company’s ordinary shares owned by the person – 0,010107. 84 % share in the Joint Stock Company’s authorized capi- tal – none. % share of the Joint Stock Company’s ordinary shares owned by the person – none. % share in the Joint Stock Company’s authorized capi- tal – none. % share of the Joint Stock Company’s ordinary shares owned by the person – none. % share in the Joint Stock Company’s authorized capi- tal – 0,045465. % share of the Joint Stock Company’s ordinary shares owned by the person – 0,048194. % share in the Joint Stock Company’s authorized capi- tal – 0,000284. % share of the Joint Stock Company’s ordinary shares owned by the person – none. DISTRIBUTION OF RESPONSIBILITY AND AUTHORITY AREAS OF THE GENERAL DIRECTOR AND HIS DEPUTIES In accordance with the “Regulation on General Director of PJSC TATNEFT”, the General Director has the right to entrust the resolution of certain issues to his deputies. The acting organizational and administrative documents of the Company as- sign the responsibilities between the General Director and Deputies of the General Director, in terms of the work organization in the following areas: development of oil and gas fields; • core activities: oil and gas production, creation of a technical base for the • exploration and management of external oil and gas projects; • workover, well drilling and enhanced oil recovery; • capital construction; • economics and finance; • strategic development; • selection, appointment, personnel training and development of their skills, creation of the managers and professionals reserve, planning and implementation of the Company’s social development; • interaction with federal governmental bodies, ministries, representative offices of foreign countries and companies. The Deputies of the PJSC TATNEFT’s General Director organize the work and are responsible for the relevant activities of the Company in terms strategic and long-term planning, performance of technical and economic indicators, efficient and rational use of fixed assets, raw materials, fuel and energy and other resources, organization of production and labor, labor protection and safety, as well as other activities. 85 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY PARTICIPATION OF THE MANAGEMENT BOARD MEMBERS IN THE BOARD MEETINGS IN 2016 Full Name 11.01 01.02 09.03 05.04 05.05 06.06 06.07 06.09 04.10 08.11 06.12 Всего Maganov N.U. Voskoboinikov V.A. Gorodny V.I. Glazkov N.M. Mukhamadeyev R.N Tikhturov E.A. Subaev N.Z. Lavushchenko V.P. 03.08.2016 Yukhimets A.T. 03.08.2016 Ershov V.D. Ibragimov N.G. Nurmukhametov R.S. Vakhitov A.V. 11/11 8/11 10/11 10/11 9/11 6/11 7/11 7/11 7/11 8/11 9/11 10/11 11/11 LIST OF ISSUES REVIEWED AT THE MEETINGS OF THE MANAGEMENT BOARD IN 2015 1. About participation in the establishment of the «1C-TEK» limited liability company and «TatITneft» limited liability company. 2. Participation in PJSC Bank ZENIT. 3. Participation in JSC Naberezhnye Chelny Heat Network Company. 4. Participation in the company «Tatneft International Co-operative U.A.». 5. Introduction of changes to the section «Disciplinary and financial liability for violations in the area of finance» of the PJSC TATNEFT’s Corporate Code. 6. About participation of PJSC TATNEFT n.a. V.D. Shashin in the authorized capital of PJSC ZENIT Bank. 7. On the main tasks and objectives of the development and production unit to reduce costs as part of the Company’s value doubling strategy until 2025. 8. On the approval of the «PJSC TATNEFT Policy in the area of industrial safety, labor and environmental protection» and «PJSC TATNEFT Program in the area of industrial and occupational safety and health to prevent injuries, reduce risks, ac- cidents and unscheduled losses». Information about the organization of the parade and the festive show at the square, the Lenin, Gagarin streets, and the site behind the Drama Theater in Almetyevsk. Information about the preparation for the contest «Professional Excel- lence – 2016». 9. 10. On increasing the authorized capital of the «Nizhnekamsk CHP» Limited Liability Company from RUB 1,000,000 to RUB 3,399,522,716 paid for by the property on the balance sheet of the e for Lease Relations Department. 11. On the implementation of the project «Involvement of personnel in in the industrial safety and labor protection processes on the basis of» Self-Declaration» at the NGDU “Almetyevneft 12. About work with the personnel reserve of PJSC TATNEFT. 13. Increasing the effectiveness of NGDU based on the introduction of process management. 14. On the effectiveness of investments in crude oil production in the territory of the Republic of Tajikistan for 9 months of 2016 and the program formation for 2017 15. Proposals for the implementation of the TATNEFT Company employees’ health improvement program at Company’s own health resorts in 2017, taking into account the vouchers cost subsidizing. 16. About transferring the share of PJSC TATNEFT amounting to 63.16% in OOO « LUCH TV Company» in the subsidiary. 17. On the amount of voluntary contributions from the City Housing Department as part of the Housing Construction Program under the Social Mortgage for 2016 and 2017. 18. On centralizing the management of PJSC TATNEFT’s social facilities. 86 87 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYCOMMITMENT TO THE BEST PRACTICE OF CORPORATE MANAGEMENT COMMENT OF THE CENTRAL BANK OF THE RUSSIAN FEDERATION: «THE CORPORATE GOVERNANCE IS A KEY ISSUE IN ESTABLISHING AN EFFECTIVE MARKET ECONOMY BASED ON THE RULE OF LAW. THEREFORE, THE PROBLEMS OF CORPORATE GOVERNANCE MOVES TO THE STATE LEVEL. IN THE EVENT OF EQUAL PRODUCTION, FINANCIAL AND OTHER BASIC INDICATORS THE COMPANIES WITH GOOD REPUTATION IN THE AREA OF CORPORATE MANAGEMENT ARE MUCH MORE EXPENSIVE. RUSSIAN COMPANIES MAY COUNT ON RECEIVING A BONUS TO THE PRICE OF THEIR SHARES IN THE AMOUNT FROM 20 TO 50% ONLY AT THE EXPENCE OF IMPROVING CORPORATE GOVERNANCE». The Company’s activity in the stock market is regulated by the current legislation and the requirements of the stock market regulators. The principles of the Corporate Govern- ance Code of the Central Bank approved by the Government of the Russian Federation in February 2014 and the Board of Directors of the Bank of Russia in March 2014 and the prin- ciples of the best practices of the Organization for Economic Cooperation and Development (OECD) G20 / OECD have set a high benchmark for the development of the Company’s corporate governance system. Concepts and procedures from the best international corpo- rate practices are consistently introduced into the Russian corporate environment. The Russian Code of Corporate Governance contains re- quirements for corporate governance standards, covering virtually all areas of the corporate practice. This is based on the understanding that long-term investors need a clear understanding of the Company’s strategic goals and pros- pects and the conviction that their rights will not be violated. Система корпоративного управления ПАО «Татнефть» основывается на принципах, направленных на эф- фективное управление активами, рост рыночной сто- имости, поддержание финансовой стабильности и прибыльности Компании, обеспечение законных прав и интересов акционеров и иных заинтересованных лиц, информационной открытости. They started paying more attention in the Russian practice of corporate governance to the following issues: nificant corporate actions, egy, monitoring of its implementation, • protection of the shareholders’ rights in execution of sig- • adoption of a balanced and realistic development strat- • improving the efficiency of the Board of Directors’ com- • establishment of systems for effective risk management • development of the remuneration policy principles for and conflict prevention, mittees work, top managers of the Company. The new version of the Bank of Russia’s Corporate Govern- ance Code focuses on ensuring the rights of shareholders, including: • Protection of shareholders’ dividend rights. • •Building effective work of the Board of Directors, defin- ing the Board of Directors functions, organizing the work of committees, clarifying the requirements for directors, including the directors’ independence. management bodies and key executives of the Company. • Construction of a remuneration system for members of • Building an effective system of risk management and in- • Additional disclosure of material information about the • Formation and control of internal regulations and proce- Company and entities controlled by it. ternal control. dures for the conduct of material corporate actions (on increasing the authorized capital, acquisition, listing and delisting of securities, reorganization, major transac- tions), allowing to ensure protection of rights and equal treatment of shareholders. INITIATIVES FOR THE DEVELOPMENT OF CORPORATE GOVERNANCE PRACTICES FOCUS AREAS OF IMPROVING THE CORPORATE PRACTICE To ensure full implementation of the new Listing Rules of the Moscow Stock Exchange and the provisions of the Corporate Governance Code recommended by the Bank of Russia, the Corporate Management Committee of PJSC TATNEFT’s Board of Directors has formed an appropriate plan of actions. The plan has been developed taking into account the approved work plan of the PJSC TATNEFT’s Board of Directors and decisions of the Board of Directors and it includes the current and operational tasks of the corporate practice. The plan provides for joint the work of committees of the Board of Directors and interaction with the executive bodies of the Company’s management. In order to coordinate the work of the Board of Directors’ committees, it is possible to hold joint meetings, including those in the «round table» format with the invitation of competent professionals to exchange views on significant corporate issues, as well as using electronic formats for the interaction through video and conference communications. Coordination of the committees’ interaction is arranged by the Corporate Secretary – Head of the Corporate Secretary Office of PJSC TATNEFT. High Level of Competencies Management of the vertically integrated structure of the Company requires high competence and profes- sionalism of the management team, an effective sys- tem of corporate governance and control. The Com- pany has a clear and understandable organizational structure with a good level of interaction between man- agement bodies and the distribution of responsibilities for control and management. Liability Insurance of the Company’s Manage- ment Bodies’ Members PJSC TATNEFT n.a. V.D. Shashin insures liability risks of the Company’s management body members, in- cluding the insurance abroad, on terms and in amounts corresponding to the insurance market for such risks in the Russian Federation. The insurer of such risks were SK SOGAZ (throughout the year) and Chulpan (until September 2016). In the area of respecting the shareholders’ rights: • Increasing the transparency of the information disclosed; • Implementing a set of measures to improve interaction with shareholders; In the area of improving the effectiveness of the man- aging bodies work: • Improving certain procedures for organizing the work of • drafting new versions of the Company’s key internal the managing bodies; documents in order to bring them in line with the require- ments of legislation, regulators and best practices of the corporate management. In the area of improving the quality of corporate man- agement and following the best practices: • improving the subsidiaries’ management system; • updating of internal documents and procedures regu- lating the corporate management relations within the Group; • analysis and assessment of the corporate management practices on a systematic basis. In the area of information disclosure: mation Policy of PJSC TATNEFT; • drafting of a new version of the Regulation on the Infor- • drafting of the Regulation on provision of information to • Improving the quality of information disclosure in the An- • consideration by the Board of Directors of the Informa- nual Report and on the Company’s website; the shareholders of PJSC TATNEFT tion Policy based on the recommendations of the Corpo- rate Management Committee. The information policy is based on the principles of transparency combined with the preservation of the Company’s interests in the area of protecting trade secrets and confidential information. The most important channels for disseminating information that available to interested parties are the the Company’s official website (www.tatneft.ru) and the Annual Report. Adhering to the principle of fair accessibility to the information for all interested parties, the Company publishes information posted on the official website in Russian and English. largest number of 88 89 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYINTERACTION wITH SHAREHOLDERS PRINCIPLES AND THE ORDER OF INTERACTION WITH SHAREHOLDERS The Company ensures equal and fair treatment of all shareholders in the exercise of their right to participate in the management of the Company and builds relationships with shareholders based on the principles of: Guaranteed equal protection and observance of the legitimate rights and interests of all shareholders of the Company, regardless of the size of the shareholding, established by the current legislation of the Russian Federation, requirements and recommendations of regulators of the stock markets, which the Company’s shares circulate on. Continuous interaction of the Company’s management with all shareholders in order to efficiently manage the Com- pany, ensure its sustainable and dynamic development. Continuous improvement of the existing and development of new mechanisms and forms of interaction with share- holders, increasing the efficiency and quality of interaction, taking into account the emergence of new shareholders and the setting of new tasks by the shareholders. Identification and resolution of all possible general and specific problems related to the shareholders exercising their rights. Taking all necessary and possible measures in case of a conflict arising between the Company’s bodies and the Company’s shareholders (shareholder), as well as between the shareholders, if the conflict affects the interests of the Com- pany, for a full settlement of the conflict, and creating conditions that exclude the conflict arising in the future. The Company publishes on a quarterly basis «Management’s analysis of the financial condition and performance results» - an Appendix to the financial statements of PJSC TATNEFT prepared in accordance with IFRS standards, and familiarizes the investors and analysts with the Company’s own production assets, providing an opportunity for field meetings at production facilities. The interaction is based on the availability of responsible managers and employees of the Company to communicate with the shareholders, investors and analysts of the stock market, as well as consultants of institutional investors on voting. The Company’s interaction with shareholders and investors is maintained on a regular basis in the format of meetings, presen- tations, conference calls with participation of management and key experts within the framework of investment conferences and the Company’s participation in «road shows» at the sites of international financial centers, allowing the shareholders, ana- lysts and investors representing investment companies to receive information and answers to all their questions directly from the top managers of the Company. This format of interaction allows the shareholders and investors to form a fair understand- ing of the strategy and current Company’s activities and at the same time enables the Company’s management to assess the expectations of the shareholders and investors, generally providing for a constructive dialogue and the potential for working out optimal solutions for the Company’s development, shareholders’ assets management and sustainable development of the Company. The Company seeks to further improve the mechanisms and forms of interaction with shareholders, taking into account the emergence of new shareholders and the setting of new tasks by the shareholders and improving the overall quality of the cor- porate governance. ENSURING LEGAL RIGHTS OF SHARE- HOLDERS The Company guarantees compliance with and obser- vance of legal rights and in- terests of all the Company’s shareholders regardless of the number of shares they own and the location of the shareholders, as set out by applicable laws of the Rus- sian Federation, require- ments and recommendations of stock markets regulators, where the shares of the Company circulate, and the Company’s Articles. The Shareholders participate in the Company’s Activities, exercising their rights and responsibilities and on the basis of their voluntary initiatives aimed at improv- ing the management of the Company’s operations. The Company provides the shareholders with access to documents in accordance with the applicable law. INFORMATION POLICY DIVIDEND POLICY INTEREST CONFLICT AVOIDANCE The Company’s information policy is aimed at effective information interaction of the Company with shareholders, investors and other interested parties. The Company’s information policy is aimed at providing the information to the interested parties in the amount neces- sary to make a balanced deci- sion on committing the actions that could affect the financial and economic activities of the Company. When providing the information to the Company’s shareholders a reasonable balance is main- tained between the interests of specific shareholders and the interests of the Company as such, which is interested in preserving the confidentiality of important commercial and official information that may have a significant impact the Company’s competitiveness. The Company’s dividend policy is based on strict observance of the legitimate rights and interests of the shareholders, is consistent with the mission and strategic goals of the Company aimed at increasing its capitali- zation and the level of dividend yield on invested capital, as a result of effective management of the shareholders’ assets. The Company creates condi- tions that ensure the inter- est of management and the shareholders in increasing the Company’s profitability (growth of net profit) and a long-term value. When determining the amount of dividends (per share) recommended to the General Meeting of Shareholders the Company’s Board of Directors recommendation is based on the amount of the Company’s net profit and it is assumes that the amount allocated for the dividends payment is at least 30% of the net profit deter- mined under RAS. The Company’s corporate management system includes a set of rules and procedures to avoid conflicts of inter- est between the Company’s management bodies and its shareholders, as well as be- tween the shareholders, if the conflict affects the interests of the Company, identification and resolution of all possible general and specific prob- lems relating to the rights of the shareholders. In case of a conflict aris- ing there are mechanisms provided to take all necessary and possible steps to com- plete the conflict settlement, as well as create the condi- tions excluding the conflict in future. This work is carried out by the authorized division interacting with the Board of Directors committees, the Internal Audit Department and other relevant divisions of the Com- pany. Regulation on the Information Policy of PJSC TATNEFT and the Regulation on Providing Information to Shareholders of PJSC TATNEFT (Minutes of the of the Board of Di- rectors of PJSC TATNEFT Meeting No. 12 of April 27, 2017) Regulation on Dividend Policy was approved by the Board of Directors of PJSC TATNEFT on April 25, 2016. Minutes of the Board of Directors Meeting No. 12 The authorized unit for ensuring the Company’s interaction with shareholders is the Corporate Secretary’s office. 90 91 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYENSURING THE RIGHTS OF SHAREHOLDERS FOR RECEIVING INCOME AS DIVIDENDS HISTORY OF DIVIDEND PAYMENTS FOR THE FIVE COMPLETED FISCAL YEARS Type of shares 2011 2012 2013 2014 2015 % of face value dividend per share, rubles % of face value dividend per share, rubles % of face value dividend per share, rubles % of face value dividend per share, rubles % of face value dividend per share, rubles THE PJSC TATNEFT’ SHARE CAPITAL STRUCTURE THE PJSC TATNEFT’S SHARE CAPITAL STRUCTURE AS OF DECEMBER 31, 2016 32.85% 3.46% Total 2,326,199,200 shares 35.93% Republic of Tatarstan* The ADR program Treasury groups Other shareholders 27.76% * Legal entities Controlled By the Republic Tatarstan TOTAL NUMBER 0F SHARES OUT OFTHEM: Ordinary Shares Всего Foreign shareholders Russian shareholders Preference shares Total Foreign shareholders Russian shareholders 2,326,199,200 2,178,690,700 562, 260* 2,178,128,440 147,508,500 91,667* 147,416,833 *without ownership through Russian nominal holders INFORMATION ON EACH CATEGORY (TYPE) OF SHARES Full name of securities (Rind and Type) Ordinary registered shares Preferred registered shares Securities Issue Form Quantity issued, pcs. Nominal value of 1 (one) security (RUB) Issued securities state registration number Information on state registration DIVIDEND POLICY Non-documentary Non-documentary 2,178,690,700 1 000 1-03-00161-А 26.10.2001 147,508,500 1 000 2-03-00161-А 26.10.200 The Company’s dividend policy is based on strict observance of the legitimate rights and interests of the shareholders, is con- sistent with the mission and strategic goals of the Company aimed at increasing the Company’s capitalization and the level of the dividend yield on invested capital as a result of the efficient shareholders’ assets management and follows principles: increase the amount of dividends on the basis of the consistent profits growth; • The Company recognizes dividends as one of the key indicators of the Company’s investment attractiveness and seeks to • The Company creates conditions that ensure the interest of management and the shareholders in increasing its profitability • The Board of Directors determines the amount of dividends recommended to the General Meeting of the Shareholders on the basis of an economically sound approach to the distribution the of profits and compliance with the balance sheet of short-term (revenue) and long-term (development of the Company) interests of the shareholders; (growth of net profit) and long-term value) • The Company ensures equality of conditions for all shareholders, irrespective of the size of the shareholding and the loca- tion of the shareholders, and equal treatment of them by the Company in exercising their ability to participate in the Com- pany’s profits through the receipt of dividends; • The Company ensures maximum transparency of the dividend policy. The principles and conditions for making decisions on the payment (declaration) of dividends, the procedure for determining the size and payment of the dividends are determined by the Regulation on the Dividend Policy of pa TATNEFT approved by the Board of Directors of the Company. The Regulation is based on the observance of the rights of the shareholders provided for by the legislation of the Russian Federation, taking into account the recommendations of the corporate governance code of the Bank of Russia and the best practices of the corporate governance Total amount of divi- dends (RUB bln) The percentage of net profit (under RAS) spent for paying dividends Ordinary shares Preference shares Date of the decision to pay dividends 16.5 30% 20.0 30% 19.2 30% 24.6 30% 25.5 30% 708 708 7.08 7.08 860 860 8.60 8.60 823 823 8.23 8.23 1058 1058 10.58 10.58 1096 1096 10.96 10.96 The Annual General Meeting of Sharehold- ers for 2011, which was held on June 29, 2012, Minutes No. 19 of 03.07.2012 The Annual General Meeting of Sharehold- ers on the results of 2012, which was held on June 28, 2013, Minutes No. 20 of 02.07.2013 The Annual General Meeting of Sharehold- ers on the results of 2013, which was held on June 27, 2014, Minutes No. 21 of July 2, 2014 Actual date of Payments August 27, 2012. August 26, 2013 The nominal holder is July 29, 2014. Share- holders registered in the shareholders register – August 19, 2014. The Annual General Meeting of Sharehold- ers following the results of 2014, which was held on June 26, 2015, Minutes No. 22 of July 30, 2015null The nominal holder on July 29, 2015. The shareholders registered in the shareholders register on August 19, 2015. The Annual General Meeting of Sharehold- ers on the results of 2015, which was held on June 24, 2016, Minutes No. 23 of July 29, 2016 Nominal holder – July 22, 2016. To sharehold- ers registered in the shareholders register – August 12, 2016. The amount of dividends on ordinary and preference shares of PJSC TATNEFT recommended by the Board of Directors to the General Meeting of Shareholders as of the end of 2016 is 22.81 rubles (2281% of the share’s nominal value. Dividends are paid in cash in the ruble equivalent. The Company and its Executive Bodies ensure timely accrual and full payment of dividends to the shareholders and nominal holders of shares, who have the right to receive them, in accordance with the procedure provided for by the current legislation and the Company’s Articles. Information on the decision to pay (declare) dividends, their amount and payment procedure is posted on the official Internet portal of the Company www.tatneft.ru in Russian and English, as well as on the website of the information agency authorized to perform the Company’s information disclosure conduct actions. COST OF PJSC TATNEFT SHARES FOR THE PERIOD 2006-2016. (PRIVILEGED, ORDINARY), RUB 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Ordinary Preference 121.99 148.00 55.25 139.48 145.06 158.16 218.00 208.20 226.55 315.50 427.00 77.31 87.00 20.35 76.35 86.65 88.02 105.15 121.70 134.60 198.10 235.00 DIVIDENDA YIELD IN SHARES FOR THE PERIOD 2011-2016. (PREFERENCE, ORDINARY) Ordinary Preference 2011 2012 2013 2014 2015 2016 3.17% 3.25% 4.13% 3.63% 3.35% 2.57% 5.70% 6.73% 7.07% 6.11% 5.34% 4.66% In December 1996, TATNEFT became one of the first Russian companies to place the Company’s securities on international fi- nancial markets and to provide for an access to the shares for international investors through depositary receipts. On December 12, 2016, N.U. Maganov, General Director of TATNEFT, opened trades on the London Stock Exchange and held a meeting with international investors in the presence of Nihil Rati, General Director of London Stock Exchange plc., and A.V. Yakovenko, Am- bassador of the Russian Federation in the United Kingdom. The events were timed to coincide with the 20th anniversary of the company’s listing on the London Stock Exchange. Heads of The Bank of New York Mellon (depository bank of the Company’s depositary receipts program), PWC (auditor), Cleary Gottlieb (legal adviser accompanying the placement of the TATNEFT’s securities on the international exchanges) also participated in the opening ceremony. 92 93 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPRINCIPLES AND THE INFORMATION DISCLOSURE PROCEDURE REPORT ON PUBLICLY DISCLOSED INFORMATION REGISTER OF PUBLIC OPENING INFORMATION IN 2016 The Company complies with all applicable legal requirements related to the information disclosure by public companies. Following the principle of the maximum business transparency, we provide for regular, efficient, affordable, reliable and meaningful disclosure. An important channel of the information disclosure is the Company’s official website. Presented on the website pages there are data for all major activity areas, the sustainable Company’s development, as well as the information for shareholders and investors, press releases and news, annual reports. An important source of information disclosure are quarterly reports and Annual Reports, which the Company annually issues in preparation for the Annual General Meeting of Shareholders. STATEMENTS DISCLOSURE TATNEFT Company discloses the annual consolidated financial statements together with the auditor’s report, and the con- solidated interim condensed financial statements together with the assessment review of the consolidated interim condensed financial statements. The Joint Stock Company provides for disclosure of biographical data of the Board of Directors members, including informa- tion on whether or not they are independent directors, as well as prompt information disclosure about the loss of an Independ- ent Director status by a member of the Board of Directors. The Joint Stock Company discloses information on the capital structure in accordance with the Corporate Management Code recommendations. The Joint Stock Company’s Annual Report provides additional information recommended by the Corporate Management Code: controlled entities during the past year; absentia) meetings, participation of each member of the Board of Directors in the meetings, • overview of the most significant transactions, including related party transactions made by the Joint Stock Company and its • report on the work of the Board of Directors for the year, containing, inter alia, information on the number of full-time (in • report on the work of the Committees of the Board of Directors, including the main areas of the committees’ work; • information about direct or indirect possession of Joint Stock Company’s shares by members of the Board of Directors and • information on any conflict of interests of the members of the Board of Directors and other executive bodies (including those • description of the remuneration system of the Board of Directors members, including the total remuneration amount of the associated with participation of the mentioned persons in the competitors’ managing bodies of the Joint Stock Company); other executive bodies; managing bodies: the Board of Directors and the Management Board for the year. Ser. No. Message Content 2 Message about the date on which persons who have the right to exercise rights with regard to the issuer's equity securities are defined, including the date on which the list of persons entitled to participate in the general meeting of the issuer's shareholders is drawn up Date of disclosure 3 25.02.2016 Message on the person’s termination of the right to have control over a certain number of votes as- signed to the voting shares (stakes) that constitute the authorized capital of the Issuer. 12.02.2016 Message on the person’s acquisition of the right to have control over a certain number of votes as- signed to the voting shares (stakes) that constitute the authorized capital of the Issuer. 18.03.2016, 18.06.2016, 08.04.2016, 08.04.2016, 28.06.2016, 28.10.2016, Message on the procedure of access to information contained in a quarterly report. Message about disclosure of the Company’s affiliated entities list on the Internet page. Notice of holding the meeting of the Board of Directors (Supervisory Board) and its agenda. 12.02.2016, 13.05.2016, 12.08.2016, 11.11.2016 11.01.2016, 01.04.2016, 01.07.2016, 04.10.2016 26.01.2016, 15.02.2016, 16.03.2016, 18.04.2016, 17.05.2016, 20.06.2016, 25.07.2016, 22.08.2016, 26.09.2016, 28.10.2016, 21.11.2016, 20.12.2016 On convening and holding the general meeting of members (shareholders) of the Issuer, as well as about the decisions taken by the general meeting of members (shareholders) of the Issuer. Messages about paid income on the Issuer's securities. Message of the Issuer’s default to the holders of the securities issued 25.02.2016 12.08.2016 12.08.2016 Message about information disclosure on the internet web site about annual financial statements of the Joint Stock Company 30.03.2016 Годовая БО, 27.04.2016, 28.07.2016, 28.10.2016 Message on certain decisions adopted by the Board of Directors (Supervisory Board) of the Joint Stock Company. 01.02.2016, 25.02.2016, 23.03.2016, 25.04.2016, 25.05.2016, 24.06.2016, 24.06.2016, 03.08.2016, 26.08.2016, 30.09.2016, 24.11.2016 Message about the issuer committing a related party transaction. 01.06.2016, 28.06.2016 Message on the taken by the General Meeting of members (shareholders) of the Issuer Message on the procedure of access to information contained in the Annual Report 2015. 29.06.2016 29.06.2016 Message about the Information Sent or Provided by the Issuer to a relevant Agency (Organization) of a Foreign State, a Foreign Exchange and (or) other Organizations under the Foreign Law for the purpose of Disclosure or Submission to Foreign Investors in Connection with the Placement or Circulation of the Issuer’s Securities outside the Russian Federation. 29.06.2016, 04.08.2016, 11.08.2016, 26.08.2016, 31.08.2016, 30.11.2016, 12.12.2016 Notice of the date of defining the persons entitled to exercise rights under the registered equity securities. Messages about accrued income on the Issuer's securities. Message on changes (corrections) the essential fact text "On certain decisions taken by the is- suer's board of directors (Supervisory Board)" 29.06.2016 29.06.2016 26.02.2016 Message about the issuer’s disclosure of the consolidated statements (consolidated financial state- ments), as well as provision of the audit opinion prepared with regard to such statement 31.03.2016 1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 94 95 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY 1 20. 21. 22. 23. 24. 2 Message about acquisition (disposal) of the voting shares (stakes) of the issuer or securities of the foreign issuer certifying the rights in respect of the issuer’s voting shares by the issuer and/or by organization controlled by the issuer. 3 12.04.2016 Message about web disclosure of the consolidated financial statements under IFRS for three months ended on March 31, 2016, June 30, 2016, September 30, 2016 09.06.2016, 26.08.2016, 30.11.2016 Message about information, which by the issuer's opinion, essentially affects the value of the is- suer’s equity securities 21.10.2016 Message about the emergence of the organization controlled by the issuer essentially important for the issuer. 28.10.2016 Message on the change (correction) of the text message of the essential fact “about the informa- tion sent or provided by the issuer to a relevant agency (organization) of a foreign state, a foreign exchange and (or) other organizations under the foreign law for the purpose of its disclosure or submission to foreign investors in connection with the placement or circulation of the issuer’s secu- rities outside the russian federation. 30.11.2016 25. Message on the change correction of information earlier published in the news bulletin. 09.12.2016 According to international standards (in the form of press releases and publication of reports in accordance with the rules of the London Stock Exchange) 26. 27. 28. 29. Publication of the annual consolidated financial statements under IFRS for 2015 Publication of the consolidated interim condensed financial statements under IFRS for the three months of 2016 (unaudited). Publication of the consolidated interim condensed financial statements under IFRS for the six months of 2016 (unaudited). 31.03.2016 09.06.2016 26.08.2016 Publication of the consolidated interim condensed financial statements under IFRS for the first nine months of 2016 (unaudited). 30.11.2016 PROTECTION OF INSIDER INFORMATION PROTECTION. INSIDER INFORMATION PROTECTION COMMITTEE The Company provides all necessary procedures for the protection of the insider information with the relevant internal regula- tory documents: Rules for Monitoring Compliance with the Legislation of the Russian Federation on Combatting the Illegal Use of Insider Information and Market Manipulation, the Regulation on the Procedure for Access to Insider Information and the Rules for the Protection of Its Confidentiality Based on the List of Information Relating to the Insider Information. The Committee is guided in its activities by the legislation of the Russian Federation. COMPOSITION OF THE INSIDER INFORMATION PROTECTION COMMITTEE IN 2016: Chairman Rustam M. KHISAMOV – Corporate Secretary - Head of the Corporate Secretary Office of PJSC TATNEFT, a responsible per- son for exercising control over the compliance with the Law on Combatting Illegal Use of the Insider Information. Committee Members: Valery D. ERSHOV – member of the Management Board, Head of PJSC TATNEFT’s Legal Department; Alexey P. BESPALOV – Head of IT Department - Deputy Chief Engineer PJSC TATNEFT; Ildar A. RAKHMATULLIN – Head of Internal Audit Department of PJSC TATNEFT; Vasiliy A. MOzGOVOY – Assistant to General Director of PJSC TATNEFT, Corporate Finances; Peter A. GLUSHKOV – Head of International Law Department, Department of Consolidated Financial Statements PJSC TAT- NEFT; Rifdar R. KHAMADYAROV – Head of Personnel Office of PJSC TATNEFT. 96 97 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYMANAGEMENT OF RISkS INTEGRATED RISK MANAGEMENT SYSTEM CORPORATE INTEGRATED SYSTEM OF RISKS MANAGEMENT The Company has an integrated risk management system based on the analysis and evaluation of possible factors that could materially affect the performance of PJSC TATNEFT’s and the Group’s entities production and financial and business activities, and also have a direct or indirect impact on the Company’s current operations and / or strategic plans. An important component of the risk management system is the activity aimed at ensuring the implementation of unified corporate standards that regulate the main processes of production and financial and business activities of PJSC TATNEFT and the Group’s enterprises. When analyzing potential risks, both external and internal factors are taken into consideration. External market, sectoral, socio-economic, political, financial, conjuncture and other conditions of the Company and its subsidiaries and dependent companies are referred to the external risks category. While managerial, production, personnel-related , social, environmental and others factors are of intra-corporate nature. The corporate risk management system is aimed at identifying potential risks and the possibility of taking timely measures to eliminate or minimize them, which makes it possible to adjust the business planning, investment activities and social policy of the Company. The corporate standards in the Company significantly reduce the intra-corporate risks. Given the dynamic development of the business environment, the constant change in the composition, quality and intensity of factors that can affect the Company’s operations, the risk management system is constantly being improved to ensure prompt response to such processes. Based on the processing of large data sets, better forecasting tools are being developed that allow taking measures aimed at eliminating or minimizing potential risks. The corporate planning system uses, in particular, various development scenarios that allow reacting promptly to changes related to the factors affecting the Company’s operations. TATNEFT Group Management Ensuring Business Process Efficiency Business Process Quality Control Corporate Risks Control Key Elements of Risk Management The mechanism of quality assessment of all possible factors, which can significantly affect the performance of production and financial activities of the Group and have a direct or in indirect im- pact on the current operations and strategic plans of the Company The system of uniform corporate standards, regulating basic processes of industrial, financial and economic activities of TATNEFT Company, its structural divisions and entities of the Group Identification of Risks Ensuring the related party transactions of the production financial and business process activities Avoidance or Minimization of Risks Prevention of risks in the framework of related party transactions Monitoring of Risk Management quality control of corporate standards performance identification of emerging risks in the course of business processes and implementation of new projects assessment of personal responsibility of officials The analysis of risk factors considers all aspects of the market, industry, socio - economic, political, financial, market competition and other conditions of the Company, its subsidiaries and affiliates operation. At the same time taken into account are all intra-corporate factors: management, production, HR, social, environmental. Currently such procedures are provided for basic production and corporate blocks. Risks Control Production Activity Corporate Management 98 99 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYMAIN RISKS ASSOCIATED WITH THE COMPANY’S ACTIVITIES INDUSTRY RISKS Risk of oil and refined products prices. Cash inflows, profitability and the future level of growth largely depend on the existing prices for crude oil and oil products. In the past, the crude oil and oil products prices fluctuated over a wide range under the influence of many factors, among which: • international and regional supply and demand (reflect- ing, inter alia, expectations of future supply and demand) for the oil and petroleum products; export restrictions and taxes; • weather conditions; • national and foreign governmental regulation, including • prices and availability of alternative fuels; • prices and availability of new technologies; • ability and willingness of members of the Organization of Petroleum Exporting Countries (OPEC) and other oil- producing countries to establish and maintain certain levels of production and prices; • political and economic events in oil-producing regions, in • global and regional economic situation. particular, in the Middle East; Over the years, the prices for crude oil and petroleum prod- ucts have been relatively high, but in recent years, there has been a significant decline. The prices for crude oil and petro- leum products vary in different directions. The fall in prices for oil and oil products adversely affects the results of op- erations and the financial position of the Company. Despite certain stabilization of oil prices, which has been observed recently, lower prices from the current levels may lead to a reduction in the volume of profitable oil production by the Company, which will lead to a reduction in the volume of effective development of the Company’s reserves and to a decrease in the economic efficiency of the programs for car- rying out search-prospecting works. It is worth noting that despite the development of alternative energy sources and the potential for increasing the fleet of electric vehicles, in the medium term the Company does not expect that they will be able to significantly lead to substitu- tion of oil and oil products, while the demand for oil and oil products will continue growing in many respects at the ex- pense of countries with developing economies. Therefore, according to the Company, no significant deterioration in of the demand structure in the industry is expected. Technical and technological risks. Exploration, development and equipping of new fields, maintenance of operating wells, drilling of new ones, as well as treatment, transportation and processing of oil and gas are a very complex and capital-intensive process. Additional investments are required for enhanced oil recovery, which is especially important for the Company. The role of special methods of the oil recovery enhancement will increase in the future, as a result of deposits depletion. Accordingly, the economic efficiency of the fields exploration and develop- ment will largely depend on the ability of the Company to use the most productive and affordable technologies. The Com- pany pays considerable attention to the development and application of the most advanced technologies in the area of exploration, production, treatment, transportation and refin- ing of oil and gas, being one of the innovation leaders in this area in Russia. The Company and its subsidiaries and dependent compa- nies operate sophisticated process systems and facilities for the extraction, treatment, transportation and refining of oil and gas, which are classified as hazardous production facili- ties. The Company takes all necessary measures aimed at ensuring safe operation of these production facilities, com- pliance with all applicable standards and requirements, ap- plies the best practices in this area, and also provides liability insurance for a number of facilities. Transportation. Since most of the regions of crude oil pro- duction in Russia are remote from the main markets for oil and oil products sailing, oil companies depend on the de- gree of the transport infrastructure development, as well as on the possibility of accessing it. The Company transports a significant portion of crude oil, which the Company sells for export and to the domestic market through the system of trunk pipelines in accordance with contracts concluded with PJSC “Transnet” and its subsidiaries, which formulate the main obligations between the parties, including the right of “Transneft” Company to mix or replace the Company’s oil with the oil from other producers. A significant part of the oil transported through the pipeline is delivered to sea ports for further transportation by sea. The Russian marine terminals have certain restrictions related to geographical location, weather conditions and the throughput. The transportation of petroleum products across Russia is mainly carried out by rail. The railway infrastructure of the Russian Federation is owned and operated by JSC “Russian Railways”. “Transneft” and “Russian Railways” are state-owned companies. Since the activities of the above companies are part of the natu- ral monopolies, their tariff policy is determined by the state COUNTRY AND REGIONAL RISKS The Company is registered and carries out most of its activities in the Russian Federation. The Company’s main production as- sets are located, and the main production activity is carried out in the territory of the Republic of Tatarstan - a constituent entity of the Russian Federation. In particular, the political situation in the Russian Federation and in the Republic of Tatarstan is sta- ble. The risks of a possible military conflict, announcement of a state of emergency or a strike in the region of the Company’s core business are assessed as low. At the same time, the Com- pany has approved procedures that can activated in the event of a state of emergency to reduce the impact of such a situation on the lives, health and safety of employees and residents of the regions of operations, as well as the Company’s production activities. Geographical features of the region of the Company’s core business are not characterized by an increased risk of nat- ural disasters, which may have a significant impact on normal production activities. When planning and carrying out the works for the production, treatment, transportation and storage of oil and gas, oil and gas products, as well as materials involved in production, the Company takes into account the geographi- cal, including climatic, features of the region of activity. In the event of negative consequences for the Company’s operations that may be caused by natural disasters such as floods, earth- quakes, mudflows, hurricane winds and others, the Company approved procedures and policies aimed at prompt elimina- tion such consequences. The Company has monitoring pro- cedures, using modern technical means, aimed at preventing possible occurrence of negative consequences of the natural phenomena and informing the population of the Company’s ac- tivities region about the possibility of such consequences. The region of the Company’s core business is not remote from the point of view of transport and other infrastructure. bodies to ensure the balance of interests of the state and all participants in the transportation process. Tariffs of the natural monopolies are established by the Federal Tariff Ser- vice of the Russian Federation (“FST”). The tariff amount depends on the transportation direction, the volume of sup- ply, the distance to the destination, and also on some other factors. The FST reviews the tariffs at least once a year. The Company closely follows the development and maintenance of the transport infrastructure necessary for the delivery of produced oil and produced oil products to customers, as well as the tariff policy, and actively participates in relevant sectorial discussions and initiatives. Environmental risks. The oil and gas sector of the economy is subject to a high degree of environmental risks. In case of violation of environmental standards, there is a risk of penal- ties. In addition, there is a possibility of revising federal and regional environmental standards in the direction of their fur- ther tightening. The Company continuously carries out and introduces new technical and organizational measures that minimize the impact of technical and environmental risks. STRATEGIC RISK The activities and results of the Company’s financial activities depend on many factors, including those related to changes in the energy market environment, state policy, primarily taxa- tion-related, technologies development and the labor market dynamics. The Company’s managing bodies decisions related with development (strategy) are prepared on the basis of all available information relevant to possible development sce- narios and seek to take into account all reasonably foreseeable variations in the assumptions used in such planning. Taking into consideration the existence of a high-tech oil and refining base formed over many years, the Company has a stable platform for development and, adjusts its plans, as necessary. At the same time, since the implementation of the main investment projects by the Company is usually carried out during a num- ber of years, a significant negative change in the prerequisites laid down when making decisions on the implementation of a project may have a negative impact on the results of operations and the Company’s profitability. 100 101 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYRisks of the banking system. The Company’s cash is allo- cated on the accounts and placed in deposits with banks of the Russian Federation. The Company implements a diversi- fied approach when placing its free cash. At the same time, the Company encountered the situations of normal activity suspension and withdrawal of licenses of the credit institu- tions where funds were placed. Due to the above diversifi- cation, as well as monitoring the state of credit institutions where the funds are placed, the Company reduces the risks of their loss. RISK OF THE BUSINESS REPUTATION LOSS in strict compliance with Due to the fact that the main products sold by the Company (oil, oil products and gas products) are homogeneous and are produced the current requirements and standards, and the Company itself is one of the largest Russian oil companies with more than 65 years of history, an understanding of the financial stability or financial position of the Company among the main counterparties (customers) of the Company’s products does not have a significant impact on their decision to cooperate with the Company. At the same time, the representation of consumers of the Company’s products and the quality of products and services affects the sales volumes and profitability of this segment. The Company carries out continuous monitoring of the quality of oil and gas products sold through the network of filling stations, expands the range of services rendered to customers at the filling station stations and undertakes other measures to improve the quality of services. In addition, the Company constantly informs its customers and counterparties of the Company’s activities through publishing materials and press releases on the Internet, distributing them through the media, and through mobile applications. There are free telephone lines for customers of the filling station network to receive feedback and complaints about the quality of products and services. The Company has adopted and operates procedures to promptly respond to the customer claims and complaints in order to eliminate their causes. In addition to the regular disclosure of information (compulsory and voluntary), at the request of customers and counterparties, subject to the requirements of the law, the Company provides all necessary information on its financial position and sustainability. FINANCIAL RISKS The main financial risks of the Company’s operations are relat- ed to currency fluctuations, inflation, as well as the conjuncture in financial markets and the stability of the banking system. Currency risks. The Company is exposed to risks of unfa- vorable changes in exchange rates, the main of which is the fluctuation of the ruble against the US dollar. This is due to the fact that a significant share of the Company’s revenues is denominated in US dollars, while the greater part of its expenses is expressed in rubles. The currency structure of the Company’s debt as a whole reflects the structure of the Company’s income, which reduces dependence on the cur- rency fluctuations. Influence of inflation. The current level of inflation does not have a significant negative impact on the Company’s fi- nancial position. It is not possible to predict the critical level of inflation for the Company, since in addition to the level of consumer prices, it is necessary to take into account the change in the real purchasing power of the ruble, the con- juncture in the Russian and international oil markets, as well as the market of materials and services for the oil industry, and the state’s further policy with regard to tariffs. Financial markets. In accordance with the Company’s de- velopment strategy until 2025, the main investments in de- velopment are planned to be financed received from the in- come of the operating activities (equity capital). At the same time, the Company periodically raises borrowed funds and the ability to do so at acceptable rates and in the required quantities depends on the environment in the financial mar- kets. In particular, the change in interest rates may have an impact on the Company’s operations of borrowing money and servicing the current debt: in the case of borrowing funds in the form of bank loans with a floating interest rate, an increase in the general level of interest rates on the mar- ket leads to an increase in the amount of funds, payable on interest. When planning its activities and forming budgets, the Company takes into account the current and forecasted situation in the financial markets and supports access to a wide range of financing sources to ensure that funds can be raised on optimal terms. The Company periodically places part of its cash in financial instruments, which value depends on the situation on the mar- ket. These financial instruments may differ in terms of risk and return. The Company pursues a balanced policy in the area of the allocating the free cash, it monitors the risks associated with such investments, but can not in all cases guarantee the achievement of the expected results for such investments. 102 To carry out its activities, the Company receives licenses for the exploration and production of oil and gas, for the operation of hazardous production facilities and other activities in accordance with applicable law. At present, the Company does not expect significant changes related to the licensing procedure for the exploration and development of oil and gas fields, the operation of hazardous production facilities, including oil and gas refineries, which could have a significant negative impact on the activities of PJSC TATNEFT and its subsidiaries. The Company is involved as a defendant in a number of court cases, as well as a party in other proceedings arising in the course of its normal business. LEGAL RISKS PJSC TATNEFT is a subject of foreign economic activity, among other things, exporting oil and oil products, equipment and services outside the Russian Federation, and investing in projects abroad. In this regard, any changes in the legislation of the Russian Federation or other countries, where the Company operates, in the area of currency regulation and currency control, as well as rules of customs control and duties that may limit the funds of repatriation, export or importation of goods and equipment, as well as requiring compliance with preliminary or subsequent procedures related to currency transactions or customs procedures, may complicate the Company’s operations and lead to additional expenditures. The Company believes that the risk of adverse changes in exchange control and customs regulations in the Russian Federation at present are not significant. Given the role of the oil industry for the Russian economy, tax revenues of the Company are significant. Changes in tax legislation may have a material impact on the Company’s operations, profitability of its operations, financial position and the value of securities. The larger part of taxes and duties, primarily in the form of a mineral extraction tax and a customs export duty on oil and oil products, are levied on the basis of gross indicators (volumes of production or exports), regardless of the profitability of the Company’s operating activities. At the same time, the current legislation provides the Company with a number of privileges for these taxes and fees, including the oil production from deposits with a high degree of reserves depletion and the development of high- viscosity oil fields, which economic effectiveness largely depends on their availability. At the moment, the Russian Federation is developing mechanisms for taxing the oil industry on the basis of the activities profitability, including, in particular, the introduction of a tax on additional income from the extraction of hydrocarbon raw materials, which is planned to be pre-tested in a number of pilot projects, as well as additional changes in the use of export duty on oil and petroleum products (up until its cancellation). These possible changes may have both a positive and negative impact on the Company’s financial performance and investment projects. 103 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYSYSTEM OF CORPORATE CONTROL AND INTERNAL AUDIT POLICY IN THE AREA OF INTERNAL AUDIT INTERNAL CONTROL The internal audit is carried out within the framework of the annual plan approved by the Board of Directors. Such items as the system of internal control over the operational efficiency of processes, compliance with legislation and safety of property are considered within the framework of the audit. The audit is conducted on a risk-oriented basis approach. A report on the internal audit results is sent to the Company’s management and to the Audit Committee. Subsequently, the Internal Audit Department monitors the implementation of activities and informs the Company’s management and the Audit Committee about the progress in eliminating the identified shortcomings. There were 9 audits performed in 2016. In addition, following the instructions of the Company’s management the Department’s representatives participated in 32 unscheduled projects on various issues of the financial and economic activity. 2016 witnessed monitoring implementation of the action plans based on the results of audits carried out in 2009-2016. All the cases of non-fulfillment of the action plans were initially reported to the management of the relevant division after which the General Director was informed. The PJSC TATNEFT’s Internal Audit Department successfully performed in November 2016 evaluation of the internal audit functions quality. Based on the results of the evaluation, the experts of ZAO Deloitte & Touche CIS concluded that the activities of the Department as a whole are in line with the International Professional Standards of the Internal Audit and the Code of Ethics of the Institute of Internal Auditors. The internal audit procedures are an integral part of the corporate management system and include targeted actions taken by the Board of Directors and the Company’s management aimed at improving the risk management process and increasing the likelihood of achieving the set goals. As part of the improvement of corporate management practices, in the reporting corporate year, there were amendments made to the Regulation on the Internal Audit Department of PJSC TATNEFT. The Board of Directors approved the new version of the Regulation in March 2016. The Internal Control Service participates in the audits of structural divisions and subsidiaries of the TATNEFT Group. The corporate control function is to provide methodological support to the management staff of the Executive Office and structural subdivisions of the TATNEFT Group of Companies in terms of compliance with the norms of both the tax legislation and the accounting legislation. This function helps ensuring compliance with legislative norms and reducing the tax and financial risks in the Company. INDEPENDENT AUDITOR In in view of the independent assessment of the financial statements reliability, the Company annually attracts an external auditor to conduct an audit of the IFRS and RAS financial statements. The PJSC TATNEFT’s Board of Directors Audit Committee preliminarily considers candidates for external auditors of the Company, which recommendations are the basis of made for further approval of the external auditors in accordance with the procedure established by the law. The General Meeting of Shareholders approved JSC PricewaterhouseCoopers Audit as the auditor of the Company’s accounting statements under RAS for 2016. The General Meeting of Shareholders approved JSC PricewaterhouseCoopers Audit as the auditor of the Company’s consolidated financial statements in accordance with IFRS for 2016. 104 105 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYANTI-CORRUPTION POLICY OF PJSC TATNEFT In 2014 the decision of the Board of Directors of PJSC TAT- NEFT approved the organization standard the «Anti-cor- ruption policy of PJSC TATNEFT n.a. V.D. Shashin (STO TH 123-2014), which sets out the basic principles aimed at pre- venting the corruption. The main principles of the anti-corruption policy are: Non-Acceptance of Corruption and the Ban on the Cor- ruption Actions The Company’s activities are based on preventing the cor- ruption in all forms and manifestations. All employees, mem- bers of the Company’s management bodies and other per- sons acting on behalf of the Company or in its interests are prohibited directly or indirectly, personally or through any in- termediary, to be involved in corrupt practices, regardless of the business doing practice in a particular country or region. PJSC TATNEFT does not allow any corrupt acts, including a conflict of interest manifestation, both in relation to repre- sentatives of the state, public formations, organizations of any form of ownership, politicians and other third parties, and with regard to the Company’s employees, in any way, including through abuse of office aimed at gaining any per- sonal benefit. Inevitability of Punishment The Company carries out an investigation of all reasonably justified reports of violating proper procedures to counteract involvement in corrupt activities and prosecutes perpetra- tors without regard to their position, term of service, status in the Company and other relationships with it in the manner prescribed by the applicable law and local regulatory docu- ments of the Company. The Company applies all possible reasonable and legitimate efforts for the quickest possible restraint of violations. The Company makes public the infor- mation about persons who violated the requirements of ap- plicable the law and this Anti-Corruption Policy. Legitimacy The Company and its employees in the course of carrying out their duties are obliged to comply with the norms of the Russian anti-corruption legislation, as well as the applicable norms of any foreign anti-corruption legislation in case of entering into legal relations subject to such a legislation. Top Management Attitude Monitoring The managing officials of the Company, including members of management bodies, heads of departments, offices and other divisions of the Company, must declare an irreconcil- able attitude to any forms and manifestations of corruption at all levels, demonstrate, implement and comply with it in practice. Regular Risks’ Assessment of Involvement in Corrupt Activities The Company identifies, evaluates and periodically reas- sesses the corruption risks inherent in its potentially vulner- able business processes. In identifying and assessing the risks, the Company takes into account the completeness of information on the Company’s activities and plans, the in- cluding investment and strategic ones, available at the time of valuation and reassessment. Consistency and Adequacy The Company develops and implements a system of proper procedures on combating and preventing any involvement in corrupt activities. The Company strives to make the proce- dures as transparent, clear, feasible and reasonably respon- sive to the identified risks as possible. Due Diligence Principle The Company monitors and checks counterparties and candidates for positions in the Company before deciding whether to start or continue business relations or hire to the positions for their reliability, non-acceptance of corruption and the conflict of interest risk. Information Sharing and Training The Company informs and clarifies the principles and norms of the applicable legislation, the Anti-Corruption Policy and other local regulatory documents with respect to combatting any involvement in corruption activities, including training employees on the basics of combatting the involvement in any corruption activities and clarifying the Company’s policy in this area to counterparties. The Company continuously monitors implemented proce- dures to combat and prevent involvement in corrupt activi- ties and controls their compliance. The Company periodi- cally makes an independent assessment of the state of the system for counteracting involvement in corrupt activities, as well as assessing the compliance of the Company’s activ- ities with the norms of the applicable legislation and the Anti- Corruption Policy. The results of the evaluation are commu- nicated to the shareholders and to the public in the annual report, press releases and other information materials. Improving the Due Diligence Procedures System The Company develops and maintains an alert system for violations and risks associated with corrupt activities. This system applies both to the employees and other persons with the possibility of maintaining anonymity. The Company guarantees confidentiality to all employees and other per- sons who have faithfully reported on the corruption risks and violations. Reports on violations of the Anti-Corruption Policy can be transferred in the following ways: • directly to the immediate or superior managing person; • through the round-the-clock phone of the PJSC TAT- • to law enforcement agencies. NEFT’s «hotline»; Protection of Workers’ Interests No sanctions can be applied to the employee for: • refusal to participate in corrupt activities, even that such a refusal resulted in the Company’s incurring losses, loss of profits, commercial and / or not obtaining competitive advantages; • bona fide reporting of alleged violations, facts of corrupt activities, other abuses or inadequate effectiveness of existing control procedures. If an employee or other person provides knowingly false information or attempts, using anticorruption procedures, to obtain personal benefits contrary to the interests of the Company or the applicable law, then such a person may be held liable in accordance with the current legislation and lo- cal regulatory documents of PJSC TATNEFT. All employees, irrespective of the position held, are liable under the current legislation of the Russian Federation for compliance with the principles and requirements of the An- ti-Corruption Policy, as well as for the actions (inaction) of subordinate persons violating these principles and require- ments. The persons guilty of violating the requirements of the Anti-Corruption Policy may be brought to disciplinary, administrative, civil or criminal liability on following the ini- tiative of the Company, law enforcement agencies or other persons in the manner and on the grounds provided for by the laws of the Russian Federation, the Company’s Articles, local regulations and Labor contracts. “HOT LINE” The Company effectively operates a special confidential channel through which an employee or an outsider can re- port the facts of various violations related to the Company’s activities, including corruption: the “Hotline”. Reception of calls is carried out by an independent operator. There were 790 applications of various nature received and processed in 2016. Appropriate measures have been taken, including introduction of new standards and regulations to the corporate practice aimed at reducing the risks of viola- tions in the Production and economic activities, as well as at improving labor discipline and employees’ responsibility. Additional control measures have been introduced to pre- vent violations of the earlier identified nature in the future. THERE IS A «HOT LINE» INFORMATION SYSTEM OPERATING AT THE COMPANY SINCE 2015 PHONE: 8 800 100 4112 106 107 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT’S REPORT ON COMPLIANCE wITH PRINCIPLES AND RECOMMENDATIONS OF CORPORATE GOVERNANCE CODE COMMENT: This Report has been generated in accordance with Chapter 70 of Bank of the Russia Regulation No. 454-P of Dec. 30, 2014 “On disclosure of information by issuers of equity securities” and it reflects the Company’s compliance with the principles and recommendations of the Corporate Governance Code (hereinafter also referred to as the Code) recommended by the Bank of Russia for use by joint-stock companies, which securities are admitted to organized trading. The text of the Corporate Governance Code is posted on the official website of the Bank of Russia on the Internet at: http:// www.cbr.ru/finmarkets/files/common/letters/2014/inf_apr_1014.pdf. As a methodology for assessing compliance of PJSC TATNEFT with principles of corporate governance, the recommendations set forth in the Bank of Russia Letter No. IN-06-52 / 8 of February 17, 2016 “On disclosure of a report on compliance with the principles and recommendations of the Code of Corporate Governance in the annual report of a public joint stock company”. Description of the most significant aspects of the model and practice of the corporate governance at PJSC TATNEFT is con- tained in the section “Corporate Management” of the Company’s Annual Report for 2016, as well as on the Company’s official Internet website at www.tatneft.runull. THE PJSC TATNEFT’S BOARD OF DIRECTORS CONFIRMS THAT THE PRESENT REPORT CONTAINS COMPLETE AND RELIABLE INFORMATION ABOUT THE COMPANY’S COMPLIANCE WITH PRINCIPLES AND RECOMMENDATIONS OF THE CORPORATE GOVERNANCE CODE RECOMMENDED BY THE BANK OF RUSSIA. PJSC TATNEFT, being a company registered in the Russian Federation, fully complies with the requirements of Russian leg- islation and is guided by the national principles of the corporate governance recommended for application by the regulatory authorities for the securities market of the Russian Federation. At the same time, the Company applies the principles of the best international corporate practices and strives to generally comply with the best standards of the corporate governance. PJSC TATNEFT adheres to the appropriate standards to provide all stakeholders with understandable, complete and structured information on the corporate governance system that has evolved in the Joint-Stock Company, explaining the key reasons, factors and (or) circumstances, in which the Company does not respect or adhere to the full principles of the corporate govern- ance, formalized in the Code of Corporate Governance. During 2016, the Company was developing the corporate practice and improving internal corporate procedures in accordance with the recommendations of the Corporate Governance Code recommended by the Bank of Russia. The following internal documents, which are fundamental to the Company’s corporate practice system were updated in the reporting corporate year: (24.06.2016 ); • Articles of Public Joint Stock Company TATNEFT n.a. V.D. Shashin (24.06.2016 ); • Regulation on the General Meeting of Shareholders of the Public Joint Stock Company TATNEFT n.a. V.D. Shashin • Regulation on the Board of Directors of the Public Joint Stock Company TATNEFT n.a. V.D. Shashin (24.06.2016 ); • Regulation on the General Director of the Public Joint Stock Company TATNEFT n.a. V.D. Shashin (24.06.2016 ); • Regulation on the Management Board of the Public Joint Stock Company TATNEFT n.a. V.D. Shashin (24.06.2016 ); • Regulation on the Board of Directors’ Audit Committee of PJSC TATNEFT n.a. V.D. Shashin (29.09.2016); • Regulation on the Board of Directors’ HR and Remuneration Committee of PJSC TATNEFT n.a. V.D. Shashin (29.09.2016); • Regulation on the Board of Directors’ Corporate Management Committee of PJSC TATNEFT n.a. V.D. Shashin New adopted documents: • Regulation on the Corporate Secretary of PJSC TATNEFT n.a. V.D. Shashin (25.02.2016); • Regulation on the Dividend Policy of PJSC TATNEFT n.a. V.D. Shashin (25.04.2016). 108 109 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYNo. Corporate Governance Principle Criteria for Assessing Compliance with the Principle of Governance Status37 of Compliance with the Principle of the Corporate Governance Explanations38 for Deviations from the Criteria for Assessing the Compliance with the Corporate Governance Principle 1 2 3 4 5 The Company shall ensure equal and fair treatment of all shareholders in the exercise of their right to participate in the management of the Company. 1.1. 1.1.1. The Company shall create the best possible conditions for shareholders to participate in the general meeting and develop informed positions on issues on its agenda and to coordinate the Company’s actions, as well as an op- portunity to express the opinions on the issues being discussed. 1.1.2. The procedure for notification on hold- ing a General Meeting and provision of materials for the general Meeting gives shareholders the opportunity to properly prepare for participation in it the General Meeting. 1.1.3. During the preparation and holding of the General Meeting, the shareholders shall have the opportunity to receive informa- tion about the meeting and materials to it without hindrance and in a timely manner, to pose questions to the executive bodies and to communicate with each other. 1.1.4. The exercise of the shareholder’s right to demand convocation of the General Meeting, nominate candidates for the management bodies and carry propos- als for inclusion in the agenda of the General Meeting shall not be accompa- nied by unjustified complexities. 1.1.5. Each shareholder had the opportu- nity to freely exercise the right to vote in the simplest and most convenient way for him. 110 complied with partial compliance no compliance complied with partial compliance no compliance 1. The “Regulation on the General Meeting of the Shareholders”, approved by the General Meeting of the Shareholders and regulating the procedures for holding the General Meeting, is publicly available. (The new version was approved by the decision of the General Meeting of the Shareholders of PJSC TATNEFT on June 24, 2016). 2. The Company provides an affordable way of communicating with the Company, such as a hotline, e-mail, allowing the shareholders to express their opinion and forward questions regarding the agenda for the General Meeting in preparation. These actions used to be taken by the Company on shortly before each General Meeting that took place in the reporting period. 1. The Company made a notice of holding the General Meeting of the Shareholders posted (published in the news line) on the Internet website at least 30 days before the date of the General Meeting. 2. The communication on holding the meeting provides information on the meeting venue and documents required for admission to the premises. 3. The shareholders were provided with access to the information about who proposed the agenda and who nominated candidates to the Board of Directors and the Audit Commission of the Company. 1. During the reporting year, the shareholders were offered the opportunity to pose questions to members of the Company’s executive bodies and the Company’s Board of Board of Directors members shortly before and during the Annual General Meeting. complied with partial compliance no compliance 2. The Board of Directors’ position of (including dissenting opinions incorporated in the Minutes) for each agenda item of General Meetings held during the reporting period was included into the materials prepared for the General Meeting of the Shareholders. 3. The Company provided for the access of the shareholders to the list of persons entitled to participate in the General Meeting from the date of its receipt by the Company, in all cases of holding General Meetings in the reporting year. 1. In the reporting year, the shareholders had the opportunity, for at least 60 days after the end of the relevant calendar year, to submit proposals for inclusion in the agenda of the annual General Meeting. 2. In the reporting year, the Company did not refuse to accept proposals on the agenda or nominees for the bodies of the Company due to misprints and other insignificant shortcomings in the shareholder’s proposal. 1. The Company’s internal documents (internal policy) contain provisions according to which each participant of the General Meeting can request a copy of the ballot filled out by him before the meeting completion. The shareholders shall be given an equal and fair opportunity to participate in the Company’s profits distribution through receiving divi- dends 1 2 3 4 5 1.1.6. Procedures for holding a General Meeting set by the Company shall provide an equal opportunity for all persons present at the general meeting to express their opinions and ask ques- tions that might be of interest to them. complied with partial compliance no compliance 1. When holding a General Meeting of the Shareholders in the form of a meeting (joint attendance of the shareholders) during the reporting period, sufficient time was provided for the reports on the agenda items and time for discussion of these issues. 2. The candidates for management and control bodies of the Company were available to answer questions from the shareholders at the meeting at which their nominees were put to a vote. 3. The Board of Directors, when making decisions related to the preparation and conduct of the General Meeting of the Shareholders, considered the issue of using telecommunications to provide remote access to the shareholders for participation in the General Meeting in the reporting period. 1.2. 1.2.1. 1.2.2. The Company shall develop and implement a transparent and under- standable mechanism for determin- ing the amount of dividends and their payment. 1. The Company has developed and made publicly available the “Regulation on the dividend policy of PJSC TATNEFT” approved by the decision of the Board of Directors of PJSC TATNEFT n.a. V.D. Shashin, Minutes No. 12 of April 25, 2016. The Company shall not decide on the payment of dividends, unless such decision, formally not violating the restrictions established by law, is economically unjustified and can lead to the formation of false perceptions about the Company’s activities. 1. The Company’s dividend policy contains clear indications of financial/economic circumstances in which a Company should not pay dividends. 1.2.3. The Company shall not allow deterio- ration of the existing shareholders’ dividend rights. 1. In the year under review, the Company did not take any actions leading to a deterioration in the dividend rights of the existing shareholders. 1.2.4. The Company shall strive to exclude the use by the shareholders of any other ways of generating profit (income) from the Company in addi- tion to dividends and the Company’s liquidation value distribution. 2. The history of dividend payments reflects the Company’s consistency in ensuring a high level of the dividend yield, while maintaining the balance of short-term (receiving the income in the form of dividend payments) and long-term (investing in the development of the Company). 1. In order to exclude any other ways of the shareholders generating profit (income) from the Company in addition to the dividends and the liquidation value distribution, internal documents of the Company establish control mechanisms that ensure the timely identification and the procedure for approving transactions with persons affiliated with material shareholders having the right to dispose of votes falling on voting shares), in cases where the law does not formally recognize such transactions as related party transactions. complied with partial compliance no compliance complied with partial compliance no compliance complied with partial compliance no compliance complied with partial compliance no compliance complied with partial compliance no compliance The Company emanates from the sufficiency principle of 55 days term as defined by the Articles. 1.3. 1.3.1. complied with partial compliance no compliance The system and practice of the Corporate governance ensure equal terms and conditions for all shareholders owing shares of the same category (type), including minority (small) and foreign shareholders, and equal treatment of them by the Company. The Company shall create the condi- tions for fair treatment of each share- holder by the Company’s management bodies and supervisory persons, in particular, ruling out the abuse possi- bility of minority shareholders by major shareholders. 1. During the reporting period, the procedures for managing potential conflicts of interest of the essential shareholders were effective, and the Board of Directors paid due attention to the conflicts between shareholders, if any. complied with partial compliance no compliance 111 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY1 2 3 4 5 1 2 3 4 5 The Company shall not perform any actions, which will or might result in artificial reallocation of the corporate control. 1. There were no quasie-treasury shares or they did not participate in the voting during the reporting period. complied with partial compliance no compliance The shareholders shall be provided with reliable and effective ways of recording the rights to the shares, as well as the possibility of un- hindered and easy disposal of their shares. The shareholders shall be provided with reliable and effective ways of recording rights to the shares, as well as the possibility of free and easy disposal thereof. 1. The quality and reliability of activities carried out by the Company’s Registrar in maintaining the register of securities’ owners correspond to the needs of the Company and its shareholders. complied with partial compliance no compliance The Board of Directors shall carry out the strategic management of the Company, define major principles and approaches to the organ- izing of the Company’s risk and internal control management system, monitor the activities of the Company’s executive bodies, and also exercise other key functions. 1.3.2. 1.4. 1.4.1. 2.1. 2.1.1. 2.1.2. The Board of Directors shall be respon- sible for making decisions related to the appointment and dismissal of the executive bodies, including due to their improper performance of their du- ties. The Board of Directors shall also ensure that the Company’s executive bodies act in accordance with the ap- proved development strategy and the main lines of the Company’s business. The Board of Directors shall set the basic long-term targets for the Com- pany’s activities, and shall assess and approve its key performance indicators and principal business goals, as well as its strategy and business plans with regard to the Company’s principal areas of operations. 2.1.3. The Board of Directors shall define the principles and approaches to the organization of the risk and internal control management system in the Company 1. The Board of Directors has the authority stipulated in the Articles of Association to appoint, discharge from office and determine the terms of contracts with respect to members of the executive bodies. complied with partial compliance no compliance 2. The Board of Directors considered the report of the sole executive body and members of the collegial executive body on the implementation of the Company’s strategy. 1. During the reporting period, the Board of Directors considered the issues related to the implementation and actualization of the strategy, approval of the Company’s financial and economic plan (budget), as well as considered the criteria and indicators (including interim ones) of implementing the strategy and business plans. 1. The Board of Directors defined the principles and approaches to the organization of the risk and internal control management system in the Company 2. The Board of Directors performed the assessment of the Company’s risk and internal control management system during the reporting period. complied with partial compliance no compliance complied with partial compliance no compliance The Board of Directors shall define the Company’s policy of remu- neration and (or) reimbursement of expenses (compensations) to the Board of Directors’ members, execu- tive bodies and other key executives of the Company. The Board of Directors shall play a key role in preventing, identify- ing and resolving internal conflicts among the Company’s bodies, and the hareholders of the Company and employees of the Company. The Board of Directors shall play a key role in ensuring the transparency of the Company, the timeliness and completeness of the Company’s information the disclosure and easy access of the shareholders to the documents of the Company. 1. The Company has developed and implemented a policy (policies) approved by the Board of Directors for the compensation and reimbursement of the Board of Directors’ members, the executive bodies of the Company and other key executives of the Company. complied with partial compliance no compliance 2. During the reporting period, the meetings of the Board of Directors considered issues related to this policy (policies). 1. The Board of Directors plays a key role in preventing, identifying and resolving internal conflicts. 2. The Company has created a system for identifying transactions related to conflicts of interest and a system of measures aimed at resolving such conflicts. 1. The Board of Directors has approved a Regulation on the information policy. 2. There were the persons responsible for the implementation of the information policy determined in the Company. complied with partial compliance no compliance complied with partial compliance no compliance 2.1.4. 2.1.5. 2.1.6. 112 2.1.7 The Board of Directors shall exercise control over the practice of the cor- porate governance in the Company and shall plays a key role in the mate- rial corporate events of the Company. 1. During the reporting period, the Board of Directors considered the issue of the corporate governance practices in the Company. 2.2. The Board of Directors shall be accountable to the Company’s shareholders. 2.2.1. The information on the work of the Board of Directors shall be disclosed and provided to the shareholders. 1. The annual report of the Company for the reporting period includes the information on the attendance of meetings of the Board of Directors and the Committees by individual directors. 2. The annual report contains the information on the main results of evaluating the operation of the Board of Directors carried out in the reporting period. 2.2.2. Chairman of the Board of Directors shall be available to communicate with the shareholders of the Com- pany. 1. There is a transparent procedure implemented in the Company that provides shareholders with the opportunity to send questions to the Chairman of the Board of Directors and express their position. complied with partial compliance no compliance complied with partial compliance no compliance complied with partial compliance no compliance 2.3. The Board of Directors shall be an effective and professional management body of the Company, capable of making objective independ- ent judgments and making decisions that are in the best interests of the Company and its shareholders. 2.3.1. Only persons with an impeccable business and personal reputation and possessing the knowledge, skills and experience necessary to make decisions within the competence of the Board of Directors, which are re- quired for the effective performance of its functions, may be elected as the Board of Directors’ members. 2.3.2. Members of the Company’s Board of Directors shall be elected through a transparent procedure that allows the shareholders to obtain informa- tion about the candidates sufficient to form an idea about their personal and professional qualities. 2.3.3. 2.3.4. The composition of the Board of Directors shall be balanced in terms of its members’ qualifications, their experience, knowledge and business qualities, and the Board shall enjoy confidence of the shareholders. The quantitative composition of the Board of Directors shall enable to organize the activities of the Board of Directors in the most efficient manner, including the possibility of forming committees of the Board of Direc- tors, and assures that the substantial minority shareholders of the Company may elect to the Board of Directors a candidate, who they vote for. 1. The accepted in the Company procedure for evaluating the performance of the Board of Directors includes, among other things, assessing the professional qualifications of the Board of Directors’ members. complied with partial compliance no compliance 2. In the reporting period, the Board of Directors (or its nominations committee) evaluated the candidates to the Board of Directors in terms of their having necessary experience, knowledge, business reputation, lack of conflict of interest, etc. 1. In all cases of the holding of the General Meeting of the Shareholders in the reporting period, which agenda included the items about electing of the Board of Directors, the Company provided the shareholders with biographical data of all candidates for membership in the Board of Directors, results of the evaluation of such candidates made by the Board of Directors (or its nominations committee), as well as information on the candidate’s compliance with the independence criteria, in accordance with recommendations 102 - 107 of the Code and the written consent of the candidates for election to the Board of Directors. 1. As part of the procedure for evaluating the Board of Directors’ work in the reporting period, the Board of Directors analyzed the own needs in terms of professional qualifications, experience and business skills. 1. As part of the evaluation procedure for the Board of Directors in the reporting period, the Board of Directors considered the issue of the quantitative composition of the Board of Directors compliance with the needs of the Company and the interests of the shareholders. complied with partial compliance no compliance complied with partial compliance no compliance complied with partial compliance no compliance 113 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY1 2 3 4 5 1 2 3 4 5 2.4. The Board of Directors shall include a sufficient number of independent directors. 2.4.1. An independent director shall be a person who has sufficient profession- alism, experience and independence to form his own position, is able to make objective and conscientious judgments that are independent of the Company's executive bodies’ influence, of certain groups of the shareholders or other parties con- cerned. However, it should be noted that, under normal circumstances, a candidate (elected director) cannot be regarded as independent if he is connected with the Company, a substantial shareholder, a material trading partner or a competitor, or connected with the Government. 2.4.2. An assessment shall be made of the candidates for the Board of Direc- tors’ membership compliance with independence criteria, and a regular analysis of the independence of the independent Board of Directors members shall be carried out. In the performance of such an assessment, the content should prevail over the form. 2.4.3. The independent directors shall account for at least one-third of all directors elected to the Board. 1. During the reporting period, all independent members of the Board of Directors met all the independence criteria specified in recommendations 102-107 of the Code, or were deemed independent by the decision of the Board of Directors. complied with partial compliance no compliance 1. In the reporting period, the Board of Directors (or the committee on nominations to the Board of Directors) formed an opinion on the independence of each candidate to the Board of Directors and presented the relevant conclusion to the shareholders. complied with partial compliance no compliance 2. During the reporting period, the Board of Directors (or the Board of Directors nomination committee) at least once examined the independence of the current members of the Board of Directors, whom the Company indicates as independent directors in its annual report. 3. The Company has developed procedures that determine the necessary actions of a member of the Board of Directors in the event that it ceases to be independent, including the obligation to promptly inform the Board of Director. 1. The independent directors account for at least one-third of all directors elected to the Board. 2.5.1. An independent director shall be elected as a Chairman of the Board of Directors, or a senior independent director out of the independent direc- tors number shall be appointed to coordinate the independent directors work and interact with the Chairman of the Board of Directors 1. The Chairman of the Board of Directors is an independent director, or a senior independent director is defined among the independent directors. 2. The role, rights and duties of the Chairman of the Board of Directors (and the senior independent director, if applicable) are duly determined in the internal documents of the Company. complied with partial compliance no compliance In the year under review, Chairman of the Board of Directors was a non-executive Director, and there wert no senior director determined among independent directors. The Chairman of the Board of Directors was elected unanimously by all Members of the Board of Directors, as the most authoritative member of the Board of Directors, pos- sessing professionalism and knowledge. The Company assumes that all members of the Board of Di- rectors have equal rights, and also takes into account the fact that the independent directors did not determine the senior independent director. 2.5.2. The Chairman of the Board of Direc- tors shall provide for a constructive atmosphere for holding meetings, free discussion of issues on the agenda of the meeting, monitor- ing the implementation of decisions taken by the Board of Directors. 2.5.3. The Chairman of the Board of Directors shall take the necessary measures for the timely provision to the Board of Di- rectors of the information necessary for making decisions on the agenda items. 1. The efficiency of the Chairman of the Board of Directors was evaluated in the framework of the procedure for assessing the effectiveness of the Board of Directors in the reporting period. complied with partial compliance no compliance 1. The duty of the Chairman of the Board of Directors to take measures to ensure the timely provision of materials to the Board of Directors members on the agenda of the Board of Directors is fixed in the documents of the Company. complied with partial compliance no compliance complied with partial compliance no compliance The Board of Directors includes three independent directors. The Company believes that the composition of Board of Directors is optimal for ensuring the interests of all groups of shareholders. 2.6. The Board of Directors’ members shall act in good faith and reasonably in the interests of the Company and its shareholders on the basis of sufficient knowledge and with due of care and diligence. 2.6.1. The Board of Directors’ members shall make decisions taking into ac- count all available information, in the absence of a conflict of interest, tak- ing into account the equal treatment of the Company’s shareholders, in the normal course of business risk. 1. The Company’s internal documents establish that a member of the Board of Directors must notify the Board of Directors if it has a conflict of interest with respect to any item on the agenda of the meeting of the Board of Directors or before the Board of Directors begins discussion on the corresponding agenda item. complied with partial compliance no compliance 2.4.4. The independent directors shall play a key role in preventing internal conflicts in the Company and in its performance of material corporate actions. 1. The independent directors (who have no conflict of interest) preliminarily assess the essential corporate actions associated with a possible conflict of interests, and the results of such an assessment are submitted to the Board of Directors complied with partial compliance no compliance 2.5. Chairman of the Board of Directors shall contribute to the most efficient implementation of the functions assigned to the Board of Directors. 2. The Company’s internal documents provide that a member of the Board of Directors must refrain from voting on any issue in which he has a conflict of interest. 3. The Company has established a procedure that allows the Board of Directors to receive professional advice on matters within its competence, at the expense of the Company. 1. The Company adopted and published an internal document clearly defining the rights and duties of members of the Board of Directors. complied with partial compliance no compliance 2.6.2. The rights and duties of the Board of Directors’ members shall be clearly articulated and secured in the inter- nal documents of the Company. 114 115 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY1 2 3 4 5 1 2 3 4 5 2.6.3. The Board of Directors’ members shall have enough time to fulfill their duties. 1. The individual attendance of the meetings of the Board of Directors and its committees, as well as the time devoted to preparing for participation in the meetings, was taken into account in the evaluation procedure of the Board of Directors in the reporting period. complied with partial compliance no compliance 2. In accordance with the internal documents of the Company, members of the Board of Directors are obliged to notify the Board of Directors of their intention to become members of the management bodies of other organizations (other than the controlled and dependent organizations of the Company), as well as the fact of such appointment. 1. In accordance with the internal documents of the Company, members of the Board of Directors have the right to access documents and make inquiries concerning the Company and its controlled entities, and the Company’s executive bodies are required to provide relevant information and documents. 2. There is a formalized program in the Company of familiarization activities for newly elected members complied with partial compliance no compliance 2.6.4. All the Board of Directors’ members shall have equal access to the Com- pany’s documents and information. Sufficient information about the Company and the work of the Board of Directors shall be provided to the newly elected members of the Board of Directors as soon as possible. 2.7. Meetings of the Board of Directors, preparation for and participation in them of the Board of Directors’ members ensure the effective functioning of the Board of Directors. 2.7.1. Meetings of the Board of Directors shall be held as necessary, taking into account the scale of the activities and the Company’s tasks in a certain period. 1. The Board of Directors held at least six meetings in the reporting year. 2.7.2. The procedure for preparing and hold- ing meetings of the Board of Directors shall be stipulated in the Company’s internal documents, which provide for the Board of Directors members to properly prepare for the meeting. 1. The Company has approved an internal document that defines the procedure for preparing and holding meetings of the Board of Directors, which also stipulates that a notice of the meeting should be made, as a rule, at least 5 days before the date of the meeting holding. complied with partial compliance no compliance complied with partial compliance no compliance 2.7.3. The form of the meeting of the Board of Directors shall be determined taking into account the importance of the issues on the agenda. The most important issues shall be resolved at physical meetings. 2.7.4. Decisions on the most important issues of the Company shall be taken at the meeting of the Board of Directors by a qualified majority or a majority of all elected members the Board of Directors. 1. The Company's Articles or internal documents stipulate that the most important issues (according to the list given in Recommendation 168 of the Code) should be considered at the physical meetings of the Board. complied with partial compliance no compliance 1. The Company's Articles stipulate that decisions on the most important issues set out in the Recommendation 170 of the Code should be taken at a meeting of the Board of Directors by a qualified majority of not less than three-quarters of the votes, or by a majority of all elected members of the Board Of Directors. complied with partial compliance no compliance Not formalized, but actually performed 2.8. The Board of Directors shall establishes Committees for preliminary consideration of the most important issues of the Company’s business. 2.8.1 It is recommended to establish an Audit Committee consisting of inde- pendent directors for the preliminary consideration of issues related to the control over the financial and eco- nomic activities of the Company. 1. The Board of Directors established an Audit Committee consisting entirely of independent directors. 2. The Company’s internal documents define the tasks set out before the Audit Committee, including the tasks contained in Recommendation 172 of the Code. 3. At least one member of the Audit Committee, who is an independent director, has experience and knowledge in the preparation, analysis, assessment and audit of the accounting (financial) statements. 4. Meetings of the Audit Committee were held at least once a quarter during the reporting period. complied with partial compliance no compliance One non-executive Director taking into account vast experience and the competencies required It is recommended to establish a Remuneration Committee consisting of independent directors and headed by an independent director who is not the Chairman of the Board of Direc- tors for the preliminary consideration of issues related to the formation of an effective and transparent remu- neration practice. 1. The Board of Directors established the Remuneration Committee, which consists of independent directors only. 2. The Chairman of the Remuneration Committee is an independent director who is not the Chairman of the Board of Directors. 3. The tasks of the Remuneration Committee are defined in the internal documents of the Company, including the tasks contained in Recommendation 186 of the Code. complied with partial compliance no compliance One non-executive Director taking into account vast experience and the competencies required 2.8.2 2.8.3 It is recommended to establish a Nomination Committee (appoint- ments, cadres) for the preliminary consideration of issues related to the HR planning (succession planning), professional composition and ef- ficiency of work of the Board of Direc- tors, with the majority of members presenting independent directors. 2.8.4 Given the scale of the activities and the level of risk, the Company’s Board of Directors shall make sure that the composition of its Committees fully meets the objectives of the Company. Additional Committees either had to be established or were not deemed necessary (Strategy Committee, Corporate Management Committee, Ethics Committee, Risk Manage- ment Committee, Budget Committee, Health, Safety and Environment Com- mittee, etc.). The Committees‘ composition should have been defined in a way allow- ing for a comprehensive preliminary discussion of the issues to be con- sidered, taking into account different opinions. 2.8.5 2.8.6 Chairmen of the Committees shall on the regular basis inform the Board of Directors and its Chairman about the work of their Committees. 1. The Board of Directors established the Nomination Committee (or its tasks specified in Recommendation 186 Code are implemented within the framework of another Committee) with the majority of members being independent directors. complied with partial compliance no compliance 2. In the internal documents of the Company, the tasks of the Nomination Committee (or the corresponding Committee with a combined functionality) are defined, including tasks specified 1. In the reporting period, the Board of Directors of the Company considered the issue of the consistency of its Committees with the tasks of the Board of Directors and the objectives of the Company. The additional committees had either been established, or they were not deemed necessary 1. The committees of the Board of Directors are headed by independent directors. 2. The Company’s internal documents (policies) include the provisions according to which persons, who are not members of the Audit Committee, the Nomination Committee and the Remuneration Committee, may attend the meetings of the Committees upon the invitation of the Chairman only. 1. During the reporting period, the Chairmen of the Committees regularly reported on the work of the Committees to the Board of Directors. complied with partial compliance no compliance complied with partial compliance no compliance complied with partial compliance no compliance 2.9. The Board of Directors provides for the assessment of the Board of Directors, its Committees and the Board of Directors’ members work. 2.9.1 The performance evaluation of the Board of Directors shall be aimed at determining the degree of effective- ness of the Board of Directors, the Committees and the Board of Direc- tors’ members, their relevance to the development needs of the Company, the revitalization of the Board of Di- rectors and the identification of areas in which their activities improved. 1. The self-assessment or the external evaluation of the Board of Directors operation in the reporting period included the work evaluation of the Committees, individual members of the Board of Directors and the Board of Directors as a whole. complied with partial compliance no compliance 2. The results of the self-assessment or the external evaluation of the Board of Directors conducted during the reporting period were considered at the physical meeting of the Board of Directors. 116 117 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY1 2 3 4 5 1 2 3 4 5 The work evaluation of the Board of Directors, Committees and the Board of Directors’ members shall be carried out on a regular basis at least once a year. The independent exter- nal organization (consultant) shall be invited for assessing the work quality of the of the Board of Directors at least once every three years. 1. The Company invited the independent external organization (consultant) to evaluate the work quality of the Board of Directors, at least once during the last three reporting periods). complied with partial compliance no compliance Over the past three years, the Company has not brought an external organization to carry out an independent evalua- tion of the work of the Board of Directors, since this procedure would have involved additional costs (time, financial costs). The Company’s Corporate Secretary shall carry out effective current interaction with shareholders, and coordinate the actions of the Company to protect the rights and interests of the shareholders, supporting the effective operation of the Board of Directors. The Corporate Secretary shall have the knowledge, experience and quali- fications that are sufficient to fulfill the duties assigned to him, an impec- cable reputation and shall enjoy the confidence of the shareholders. The Corporate Secretary shall be sufficiently independent from the executive bodies of the Company and shall have the necessary powers and resources to carry out the tasks assigned to him. 1. The internal document has been adopted and disclosed in the Company: the Regulation on the Corporate Secretary. 2. The biographical information on the Corporate Secretary with the same level of detail as for the members of the Board of Directors and the executive management of the Company has been placed on the Company’s website and in the Company’s Annual Report. 1. The Board of Directors approves appointment, removal from office and additional remuneration of the Corporate Secretary. complied with partial compliance no compliance complied with partial compliance no compliance The level of remuneration paid by the Company shall be sufficient to attract, motivate and retain individuals, who are qualified and com- petent for the Company. The remuneration to the members of the Board of Directors, executive bodies and other key executives of the Company shall be paid in accordance with the Company’s remuneration policy. The level of remuneration provided by the Company to the Board of Directors members, executive bodies and other key executives shall create sufficient motivation for their effective work, allowing the Company to attract and retain competent and qualified specialists. However, the Company shall avoid setting the compensa- tion level any higher than necessary as well as an unjustifiably large gap between the remuneration levels of these individuals and employees of the Company. The Company’s compensation policy has been devised by the Remunera- tion Committee and approved by the Company’s Board of Directors. The Board of Directors, with the support of the Remuneration Committee, shall oversee the implementation the remuneration policy in Company, and, if necessary, shall revise and correct it. The Company’s remuneration policy shall contain transparent mecha- nisms for determining the remunera- tion of the Board of Directors’ mem- bers, executive bodies and other key executives of the Company, as well as regulate all types of payments, benefits and privileges granted to these persons. 1. The Company has adopted an internal document (policy) for the remuneration of members of the Board of Directors, executive bodies and other key management personnel, which clearly outlines the approaches to the remuneration for these individuals. complied with partial compliance no compliance 1. During the reporting period, the Remuneration Committee reviewed the remuneration policy (policies) and practices of its (their) implementation and, if necessary, submitted appropriate recommendations to the Board of Directors. complied with partial compliance no compliance 1. The Company’s remuneration policy contains transparent mechanisms for determining the remuneration of members of the Board of Directors, executive bodies and other key executives of the Company, and also regulates all types of payments, benefits and privileges granted to these persons. complied with partial compliance no compliance 2.9.2 3.1. 3.1.1 3.1.2 4.1. 4.1.1 4.1.2 4.1.3 118 4.1.4 The Company shall define a policy of expenses reimbursement (compensa- tion), which shall specify the list of ex- penses to be reimbursed, and the level of service that the Board of Directors’ members, executive bodies and other key executives of the Company can claim. Such a policy can be an integral part of the Company’s remuneration policy. 1. The remuneration policy (policies) or other internal documents of the Company set the rules for compensating the expenses of the members of the Board of Directors, executive bodies and other key executives of the Company. complied with partial compliance no compliance 4.2. Remuneration system of the Board of Directors members shall ensure that the financial interests of the directors shall be in line with the long-term financial interests of the shareholders. 4.2.1. The Company shall pay a fixed an- nual fee to the Board of Directors members. 1. The fixed annual remuneration was the only monetary form of remuneration for members of the Board of Directors for their work on the Board of Directors during the reporting period. complied with partial compliance no compliance The Company shall not pay remuner- ation for participation in the individual meetings of the Board or the commit- tees of the Board of Directors. The Company shall not apply forms of short-term motivation and any additional material incentives to the Board of Directors’ members. 4.2.2. The long-term ownership of the Company’s shares shall be the most conducive to convergence of the finan- cial interests of the Board of Directors’ members with long-term interests of shareholders. At the same time, the Company shall not stipulate the rights to sell shares by achieving certain performance indicators, and the Board of Directors’ members shall not partici- pate in option programs. 4.2.3. The Company shall not provide for any additional payments or compensation in the event of early powers termination of the Board of Directors’ members in connection with the transfer of control over the Company or due to other circumstances. 1. If an internal document (documents): the Company’s policy (policies) provide for the provision of the Company’s shares to the Board of Directors members, clear rules for the ownership of shares by members of the Board of Directors should be provided and disclosed, aimed at encouraging the long-term ownership of such shares. complied with partial compliance no compliance 1. The Company does not provide for any additional payments or compensation in the event of early termination of the powers of members of the Board of Directors in connection with the transfer of control over the Company or other circumstances. complied with partial compliance no compliance 4.3. The remuneration system of members of the executive bodies and other key executives of the Company shall provide for the dependence of the reward on the results of the Company’s operation and their personal contribution to achieving this result. 4.3.1. Remuneration of members of the executive bodies and other key ex- ecutives of the Company shall be de- termined in such a way as to ensure a reasonable and justified ratio of the fixed part of the remuneration and the variable part of the remuneration depending on the results of work of the Company and the personal (indi- vidual) contribution of the employee to the final results. 1. During the reporting period, the annual performance indicators approved by the Board of Directors were used to determine the amount of variable compensation for members of the executive bodies and other key management personnel of the Company. complied with partial compliance no compliance 2. In the course of the latest evaluation of the remuneration system for members of the executive bodies and other key management personnel, the Company, the Board of Directors, ascertained that an effective ratio of the fixed part of the remuneration and the variable part of the remuneration are applied in the Company. 3. There is a procedure existing at the Company ensuring the return to the Company of bonus payments illegally received by the members of the executive bodies and other key management personnel of the Company. 119 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY1 2 3 4 5 1 2 3 4 5 4.3.2. The Company has implemented a program of the long-term motiva- tion of the members of the executive bodies and other key executives of the Company using the Company’s shares (options or other deriva- tive financial instruments, which underlying assets are the Company’s shares). 4.3.3. The amount of compensation (“golden parachute”) paid by the Company in case of early termination of powers to members of executive bodies or key executives on the initiative of the Company and in the ab- sence of unfair acts on their part shall not exceed twice the value of the fixed portion of the annual remuneration. 1. The Company introduced a long-term motivation program for members of the executive bodies and other key executives of the Company using the shares of the Company (financial instruments based on the shares of the Company). complied with partial compliance no compliance 2. The program of the long-term motivation of the members of executive bodies and other key executives of the Company provides that the right to sell shares and other financial instruments used in such a program shall start only after three years from the date of their provision. At the same time, the right to sell them is conditioned by the achievement of certain performance indicators of the Company. 1. The amount of compensation (“golden parachute”) paid by the Company in the event of early termination of powers to members of the executive bodies or key executives on the initiative of the Company and in the absence of unfair acts on their part did not exceed twice the fixed part of the annual remuneration in the reporting period. complied with partial compliance no compliance 5.1. The Company shall establish an efficient risk and internal control management system aimed at ensuring reasonable confidence in achieving the goals set for the Company. 5.1.1. The Company’s Board of Directors shall define the principles and ap- proaches to the organization of the risk and internal control management system in the Company. 1. The functions of various management bodies and divisions of the Company in the system of risk and internal control management are clearly defined in the internal documents/corresponding policies of the Company, approved by the Board of Directors. 5.1.2. The Company’s executive bodies shall ensure the creation and mainte- nance of the effective risk manage- ment and internal control system in the Company. 1. The Company’s executive bodies ensured distribution of functions and authorities with regard to the risk management and the internal control among the subordinate managers (heads) of departments and divisions accountable to them. 5.1.3. The system of risk and internal control management in the Company shall en- sure an objective, fair and clear picture of the current state and prospects of the Company, the Company’s integrity and transparency of reporting, as well as the soundness and acceptability of the Company’s accepted risks. 5.1.4. The Company’s Board of Direc- tors shall take the necessary steps to ensure that the current risk and internal control management system complies with the Board of Direc- tors’ principles and approaches to its organization and functions effectively. 1. The Company has adopted a policy on combatting corruption. 2. There is an accessible way established in the Company to inform the Board of Directors or the Audit Committee of the Board of Directors of violations of law, internal procedures, the Code of Ethics of the Company. 1. During the reporting period, the Board of Directors or the Audit Committee of the Board of Directors conducted an evaluation of the effectiveness of the Company's risk and internal control management system. The information on the main results of such an assessment is included in the annual report of the Company. complied with partial compliance no compliance complied with partial compliance no compliance complied with partial compliance no compliance complied with partial compliance no compliance The Company shall organize the internal audit for a regular independent evaluation of the reliability and effectiveness of the risk and internal control management system, and the Corporate Governance practice. 1. A separate structural division for conducting the internal audit functions has been established in the Company, which is functionally accountable to the Board of Directors or the Audit Committee, or an independent external organization with the same principle of accountability has been invited. complied with partial compliance no compliance It is recommended that internal audits be performed by a separate structural division (internal audit department) to be established by the Company or by retaining an inde- pendent outside body. The functional and administrative accountability of the internal audit division shall be dif- ferentiated. The internal audit division shall be functionally accountable to the Board of Directors. 5.2. 5.2.1. 120 5.2.2. The Internal Audit Division shall perform effectiveness evaluation of the internal control system, as well as effectiveness evaluation of the risk management system, and the corporate governance system. The Company shall apply generally accepted activity standards in the area of the internal audit. 1. The effectiveness of the internal control and risk management system was assessed during the reporting period within the framework of the internal audit. complied with partial compliance no compliance 2. The Company applies commonly accepted approaches. 6.1. The Company and its activities shall be transparent to the shareholders, investors and other interested parties. 6.1.1. The Company shall develop and implement an information policy ensuring the efficient exchange of information by the Company, its shareholders, investors, and other interested parties. 6.1.2. The Company shall disclose the information on the corporate govern- ance system and practice, including detailed information on the compli- ance with the principles and recom- mendations of the Code. complied with partial compliance no compliance complied with partial compliance no compliance 1. The Board of Directors of the Company has approved the information policy of the Company, developed in accordance with the recommendations of the Code. 2. The Board of Directors (or one of its Committees) has considered issues related to the Company’s compliance with its information policy at least once during the reporting period. 1. The Company discloses the information on the Company’s corporate governance system and the general principles of the corporate governance applied in the Company, including the information disclosed on the Company’s Internet website. 2. The Company discloses the information on the composition of the executive bodies and the Board of Directors, the independence of the members of the Board and their membership in the Committees of the Board of Directors (as defined by the Code). 3. In the event that there is a person controlling the Company, Company publishes a memorandum of supervisory authority regarding the plans of such a person with respect to corporate governance in the Company. 6.2. The Company shall timely disclose full, up-to-date and reliable information about the Company to ensure the possibility of making in- formed decisions by the Company’s shareholders and investors. 6.2.1. The Company shall disclose the information in accordance with the principles of regularity, consistency and efficiency, as well as availability, reliability, completeness and compa- rability of the disclosed data. 1. The Company’s information policy identifies approaches and criteria for identifying the information that can have a significant impact on the Company’s valuation and the value of its securities and procedures that ensure the timely disclosure of such information. complied with partial compliance no compliance 2. In the event that the Company’s securities are circulated in foreign organized markets, the disclosure of material information in the Russian Federation and in such markets is carried out synchronously and is equivalent during the reporting year. 3. If foreign shareholders own a significant number of the Company’s shares, then during the reporting year, the information is disclosed not only in Russian, but also in one of the most common foreign languages. 6.2.2. The Company shall avoid a formal ap- proach in disclosing the information and shall disclose significant informa- tion about its activities, even if the law does not provide for the disclosure of such information. 1. During the reporting period, the Company was disclosing the annual and semi-annual financial statements prepared in accordance with IFRS. The annual report of the Company for the reporting period includes annual financial statements prepared in accordance with IFRS, together with an audit report. complied with partial compliance no compliance 2. The Company discloses full information on the Company’s capital structure in accordance with Recommendation 290 of the Code in the annual report and on the Company’s Internet website. 121 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY1 2 3 4 5 1 2 3 4 5 6.2.3. The Company’s annual report, as one of the most important tools of the Company’s information exchange with shareholders and other interested par- ties, shall contain information making it possible to assess the Company’s performance results for the year. 1. The annual report of the Company contains information on the key aspects of the Company’s operations and its financial results. 2. The Company’s annual report contains information on the environmental and social aspects of the Company’s activities. complied with partial compliance no compliance 6.3. The Company shall provide information and documents at the requests of the shareholders in accordance with the principles of equal and unhindered accessibility 6.3.1. The Company shall provide the infor- mation and documents at the request of the shareholders in accordance with the principles of fairness and ease. 1. The Information Policy of the Company defines an easy procedure for providing the shareholders with access to the information, including the information on entities controlled by the Company, at the request of the shareholders. 6.3.2. It is recommended that when provid- ing the information to the sharehold- ers the Company shall maintain a reasonable balance between the interests of individual sharehold- ers and the Company’s interests, which is interested in preserving the confidentiality of important com- mercial information that may have a significant impact on the Company’s competitiveness. 1. During the reporting period, the Company did not refuse to satisfy the shareholders’ requests for the information, or such refusals were justified. 2. In cases determined by the Information Policy of the Company, the shareholders are warned about the confidential nature of the information and assume the responsibility for maintaining its confidentiality. complied with partial compliance no compliance complied with partial compliance no compliance 7.1. Actions that shall or may materially affect the structure of the Company’s share capital and financial position and, accordingly, the share- holders’ position (material corporate actions) shall be carried out on fair terms ensuring compliance with the rights and interests of the shareholders as well as other parties concerned. 1. The Company’s Articles, taking into account the specifics of its activities, set at a lower level than the statutory minimum criteria for classifying the Company’s transactions as material corporate actions. complied with partial compliance no compliance 2. During the reporting period, all material corporate actions went through the approval procedure prior to their implementation. 7.1.3. When taking material corporate actions, which would affect rights or legitimate interests of the sharehold- ers, it is recommended that equal terms and conditions be guaranteed for all shareholders; if the statutory machinery designed to protect the shareholders’ rights proves insuf- ficient, then additional measures shall be introduced to protect their rights and legitimate interests. In such instances, the Company shall comply with formal requirements of the law and with the corporate governance principles set out in this Code. 7.2. The Company shall provide a procedure for taking material corporate actions that enables its shareholders to receive full information about such actions in due time and influence them, and also guarantee that the shareholder rights are observed and duly protected when such actions are taken. 7.2.1. The information on the performance of the material corporate actions shall be disclosed with an explana- tion of the reasons, conditions and consequences of committing such actions. 1. During the reporting period, the Company disclosed in a timely manner and in detail the information on the material corporate actions of the Company, including the grounds and timing of such actions. 7.2.2. The rules and procedures related to the Company’s performance of material corporate actions shall be formulated in the Company’s internal documents. 1. The internal documents of the Company provide for the procedure for attracting an independent appraiser to determine the value of property disposed of or acquired by a major transaction or an related party transaction. complied with partial compliance no compliance complied with partial compliance no compliance 1. The Company’s Articles determined a list of transactions or other actions that are material corporate actions and the criteria for their determination. Decisions on the material corporate actions are within the competence of the Board of Directors. In cases where the implementation of these corporate actions is directly attributed by law to the competence of the General Meeting of the Shareholders, the Board of Directors provides appropriate recommendations to the shareholders. 2. As a minimum, the Company’s Articles consider the following events as essential corporate actions: reorganization of the Company, acquisition of 30 percent or more of the voting Company’s shares (takeover), fulfillment of substantial transactions by the Company, increase or decrease in the capital of the Company, listing and delisting of the Company’s shares. 1. The Company provides for a procedure whereby the independent directors declare their position on the material corporate actions prior to their approval. complied with partial compliance no compliance complied with partial compliance no compliance 7.1.1. Material corporate actions shall be deemed to include reorganization of the Company, acquisition of 30 per cent or more of the Company’s vot- ing shares (takeover), making major transactions, increasing or reducing the Company’s share capital, listing and delisting of the Company’s shares, as well as other actions, which might result in material changes in the rights of the shareholders or infringement of their interests. It is recommended that the Company’s Articles of Association shall define a list (criteria) of transac- tions or other actions, deemed to be material corporate actions, and refer the consideration of such actions to the competence of the Company’s Board of Directors. The Board of Directors shall play a key role in making decisions or mak- ing recommendations for material corporate actions. The Board of Di- rectors shall base its position on the opinion of the Company‘s independ- ent directors. 7.1.2. 122 2. The internal documents of the Company provide for the procedure for engaging an independent appraiser to estimate the cost of acquiring and repurchasing the shares of the Company. 3. The internal documents of the Company provide for an expanded list of grounds, on which the members of the Board of Directors of the Company and other persons provided for by the law are recognized as interested in the transactions of the Company. 123 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYINFORMATION ON RELATED PARTY TRANSACTIONS CONCLUDED BY PJSC TATNEFT N.A. V.D. SHASHIN IN 2016 COMMENT: LIST OF RELATED PARTY TRANSACTIONS CONCLUDED BY THE COMPANY IN 2016: This Report contains a list of transactions concluded by PJSC TATNEFT named after V.D. Shashin (hereinafter referred to as PJSC TATNEFT) in 2016, which were recognized transactions as related party in accordance with Federal Law No. 208-FZ “On Joint Stock Companies” of 26.12.1995 on the basis of their status at the time of the transactions. Transaction Date Transaction Approval Date The Company’s Body That Approved the Transaction Information about the Person (Persons), Interested in Concluding the Transaction, Subject of the Transaction and Its Essential Terms 1 2 3 4 This Report in the form of an independent document is published by the Company for the first time in accordance with require- ments of Articles 52 and 81 of the Federal Law No. 208-FZ “On Joint Stock Companies” of 26.12.1995 The Board of Directors shall also in prepare a report on the related party transactions concluded by PJSC TATNEFT named after V.D. Shashin in 2016 for the approval of the Annual General Meeting of Shareholders. The report is signed by the General Director of PJSC TATNEFT. The reliability of the data contained in the Report is confirmed by the Audit Commission of PJSC TATNEFT. The information included in the Report contains: • name of counterparties to transactions; • list of persons interested in transactions, and the basis for recognizing these persons as the parties interested in transac- • subject of transactions and essential conditions for them. tions; This Report on the related party transactions of PJSC TATNEFT n.a. V.D. Shashin in 2016, were reviewed and ap- proved at the meeting of the Board of Directors of PJSC TATNEFT on May 27, 2017. 01.03.2016 25.02.2016 Board of Directors of PJSC TATNEFT 01.03.2016 25.02.2016 Board of Directors of PJSC TATNEFT 01.03.2016 25.02.2016 Board of Directors of PJSC TATNEFT Transaction type and subject matter: Property Sale and Purchase Contract between PJSC TATNEFT n.a. V.D. Shashin (Seller) and OOO “Nizhnekamsk CHP” (Buyer). The content of the transaction, including civil rights and obligations, which establishment, modification or termination the transaction is directed at: the sale and purchase of spare tools and accessories for the equipment under the project “Construction of power generation facilities using turbines of low-potential steam at Nizhnekamsk”. Parties to the Transaction: PJSC TATNEFT n.a. V.D. Shashin and OOO “Nizhnekamsk CHP”. Sign of interest: OOO “Nizhnekamsk CHP”, a legal entity in which Public Joint Stock Company n.a. V.D. Shashin is entitled to dispose of more than 20 percent of the votes attached to voting shares or composing the authorized capital or the shareholders’ capital, contributions, shares of the mentioned legal entity. Amount – RUB 46,000,000.00 (46 million) 00 kopecks. Deadline for the fulfilment of obligations under the transaction: 30 calendar days since the day of signing the relevant specification. Monetary valuation of property under the transaction: RUB 46,000,000 accounting for 0.0075% of the Company‘s assets book value as of September 30, 2015. Transaction type and subject matter: Lease contract of immovable property and land plots between PJSC TATNEFT n.a. V.D. Shashin (Lessor) and OOO “Nizhnekamsk CHP” (Lessee). The content of the transaction, including civil rights and obligations, which establishment, modification or termination of the transaction is directed at: Lease of immovable property and land plots. Parties to the Transaction: PJSC TATNEFT n.a. V.D. Shashin OOO “Nizhnekamsk CHP”. Sign of interest: OOO “Nizhnekamsk CHP”, a legal entity in which Public Joint Stock Company n.a. V.D. Shashin is entitled to dispose of more than 20 percent of the votes attached to voting shares or composing the authorized capital or the shareholders’ capital, contributions, shares of the mentioned legal entity. Deadline for the fulfilment of obligations under the transaction: Lease term is 11 months from the contract conclusion date. Leased property: l immovable property, costing RUB 3,022,154,012.05; l land plots, costing RUB 17,148,396.08. The amount of rent for one month of using the immovable property and land plots (Contract price): l immovable property: RUB 13,205,991.94 (Thirteen million two hundred five thousand nine hundred ninety one) 94 kopecks (Including 18% VAT); l l and plots: RUB 533,175.34 (five hundred thirty three thousand one hundred seventy five) 34 kopecks (Including 18% VAT). Monetary valuation of property under the transaction: RUB 3,039,302,408.13 (three billion thirty nine million three hundred two thousand four hundred eight) 13 kopecks, accounting for 0.49% of the Company‘s assets book value as of September 30, 2015. Transaction type and subject matter: Lease contract of movable property between PJSC TATNEFT n.a. V.D. Shashin (Lessor) and OOO “Nizhnekamsk CHP” (Lessee). The content of the transaction, including civil rights and obligations, which establishment, modification or termination of the transaction is directed at: Rent of movable property. Parties to the Transaction: PJSC TATNEFT n.a. V.D. Shashin and OOO “Nizhnekamsk CHP”. Sign of interest: OOO “Nizhnekamsk CHP”, a legal entity in which Public Joint Stock Company n.a. V.D. Shashin is entitled to dispose of more than 20 percent of the votes attached to voting shares or composing the authorized capital or the shareholders’ capital, contributions, shares of the mentioned legal entity. Deadline for the fulfilment of obligations under the transaction: Lease term is 11 months from the contract conclusion date. The amount of rent for one month of using the movable property (Contract price): 11,903,655.62 (eleven million nine hundred and three thousand six hundred and fifty five) 62 kopecks. Monetary valuation of property under the transaction: 11,903,655.62 (eleven million nine hundred and three thousand six hundred and fifty five) 62 kopecks, accounting for 0.61% of the Company‘s assets book value of September 30, 2015. 124 125 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY1 2 3 4 1 2 3 4 11.04.2016* 23.03.2016 26.08.2016 Board of Directors of PJSC TATNEFT * The prop- erty Sale and Purchase Contract was termi- nated without transfer or dis- posal of any property, as a result of the parties signing the agreement on termination of the contract in connection with the termi- nation of the need for its transaction. 24.05.2016 25.04.2016 Board of Directors of PJSC TATNEFT 06.06.2016 25.04.2016 Board of Directors of PJSC TATNEFT Transaction type and subject matter: Property Sale and Purchase Contract between PJSC TATNEFT n.a. V.D. Shashin (Seller) and OOO “Nizhnekamsk CHP” (Buyer). The content of the transaction, including civil rights and obligations, which establishment, modification or termination the transaction is directed at: Sale and purchase of equipment under the project “Reconstruction of installed power boiler units TGME-464 of the Nizhnekamsk CHP for burning petroleum coke in the form of dust from the delayed coking unit JSC TANECO. Parties to the Transaction: PJSC TATNEFT n.a. V.D. Shashin and OOO “Nizhnekamsk CHP”. Sign of interest: OOO “Nizhnekamsk CHP”, a legal entity in which Public Joint Stock Company n.a. V.D. Shashin is entitled to dispose of more than 20 percent of the votes attached to voting shares or composing the authorized capital or the shareholders’ capital, contributions, shares of the mentioned legal entity. Deadline for the fulfilment of obligations under the transaction: Property transfer time – 30 calendar days since the day of signing the relevant specification. Monetary valuation of property under the transaction: RUB 3,400,703,564.94 (three billion four hundred million seven hundred three thousand five hundred sixty four rubles and 94 kopecks), accounting for 0.55% of the company‘s assets book value as of September 30, 2015. Transaction type and subject matter: Immovable property Sale and Purchase Contract between PJSC TATNEFT n.a. V.D. Shashin (Seller) and JSC TANECO (Buyer). The content of the transaction, including civil rights and obligations, which establishment, modification or termination of the transaction is directed at: Sale and purchase of immovable property. immovable property item: title 007 section 1700: “Naphtha Splitter Section”. Parties to the Transaction: PJSC TATNEFT n.a. V.D. Shashin and JSC TANECO. Sign of interest: JSC TANECO, a legal entity in which Public Joint Stock Company n.a. V.D. Shashin is entitled to dispose of more than 20 percent of the votes attached to voting shares or composing the authorized capital or the shareholders’ capital, contributions, shares of the mentioned legal entity. Parties interested in the transaction: FULL NAME PJSC TATNEFT n.a. V.D. Shashin JSC TANECO 1. N.U. Maganov Board of Directors member, Member of the collegial executive body (Chairman), Sole executive body Board of Directors member (Chairman) 2. R.K. Sabirov Board of Directors member Board of Directors member 3. E.A. Tkhturov Member of the collegial executive body Board of Directors member 4. N.M. Gazkov Member of the collegial executive body Board of Directors member Deadline for the fulfilment of obligations under the transaction: 10 working days from the date of handing technical documentation for the facility and Signing reconciliation reports of completed construction and installation works. Monetary valuation of property under the transaction: RUB 1,192,332,009 (One billion one hundred ninety two million three hundred thirty-two thousand nine) and 53 kopecks, accounting for 0.19% of the Company‘s assets book value as of December 31, 2015. Transaction type and subject matter: Supplementary Agreement to the Purchase and Sale Contract between PJSC TATNEFT n.a. V.D. Shashin and JSC TANECO. The content of the transaction, including civil rights and obligations, which establishment, modification or termination the transaction is directed at: Increasing the amount of the Contract for the Purchase of inventory items, including spare tools and accessories (SPTA) for equipment for the facilities of the Complex of Oil Refining and Petrochemical Plants in Nizhnekamsk, No. 430/13.02-06/13 dated October 23,.2013. Parties to the Transaction: PJSC TATNEFT n.a. V.D. Shashin and JSC TANECO. Sign of interest: JSC TANECO, a legal entity in which Public Joint Stock Company n.a. V.D. Shashin is entitled to dispose of more than 20 percent of the votes attached to voting shares or composing the authorized capital or the shareholders’ capital, contributions, shares of the mentioned legal entity. Parties interested in the transaction: FULL NAME PJSC TATNEFT n.a. V.D. Shashin JSC TANECO 1. N.U. Maganov Board of Directors member, Member of the collegial executive body (Chairman), Sole executive body Board of Directors member (Chairman) 2. R.K. Sabirov Board of Directors member Board of Directors member 3. E.A. Tkhturov Member of the collegial executive body Board of Directors member 4. N.M. Gazkov Member of the collegial executive body Board of Directors member 06.06.2016 25.04.2016 Board of Directors of PJSC TATNEFT 04.05.2016 25.05.2016 Board of Directors of PJSC TATNEFT 01.06.2016 25.05.2016 Board of Directors of PJSC TATNEFT Deadline for the fulfilment of obligations under the transaction: 06.06.2016 Monetary valuation of property under the transaction – RUB 300,000,000 (three hundred million) and 00 kopecks, accounting for 0.05% of the Company‘s assets book value as of December 31, 2015. Transaction type and subject matter: Supplementary Agreement to the Purchase and Sale Contract between PJSC TATNEFT n.a. V.D. Shashin and JSC TANECO. The content of the transaction, including civil rights and obligations, which establishment, modification or termination the transaction is directed at: Increasing the amount of the Contract for the Purchase of inventory items, including spare tools and accessories (SPTA) for equipment for the facilities of the Complex of Oil Refining and Petrochemical Plants in Nizhnekamsk, No. 430/13.02-06/13 dated October 23,.2013. Parties to the Transaction: PJSC TATNEFT n.a. V.D. Shashin and JSC TANECO. Sign of interest: JSC TANECO, a legal entity in which Public Joint Stock Company n.a. V.D. Shashin is entitled to dispose of more than 20 percent of the votes attached to voting shares or composing the authorized capital or the shareholders’ capital, contributions, shares of the mentioned legal entity. Parties interested in the transaction: FULL NAME PJSC TATNEFT n.a. V.D. Shashin JSC TANECO 1. N.U. Maganov Board of Directors member, Member of the collegial executive body (Chairman), Sole executive body Board of Directors member (Chairman) 2. R.K. Sabirov Board of Directors member Board of Directors member 3. E.A. Tkhturov Member of the collegial executive body Board of Directors member 4. N.M. Gazkov Member of the collegial executive body Board of Directors member Deadline for the fulfilment of obligations under the transaction: 06.06.2016 Monetary valuation of property under the transaction – RUB 300,000,000 (three hundred million) and 00 kopecks, accounting for 0.05% of the Company‘s assets book value as of December 31, 2015. Transaction type and subject matter: Agreement on paying up the contribution with “Tatneft International Co- operative U.A.” The content of the transaction, including civil rights and obligations, which establishment, modification or termination of the transaction is directed at: paying up the contribution on the following essential terms: amount of contribution shall not exceed 49,900 (forty-nine thousand nine hundred) US dollars. Parties to the Transaction: PJSC TATNEFT n.a. V.D. Shashin and “Tatneft International Co-operative U.A.” Sign of interest: “Tatneft International Co-operative U.A., a legal entity in which Public Joint Stock Company n.a. V.D. Shashin is entitled to dispose of more than 20 percent of the votes attached to voting shares or composing the authorized capital or the shareholders’ capital, contributions, shares of the mentioned legal entity. Parties interested in the transaction: FULL NAME PJSC TATNEFT n.a. V.D. Shashin “Tatneft International Co-operative U.A. 1. N.Z. Syubayev Member of the collegial executive body Member of the collegial executive body Monetary valuation of property under the transaction: no more than RUB 3,241,504, accounting for 0.0005 % of the Company‘s assets book value as of March 31, 2016. Transaction type and subject matter: Sale and Purchase Contract of immovable property between PJSC TATNEFT n.a. V.D. Shashin (Seller) and JSC TANECO (Buyer). The content of the transaction, including civil rights and obligations, which establishment, modification or termination of the transaction is directed at the Purchase and Sale of immovable property. Items of immovable property: l title 015, section 5100: “Delayed Coking Unit”, costing RUB 11,602,990,000.00 (Excluding VAT); l Land plot, with cadastral number 16:00:000000:450, total area of 41,673 sq. m., costing RUB 20,867,754.75 (Excluding VAT). Contract price: RUB 11,623,857,754 (Eleven billion six hundred twenty three million eight hundred fifty seven thousand seven hundred fifty four) and 75 kopecks. Parties to the Transaction: PJSC TATNEFT n.a. V.D. Shashin and JSC TANECO. Sign of interest: JSC TANECO, a legal entity in which Public Joint Stock Company n.a. V.D. Shashin is entitled to dispose of more than 20 percent of the votes attached to voting shares or composing the authorized capital or the shareholders’ capital, contributions, shares of the mentioned legal entity. 126 127 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY1 2 3 4 1 2 3 4 25.05.2016 25.05.2016 Board of Directors PJSC TATNEFT 06.06.2016 25.04.2016 Board of Directors of PJSC TATNEFT Parties interested in the transaction: FULL NAME PJSC TATNEFT n.a. V.D. Shashin JSC TANECO 1. N.U. Maganov Board of Directors member, Member of the collegial executive body (Chairman), Sole executive body Board of Directors member (Chairman) 2. R.K. Sabirov Board of Directors member Board of Directors member 3. E.A. Tkhturov Member of the collegial executive body Board of Directors member 4. N.M. Gazkov Member of the collegial executive body Board of Directors member Deadline for the fulfilment of obligations under the transaction: 10 working days from the date of handing technical documentation for the facility and Signing reconciliation reports of completed construction and installation works. Monetary valuation of property under the Monetary valuation of property under the transaction: RUB 11,623,857,754 (Eleven billion six hundred twenty three million eight hundred fifty seven thousand seven hundred fifty four) and 75 kopecks, accounting for 1.78% of the Company‘s assets book value as of March 31, 2016. Transaction type and subject matter: Guarantee Contract No. VLG/PR/080/16 with PJSC ROSBANK. The content of the transaction, including civil rights and obligations, which establishment, modification or termination the transaction is directed at: The Guarantor agrees to have full joint and several liability with the Limited Liability Company “Tatneft-Neftekhimsnab” (hereinafter referred to as the Client) to the Bank for the execution by the Client of any and all of its obligations arising from or in connection with the Agreement on the opening of documentary letters of credit (hereinafter referred to in the text as the Basic Agreement) concluded between the Bank and the Client on the following essential terms: l The maximum amount of all current letters of credit opened by the Bank on behalf of the Client under the Basic Agreement) shall not exceed 30,000,000.00 (Thirty million and 00/100) US dollars; l The expiry date of each Letter of Credit opened within the framework of the Agreement cannot exceed 6 months (subject to a deferred payment under the letter of credit), and it shall not fall on a date later than the date that occurs 18 months from the date of concluding the Agreement for Opening the documentary letters of credit. Sign of interest: OOO Tatneft-Neftekhimsnab belongs to the group of persons of the public Joint-Stock Company TATNEFT named after V.D. Shashin. Validity Term of the Guarantee Contract: until November 30 2019. Monetary valuation of property under the transaction: 30,000,000.00 (Thirty million and 00/100) US dollars, accounting for 0.3% of the Company‘s assets book value as of March 31, 2016. Transaction type and subject matter: Sale and purchase of ordinary registered uncertificated shares (individual state registration number of the shares’ issue – 10103255B007D, date of the issue state registration – March 25, 2016). The content of the transaction, including civil rights and obligations, which establishment, modification or termination of the transaction is directed at: Sale and Purchase Contract No. 17-002/2016 of ordinary registered uncertificated shares (individual state registration number of the shares’ issue – 10103255B007D, date of the issue state registration – March 25, 2016). Deadline for the fulfilment of obligations under the transaction: No later than 10 working days from the date of conclusion of the agreement to pay the value of shares, the seller within three working days after transferring the value of shares to conduct operations in the register on making a credit entry on the personal account Transection parties and beneficiaries: PJSC TATNEFT n.a. V.D. Shashin (Buyer) and PJSC Zenit Bank (Seller). Sign of interest: PJSC Zenit Bank, a legal entity in which Public Joint Stock Company n.a. V.D. Shashin is entitled to dispose of more than 20 percent of the votes attached to voting shares or composing the authorized capital or the shareholders’ capital, contributions, shares of the mentioned legal entity. Parties interested in the transaction: FULL NAME PJSC TATNEFT n.a. V.D. Shashin PJSC zenit Bank 1. N.U. Maganov Board of Directors member, Member of the collegial executive body (Chairman), Sole executive body Board of Directors member (Chairman) 2. N.Z. Syubayev Member of the collegial executive body Board of Directors member 3. 4. E.A. Tkhturov Member of the collegial executive body Board of Directors member Sh.F. Takhautdinov Board of Directors member Board of Directors member Transaction amount in monetary terms: RUB 6,700,000,000 (Six billion seven hundred million). Transaction amount as a percentage of the issuer’s assets value: 1.03% of the Company’s book assets value. The issuer’s assets value as of the end date of the last completed reporting period preceding the transaction (conclusion of the contract): RUB 651,259,342 thousand, as of March 31, 2016. 18.07.2016 26.08.2016 Board of Directors of PJSC TATNEFT 03.08.2016 26.08.2016 Board of Directors PJSC TATNEFT 25.11.2016 24.11.2016 Board of Directors of PJSC TATNEFT Transaction type and subject matter: Supplementary Agreement No. 3 of July 18, 2016 to Guarantee Contract No. 85130007/1 of September 30, 2013, concluded between PJSC TATNEFT n.a. V.D. Shashin and PJSC Sberbank. The content of the transaction, including civil rights and obligations, which establishment, modification or termination the transaction is directed at: Supplementary Agreement No. 3 of July 18, 2016 to Guarantee Contract No. 85130007/1 of September 30, 2013, concluded between PJSC TATNEFT n.a. V.D. Shashin and PJSC Sberbank, which is a related party transaction in securing the performance of JSC TANECO’s obligations under the Bank Guarantee Agreement No. 85130007 of April 23, 2013. The Supplementary Agreement provides for: l Reduction of the fee for providing the Guarantee – down by 0.17 (zero point seventeen) percent per annum. l Reduction of the total liability limit of the Guarantor PJSC TATNEFT n.a. V.D. Shashin under the current Guarantee Contract No.85130007/1 of September 30, 2013 to the amount of RUB 9,500,000,000 (Nine billion five hundred million) rubles. l Other terms of the Contract remain without change. Beneficiary under the transaction – JSC TANECO. Sign of interest: JSC TANECO, a legal entity in which Public Joint Stock Company n.a. V.D. Shashin is entitled to dispose of more than 20 percent of the votes attached to voting shares or composing the authorized capital or the shareholders’ capital, contributions, shares of the mentioned legal entity. Parties interested in the transaction: FULL NAME PJSC TATNEFT n.a. V.D. Shashin JSC TANECO 1. N.U. Maganov Board of Directors member, Member of the collegial executive body (Chairman), Sole executive body Board of Directors member (Chairman) 2. R.K. Sabirov Board of Directors member Board of Directors member 3. E.A. Tkhturov Member of the collegial executive body Board of Directors member 4. N.M. Gazkov Member of the collegial executive body Board of Directors member Transaction type and subject matter: Property Sale and Purchase Contract between PJSC TATNEFT n.a. V.D. Shashin (Buyer) and OOO “Nizhnekamsk CHP” (Seller). The content of the transaction, including civil rights and obligations, which establishment, modification or termination of the transaction is directed at: Sale and purchase of flanges. Property total cost: RUB 416,385 (four hundred and sixteen thousand three hundred and eighty-five and 36 kopecks (Excluding VAT); Parties to the Transaction: PJSC TATNEFT n.a. V.D. Shashin and OOO “Nizhnekamsk CHP”. Sign of interest: OOO “Nizhnekamsk CHP”, a legal entity in which Public Joint Stock Company n.a. V.D. Shashin is entitled to dispose of more than 20 percent of the votes attached to voting shares or composing the authorized capital or the shareholders’ capital, contributions, shares of the mentioned legal entity. Deadline for the fulfilment of obligations under the transaction: Deadline for the property transfer – 30 calendar days after the day of signing the relevant specification. Monetary valuation of property under the transaction: RUB 416,385 (Four hundred sixteen thousand three hundred and eighty five) and 36 kopecks, accounting for 0.00006% of the Company‘s assets book value as of June 30, 2016. Transaction type and subject matter: Supplementary Agreement to Contract No. 0083/26/108 of June 01, 2016 PJSC TATNEFT n.a. V.D. Shashin (Seller) and JSC TANECO (Buyer). The content of the transaction, including civil rights and obligations, which establishment, modification or termination the transaction is directed at: Subject matter of the supplementary agreement: The amount reduction of the immovable property sale contract No. 0083/26/108 of June 01, 2016. Supplementary Agreement price: 382,845,022.18 (three hundred and eighty-two million eight hundred forty-five thousand twenty-two) rubles and 18 kopecks. Parties to the Transaction: PJSC TATNEFT n.a. V.D. Shashin and JSC TANECO. Sign of interest: JSC TANECO, a legal entity in which Public Joint Stock Company n.a. V.D. Shashin is entitled to dispose of more than 20 percent of the votes attached to voting shares or composing the authorized capital or the shareholders’ capital, contributions, shares of the mentioned legal entity. 128 129 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY1 2 3 4 Parties interested in the transaction: 1 2 3 4 ФИО ПАО «Татнефть» им. В.Д. Шашина FULL NAME PJSC TATNEFT n.a. V.D. Shashin АО «ТАНЕКО» JSC TANECO 1. N.U. Maganov Board of Directors member, Member of the collegial executive body (Chairman), Sole executive body Board of Directors member (Chairman) 2. R.K. Sabirov Board of Directors member Board of Directors member 3. E.A. Tkhturov Member of the collegial executive body Board of Directors member 4. N.M. Gazkov Member of the collegial executive body Board of Directors member Deadline for the fulfilment of obligations under the transaction: November 25, 2016 Monetary valuation of property under the transaction: RUB 382,845,022.18 (three hundred and eighty-two million eight hundred forty-five thousand twenty-two) and 18 kopecks accounting for 0.055% of the Company‘s assets book value as of September 30, 2016. Transaction not com- pleted 26.08.2016 Board of Directors PJSC TATNEFT Transaction type and subject matter: Immovable property Sale and Purchase Contract between PJSC TATNEFT n.a. V.D. Shashin (Seller) and JSC TANECO (Buyer). The content of the transaction, including civil rights and obligations, which establishment, modification or termination of the transaction is directed at: Sale and purchase immovable property. Immovable property items: l Title 066, section 8220 Pumping unit at the flushing and off-test product park delayed coking unit”, costing RUB 210,369,397.68; l Title 124/4, section 9504 “Stand-alone distribution and transformer substation of the off-plot facilities”, costing RUB 265,276,831.98; l Title 030/1, section 8204 “Flushing and off-test product park of the diesel fuel hydrotreatment installation”, costing RUB 160,196,494.16; l Title 062, section 8217 “Pumping unit at the flushing and off-test product park of the installations of hydrotreatment of gasoline fraction, kerosene, diesel fuel”, costing RUB 139,402,171.80; l Title 015/1, section 5110, facility No. 1 “Unit of loading petroleum coke into dump trucks”, costing RUB 233,499,672.10; l Land plot with cadastral number 16:30:011701:250, total area of 3466 sq. m., costing RUB 40,646.88; l Land plot with cadastral number 16:30:011701:256, total area of 496 sq. m., costing RUB 31,570.28. Contract price: RUB 1,008,816,784 (one billion eight million eight hundred sixteen thousand seven hundred and eighty four) and 89 kopeck. Parties to the Transaction: PJSC TATNEFT n.a. V.D. Shashin and JSC TANECO. Sign of interest: JSC TANECO, a legal entity in which Public Joint Stock Company n.a. V.D. Shashin is entitled to dispose of more than 20 percent of the votes attached to voting shares or composing the authorized capital or the shareholders’ capital, contributions, shares of the mentioned legal entity. Parties interested in the transaction: FULL NAME PJSC TATNEFT n.a. V.D. Shashin JSC TANECO 1. N.U. Maganov Board of Directors member, Member of the collegial executive body (Chairman), Sole executive body Board of Directors member (Chairman) 2. R.K. Sabirov Board of Directors member Board of Directors member 3. E.A. Tkhturov Member of the collegial executive body Board of Directors member 4. N.M. Gazkov Member of the collegial executive body Board of Directors member Monetary valuation of property under the transaction: RUB 1,008,816,784 (one billion eight million eight hundred sixteen thousand seven hundred and eighty four) and 89 kopecks, accounting for 0.15% of the Company‘s assets book value as of June 30, 2016. Transaction type and subject matter: Supplementary Agreement to Contract the Purchase and Sale Contract between PJSC TATNEFT n.a. V.D. Shashin and JSC TANECO No. 430/13.02-06/13 от 23.10.2013 The content of the transaction, including civil rights and obligations, which establishment, modification or termination the transaction is directed at: Increasing the contract amount for the purchase and sale of inventories, including spare tools and supplies (SPTA) for equipment for the facilities of the Complex of Oil Refining and Petrochemical Plants in Nizhnekamsk, No. 430 / 13.02-06 / 13 of October 23, 2013 Supplementary Agreement price: 400 000 000 (Four hundred million) rubles 00 kopeck; Parties to the Transaction: PJSC TATNEFT n.a. V.D. Shashin and JSC TANECO. Sign of interest: JSC TANECO, a legal entity in which Public Joint Stock Company n.a. V.D. Shashin is entitled to dispose of more than 20 percent of the votes attached to voting shares or composing the authorized capital or the shareholders’ capital, contributions, shares of the mentioned legal entity. Transaction not com- pleted 26.08.2016 Board of Directors PJSC TATNEFT 24.11.2016 Transaction not com- pleted Board of Directors PJSC TATNEFT 24.11.2016 Transaction not com- pleted Board of Directors PJSC TATNEFT Parties interested in the transaction: FULL NAME PJSC TATNEFT n.a. V.D. Shashin JSC TANECO 1. N.U. Maganov Board of Directors member, Member of the collegial executive body (Chairman), Sole executive body Board of Directors member (Chairman) 2. R.K. Sabirov Board of Directors member Board of Directors member 3. E.A. Tkhturov Member of the collegial executive body Board of Directors member 4. N.M. Gazkov Member of the collegial executive body Board of Directors member Monetary valuation of property under the transaction: RUB 400,000,000 (four hundred million) and 00 kopecks accounting for 0.06% of the Company‘s assets book value as of June 30, 2016. Transaction type and subject matter: Immovable property Sale and Purchase Contract between PJSC TATNEFT n.a. V.D. Shashin (Seller) and JSC TANECO (Buyer). The content of the transaction, including civil rights and obligations, which establishment, modification or termination of the transaction is directed at: Immovable property sale and purchase. Immovable property item: l title 007 section 1300: “Naphtha hydrotreatmenr”; l Contract price: RUB 2,596,327,212.62 (two billion five hundred ninety six million three hundred twenty seven thousand two hundred twelve) and 62 kopecks. Parties to the Transaction: PJSC TATNEFT n.a. V.D. Shashin and JSC TANECO. Sign of interest: JSC TANECO, a legal entity in which Public Joint Stock Company n.a. V.D. Shashin is entitled to dispose of more than 20 percent of the votes attached to voting shares or composing the authorized capital or the shareholders’ capital, contributions, shares of the mentioned legal entity. Parties interested in the transaction: FULL NAME PJSC TATNEFT n.a. V.D. Shashin JSC TANECO 1. N.U. Maganov Board of Directors member, Member of the collegial executive body (Chairman), Sole executive body Board of Directors member (Chairman) 2. R.K. Sabirov Board of Directors member Board of Directors member 3. E.A. Tkhturov Member of the collegial executive body Board of Directors member 4. N.M. Gazkov Member of the collegial executive body Board of Directors member Monetary valuation of property under the transaction: RUB 2,596,327,212.62 (two billion five hundred ninety six million three hundred twenty seven thousand two hundred twelve) and 62 kopecks, accounting for 0.375% of the Company‘s assets book value as of September 30, 2016. Transaction type and subject matter: Supplementary Agreement to the Sale and Purchase Contract of PJSC TATNEFT n.a. V.D. Shashin (Seller) and OOO “Nizhnekamsk CHP” (Buyer). The content of the transaction, including civil rights and obligations, which establishment, modification or termination the transaction is directed at: Subject matter of the Supplementary Agreement: Increasing the amount of the Sale and Purchase Contract of No. 0083/21/2 of March 01, 2016 Price of the Supplementary Agreement: RUB 15,000,000 (Fifteen million) and 00 kopecks. Parties to the Transaction: PJSC TATNEFT n.a. V.D. Shashin and OOO “Nizhnekamsk CHP”. Sign of interest: OOO “Nizhnekamsk CHP”, a legal entity in which Public Joint Stock Company n.a. V.D. Shashin is entitled to dispose of more than 20 percent of the votes attached to voting shares or composing the authorized capital or the shareholders’ capital, contributions, shares of the mentioned legal entity. Monetary valuation of property under the transaction: RUB 15,000,000 (Fifteen million) and 00 kopecks, accounting for 0.00216% of the Company‘s assets book value as of September 30, 2016. INFORMATION ON MAJOR TRANSACTIONS MADE BY THE COMPANY IN THE REPORTING YEAR: The Company did not make any major transactions in 2016. 130 131 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPERSONNEL MANAGEMENT AVERAGE NUMBER OF PJSC TATNEFT AND TATNEFT GROUP EMPLOYEES In 2016 the average number of PJSC TATNEFT employees was 20 899 persons. The total number of the TATNEFT Group’s per- sonnel is 53 thousand persons (by enterprises consolidated under IFRS). The main reason for the change in the number of personnel for the TATNEFT Group is related to the change in the list of enterprises consolidated under IFRS. PERSONNEL MANAGEMENT POLICY In 2016, the Personnel Management Policy of PJSC TAT- NEFT underwent significant changes in the development of the Company’s employees. A Competency based model of the Company has been cre- ated, competency indicators have been developed, a sys- tem of integrated personnel assessment has been intro- duced, and a new business process scheme “Staff reserve formation” has been built. The approved Competency-based model is balanced and includes the following elements: qualification requirements, formed list of corporate competencies, as well as evaluation of the employee’s performance. The Competences are formed and consolidated in corpo- rate professional standards on the basis of existing profes- sional standards, based on the specifics of the organization of the production process. Block of Corporate Competencies: • Management competencies (“Personnel development” for the whole category of managers and the competency “ So- lutions Systemic Character”, which is absorbed by “Strate- gic thinking” - for the managerial level of the heads of enter- prises, offices, deputy directors of PJSC TATNEFT); • General professional competencies (“Knowledge of in- formation and communication technologies”, “Labor pro- tection, industrial and environmental safety”, “Competent communication”); • Competencies related to ensuring the performance of labor functions within the scope of the type of production activity. Since July 1, 2016, amendments to the Labor Code on the specifics of the using professional standards have come into force (Federal Law No. 122-FZ of May 2, 2015). Since then, the employers are obliged to apply professional standards, if the law or regulations establish requirements for the qualifications required for the employees to perform a certain work function (Article 195.3 of the Labor Code of the Russian Federation, from July 1, 2016). Comprehensive assessment of the employee competencies Competency based model Methods of the competence development THE COMPANY’S HR MANAGEMENT POLICY IS BASED ON THE IMPORTANCE OF THE HUMAN CAPITAL, ATTRACTING HIGHLY SKILLED WORKERS AND ARRANGEMENT OF CONDITIONS FOR THEIR SUSTAINABLE MOTIVATION TO ACHIEVE MAXIMUM PRODUCTIVITY, PROFESSIONAL AND PERSONAL GROWTH. Training program Individual development plan SUCCESSION PIPELINE The Company has established mechanisms for the transparent formation of the personnel reserve. Each employee can take part in the formation of the staff reserve - business unit man- agers, enterprise managers, personnel departments of enter- prises, ordinary employees who can apply for inclusion their colleagues into the personnel reserve. There are two levels of the staff reserve formation: the Com- pany’s reserve and the reserve of the Group’s enterprises. Two types of reserve are also defined: operational and prospective personnel reserve. Adhering to the general trend of business development in the industry, TATNEFT opens projects for the removal of operation- al functions from the main productions and business blocks. In 2016, the Company established the Center for Regulatory Research, the Center for Human Resources Management and Motivation, and the plans provide that in 2017 the Center for Accounting and Tax Support, the Procurement Center, the Corporate Finance Center and the Personnel Administration Center will be opened. The plans for 2017 provide for revising the existing personnel management system in PJSC TATNEFT with the establishment of the Corporate Center as a separate unit in the organizational structure of the Company, which will be assigned with strategic functions of the General Service Center, which assumes the centralization of operational functions, and particularly in the Company’s structural enterprises, the so-called supporting functionality that performs HR functions at the sites. TRAINING AND DEVELOPMENT PROGRAMS FOR THE TATNEFT GROUP EMPLOYEEES Since 2016, the main goal of the Company in terms of the staff development is the transfer of the training to the corporate for- mat. The training, organized in the corporate format, allows motivating the staff for the achievement of high results, rallying the team of efficient professionals and making the Company even more successful, profitable and competitive. In 2016, the Company upgraded the skills of its mid-level pro- fessionals in accordance with the Training Plan for Company’s Managers and professionals approved by the General Director of PJSC TATNEFT, as well as with the Personnel Development Plans. The training was conducted at the Corporate Univer- sity of PJSC TATNEFT and at the TATNEFT Personnel Training Center on the basis of profile universities of the region and the Russian Federation. 550 educational programs have been developed, including 278 vocational training programs for workers, 177 additional training programs for workers and 95 additional training pro- grams for managers and professionals. 67 vocational training programs have been developed taking into account professional standards approved by the Ministry of Labor and Social Protection of the Russian Federation. In 2016, more than 19,000 employees of the Company were trained and upgraded. The amount over RUB 130 million was allocated for the purpose. February 2016 witnessed the completion of a large-scale pro- fessional retraining project of the Company’s geological ser- vice in accordance with the program of the Non-State Educa- tional Private Institution of Additional Professional Education “Moscow Institute of Oil and Gas Business”, “Geotechnologies for Oil and Gas Production”: 75 professionals received profes- sional retraining diplomas. From March 2015 to December 2016 10 professionals of PJSC TATNEFT went through the corporate training under the 14 module program of the Higher School of the Kazan (Privolzh- sky) Federal University “MBA of Extractive Industries”. 132 133 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY In 2016, the Company’s professionals took part in federal training programs going through the Russian and foreign in- ternships: • 120 persons. have been upgrading their qualifications in the Kazan (Privolzhsky) Federal University within the framework of the industry dedicated program; search institutes in Russia; • 25 persons were sent for training at enterprises and re- • 12 persons were sent for an internship in France; • 18 persons - Managers and professionals of the struc- tural divisions of PJSC TATNEFT (including 5 profession- als from the personnel reserve) were trained under the Presidential Program of Management Personnel for the National Economy at the Kazan (Privolzhsky) Federal University. In December 2016 in Almetyevsk, corporate training of 161 ac- counting professionals of PJSC TATNEFT was organized with the involvement of an external provider; the Institute of Devel- opment of Modern Educational Technologies in Moscow. The corporate training was organized on the basis of the Al- metyevsk State Petroleum Institute in the course “Statistical Management”. 115 employees of the Company were trained. At the beginning of October 2016, within the framework of training activities in the area of information security for 13 professionals, a corporate training seminar “Cybersecurity of modern industrial systems” was organized by the Com- petence Center of the Kaspersky Laboratory of the ANO VU “University of Innopolis” in Almetyevsk. PJSC TATNEFT STAFF STRUCTURE BY SEX FOR THE PERIOD 2014-2016 DISTRIBUTION OF PJSC PERSONNEL BY COUNTRIES FOR THE PERIOD 2014-2016 2014 2015 2016 2014 (%) 2015 (%) 2016 (%) persons. % persons. % persons. % Russian Federation 99.728 99.810 99.806 Male Female TOTAL 12, 843 60.8 13, 388 61.7 13,212 8,287 39.2 8,315 38.3 8,028 62.2 37,8 21 130 21 703 21 240 Turkmenistan Libya Ukraine 0.219 0.048 0.005 0.139 0.046 0.005 0.146 0.43 0.005 PJSC TATNEFT STAFF STRUCTURE BY AGE FOR THE PERIOD 2014-2016 THE DYNAMICS OF THE MEN AND WOMEN RATIO IN THE MANAGEMENT OF PJSC TATNEFT FOR 2014-2016 Up to 30 From 31 to 50 Over 50 2014 (%) 2015 (%) 2016 (%) 24.2 51.4 24.4 25.2 51.5 23.3 24.3 52.7 23 Male Female 2014 (%) 2015 (%) 2016 (%) 82.2 17.8 82.1 17.9 82.1 17.9 STAFF TURNOVER BY AGE AND SEX AT PJSC TATNEFT FOR 2014-2016 Dismissed Total (%) Of them Of them by age (years) M (%) F (%) to 20 (%) From 20 to 30 (%) From 30 to 40 (%) From 40 to 50 (%) From 50 to 60 (%) Over 60 (%) 2014 2015 2016 4.87 3.44 3.13 3.45 2.5 2 1.42 0.94 1.13 0.19 0.1 0.25 2.29 1.39 1.2 1.25 0.99 0.88 0.76 0.61 0.5 0.33 0.29 0.24 0.05 0.06 0.06 COOPERATION WITH EDUCATIONAL INSTITUTIONS The Company annually establishes personal scholarships to encourage the best students who have distinguished them- selves in their studies and the research work. In 2016, 111 students from the Almetyevsk State Petroleum Institute, the Almetyevsk Polytechnic College, the Leninogorsk Oil Techni- cal College and the Bugulma Engineering College received 111 special scholarships from PJSC TATNEFT. The amount of the scholarship paid was RUB 3,477 thousand. In 2016, PJSC TATNEFT structural divisions employed 220 graduates of the profile educational institutions of higher and secondary vocational education, mainly graduates of the Almetyevsk State Petroleum Institute, Kazan (Privolzh- sky) Federal University, Kazan National Research Techno- logical University, Kazan State Technical University n.a. A.N. Tupolev, Ufa State Petroleum Technical University, Alme- tyevsk Polytechnic College, Leninogorsk Oil Technical Col- lege, Bugulma Engineering College and other specialized educational institutions of higher professional education. In 2016, financial assistance provided to the educational institutions of higher professional education amounted to RUB 183,404 thousand, secondary vocational education – RUB 5,664 thousand. An integrated system of continuous professional education has developed and successfully operates in the Company. It has been created with the support of the Government of Tatarstan and in close cooperation with specialized educa- tional institutions. This allows maintaining the intellectual potential of the Company and its competitiveness in the oil industry of the country at a sufficient level. The Company develops training centers, opens basic chairs at the educational institutions, organizes all types of intern- ship for students. PJSC TATNEFT together with the leading higher educational institutions of the Republic of Tatarstan annually organizes targeted contract training for attracting young professionals at expense of the federal and republican budgets. To date, there are about 250 students studying in the areas of training relevant to the Company at the Russian State Uni- versity of Oil and Gas named after I.M. Gubkin, Kazan (Priv- olzhsky) Federal University, Almetyevsk State Petroleum Institute, Kazan National Research Technological University and other educational institutions. Students are assigned to the companies of the TATNEFT Group. In accordance with the terms of the targeted contract training concluded the students will be employed at these enterprises upon com- pletion of the training. Employees of the profile production services of the Compa- ny’s enterprises hold meetings with students, discuss ques- tions of academic progress, writing the term and diploma papers, and doing all kinds of internship. For many years already TATNEFT Company has been suc- cessfully implementing a cluster system of continuous pro- fessional education with the participation of the Almetyevsk State Petroleum Institute (AGNI), Almetyevsk Polytechnic, Leninogorsk Oil, the Bugulma Engineering Colleges and the TATNEFT Personnel Training Center. In 2016, the Company supported opening at the premises of AGNI of a unique training course for masters in the field “Oil and Gas Business” under the program “Modeling and man- agement of hydrocarbon fields development”. 134 135 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYRESULTS OF TRAINING ORGANIzATION, PERSONS CU Trainings CU Webinrs 326 Training on the basis of AGNI 229 Invited teachers 974 880 STAFF CERTIFICATION The issues of staff appraisal in the Company are regulated by the “PJSC TATNEFT’s Personnel Certification Standard”. The standard establishes a uniform procedure for attestation of personnel in all divisions of the Company and it is recommend- ed for application in subsidiaries and dependent companies. The personnel certification/ which is an integral part of the hu- man resources management system, aimed at implementing the corporate strategy, is conducted in accordance with the Labor Code of the Russian Federation and relevant regulatory documents. The purpose of personnel certification is to identify the com- pliance of the employees’ competence with and qualification requirements, as well as to assess the opportunities for their further career growth. Managers, professionals and employees of the Company are subject to attestation. CORPORATE UNIVERSITY In 2016, the order of PJSC TATNEFT’s General Director estab- lished the Corporate University as a division of the Company. The Corporate University is part of the emerging Corporate Personnel Development System of the TATNEFT Group, aimed at creating effective HR-cycle processes. Within the framework of the «Definition of Criteria» and «Staff Assessment» programs the main tasks of the Corporate Uni- versity are: • methodical support of the Company’s transition to the system of professional standards, including ensuring the active participation of the Company in the creation both in the Republic of Tatarstan and in the Russian Federa- tion of a system of professional public accreditation of educational programs for training professionals for the oil and gas industry and a system of professional certifi- cation of the already working professionals; • development and implementation of corporate profes- sional standards, including the definition for all employ- ees of general corporate, managerial, professional and general professional competencies; • organization of the staff evaluation procedures in terms of new qualification requirements and competencies. Within the framework of new approaches to the personnel management, the Corporate University developed a two-day course «National Qualification System of the Russian Federa- tion: Qualification Frame, Professional Standards, Competen- cy Approach» for managers, employees of HR departments and the Company’s Offices of labor organization and salaries. More than 200 persons were trained in this course, including the employees of PJSC TATNEFT, Tatneft-Neftekhim Man- agement Company, OOO Tatneft-AZS Center. On May 27, 2016 the PJSC TATNEFT’s Corporate University together with GMC Consulting held a national scientific and practical seminar «Professional standard as a tool for per- sonnel policy. Problems of adaptation and implementation», which was attended by more than 200 representatives of the leading companies of the Republic of Tatarstan. In 2016, the Corporate University developed the main corpo- rate educational programs aimed at shaping and develop- ment of general corporate and management competencies of the Company’s employees. All educational programs are built on a modular basis. In accordance with the concept, the professional retraining program «Efficient Manager» includes the following educa- tional modules: • fundamentals of management and economics; • psychology of management; • personal potential of the manager; • leadership and teambuilding; • personnel management and fundamentals of coaching; • project management; • change management; • time management; • information management systems; • corporate culture and efficient communication. In 2016, the Corporate University of PJSC TATNEFT received a license to conduct educational activities under the pro- grams of additional vocational education. The training was organized for 2,409 persons in 2016. There was a project «Professionalism from the first person» initiated in PJSC TATNEFT to improve the quality of shaping the professional competencies of the graduates of the edu- cational organizations, which form the basis for the training of the Company’s personnel. In 2016 there were 26 sessions organized and conducted by the Company’s managers for the students of AGNI. The project was launched to create a unified IT-platform for training and development of the TATNEFT Group employees, which takes into account the needs of all types of business. 136 137 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYFINANCIAL RESULTS 138 139 28.7 mln tonnes - Total oil production for TATNEFT Group in 2016 FINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYwww.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTPJSC TATNEFT ANNUAL REPORT 2016ACCOUNTING STATEMENTS PREPARED IN ACCORDANCE wITH RUSSIAN ACCOUNTING STANDARDS AUDITOR’S REPORT Independent Auditor’s Report To the Shareholders and Board of Directors of PJSC TATNEFT n.a. V.D. Shashin Opinion In our opinion, the attached financial statements reflect fairly, in all material respects, the financial position of PJSC Tatneft n.a. V.D. Shashin (the «Company») as of December 31, 2016, as well as its financial results and cash flows for the year then ended, in accordance with the accounting rules established in the Russian Federation. Subject of audit We have audited the Company’s financial statements, which include: • balance sheet as of December 31, 2016; • statement of financial results for the year ending on that date; • statement of changes in equity for the year ending on that date; • statement of cash flows for the year ending on that date; • explanations to the balance sheet and the financial results report. GROUNDS FOR EXPRESSING THE OPINION We conducted our audit in accordance with International Standards on Auditing (ISA). Our responsibility in accordance with these standards is described further in the section «Auditor’s Responsibility for the Audit of Financial Statements» of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our report. Independence We are independent of the Company in accordance with the Code of Ethics for Professional Accountants of the International Ethics Standards Board for Accountants (IESBA) and the ethical requirements of the Code of Professional Ethics of Auditors and the Rules of Independence of Auditors and Audit Organizations applicable to our audit of accounting in the Russian Federation. We have also fulfilled other ethical duties in accordance with these requirements and the Code of IESBA. OUR AUDIT METHODOLOGY OVERVIEW Materiality Materiality at the level of the Company’s accounting statements as a whole: 5,400 million Russian rubles (million rubles), which is 4% of profit before tax. Key issues of audit Estimation of the obligation to liquidate fixed assets and of restoration of natural resources. Our audit methodology assumes the definition of materiality and the assessment of the risks of material misstatement of the financial statements. In particular, we analyzed in which areas the management made subjective judgments, for example, with respect to significant accounting estimates, which included the application of assumptions and consideration of future events with which uncertainty is due to their nature. We also considered the risk of circumvention of the internal controls by management, including, among other things, an assessment of whether there are signs of management bias that creates the risk of material misstatement due to fraud. The scope of the audit is defined by us in such a way that we can perform the work in sufficient volume to express our opinion on the accounting statements as a whole, taking into account the Company’s structure, accounting processes and controls used by the Company, as well as taking into account the specifics of the industry in which the Company operates. Materiality The determination of the scope of our audit was influenced by the application of our materiality. The audit is intended to obtain reasonable assurance that the financial statements do not contain material misstatement. Distortions can arise as a result of unfair acts or mistakes. They are considered significant if it is reasonable to expect that individually or collectively they will affect the economic decisions of users made on the basis of these financial statements. Based on our professional judgment, we have established certain quantitative thresholds for materiality, including materiality at the level of the Company’s accounting as a whole, as indicated in the table below. With the help of these values and taking into account qualitative factors, we have determined the scope of our audit, as well as the nature, timing and scope of our audit procedures and assessed the impact of distortions (taken separately and in aggregate), if any, on the financial statements as a whole. 140 141 ABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUMATERIALITY AT THE LEVEL OF ACCOUNTING IN GENERAL: RUB 5,400 million HOW DID WE DETERMINE IT: 4% of the Company’s profit before taxation RATIONALE FOR THE APPLIED LEVEL OF MATERIALITY: We decided to use as a base indicator to determine the level of materiality of profit before tax, because we believe that it is this base indicator that is most often considered by users to assess the performance of the Company, and it is a generally accepted benchmark. We have established materiality at 4%, which falls within the range of acceptable quantitative thresholds of materiality applicable to profit-driven companies in this industrial sector. Key audit issues The key issues of the audit are issues that, according to our professional judgment, were the most significant for our audit of financial statements for the current period. These issues were considered in the context of our audit of the financial statements in general and in the formation of our opinion on these financial statements, and we do not express a separate opinion on these issues. Key audit question What audit procedures were performed regarding the key issue of the audit Assessment of an estimated liability for fixed assets liquidation and natural resources restoration See Explanation 8 (table section), Explanations 2 and 13 (text part) to the balance sheet and the financial results report. The Company’s financial statements reflect the estimated liability to liquidate fixed assets related to exploration, development and production activities after the end of their operation and to restore natural resources («OLOS»). We carried out the following procedures with respect to the calculation models for estimating OLOS: • verification of the arithmetic accuracy of calculations and the completeness of the data used, such as the list of objects subject to liquidation, the cost of conservation and abandonment of wells, the number of wells and other fixed assets, the cost of reclamation and the area of land, the period before abandonment of the field (discount period); The evaluation of OLOC is carried out by the management annually and involves the use of various estimates and judgments of the management due to the complexity inherent in the estimation of future costs, while the amount of the estimated liability is significant for the Company’s balance sheet. As of December 31, 2016, the amount of this liability amounted to RUB 30,406 million. As of December 31, 2015, it was RUB 33,545 million (lines 1430 and 1540 «Estimated liabilities» of the balance sheet). We paid considerable attention to the evaluation of OLOS in view of the materiality of this obligation, and especially in connection with the reduction in the amount of OLOS during 2016 by RUB 3,139 million, which affected the financial results of the Company for 2016. Expenses in the amount of RUB 3,271 million and income in the amount of RUB 7,150 million from the changes in OLOS are reflected in the statement of financial results under lines 2330 «Interest payable» and 2340 «Other income», respectively. This decrease was due to several multidirectional factors, the most significant of which is revision of the assumptions used in the calculation, in particular, the inflation rate, the discount rate, the cost of liquidation of fixed assets and the period of discounting. • An analysis of the validity of the assumptions used in calculating OLOS, such as the inflation rate and the discount rate Our procedures for verifying the validity of the management costs used by the management for estimating OLOS of the cost of liquidation of wells, other fixed assets and land reclamation included discussion with the Company’s technical experts of the list and procedure for conducting liquidation and restoration works, as well as reconciliation with the standard estimates of the Company for the liquidation of fixed assets. The most significant effect on the change in the value of OLOS during 2016 was the change in the inflation rate used to estimate the future cost of liquidation of fixed assets. We checked the inflation rate applied by the Company’s management to the forecasts of the socio-economic development of the Russian Federation prepared by the Ministry of Economic Development of the Russian Federation. We have also checked the discount rate used by the Company’s management to the level of profitability of government securities, the maturity of which is comparable to the expected deadline for fulfilling obligations to liquidate fixed assets and restore natural resources. Based on the results of the conducted procedures, we came to the conclusion that the assessment of the obligation to liquidate fixed assets and restore natural resources as of December 31, 2016, made by the Company’s management, is appropriate. OTHER INFORMATION The management is responsible for other information. Other information contains the Company’s Annual Report for the year 2016 and the Issuer’s Quarterly Report for the 1st quarter of 2017 (but excludes the financial statements and our audit report on these financial statements), which are expected to be provided to us after the date of this audit report. Our report on the financial statements does not apply to other information, and we do not and will not provide a conclusion expressing confidence in any form regarding this information. In connection with our audit of the financial statements, our responsibility is to acquaint ourselves with the above other information and to consider whether there are material inconsistencies between other information and accounting statements or our knowledge obtained during the audit and whether other information contains other possible material distortions. If, upon acquaintance with the Company’s Annual Report for 2016 and the Quarterly Report of the Issuer for the 1st quarter of 2017, we come to the conclusion that they contain material distortions, we are obliged to bring this to the attention of those responsible for corporate governance. RESPONSIBILITY OF THE MANAGEMENT AND PERSONS RESPONSIBLE FOR COR- PORATE GOVERNANCE FOR FINANCIAL STATEMENTS The management is responsible for the preparation and fair presentation of these financial statements in accordance with the accounting rules established in the Russian Federation and for the internal control system that the management considers necessary for the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the management is responsible for assessing the ability of the Company to continue its business continuously, for disclosure, as appropriate, of information relating to business continuity and for reporting on the basis of the assumption of business continuity, unless the management intends to liquidate the Company, to terminate its activities or when it lacks any other real alternative, except for the liquidation or termination of activities. The persons responsible for corporate governance are responsible for overseeing the preparation of the Company’s financial statements. 142 143 ABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RU AUDITOR’S RESPONSIBILITY FOR AUDIT OF FINANCIAL STATEMENTS Our goal is to obtain reasonable assurance that the financial statements do not contain material misstatements due to fraud or error, and in the issuance of an audit report containing our opinion. Reasonable confidence is a high degree of certainty, but it is not a guarantee that an audit conducted in accordance with ISA always reveals material distortions when they are present. Distortions can be the result of fraud or error and are considered material if it can reasonably be assumed that individually or in combination they can affect the economic decisions of users taken on the basis of this accounting. As part of the audit conducted in accordance with ISA, we apply professional judgment and maintain professional skepticism throughout the audit. In addition, we perform the following: • identify and assess the risks of material misstatement of financial statements due to fraud or error; develop and conduct audit procedures in response to these risks; obtain audit evidence that is sufficient and appropriate to serve as a basis for expressing our opinion. The risk of not detecting a material misstatement as a result of unfair acts is higher than the risk of not detecting a material distortion as a result of an error, since unfair acts may include collusion, fraud, intentional omission, misrepresentation or circumvention of the internal control system; • obtain an understanding of the internal control system that is relevant to the audit in order to develop audit procedures appropriate to the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control system; • assess the appropriate nature of the accounting policies applied and the reasonableness of accounting estimates and the • conclude that the management has accepted the assumption of continuity of business and, on the basis of the audit corresponding disclosure of information prepared by management; evidence obtained, the conclusion is whether there is significant uncertainty in connection with events or conditions that may raise significant doubts about the Company’s ability to continue its business. If we come to the conclusion that there is significant uncertainty, we must draw attention to our disclosure in the financial statements in our audit report, or, if such disclosure is improper, modify our report. Our conclusions are based on the audit evidence received before the date of our audit report. However, future events or conditions may lead to the Company losing the ability to continue its business continuously; • assess the presentation of the accounting statements in general, its structure and content, including disclosure of information, and also whether the accounting statements present the underlying operations and events in such a way as to ensure their reliable representation. We carry out informational interaction with persons responsible for corporate governance, bringing to their attention, among other things, information about the planned scope and timing of the audit, as well as significant comments on the audit results, including significant deficiencies in the internal control system that we identify in the audit process. We also provide those responsible for corporate governance with a statement that we have complied with all relevant ethical requirements for independence and have informed these individuals of all relationships and other matters that can reasonably be considered influencing the independence of the auditor and, where necessary, a statement on appropriate precautions. Of those issues that we brought to the attention of those responsible for corporate governance, we identify the issues that were most significant for the audit of financial statements for the current period and, therefore, were key audit issues. We describe these issues in our audit report, except in cases where public disclosure of information about these issues is prohibited by law or regulation, or when in very rare cases we come to the conclusion that information about an issue should not be reported in our report, as it can reasonably be assumed that the negative consequences of the communication of such information will exceed the socially significant benefit from its communication. Maxim Timchenko Head of the assignment, which resulted in the issuance of this auditor’s report of an independent auditor. March 28, 2017 Moscow, Russian Federation Maxim Timchenko, Head of the assignment (Qualification certificate No. 01-000267), PricewaterhouseCoopers Audit Joint Stock Company Auditee: Public corporation «Tatneft named after V.D. Shashina The certificate of state registration No. 632 was issued by the Ministry of Finance of the Republic of Tatarstan on January 21, 1994. The certificate of entry in the Unified State Register of Legal Entities for No. 1021601623702 was issued on July 18, 2002 by the Interdistrict Inspectorate of the Ministry of the Russian Federation for Taxes and Levies No. 16 for the Republic of Tatarstan 423450 Russia, Republic of Tatarstan, Almetyevsk, ul. Lenin 75 Independent Auditor: PricewaterhouseCoopers Audit Joint Stock Company The certificate of state registration No. 008.890 was issued by the Moscow Registration Chamber on February 28, 1992. The certificate of entry in the Unified State Register of Legal Entities was issued on August 22, 2002 under No. 1027700148431 Member of the self-regulatory organization of auditors «Russian Union of Auditors» (Association) ORNZ in the register of auditors and audit organizations - 11603050547 144 145 ABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUPUBLIC JOINT STOCK COMPANY “TATNEFT” NAMED AFTER V.D. SHASHIN (PJSC- TATNEFT N.A. V.D. SHASHIN) State Registration Certificate No. 632 issued by the Ministry of Finance of Tatarstan Republic on January 21, 1994. Certificate of Entry in the Unified State Register of Legal Entities registered before July 1, 2002, Registration No. 1021601623702 dated July 18, 2002 issued by the Interdistrict Inspectorate of the Ministry for Taxes and Duties of the Russian Federation No. 16 for Republic of Tatarstan. Principal place of business: 75 Lenin Street, Almetyevsk 423450, Republic of Tatarstan, Russian Federation AUDITOR Joint Stock Company “PricewaterhouseCoopers Audit” (JSC PwC Audit) having its place of business at: 10 Butyrsky Val, Mos¬cow 125047, Russian Federation. Certificate of State Registration of Joint-Stock Company No. 008.890 issued by the Moscow Registration Chamber on Febru¬ary 28, 1992. Certificate of Entry in the Unified State Register of Legal Entities registered before July 1, 2002, Registration No. 1027700148431 dated August 22, 2002 issued by the Moscow Interdistrict Inspectorate of the Ministry for Taxes and Duties of the Russian Fed¬eration No. 39. Member of the Non-commercial Partnership “Audit Chamber of Russia” (NP APR), which is a self-regulating organization of auditors - Registration number 870 in the Register of NP APR members. Basic State Registration Number in the register of auditors and auditor organizations - 10201003683 We have audited the enclosed accounting statements of PJSC TATNEFT n.a. V.D. Shashin (hereinafter referred to as the Com¬pany) which comprise the Balance Sheet as at December 31, 2015, Profit and Loss Account, Statement of Capital Changes, Cash Flow Statement for 2015, Notes to the Balance Sheet and Profit & Loss Account (hereinafter jointly referred to as the “Accounting Statements”). COMPANY’S RESPONSIBILITY FOR THE ACCOUNTING STATEMENTS The Company’s management is responsible for preparation and fair presentation of the said of the said Accounting Statements in compliance with the rules on preparing accounting statements set out in the Russian Federation and for the internal control system necessary to prepare the accounting statements that are free from material misstatements whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on the fair presentation of the accounting statements based on our audit. We con¬ducted our audit in accordance with the Federal Auditing Standards and International Standards on Auditing. These standards require the compliance with the applicable ethical rules as well as audit planning and carrying out in such a manner that gives sufficient confidence that the accounting statements are free of material misstatements. The audit included auditing procedures aimed at obtaining the audit evidence that prove the numeric values in the accounting statements and disclose of the information contained therein. The choice of the auditing procedures is the subject matter of our judgment which is based on assessment of the risk of material misstatements, whether due to fraud or error. During the assess¬ment of the risk we considered the internal control system procuring preparation and accuracy of the accounting statements in order to select appropriate auditing procedures but not to express the opinion if the internal control system is efficient. The audit also included the assessment of the proper nature of the applied accounting policy and soundness of the estimates obtained by the management of the Company as well as the evaluation of the overall presentation of the accounting statements. We believe that the audit evidence we have obtained is sufficient and appropriate to express an opinion on the fair presentation of the accounting statements. OPINION In our opinion, the accounting statements present fairly in all material respects the financial standing of the Company as at December 31, 2015, and the results of its financial and economic activities and cash flows for 2015 in conformity with the rules on preparing the accounting statements set out in the Russian Federation. March 28, 2016 Moscow, Russian Federation M.E. Timchenko, Director JSC PriceWaterhouseCoopers Audit 146 147 ABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUACCOUNTING REPORTS OF JSC TATNEFT, FY 2016 BALANCE SHEET ASSETS I. FIXED ASSETS Intangible assets Research and development results Intangible exploration assets Tangible exploration assets Fixed assets incl. incomplete capital investments advance payments given for procurement and construction of fixed assets Income-bearing investments in tangible assets Financial investments Deferred tax assets Other 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 Value added tax on acquired assets Accounts receivable incl. noncurrent nondelinquent accounts receivable (that are due beyond 12 months after 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 investments (except for cash equivalents) Cash and cash equivalents Other current assets TOTAL for section II BALANCE 148 Line Code As of December 31, 2016 As of December 31, 2015 As of December 31, 2014 LIABILITIES Line Code As of December 31, 2016 As of December 31, 2015 As of December 31, 2014 thousand RUB thousand RUB BALANCE SHEET (CONTINUED) 1110 1120 1130 1140 1150 1151 1152 1160 1170 1180 1190 1191 1100 1210 1211 1212 1213 1214 1215 1220 1230 1231 1232 1233 1234 1235 1236 1237 1238 1240 1250 1260 1200 1600 465 285 632 054 4 288 829 2 376 749 363 181 425 495 4 298 721 1 181 376 307 582 325 099 4 256 953 1 133 728 207 011 450 185 402 361 121 288 999 87 479 230 79 479 182 27 392 755 4 575 908 9 896 607 8 688 542 4 776 524 2 302 366 1 888 783 253 078 329 234 265 798 213 205 328 - - - 51 255 795 37 433 580 40 578 570 28 996 993 29 293 324 29 232 592 523 885 015 465 672 878 382 985 042 33 955 382 27 195 783 26 948 648 4 900 427 2 581 938 421 525 412 249 1 994190 225 794 25 781 234 21 045 366 17 399 856 2 398 102 454 094 2615 128 541 102 6 700 323 628 485 3 386 647 3 708 117 4 308 690 88 128 999 107 136 545 82 279 954 4 686 487 6 348 987 6 656 414 436 418 822 812 128 897 582 784 363 188 3 427 257 6 219 727 6 073 442 83 442 512 100 787558 75 623 540 64 239 889 56 610 370 47 652 992 6 843 389 27 710 973 18816538 12 359 234 16466215 9 154010 55 736 376 28 266 335 45 942 537 21 949 639 8 393 083 34 916 922 1 259 705 19 634 17 200 204 416 748 174 719 497 194413951 728 301 763 640 392 375 577 398 993 III. CAPITAL AND RESERVES Authorized capital (share capital, registered fund, contributions of partners) 1310 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 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 (-) (-) (-) 11 294 898 10 546 619 9 799 512 320 092 441 293 252 710 1 328 926 1 364 610 1 341 864 609 147 154 530 650 255 471 369 384 624 417 269 545 328 976 485 089 669 370 000 1 568 072 3 144 387 10 272 462 8 602 514 10 372 405 30 330 233 33 486 117 29 975 977 392 - - 40 973 087 43 656 703 43 492 769 4 207 953 2 396 685 8 739 722 56 573 009 47 072 098 38 349 893 21 155 447 26 585 497 19 086 327 545 876 462 037 19 498 095 10 059 307 8 403 106 2 939 963 149 472 133 304 337 717 8 982 193 6 432 831 117215 6 821 013 6 891 990 3 393 610 55 757 3 568 4 478 2 074 688 1 934 345 1 722 462 - - - 62 911 407 51 406 696 48 816 555 728 301 763 640 392 375 577 398 993 149 ABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUPROFIT AND LOSS STATEMENT FY 2016 thousand RUB ESSENTIAL ASPECTS OF THE ACCOUNTING POLICY AND PRESENTATION OF THE ACCOUNTING STATEMENTS Indicator Description Line Code FY 2016 FY 2015 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) 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 the period Total profit/loss for the period FOR REFERENCE Basic earnings (loss) per share Diluted earnings (loss) per share 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 486 176 316 462 962 074 (312 524 760) (306 851 332) 173 651 556 156 110742 (36 919 888) (36 617 097) - - (127 769) (72 494) 136 603 899 119421 151 1 593 297 4 857 244 707 955 9 845 751 (3 451 408) (3 801 044) 64 995 252 19 168 972 (71 033 928) (33 833 924) 133 564 356 111 508 861 (27 313 688) (28 308 902) (2 270 765) (4 237 239) (1 669 948) 1 769 891 - 49 045 194 284 - 45 445 (6 557) 104 824 049 85 008 738 1 095 374 826 602 (121 201) 188 583 105 798 222 86 023 923 47,20 38.28 - * The full version of the accounting (financial) statements under RAS is available at: http://www.tatneft.ru/storage/block_editor/files/fc100472fb7ea0fab305d3ec5ebadc2748f99559.pdf 150 MAIN APPROACHES TO PREPARATION OF THE ANNUAL ACCOUNTING STATEMENTS Financial accounting in the Company is performed in accordance with Federal 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. The accounting statements of the Company for 2015 were prepared in compliance with the mentioned Accounting Law, accounting regulations and policy. The annual accounting statements for 2015 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 accounting statements”. The data of the accounting statements are presented in thousands of Russian rubles. ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCY Accounting for assets and liabilities denominated in foreign currencies is carried out in accordance with RAS 3/2006 “Account¬ing of Assets and Liabilities Denominated in Foreign Currencies”, and approved by Order No. 154n of November 27, 2006 of the Finance Ministry of the Russian Federation. The exchange rate difference is reflected in the accounting and financial statements for the concerned reporting period with the due date of payment or which the financial statements were executed for. The exchange rate difference arising from conversion of the organization’s assets and liabilities denominated in foreign cur¬rency used for performing activities outside the Russian Federation into rubles is credited to the company’s capital surplus. The exchange rate difference on other activities is credited to financial results of the organization as other income and ex¬penses. The currency exchange rate gains and losses are recognized in the Profit and Loss account in the “Other income” or “Other expenses”. For accounting business transactions in foreign currencies there was the official exchange rate applied of the foreign currency to the ruble valid on the date of transaction. Cash on foreign currency accounts in banks and on hand, financial investments (except shares), and settlement funds in foreign currencies (except the funds received and paid advances and pre-payment or earnest money) are reflected in the financial statements as amounts calculated on the basis of the currency official exchange rates valid on the reporting date. The currency exchange rates amounted to RUB 60,6569 to USD 1.00 as of December 31, 2016 (RUB 72,8827as of December 31, 2015; RUB 56,2584 as of December 31, 2014); RUB 63,8111 to EURO 1.00 (RUB 79.6972 as of December 31, 2015; RUB 68.3427 as of December 31, 2014). INTANGIBLE ASSETS As a part of intangible assets there are software programs for computers reflected; databases; inventions; useful models; trademarks and service marks, licenses for mineral geological exploration and production, licenses for mineral production, exploration and evaluation expenditures of mineral resources (transferred from the intangible exploration assets after confirmation of the commercial viability of oil production in the field). Intangible assets are reflected in the accounting records at historic cost in that reporting period when the documents are received confirming the Company’s exclusive rights to the results of intellectual activity or means of individualization irrespective of in¬tangible assets used in production, performance of works or rendering of services, for administrative purposes. 151 ABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUThe value of intangible assets shall be repaid by the straight-line depreciation method at the rates specified on the basis of the due date of the useful life. Depreciation is not charged for intangible assets with an indefinite period of the useful life. 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 explora¬tion of mineral resources for relevant license blocks. Depreciation charging is performed through accumulation of appropriate amounts in a separate account. Depreciation on in¬tangible assets is reflected in the accounting period, which they refer to and and which is charged regardless of the company’s operating results in the reporting period. Intangible exploration assets as licenses for geological subsurface study are depreciated by straight-line method 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. The useful life of intangible assets is annually verified for the purpose of clarification. 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 defined. The resulting ad¬justments are reflected in the accounting and financial reporting at the beginning of the year as changes in the estimated values. Acquisition costs incurred for exploration and mining licenses, as well as the costs of prospecting, evaluation and exploration of mineral resources are not depreciated until the commercial feasibility of oil production is confirmed in the relevant license block of mineral resources and approval of the order of commercial field development. Value adjustment of intangible assets of homogeneous groups at fair market value is not performed. EXPENSES FOR RESEARCH & DEVELOPMENT, DEVELOPMENT AND ENGINEERING WORKS The commercial feasibility of oil production is considered to be confirmed at the moment of approval of the reservoir manage¬ment plan in the license area of mineral resources. The Company performs annual verification of exploration assets depreciation as of December 31 of the calendar year, as well as in the case of cessation of their recognition when confirming commercial feasibility of oil production in the relevant license block. Expenses for the research & development, development and engineering works are accounted in the amount of actual ex¬penses incurred during performance of these works. For the purposes of verifying exploration assets for depreciation the aforementioned assets are categorized by mineral re¬source blocks indicated in the licenses. 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 company. Writing off the costs of each performed research & development, development and engineering work which 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 works which have not produced positive results are written off to the financial result as miscellaneous expenses in the reporting period. 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 advance producing wells, as well as other oilfield • expenses for acquisition and rig-up of the equipment for prospecting, exploration and advance producing operation wells. facilities; According to the Company, intangible exploration assets include the following types of exploration costs: min¬eral resources; • acquisition costs of licenses for geological study of subsurface, licenses for geological exploration and production of • 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 structural 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 performance and coordination of works on exploration, evaluation and prospect¬ing of mineral resources, as well as expenses for maintenance and repair of tangible exploration assets. Impairment loss of exploration assets is reflected in the profit-and-loss statement in line code “Other expenses”. Furthermore, the Company applies the reversal of impairment loss to exploration assets. The Company ceases recognition of exploration assets in relation to a certain licensed block of mineral resources when con¬firming commercial feasibility of oil production in the relevant licensed block or recognizing lack of prospects of mineral re¬sources production in this area. When confirming the commercial feasibility of oil production in the licensed block of mineral resources the Company performs reclassification of exploration assets: • tangible exploration assets are included in the category of fixed assets at residual value; • intangible exploration assets are included in the category of intangible assets at residual value. The Company writes off the exploration assets to other expenses, if they are not able to provide economic benefits 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 reflected in the fixed assets. The Company annually revaluates fixed assets (buildings for industrial purposes; facilities, such as pipelines, machinery and equipment (except for data equipment) based on the current value (replacement asset value) at the end of the report¬ing period. The fixed assets put into operation before January 1, 2002 are depreciated at uniform depreciation rates approved by Decree No. 1072 of the USSR Council 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 classification of fixed 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 information sources about the useful life periods. For this purpose, the following useful life periods are specified for fixed assets put into operation starting from January 1, 2002 by depreciation groups. 152 153 ABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUThe straight line depreciation method is used for depreciation calculations. Fixed asset group Buildings Facilities, including: Wells Machinery and equipment Useful life of items of fixed assets (number of years) Before 01.01.2002 After 01.01.2002 25-50 10-25 10-15 5-15 8 -31 4-31 6 -11 1-26 Depreciation is not charged on land plots and natural resources sites. On disposal of financial 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 first-time financial investments acquisition (FIFO method); • on disposal of bills - at original cost of each unit of financial investments accounting. On disposal of financial 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 financial investments disposal are reflected in the profit and loss statement as part of other income and expenses. Changing the original value of fixed assets as they were included for accounting purposes is allowed in cases of completion, retrofit, renovation, modernization, partial liquidation and revaluation of the fixed assets. INVENTORIES Repair expenses of fixed assets items are included at actual costs and referred to the reporting period in which they were done. The line of “Capital expenditures 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 reflects the cost of capital construction projects before their putting into operation, after which the structures are transferred into fixed assets. The “Raw Materials and Supplies” line of the balance sheet reflects raw materials, basic and auxiliary materials, purchased semi-finished products and components, fuel, packaging, spare parts, construction and other materials. The line of the inventories also reflects the assets, which meet the conditions necessary for the recognizing them as fixed as¬sets of the cost no more than 40 000 rubles per unit. In addition to this, the “Capital expenditures in progress” line reflects the costs associated with the lease of land for construction of future wells. The inventories are recorded at the actual cost of their acquisition with the exception of VAT and other recoverable taxes (ex¬cept as provided by the legislation of the Russian Federation). Disposal of the inventories is carried at the average cost. Leased fixed assets are reflected in the line of “Income-bearing Investments in Tangible Assets”. OTHER NONCURRENT ASSETS Assets under construction are Included in other noncurrent assets, which the management decided to sell. Also included in other non-current assets are costs associated with the production of extra-viscous oil, which had been incurred before the start of production. These costs are written off evenly over the period of oil production at the relevant development target, starting 1 day of the month following the month of the start of production. FINANCIAL INVESTMENTS Financial investments are accepted for accounting at original cost. Financial investments defining the fair market value are reflected in the financial 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 definition of the current market value are reflected in financial statements as of the re¬porting date at original cost after deduction of the reserve amount formed for their depreciation. The provision for depreciation of financial investments is created by the amount of the difference between the book value and their estimated value if the results of the depreciation test confirm a sustained significant decrease in the value of financial investments. Financial investments are reflected as part of the current assets if the expected duration of their possession is less than 12 months after the reporting date. Other financial investments are included in fixed assets. The inventories, which are obsolete, wholly or partially have lost their original quality, or which current market value is de¬creased, are reflected in the balance sheet less the reserve provision for impairment of the material values. Raw materials and materials transferred to processing on a give-and-take basis continue to be accounted for in raw materials and materials of the Company. Monthly raw materials and materials that have passed through all processing stages are recognized in the finished products. FINISHED PRODUCTS, GOODS AND SALES EXPENSES Finished products are reflected 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 financial and economic activities without differentiating be¬tween the sold and unsold products. GOODS SHIPPED The accounting item “Goods Shipped” reflects shipped products, the title for which was not transferred to buyers. This line also reflects the real estate property transferred to the buyer by the delivery-acceptance act before the moment of state registration of the transfer ownership. 154 155 ABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RU ACCOUNTS RECEIVABLES AUTHORIzED CAPITAL, SURPLUS CAPITAL AND RESERVE FUNDS Indebtedness of buyers and customers (reflected as part of the accounts receivable) is determined based on the 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 proven to be such. Accounts receivable not paid within the time limits or which will most likely not be paid within the time limits stipulated in contracts and not secured with respective guarantees is shown after deduction of accrued reserves for doubtful debts. The reserve is created for each doubtful debt outstand¬ing (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 within one financial year are reflected in the financial results statement in the lines “Other Income” or “Other Expenses”. Advance payments issued and received are presented in the balance sheet less the value added tax (from the amount of advance payments) that is subject to deduction (payment) in accordance with tax legislation. The authorized capital is reflected in the amount of the face value of ordinary and preferred shares. 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 fixed assets resulting from revaluation classified in the additional capital is reflected in the “Revalua¬tion of Fixed Assets” line. Revaluation surplus in case of the fixed asset item disposal is transferred from the capital surplus to the undistributed profit of the Company. In accordance with the legislation, the Company established a reserve fund in the amount to 5% of the authorized capital formed out of net profits of the Company. The reserve fund is intended to cover the losses of the Company, for bonds redemp¬tion and repurchase of the Company’s shares if other funds are unavailable. In accordance with the constituent documents, the Company establishes the Employee Share Ownership Fund which is formed out of net profits of the Company. Contributions to this fund are made in accordance with the methodology approved by the “Regulations on Bonus Certificates of PJSC TATNEFT”. CASH AND CASH EQUIVALENTS ESTIMATED LIABILITIES In accordance with the RAS 23/2011 “Report of Cash Flows” approved by Order No. 11 n 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 insignificant risk of value change. The Company refers the bank deposits placed for maximum 3 months period to the cash equivalents. 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 reflected in the rubles amount, which is determined in accordance with RAS 3/2006. «Accounting for assets and liabilities, which are expressed in foreign currency», approved by the Order of the Ministry of Finance of Russia on November 27, 2006 No. 154n. Differences arising in connection with the conversion of the organization’s cash flows and cash equivalents in foreign currency exchange rates on different dates are reflected in the cash flows 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 con¬tractors and payments to the budget system of the Russian Federation or reimbursement out of it are reflected as bal¬anced result being part of other income (payments) for the current activity in the line of “Other Income” (“Other Payments”). • Proceeds from the sale of products and goods contain customs duties. Cash flows are reflected in the statement of cash flows on a net basis in the following cases: • cash receipts from certain entities stipulate relevant payments to other entities (cash flows of the commission buyer or agent in connection with the performance of commission or agency services (except for payment for services themselves); income from the counterparty against the reimbursement of utility payments and performance realization of these payments in leasing and other similar relationships etc.); • cash flows are characterized by quick return, large amounts and short payback periods (purchase and resale of financial • cash flows on short-term deposits (more than three months but less than one year), which relate to financial investments. investments, short¬term investments (up to three months) using the proceeds from borrowings etc.); Cash flows on deposits are disclosed in Tabular Format 3 “Financial Investments” in the Notes to the balance sheet and financial results statement. • Cash flows for loans received by the Company from subsidiaries - participants in the Treasury system. These loans are characterized by a rapid turnover, large amounts and short terms of return. 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. Further, based on the Provision “Estimated Liabilities, Contingent Liabilities and Contingent Assets (RAS 8/2010)” approved by the Order of the Russian Ministry of Finance No. 167n of December 13, 2010, the Company recognizes estimated liabilities on unused vacations by the employees. The estimated liability value of unused vacations 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 specified 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. An inventory of the estimated liability for unused vacation payment is carried out as of the last day of each quarter, which results are reflected by the estimated liability adjustments. In accordance with the requirements of the regulations (Federal Law No. 2395-1 “On Subsoil”, No. 7-FZ “On Environmental Protection”, etc.), the terms of license agreements for the right to use the subsoil the Company recognizes in the accounting records and financial statements the estimated liabilities on liquidation of fixed assets, as well as commitments for remediation of lands in the fields after completion of the oil and gas production. Estimated liabilities are formed for all real estate oil & gas assets. Estimated liabilities on fixed assets retirement and restora¬tion of natural resources are calculated by groups of the fields. The value of estimated liability is recorded at the present value (discounted cost). Accrued estimated liabilities at initial recognition, as well as the newly introduced fixed assets are included in the “Other fixed assets”. Depreciation of assets on liquidation liabilities is accrued on a monthly basis in proportion to the oil production volume. The 156 157 ABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUamount of monthly depreciation is determined for each group of the fields and Oil & Gas Production Division based on the amount of oil produced during the current month and the amount of assets on liquidation liabilities attributable to 1 tonne of oil reserves on deposits of the group at the end of the previous reporting period. Accrual of interest due to the increased present value as we approach the period of performance estimated liability is recorded in the financial results statement in the line of “Interest payable”. Adjustment of estimated liabilities on the fixed assets retirement and restoration of natural resources due to the review of core indicators of calculation (forecast inflation rate, discount rate, discount period) is recorded in the financial results statement in the line of “Other income”. LOANS AND BORROWINGS In accordance with RAS 15/2008 “Accounting of expenses on loans and borrowings” approved by Order No. 107n of the Minis¬try 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 reflected in the balance sheet line of “Bor¬rowings”. Indebtedness under the received loans and borrowings as well as accrued interest for accounting is subdivided 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 are 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 first day of the month following the month of accepting the asset for accounting as a fixed asset, intangible asset or R & D expenses. SALES REVENUE RECOGNITION Revenue from sales of goods, products and (execution of works, service rendering) is recognized as and when the ownership of the products is transferred to the customers (as works are executed, services are rendered to the customers). Revenues are reflected in the accounting statements less value added tax, excise duties, customs duties. The item “Other income” include the income which is not included in the revenue: revenue from the sale of fixed assets, con¬struction in progress and other assets, foreign currency sale, income from changes in estimates on fixed assets liquidation and restoration of natural resources, foreign exchange differences and other similar income. EXPENSES The administrative expenses include the maintenance expenditures of the Executive Office. The mentioned expenses are al¬located on a monthly basis between the oil-and-gas production divisions in proportion to the planned volume of oil production (in natural terms). 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 products (works, services) on a pro rata basis to their total production expenses less the deductions, taxes and other obligatory payments. The item “Other expenses” include expenses which are not related to the manufacture and sales of products, execution of works, rendering of services, purchase and sale of goods . ACCOUNTING OF PROFIT TAX CALCULATIONS The Company has been a responsible member of the consolidated group of taxpayers (hereinafter referred to as CGT) from January 1, 2012. In 2015, the CGT included four members. Since 2016, the composition of the participants has been expanded to five members. The Company independently forms the accounting information on income tax in accordance with RAS 18/02. In this regard, temporary and permanent differences are determined by the Company based on its revenues and expenses included in the consolidated tax base of the CGT in accordance with the norms of the Tax Code of the Russian Federation. The amount of the current income tax is determined on the basis of the Company’s accounting information and recognized in the profit-and loss statement in the line 2410 “Current income tax”. The difference between the amount of the current income tax calculated by the Company for inclusion in the consolidated tax base of the CGT and the amount of funds due and payable by the Company based on the terms of the agreement on CGT establishment in the profit-and loss statement, is reflected in the line 2465 “Adjusted tax on the profit for the consolidated group of taxpayers” and included in determination of net income (loss) of the Company without participating in generation of the profit (loss) before taxation. The outstanding amount of CGT income tax on CGT as a whole, to be paid by the Company as a responsible CTG participant to the budget, is reflected in the Company’s balance sheet in the line 1523 “Taxes and dues payable”. The overpaid amounts of CGT income tax to the budget is reflected in the balance sheet in the line 1238 “Other debtors”. The outstanding amount upon settlements with the CGT members on CGT income tax (interim payment) is reflected in the balance sheet separately in the items of the current assets in the line 1238 “Other debtors” and short-term liabilities in the line 1526 “Other creditors” of the balance sheet, respectively. The Company as a responsible CGT member reflects the income tax assessment and payments to the participants in the framework of the agreement on CGT establishment with account 78 “Settlements with the CGT members”. In preparation of the accounting statements, the balanced (net) amounts of deferred tax asset and deferred tax liability are reflected in the balance sheet. CORRECTION OF ERRORS IN THE ACCOUNTING AND REPORTING An error identified in the accounting and financial statements is recognized to be essential if the ratio of the error to the nu¬merical indicator of the relevant group of balance sheet items of the Company, or item of the profit-and-loss statement of the Company for the reporting period is minimum five percent. Otherwise, the error is insignificant. 158 159 ABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUIFRS CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2016 160 161 ABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RU162 163 ABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RU164 165 ABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUCONSOLIDATED STATEMENT OF FINANCIAL POSITION Assets Cash and cash equivalents Banking: Mandatory reserve deposits with CB RF Restricted cash Accounts receivable, net Banking: Loans to customers Other short-term financial assets Inventories Prepaid expenses and other current assets Prepaid income tax Non-current assets held for sale Total current assets Long-term accounts receivable, net Banking: Loans to customers Other 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 Banking: Due to banks and CB RF Banking: Customer accounts Taxes payable Income tax payable Other short-term liabilities Total current liabilities Long-term debt, net of current portion Banking: Due to banks and CB RF Banking: Customer accounts Decommissioning provision, net of current portion Deferred income tax liability Other long-term liabilities Total non-current liabilities Total liabilities Note 31 December 2016 31 December 2015 6 7 8 9 10 11 12 7 8 9 13 14 15 16 17 18 19 20 15 18 17 19 20 14 15 21 77,106 1,988 3 63,900 69,103 57,931 33,271 23,889 1,058 4,247 24,600 - 318 60,151 - 13,055 32,042 48,033 1,030 - 332,496 179,229 1,807 123,923 44,397 639 2,248 - 48,469 5,632 583,614 557,778 2,043 5,678 762,101 1,094,597 19,288 45,509 13,935 177,422 23,737 4,511 1,961 286,363 34,842 4,415 3,292 30,324 22,600 3,857 99,330 385,693 2,535 2,800 619,462 798,691 5,281 43,488 - - 18,202 1,940 - 68,911 12,880 - - 33,352 21,771 4,119 72,122 141,033 166 167 The accompanying notes are an integral part of these consolidated financial statements. In mIllIons of RussIan RoublesFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYwww.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTPJSC TATNEFT ANNUAL REPORT 2016CONSOLIDATED STATEMENT OF FINANCIAL POSITION (CONTINUED) CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Note 31 December 2016 31 December 2015 Note Year ended 31 December 2016 Year ended 31 December 2015 Shareholders’ equity Preferred shares (authorized and issued at 31 December 2016 and 2015 – 147,508,500 shares; nominal value at 31 December 2016 and 2015 – RR1.00) Common shares (authorized and issued at 31 December 2016 and 2015 – 2,178,690,700 shares; nominal value at 31 December 2016 and 2015 – RR1.00) 22 22 746 746 11,021 11,021 Additional paid-in capital Accumulated other comprehensive income Retained earnings Less: Common shares held in treasury, at cost (75,481,000 shares and 55,491,000 shares at 31 December 2016 and 2015, respectively) Total Group shareholders’ equity Non-controlling interest Total shareholders’ equity Total liabilities and equity 85,224 1,293 615,477 (10 250) (10,250) 703,511 5,393 708,904 1,094,597 85,170 1,639 532,821 (3 083) (3,083) 628,314 29,344 657,658 798,691 28,29 Sales and other operating revenues on non-banking activities, net 25 580,127 552,712 Costs and other deductions on non-banking activities Operating expenses Purchased oil and refined products Exploration Transportation Selling, general and administrative Depreciation, depletion and amortization Loss on impairments of property, plant and equipment and other assets Taxes other than income taxes Maintenance of social infrastructure and transfer of social assets Total costs and other deductions on non-banking activities Gain/(loss) on disposals of interests in subsidiaries and associates, net Other operating (expenses)/income, net Operating profit on non-banking activities Net interest, fee and commission and other operating income/(expenses) and gains/ (losses) on banking activities Interest, fee and commission income Interest, fee and commission expense Provision for loan impairment Operating expenses Loss arising from dealing in foreign currencies, net Other operating expenses, net Total net interest, fee and commission and other operating expenses and losses on banking activities Other income/(expenses) Foreign exchange (loss)/gain, net Interest income on non-banking activities Interest expense on non-banking activities, net of amounts capitalized Share of results of associates and joint ventures (119,480) (108,294) (80,166) (1,185) (30,478) (46,754) (21,626) (5,616) (59,913) (1,856) (30,149) (48,871) (25,052) (5,981) (126,590) (137,380) (5,182) (4,665) (437,077) (422,161) 1,951 (50) (917) 3,684 144,084 134,185 7,955 (5,105) (1,167) (2,258) (175) (230) (980) (3,304) 5,430 (3,920) (339) - - - - - - - 2,283 11,023 (7,691) (2,172) 14 25 14, 30 15 14 13, 28 25 30 24 24 13, 29 Total other (expenses)/income Profit before income tax (2,133) 140,971 3,443 137,628 The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. 168 169 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUCONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME (CONTINUED) CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Income tax Current income tax expense Deferred income tax expense Total income tax expense Profit for the year Other comprehensive income/(loss): Items that may be reclassified subsequently to profit or loss: Foreign currency translation adjustments Unrealized holding gains on available-for-sale securities Items that will not be reclassified to profit or loss: Actuarial loss on employee benefit plans Other comprehensive loss Total comprehensive income for the year Profit/(loss) attributable to: - Group shareholders - Non-controlling interest Total comprehensive income/(loss) attributable to: - Group shareholders - Non-controlling interest Basic and diluted earnings per share (RR) Common Preferred Weighted average shares outstanding (millions of shares) Common Preferred Прим. За год, закончившийся 31 декабря 2016 За год, закончившийся 31 декабря 2015 15 21 22 22 (29,657) (5,184) (34,841) 106,130 (30,954) (902) (31,856) 105,772 (1,050) 1,338 (634) (346) 318 222 (789) (249) 105,784 105,523 107,389 (1,259) 98,930 6,842 106,130 105,772 107,043 (1,259) 98,681 6,842 105,784 105,523 47.50 47.48 2,113 148 43.56 43.53 2,123 148 Attributable to Group shareholders s e r a h s f o r e b m u N ) s d n a s u o h t ( n i - d a p i l a n o i t i d d A l a t i p a c l a t i p a c e r a h S s e r a h s y r u s a e r T t fi e n e b e e y o p m e l n o s s o l l a i r a u t c A s n a p l y c n e r r u c n g e r o F i s t n e m t s u d a j l n o i t a s n a r t i l g n d o h d e z i l a e r n U s e i t i r u c e s e a s - r o f l i s g n n r a e d e n a t e R i l ’ s r e d o h e r a h s l a t o T y t i u q e g n i l l o r t - n o c - n o N t s e r e t n i y t i u q e l a t o T l - e b a l i a v a n o s n a g i Balance at 1 January 2015 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 Disposal of non- controlling interest in subsidiaries Dividends declared Balance at 31 December 2015 Profit for the year Other comprehensive (loss)/income for the year Total comprehensive (loss)/income for the year Treasury shares - Acquisitions - Disposals Business combinations (Note 29) Acquisition of non- controlling interest in subsidiaries Disposal of subsidiaries (Note 28) Dividends declared Balance at 31 December 2016 2,270,685 11,767 87,482 (3,087) (198) 1,933 153 457,915 555,965 26,279 582,244 - - - 23 (21) 44 - - - - - - - - - - - - - - - - - - (2,312) - - - - - 4 (5) 9 - - - - (789) - 318 - 98,930 98,930 6,842 105,772 222 - (249) - (249) (789) 318 222 98,930 98,681 6,842 105,523 - - - - - - - - - - - - - - - - - - - - - - - 4 (5) 9 - - - 4 (5) 9 (2,312) 1,220 (1,092) - (2,963) (2,963) (24,024) (24,024) (2,034) (26,058) 2,270,708 11,767 85,170 (3,083) (987) 2,251 375 532,821 628,314 29,344 657,658 - - - (19,990) (20,196) 206 - - - - - - - - - - - - - - - - - - - - - 54 - - - - - (7,167) (7,215) 48 - - - - - - - 107,389 107,389 (1,259) 106,130 (634) (1,050) 1,338 - (346) - (346) (634) (1,050) 1,338 107,389 107,043 (1,259) 105,784 - - - - - - - - - - - - - - - - - - - - - - - - - - - (7,167) (7,215) 48 - 54 - - - 7,395 (7,167) (7,215) 48 7,395 (229) (175) - (29,855) (29,855) (24,733) (24,733) (3) (24,736) 2,250,718 11,767 85,224 (10,250) (1,621) 1,201 1,713 615,477 703,511 5,393 708,904 The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. 170 171 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RU CONSOLIDATED STATEMENT OF CASH FLOwS CONSOLIDATED STATEMENT OF CASH FLOwS (CONTINUED) operAting Activities Profit for the year Adjustments: Net interest, fee and commission and other operating expenses and losses on banking activities Depreciation, depletion and amortization Income tax expense Loss on impairments of property, plant and equipment, other assets and disposals of interest in subsidiaries and associates Effects of foreign exchange Share of results of associates and joint ventures Change in provision for impairment of financial assets Change in fair value of trading securities Interest income on non-banking activities Interest expense on non-banking activities, net of amounts capitalized Other Changes in operational working capital, excluding cash: Accounts receivable Inventories Prepaid expenses and other current assets Financial assets at fair value through profit or loss Accounts payable and accrued liabilities Taxes payable Other non-current assets Net cash provided by non-banking operating activities before income tax and interest Net interest, fee and commission and other operating expenses and losses on banking activities Adjustments: Provision for loan impairment Other Changes in operational working capital on banking activities, excluding cash: Mandatory reserve deposits with CB RF Due from banks Loans to customers Due to banks and CB RF Customers accounts Debt securities issued Financial assets at fair value through profit or loss Other assets and liabilities Net cash used in banking operating activities before income tax Year ended 31 December 2016 Year ended 31 December 2015 106,130 105,772 980 21,626 34,841 3,665 (1,774) 339 (226) (48) (5,430) 3,920 (3,020) (5,336) (1,412) 5,326 (51) 7,417 6,934 (519) - 25,052 31,856 6,031 1,501 2,172 1,862 (30) (11,023) 7,691 (4,913) (16,608) (776) 2,771 1,303 885 3,999 333 Income taxes paid Interest paid on non-banking activities Interest received on non-banking activities Net cash provided by operating activities investing Activities Additions to property, plant and equipment Proceeds from disposal of property, plant and equipment Net cash inflow/(outflow) on acquisition of subsidiaries Proceeds from disposal of subsidiaries and associates, net of disposed cash Purchase of available-for-sale financial assets Purchase of held to maturity investments Proceeds from disposal of available-for-sale financial assets Proceeds from redemption of held to maturity investments Proceeds from sale of non-current assets held for sale Purchase of investments in associates and joint ventures Placement of bank deposits Proceeds from redemption of bank deposits Proceeds from redemption of loans and notes receivable Issuance of loans and notes receivable Dividends received Change in restricted cash Net cash used in investing activities 173,362 157,878 FinAncing Activities (980) 1,167 (1,235) 4 2,770 (8,651) (506) 1,083 (1,950) (983) (30) (9,311) - - - - - - - - - - - - Proceeds from issuance of debt from non-banking activities Repayment of debt from non-banking activities Issuance of bonds Redemption of bonds 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 Note Year ended 31 December 2016 Year ended 31 December 2015 (26,888) (807) 5,015 (27,792) (1,032) 11,462 141,371 140,516 29 13 13 13 26 (95,669) 993 48,534 33,155 (7,566) (3,037) 5,587 2,174 110 (6,700) (40,096) 10,032 6,151 (2,940) 1,521 315 (92,872) 895 (2,122) - (19,821) - - - - (20,129) (98,851) 112,368 7,748 (8,291) - 1,317 (47,436) (119,758) 2,129 (6,629) 1,504 (5,081) (24,717) (3) (7,215) 48 - 12,072 (24,914) - - (24,008) (2,034) (5) 9 57 (39,964) (38,823) 53,971 (1,465) 24,600 77,106 (18,065) 1,117 41,548 24,600 The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements. 172 173 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: ORGANISATION PJSC 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 refining and marketing of crude oil, refined products as well as production and marketing of petrochemicals and since October 2016, with acquisition of the controlling interest in ZENIT Banking Group (Bank ZENIT) the Group is also engaged in banking activities (see Note 29). 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 2016 and 2015 the government of Tatarstan controls approximately 36% of the Company’s voting stock. 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 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 defined under Russian law. The Golden Share currently has an indefinite term. The Tatarstan government also controls or exercises significant influence over a number of the Group’s suppliers and contractors. The Company is domiciled in the Russian Federation. The address of its registered office is Lenina St., 75, Almetyevsk, Republic of Tatarstan, Russian Federation. NOTE 2: BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). These consolidated financial statements have been prepared on a historical cost basis, except for initial recognition of financial instruments based on fair value, revaluation of available-for-sale financial assets and financial instruments categorized at fair value through profit or loss. The entities of the Group maintain their accounting records and prepare their statutory financial statements principally in accordance with the Regulations on Accounting and Reporting of the Russian Federation (“RAR”), and applicable accounting and reporting standards of countries outside the Russian Federation. A number of entities of the Group prepare their financial statements in accordance with IFRS. The accompanying consolidated financial 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 hyperinflation 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 benefits and (11) business combinations and goodwill. The preparation of financial 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 significant to the consolidated financial statements are disclosed in Note 4. Reclassifications. Certain reclassifications have been made to previously reported financial statements to conform to the current year presentation; such reclassifications had no effect on net profit for the year, shareholders’ equity or cash flows. NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Functional and Presentation Currency. The presentation currency of the Group is the Russian Ruble. 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 Ruble because the majority of Group revenues, costs, property and equipment purchased, debt and trade liabilities are either priced, incurred, payable or otherwise measured in Russian Rubles. Accordingly, transactions and balances not already measured in Russian Rubles (primarily US Dollars) have been re-measured into Russian Rubles 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 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 Rubles are recognized in the profit or loss for the year. For operations of major 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 Rubles are recorded in a separate component of shareholders’ equity entitled foreign currency translation adjustments. Revenues, expenses and cash flows 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 official rate of exchange, as published by the Central Bank of Russian Federation (“CB RF”), of the Russian Ruble (“RR”) to the US Dollar (“US $”) at 31 December 2016 and 2015 was RR 60.66 and RR 72.88 to US $, respectively. Average rate of exchange for the years ended 31 December 2016 and 2015 were RR 67.03 and RR 60.96 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 significantly 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. Identifiable 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 recognizes 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 or at fair value. 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 identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognized 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 recognized directly in the profit and loss for the year. 174 175 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUInter-company transactions, balances and unrealized gains and losses on transactions between Group companies are eliminated. Unrealized losses are also eliminated unless the cost cannot be recovered. Associates and joint ventures. Associates and joint ventures are entities over which the Group has significant influence (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 recognized 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 recognized as follows: (i) the Group’s share of profits or losses of associates or joint ventures is recorded in the consolidated profit or loss for the year as share of result of associates or joint ventures, (ii) the Group’s share of other comprehensive income is recognized 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 recognized in profit 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 recognize 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 classifications in its consolidated statement of financial position. Cash and cash equivalents. Cash represents cash on hand and in bank accounts and CB RF, other than mandatory reserves deposits with CB RF, 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. Cash and cash equivalents are carried at amortised cost. 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 financial position and of the consolidated statement of cash flows and disclosed separately. Mandatory reserve deposits with the CB RF. Mandatory reserve deposits with the CB RF represent non-interest bearing funds placed with the CB RF that are not available to finance the Group’s day-to-day operations and, therefore, are not considered part of cash and cash equivalents. The amount to be deposited with the CB RF is calculated in accordance with the CB RF’s regulation and depends on the volume of funds attracted by the Group from its customers and banks in the course of banking activities. Financial Assets. All financial assets are initially recognized when an entity becomes a party to the contract, they are recognized at fair value plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Group‘s financial assets include cash and cash equivalents, restricted cash, mandatory reserve deposits with CB RF, banking customer loans, deposits, due from banks, securities, derivatives, precious metals, trade and other receivables, loans issued. Financial assets have the following categories: (a) loans and receivables; (b) available-for-sale financial assets; (c) financial assets at fair value through profit or loss; (d) held to maturity investments. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. The Group derecognizes financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Group has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass- through arrangement while (i) also transferring substantially all risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership, but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose restrictions on the sale. Loans and receivables. Loans and receivables is a category of financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. The accrued interest is included in the profit and losses for the year. The allowance for impairment of loans and receivables is established if there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the loans and receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the receivable is impaired. The amount of the allowance is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the financial asset’s original effective interest rate at the date of origination of the loan or receivable. The losses arising from impairment are recognized as selling, general and administrative expenses in the consolidated statements of profit or loss and other comprehensive income. Due from banks. Amounts due from banks other than those that are part of the Group are recorded when the Group advances money to counterparty banks with no intention of trading the resulting unquoted non-derivative receivable due on fixed or determinable dates. Amounts due from other banks are carried at amortised cost. Deposits, placed in the course of banking activities in other banks having maturity exceeding one working day from the balance sheet date are treated as amounts due from banks. Due from banks that mature within three months or less from the date of placement are included in cash and cash equivalents. Due from banks are initially recognized at fair value. These balances are subsequently re-measured at amortized cost at the effective interest method and are carried net of any allowance for impairment. Loans to customers. Loans issued in the course of banking activities that have fixed or determinable payments that are not quoted in an active market are classified as loans to customers. Loans to customers are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognized by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. Financial assets at fair value through profit or loss. A financial asset is classified at fair value through profit or loss category if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through profit 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 profit or loss are measured at fair value, and changes therein are recognized in profit and loss for the year. Coupon and interest earned on financial assets at fair value through profit or loss are reflected as interest, fee and commission income. Dividends received, all other elements of the changes in the fair value and gains or losses on derecognition are recorded in other operating income/(expenses) in the consolidated statement of profit or loss and other comprehensive income in the period in which they arise. Available-for-sale financial assets. Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or are not classified in any of the above categories of financial assets. Available-for-sale financial assets include investment securities which the Group intends to hold for an indefinite 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 changes 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 reclassified to profit and loss for the year. Dividends on available-for-sale equity instruments are recognized in profit or loss for the year when the Group’s right to receive payment is established and it is probable that the dividends will be collected. All other elements of 176 177 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUchanges in the fair value are recognized in other comprehensive income until the investment is derecognized or impaired, at which time the cumulative gain or loss is reclassified from other comprehensive income to profit or loss for the year. Impairment losses are recognized in profit or loss for the year when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of investment securities available for sale. The Group assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. Prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss (measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the other comprehensive income) is recognized in the profit and loss for the year as a reclassification adjustment from other comprehensive income. Held to maturity investments. Held to maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Group has the positive intent and ability to hold to maturity. Held to maturity investments are measured at amortized cost using the effective interest method less any impairment. If the Group were to sell or reclassify more than an insignificant amount of held to maturity investments before maturity (other than in certain specific circumstances), the entire category would be tainted and would have to be reclassified as available- for-sale. Furthermore, the Group would be prohibited from classifying any financial asset as held to maturity during the current financial year and following two financial years. Impairment of financial assets carried at amortized cost. Impairment losses are recognized in profit or loss when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the Group determines that no objective evidence exists that impairment was incurred for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics, and collectively assesses them for impairment. The primary factors that the Group considers in determining whether a financial asset is impaired are its overdue status and realisability of related collateral, if any. Repurchase agreements. Repurchase agreements (“REPO”) are used by the Group as an element of its treasury management and trading business in a course of its banking activities and are treated as secured financing transactions. A REPO is an agreement to transfer a financial asset to another party in exchange for cash or other consideration and a concurrent obligation to reacquire the financial assets at a future date for an amount equal to the cash or other consideration exchanged plus interest. Financial assets sold under REPO are included into financial assets at fair value through profit or loss, available-for-sale financial assets or held to maturity investments and funds received under these agreements are accounted for as amounts due to banks and CB RF and customer accounts as appropriate. Financial assets purchased under agreements to resell (“reverse repurchase”) are recorded as amounts due from banks or loans to customers as appropriate. Gain/loss on the sale of the above instruments is recognized as interest income or expense on banking activities in the consolidated statement of profit or loss and other comprehensive income based on the difference between the repurchase price accreted to date using the effective interest method and the sale price when such instruments are sold to third parties. When the reverse REPO/REPO is fulfilled on its original terms, the effective yield/interest between the sale and repurchase price negotiated under the original contract is recognized using the effective interest method. Financial liabilities. All financial liabilities are recognized initially at fair value and in the case of loans and borrowings, net of directly attributable transaction costs. The Group’s financial liabilities include trade and other payables, due to banks and CB RF, banking customer accounts, debt securities and bonds issued, credit facilities, subordinated debt and other borrowings. Financial liabilities are recognized initially at fair value. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest method. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification 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 recognized in the profit and loss for the year. Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognized amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously. Due to banks and CB RF, customer accounts and subordinated debt. Amounts due to banks and CB RF, customer accounts and subordinated debt are initially recognized in accordance with the accounting policy for financial instruments and subsequently re-measured at amortized cost. Any difference between net proceeds and the redemption value of these amounts due is recognized in the consolidated statement of profit or loss and other comprehensive income over the life of related financial liability using the effective interest method. Debt securities and bonds issued. Debt securities issued include promissory notes and certificates of deposit issued by the Group to its customers in the course of its banking activities. Bonds issued represent securities issued by the Bank that are traded and quoted in the open market. Promissory notes carry a fixed date of repayment. These may be issued against cash deposits or as a payment instrument, which the customer can sell at a discount in the over-the-counter market. Debt securities and bonds issued are accounted for according to the same principles used for amounts due to banks and CB RF, customer accounts and subordinated debt. If the Group purchases its own debt, it is removed from the consolidated statement of financial position and the difference between the carrying amount and the amount paid is recognized as a gain or loss on redemption of debt. Non-current assets held for sale. A non-current asset is classified as held for sale if it is highly probable that the asset’s carrying amount will be recovered through a sale transaction rather than through continuing use and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification of an asset as held for sale. Non-current assets held for sale are measured at the lower of its carrying amount and fair value less costs to sell. If the fair value less costs to sell of an asset held for sale is lower than its carrying amount, an impairment loss is recognized in the consolidated statement of profit or loss and other comprehensive income as other operating income/expense. Any subsequent increase in an asset’s fair value less costs to sell is recognized to the extent of the cumulative impairment loss that was previously recognized in relation to that specific asset. Precious metals. Assets and liabilities denominated in precious metals are translated at the current rate computed based on the second fixing of the London Metal Exchange rates, using the RR/US $ exchange rate effective at the date. Changes in the bid prices are recorded in other operating income/expenses from banking activities. Inventories. Inventories of crude oil, refined oil products, materials and supplies, finished goods and other inventories 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 benefits associated with the asset will flow to the Group. Prepayments for services such as insurance, transportation and others are written off to profit or loss when the goods or services relating to the prepayments are received. 178 179 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUIf 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 recognized in the profit or loss for the year. Mineral extraction tax. Mineral extraction tax (MET) on crude oil is defined monthly as an amount of volume produced per fixed tax rate (RR 857 and RR 766 per ton in 2016 and 2015, 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 modified by benefit for fields whose depletion rate exceeds 80% of proved reserves as determined under Russian resource classification. The Company receives a benefit of 3.5% per field for each percent of depletion in excess of the 80% threshold. Tax benefit is calculated using tax rate of RR 559 per ton (в 2015: RR 530 per ton). The ultimate amount of the MET on crude oil depends also on geographic location of the oil field (for certain regions zero tax rate may be applied depending on the volume of crude oil produced and period of field development). Also a zero MET tax rate applies to the production of highly viscous crude oil with viscosity of more than 10,000 Megapascal second in reservoir conditions. MET for production of highly viscous crude oil with viscosity between 200 and 10,000 Megapascal second is eligible to tax benefit calculated using tax rate of RR 559 per ton (2015: RR 530 per ton). MET is recorded within Taxes other than income tax in the consolidated statements of profit 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 confirmation 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 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 find oil and gas reserves are capitalized as exploration and evaluation assets on a “field by field” 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 firmly planned. Exploration costs not meeting these criteria are charged to expense. 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 field 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 flows to be written down to their recoverable amount which is the higher of fair value less costs to sell and value-in-use. Individual assets are grouped for impairment purposes at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets - generally on a field-by-field basis for exploration and production assets, at an entire complex level for refining assets or at a site level for service stations. Impairment losses are recognized in the profit 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 field based upon proved developed oil and gas reserves, except in the case of significant asset components whose useful life differs from the lifetime of the field, 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: Buildings and constructions Machinery and equipment Years 30-50 10-35 Exploration and evaluation costs are subject to technical, commercial and management review as well as review for impairment at least once a year to confirm the continued intent to develop or otherwise extract value from the discovery. When indicators of impairment are present, resulting impairment loss is measured. 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 other income and expenses in the consolidated statement of profit or loss and other comprehensive income. If subsequently commercial reserves are discovered, the carrying value, less losses from impairment of respective exploration and evaluation assets, is classified as development assets. However, if no commercial reserves are discovered, such costs are expensed after exploration and evaluation activities have been completed. Capitalisation of borrowing costs on non-banking activities. 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. 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 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 specifically 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. 180 181 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUCapitalisation 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. 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. Interest income on non-banking activities. Interest income on non-banking activities is recognized on a time- proportion basis using the effective interest method. Employee Benefits, Post-employment and other long-term Benefits. Wages, salaries, contributions to the social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits (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 outflows 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 recognized using the projected unit credit method. The cost of providing pensions is accrued and charged to staff expense within operating expenses in the Consolidated Statement of Profit or Loss and Other Comprehensive Income reflecting the cost of benefits as they are earned over the service lives of employees. Remeasurements of the net defined benefit liability arose as the actuarial gains or losses from changes in assumptions and from experience adjustments with regard to post employment benefit plans are recognized immediately in other comprehensive income. Actuarial gains and losses related to other long-term benefits are recognized immediately in the profit or loss for the year. Past service costs are recognized 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 flow using a discount rate that reflects 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 2016 and 2015 is determined based on the final 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 field 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 reflects current market assessments of the time value of money and the risks specific 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 recognized 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 recognized immediately in profit and loss. The Group’s petrochemical, refining 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. Financial guarantee contracts issued and letters of credit. Financial guarantee contracts and letters of credit issued by the Group in the course of its banking activities are credit insurance that provides for specified payments to be made to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due under the original or modified terms of a debt instrument. Such financial guarantee contracts and letters of credit issued are initially recognized at fair value. Subsequently they are measured at the higher of (a) the amount recognized as a provision in accordance with IAS 37 “Provisions, Contingent Liabilities and Contingent Assets» and (b) the amount initially recognized less, where appropriate, cumulative amortization of initial premium revenue received over the financial guarantee contracts or letter of credit issued. Income Taxes. Effective 1 January 2012, the Company has established the Consolidated Taxpayer Group which currently includes 5 companies of the Group. Income taxes have been provided for in the consolidated financial 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 recognized in profit or loss for the year, except if it is recognized in other comprehensive income or directly in equity because it relates to transactions that are also recognized, in the same or a different period, in other comprehensive income or directly in equity. Current tax is the amount expected to be paid to, or recovered from, the taxation authorities in respect of taxable profits 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 financial reporting purposes. Deferred income tax assets and liabilities are recognized 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 • In respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal is not a business combination and, at the time of the transaction, affects neither the accounting nor taxable profit or loss; 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 profit will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilised. 182 183 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUDeferred 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 statement of profit 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 profit 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 classified as equity. Dividends paid to shareholders are determined by the Board of directors and approved at the annual shareholders’ meeting. Dividends are recorded as a liability and deducted from equity in the period in which they are declared and approved. 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 profit or loss attributable to ordinary and preference share holders by the weighted average number of ordinary and preferred shares outstanding during the period. Profit 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 profit 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 risks and rewards of ownership are 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 which are of a similar nature and value 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 statement of profit or loss and other comprehensive income. Revenue includes only economic benefits which flow to the Group. Taxes and duties arising on the sale of goods to third parties do not form part of revenue. Recognition of interest, fee and commission income and expense on banking activities. Interest income and expense are recognized on an accrual basis calculated using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. Commissions and other fees are recognized when the related transactions are completed. Loan origination fees for loans issued to customers, are deferred (together with related direct costs) and recognized as an adjustment to the loans effective yield. Other income and expenses are recognized on an accrual basis. Once a financial asset or group of similar financial assets has been written down (partly written down) as a result of an impairment loss, interest income is thereafter recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Loan origination fees are deferred, together with the related direct costs, and recognized as an adjustment to the effective interest rate of the loan. Where it is probable that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are deferred, together with the related direct costs, and recognized as an adjustment to the effective interest rate of the resulting loan. Where it is unlikely that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are recognized in the consolidated statement of profit or loss and other comprehensive income over the remaining period of the loan commitment. Where a loan commitment expires without resulting in a loan, the loan commitment fee is recognized in the consolidated statement of profit or loss and other comprehensive income on expiry. Loan servicing fees are recognized as revenue as the services are provided. Loan syndication fees are recognized in the consolidated income statement when the syndication has been completed. All other commissions are recognized when services are provided. Transportation expenses. Transportation expenses recognized in the consolidated statements of profit 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. Fiduciary activities. The Group provides fiduciary services to its customers in the course of its banking activities. The Group also provides depositary services to its customers which include transactions with securities on their depositary accounts. Assets and liabilities held by the Group in its own name, but on behalf of third parties, are not reported on the consolidated statement of financial position. The Group accepts the operational risk on these activities, but its customers bear the credit and market risks associated with such operations. NOTE 4: CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES The Group makes estimates and assumptions that affect the amounts recognized in the consolidated financial statements and the carrying amounts of assets and liabilities within the next financial 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 significant effect on the amounts recognized in the consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include: • Estimation of oil and gas reserves; • Useful life of property, plant and equipment; • Decommissioning provisions; • Impairment of property, plant and equipment; • Impairment of loans to customers on banking activities; • Financial instruments fair value estimation. Estimation of oil and gas reserves. Oil and gas development and production assets are depreciated on a unit-of- production (UOP) basis for each field or group of fields 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 184 185 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUGroup 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 profit 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 insignificant 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. 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 benefit 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, refining 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 discount rate: Discount rate Change in Impact on decommissioning provision At 31 December 2016 At 31 December 2015 +1% -1% (6,812) 8,954 (7,892) 10,534 Information about decommissioning provision is presented in Note 14. Impairment of property, plant and equipment. At 31 December 2016 management assessed whether there is any indication of impairment of long-lived assets. Based on the stable financial performance, absence of significant adverse changes in economic and market environment and decrease in interest rates the management believes that there is no indication of impairment as of 31 December 2016. Impairment of loans to customers on banking activities. The Group regularly reviews its loans to assess for impairment. The Group’s loan impairment provisions are established to recognize incurred impairment losses in its portfolio of loans and receivables. The Group considers accounting estimates related to allowance for impairment of loans and receivables a key source of estimation uncertainty because (i) they are highly susceptible to change from period to period as the assumptions about future default rates and valuation of potential losses relating to impaired loans and receivables are based on recent performance experience, and (ii) any significant difference between the Group’s estimated losses and actual losses would require the Group to record provisions which could have a significant impact on its financial statements in future periods. The Group uses management’s judgment to estimate the amount of any impairment loss in cases where a borrower has financial difficulties and there are few available sources of historical data relating to similar borrowers. Similarly, the Group estimates changes in future cash flows based on past performance, past customer behavior, observable data indicating an adverse change in the payment status of borrowers in a group, and national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans. The Group uses management’s judgment to adjust observable data for a group of loans to reflect current circumstances not reflected in historical data. The allowances for impairment of financial assets in the consolidated financial statements have been determined on the basis of existing economic and political conditions. The Group is not in a position to predict what changes in conditions will take place in the Russian Federation and what effect such changes might have on the adequacy of the allowances for impairment of financial assets in future periods. Financial instruments fair value estimation. Financial instruments that are classified at fair value through profit or loss or available-for-sale, and all derivatives are stated at fair value. If a quoted market price is available for an instrument, the fair value is calculated based on the market price. When valuation parameters are not observable in the market or cannot be derived from observable market prices, the fair value is derived through analysis of other observable market data appropriate for each product and pricing models which use a mathematical methodology based on accepted financial theories. Pricing models take into account the contract terms of the securities as well as market-based valuation parameters, such as interest rates, volatility, exchange rates and the credit rating of the counterparty. Where market-based valuation parameters are missed, management will make a judgment as to its best estimate of that parameter in order to determine a reasonable reflection of how the market would be expected to price the instrument, in exercising this judgment, a variety of tools are used including proxy observable data, historical data, and extrapolation techniques. The best evidence of fair value of a financial instrument at initial recognition is the transaction price unless the instrument is evidenced by comparison with data from observable markets. Any difference between the transaction price and the value based on a valuation technique is not recognized in the consolidated statement of profit or loss and other comprehensive income on initial recognition. Subsequent gains or losses are only recognized to the extent that they arise from a change in a factor that market participants would consider in setting a price. Information on fair value of financial instruments where estimate is based on assumptions that do not utilize observable market prices is presented in Note 30. NOTE 5: ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS A number of amendments to current IFRS and annual improvements also approved for application in Russian Federation became effective for the periods beginning on or after 1 January 2016 but did not have any significant impact on the Group’s consolidated financial statements: • IFRS 14, Regulatory Deferral Accounts (issued in January 2014 and effective for annual periods beginning on or after 1 January 2016). 186 187 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RU beginning 1 January 2016). for the periods beginning on or after 1 January 2016). May 2014 and effective for the periods beginning on or after 1 January 2016). • Accounting for Acquisitions of Interests in Joint Operations – Amendments to IFRS 11 (issued on 6 May 2014 and effective • Clarification of Acceptable Methods of Depreciation and Amortisation – Amendments to IAS 16 and IAS 38 (issued on 12 • Agriculture: Bearer plants – Amendments to IAS 16 and IAS 41 (issued on 30 June 2014 and effective for annual periods • Equity Method in Separate Financial Statements – Amendments to IAS 27 (issued on 12 August 2014 and effective for • Annual Improvements to IFRSs 2014 (issued on 25 September 2014 and effective for annual periods beginning on or after • Disclosure Initiative Amendments to IAS 1 (issued in December 2014 and effective for annual periods on or after 1 January 2016). • Investment Entities: Applying the Consolidation Exception Amendment to IFRS 10, IFRS 12 and IAS 28 (issued in December annual periods beginning 1 January 2016). 1 January 2016). 2014 and effective for annual periods on or after 1 January 2016). Certain new standards, amendments to standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2017 or later, and which the Group has not early adopted: IFRS 9, Financial Instruments: Classification and Measurement (amended in July 2014 and effective for annual periods beginning on or after 1 January 2018). The standard reflects all phases of the financial instruments project and replaces all previous of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. The Group is considering the implications of the standard, the impact on the Group and the timing of its adoption by the Group. IFRS 15, Revenue from Contracts with Customers (issued on 28 May 2014 and effective for the periods beginning on or after 1 January 2018). The new standard introduces the core principle that revenue must be recognized when the goods or services are transferred to the customer, at the transaction price. Any bundled goods or services that are distinct must be separately recognized, and any discounts or rebates on the contract price must generally be allocated to the separate elements. When the consideration varies for any reason, minimum amounts must be recognized if they are not at significant risk of reversal. Costs incurred to secure contracts with customers have to be capitalised and amortised over the period when the benefits of the contract are consumed. Amendments to IFRS 15, Revenue from Contracts with Customers (issued on 12 April 2016 and effective for annual periods beginning on or after 1 January 2018). The amendments do not change the underlying principles of the Standard but clarify how those principles should be applied. The amendments clarify how to identify a performance obligation (the promise to transfer a good or a service to a customer) in a contract; how to determine whether a company is a principal (the provider of a good or service) or an agent (responsible for arranging for the good or service to be provided); and how to determine whether the revenue from granting a licence should be recognized at a point in time or over time. In addition to the clarifications, the amendments include two additional reliefs to reduce cost and complexity for a company when it first applies the new Standard. IFRS 16, Leases (issued in January 2016 and effective for annual periods beginning on or after 1 January 2019). The new standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. All leases result in the lessee obtaining the right to use an asset at the start of the lease and, if lease payments are made over time, also obtaining financing. Accordingly, IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. Lessees will be required to recognize: (a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and (b) depreciation of lease assets separately from interest on lease liabilities in the income statement. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. Disclosure Initiative – Amendments to IAS 7 (issued on 29 January 2016 and effective for annual periods beginning on or after 1 January 2017). The amended IAS 7 will require disclosure of a reconciliation of movements in liabilities arising from financing activities. The Group will present this disclosure in its 2017 financial statements. The Group is currently assessing the impact of new standards on its consolidated financial statements. The following other new pronouncements are not expected to have material impact on the Group when adopted: • Recognition of Deferred Tax Assets for Unrealised Losses – Amendments to IAS 12 (issued on 19 January 2016 and • Amendments to IFRS 2, Share-based Payment (issued on 20 June 2016 and effective for annual periods beginning on or effective for annual periods beginning on or after 1 January 2017). after 1 January 2018). All new standards, amendments to standards and interpretations are approved for application in Russian Federation except for those listed below. These new pronouncements are also not expected to have material impact on the Group when adopted: • Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments to IFRS 10 and IAS 28 • Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts - Amendments to IFRS 4 (issued on 12 September (issued on 11 September 2014 and effective for annual periods beginning on or after a date to be determined by the IASB). 2016 and effective, depending on the approach, for annual periods beginning on or after 1 January 2018 for entities that choose to apply temporary exemption option, or when the entity first applies IFRS 9 for entities that choose to apply the overlay approach). after 1 January 2017 for amendments to IFRS 12, and on or after 1 January 2018 for amendments to IFRS 1 and IAS 28). • Annual Improvements to IFRSs 2014-2016 cycle (issued on 8 December 2016 and effective for annual periods beginning on or • IFRIC 22 - Foreign Currency Transactions and Advance Consideration (issued on 8 December 2016 and effective for annual • Transfers of Investment Property – Amendments to IAS 40 (issued on 8 December 2016 and effective for annual periods periods beginning on or after 1 January 2018). beginning on or after 1 January 2018). 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 Due from banks Total cash and cash equivalents At 31 December 2016 At 31 December 2015 40,847 22,744 13,515 77,106 12,273 12,327 - 24,600 Term deposits with original maturity of less than three months represent deposits placed in banks in the course of non-banking activities. Due from banks represent deposits with original maturities of less than three months placed in the course of banking activities in banks other than those that are part of the Group. The fair value and credit quality analysis of cash and cash equivalents is presented in Note 30. 188 189 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUNOTE 7: ACCOUNTS RECEIVABLE Short-term and long-term accounts receivable comprise the following: At 31 December 2016 At 31 December 2015 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 Fair value of short-term and long-term accounts receivable is presented in Note 30. Analysis by credit quality of trade and other receivables is as follows: 61,295 4,239 (1,634) 63,900 1,581 334 (108) 1,807 65,707 58,170 3,891 (1,910) 60,151 1,512 794 (58) 2,248 62,399 At 31 December 2016 At 31 December 2015 Trade receivables Other financial receivables Trade receivables Other financial receivables 17,079 7,783 14,054 11,183 2,862 1,172 6,646 60,779 646 42 - 688 - - 1,409 1,409 (1,409) 61,467 - - - - - - 4,170 4,170 24 - 46 70 - - 333 333 (333) 4,240 15,399 8,166 7,903 5,005 3,134 6,866 10,423 56,896 852 417 - 1,269 - - 1,517 1,517 (1,517) 58,165 - - - - - - 4,059 4,059 60 59 56 175 - - 451 451 (451) 4,234 Neither past due nor impaired - international crude oil and oil products traders - Russian crude oil and oil products traders - Russian refineries - central and eastern Europe refineries - Russian tire dealers and automotive manufacturers - Russian construction companies - unrated Total neither past due nor impaired 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 impaired (gross) - less than 90 days overdue - 91 to 180 days overdue - over 180 days overdue Total individually impaired Less: provision for impairment Total 190 Movements in the provision for impairment for trade and other receivables are as follows: Provision for impairment at 1 January Provision for impairment during the year Amounts written off during the year as uncollectible Foreign exchange gain Change in Group structure At 31 December 2016 At 31 December 2015 Trade receivables Other financial receivables Trade receivables Other financial receivables (1,517) (167) 165 103 7 (451) (140) 251 - 7 (19,880) (498) 18,111 750 - (447) (4) - - - Provision for impairment at 31 December (1,409) (333) (1,517) (451) As of 31 December 2014 the Group had receivables from ChMPKP Avto of US $334 million, relating to the sale of crude oil to Ukraine (Kremenchug refinery), which had been fully provided for (Note 27). During the year ended 31 December 2015 the receivables were written off against the provision due to bankruptcy and subsequent liquidation of the debtor (intermediary in the crude oil sales transaction). NOTE 8: BANKING: LOANS TO CUSTOMERS Loans to legal entities Loans to individuals Loans to customers before impairment Provision for impairment Total loans to customers Less: long term loans Less: provision for long term loans impairments Total short term loans to customers and current portion of long term loans to customers At 31 December 2016 At 31 December 2015 159,176 35,017 194,193 (1,167) 193,026 (125,090) 1,167 69,103 - - - - - - - - Since acquisition of Bank ZENIT additional provision of loans to customer of RR 1,167 million was accrued. As at 31 December 2016 the Group granted loans to 36 customers totaling RR 78,955 million, which individually exceeded 5% of the Bank ZENIT equity. 191 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RURisk concentrations by customer industry within the customer loan portfolio are as follows: Other long-term financial assets comprise the following: Trade Manufacturing Construction Services Food Finance Agriculture Oil and gas Individuals, including: mortgage loans consumer loans car loans plastic cards overdrafts Other Other Total loans to customers before impairment At 31 December 2016 At 31 December 2015 Carrying value Share in customer loan portfolio, % Carrying value Share in customer loan portfolio, % 37,883 34,895 33,733 33,811 4,983 6,765 2,653 1,629 35,017 23,182 10,105 973 638 119 2,824 194,193 19.51% 17.97% 17.37% 17.41% 2.57% 3.48% 1.37% 0.84% 18.03% 11.94% 5.20% 0.50% 0.33% 0.06% 1.45% 100% - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Loans to customers’ credit quality analysis is presented in Note 30. As at 31 December 2016, the total amount of pledged loans to legal entities is RR 7,246 million and loans to individuals is RR 5,435 million. The loans are pledged against the funds accounted within Due to banks and CB RF (Note 19). NOTE 9: OTHER FINANCIAL ASSETS Short-term other financial assets comprise the following: Loans and receivables: Notes receivable Other loans (net of provision for impairment of RR 5 million and RR 23 million as of 31 December 2016 and 2015) Bank deposits (net of provision for impairment of RR 5,400 million as of 31 December 2016) Due from banks REPO with banks Financial assets at fair value through profit or loss: Held-for-trading Available-for-sale financial assets Held to maturity investments Total short-term financial assets At 31 December 2016 At 31 December 2015 3 1,107 32,206 3,022 6,638 8,190 4,254 2,511 57,931 5,596 3,617 2,594 - - 1,248 - - 13,055 Loans and receivables: Notes receivable (net of provision for impairment of RR 318 million as of 31 December 2016 and 2015) Loans to employees (net of provision for impairment of RR 1,476 million and RR 1,414 million as of 31 December 2016 and 2015) Other loans Bank deposits Due from banks Available-for-sale financial assets Held to maturity investments Total long-term financial assets At 31 December 2016 At 31 December 2015 455 1,018 2,284 500 227 31,864 8,049 44,397 4,181 1,262 1,963 17,774 - 23,289 - 48,469 Fair value, credit quality and maturity analysis for financial assets are presented in Note 30. Financial assets at fair value through profit or loss Financial assets at fair value through profit and loss comprise the following: Held-for-trading: Russian government and municipal debt securities Corporate debt securities Corporate shares Total financial assets at fair value through profit and loss At 31 December 2016 At 31 December 2015 1,928 5,673 589 8,190 85 562 601 1,248 Corporate bonds consist of Russian Ruble, US Dollar and Euro denominated bonds and Eurobonds issued by Russian banks and companies. These bonds mature from 2017 to 2046. The annual coupon rates on these securities range from 4.7% to 13.3%, and yields to maturity vary from 4.2% to 13.2%. Municipal bonds consist of Russian Ruble denominated bonds issued by regional and municipal authorities of the Russian Federation and mature from 2017 to 2023. The annual coupon rates on these securities range from 7.5% to 11.9%, and yields to maturity vary from 8.6% to 10.9%. Federal loan bonds consist of Russian Ruble denominated government securities issued by the Ministry of Finance of the Russian Federation, which are commonly referred to as “OFZ” and Russian Federation Eurobonds. These bonds mature from 2023 to 2031. The annual coupon rates on these securities vary from 7% to 8.5%, and yield to maturity vагу from 8.3% to 8.6%. Corporate shares include quoted shares of Russian companies and banks. 192 193 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUAvailable-for-sale financial assets Available for sale financial assets comprise of the following: Russian government and municipal debt securities Corporate debt securities Corporate shares Investment fund units Total available-for-sale financial assets At 31 December 2016 At 31 December 2015 543 7,822 8,150 19,603 36,118 - - 3,505 19,784 23,289 NOTE 10: INVENTORIES Materials and supplies Crude oil Refined oil products Petrochemical supplies and finished goods Other Total inventories At 31 December 2016 At 31 December 2015 9,696 9,996 9,087 4,183 309 33,271 11,861 6,436 7,586 6,159 - 32,042 Corporate bonds consist of Russian Ruble, US Dollar and Euro denominated bonds and Eurobonds issued by Russian banks and companies. Corporate bonds include RR 16 million securities sold under REPO agreements. These bonds mature from 2017 to 2046. The annual coupon rates on these securities range from 3.2% to 15%, and yields to maturity vary from 1.2% to 43.3%. NOTE 11: PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets are as follows: Municipal bonds consist of Russian Ruble denominated bonds issued by regional and municipal authorities of the Russian Federation and mature in 2020. The annual coupon rate on these securities is 8.2% and yield to maturity is 9.4%. Federal loan bonds consist of OFZ and Russian Federation Eurobonds. These bonds mature from 2017 to 2028. The annual coupon rates on these securities vary from 6.5% to 12.8%, and yield to maturity vагу from 4.8% to 10.7%. Corporate shares include quoted and unquoted shares of Russian companies and banks. At 31 December 2016 and 2015 unquoted securities include investment in AK BARS Bank ordinary shares (8.6%) in the amount of RR 2,300 million. The fair value of these shares is measured using combination of the net asset method (based on IFRS consolidated financial statements of AK BARS Bank) and comparable company valuation multiples technique. Investment fund units are solely presented with investment in closed mutual investment fund AK BARS – Gorizont. The main assets of this fund are the land plots. The Group does not exercise significant influence over this investment and therefore accounts for it as an available-for-sale investment. Held to maturity investments Held to maturity investments comprise of the following: Municipal debt securities Corporate debt securities Total held to maturity securities At 31 December 2016 At 31 December 2015 483 10,077 10,560 - - - Municipal bonds consist of Russian Ruble denominated bonds issued by regional and municipal authorities of the Russian Federation and mature from 2017 to 2021. The annual coupon rates on these securities range from 9.7% to 10.9%, and yields to maturity vary from 8.5% to 9.6%. Corporate bonds consist of Russian Ruble, US Dollars and Euro denominated bonds and Eurobonds issued by Russian banks and companies. Corporate bonds include RR 1,066 million securities sold under REPO agreements. These bonds mature from 2017 to 2027. The annual coupon rates on these securities range from 0.5% to 12%, and yields to maturity vary from 2.6% to 9.6%. At 31 December 2016 At 31 December 2015 Prepaid export duties VAT recoverable Advances Prepaid transportation expenses Other Prepaid expenses and other current assets 4,490 5,375 11,475 1,679 870 23,889 NOTE 12: NON-CURRENT ASSETS HELD FOR SALE Long-term financial assets include the following: 1 January 2016 Addition as a result of acquisition of subsidiary Addition by taking possession of collateral Impairment Disposal as a result of sale 31 December 2016 6,678 9,473 28,985 1,192 1,705 48,033 - 4,347 217 (159) (158) 4,247 As at 31 December 2016 non-current assets held for sale include real estate which the Group received in the course of its banking activities by taking possession of collateral held as security for loans and receiving other property. These non-cash settlements were excluded from the consolidated statement of cash flows. The carrying amount of non-current assets held for sale will be recovered through a sale transaction. The Group’s management approved a sales plan and the Group has started the process of active marketing of non-current assets held for sale in order to sell them within 12 months starting from the date of their classification into this category. The property in the amount of RR 158 million has been converted into cash during fourth quarter of 2016 with a loss of RR 48 million. 194 195 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUNOTE 13: INVESTMENTS IN ASSOCIATES AND JOINT VENTURES NOTE 14: PROPERTY, PLANT AND EQUIPMENT Investments in associates and joint ventures comprise the following: Name of an investee Associates and joint ventures: Bank ZENIT Nizhnekamskneftekhim Other Total Ownership percentage at 31 December Net book value at 31 December Share of results of associates and joint ventures 2016 2015 2016 2015 2016 2015 - - 25 - 20-75 20-75 - - 639 639 5,246 (4,690) (2,111) - 386 5,632 4,098 253 (339) - (61) (2,172) On 17 March 2016 the Group acquired a 25% minus 1 share voting interest in Nizhnekamskneftekhim for total cash consideration of RR 19,850 million which was paid in December 2015. 26 December 2016 the Group sold its share in Nizhnekamskneftekhim for RR 32,000 million, received in December 2016. RR 9,800 million gain on sale is presented within gain on disposals of interests in subsidiaries and associates of consolidated statement of profit or loss and other comprehensive income. During 2016 the Group received dividends from Nizhnekamskneftekhim in the amount of RR 1,521 million net of RR 227 million income tax withheld at source. In June 2016, the Group increased its equity share in Bank ZENIT through a subscription to the bank’s additional share emission for a cash consideration of RR 6,700 million. As a result of the transaction the Group increased its share in Bank ZENIT from 24.56% to 48.79%. As a result of the mandatory offer carried out by the Company in accordance with the Federal Law on “Joint-Stock Companies”, Tatneft Group’s stake in the share capital of Bank ZENIT increased and exceeded 50% in the fourth quarter of 2016. At 31 December 2016 the Group’s share in Bank ZENIT is 50.43% (Note 29). 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 or loss of associates and joint ventures Share of other comprehensive income of associates and joint ventures Dividends from associates Remeasurement of investment in associate upon business combination (Note 29) Acquisition of associates Reclassification of investment in Bank ZENIT to subsidiaries (Note 29) Disposal of associates Other Net book value at 31 December 2016 5,632 2,407 24 (1,748) (2,746) 26,550 (7,278) (22,200) (2) 639 2015 7,212 (2,172) 222 - - - - 370 5,632 The condensed financial information of the Group’s equity basis investments is as follows: Year ended 31 December 2016 Year ended 31 December 2015 Sales/interest income Net income/(loss) Other comprehensive income Total comprehensive income/(loss) Total assets Total liabilities 196 Other 4,274 801 - 801 9,040 9,382 Bank zENIT 32,318 (9,498) 902 (8,596) 314,817 293,771 Other 3,496 (139) - (139) 6,502 6,138 Oil and gas properties Buildings and constructions Machinery and equipment Construc-tion in progress Total Cost As of 31 December 2014 348,458 179,566 144,597 Additions Disposals Changes in Group structure Transfers Changes in decommissioning provision As of 31 December 2015 Depreciation, depletion and amortisation 41 (2,912) - 31,945 (17,631) 359,901 - (467) (345) 7,494 - 1 (1,166) (8,007) 12,547 - 90,379 101,884 (4,553) (1) (51,986) - 186,248 147,972 135,723 As of 31 December 2014 Depreciation charge Disposals Changes in Group structure As of 31 December 2015 Net book value As of 31 December 2014 As of 31 December 2015 Cost 164,480 27,918 9,589 (2,703) - 4,744 (310) (158) 171,366 32,194 63,016 10,734 (692) (4,552) 68,506 - - - - - 183,978 188,535 151,648 154,054 81,581 79,466 90,379 135,723 507,586 557,778 763,000 101,926 (9,098) (8,353) - (17,631) 829,844 255,414 25,067 (3,705) (4,710) 272,066 As of 31 December 2015 359,901 186,248 147,972 135,723 829,844 Additions Disposals Changes in Group structure (Note 28, 29) Transfers Changes in decommissioning provision 19 (497) (58,426) 36,742 (6,253) - (1,358) (3,257) 15,869 - 1 (524) (20,776) 4,852 - 92,780 (1,995) (230) (57,463) 92,800 (4,374) (82,689) - - (6,253) As of 31 December 2016 331,486 197,502 131,525 168,815 829,328 Depreciation, depletion and amortisation As of 31 December 2015 Depreciation charge Disposals Changes in Group structure (Note 28, Note 29) As of 31 December 2016 Net book value As of 31 December 2015 As of 31 December 2016 171,366 32,194 68,506 10,723 (370) (29,214) 152,505 4,693 (831) (2,078) 33,978 7,900 (453) (16,722) 59,231 - - - - - 272,066 23,316 (1,654) (48,014) 245,714 188,535 178,981 154,054 163,524 79,466 72,294 135,723 168,815 557,778 583,614 Included within construction in progress are advances for construction of RR 7,329 million and RR 12,326 million at 31 December 2016 and 2015, respectively. 197 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RU 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 fields as discussed below in further detail. 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 significant. The Group incurred social infrastructure expenses of RR 4,918 million and RR 4,643 million for the years ended 31 December 2016 and 2015, respectively, for maintenance that mainly relates to housing, schools and cultural buildings. The Group’s oil and gas fields 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 fields. The Group’s existing production licenses for its major fields expire, after their recent extension, between 2026 and 2038, with other production licenses expiring between 2018 and 2044. The economic lives of many of the Group’s licensed fields extend beyond these dates. Under Russian law, the Group is entitled to renew the licenses to the end of the economic lives of the fields, provided certain conditions are met. Article 10 of the Subsoil Law provides that a license to use a field “shall be” extended at its scheduled termination at the initiative of the subsoil user if necessary to finish production in the field, 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 field, Romashkinskoye, was extended through 2038. And the license to produce oil and gas from the Group’s second largest field, 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. Decommissioning provisions. The following tables summarize the Group’s decommissioning provisions and decommissioning costs activities: Balance, beginning of period Unwinding of discount New obligations Release of existing obligations Changes in estimates Balance, end of period Less: current portion of decommissioning provisions (Note 18) Long-term balance, end of period 2016 2015 33,417 45,738 3,271 770 (29) (7,023) 30,406 (82) 5,337 502 (27) (18,133) 33,417 (65) 30,324 33,352 In 2016 the Group recorded the change in estimate for oil and gas properties decommissioning mainly due to the change in discount rate and expected long-term inflation rate. In 2015 the Group recorded the change in estimate for oil and gas properties decommissioning mainly due to the change in discount rate, estimated cost per well and expected long-term inflation rate. These plans have been designed on the basis that the Group will be producing crude oil through the economic lives of the fields and not with a view to exploiting the Group’s reserves to maximum effect only through the license expiration dates. Key assumptions used for evaluation of decommissioning provision were as follows: 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 fields. “Reasonable certainty” is the applicable standard for defining proved reserves under the SEC’s Regulation S-X, Rule 4-10. Discount rate Inflation rate Exploration and evaluation assets included in Oil and Gas assets above, net book value: At 1 January 2015 Additions Reclassification (to)/from other categories Charged to expense At 31 December 2015 Additions Reclassification (to)/from other categories Charged to expense At 31 December 2016 11,323 430 (150) (4,558) 7,045 3,076 6,948 - 17,069 NOTE 15: TAXES Income tax expense comprises the following: Current income tax expense Deferred income tax expense Income tax expense for the year At 31 December 2016 At 31 December 2015 8.56% 4.30% 9.75% 5.85% Year ended 31 December 2016 Year ended 31 December 2015 (29,657) (5,184) (34,841) (30,954) (902) (31,856) For the years ended 31 December 2016 and 2015, operating and investing cash flows used for exploration and evaluation activities amounted to RR 1,185 million and RR 3,076 million and RR 1,856 million and RR 430 million, respectively. Social assets. During the years ended 31 December 2016 and 2015 the Group transferred social assets with a net book value of RR 264 million and RR 22 million, respectively, to local authorities. At 31 December 2016 and 2015 the Group held social assets with a net book value of RR 5,954 million and RR 5,459 million, respectively, all of which were constructed after the privatization date. 198 199 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RU Presented below is reconciliation between the provision for income taxes and taxes determined by applying the statutory tax rate 20% (2015: 20%) to income before income tax: Profit before income tax Theoretical income tax expense at statutory rate Increase due to: Non-deductible expenses, net Unrecognized deferred tax assets Other Income tax expense Year ended 31 December 2016 Year ended 31 December 2015 140,971 (28,194) (5,484) (1,163) - (34,841) 137,628 (27,526) (3,150) - (1,180) (31,856) At 31 December 2016 no provision has been made for additional income taxes on RR 35,385 million (2015: RR 31,159 million) of 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 2,191 million (2015: RR 1,964 million) if they were remitted as dividends. Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for statutory tax purposes. Deferred tax assets (liabilities) are comprised of the following: 31 December 2015). Starting from 1 January 2017 the amendments to the Russian tax legislation became effective in respect of tax loss carry forwards. The amendments affect tax losses incurred and accumulated since 2007 that have not been utilised. The ten year expiry period for tax loss carry-forwards no longer applies. The amendments also set limitation on utilisation of tax loss carry forwards that will apply during the period from 2017 to 2020. The amount of losses that can be utilised each year during that period is limited to 50% of annual taxable profit. In determining future taxable profits and the amount of tax benefits that are probable in the future management makes judgments including expectations regarding the Group’s ability to generate sufficient future taxable income and the projected time period over which deferred tax benefits will be realized. The Group is subject to a number of taxes other than income taxes, which are detailed as follows: Mineral extraction tax Property tax Penalties and interest Other Year ended 31 December 2016 Year ended 31 December 2015 119,393 5,623 - 1,574 129,608 5,888 86 1,798 Total taxes other than income taxes 126,590 137,380 For mineral extraction tax for fields whose depletion rate exceeds a certain threshold the Group received a benefit of approximately RR 23.2 billion and RR 24.3 billion for the years ended 31 December 2016 and 2015, respectively. Tax loss carry forward Decommissioning provision Prepaid expenses and other current assets Long-term investments Other Deferred income tax assets Property, plant and equipment Inventories Accounts receivable Long-term investments Other liabilities Deferred income tax liabilities Net deferred tax liability At 31 December 2016 At 31 December 2015 At 31 December 2016 and 2015 taxes payable were as follows: 3,736 6,065 304 85 886 11,076 (29,145) (1,896) (413) (166) (13) (31,633) (20,557) 4,220 6,670 - - 814 11,704 (29,449) (980) (57) 217 (671) (30,940) (19,236) Mineral extraction tax Value Added Tax on goods sold Export duties Property tax Other Total taxes payable NOTE 16: OTHER LONG-TERM ASSETS Other long-term assets are as follows: Deferred income taxes are reflected in the consolidated statement of financial position as follows: Deferred income tax asset Deferred income tax liability Net deferred tax liability At 31 December 2016 At 31 December 2015 2,043 (22,600) (20,557) 2,535 (21,771) (19,236) Prepaid computer programs Precious metals Prepaid license agreements Other long-term assets Total other long-term assets 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 profits will be available against which the unused tax losses/credits can be utilized. Tax losses carry forward. At 31 December 2016, the Group had recognized deferred income tax assets of RR 3,736 million (RR 4,220 million at 31 December 2015) in respect of unused tax loss carry forwards of RR 18,680 million (RR 21,102 million at 200 At 31 December 2016 At 31 December 2015 14,652 2,707 1,277 1,128 3,973 23,737 7,401 3,909 2,534 1,360 2,998 18,202 At 31 December 2016 At 31 December 2015 1,721 974 11 2,972 5,678 1,521 - 59 1,220 2,800 201 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RU NOTE 17: DEBT Short-term debt Bonds issued Debt securities issued US $2.0 bln 2010 credit facility US $75 mln 2011 credit facility US $144.5 mln 2011 credit facility EUR 55 mln 2013 credit facility Other debt Total short-term debt Current portion of long-term debt Total short-term debt, including current portion of long-term debt Long-term debt US $2.0 bln 2010 credit facility US $75 mln 2011 credit facility US $144.5 mln 2011 credit facility EUR 55 mln 2013 credit facility Bonds issued Subordinated debt Other debt Total long-term debt Less: current portion of long-term debt Total long-term debt, net of current portion At 31 December 2016 At 31 December 2015 3,903 4,894 830 2,001 3,584 2,925 695 18,832 456 19,288 - - - - 28,795 4,497 2,006 35,298 (456) 34,842 - - - - - - 1,313 1,313 3,968 5,281 3,144 2,952 4,921 4,038 - - 1,793 16,848 (3,968) 12,880 Fair value of debt is presented in Note 30. Maturity and currency analysis of debt is presented in Note 30. Credit facilities 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 PLC, 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 financial covenants including, but not limited to, minimum levels of consolidated tangible net worth and interest coverage ratios. The 7-year tranche bears the interest of LIBOR plus 5%. The 3-year and 5-year tranches were fully repaid. 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 financial covenants including, but not limited to, minimum levels of consolidated tangible net worth and interest coverage ratios. 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 financial covenants including, but not limited to, minimum levels of consolidated tangible net worth and interest coverage ratios. In May 2013, TANECO entered into a Euro 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 financial covenants including, but not limited to, minimum levels of consolidated tangible net worth and interest coverage ratios. Bonds issued. At 31 December 2016 bonds issued are bonds denominated in Russian Rubles issued by Bank ZENIT that mature between 2017 and 2026. The annual coupon rates on these securities range from 8.5% to 12.5%, and yields to maturity vary from 7.5% to 12.3%. Subordinated debt. At 31 December 2016 subordinated debt is presented with eight subordinated loans raised by Bank ZENIT, including five subordinated loans from Deposit Insurance Agency (DIA). Further information on subordinated debt received from DIA is provided in Note 30. Other subordinated loans bear interest at rates ranging from 6.5% to 8.3% and mature from 2019 to 2024. In relation to two of subordinated loans maturing in 2021 and 2024 bearing an interest rate of 8.3% the Group is obliged to comply with eight financial covenants. As of 31 December 2016 the Group failed to comply with some of these covenants. The Group has obtained a waiver on breach of the covenants as of 31 December 2016. Debt securities issued. At 31 December 2016 debt securities are promissory notes issued by Bank ZENIT at a discount to nominal value and interest bearing promissory notes denominated in Russian Rubles, US Dollars and Euro with effective interest rates from 3.99% to 10.73%, from 2% to 5.99% and from 1.65% to 2.8% respectively. Maturity dates of these promissory notes vary from 2017 to 2028. As at 31 December 2016 non-interest-bearing promissory notes of the aggregate nominal value of RR 915 million were issued by the Group for settlement purposes and mature primarily on demand. Other debt. Other debt is primarily comprised of loans with Russian companies and banks. Other debt bear contractual interest rates of 0.5% to 4.8% per annum as of 31 December 2016 and 0.5% to 4.4% per annum as of 31 December 2015. NOTE 18: 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 14) Other accounts payable and accrued liabilities Total non-financial liabilities Accounts payable and accrued liabilities At 31 December 2016 At 31 December 2015 25,575 149 430 26,154 4,555 10,361 82 4,357 19,355 45,509 27,816 133 580 28,529 4,746 2,847 65 7,301 14,959 43,488 In November 2011, TANECO entered into a US $144.5 million credit facility with equal semi-annual repayments during ten years with the first repayment date on 15 May, 2014. The loan was arranged by Société Générale, Sumitomo Mitsui Banking Corporation Europe The fair value of each class of financial liabilities included in short-term trade and other payables at 31 December 2016 and 2015 is presented in Note 30. 202 203 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUNOTE 19: BANKING: DUE TO BANKS AND CB RF Risk concentrations by customer industry within customer accounts are as follows: Term deposits from other banks Term deposits from CB RF Correspondent accounts and other banks’ overnight deposits Total due from banks and CB RF Less: long term due from banks and CB RF Total short term of due from banks and CB RF At 31 December 2016 At 31 December 2015 11,810 6,080 460 18,350 (4,415) 13,935 - - - - - - Included in amounts due to banks as at 31 December 2016 are RR 12,510 million of correspondent accounts and term deposits from three Russian banks, which individually exceeded 5% of the Bank ZENIT equity. Term deposits from the CB RF mature from 25 January 2017 to 27 December 2018. The interest rates on term deposits from CB RF range from 10.3% to 10.8%. As at 31 December 2016 term deposits in the amount of RR 10,974 million are collateralized with loans to customers in the amount of RR 12,669 million discussed in Note 8. NOTE 20: BANKING: CUSTOMER ACCOUNTS Individuals Finance Oil and gas Trade Services Manufacturing Construction Other Total customer accounts At 31 December 2016 At 31 December 2015 Carrying value Share in customer loan portfolio, % Carrying value Share in customer loan portfolio, % 109,856 34,953 3,193 7,358 8,368 5,176 6,456 5,354 180,714 60.79% 19.34% 1.77% 4.07% 4.63% 2.86% 3.57% 2.97% 100% - - - - - - - - - - - - - - - - - - At 31 December 2016 At 31 December 2015 Other long-term liabilities are as follows: NOTE 21: OTHER LONG-TERM LIABILITIES State and public organizations Current / settlement accounts Term deposits Other legal entities Current / settlement accounts Term deposits Individuals Current / settlement accounts Term deposits Total customer accounts Less: long-term customer accounts Total short-term customer accounts 739 4,457 21,022 44,640 11,578 98,278 180,714 (3,292) 177,422 - - - - - - - - - Included in customer accounts at 31 December 2016 are RR 31,432 million of current/settlement accounts and term deposits from 11 customers, which individually exceeded 5% of the Bank ZENIT equity. Pension liability Other long-term liabilities Total other long-term liabilities Pension liabilities At 31 December 2016 At 31 December 2015 3,856 1 3,857 3,871 248 4,119 The Group has various pension plans covering substantially all eligible employees and members of management. The amount of contributions, frequency of benefit payments and other conditions of these plans are regulated by the “Statement of Organization of Non-Governmental Pension Benefits for OAO Tatneft Employees” and the contracts concluded between the Company or its subsidiaries, management, and the JSC “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 benefit upon retirement. Contributions or benefits are generally based upon grade and years until official 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 benefits, the amounts of which are generally based on salary grade and years of service at the time of retirement. Principal actuarial assumptions are as follows: Discount rate Rate of increase in salary levels Actuarial rate of NPF Statutory insurance contributions rate At 31 December 2016 At 31 December 2015 8.33% 7.23% 3.0% 31.73% 9.7% 6.27% 3.0% 30.69% Management has assessed that reasonable changes in the principal significant actuarial assumptions will not have a significant impact on the consolidated statements of profit of loss and other comprehensive income or the liability recognized in the consolidated statement of financial position. 204 205 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RU Amounts recognized in the consolidated statement of financial position: Reconciliation of the opening and closing balances of plan assets’ fair value: At 31 December 2016 At 31 December 2015 Present value of defined benefit obligation Less: Fair value of plan assets Net defined benefit liability Change in the defined benefit obligation amount: Defined benefit obligation at beginning year Effect of exchange rate changes Current service cost Interest cost Benefits paid Remeasurement losses/(gains): Actuarial losses arising from changes in financial assumptions Actuarial losses arising from changes in demographic assumptions Actuarial (gains)/losses - Experience Past service cost Disposal of subsidiaries (Note 28) Defined benefit obligation at the end of the year The amounts recognized in profit or loss are as follows: Service cost Net interest expense Remeasurement losses/(gains): Actuarial losses arising from changes in financial assumptions Actuarial losses arising from changes in demographic assumptions Actuarial (gains)/losses– Experience Disposal of subsidiaries (Note 28) Total included in ‘employee benefits expense’ 5,442 (1,586) 3,856 2016 5,834 (38) 151 566 (604) 775 11 (95) - (1,158) 5,442 2016 151 376 141 3 (125) (711) (165) 5,834 (1,963) 3,871 2015 4,379 48 140 558 (677) 643 38 640 65 - 5,834 2015 205 350 143 13 153 - 864 The amounts recognized in other comprehensive income are as follows: Remeasurement losses: Actuarial losses arising from changes in financial assumptions Actuarial losses arising from changes in demographic assumptions Actuarial losses – Experience Effect of exchange rate changes Total included in other comprehensive income 2016 2015 634 8 30 (38) 634 229 25 487 48 789 Plan assets at beginning of year Interest income Contributions Benefits paid Actuarial gain/(loss) Disposal of subsidiaries (Note 28) Plan assets at year end 2016 1,963 190 183 (305) 2 (447) 1,586 2015 1,630 208 193 (340) 272 - 1,963 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 benefit payments and portfolio management. Plan assets structure: Russian corporate bonds and equity securities of Russian issuers Russian government and regions bonds Bank deposits Foreign government securities Other Total plan assets At 31 December 2016 At 31 December 2015 49.36% 11.86% 27.87% 6.61% 4.3% 100% 32.61% 11.6% 33.86% 6.9% 15.03% 100% Expected contributions to be paid during the next annual reporting period are RR 493 million. NOTE 22: SHAREHOLDERS’ EQUITY Authorized share capital. At 31 December 2016 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 hyperinflation of capital contributions made before 2003. Golden share. Tatarstan 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 defined under Russian law. The Golden Share currently has an indefinite term. The Tatarstan government also controls or exercises significant influence 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: 206 207 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RU• 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 significantly from IFRS (see Note 2). The statutory accounts are the basis for profit distribution and other appropriations. Russian legislation identifies the basis of distribution as the current period net profit 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 2016 and 2015, the Company had a statutory current profit of RR 104,824 million and RR 85,009 million, respectively. In June 2016 the shareholders of the Company approved the payment of dividends for the year ended 31 December 2015 in amount of RR 10.96 per preference and ordinary share. In June 2015 the shareholders of the Company approved the payment of dividends for the year ended 31 December 2014 in amount of RR 10.58 per preference and ordinary share. 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 profit or loss attributable to ordinary and preference shareholders by the weighted average number of ordinary and preferred shares outstanding during the period. Profit 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 profit 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 2016 Year ended 31 December2015 107,389 (23,116) (1,617) 82,656 2,113 148 2,261 47.50 47.48 98,930 (22,463) (1,561) 74,906 2,123 148 2,271 43.56 43.53 Non-controlling interest. Non-controlling interest is adjusted by dividends paid by the Group’s subsidiaries amounting to RR 3 million and RR 2,034 million at 31 December 2016 and 2015, respectively. NOTE 23: EMPLOYEE BENEFIT EXPENSES Wages and salaries Statutory insurance contributions Bonus certificates granted to directors and employees Pension costs – defined benefit plans (Note 21) Other employee benefits Total employee benefit expense Year ended 31 December 2016 Year ended 31 December 2015 29,569 8,656 1,215 (165) 2,043 41,318 39,018 11,438 1,257 864 2,055 54,632 Employee benefit expenses are included in operating expenses, selling, general and administrative expenses, maintenance of social infrastructure and transfer of social assets, other expenses and operating expenses from banking activities in the consolidated statement of profit or loss and other comprehensive income. NOTE 24: INTEREST INCOME AND INTEREST EXPENSE ON NON-BANKING ACTIVITIES Interest income on non-banking activities comprises the following: Interest income from loans and receivables Unwinding of the present value discount of long-term financial assets Total interest income on non-banking activities Interest expense on non-banking activities comprises the following: Bank loans Unwinding of the present value discount of decommissioning provision Unwinding of the present value discount of long-term financial assets and liabilities Total interest costs recognized in profit or loss Year ended 31 December 2016 Year ended 31 December 2015 5,084 346 5,430 10,873 150 11,023 Year ended 31 December 2016 Year ended 31 December 2015 564 3,271 85 3,920 1,082 5,337 1,272 7,691 NOTE 25: SEGMENT INFORMATION 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 financial 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 four main operating segments: consist of transfer of crude oil to refinery and other goods and services provided to other operating segments, • Exploration and production consists of exploration, development, extraction and sale of own crude oil. Intersegment sales • Refining and marketing comprises purchases and sales of crude oil and refined products from third parties, own refining • Petrochemical products include production and sales of tires and petrochemical raw materials and refined products, which • Banking segment includes operations of Bank ZENIT. activities and retailing operations, are used in production of tires. 208 209 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RU Other sales include revenues from ancillary services provided by the specialized subdivisions and subsidiaries of the Group, such as sales of oilfield equipment 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, defined as profit before income taxes and non-controlling interest not including interest income and expense on non-banking activities, share of results of associates and joint ventures, other income (expenses) and foreign exchange loss or gain. Intersegment sales are at prices that approximate market. Group financing (including interest expense and interest income on non-banking activities) and income taxes are managed on a Group basis and are not allocated to operating segments. For the year ended 31 December 2016, revenues of RR 79,257 million or 14% of the Group’s total sales and operating revenues is derived from one external customer. For the year ended 31 December 2015, revenues of RR 68,833 million or 12% of the Group’s total sales and operating revenues is derived from one external customer. Petrochemicals Tires – domestic sales Tires – CIS sales Tires – non-CIS sales Petrochemical products and other Intersegment sales Total petrochemicals Banking Interest income Fee and commission income Total banking Total segment sales Corporate and other sales These revenues represent sales of crude oil and are attributable to the exploration and production segment and refining and marketing segment. Elimination of intersegment sales Total sales and other operating revenues 32,861 27,641 8,443 1,709 2,250 929 6,802 1,999 2,385 1,142 46,192 39,969 7,054 901 7,955 673,041 12,833 (97,792) 588,082 - - - 656,484 17,763 (121,535) 552,712 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 2016 Year ended 31 December 2015 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 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 210 86,486 16,572 173,371 4,601 94,592 375,622 14,498 123,743 138,241 6,979 6,979 7,165 81,608 88,773 7,008 2,271 73,486 19,328 150,295 5,864 117,088 366,061 15,735 127,592 143,327 15,411 15,411 10,374 72,155 82,529 5,882 3,305 243,272 250,454 (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, Netherlands and United Kingdom based traders and Poland based refineries. Segment earnings Segment earnings Exploration and production Refining and marketing Petrochemicals Banking Total segment earnings Corporate and other Other income/(expenses) Profit before income tax Year ended 31 December 2016 Year ended 31 December 2015 146,618 13,899 1,463 (980) 161,000 (17,896) (2,133) 140,971 122,657 16,617 1,482 - 140,756 (6,571) 3,443 137,628 For the year ended 31 December 2016 corporate and other loss includes loss on deconsolidation of subsidiaries (Note 28), gain on disposal of interest in associate (Note 13) and impairment of bank deposits (Note 30). For the year ended 31 December 2015 corporate and other loss included impairments of financial assets and other losses. Segment assets. Assets Exploration and production Refining and marketing Petrochemicals Banking Corporate and other Total assets At 31 December 2016 At 31 December 2015 300,673 356,191 29,977 286,421 121,335 1,094,597 297,517 338,852 31,674 130,648 798,691 211 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RU As of 31 December 2016 and 2015 corporate and other comprised RR 639 million and RR 5,632 million, respectively, investments in associates and joint ventures. For the year ended 31 December 2016 deconsolidation of subsidiaries (Note 28) caused disposal of exploration and production segment assets and corporate and other assets on amount of RR 33,149 million and RR 14,289 million respectively. 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 Banking Corporate and other Additions to property, plant and equipment Exploration and production Refining and marketing Petrochemicals Corporate and other Total additions to property, plant and equipment Итого поступления основных средств Year ended 31 December 2016 Year ended 31 December 2015 11,848 7,120 1,852 56 750 21,626 13,340 7,137 1,995 - 2,580 25,052 Year ended 31 December 2016 Year ended 31 December 2015 47,694 34,433 1,193 3,273 86,593 86 593 19,809 58,163 1,027 5,531 84,530 84 530 For the years ended 31 December 2016 and 2015 additions to property, plant and equipment of exploration and production segment are shown net of RR 6,253 million and RR 17,631 million, respectively, associated with changes in the decommissioning provision. NOTE 26: 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 significant influence or joint control over the other party in making financial 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 associates, joint ventures, government related companies, key management personnel and other related parties. These transactions include sales and purchases of refined products, purchases of electricity, transportation services and banking transactions. 212 Associates, joint ventures and other related parties The amounts of transactions for each period with associates, joint ventures and other related parties are as follows: Revenues and income Sales of refined products Other sales Interest income Costs and expenses Purchases of crude oil Other services Other purchases Прочие закупки Year ended 31 December 2016 Year ended 31 December 2015 975 1,019 2,113 - 1,231 5,055 5 055 15 294 3,622 103 1,575 597 597 For the years ended 31 December 2016 and 2015, the Group sold crude oil on a commission basis from related parties for RR 0 million and RR 103 million, respectively. At 31 December 2016 and 2015 the outstanding balances with associates, joint ventures and other related parties were as follows: At 31 December 2016 At 31 December 2015 Assets Cash and cash equivalents Restricted cash Accounts receivable Other financial assets Notes receivable Trading securities Other loans receivable Prepaid expenses and other current assets Due from related parties short-term Long-term accounts receivable Other financial assets Notes receivable Bank deposits Available for sale Other loans receivable Due from related parties long-term Liabilities Accounts payable and accrued liabilities Customer accounts Other debt Due to related parties short-term Other debt Due to related parties long-term - - 675 - 146 361 469 1,651 142 - - 3,758 2,022 5,922 (47) (812) - (859) (33) (33) 9,392 211 373 5,085 7 428 325 15,821 14 4,156 17,199 - 1,715 23,084 (42) - (814) (856) - - 213 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RURussian Government bodies and state organizations The amounts of transactions for each period with Government bodies and state organizations are as follows: At 31 December 2016 and 2015 the outstanding balances with Russian Government bodies and state organizations were as follows: At 31 December 2016 At 31 December 2015 Assets Cash and cash equivalents Banking: Mandatory reserve deposits with CB RF Accounts receivable Banking: Loans to customers Other financial assets Bank deposits Trading securities Available-for-sale Held to maturity Other loans Prepaid expenses and other current assets Due from related parties short-term Other financial assets Available-for-sale Held to maturity Other loans Due from related parties long-term Liabilities Accounts payable and accrued liabilities Banking: Due to banks and CB RF Banking: Customer accounts Other debt Due to related parties short-term Subordinated debt Banking: Due to banks and CB RF Due to related parties long-term 19,899 1,988 1,720 2,279 409 3,138 1,452 571 290 9,052 40,798 5,027 3,453 238 8,718 (961) (4,700) (4,061) (3) (9,725) (2,140) (9,624) (11,764) 3,388 - 616 - 907 6 - - - 23,575 28,492 - - - - (511) - - (378) (889) - - - At 31 December 2015 prepaid expenses and other current assets include prepayments for acquisition of 25% minus 1 share of Nizhnekamskneftekhim, the transaction was completed in March 2016 (Note 13). Sales of crude oil Sales of refined products Other sales Interest income Interest expense Purchases of crude oil Purchases of refined products Purchases of electricity Purchases of transportation services Other services Other purchases Year ended 31 December 2016 Year ended 31 December 2015 567 10,501 3,994 585 460 - 21,941 12,897 22,272 3,943 1,735 - 11,439 1,841 2,865 - 841 19,141 11,507 20,005 3,867 7,750 In April 2016 the Group purchased 20 million treasury shares from the company related to Russian Government bodies and state organizations in the amount RR 7,168 million. Compensation to key management personnel As of 31 December 2016 and 2015 total remuneration, including pension cost, for key management personnel was RR 1,677 million and RR 1,797 million, respectively. For the year ended 31 December 2016, the Company issued 2.1 million Awards to key management personnel, all of which are expected to be settled at a price of RR 252.81 per Award. Final settlement is subject to approval at the Company’s Management Committee meeting in July-September 2017. For the year ended 31 December 2015, the Company issued 3.3 million Awards to key management personnel, all of which were expected to be settled at a price of RR 200.76 per Award. The amount of related compensation expense recognized in selling, general and administrative expenses of the consolidated statement of profit or loss and other comprehensive income for the years ended 31 December 2016 and 2015 was RR 534 million and RR 667 million, respectively. At 31 December 2016 key management personnel customer accounts in Bank ZENIT amounted to RR 21,667 million. NOTE 27: CONTINGENCIES AND COMMITMENTS Operating Environment of the Group The Russian Federation displays certain characteristics of an emerging market. Its economy is particularly sensitive to oil and gas prices. Tax, currency and customs legislation is sometimes subject to varying interpretations and contributes to the challenges faced by companies operating in the Russian Federation. In the recent years the Russian economy was negatively impacted by a decline in oil prices and ongoing political tensions. The ongoing uncertainty and volatility of the financial markets and other risks could have significant negative effects on the Russian financial and corporate sectors. Management determined provisions for impairment by considering the economic situation and outlook at the end of the reporting period. These events may have a further significant impact on the Group’s future operations and financial position, the effect of which is difficult to predict. 214 215 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RU 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. Capital commitments. As of 31 December 2016 and 31 December 2015 the Group has outstanding capital commitments of approximately RR 46,176 million and RR 59,294 million, respectively, mainly for the construction of the TANECO refinery complex. These commitments are expected to be paid between 2017 and 2019. Management believes the Group’s current and long-term capital expenditures program can be funded through cash flows generated from existing operations as well as lines of credit available to the Company. The TANECO refinery project has been funded from the Company’s cash flow with the support of the bank facilities (Note 17). Management believes the Company has the ability to obtain syndicated loans and other financings as needed to continue funding the TANECO refinery project, refinance any maturing debts as well as finance business acquisitions and other transactions that may arise in the future. Operating lease commitments. Where the Group is the lessee, the future minimum lease payments under non- cancellable operating leases are as follows: Less than one year More than one year and less than five years More than five years Total operating lease commitments At December 31 2016 At December 31 2015 481 1,115 21 1,617 - - - - Credit related commitments. The credit related commitments comprise loan commitments, letters of credit and guarantees. The contractual commitments represent the value at risk should the contract be fully drawn upon, the client defaults, and the value of any existing collateral becomes worthless. In general, certain part of Group’s import letters of credit are collateralised with cash deposits or collateral pledged to the Group and accordingly the Group normally assumes minimal risk. Outstanding credit related commitments are as follows: Loan commitments Guarantees issued Import letters of credit Total credit related commitments before impairment Less: allowance for credit related commitment impairment Less: client funds held as security for guarantees issued Less: client funds held as security for import letter of credit Total credit related commitments At December 2016 At December 2015 24,885 15,211 1,082 41,178 (978) (354) (751) 39 085 - - - - - - - - Trustee services. These assets are not included in the Group’s consolidated statement of financial position as they are not assets of the Group and are held in custody or safekeeping for customers. The nominal values disclosed below are normally different from the fair values of respective securities. Bills of exchange Corporate bonds Banks’ shares Corporate eurobonds Federal loan bonds (OFZ) Companies’ shares Municipal bonds Investment funds’ units Depositary notes Total At December 2016 At December 2015 25,611 15,672 5,074 3,747 2,736 2,030 338 90 26 55,324 - - - - - - - - - - Taxation. The Russian tax legislation is subject to varying interpretations and changes which can occur frequently. Management’s interpretation of the legislation, as applied to the transactions and activities, may be challenged by the tax authorities. The tax authorities may take a different position in their interpretation of the legislation, and it is possible that transactions and activities that have not been challenged in the past may be challenged. The Russian transfer pricing legislation is generally aligned with the international transfer pricing principles developed by the Organisation for Economic Cooperation and Development (OECD), with certain specific features. This legislation allows tax authorities to assess additional taxes for controllable transactions (transactions between related parties and certain transactions between unrelated parties) if such transactions are not on an arm’s length basis. Tax liabilities arising from intercompany transactions are determined using actual transaction prices. It is possible, with the evolution of the interpretation of the transfer pricing rules, that such prices could be challenged. 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. The Group believes that its interpretation of the new legislation is appropriate and the Group’s tax position will be sustained. 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 financial 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 financial statements. Social commitments. The Group contributes significantly 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. Transportation of crude oil. The Group benefits 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. 216 217 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RU Ukrtatnafta. 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”) in connection with the forcible takeover of Ukrtatnafta and seizure of shares of the Group in Ukrtatnafta. In July 2014 the arbitral tribunal issued the award holding Ukraine liable for violation of the Russia-Ukraine BIT and required Ukraine to pay Tatneft US$ 112 million plus interest. Ukraine filed an appeal of award in Court of Appeals in Paris, France (seat of arbitration) which on 29 November 2016 refused the appeal. In March 2017 Ukraine has filed a cassation appeal against the Paris Court of Appeals decision of November 29, 2016 rejecting its request for annulment. At this time it is not clear whether and when the appeal will be heard. Filing of the cassation appeal shall not preclude Tatneft from commencing enforcement of the award. On 23 March 2016 Tatneft commenced court proceedings in England against Gennady Bogolyubov, Igor Kolomoisky, Alexander Yaroslavsky and Pavel Ovcharenko. Tatneft alleges that in 2009 those individuals fraudulently diverted to themselves sums owed to Tatneft for oil it had supplied to Kremenchug refinery (Ukrtatnafta). Tatneft claims damages of US$ 334.1 million plus interest. On 8 November 2016 the High Court refused the claim. On 23 November 2016 Tatneft filed with the Court of Appeals permission to appeal the judgement of 8 November 2016. Permission to appeal will be heard by the Court of Appeals on the week commencing 24 July 2017. Libya. As a result of the political situation in Libya, in February 2011 the Group had to entirely suspend its operations in that country and evacuate all its personnel. In February 2013 the Group started the process of resuming its activities in Libya, including the return of its personnel to a branch in Tripoli and recommencement of some exploration activities. Due to the deterioration of security situation in Libya in the second half of 2014 the Group had to suspend all of its operations and announced a force-majeure under the Exploration and Production Sharing Agreements, acknowledged by the National Oil Company, which is continuing as of the date of this report. The Group is constantly monitoring the security and political situation in Libya, and plans to resume its operations once the conditions permit to do so. As of 31 December 2016 the Group had approximately RR 5,752 million of assets associated with its Libyan operations of which RR 5,532 million is related to capitalized exploration costs, RR 210 million of inventories and RR 10 million of cash. As of 31 December 2015 the Group had approximately RR 5,745 million of assets associated with its Libyan operations of which RR 5,524 million is related to capitalized exploration costs, RR 210 million of inventories and RR 11 million of cash. NOTE 28: PRINCIPAL SUBSIDIARIES Set out below are the Group’s principal subsidiaries at 31 December 2016. 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 Principal activity At 31 December 2016 At 31 December 2015 Bank ZENIT Tatneft Europe AG TANECO TMS Group Nizhnekamskshina Banking operations Export oil sales Oil refinery Oil lifting services Tires production Nizhnekamskiy zavod shin CMK Tires production Trade House Kama Tatneft AZS-Centr Tatneft AZS-Zapad Tires sales Oil products sales Oil products sales 218 % 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 50 100 100 - 85 100 100 100 100 50 - - - 15 - - - - - 100 91 - 73 100 100 100 100 - - 9 100 27 - - - - On 1 January 2016 several entities of the Group ceased to meet the power criteria for consolidation under IFRS 10 “Consolidated financial statements” and were deconsolidated as of that date. The Group did not have any direct or indirect ownership in the deconsolidated entities but exercised control over them in prior years. Deconsolidation resulted in one-off loss on disposal in amount of RR 8,745 million recorded within gains/(losses) on disposals of interest in subsidiaries and associates in the consolidated statement of profit or loss and other comprehensive income. Non-controlling interest in the consolidated statement of financial position decreased by RR 29,878 million comparing to non-controlling interest as at 31 December 2015. Loss attributable to total non-controlling interest for the year ended 31 December 2016 is RR 1,259 million, of which RR 790 million is attributed to Bank ZENIT. Profit attributable to non-controlling interest for the year ended 31 December 2015 is RR 6,842 million, of which RR 2,677 million is attributed to TMS Group and Burenie. As of 31 December 2016 accumulated non- controlling interest in Bank ZENIT was RR 6,605 million and as of 31 December 2015 accumulated non-controlling interest in TMS Group was RR 8,699 million. The summarised financial information relating to the subsidiaries with material non-controlling interest was as follows: Current assets Non-current assets Current liabilities Non-current liabilities Revenue Profit/(Loss) Year ended 31 December 2016 Bank ZENIT Nizhnekamskshina Total Year ended 31 December 2015 TANECO TMS Group Nizhnekamskshina Burenie Total 139,869 2,413 136,694 3,652 219,019 4,034 54,459 3,584 7,955 15,407 (1,508) (287) 142,282 140,346 223,053 58,043 23,362 (1,795) 10,690 1,278 2,411 - 181,959 30,147 3,004 - 25,622 585 3,709 - 155,253 4,751 2,972 - 38,508 33,435 15,344 11,182 6,520 1,977 199 797 14,379 215,110 29,916 162,976 98,469 9,493 NOTE 29: BUSINESS COMBINATIONS In June 2016, the Group increased its equity share in PJSC “Bank ZENIT” through a subscription to the bank’s additional share issue for a cash consideration of RR 6,700 million. As a result of this transaction the Group increased its share in PJSC “Bank ZENIT” from 24.56% as of 31 December 2015 to 48.79% as of 30 June 2016. The Group continued to exercise significant influence and applied the equity method of accounting for its investment in PJSC “Bank ZENIT”. In October 2016, as a result of the mandatory offer procedure in accordance with the Federal Law “On Joint Stock Companies”, the Group acquired additional 1.64% interest in PJSC “Bank ZENIT” for cash consideration of RR 327 million increasing its interest to 50.43% and, as a result, obtained control over PJSC “Bank ZENIT” in October 2016. At 31 December 2016 the Group had finalized purchase price allocation and in accordance with IFRS 3 “Business Combinations” recognized the acquired assets and liabilities at fair value. The fair values of assets and liabilities acquired are based on discounted cash flow models and market quotes. Purchase consideration of RR 7,605 includes cash for the 1.64% interest in PJSC “Bank ZENIT” acquired in October 2016 in the amount of RR 327 million and fair value of previously held 48.79% interest accounted for using the equity method in the amount of RR 7,278. As a result of the Group obtaining control over PJSC “Bank ZENIT”, the Group’s previously held 48.79% interest was remeasured to fair value, resulting in a loss of RR 2,746 recognized in share of results of associates and joint ventues in the statement of profit or loss and other comprehensive income. 219 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUDetails of the fair values of assets and liabilities acquired and goodwill arising are as follows: NOTE 30: FINANCIAL RISK MANAGEMENT Attributed fair value Financial risk management objectives and policies. Cash and cash equivalents Banking: Mandatory reserve deposits with CB RF Accounts receivable, net Inventories Banking: Loans to customers Other financial assets Due from banks Financial assets at fair value through profit or loss Available-for-sale financial assets Held to maturity investments Prepaid expenses and other current assets Prepaid income tax Non-current assets held for sale Property, plant and equipment, net Other assets Debt Bonds issued Subordinated debt Debt securities issued Accounts payable and accrued liabilities Banking: Due to banks and CB RF Banking: Customer accounts Taxes payable Other liabilities Income tax payable Deferred tax liability Fair value of identifiable net assets of subsidiary Less: non-controlling interest Goodwill arising from the acquisition Total purchase consideration and previously held interest in the acquiree Less: Non-cash consideration Less: Cash and cash equivalents of subsidiary acquired (net of intercompany accounts) Inflow of cash and cash equivalents on acquisition 60,023 1,992 623 398 185,500 12,924 5,389 10,856 10,679 448 265 4,347 3,951 3,454 (38,023) (14,500) (12,775) (587) (19,086) (198,545) (164) (2,109) (5) (136) 14,919 (7,395) 81 7,605 (7,278) 48,507 48,834 The acquired subsidiary contributed revenue of RR 7,955 million and loss of RR 1,508 million to the Group for the period from the date of acquisition to 31 December 2016. The Group‘s activities expose it to a variety of financial 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 financial markets and seeks to minimize potential adverse effects on the Group‘s financial 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 financing denominated in foreign currencies. The table below summarises the Group’s exposure to foreign currency exchange rate risk as of 31 December 2016. Russian Ruble US Dollar Other Total Financial assets Cash and cash equivalents Cash on hand and in banks Term deposits with original maturity of less than three months Due from banks Restricted cash Banking: Mandatory reserves with CB RF Accounts receivable Trade receivables Other financial receivables Banking: Loans to customers Other financial assets Bank deposits Due from banks Notes receivable Loans to employees Other loans Financial assets at fair value through profit or loss Available-for-sale financial assets Held to maturity investments Total financial assets 21,348 22,744 13,496 3 1,988 32,805 4,240 173,725 32,706 6,758 458 1,018 3,391 6,168 32,596 3,847 13,628 5,871 - 6 - - 27,214 - 18,568 - 2,621 - - - 2,005 3,489 6,713 - 13 - - 1,448 - 733 - 508 - - - 17 33 - 40,847 22,744 13,515 3 1,988 61,467 4,240 193,026 32,706 9,887 458 1,018 3,391 8,190 36,118 10,560 357,291 74,244 8,623 440,158 220 221 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUFinancial liabilities Trade and other financial payables Trade payables Dividend payable Other payables Debt Bonds issued Subordinated debt Debt securities issued Credit facilities Other debt Banking: Due to banks and CB RF Banking: Customer accounts Other short-term liabilities Total financial liabilities Net position Russian Ruble US Dollar Other Total 24,302 149 404 32,698 2,060 2,265 - 1,951 10,989 142,404 1,398 218,620 138,671 941 - 26 - 2,437 2,629 6,415 750 653 29,724 - 43,575 30,669 332 25,575 - - - - - 2,925 - 6,708 8,586 - 18,551 (9,928) 149 430 32,698 4,497 4,894 9,340 2,701 18,350 180,714 1,398 159,412 В таблице ниже представлен риск Группы в отношении изменения обменного курса валют по состоянию на 31 декабря 2015 г.: Russian Ruble US Dollar Other Total Financial assets Cash and cash equivalents Cash on hand and in banks Term deposits with original maturity of less than three months Due from banks Restricted cash Accounts receivable Trade receivables Other financial receivables Other financial assets Bank deposits Notes receivable Loans to employees Other loans Financial assets at fair value through profit or loss Available-for-sale financial assets Total financial assets Financial liabilities Trade and other financial payables Trade payables Dividend payable Other payables Debt Credit facilities Other debt Total financial liabilities Net balance sheet position 222 3,422 11,299 - 318 36,005 4,232 17,157 1,718 1,262 5,272 1,219 23,289 8,733 1,028 - - 20,487 - 3,211 8,059 - 308 29 - 118 - - - 1,673 2 - - - - - - 12,273 12,327 - 318 58,165 4,234 20,368 9,777 1,262 5,580 1,248 23,289 105,193 41,855 1,793 148,841 25,616 133 308 - 1,738 27,795 77,398 - - 272 11,017 1,368 12,657 29,198 2,200 27,816 - - 133 580 4,038 - 6,238 (4,445) 15,055 3,106 46,690 102,151 For the year ended 31 December 2016 recognized RR 17,170 million and RR 20,474 million foreign exchange gains and losses respectively in the consolidated statement of profit or loss and other comprehensive income (2015: RR 39,779 million and RR 37,496 million). The following table presents sensitivities of profit and loss and equity to changes in US Dollar exchange rates applied at the end of the reporting period relative to Russian Ruble: US Dollar strengthening by 10% US Dollar weakening by 10% b) Interest rate risk. Year ended 31 December 2016 Year ended 31 December 2015 Impact on profit before tax Impact on equity Impact on profit before tax Impact on equity 3,067 (3,067) 2,453 (2,453) 2,825 (2,825) 2 260 (2 260) Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in interest rates. Non-banking operations interest rate risk management The majority of the Group’s borrowings is at variable interest rates (linked to the LIBOR rate). To mitigate the risk of significant 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 fixed 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 financing on fixed-rate or variable-rate basis would be more beneficial to the Group over the expected period until maturity. Banking operations interest rate risk management The majority of the Group’s interest rate sensitive banking financial assets and liabilities are at fixed rates. Therefore, the Group’s interest rate risk arises primarily from unmatched positions on maturities of assets and liabilities carried at fixed rates. Management of interest rate risk is performed through analysis of the structure of assets and liabilities by re- pricing dates. Interest rates that are contractually fixed on both assets and liabilities may be renegotiated before any new credit tranche is issued to reflect current market conditions. All new credit products and transactions are assessed in respect of interest rate risk upfront, prior to starting these transactions. Additionally, as disclosed in the maturity analysis above, the maturity dates applicable to the majority of the Group’s assets and liabilities are relatively short-term and that provides the Group with a certain level of flexibility to react to changing market conditions. The Group’s overall interest rate risk is monitored by Assets and liabilities committee (“ALCO”) which reviews the structure of assets and liabilities, current and projected interest rates. Treasury departments are responsible for day-to-day management of the interest rate mismatch, preliminary approval of interest rates on projected transactions, preparation and submission for approval suggestions on acceptable interest rate levels by instrument and duration. Risk management departments review current interest rate gaps and assess resulting effects of interest rate risk on the Group’s interest margin and economic capital. The Group’s approach to interest rate risk assessment is based on advisory materials of the Basel Committee on Banking Supervision, CB RF regulations and IFRS. The methodology is designed on the current experience of mathematical simulation models of interest rate sensitive assets and liabilities and dynamics of interest rates using the series models, which consider major statistical regularities. An automated procedure of interest rate risk assessment designed in accordance with the above methodology uses scenario simulation (Monte Carlo simulation) of fluctuations of interest rate sensitive assets and liabilities depending on the model of volume 223 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUand term structure of assets and liabilities. The new methodology provides that interest rate risk, with adequacy confirmed by results of back-testing, is assessed as Value at Risk (“VaR”) estimation with 99 percent confidence level for a one-year holding period. The given VaR-estimation of the Group interest rate risk includes the risk of new interest rate, basis risk, yield curve risk and optional risk. The quantitative estimation of interest rate risk is carried out using stress-models which quantify the change in net interest margin due to fluctuations of interest rate sensitive assets and liabilities. For this purpose the Group identifies interest rate sensitive assets and liabilities and assesses the level of interest rate sensitivity by each asset or liability. The analysis is made by currencies on an annual horizon and is based on certain assumptions in respect of expected fluctuations of interest rates and most sensitive stress scenario. The results are used for on-going interest margin monitoring and regulation and are included in the quarterly report on the Group’s consolidated risks. Interest rate risk analysis on banking and non-banking operations of the Group The table below summarises the Group’s exposure to interest rate risks. The table presents the aggregated amounts of the Group’s financial assets and liabilities at carrying amounts, categorised by the earlier of contractual interest repricing or maturity dates: Financial assets Cash and cash equivalents Cash on hand and in banks Term deposits Due from banks Banking: Loans to customers Other financial assets Bank deposits Due from banks Notes receivable Loans to employees Other loans From 1 to 6 months From 6 to 12 months From 1 to 2 years From 2 to 5 years More than 5 years Non- sensitive Total Financial assets at fair value through profit or loss Available-for-sale financial assets Held to maturity investments Demand and less than 1 month 43,011 33,040 9,971 31 December 2016 Total financial assets Total financial liabilities Net interest sensitivity gap 31 December 2015 Total financial assets Total financial liabilities 66,740 73,097 63,016 53,797 25,130 11,847 75,899 15,040 40,544 32,370 125,818 440,158 61,554 280,746 (6,356) 9,219 13,283 60,859 8,173 64,264 159,412 11,020 - 7,887 2,983 5,970 2,298 4,453 2,546 4,291 6,552 16,341 3,782 98,878 28,529 148,841 46,690 Net interest sensitivity gap 11,020 4,904 3,672 1,907 (2,261) 12,559 70,349 102,151 The table below summarizes the effective average year end interest rates, by major currencies (US Dollars, Russian Ruble), for financial instruments outstanding as of 31 December 2016 and 2015. The analysis has been prepared on the basis of weighted average effective interest rates for the various financial instruments using year-end contractual terms and conditions. Financial liabilities Debt Bonds issued Subordinated debt Debt securities issued Credit facilities Other debt Banking: Due to banks and CB RF Banking: Customer accounts At 31 December 2016 At 31 December 2015 Russian Ruble US Dollar Russian Ruble US Dollar 2.00% 10.34% 10.30% 12.48% 10.83% 12.90% 0.10% 3.19% 3.75% 10.81% 9.84% 6.52% 11.33% 11.90% 8.65% - 4.77% 10.10% 10.15% 0.13% - - 10.36% 2.50% 6.64% 6.50% 4.00% - - 6.20% 5.62% 6.70% 6.51% - 7.95% 4.00% 2.93% 2.61% 2.09% 2.62% - - 12.26% - 8.15% 3.95% 4.36% - - - - - - - 4.37% - - - - - - 7.17% - 2.47% - 5.90% - - - - - - 2.66% 3.52% - - The following table presents a sensitivity analysis of interest rate risk on banking and non-banking financial assets and liabilities: Year ended 31 December 2016 Year ended 31 December 2015 Impact on profit before tax Impact on equity Impact on profit before tax Impact on equity (951) 951 (761) 761 (188) 70 (150) 56 Increase by 100 basis points Decrease by 100 basis points c) Commodity and financial instruments price risk Commodity price risk management 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 flows. 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 fluctuation in commodity prices and their impacts on operational and investment decisions. 224 225 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUHowever, in the current environment management estimates may materially differ from actual future impact on the Group’s financial position. Actual results, and the impact on the Group’s operations and financial position, may differ from management’s estimates of potential scenarios. Financial instruments price risk management Financial instruments prices risk is the risk that movements in market prices resulting from factors associated with an issuer of financial instruments (specific risk) and general changes in the market prices of financial instruments (general risk) will affect the fair value or future cash flows of a financial instrument and, as a result, the Group’s profitability. Financial instruments prices risk for financial instruments held with in the Group’s financial assets at fair value through profit or loss is managed: (a) through maintaining a diversified structure of portfolios; and (b) by setting position limits (i.e. limits restricting the total amount of an investment or maximum mismatch between respective assets and liabilities) as well as stop- loss and call-level limits, in addition to these, the Group sets limits on a maximum duration of debt financial instruments. When necessary the Group establishes margin and collateral requirements. Financial instruments prices risk is managed primarily through daily mark-to-market procedures, sensitivity analysis and control of limits established for various types of financial instruments. Financial instruments prices sensitivity is assessed using the VaR method. This is a technique that estimates potential losses that could occur on a risk position as a result of movements in market rates and prices over a specified time horizon and to a given level of confidence. The method is predominantly based on historical simulation models which incorporate the following features: (i) potential market movements calculated with reference to data from the previous two years: (ii) risk is calculated to a 98.5 per cent confidence level: and (iii) risk is calculated for a one-day holding period. The Group uses a VaR model that relies on Monte Carlo simulations. VaR estimates in respect of financial assets at fair value through profit or loss and available-for-sale financial assets as of 31 December 2016 and 2015 are as follows: Fixed income securities price risk Total price risk Credit risk Year ended 31 December 2016 Year ended 31 December 2015 Impact on profit before tax Impact on equity Impact on profit before tax Impact on equity 153 153 122 122 - - - - Credit risk refers to the risk exposure that a potential financial loss to the Group may occur if a counterparty defaults on its contractual obligations. Non-banking activities credit risk management Credit risk arises from cash and cash equivalents, bank 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 financial position, past experience and other factors. Management systematically reviews ageing analysis of receivables and uses this information for calculation of provision for impairment. A significant 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 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 influenced by economic factors affecting these customers, management believes there is no significant risk of loss to the Group beyond the provisions already recorded. 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 financial and banking institutions where it deposits cash. The Group deposits available cash mostly with financial 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. Banking activities credit risk management The Group takes on exposure to credit risk which is the risk that a counterparty will be unable to pay amounts in full when due. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. Limits on the level of credit risk by product, borrower, group of borrowers and industry sector are described in the Credit Policies, which are approved by Management Boards, and are reviewed on a regular basis. The credit risk exposure is monitored on a regular basis to ensure that the credit limits and credit worthiness guidelines established by the Group’s risk management policy are not breached. The Group is generally exposed to credit risk through its financial assets and contingent liabilities. The Group’s maximum exposure to credit risk, ignoring the fair value of any collateral, is generally reflected in the carrying amounts of financial assets in the consolidated statement of financial position. The impact of possible netting of assets and liabilities to reduce potential credit exposure is not significant. In accordance with the Group’s collateral policies and procedures the Group may securitize its loans by multi- collateral, i.e. to take different types of collateral in order to secure the same loan, in these cases the value of collateral taken by the Group may exceed amounts lent to the customer. Therefore, maximum credit risk exposure on such loans is limited to the amount of loan balances outstanding at reporting dates. For risk management purposes, credit risk arising from positions held-for-trading and other financial instruments at fair value through profit and loss is managed and reported as a market (financial instruments prices) risk. In order to optimize the decision-making process on taking credit risk the Group established several credit committees with different levels of responsibilities. Credit committees and their level of responsibility in respect of approval of maximum exposures on a borrower or group of related borrowers are as follows: Assets and Liabilities Management Committee Credit committee Credit committee on small and medium business borrowers Credit committee on retail lending Maximum exposure allowed to be approved More than RR 600 million RR 600 million RR 100 million RR 14 million Exposure to credit risk is managed through regular analysis of the ability of borrower and potential borrowers to meet interest and principal repayment obligations and by changing these lending limits, where appropriate. Exposure to credit risk is also managed, in part, by obtaining collateral and corporate or personal guarantees. The Group implements a continuous monitoring system of risk factors on substandard loans. Internal instructions to assess potential borrowers are developed and applied for each segment of lending activities including lending to legal entities, individuals, small and medium-size enterprises and certain others. 226 227 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RU The decision making process within the Group is designed to ensure a thorough risk assessment is performed before any credit risk is taken and on all transactions submitted for approval. Therefore, an initiator of the transaction prepares a resume with a description of the suggested project, ensures (where appropriate) that an independent assessment of the collateral and its quality is performed and forwards all transaction related documentation to the risk management department, which is responsible for the independent risk assessment of the project itself, the transaction structure and the assessment of the adequacy of limits, terms and conditions associated with the transaction. The risk management department formulates its own conclusion on the project, which is submitted for approval along with all other transaction related documents. The core procedure to assess credit risk associated with corporate lending is the analysis of corporate borrowers’ financial statements for the latest available four quarters, their market position, business developments, organizational and functional structure, business cycle and cash flows, transparency of shareholders (owners) as well as reputational risks of the borrowers. Underwriting procedures with respect to individual borrowers are built to minimize internal costs in order to maximize financial results taking into account potential risks. These procedures are based on certain rating techniques such as scoring methods that allow the minimization of credit risks both on a separate loan and on a portfolio basis. The rating accounts for the financial position of an individual borrower as well as the specifics of each credit product. However, the portion of loans to individuals issued purely using scoring models is still insignificant. The majority of loans to individuals are approved by specialized credit committees winch include transaction initiators and representatives of units responsible for risk assessment, control and monitoring. Such underwriting procedures allow a flexible combination of formalized techniques and non-formalized knowledge of experts which is adequate for the current retail lending operations and provide a good basis for further development of retail business. The Group securitizes its credit risk exposure by taking guarantees and collateral. If a guarantee is taken the Group assesses a guarantor’s financial stability and business profile in a similar manner to the assessment of a borrower described above. The assessment of collateral is performed internally by special divisions responsible for collateral assessment and control. They use several methodologies developed for each type of collateral. Valuations performed by third parties, including independent appraisal firms authorized by the Group, may serve as additional data for such assessment. The Group usually requires collateral to be insured by insurance companies authorized by the Group. The Group does not enter into transactions with an initial rating of III or IV. Procedures on subsequent monitoring of credit risk include: bodies; • analysis of actual exposures versus established limits; • control over compliance with internal policies, procedures, instructions and orders issued by respective management • review of corporate borrowers’ quarterly financial statements and, where appropriate. actual performance versus business • control over existence and valuation of collateral taken; • monitoring of business, economic and political events in order to assess whether these events can negatively affect (a) an industry or a region where the Group’s corporate borrowers operate; (b) the reputation of these corporate borrowers and of the Group itself; plans; • monitoring of macroeconomic parameters in order to assess adequacy of risk assessment associated with corporate • portfolio analyses showing trends in default rates, concentrations/diversifications by borrowers or groups of borrowers, lending portfolios and to validate scoring models used for retail lending programs; and products, industries, countries, etc. Attention is paid to improve efficiency of distressed debt collection and to protect the Group against illegal actions. Distressed debt collection procedures are initiated if loans are overdue by more than 30 days. These procedures include the Group’s proprietary techniques and the best practices of international and Russian banks in this area such as debt restructuring, searching for evading debtors and their property, claims to property and earnings and actions against lending fraud. Debt collection procedures are performed on the basis of current Russian legislation and international standards in close interaction with legal and law enforcement authorities. Credit risk for off-balance sheet financial instruments is defined as the possibility of sustaining a loss as a result of another party to a financial instrument failing to perform in accordance with the terms of the contract. The Group applies the same credit policies in making conditional obligations as it does for off-balance sheet financial instruments through established credit approvals, risk control limits and monitoring procedures. The Group also uses several types of limits on amounts due from other banks such as maximum credit exposure on counterparty and on a group of transactions with tins counterparty including lending, purchase and sale of securities, currency and other financial assets if these transactions may cause a credit risk. In order to establish these limits the Group uses credit quality assessment procedures similar to the ones applicable to corporate borrowers discussed above. Collateral is not generally held over amounts due to banks, except where securities are held as a part of reverse re-purchase and sale transactions. Credit risk analysis on banking and non-banking operations of the Group The Group measures and monitors credit risk on corporate portfolios by individual corporate exposure and estimates quantitative parameters of credit risk such as expected and unexpected losses on credit exposures. These calculations are based on internal ratings of creditworthiness assigned to each corporate borrower. The internal rating system is regularly updated and developed. The information accumulated over tins period provides a sound ground for assessment of ratings migration and allows the Group to calibrate corresponding parameters of default probability. While the revision of a recovery number in classes of corporate borrowers is performed the historical data on losses is taken into consideration. In the final calculations of losses on loans, liquid and reliable collateral is considered. The Group uses the following rating categories for the analysis of credit quality of loans to customers: The following table represents aggregate amounts affecting overall credit risk of the Group as of 31 December 2016: borrower allowing generation of cash flows sufficient for meeting requirements of analyzed transaction; • Rating I – standard quality transaction: low probability of default on the transaction due to stable financial position of the • Rating II –stable quality transaction: average probability of default due to acceptable quality of the borrower’s cash flows, • Rating III – middle and low quality transaction: middle and high probability of default because of non- stable financial • Rating IV – non-recoverable loans which may be collected through legal procedures, claims to guarantors or realization of however, the borrower’s financial position and its performance against business plans require closer monitoring; position of the borrower, or the lack of or poor quality of collateral; and collateral but expected results of these collection procedures are uncertain. 228 229 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUCash and cash equivalents Restricted cash Banking: Mandatory reserves with CB RF Accounts receivable Banking: Loans to customers Other financial assets Total balance sheet credit risk Loan commitments Guarantees issued Import letters of credit Total off-balance sheet credit risk Total credit risk Maximum exposure to credit risk Offset Net exposure after offset Collateral pledged Net exposure after offset and collateral 77,106 3 1,988 65,707 193,026 102,328 440,158 24,885 13,869 331 39,085 479,243 - - - - - - - - - - - - 77,106 3 1,988 65,707 - - - - 193,026 (162,258) 102,328 (6,639) 77,106 3 1,988 65,707 30,768 95,689 440,158 (168,897) 271,261 24,885 13,869 331 (2,094) (5,431) (161) 22,791 8,438 170 39,085 (7,686) 31,399 479,243 (176,583) 302,660 The following table represents aggregate amounts affecting overall credit risk of the Group as of 31 December 2015: Cash and cash equivalents Restricted cash Accounts receivable Other financial assets Total credit risk Maximum exposure to credit risk 24,600 318 62,399 61,524 148,841 Offset Net exposure after offset Collateral pledged - - - - - 24,600 318 62,399 61,524 148,841 - - - - - Net exposure after offset and collateral 24,600 318 62,399 61,524 148,841 The table below shows credit quality by class of loans to customers as of 31 December 2016: Neither past due nor impaired - rating I - rating II - rating III - rating IV Loans to legal entities Loans to individuals 111,316 17,139 - - 31,615 541 875 272 Total 142,931 17,679 875 272 Total neither past due nor impaired 128,455 33,302 161,757 Past due but not impaired - less than 30 days overdue - 30 to 90 days overdue - 91 to 180 days overdue - 181 to 360 days overdue - more than 360 days overdue Total past due but not impaired Individually impaired - not overdue - less than 30 days overdue - 30 to 90 days overdue - 91 to 180 days overdue - 181 to 360 days overdue - more than 360 days overdue Less: provision for impairment Total loans to customers 285 4 15 2 3 309 27,012 68 233 524 335 2,104 (1,030) 158,009 27 40 93 137 275 572 - 53 81 186 274 686 (137) 35,017 312 44 108 139 278 880 27,012 121 314 710 609 2,790 (1,167) 193,026 The Group uses the following rating categories for the analysis of credit quality of assets other than loans to customers and accounts receivable: • investment grade ratings classification referred to as Aaa to Baa3 for Moody’s Investment Services, as AAA to BBB- for • non-investment (speculative) grade ratings classification referred to as Ba1 to C for Moody’s Investment Services, as BB+ Fitch Rating and as AAA to BBB- for Standard and Poor’s Rating, respectively; to B- for Fitch Rating and as BB+ to D for Standard and Poor’s Rating, respectively. 230 231 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUThe table below shows credit quality of assets other than loans to customers and accounts receivable as of 31 December 2016: The table below shows credit quality of assets other than loans to customers and accounts receivable as of 31 December 2015: Investment grade rating Non-investment grade rating Unrated Total Investment grade rating Non-investment grade rating Unrated Total Cash and cash equivalents Cash on hand and in banks Term deposits Due from banks Restricted cash Banking: Mandatory reserves with CB RF Other financial assets Bank deposits Due from banks Notes receivable Other loans Financial assets at fair value through profit or loss Available-for-sale financial assets Held to maturity investments Past due but not impaired Individually impaired Other financial assets Bank deposits Due from banks Notes receivable Loans to employees Financial assets at fair value through profit or loss Available-for-sale financial assets Held to maturity investments Less: provision for impairment Total credit risk 16,014 - 2,066 - - - 3,447 - - 1,900 2,743 3,774 - - - - - - - - - 29,944 948 13,585 - 3 - 32,206 5,000 - - 3,528 3,208 4,632 - 5,400 - - - - 3,585 602 (7,287) 65,412 23,885 9,159 11,449 - 1,988 500 1,440 458 3,391 2,762 27,876 2,153 - - - 318 2,494 23 - - (1,827) 86,069 40,847 22,744 13,515 3 1,988 32,706 9,887 458 3,391 8,190 33,827 10,560 - 5,400 - 318 2,494 23 3,585 602 (9,114) 181,425 Included in short term bank deposits is RR 5,400 million placed within Tatfondbank. Starting from 15 December 2016 a three- month moratorium on satisfying claims of creditors was imposed on Tatfondbank. DIA has been authorized to perform duties of a temporary administration for a period of six months. Subsequently, in March 2017, by the order of CB RF the license to conduct banking operations was withdrawn from Tatfondbank. At December 31, 2016, the Group created a provision for impairment of deposits placed with Tatfondbank in the amount of RR 5,400 million recognized within short term bank deposits. Cash and cash equivalents Cash on hand and in banks 1,758 Term deposits Restricted cash Other financial assets Bank deposits Notes receivable Other loans Financial assets at fair value through profit or loss Available-for-sale financial assets Past due but not impaired Individually impaired Other financial assets Notes receivable Loans to employees Other loans Available-for-sale financial assets Less: provision for impairment Total credit risk Итого кредитный риск Liquidity risk - - - - - - - - - - - - 1,758 1 758 9,053 4,758 211 17,204 9,242 - 117 - - - - - 3,585 (1,285) 42,885 42 885 1,462 7,569 107 3,164 535 5,580 1,131 20,988 - 318 2,676 23 - (1,755) 41,798 41 798 12,273 12,327 318 20,368 9,777 5,580 1,248 20,988 - 318 2,676 23 3,585 (3,040) 86,441 86 441 Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Non-banking operations liquidity risk management The Group’s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group‘s reputation. In managing its liquidity risk, the Group maintains adequate cash reserves and debt facilities, continuously monitors forecast and actual cash flows and matches the maturity profiles of financial assets and liabilities. The Group prepares various financial plans (monthly, quarterly and annually) which ensures that the Group has sufficient cash on demand to meet expected operational expenses, financial obligations and investing activities for a period of 30 days or more. To fund cash requirements of a more permanent nature, the Group will normally raise long-term debt in available international and domestic markets. Banking operations liquidity risk management It is unusual for banks ever to be completely matched on maturities of assets and liabilities since business transacted is often of an uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Group and its exposure to changes in interest and exchange rates. 232 233 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUThe Group’s approach to liquidity management is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due under both ordinary and stressed conditions, without incurring unacceptable losses or damaging the Group’s reputation. The Group endeavors to maintain a stable and diversified funding base including core corporate and individual customer accounts; short-, medium- and long-term loans from other banks; promissory notes and bonds issued. On the other hand, the Group tends to keep diversified portfolios of liquid and highly liquid assets in order to be able to settle unforeseen liquidity requirements in an efficient and timely manner. Key parameters in liquidity risk management such as the structure of assets and liabilities, composition of liquid assets and acceptable liquidity risks are established by ALCO. ALCO sets and reviews limits on liquidity gaps which are assessed on the basis of liquidity stress-tests in regard to medium- and long-term liquidity. These tests are performed using the following information: • current structure of assets and liabilities including any known renewal arrangements as at the date of the respective test; • amounts, maturity and liquidity profiles of transactions projected by business units; • current and projected characteristics of liquid assets which include, apart from cash and cash equivalents, amounts due • relevant external factors. from other banks and certain financial assets held-for-trading: and The resulting models allow for the assessment of future expected cash flows due to projected future business and different crisis scenarios. While managing liquidity risk treasury departments of the Group distinguish liquidity required within a current business day and term liquidity with a 1-year horizon. For managing current liquidity (with a 1-day horizon) the following methods are used: based); • reallocation of cash between accounts with other banks; • collection of information from business and other supporting units on large transactions (both proprietary and customer • purchase and sale of certain financial assets in liquid portfolios; • accelerating closure of trade positions; • estimation of minimum expected cash inflow during a business day; and • daily control over the balance of cash and estimated liabilities to be settled on demand. For managing term liquidity treasury departments of the Group use liquidity graphs that reflect volume and time of liquidity mismatches (surpluses or deficiencies). These liquidity graphs, in essence, present projected cash flows estimated with due regard for expected maturities of assets and liabilities. The Group sets limits on acceptable accumulated liquidity mismatches which are calculated by using the following instruments: • discounts to assets are applied to recognize market risk in case of accelerated realization of respective assets; and • models showing cash flow fluctuations due to accelerated settlement of liabilities. In the normal course of business, liquidity reports covering the current and projected structure of assets and liabilities as well as future expected cash flows are submitted to ALCO once every two weeks. Decisions on liquidity management made by ALCO are implemented by treasury departments within their duties and responsibilities, in addition to this, ALCO reviews and approves model of maturity for the minimum required daily balances of current accounts by currencies on the basis of analysis of historical dynamics. Financial liabilities Trade and other financial payables Trade payables Dividend payable Other payables Debt Bonds issued Subordinated debt Debt securities issued Credit facilities Other debt Banking: Due to banks and CB RF Banking: Customer accounts Other short-term liabilities Credit related commitments (Note 27) Total Less than 1 Between 1 Between 2 Over 5 years Total year and 2 years and 5 years 25,575 149 430 9,471 223 4,713 9,781 1,224 5,551 200,234 1,398 26,127 284,876 - - - 8,734 224 94 - 219 9,369 8,728 - 5,465 32,833 - - - 13,866 3,940 36 - 1,173 6,240 8,183 - 6,231 39,669 - - - 23,146 1,552 29 - 625 - - - 1,262 25,575 149 430 55,217 5,939 4,872 9,781 3,241 21,160 217,145 1,398 39,085 26,614 383,992 The following tables summarise the maturity profile of the Group‘s financial liabilities based on contractual undiscounted payments, including interest payments as of 31 December 2015: Financial liabilities Trade and other financial payables Trade payables Dividend payable Other payables Debt Credit facilities Other debt Total Fair values Less than 1 Between 1 Between 2 Over 5 years Total year and 2 years and 5 years 27,816 133 580 5,289 738 34,557 - - - - - - - - - 3,138 - 3,138 5,576 1,758 7,334 3,782 144 3,926 27,816 133 580 17,786 2,640 48,955 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 financial instruments are determined with reference to various market information and other valuation techniques as considered appropriate. Liquidity analysis for banking and non-banking operations of the Group The different levels of fair value hierarchy have been defined as follows: The following tables summarise the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments, including interest payments as of 31 December 2016: Level 1 – Quoted prices in active markets for identical assets or liabilities that Group has the ability to assess at the measurement date. For the Group, Level 1 inputs include held-for-trading financial assets that are actively traded on 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. 234 235 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RULevel 3 – Unobservable inputs for the asset or liability. These inputs reflect the Group‘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: At 31 December 2016 Fair value Level 1 Level 2 Level 3 Carrying value At 31 December 2015 Fair value Level 1 Level 2 Level 3 Carrying value 7,759 - 431 8,190 803 - 445 1,248 9,509 2,300 24,309 36,118 - 3,504 19,785 23,289 Financial assets at fair value through profit or loss Available-for-sale financial assets Total 17,268 2,300 24,740 44,308 803 3,504 20,230 24,537 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 2016 and 2015: Available-for-sale financial assets Fair value hierarchy Level 2, Level 3 Valuation technique and key input data Quoted prices for similar investments in active markets, net assets valuation, comparative (market) approach Publicly available information, comparable market prices There were no changes in valuation technique for Level 2 and Level 3 recurring fair value measurements during the year ended 31 December 2016 (2015: 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 2016 Fair value Level 1 Level 2 Level 3 Carrying value At 31 December 2015 Fair value Level 1 Level 2 Level 3 Carrying value Assets Cash and cash equivalents Cash on hand and in banks Term deposits Due from banks Restricted cash Banking: Mandatory reserve deposits with CB RF Accounts receivable Trade receivables Other financial receivables Banking: Loans to customers Other financial assets Bank deposits Due from banks Notes receivable Loans to employees Other loans - - - - - - - - - - - - - Held to maturity investments 10,560 40,847 22,744 13,515 3 - - - - - - - - 1,988 40,847 22,744 13,515 3 1,988 61,467 4,240 61,467 4,240 193,026 193,026 32,706 9,887 - - - - - - 458 1,018 3,391 32,706 9,887 458 1,018 3,391 - 10,560 12,273 12,327 - 318 - - - - - - - - - - Total financial assets 10,560 119,702 265,588 395,850 24,918 Trade and other financial payables Trade payables Dividend payable Other payables Debt Bonds issued Subordinated debt Debt securities issued Credit facilities Other debt Due to banks and CB RF Customer accounts Other liabilities - - - 32,698 - - - - - - - - - - - - - - - 18,350 180,714 25,575 25,575 149 430 149 430 - 32,698 4,497 4,894 9,340 2,701 - - - 1,398 4,497 4,894 9,340 2,701 18,350 180,714 1,398 Total financial liabilities 32,698 199,064 48,984 280,746 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 58,165 4,234 - 12,273 12,327 - 318 - 58,165 4,234 - 20,161 20,368 - 9,518 1,262 5,162 - - 9,777 1,262 5,580 - 98,502 124,304 27,816 27,816 133 580 - - - 133 580 - - - 13,744 3,106 15,055 3,106 - - - - - - 45,379 46,690 236 237 The carrying amounts of financial assets and liabilities carried at amortized cost approximates their fair values. The fair values in Level 2 fair value hierarchy were estimated using the discounted contractual cash flows and observable interest rates for identical instruments. The fair values in Level 3 fair value hierarchy were estimated using the discounted cash flows and observable interest rates for similar instruments with adjustment to credit risk and maturity. In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUand the subordinated loan received from DIA are not recognized within assets and liabilities in the consolidated statement of financial position. In accordance with the Bank of Russia’s Regulation No. 395-P these subordinated loans accounted for in capital adequacy ratio calculation in accordance with Bank of Russia’s Regulation No. 395-P. NOTE 31: SUBSEQUENT EVENTS On 7 March 2017, the Central Bank of Russian Federation registered an additional issuance of 14 billion of PJSC “Bank ZENIT” ordinary shares with par value of RR 1 per share. The additional shares issuance will be placed via closed subscription in favour of PJSC “Tatneft”. As a result of this transaction, after giving effect to PJSC “Bank ZENIT” new share issuance, the Group’s share in PJSC “Bank ZENIT” will increase to 71.12%. 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 defines capital under management as equity as shown in the consolidated statement of financial position. The amount of capital that the Group managed as of 31 December 2016 was RR 703,511 million (2015: RR 628,314 million). The Group manages capital for banking and non-banking operations separately. Non-banking operations capital management 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. Consolidated total borrowings excluding borrowings of Bank ZENIT: Credit facilities Other debt Notes payable Consolidated shareholders’ equity Debt to capital employed ratio, % (Consolidated total borrowings / Consolidated shareholders’ equity) Banking operations capital management Year ended 31 December 2016 Year ended 31 December 2015 12,301 9,340 2,701 260 703,511 2% 18,421 15,055 3,106 260 628,314 3% The Group’s policy on capital management is to maintain a strong capital base in order to support further business development of the Group and to satisfy requirements set by regulatory authorities. The Group has been developing procedures for the economic capital calculation on the basis of best international risk management practices. The CB RF establishes and controls capital adequacy requirements. The Group also monitors capital requirements set by the CB RF for credit institutions. Under the current capital requirements banks have to maintain a ratios of capital to risk-weighted assets (“statutory capital ratios”) above the prescribed minimum levels. The CB RF sets the following mandatory capital ratios requirements for core capital, Tier 1 and total capital: 4.5%, 6% and 8% respectively. As of 31 December 2016 and during the period from Bank ZENIT acquisition till 31 December 2016 the Group complied with the statutory requirements related to the capital ratio. In September 2015 Bank ZENIT received five subordinated loans totalling RR 9,933 million from DIA within the Russian Federation Government programme for additional capitalisation of Russian banks. Under the terms of these subordinated loan agreements DIA paid these loans by securities (OFZ of five series), that should be returned upon maturity of the subordinated loans. These subordinated loans mature from January 2025 to November 2034 and bear interest equal to OFZ coupon rate plus 1%. In accordance with IAS 39 ”Financial Instruments: Recognition and Measurement” if securities are loaned under an agreement to return them to the transferor, they are not derecognized because the transferor retains substantially all the risks and rewards of ownership. Accordingly, the obligation to return the securities should not be recognized. Therefore, OFZ 238 239 In mIllIons of RussIan RoublesIn mIllIons of RussIan RoublesABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUSOCIAL RESPONSIBILITY 240 241 RUB 5.2 Bn – expenses for the maintenance of social infrastructure, including the construction and maintenance of housing, schools, cultural and recreational facilities in 2016. PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYSOCIAL INVESTMENT INFORMING ON THE ACTIVITY RELATED TO SUSTAINABLE DEVELOPMENT AND CORPORATE SOCIAL RESPONSIBILITY GOALS AND PRIORITIES OF THE SOCIAL POLICY IN THE ACTIVITY REGIONS The Company develops and implements social programs relying on the following principles: Consistency Social programs are of regular and systematic character. Openness The Company strives for development and imple¬mentation of social pro¬grams based on dialog and collabora- tion with the concerned parties Significance The Company aspires to make social programs targeted as much as possible, timely and corresponding to vital demands of the society. Efficiency Funds spent on imple¬mentation of the programs must sensibly help in solving problems. Results of the programs are liable to regular as- sessment and record. TATNEFT Company has been elaborating annual reports on the sustainable development and social responsibility since 2005. Since 2014, disclosure of information on the activity related to the corporate social responsibility is carried out as a part of preparation of the TATNEFT Company’s Annual Report. This chapter of the Report was elaborated based on: • Guidelines on Reporting in the Field of Sustainable Development of Global Reporting Initiative (GRI) • Standard of Interaction with Concerned Parties AA 1000 • International Standard ISO 26000 “Guideline on the Social Responsibility” • Social Articles of the Russian Business Community. • In general, the Report for 2016 con¬tains standard elements of GRI Guideline version G4 reporting. In addition to the Guideline, GRI Oil and Gas Sector Supple¬ment was applied during the Report elaboration. IMPLEMENTATION OF THE GRI PRINCIPLES GRI Principle Our actions The Company aspires to make its social programs targeted as much as possible and corresponding to vital demands of the society. Target groups of the social programs developed by PJSC TATNEFT are children and young people, war and labor veterans, those in need of medical care and rehabilitation, orphaned children, as well as other socially vulnerable population groups. The Company builds business relationships and interacts with the partners and other concerned parties based on the corporate social responsibility. Coverage of concerned parties Context of sustainable development TARGET AUDIENCES OF THE COMPANY’S SOCIAL PROGRAMS Program on infrastructure development in cities and settlements Program on health care support in the southeast of the Republic of Tatarstan Residents of the activity regions The Company’s employees Program on development of popular sports and physical culture in the oil region of the Republic of Tatarstan Program on hockey development in the southeast of the Republic of Tatarstan Program on social (targeted) support for population of districts of the Republic of Tatarstan Program on education support Program on culture support Program on spiritual revival Program on agricultural development Program on workplace creation Children Adults Coaches The Company’s employees Orphaned children Handicapped people Veterans Other socially vulnerable population groups Schoolchildren Students Teachers, professors Theaters Museums Libraries Cultural establishments Mosques Churches Residents of the activity regions Residents of rural areas Unemployed people Graduates of higher and other educational establishments Program on maternity and childhood support Program on development of large-scale ecological programs Children Population Information significance Information completeness Principle of balance Information compatibility Information accuracy Timeliness Clarity Reliability The Company makes considerable efforts in order to involve the concerned parties into discussion of issues related to elaboration of the report, such as determination of the Report content, selection of performance indicators, etc. To do that, consultations with representatives of the concerned parties, conferences and seminars are held, questioning is carried out. The information on the Company’s activity results is presented in the Report in close connection with its contribution to the sustainable development. The Report shows all key points, indexes and initiatives related to economic stability maintenance, environmental safety improvement and strengthening of the social stability. We strive to include in the report only those issues and indicators that are significant to the concerned parties and are capable of influencing their decisions. While we determine significance of the issues, we take into account such factors as goals and objectives of the Company, risks and capabilities, industry-specific problems, etc. The Company strives to achieve full disclosure of information in economic, environmental and social spheres of the activity. The bulk of issues reviewed in the report is enough for the readers to assess the Company’s performance and its contribution to sustainable development of the society. In the framework of the principle of balance, the report covers both favorable results of the Company’s activity and problems that the Company faces. Amount of attention given to various issues corresponds to their relevance. The report ensures comparability of the activity results from year to year. Each significant change related to boundary, coverage or reporting period is explained. To ensure comparability of the Company’s performance with the results achieved by the other companies, indicators included in the GRI guidelines and technical protocols were used in elaboration of the report. We strive to make information provided in the report accurate and detailed enough for the concerned parties to use it in decision-making with a high level of reliability. Error of quantitative data is minimized. Proportions and specific values used in the report are complimented with respective absolute values. Data are provided using common international units and are calculated with standard coefficients. The Company is aware of the necessity to present timely information in the report that is why the report is issued with equal periodicity once a year prior to the annual meeting of shareholders. We make efforts to make information provided in the report clear, understandable and useful for different concerned parties. The report contains a glossary and a list of abbreviations, which make science and technology terms and abbreviations clear. Information and data provided in the report are based on internal documentation, which can be assessed by independent parties. Data that can not be supported by documents are not included in the report. 242 243 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYCORPORATE STANDARDS AND REGULATIONS FOR INTERACTION wITH STAkEHOLDERS Concerned Parties Regulatory Documents All Stakeholders Corporate management code of PJSC TATNEFT Articles of Association of PJSC TATNEFT Provisions on the information policy of PJSC TATNEFT The TATNEFT Company’s hotline work order Policy of the TATNEFT Group in the field of industrial safety, labor and environmental protection Integrated risk management system Corporate standard “Anti-Corruption Policy of the TATNEFT Company” Shareholders Provisions on the General Meeting of Shareholders of PJSC TATNEFT Provisions on the Board of Directors of PJSC TATNEFT Provisions on the committees under the Board of Directors of PJSC TATNEFT Business Partners Provisions on the procedure for registration of suppliers of goods/works/services in the TATNEFT Company Regulation on the logistics of structural subdivisions and affiliates of the TATNEFT Company Provisions on the organization of contractual work in the TATNEFT Company Provisions on the organization of goods purchasing using electronic trading platform Regulation on work in the “Trading Procurement Platform” system of the TATNEFT Company Corporate standard on the accreditation order for prospective suppliers when organizing goods purchasing using electronic trading platform Provisions on the order of the Company’s subdivisions interaction on handling of complaints received by the Hotline of the TATNEFT Company’s trading procurement platform Provisions on the organization, execution, and automated record keeping of claim-related work in the TATNEFT Company Regulation on the organization of goods purchasing from the companies manufacturing unique (custom-made) goods (monopolist manufacturers) Provisions on the use of insider information and on the procedure for distribution of information on security transactions Provisions on the safe execution of works performed by third parties at the TATNEFT Company facilities Provisions on the TATNEFT Group. Corporate culture code of the TATNEFT Company HR management policy Employees Standard for the Collective Agreement Standard for personnel hiring and transfer to another job Standard for personnel dismissal Standard for personnel adaptation Provisions on coaching Standard for working with the candidate pool Standard for personnel certification Standard for personnel training and development Standard for labor discipline Standard for personnel rewarding Standard for business trips of employees Standard for the provision of information on candidates (internal and external) for vacant positions Rules of internal work order for employees Regulation on the preparation and holding of the employees conference Provisions on the insurance of employees against industrial accidents Provisions on the arrangement of therapeutic-resort activities for employees Provisions on the system of industrial safety management System for the assurance of industrial safety Provisions on production control over compliance with industrial safety requirements at the hazardous production facilities Procedure for the arrangement of pre-employment and routine medical examinations of employees involved in heavy and harmful works, as well as works with harmful and/or hazardous production factors System of the employees’ personal responsibility for occupational safety Provisions on non-recurrent loans provided for the employees to cover initial installments for housing bought through the social mortgage system of the Republic of Tatarstan Trade Union Provisions on the allocation of loans for private housing construction or participation in joint housing construction (with other entities involved in housing construction) Standard for the Collective Agreement Veterans and Pensioners Provisions on the workplace protection committee (commission) Workplace protection agreement Provisions on the arrangement of non-governmental pension provision for employees Corporate standard “Requirements on environmental safety for the organizations involved in providing works and services at the TATNEFT Company’s facilities” Standard for the interaction of TATNEFT Company with external service providers during service rendering Standard for the investment and technical policy of the TATNEFT Company for diversification and quality enhancement of oil services Regulation on the introduction of changes and approving of changes introduced in the layout of production facilities, defining limits of liability sharing between service providers and structural subdivisions under the process of service providing for the TATNEFT Company Provisions on service for ordering of information technologies at the TATNEFT Company Provisions on tenders for the submission of goods supply, work performance, and service rendering orders according to the needs of TATNEFT Company Regulation on pre-tender and post-tender activities concerning goods supply, work performance, and service rendering according to the needs of the TATNEFT Company Provisions on the marketing assessment of materials and equipment with regard to the TATNEFT Company logistics Consumers Provisions on the TATNEFT trademark and its use Standard for production control over products and manufacturing processes Standard for final inspection and products testing Procedure for reviewing of claims and requests submitted by tire products consumers Procedure for the collection and processing of information on consumers satisfaction Rules for service rendering at filling stations Local Com- munities and Public Organi- zations Rules of the TATNEFT Company’s trade practice in respect of diesel fuel realization in the Russian Federation Agreements with municipal administrations of the cities and settlements in activity regions Provisions on work with boarding schools graduates and orphaned students of specialized education establishments Specialized corporate project of the TATNEFT Company aimed at the support for small and medium-sized business development in the Republic of Tatarstan Provisions on the participation of the TATNEFT Company in public organizations 244 245 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYINTERACTION wITH STAkEHOLDERS SOCIAL RESPONSIBILITY THE COMPANY PERMANENTLY INTERACTS WITH A WIDE RANGE OF STAKEHOLDERS, CONSIDER¬ING THE MUTUALLY BENEFICIAL RELATIONS WITH THEM AS A CRUCIAL ASSET FOR SUSTAINABLE DEVEL- OPMENT. AS PER AA 1000 STANDARD DEFININTION CRITERIA, THE STAKEHOLDERS ARE ORGANI- zATIONS, INDIVIDUALS OR GROUPS WHOSE INTERESTS COULD BE AFFECTED BY THE COMPANY’S ACTIVITIES. Ensuring a high level of the corporate social responsibil- ity is a strategic initiative and a major principle of the Com- pany’s activity, which implies the transparency and ethical conduct that contributes to sustainable development and is consist¬ent with the law and international standards. Fundamentals of the stakeholder engagement: garding the Company’s activities; • Identification of the stakeholders; • analysis of the stakeholders’ needs and expectations re- • identification and implementation of communication and • definition of the Company’s responsibility areas to the feedback forms for each stakeholder; key stakeholders. Guiding principles of the Company’s social responsibility are as follows: ers and other stakeholders on its activity; • to act in accordance with the legislation; • to be a responsible partner of the government; • to protect rights of the shareholders; • to appreciate and respect its employees; • to openly inform its shareholders, employees, consum- • to act in accordance with the highest ethical standards; • to be intolerant to corruption and bribery; • to use its resources with the maximum efficiency; • to use up-to-date technological achievements; • to ensure environmental protection; • to cooperate with public organizations; • to strive to make each employee feel proud of the Com- pany they work for. Key stakeholders are divided into two groups according to their degree of influence on the activity of the TATNEFT Group and the degree of the Company’s influence on their vital activity. A group of substantial influence includes stake- holders which can substantially influence the activity of the TATNEFT Group or whose interests are substantially affected by the Company’s activity. These are internal stakeholders, shareholders and investors, consumers and clients, business partners, and public authorities. A group of limited influence includes public organizations, invest¬ment analytical companies and credit rating agencies, mass me- dia communications, specialized institutions of higher and intermediate vocational education and local compa¬nies, i.e. the stakeholders whose interests can be partially af- fected by the Company or which can indirectly influence the Company. THE COMPANY’S REPRESENTATION IN THE BUSINESS AND PUBLIC ORGANIzATIONS The Chamber of Commerce and Industry of the Russian Federation All-Russian Association of Oil and Gas Employers Russian Union of Industrialists and Entrepreneurs (RSPP) “Miners of Russia” Non-Profit Partnership Union of Oil and Gas Producers of Russia Moscow International Petroleum Club (MMNK) “Russian Institute of Directors” (RID) Non-Profit Partnership The National Council on Corporate Governance (NSKU) Share Issuers Committee of Moscow Exchange Russian National Committee of the World Petroleum Council (RNKMNS) REGISTRY OF CORPORATE SOCIAL PROJECTS OF 2016 In many cities and towns of the southeast of the Republic, Tatneft’s enterprises are city-forming. In Almetyevsk, Leninogorsk, Aznakaevo, Bavly, Jalil, Yelabuga and other towns of the enterprise PJSC TATNEFT provides tens of thousands of people with modern jobs, a decent salary, forming the main part of the local budget, which allows full and timely payment of pensions and salaries for those employed in the budgetary sphere. Following the principles of corporate social responsibility, TATNEFT annually makes a weighty contribution to improving the quality of life of residents of the Republic of Tatarstan. Social programs of the Company are regular and well-planned. Lines of Social Investments Projects Program on infrastruc- ture development in cities and settlements Wedding Palace construction Repair of the roof in multiple flat buildings Purchase of utility machinery Places of implementation Leninogorsk Nurla Urussu urban-type settlement of Yutaza mu- nicipal district, Bugulma municipal district Overhaul of housefronts and square reconstruction Aznakaevo Repair of urban streets and roads Improvement of inner areas adjacent to houses Almetyevsk and Almetyevsk municipal dis- trict, Aznakaevo, Bavly, Leninogorsk, Urussu urban-type settlement of Yutaza municipal district Leninogorsk, Bugulma municipal district Almetyevsk, Leninogorsk, Karabash urban- type settlement of Bugulma municipal district, Bugulma municipal district Program on devel- opment of popular sports and physical culture in oil region of the Republic of Tatarstan Overhaul of the central park, water supply and disposal system Bugulma municipal district Construction of squares Bugulma municipal district Organization and holding of physical education and recreational events oil region of the Republic of Tatarstan Support for the adolescent and juvenile boxing, wrestling, volleyball, ka- rate, figure skating, equestrian sports Oil region of the Republic of Tatarstan Sports center construction Cycling trek construction Reconstruction of the ‘Jubileyny’ Ice Sports Palace Nizhnyaya Maktama urban-type settlement (Alnetyesvsk) Almetyevsk Almetyevsk Construction of an ice sports palace Aznakaevo, Leninogorsk Construction of multipurpose sports hall with a swimming pool Almetyevsk, Agryz Construction of a tennis court Reconstruction and repair of stadiums Jalil urban-type settlement of Sarman mu- nicipal district Almetyevsk, Aznakaevo, Leninogorsk, Chistopol, Jalil urban-type settlement of Sarman municipal district Establishment of ice hockey rinks with changing rooms and lighting Almetyevsk, Alkeev, Atna municipal districts Preparation of five sites in squares and parks for the free “Green Fitness”– dancing exercises, yoga, Zumba, calanetics and a number of other sports activities Almetyevsk Program on housing improvement Furnishing of apartments acquired by social mortgage oil region of the Republic of Tatarstan Provision of loans for employees to cover the first installment under the social mortgage program oil region of the Republic of Tatarstan The Corporate Calendar of the Company’s Events for 2016 is detailed on the corporate website tatneft.ru 246 247 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYCulture Support Program Construction of a hotel with a bath complex - an analogue of the historical White Chamber of Bulgar of the XIV century Program on occupa- tional safety Workplaces assessment Acquisition of coveralls oil region of the Republic of Tatarstan oil region of the Republic of Tatarstan Construction of an art gallery Construction of children's art school Construction of Civil Registry Office Overhaul and equipment of the Culture House Almetyevsk Novosheshminsk village Novosheshminsk village Cheremshan, Yersubaykino Support of the CH “Neftche” and the Drama Theater Almetyevsk Conducting cultural events, celebrating of the Victory Day and Sabantuy oil region of the Republic of Tatarstan “Cultural Environment” pilot project was launched, aimed at developing of an active creative urban environment Almetyevsk Collective Agreement Program on non-governmental pension provision Purchase of equipment for handicapped people Payment for the utility services for the local communities of handicapped people Repair of the premises of the boarding houses for the elderly and disabled Financial aid to war veterans, widows, rear workers of the oil region of the Republic of Tatarstan oil region of the Republic of Tatarstan oil region of the Republic of Tatarstan Almetyevsk Almetyevsk Jalil Sarman district, Aznakaevo, Nurlat Municipal Districts oil region of the Republic of Tatarstan Various activities for people with disabilities oil region of the Republic of Tatarstan Program on the social guarantees provided for the personnel Program on sup- port for veterans and handicapped people Program on health care support in the southeast of the republic Overhaul of the Central District Hospital Purchase of medical equipment Design work on the reconstruction of a pediatric hospital Almetyevsk Medical Sanitary Station of PJSC TATNEFT and Almetyevsk Children's hospital with perinatal center in Almetyevsk Construction of a radiotherapy complex in the oncologic dispensary Almetyevsk Acquisition of medical clothing and surgical underwear for medical institu- tions oil region of the Republic of Tatarstan Implementation of the “Winter Without Cold” Municipal Project Program on maternity and childhood welfare Health improvement for children of employees in the budgetary sphere in recreation camps of the oil region of RT Overhaul of a kindergarten Overhaul of seven kindergartens Almetyevsk oil region of RT Bugulma Almetyevsk Overhaul of secondary schools, gymnasiums and lyceums Almetyevsk, Aznakaevo, Nurlat, Cheremshan municipal districts Installation of 30 children's playgrounds in the courtyards of the city. Instal- lation of 5 children's playgrounds in the courtyards of the village Almetyevsk, Sarmanovo village Program on education support Almetyevsk State Oil Institute modernization and re-equipment Acquisition of equipment, inventory for the dining rooms of the Almetyevsk State Oil Institute Repair of the student hostel The completed satchels and sports suits for multi-child families and low- income families were acquired within the framework of the campaign "Help to Be Going to School" Reconstruction of the central library Repair of the roof of Youth Sports School building Repair of the children's health camp “Rodnichok” Acquisition of a playground for orphaned children Almetyevsk Almetyevsk Almetyevsk Almetyevsk Almetyevsk Bugulma Leninogorsk orphan asylum Laishevo Boarding School Participation in the implementation of the "Day5" project Almetyevsk Agricultural Support Program Large-scale environ- mental program Allocation of funds for agriculture development Almetyevsk municipal district Creation of green zones, parks and avenues oil region of the Republic of Tatarstan Construction of a park Improvement of the park zone Improvement of the central city park Novosheshminsk village Aznakaevo Nizhnekamsk Landscaping and planting of greenery in the park and the Central Park Bavly Landscaping of the park and the central park Reconstruction of water bodies (lakes) Chuvashskoe village, Sirenkino of Alme- tyevsk district Sosnovka village, Almetyevsk municipal district, Leninogorsk Normalization of the reservoirs, Chernaya River Banking Almetyevsk, Aznakaevo Construction of water reservoirs Provision of clean drinking water Program of spiritual revival A charitable aid was allocated for the organization of the Hajj in the Kingdom of Saudi Arabia for Muslims with limited material resources, for holding the Republican Iftar (rendition), for the implementation of the plan of activities of the Strategic Vision Group "Russia - Islamic World"; on the restoration of the Cathedral of the Kazan Icon of the Mother of God Aznakaevo, Bavly, Nurlat municipal district oil region of the Republic of Tatarstan Spiritual Administration of Muslims of the Republic of Tatarstan, Kazan The company takes part in the re-creation of the Bulgarian Islamic Acad- emy Bolgar, Spassky municipal district. Charity aid was provided to muhtasibat Almetyevsk, Aktanysh, Bugulma municipal districts Funds were allocated for capital repairs of the roof of the building of Kazan Cathedral Almetyevsk Funds were allocated for the reconstruction of the church New Mikhailovka village Almetyevsk Cemeteries improvement Construction of a church Construction of an Orthodox church Construction of a mosque Bigash village, Kichuchatovo village, Alme- tyevsk Aznakaevo Alexandrovka Middle Kashir, Sarmanovo district Part of the large-scale work on social development of the region was the grant system introduced by Tatneft this year. Through it, funds have been allocated for the implementation of social initiatives aimed at addressing the pressing problems of the region. In 2016 the grant committee considered about 70 projects from different regions of Tatarstan in the categories “Social Sphere”, “Citizenship and Patriotism”, “Culture and Art” and “Sport”, 28 of them received financial aid from the Tatneft Company. Social programs on the territory of production activities of PJSC TATNEFT continue to develop actively, they have been and will be in the sphere of the Company’s responsibility. 248 249 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYCOLLECTIVE AGREEMENT PJSC TATNEFT takes care of well-being and social security of its employees and their families. The Company provides its employees with a package of social benefits and guaran- tees. Obligations on their fulfillment are stipulated in the Col- lective Agreement annually concluded between PJSC TAT- NEFT and the staff, including all employees and non-working pensioners of the Company. The Collective Agreement stipulates: • employees’ benefits and guarantees; • social protection of young employees; • support for veterans and pensioners. Structure of the social benefits and guarantees is stipulat- ed by the Collective Agreement Standard of the TATNEFT Group, which is advisory for all enterprises of the Group. In 2016, the Company made amendments and changed size of payments for the following: first marriage; caring for children aged 1.5-3. • Financial aid for employees having parental leave and • Financial aid at child birth or adoption of a child under 14; • Financial aid for young employers in connection with the • Financial aid for employees and pensioners in connec- • One-time payment in connection with annual leave; • Financial aid for retiring employees; • Financial aid for families of late employees (pensioners) • Financial aid for an employee having dependent disabled to cover funeral-related expenditures; tion with their jubilee; children under 18. SOCIAL BENEFITS UNDER THE COLLECTIVE AGREEMENT Main Employees’ Benefits and Guarantees; and caring for children aged under 3 years • Financial aid for female employees having parental leave • Financial aid at child birth or adoption of a child under 14 • Granting a three-day paid vacation to an employee (fa- ther) at the release of a baby from the maternity hospital with retention of his average monthly income; relatives; • Financial aid in the event of death of an employee’s close • Financial aid for the family of a late employee to cover • Financial aid for orphaned children under 18 who lost funeral-related expenditures; both parents, if one of them was employed in PJSC TAT- NEFT; children under 18; • Financial aid for multi-child families; • Financial aid for an employee having dependent disabled • Financial aid upon retirement; • Granting at least two hours off weekly or one day off monthly to female employees having children under 16 (disabled children under 18); • Financial aid for an orphaned child under 18 whose par- ents (or one of them) died in the line of duty at PJSC TAT- NEFT was employed in PJSC TATNEFT; Main Benefits for Young Employees: OUTREACH OF YOUNG PEOPLE The youth policy of PJSC TATNEFT covers research and production, creative, social, cultural, popular, information, sports and other spheres. The total number of young employees of the Tatneft Group is more than 28,000, including 7,340 employees of structural divisions, and 20,660 young employees of subsidiaries and oil services. In 2016, the Corporate Youth Organization implemented a number of new projects aimed at increasing the effective- ness of organizing work with young people, reducing inef- ficient costs, increasing the involvement of young people in scientific creative and rationalization work. Activities carried out by the Youth Organization that con- tribute to the process of youth adaptation in the workplace, and the disclosure of their talents: School of Youth Leader, School of Production Management, scientific and practical conferences and seminars, trainings from leading Russian business trainers, intellectual games, youth sports days, games of the corporate League of KVN, charity events and much more. Great attention shall be paid to cooperation with the student community. In 2016, the Company Tatneft acted as the organ- izer of the championship in solving engineering cases Case-in at the All-Russian level in the oil and gas field. Students of 14 oil and gas higher education institutions – Gubkin Russian State University of Oil and Gas, Almetyevsk State Oil Institute, Ka- zan (Privolzhsky) Federal University, Russian State Geological Prospecting University named after Sergo Ordzhonikidzе have participated in the championship. In general, taking into ac- count a selection stage about 350 students have participated in our intellectual competitions. In November, 2016 the team of young specialists of PJSC TAT- NEFT has taken part in Youth day of the V International Forum on Energy Efficiency and Development of Power ENES 2016. In total during 2016 young employers have submitted 17 000 innovation proposals, 80 patents were taken out. The company relies on young talents, creating conditions for professional and career growth. In 2016, 1,300 young workers raised their category and over 900 were promoted. In December 2016, the Strategy for the Development of the Youth Organization of PJSC TATNEFT for 2017-2021 was ap- proved, according to which the development of young lead- ers and young talents becomes the main vectors of work with young people. quisition • Interest-free loan for furniture and essential goods ac- • Financial aid for an employee dismissed for military ser- vice in the Armed Forces of the Russian Federation after their return to the same workplace; • Financial aid for the first marriage. Benefits for Pensioners and Veterans: • Financial aid on the Victory Day for the Great Patriotic • Quarterly financial aid for non-working pensioners who War participants, widows and home front workers used to work in the system of PJSC TATNEFT for at least 10 years and retired before the foundation of the National Private Pension Fund COMMUNICATION Corporate social network Corporate mass media Website of PJSC TATNEFT Information stands at enterprises Annual Reporting Reporting-and Election Conference Methods of informing and inter- acting with young people INTERACTION Corporate social network Project implementation Scientific and practical seminars and conferences Youth Forums Competitions of professional skill Educational seminars and trainings Intrafirm training Creativity competitions Festivals, KVN games Sports and tourist activities • Providing employees who worked in PJSC TATNEFT for at least 10 years with an opportunity of early retirement at the Company’s expense with retention of the Company’s benefits and guarantees for pensioners; • Financial aid in the event of death of a pensioner’s close relatives. FEEDBACK Corporate social network Annual sociological survey Meetings of the Trade Union Committee Meetings with the leadership Focus Groups 250 251 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYNON-GOVERNMENTAL PENSION PROVISION For the purpose of the social support for retiring employees, the Company has been implementing a non-governmental pension provision program since 1997. The program provides employees with an opportunity to form their pension capital on a parity basis securing respect- able level of living at the advanced age. Provisions “On non- governmental pension provision” stipulate rules, criteria and procedures for non-governmental pension granting, as well as three main pension schemes. In 2016, the number of the PJSC TATNEFT, employees that joined the non-governmen- tal pension provision program amounted to 8 600 people. The number of pensioners of PJSC TATNEFT receiving a non-governmental pension is 9 833 pensioners. In the reporting year, Company allocated RUB 147,608 for the non-governmental pension provision. In 2016, the non- governmental pension payments for PJSC TATNEFT’s pen- sioners through the National Non-governmental Pension Fund were amounted to RUB 212,383. The Company performs regular communication and explan- atory work on terms of the corporate pension program as well as on the rules of involvement. Information is published at the Internet portal of the TATNEFT Group. Annually each employee of the Company receives the notice on a condi- tion of a personalized pension account. The main partner of PJSC TATNEFT for the implementation of the corporate pension program is the National Non-Governmental Pension Fund (NNPF) - one of the largest interindustry non-state pension fund of our country (it is included in the top ten of more than 150 Russian non-state pension funds). HIGH-TECH MEDICAL CARE The TATNEFT Company with its significant financial invest- ments in short time implemented Program on establishing and putting into service regional medical-diagnostic center under the Medical Sanitary Station of PJSC TATNEFT and Almetyevsk for delivering of the High-Tech Medical Care (HMC) on Cardiovascular Surgery, Traumatology and Or- thopedics, Ophthalmology and Urology for the population of the southeast region of our Republic. The center is large and modern multifaceted medical and preventive establishment having high-skilled talent pool and equipped with the state- of-the-art medical equipment. Over the past few years, the hospital was equipped with the modern high-tech equipment for the diagnosis and treat- ment. Public and republic programs on improving delivery of health care for the people having heart diseases were imple- mented, high-skilled experts passed their training in the best clinics of the world. Annually since 2008 for the Medical Unit there are allocated state quotas for high-tech operations to residents of 10 dis- tricts of the southeast of the Republic of Tatarstan in the are- as of Cardiovascular Surgery, Orthopaedics & Traumatology and Neurosurgery. In 2016 for the implementation of the state order, financial resources were allocated for the implementation of the High-Tech Medical Care for residents of the southeast of the Republic of Tatarstan in the amount of 207.6 million Rubles. Additionally PJSC TATNEFT allocated 29.5 million Rubles for the implementation of 160 coronary angiography and 160 operations of stenting of the coronary arteries in acute myo- cardial infarction. VOLUNTARY MEDICAL INSURANCE FOR EMPLOYEES ARRANGEMENT OF SANATORIUM AND RESORT VACATION OF EMPLOYERS Since 1997, PJSC TATNEFT has been implementing the vol- untary medical insurance program, which gives employees an opportunity for high-quality medical services and thera- peutic-resort treatment, if needed. In 2016, the total number of insured employees made up 21 618 people, RUB 236,7 million was allocated for the program implementation. The TATNEFT Company maintains arrangement and payment for the medical and other services under four programs, such as “Outpatient Care”, “Hospital Service”, “Rehabilitation Treatment” and “Complex Medical Care” programs. In order to reduce the rate of infectious diseases, seasonal immunoprophylaxis was held within the framework of the program (vaccination against seasonal flu and tick-borne encephalitis). The balance of structural divisions and subsidiaries of PJSC TATNEFT contains 11 Health and Recreation Resorts. During 2016, 3,618 employees of the Company rested and strength- ened their health in medical institutions. And 339 employees visited Health and Recreation Resorts of the Republic of Ta- tarstan and the Russian Federation. In a number of resorts of the Company, a preferential cat- egory of Russian citizens, children and citizens are treated, which, according to the doctors, need rehabilitation treat- ment. Within the contract on voluntary health insurance employ- ees of the structural divisions of PJSC TATNEFT occupied at works with harmful and (or) dangerous production factors will undergo sanatorium improvement in Health and Recrea- tion Resorts of PJSC TATNEFT. PJSC TATNEFT took part in the XVI All-Russian forum «Health resort-2016» (Kazan). In the competition held within the framework of the forum, the Company’s social facilities were awarded with medals and diplomas. 252 253 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYHOUSING POLICY PJSC TATNEFT is an active participant and the main payer of the housing construction program on the social mortgages in the Republic of Tatarstan. In 2016, 6 residential buildings were put into operation. This is 802 apartments with total area of 54,1 thousand m2 amounted to RUB 1.5 billion. In 2016 the initial contribution amounted to RUB 102.6 mil- lion was paid instead of employers of structure units. 30% of the apartments are allocated to young families. The num- ber of persons interested to furnish apartments has made 32 persons. 10 million Rubles are directed to these fami- lies to acquisition of furniture. Under the “Rental Housing” program, two houses (228 apartments with a total area of 11.5 thousand m2) were put into operation in the cities of Almetyevsk and Nizhnekamsk for temporary residence of employers with low incomes. Apartments are fully equipped with furniture, household appliances and accessories. In 2017 the construction of houses will be continued under the social mortgage program. It is planned to put into opera- tion 9 multi-apartment houses (1,033 apartments) in 2017 according to the housing construction program. Construction of 40 individual houses was initiated in urban- type settlement Karabash (with total area of 74.4 thousand m2 amounted to RUB 2.3 billion). ARRANGEMENT OF HEALTH- IMPROVING ACTIVITIES FOR CHILDREN Within the bounds of maternity and childhood protection program, the Company annually arranges health-improv- ing activities for employees’ children at thirteen recrea- tion camps with the capacity of 2 736 beds. All recreation camps offer cozy and modern blocks, gyms, playgrounds , swimming pools, proper equipment and assistance of well- trained staff. In accordance with the decision of the General Director of PJSC TATNEFT, N.U. Maganov, in 2016, similarly to the last year, the program for military-patriotic education of children was organ- ized in children’s recreation camps of the Tatneft Company. Ac- tivities carried out by mobile groups of the Center of assistance and development of patriotic and sports education of youth “Sons of the Fatherland”, Moscow. For the purpose of early vocational guidance of schoolchil- dren, children’s camps together with the youth committees of the enterprises of the Tatneft Group are developing the- matic exhibitions, including activities in the recreation pro- gram that tell about the work of oilmen, and other working professions. Excursions on production objects of the Com- pany will be organized. In the program of rest of children’s camps are included also sports actions with delivery of GTO norms. Ecological class- es, lectures of medical workers, classes on traffic rules and many other things are conducted. Over the past three years, the number of children covered by summer holidays has increased by 2,500 children due to the annual construction of additional sleeping buildings for chil- dren’s camps, as well as major repairs of existing buildings. In 2016, in accordance with the program for the improve- ment of children in the children’s health camps of the Com- pany, 11,709 children rested for four shifts. INVOLVEMENT OF EMPLOYEES IN SPORTS AND HEALTHY LIFESTYLE Due to the favorable conditions, created in the Company, sport has become an inherent part of oilmen’s everyday life. Modern ice palaces and sports complexes were built in every city of the oil region. 16 Ice Palaces were built in the Republic of Tatarstan with the Company’s participation and 91 teenage hockey clubs were taken under control by efforts of the Company Funds for purchase of hockey kits for the teenage clubs’ teams and remuneration for coaches and staff maintaining the hockey rinks are allocated annu- ally. In general, more than 5.0 thousand adolescents in- volved in teenage clubs and hockey sections at the place of residence. Tournaments are held between courtyard hockey teams for the prizes of the Joint-Stock Company Tatneft, as well as prizes of the “Oil and Life” magazine. Since 2011, hockey competitions have been held among amateur teams of PJSC TATNEFT. Sport centers are provided for sports activities, within the national idea of promotion of a healthy lifestyle, for workers of oil country in the cities of the southeast of Tatarstan. In 2016, the ski complex of PJSC TATNEFT was visited by more than 36 thousand people. In summertime, the Company gives to employees an oppor- tunity to enjoy active recreation together with the families on the recreation facilities located on banks of the Kama River and Karabash Reservoir. In 2016, about 13 thousand em- ployees and their families rested on summer camps. In 2016, the XXIX Corporate Sports Games of PJSC TATNEFT took place, in which more than 10 thousand employees took part. Competitions were held in 12 kinds of sports. RUB 8.03 million was allocated for the arrangement of the Spartakiada in 2016. DEVELOPMENT OF EQUESTRIAN SPORT At present, Tatneft is implementing the program “Develop- ment of Equestrian Sport and Horse Breeding in the South- east of the Republic of Tatarstan for 2016-2020”. In the fourth quarter of 2016 competitions were held on equestrian sports (competitions, dressage) at the Eques- trian Sports School Centaur of the oil and gas production department Prikamneft, the Equestrian sports school of the Aznakayevskneft oil and gas production department and the municipal autonomous supplementary education institution “Children’s Youth Sports School for Equestrian Sports” of Almetyevsk municipal district. In 2016, the cosmetic repair was carried out, as well as allocated funds for the organiza- tion and prize fund of the competitions were allocated for the above schools with the purpose of organizing and conduct- ing equestrian competitions. In the future, regular competi- tions will be held in these schools. One of the tasks of 2017 is the construction and organization of a complex of mini stables for keeping ponies in each chil- dren’s health camp of PJSC TATNEFT, in order to attract rest- ing children to communicate with horses, instilling love for horses and equestrian sports. 26 heads of Scottish breed ponies have already been acquired for these purposes. One of the directions is the breeding of horses of purebred riding English breed in the Republic of Tatarstan. This direc- tion is being developed by the Tatneft company on the basis of the Nurlatsky stud farm. Currently, there are more than 50 horses of this elite breed. This is a horse race that has a ten- dency in recent years in our country, first of all, thanks to the established and annually played prizes of the President of the Russian Federation. Thus, the Company relies on the de- velopment of horse breeding in the territory of our republic. 254 255 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYACTIVITY OF THE TRADE UNION ORGANIzATION The conscientious work of the collective of PJSC TATNEFT, the consistent implementation of measures to preserve the financial and economic sustainability of the company, al- lowed the fulfillment of the obligations of the PJSC TATNEFT Collective Agreement during 2016. At the same time, the achieved level of social protection of employees, including youth, and non-working pensioners of the Company is ensured, including voluntary medical in- surance, housing construction under the mortgage lending program, organization of summer recreation for children of employees, pensions, so on. The Trade Union Committee of PJSC TATNEFT, its primary trade union organizations on the basis of the Federal Law “On Trade Unions, Their Rights and Guarantees of Activi- ties”, the Labor Code of the Russian Federation, the Collec- tive Agreement provide: • Representation and protection of social and labor rights • and interests of trade union members; • Control over compliance with labor legislation of the Rus- • Organization of sports and health and cultural-mass sian Federation; work in labor collectives. The administration and the Trade Union Committee of PJSC TATNEFT organized and conducted: • the conference of the labor collective of PJSC TATNEFT, where the Collective Agreement of the Company for 2016 was signed; • a meeting of the permanent labor safety commissions of PJSC TATNEFT and the Industrial Engineering Complex, its structural divisions and subsidiaries following the re- sults of work in 2016. The interregional Trade Union Organization of PJSC TAT- NEFT has 142,894 members of the trade union, consists of 92,466 employed, 44,831 unemployed pensioners, 5,597 students of AGNI, APT, LNT and BMT, and 31,550 young workers. Primary associations, primary trade union organi- zations in the number of 167 entities operate in structural divisions, service management companies and subsidiaries located in Tatarstan and beyond, and 4 entities are students of AGNI, APT, LNT and BMT. The qualitative composition of the active Trade Unionists, numbering 13,861 people, includes: 171 heads of primary Trade Unions, 636 chairmen of Trade Union Committees, 2,747 Trade Union groups, 1,417 members of Trade Union Committees, 2,544 members of all Trade Union Committees and 440 members of the revision commissions of primary Trade Unions, 3,161 members of Trade Union Committees and 2,745 labor protection commissioners. Admission to the Trade Union is carried out on a voluntary basis, on the basis of a personal application of the employee. For newly-admitted employees, explanatory work is carried out, the Trade Union Committee informs about the activities of the Trade Union, sections of the collective agreement, and shall be revealed the employee’s inclination to social activi- ties, sports and other interests. The work of the Trade Union Committee of PJSC TATNEFT, consisting of 51 members of the Trade Union, was conduct- ed according to the approved annual plan in full accordance with the Trade Union’s Charter, the requirements of higher Trade Union bodies, the Federal Law “On Trade Unions, their Rights and Guarantees of Activities” and the Labor Code of the Russian Federation. 9 commissions were created for goal-oriented control over ful- fillment of the liabilities stipulated in the Collective Agreement: union members; • commission on social and economic protection of trade • legal protection commission; • workplace protection commission; • mass organization commission; • housing and public services commission; • public catering control commission; • culture, sports and health commission; • young people’s affairs commission; • commission for labor and the Great Patriotic War veterans. In order to control the fulfillment of obligations of collective agreements, the chairman of the trade union committee of PJSC “Tatneft” G.K. Yarullin and his deputies, the chairper- sons of the Trade Union Committees of the enterprises regu- larly visited workplaces, got acquainted with the working and living conditions, met with the collectives of the shops and brigades. The meetings of the conciliation commission for the develop- ment of the Collective Agreement of PJSC TATNEFT for 2017 were organized and held, where the proposals of the compa- ny’s employees were announced for the purpose of entering into a Collective Agreement for their financial evaluation. MPO PJSC TATNEFT on the principles of social partnership takes an active part in the formation of the social strategy of PJSC TATNEFT. In July 2016, the administration and the Trade Union Com- mittee of PJSC TATNEFT organized a festival of children’s health camps at a high organizational level, attended by more than 1,000 children from all 13 children’s health camps of the Tatneft Company. In 2016, in the review competition of children’s health camps of the Neftegazstroyprofsoyuz of Russia, the Yunost chil- dren’s health camps of NGDU Almetyevneft, Landysh chil- dren’s health camps and Yubileyny children’s health camps of NGDU Leninogorskneft, Vishnevaya Polyana children’s health camps of NGDU Nurlatneft were recognized as win- ners and awarded with Diplomas of Presidium of the Russian Trade Union Council. Information on cooperation of the administration and the Trade Union Organization o PJSC TATNEFT for implementa- tion of the Collective Agreement in due time was led up to workers and the public during visits of jobs through corpo- rate and republican media, the NGSP inform all-Russian magazine, the monthly newsletter of trade-union committee of PJSC TATNEFT “Tribune”, the electronic portal – corpo- rate social network. During the year, the Trade Union Committee of PJSC TAT- NEFT from the primary Trade Unions consolidated proposals on improving the provisions of the Collective Agreement for discussion at the Conciliation Commission. The Trade Union Committee organizes cultural-mass and sports-recreational activities during the winter races for the two-day recreation centers of PJSC TATNEFT. The Trade Union Committees organize “Health Days”, con- cert programs for employees and their families from May to September in the city park named after the 60th anniversary of Tatarstan’s oil. Trade Union Committees organizes rest for employees of the enterprises in Health and Recreation Resorts of PJSC TAT- NEFT and beyond. They carry out Christmas parties for the children of employees of enterprises. They organize a visit to lectures and concerts for members of the Trade Union. Representatives of the Trade Union of PJSC TATNEFT took an active part in the meetings of the Russian Council Pre- sidium and Plenums of the Neftegazstroyprofsoyuz, semi- nars and meetings of the International Trade Union Confed- eration, meetings of the Federation of Trade Unions of the Republic of Tatarstan and meetings at the enterprises of the Tatneft Production Group. Trade Union employees are routinely involved in conducting of preventive measures for labor protection and summariz- ing the results of competitions: • “For Maintenance of an Esthetic Condition of the • “Best Recreation Camp of Structural Divisions and Sub- Equipped Springs and Improvement of Water Quality”; sidiaries”. 256 257 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY The positive solution of issues on safety of work in reporting year was promoted by systematic work of the Committee on labor protection which is a component of a control system of labor protection of the Company. In the reporting year, 39 inspections of the conditions and safe- ty of enterprises, compliance with labor protection legislation, implementation of collective agreements and labor protection agreements were conducted. In accordance with the Labor Code of the Russian Federation, Trade Union control in the field of labor protection on a volun- tary basis is carried out by 2,713 authorized persons. The obligatory participation of authorized persons of the Trade Union for labor protection in administrative and pub- lic multistage control is reflected in the Regulation on the Industrial Safety and Labor Protection Management Sys- tem in PJSC TATNEFT. PROTECTION OF THE TRADE UNION MEMBERS RIGHTS FOR THE SAFE WORK One of the main directions in the work of the Trade Union Organization of PJSC TATNEFT is the protection of workers’ rights to work in conditions that meet the requirements of safety and hygiene; as well as public control over compliance with labor protection legislation. This joint work is carried out on the basis of collective agree- ments, on the principles of social partnership between the administrations of PJSC TATNEFT and its subsidiaries and other enterprises on the one hand and representatives of employees - the Trade Union Committees of PJSC TATNEFT and the enterprises of the Tatneft Group, the technical labor inspectorate and the authorized Trade Union for labor protec- tion on the other hand. At conferences and meetings of labor collectives, on the basis of the results of work for 2016, the implementation of collec- tive bargaining agreements, including the obligations of labor protection agreements, was accepted by the administrator and the Trade Union Committee. To finance the activities to improve the conditions and safety of labor, the employer sent: PJSC TATNEFT Subsidiaries Total, thousand Rubles. per one employee, thousand Rubles 612,789 568,131 29.3 27.2 LEGAL PROTECTION OF TRADE UNION MEMBERS WORK WITH YOUNG MEMBERS OF THE TRADE UNION In 2016 legal work was continued, aimed at protecting rights, legal assistance and protection of union members. Based on the Regulations on the Legal Commission for the Protection of Trade Union Members, a commission of four persons is working. In the reporting year, the Commission conducted scheduled inspections in terms of compliance with the working hours schedule, the provision of annual paid holidays, payment for overtime work, on weekends, non-working holidays in the oil and gas production depart- ment of Elkhovneft, Tatneftegazpererabotka, OOO “UK Sis- tema-Service”(in July); in JSC “Ta- togolgaz”, OOO “UPTZh for PPD”, FKU “2 OFPS of the GPS for RT” (in September). Nine inspections were carried out according to address- es of members of labor union at the Bugulma mechanical plant, in OOO Aznakayevsk Department of Technological Transport, OOO UK Tatneft Neftekhim, OOO Ta-gras-Neft- egazstroy, TatNIPIneft institute, NGDU “Aznakayevskneft”, the Aznakayevsk enterprise of drilling operations, OOO UK Tatburneft, management of Tatneftegazpererabotk. Accord- ing to the annual schedule”the exit legal reception” works, in 2016 92 persons are accepted: in YYelabuga (NGDU “Pri- kamneft”, OOO P-D Tatneft-Alabuga Steklovolokno, OOO Tatneft-Presskompozit), in Bugulma (OOO TNG Group, In- stitute TatNIPIneft, OOO Tatneftedor). Issues that the mem- bers of the Trade Union addressed were related to improv- ing working conditions, indexation of the salary, payment of utilities and others. Work with letters and addresses of members of labor union was continued except activity of a legal reception. The joint work with PJSC “Tatneft” on appeals of employees to the “hot line” was continued. During the reporting period Trust line also continued to work. 265 complaints and other ap- peals were considered, 217 complaints were found to be jus- tified and satisfied. Legal assistance was provided in the development of collec- tive agreements. An examination of Collective Agreements and local normative acts was carried out. Trade Union Mem- bers receive free legal advice not only on labor, but also on family, housing issues. The constant practical help was pro- vided to primary Trade Union Organizations in the solution of legal questions. Trade Union Committees of primary Trade Union Organizations pay special attention to working with young members of the Trade Union. The commission on work with youth works effec- tively. The Trade Union Committee of PJSC TATNEFT sends funds from the employer to organize cultural, sports, health and other collective activities with young workers. A section dedicated to the young employees of the company is highlighted in the Collective. All youth leaders are members of Trade Union Committees of enterprises. Representatives of the youth organizations of enterprises take part in the development of the Collective Agreement. Young trade unionists actively and successfully participate in all competitive and educational events of the Federation of Trade Unions of the Republic of Tatarstan and the Neftegazstroyprof- soyuz of Russia. In September, 2016 in Alushta, the Republic of Crimea youth leaders of PJSC TATNEFT have participated in the traditional youth meeting organized by NGSP of Russia. Much attention is paid to military patriotic education. So with as- sistance of Trade Union Committee in 2016 “A Сourage Тrack” activity was held for the first time. Competitions have taken place dynamically, in fascinating fight and have allowed all par- ticipants to check themselves and the team. Thanks to joint support of Administration and Trade Union Or- ganization finalists of “Tatneft” KVN League KVN could play on one stage with Champions of the Highest KVN League the SOYUZ team. Young trade unionists actively and successfully participate in all competitive and educational events of the Federation of Trade Unions of the Republic of Tatarstan. In 2016, creative youth of the Company’s enterprises took part in the IV Republican TV Festival of Creativity of Working Youth “Our Time - Beznen Za- man”, according to which young members of the trade union won a number of prizes in various nominations. In December, 2016 “The development strategy of the Youth or- ganization for 2017-2021” was considered and approved at the 17th conference of young employees of the company 258 259 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY CHARITABLE ACTIVITIES «ODARENNYE DETI» (“GIFTED CHILDREN”) FOUNDATION “MILOSERDIE” (“MERCY”) CHARITY FOUNDATION In 2016 the charitable foundation funds were sent to sup- port participants in various scientific forums: conferences, subject and inter-subject Olympiads, master classes in academic subjects. The Foundation provided support to 14 participants of the International Test-Rating Olympiad for Schoolchildren in Physics and Mathematics - 3 team and 8 personal prizes, 10 participants of the Summer Academy of Young Geologists under the “Step into the Future” program – 4 awards, 47 participants of the Republican Conference of the Lobachevsky KFU - 12 prizes. Four times team of young geologists from Almetyevsk and Nizhnekamsk traveled to the Olympiads and conferences on Geology, as a result they took the 2nd and the 1st places respectively in the Republi- can Geological Field Olympiad in August 2016. The fund winners were held in the city of Bavly, 180 school- children and their mentors took part. The XIII regional sci- entific and practical conference “Schoolchildren for the sci- ence of the 21st century” was held with the participation of 300 scientific and research works, of which 104 experts were admitted to the report in 11 sections, 38 reports were noted and 43 students were awarded. The winter school for the preparation of candidates for na- tional teams for the national round of the All-Russian Sub- ject Olympiad of schoolchildren in mathematics and physics covered 40 pupils. The scholarship was paid to 5 gifted schoolchildren from low-income families. More than 200 students and 150 mentors were encouraged on rallies of the prize-winners of the All-Russian subject Ol- ympiad of schoolchildren in the municipal districts covered by the fund. “Mercy” Charity Foundation was created in 1999. The objec- tives of the fund: support for education, education, science, culture, health, sports, social support for low-income seg- ments of the population. The Fund carries out its activities in all regions of the Repub- lic of Tatarstan and abroad. The appearance of the settle- ments and cities of the Republic is changing with the support of the Foundation. The great help is rendered by the fund for the development of sport, especially children’s hockey, the construction of new hockey grounds in all areas of the southeast of the republic. The “Mercy” Charity Foundation supports work of “Rukhi- yat” and “Gifted Children” Foundations. The Foundation constantly provides assistance to children from low-income families, identifies gifted children and directs them to various Republican, Russian and International competitions and ol- ympiads, where children adequately represent the Republic of Tatarstan. Much attention is paid to preservation and support of reli- gious institutions. Recipients of the charitable help of fund are various public organizations and outside the Republic of Tatarstan. The “Mercy” Charity Foundation renders all-round assistance to the Ministry of Internal Affairs of the Republic of Tatarstan. The Foundation pays special attention to labor veterans of PJSC TATNEFT. The “Mercy” Charity Foundation allocates significant funds for the economic support of people who gave their strength and youth to the formation of the oil industry of the republic. This is a purposeful and thoughtful policy of the company, aimed at improving the living standards of veteran - oilmen. “Mercy” together with the Trade Union of TATNEFT takes part in the organization of rest and treatment of veterans of labor in sanatoriums, where for them here, apart from high- quality leisure, there are performances of professional and amateur artists and creative teams. There are other types of material assistance to veterans. FOUNDATION FOR SPIRITUAL REVIVAL “RUKHIYAT” («SPIRITUALITY») The Foundation for Spiritual Revival “Rukhiyat” was estab- lished by PJSC TATNEFT in 1997 with the aim of activating of the spiritual revival and cultural life of the oil region of the Republic of Tatarstan; identification and support of talented children of the oil region of the Republic of Tatarstan, organi- zation of cultural and educational work, etc. One of the projects of the Foundation is the Children’s Crea- tivity Festival “Land of the Singing Nightingale”, which has been held since 1998. About 50 thousand children from 21 settlements of the oil region of the Republic of Tatarstan took part in it. The festival provides for about 20 nominations, an- nually the foundation organizes a contest program in 7-9 nominations, alternating and conducting some of them once in 2-3 years. When forming the jury members, the foundation cooperates with the Kazan State Conservatory named after N. Zhiganov, the Kazan State Institute of Culture and Arts, the Union of Writers, Artists and Composers of the Repub- lic of Tatarstan, the Creative School “Master Class” of the Banking Group “Zenith” (Moscow), the musical colleges of Almetyevsk and Nizhnekamsk, the Almetyevsk Picture Gal- lery named after G. Stefanovsky. Gala concerts are organ- ized in Almetyevsk and Kazan. The number of participants is from 350 to 500 people. The scholarship for the graduates of the festival “Land of the Singing Nightingale” is awarded from 2011 to encourage the winners of the festival, who decided to continue their studies in higher or secondary educational institutions of the artis- tic and aesthetic direction. The size of the scholarship is 12 thousand rubles. To encourage the members of the Writers’ Union of the Re- public of Tatarstan who gained recognition in the field of lit- erary creativity, the Tatneft Company established a literary prize named after the well-known Tatar poetess Sazhida Suleymanova within the framework of the Foundation’s ac- tivities. Annually it is awarded to 6 writers and poets. Ten students engaged in literary creativity traditionally become scholars of this award. To support writers and artists of the oil region of the Republic of Tatarstan, the Foundation also holds competitions, such as “Literary debut” among novice writers, which resulted in the publication of the collection “Yash Dulkyn - A New Lit- erary Wave”, a competition of fine artists, together with the Union of Artists of the Republic of Tatarstan, Almetyevsk Pic- ture Gallery and the Creative School “Master Class” of the Banking Group “ Zenith”. As a result, an album-catalog was released. For 20 years, the foundation is very active in publishing ac- tivities. About 200 books with a total circulation of about 350 thousand copies were issued. Among them - scientific bib- liographic publications, works of recognized Tatar poets and writers, works by young authors, etc. The books published by the Foundation are donated to the republican libraries, educational institutions, museums, orphanages, nursing homes, as well as to the regions of Russia to places of com- pact residence of Tatars. Annually there are presentations of books with the partici- pation of authors and editors of books, the Union of Writers of the Republic of Tatarstan, creative clerisy, university stu- dents. In November 2016, together with the Vladimir Spivakov Inter- national Charity Foundation, a cultural and educational pro- ject was implemented, “The Academy of the Vladimir Spiva- kov Foundation, Children for the Children. Tatarstan”. Within the framework of the project, there were “master classes” of famous Russian and foreign musicians, choreographers and artists for children and teachers of small towns in the oil region of Tatarstan, as well as concerts with the participation of scholarship holders of the funds and the best children’s creative teams in the oil region of the Republic of Tatarstan. The charity project, master classes were organized at the expense of the Grant of the President of the Russian Federa- tion and PJSC TATNEFT. The Foundation actively cooperates with Ministries of Cul- ture and Education of Tatarstan, the Union of Writers, Artists, Composers and representatives of the creative clerisy of the Republic of Tatarstan, the Russian Federation and others. 260 261 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS’ REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY INDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY 262 1.2 billion rubles invested in fixed capital to protect environment and use natural resources efficiently in 2016. 263 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYHEALTH, SAFETY AND ENVIRONMENT POLICY OF THE COMPANY The Company carries out the environmental safety activi- ties in compliance with the federal laws and environmental rules and regulations, taking into account the requirements of the international instruments and according to the Health, Safety and Environment Policy of the Company. The Fundamental Principles of the PJSC TATNEFT Health, Safety and Environment Policy are as follows: working conditions and healthy environment; • recognizing the constitutional right of people to safe • industrial and environmental safety priority as an integral • energy saving and rational use of natural resources dur- • managerial and investment decision-making based on ing oil production operations; part of national security; multi-optional scenarios, taking into account the indus- trial and environmental safety priorities; • giving priority to preventive measures over response ac- tions to eliminate negative environmental impacts. Realization of the health, safety and environment goals pro- vides for the Company to accomplish the following objec- tives: • ensuring safe working conditions, protecting health of workers and people living in the areas of the Company’s operations; mental impact standards • compliance with the established permissible environ- • improving industrial and environmental safety of hazard- • mitigating manmade impact on the ecosystem in the ous production facilities; area of its operations by implementing new technolo- gies, equipment, materials, upgrading process control automation level rational use of natural resources • and minimization of oil and gas losses • increasing industrial and environmental safety of hazard- • Eliminating unjustified wastes generated in technological ous production facilities. processes of oil production and related operations with environmentally safe handling of wastes and their maxi- mum use as a secondary raw material; The Company makes the following commitments: • ensure compliance with current legislation, industrial, corporate and local regulations governing the Compa- ny’s health, safety and environment activities as well as other related external requirements the Company has committed to be met; • identify and assess industrial hazards and risks, work out measures to manage and mitigate significant operation- al risks; pollutions; es during its operations; • identify and eliminate occupational hazards at workplac- • take all possible measures to prevent the environment • carry out a set of preventive measures to prevent a possi- bility of emergency situations, and should it happen take measures to mitigate the emergency situation impact on the environment; cupational diseases; • carry out a set of measures to prevent injuries and oc- • provide health, safety and environment training and skill • require that the contractors carrying out work at produc- development of the Company’s personnel; tion facilities of the Company comply with the health, safety and environment requirements existing in PJSC TATNEFT; holders in health, safety and environment activities; • maintain an open dialogue with all the Company’s stake- • attain and continuously improve the Company’s health, • maintain and continuously improve the Integrated Health, • ensure compliance with the Integrated Management Safety And Environment Management System; safety and environment performance results; System to international occupational health and safety standards OHSAS 18001: 2007 and the environmental guidelines ISO 14001:2004; • report to the public on the Company’s health, safety and environment activities. PRODUCTION SAFETY SYSTEM The Company provides the measures for industrial safety, occupational health and prevention of industrial injuries and occupational diseases in compliance with its internal documents: “Production Safety System”, “Industrial Safety Management System Regulations” and “Regulations on in- dustrial control over compliance with the industrial safety requirements of industrial at hazardous industrial facilities”, which establish a unified procedure for the implementation of management of industrial, fire, electric power, radiation safety, occupational health and production control in all structural divisions and subsidiaries of PJSC TATNEFT. There are standing commissions operating on an ongoing basis such as the occupational health and safety commis- sion, the production control commission, the fire and techni- cal commission and the internal audit team of the integrated management system. The working schedules of standing commissions and the schedule of individual industrial safety and occupational health inspections at the Company’s facili- ties are fulfilled. DYNAMICS OF OCCUPATIONAL HEALTH EXPENDITURE, MLN RUBLES 2016 2015 2014 612.7 +28.2% 478.1 365.8 DYNAMICS OF OCCUPATIONAL HEALTH EXPENDITURE PER WORKER, THOUS RUBLES. 2016 2015 2014 29.3 +26.3% 23.2 17.8 DYNAMICS OF INDUSTRIAL INJURIES FOR 2014 TO 2016 2016 2015 2014 3 0.14 2 0.1 6 0.3 In order to comply with the requirements of the international standard OHSAS 18001 the Company developed the Health, Safety and Environment Program to prevent injuries, reduce risks and accidents, and contingent losses for 2016 through 2018. In 2016, 4.98 billion rubles were spent to realize the Program. Year Number of accidents Incl. fatal accidents Fr. rate* 2014 2015 2016 2 6 3 0 0 0 0.1 0.3 0.14 * Fr. Rate (frequency rate – number of injured per 1000 employees) In 2016, 121 mln rubles were assigned to implement fire safety measures. Over the period of 2014 through 2016 no fire had been registered in the PJSC TATNEFT’s structural divisions. More than 600 million rubles were spent to carry out the measures provided for by occupational health agreements in the structural divisions of PJSC TATNEFT. The average cost per employee amounted to 29 321 rubles. In 2016, no manmade accident was allowed to happen that might cause any environmental damage within the operating area of the Company. 264 265 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYENVIRONMENTAL MANAGEMENT SYSTEM • Ecological strategy of the Company up to 2020 and the fourth in succession the comprehensive and large scale Environmental Program for the period of 2016 through 2020 were approved in 2016. • Certified in 2006, the PJSC TATNEFT Integrated Health, Safety and Environment Management System (IHSE MS) successfully passed in 2016 through the re-certification audit for compliance with the international standards ISO 14001:2004 and OHSAS 18001:2007. The audit was per- formed by JSC Bureau Veritas Certification Russia. Pursuant to the standard ISO 14001:2004 the PJSC TAT- NEFT’s Environmental Management System has been certi- fied for compliance with, the Company uses a methodology of “sequential procedures” that provides for subsequent ac- tions to be taken based on the data obtained according to the previous level results. INDUSTRIAL ENVIRONMENTAL MONITORING The PJSC TATNEFT industrial environmental monitoring (IEM) system is implemented in the following areas: • taking measurements and samples related to the envi- • maintenance of databases of sources of environmental ronment protection; impact and environmental setting, processing and anal- ysis of data obtained; mental requirements; • determination of impact source conformity with environ- • analysis and forecast of the environment conditions in • development of the industrial environmental monitoring the region; system in new operating areas. The industrial environmental monitoring system provides the following types of monitoring: • monitoring of sources of environmental impact (emis- • monitoring of condition of the environment components sions and discharges of pollutants and waste waters); (air, surface and underground waters, lands and soils, geological environment); • two-level supervisory control of compliance with envi- ronmental legislation. ENVIRONMENTAL SECURITY MEASURES In 2016, the Company continued its dedicated work on a consistent basis to improve environmental safety of oil pro- duction processes. The Company is particularly focused on the environmental activities to reduce harmful emissions into the atmosphere, discharges of pollutants into groundwater and surface water, soil and subsoil as well as to ensure com- pliance with the established norms of permissible impact on the environment. Primarily, all these are ensured by main- taining the technical condition of the oil-field equipment at the appropriate level and implementing advanced and in- novative environmental technologies as well as through the activities, such as: • Implementation of the technology to capture light hydro- carbon fractions released from storage tank equipment (vapor recovery units); unit; • Reducing flared associated gas volumes; • Associated petroleum gas cleaning at desulphurization • Repair and replacement of tanks and other storage tank equipment and anti-corrosive coating application and equipping with electrochemical protection means; lines; systems; collection and disposal of wastes; tion of technological process and product streams; • Overhaul and replacement of commercial oil and gas pipe- • Reconstruction of oil treatment facilities with the optimiza- • Construction of storm water drain at industrial facilities for • Mud pit lining and equipping rigs with waterproof circulating • Overhaul and replacement of oil pipelines and their sacrifi- • Equipping well servicing and workover crews with special • Monitoring production casings of wells for integrity and • Sealing of production casings, bringing top of cement to • Running in additional (intermediate) casings; • Increase lifetime of downhole equipment using protective surface behind surface and production casings; equipment to prevent fluid spills; cial and inhibitory protection; behind-casing cross-flows; coatings, M1-X packers, sacrificial protection, corrosion in- hibitors and cathodic protection of casing wells. ATMOSPHERIC AIR PROTECTION AND MONITORING The gas pipeline corrosion control works were performed such as introduction of active electrochemical protection, delivery of corrosion inhibitors, use of corrosion-resistant tubular to replace gas pipelines as well as major repair (re- placement) of worn out sections. For the purpose of sustainable use of associated petroleum gas (APG), compliance with the established standards of maximum permissible emissions (MPE) of pollutants into the air, further reduction of pollutant emissions into the atmos- phere and reduction of greenhouse gas emissions in 2016: • major repairs were accomplished for 16.34 km of gas • reconstruction (replacement) of flare facilities of NGDU pipelines with 122 807 thous. rubles of the total costs; Almetyevneft, NGDU Bavlyneft, NGDU Jalilneft was completed which will provide soot-free combustion. The investments totaled more than 12 635 thous. rubles in 2016; oil heating furnaces with waste-heat exchang- ers were commissioned at the Kama-Ismagilovky Sour Crude Oil Treatment Facility of NGDU Leninogorskneft. The investments had totaled more than 65 607 thous. Rubles since the project beginning in 2013. • Construction of the gas gathering system of Tatneft- egazpererabotka Division (UTNGP) from NGDU Yamash- neft and NGDU Elkhovneft continued. Since the project beginning in 2015 the investments totaled more than 28 676 thous. rubles, including more than 4 231 thous. ru- bles in 2016 • And other works. To ensure compliance with the requirements for establishing the maximum permissible emission limits and meeting the requirements for granting the emission permits, the recon- struction of the booster pumping station DNS-2 “Vishnevaia Poliana” and the Sour Crude Oil Treatment Facility UPVSN-2 “Kutema” continued at NGDU Nurlatneft in 2016. Since the project beginning in 2015 the investments totaled 119 732 thous. rubles including 104 876 thous. rubles in 2016. Thanks to the focused efforts made out to reduce the as- sociated petroleum gas (APG) flaring at the flare facilities, in 2016 the APG utilization efficiency was 96.44% across PJSC TATNEFT. This made it possible to reduce harmful emissions of pollutants and greenhouse gases from APG combustion and dispersion. The total costs for implementation of APG utilization projects for the period from 2008 to 2016 amount- ed to more than 4.6 bln rubles. Application of light hydrocarbon fraction capture technology (vapour recovery units) helped reduce the carbon emissions by more than 3.5 times as compared with the emissions in 1991. Currently, the PJSC TATNEFT’s facilities operate 44 vapor recovery units. As a result of the air protection measures implemented in the Company for the period from 1990 to 2016 the total emis- sions of pollutants into the air from stationary sources be- came three times less. In 2016, PJSC TATNEFT produced 978 471 thous m3 of APG (2015 – 946 941 thous m3), gathered and utilized 941 242 thous m3 (2015 - 899 538 thous m3), flared 37 229 thous m3, including 2 357 thous m3 due to the UTNGP’s lifting and hoisting equipment scheduled preventive maintenance (2015 – 47 403 thous m3, incl. 1 651 thous m3 due to the UTNGP’s lifting and hoisting equipment scheduled preven- tive maintenance). In order to monitor compliance with the sanitary norms and regulations for air protection in the populated areas, as well as part of substantiation (defining) of the sanitary buffer zone sizes the atmospheric air was monitored in the human settlements located within the area of the Company’s op- erations and sanitary buffer zones of the production facili- ties. There were 416 monitoring points. During the activities, 6 396 measurements of physical factors were taken and 15 173 analyses were performed to determine the current state of the atmospheric air. The air basin was analyzed for 33 in- gredients (hydrocarbons, hydrogen sulfide, nitrogen diox- ide, carbon monoxide, etc.) with simultaneous meteorologi- cal observations by measuring a wind speed and direction, temperature and relative humidity. GROSS HARMFUL EMISSIONS, THOUS TONNES 2016 2015 2014 81.3 83.9 92.3 -3.1% SPECIFIC EMISSIONS PER TONNE OF OIL PRODUCTION, KG 2016 2015 2014 2.869 3.115 -7.9% 3.520 266 267 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYWATER CONSERVATION AND SUSTAINABLE USE, SUBSURFACE PROTECTION. In 2016, a considerable amount of efforts was made to im- prove reliability of various-application pipelines and well de- signs. To ensure a leak-free operation of oilfield facilities the Company applies the technologies to: ing and paint coating application; • protect the pipes against corrosion by polyethylene lin- • manufacture pipes in corrosion-resistant versions; • construct pipelines with effective internal and external insulation and welding joint protection. The following water resources conservation and their ration- al management activities were going on: • Reconstruction of the circulating water supply system 7/8 of the Tatneftegaspererabotka (UTNGP) plant. The investments since the beginning of the project in 2015 totaled to more than 28 279 thous rubles including more than 26 979 thous rubles in 2016; • construction of modular sewage treatment units for the circulation water supply system of the UTNGP’s gas pro- cessing facilities. Since the project start in 2006, the in- vestments totaled 178 709 thous rubles, incl. more than 34 994 thous rubles in 2016; • Overhaul of hydraulic engineering works and special foun- dations of NGDU Prikamneft. The total costs since the be- ginning of the project in 2013 were more than 696 780 thous rubles, including. 175 948 thous rubles in 2016. In 2016, to ensure stable and smooth operation of the pro- duction facilities while improving their industrial and environ- mental safety the Company manufactured 785 km of corro- sion-resistant pipes (MPT, TPC). Cathodic protection was applied to 582 well casings; 21 662.5 km of pipelines were furnished with electrochemical protection. The diagnostic tests amounted to 2 546.6 km of pipelines. In order to pro- tect the oilfield equipment and pipelines against corrosion the Company tested and adapted dozens of chemical rea- gent brands. Currently, only high efficient and technological- ly sound corrosion inhibitors are used based on the recent unification results. The high-efficient corrosion inhibitors in the quantity of 5 380 tonnes were used in 2016. The inner surfaces of 57 process tanks (vertical stainless steel tanks and horizontal flow settling tanks) were lined with anticorrosion coating at the crude oil gathering and treat- ment facilities of the oil and gas field operating divisions. 50 vertical steel tanks were repaired. Diagnostic tests were run in 545 bullet tanks and 60 vertical steel tanks. There is a network of local observation points to monitor water bodies in place within PJSC TATNEFT license areas. In 2016, the observation system consisted of 1 975 sampling points includ- ing 495 observation points to monitor surface water bodies and 1 480 observation points for underground water bodies. Industrial environmental monitoring of water bodies is carried out by 12 chemical analytical laboratories owned by the struc- tural units of the Company, as well as the laboratories of other organizations: OOO UPTZH dlya PPD, the Federal State-Fund- ed Healthcare Institution “Hygienic and Epidemiological Center in the Republic of Tatarstan”, the Federal Budgetary Institution branches of the Centre of Laboratory Analysis and Techni- cal Metrology for the Volga Federal District. Water analysis is conducted to check the following parameters that are typi- cally influenced by oil production: chloride ion, sulfate ion, total hardness, hydrocarbonates, pH, calcium, anionic surfactants (surfactant), and crude oil and petroleum products in dissolved and emulsified state. In the course of industrial control of environmental protection, totally in 2016, the Company carried out 110 thousand analy- ses of natural water, including 10 672 chemical analyses of water samples that were run by the OOO UPTZH dlya PPD’s chemical-analytical laboratory. Based on the results of labora- tory studies the water quality in major rivers within the area of the Company’s operations was stable in 2016. The content of chlorides, crude oil and oil products in dissolved and emulsified state in the major rivers and in the vast majority of the springs did not exceed maximum permissible concentrations (MPC) of harmful substances. Now the concentrations of these harmful substances are steadily lowering in the groundwater. In 2016, for twenty-first consecutive time since 1995 PJSC TAT- NEFT had organized and held annual contest “maintaining beauty of landscaped spring sites and improving water quality”. CONSERVATION AND SUSTAINABLE USE OF LAND AND FOREST RESOURCES PJCS TATNEFT addresses the issues regarding sustainable use of land resources and soil pollution prevention with the utmost care. The land protection measures provide for using modular build rigs equipped with tank circulation systems with three- stage mud cleaning systems. This helps prevent liquid spill- age on the land surface and eliminate construction of earth pits as well as provides reliable protection of fertile lands on well-site area against contamination from drilling fluids and formation waters. In 2016, 1 606 hectares of land were reclaimed during the construction of pipelines and other oil facilities. In order to create a favourable environment within its oper- ating area and higher greenhouse gas absorption, starting from 2000, PJSC TATNEFT has been realizing special activity programs for planting of greenery in by-road lanes along highways and oilfield roads in the oil producing regions of Tatarstan. TATNEFT’s personnel had planted over 472 thou- sand seedlings of trees and shrubs including 15 023 seed- lings in 2016. During the year under report, the extensive work was carried out to reduce the agricultural land allotment for construction of oil facilities and restore the fertility of the disturbed land, which became possible due to pad drilling and well pad con- struction techniques. In order to protect the land, surface and underground waters 162.2 km of oil pipelines for the oil gathering and treatment system and 110.9 km of water lines for the reservoir pres- sure maintenance system were overhauled using corrosion- resistant pipes. In order to ensure conservation of subsoil and fresh ground- water resources the Company continued installation of high- ly reliable packers and corrosion-resistant tubings. In 2016, packers of various designs were run and set in 7149 injec- tion wells which accounted for 72.8% of the active injecting well stock. The corrosion-resistant tubings were run in 267 injectors. Totally, since the beginning of installation the cor- rosion-resistant tubings were run in 7 143 wastewater and formation water injecting wells which accounted for 90.1% of this well stock, respectively. PJSC TATNEFT ensures water management in compliance with the Water Code of the Russian Federation and the Federal Law “On Subsoil”. In 2016, the use of surface water bodies was car- ried out on the basis of 121 water use agreements concluded with the Ministry of Ecology and Natural Resources of the Re- public of Tatarstan (including 61 agreements made in 2016) and 7 resolutions on assignment for use of surface water bod- ies. In 2015, PJSC TATNEFT performed the underground water abstraction operations on the basis of 44 subsoil use licenses. Thanks to implementing a variety of EORs and water sustain- able use technologies, the quarterly amount of fresh water intake for reservoir pressure maintenance (RPM) for the pe- riod from 2000 to 2016 had decreased by 10.7 mln m3 (1.3 times). Moreover, 100% produced water during oil produc- tion and oil treatment operations was injected back into res- ervoir. The volume of water utilized in 2016 for PJSC TATNEFT’s own needs amounted to 36.875 mln m3, including fresh water in quantity of 36.357 mln m3. In 2016, the specific amount of fresh water consumption per tonne of crude oil production amounted to 1.283 m3 (2013 – 1.077 m3, 2014 – 1.078 m3, 2015 – 1.061). The higher water consumption is explained by the increased well drilling and completion, increased oil production and treatment, incl. increased sour crude oil treatment (UPVSN NGDU Yamashneft), increased product outputs (BMZ), commissioning of social facilities (NGDU Bavlyneft). In 2016, the specific amount of polluted waste water dis- charged into surface water bodies per tonne of oil produc- tion amounted to less than 0.0037 m3 (2013 – less than 0.005 m3, 2014 – less than 0.004 m3, 2015 – 0.0035 m3). 268 269 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYPRODUCTION AND CONSUMPTION WASTE HANDLING ACTIVITIES OIL SPILL EMERGENCY PREVENTION AND RESPONSE SYSTEM One of the PJSC TATNEFT environmental priority is to reduce the man-induced impact on the environment through selec- tive accumulation, collection and disposal of wastes gener- ated in oil production processes. The Company established a complex system to collect and recycle production and consumption wastes. Moreover, the wastes are used as a raw material for producing marketable products. In 2016, PJSC TATNEFT carried out the hazardous waste handling activities based on the license to carry out activities for waste detoxification and disposal of I-IV classes of dan- ger No. 16-00125 dated 27.06.2014a issued by the Federal Service for Supervision over Natural Resources Manage- ment (Rosprirodnadzor). TOTAL GENERATED PRODUCTION AND CONSUMPTION WASTES, THOUS TONNES 2016 2015 2014 50.2 61.2 -18.0% 75.3 SPECIFIC GENERATED WASTE VOLUME PER TONNE OF CRUDE OIL PRODUCTION 2016 2015 2014 1.772 2.273 -22.0% 2.873 The system of prevention and response to emergency situ- ations (ES) due to oil spills and protection of people and the environment from their harmful impact is implemented in PJSC TATNEFT in two focus areas: complex of engineering and organizational measures, which are aimed at enhancing production equipment reliability, timely oil spill detection and minimizing resulting damages as well as a set of measures to immediately respond to this type of emergency. Pursuant to the RF Government Regulations No. 613 from 21.08.2000 “On urgent measures to prevent and eliminate of oil spills and petroleum products” and No. 240 dated 15.04.2002 “On procedure for organizing measures to pre- vent and eliminate oil and petroleum products spills in the Russian Federation”, the “Oil spills prevention and response plans” were developed at the PJSC TATNEFT’s structural units in accordance with the established procedure, which were approved by the Emergency Ministry of the Russian Federation. The plans include the calculations of the num- ber of workforces and facilities required to eliminate an oil spill. The contents of the Plans meet the requirements of the regulatory legal documents. The irreducible material stocks were secured including for elimination of oil spills in water bodies, there were available 900 meters of booms, 15 skimmers and 10 tonnes of sorbent. The contracts were concluded with professional rescue teams of the Chief Directorate of the MES of Russia for the Republic of Tatarstan and FSI ERT “Northeast militarized well control unit.” for the purpose of prevention and elimina- tion of emergency situations related to oil spills. The training classes and drill exercises were conducted with regard to elimination of possible oil petroleum products spills. Good working conditions are maintained for 526 stationary oil recovery facilities, booms and bio-pond to prevent oil pollution of surface water bodies (rivers) and water basins (reservoirs). ENVIRONMENTAL CULTURE PROMOTION AND ENVIRONMENTALISTS TRAINING AND DEVELOPMENT FUNDS COMMITTED TO ENSURE ECOLOGICAL SAFETY AND ENVIRONMENTAL PROTECTION In 2016, eighty four (84) employees of PJSC TATNEFT’s divisions were trained in a 112-hour program “Professional training of persons to have permit for hazardous waste man- agement” to ensure environmentally sound management of waste production and consumption. Seventy-two (72) em- ployees of the Company were trained in 72-hour program “Ensuring environmental safety by managers and special- ists of general business management systems”. Two (2) employees completed to the training program “Ensuring environmental safety by managers and specialists of envi- ronmental services and environmental control systems”. In addition, 53 managers and leading specialists of the health, safety and environmental services of the PJSC TATNEFT’s divisions were trained in the program “Internal Auditor of the integrated health, safety and environment management system. Standard ISO 14001: 2015”. Altogether, 1 413 000 rubles were spent to the training programs. In accordance with PJSC TATNEFT’s commitment to maintain an open dialogue with all stakeholders with regard to the Com- pany’s environmental activities the bulk information is made available to the public by wide media coverage including print and electronic media of topical articles, stories, press releases and other materials. Environmental initiatives of the enterprises are hot topics at panel discussions with participation of part- ners, experts, local communities and mass media. Active infor- mation support for environmental projects is provided through print media, internet resources and TV. The technological processes, the nature protection round tables, seminars of chief engineers, environmental actions, articles on audit and certification of the integrated HSE man- agement system are covered in an easy-to-understand form in mass media along with the performance assessments of the experts dealing with the environmental risks in the Company. PJSC TATNEFT’s total investments in environmental safety activities by all sources of funding (opex and capex) in 2016 amounted to 7 269.149 mln. rubles including the investments assigned for environmental protection and rational use of natural resources in the amount of 1 196.477 million rubles. The specific amount of funds allocated by the Company to ensure ecological security and environmental protection per tonne of crude oil production amounted to 246 rubles (2011– 208 rubles, 2012 – 230 rubles, 2013 – 246 rubles, 2014 – 238 rubles). The results of large-scale environmental measures showed that in 2016 in the area of PJSC TATNEFT’s opera- tions the level of man-induced impact on the environment did not exceed the self-regeneration potential of the ecosys- tems. That was evidenced by lower concentration of pollut- ants in the air and underground and surface water sources. PUBLIC RECOGNITION In 2016, the results were summarized with regard to PJSC TATNEFT’s participation in the federal and republican contests where the Company successfully positioned its achievements in ensuring environmental safety at its oil pro- duction facilities: • As part of celebration of the June 5th Day of Environ- mentalist, the Non-governmental Environmental Fund named after V.I. Vernadsky awarded PJSC TATNEFT with a diploma “For active participation in All-Russian Ecologi- cal Saturday Work “Green Spring-2016” for outstanding contribution to the environment improvement and envi- ronmental education” as well as commemorative prize “Green Spring-2016”. • Based on the results of the sanitary and ecological two month’s urban area cleaning campaign in the Republic of Tatarstan, PJSC TATNEFT was awarded by the Ministry of Ecology and Natural Resources of the Republic of Tatar- stan with the Diploma Of Honor of the “EKOVESNA 2016” competition winner in the nomination “ECOCOMPANY” of the Almetyevsk municipal district; • For the 13th time in a row, PJSC TATNEFT was recognized as the absolute “ECOleader” in the Republic of Tatarstan. 270 271 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICY PJSC TATNEFT ENVIRONMENTAL, SAFETY AND SUSTAINABLE NATURE MANAGEMENT PERFORMANCE FOR 2015-2016 No. Performance Indicators 1 1 2 2 Production output Hydrocarbon production – crude oil Gross harmful emissions, total including: solid substances of which: furnace bottom ash gases and liquids of which: sulphur dioxide carbon oxide nitrogen oxide (on conversion to NO2) hydrocarbons (without volatile organic compounds) volatile organic compounds benz(a)pyrene 3 Harmful substance captured and neutralized, total including: solid substances of which: furnace bottom ash gases and liquids of which: sulphur dioxide carbon oxide 4 5 6 7 8 9 10 nitrogen oxide (on conversion to NO2) hydrocarbons (without volatile organic compounds) volatile organic compounds benz(a)pyrene Associated petroleum gas production Associated petroleum gas use (utilization) Associated petroleum gas utilization rate* Associated petroleum gas flared Including due to scheduled maintenance of lifting equipment withdrawal and production of clean water for company’s own needs, total including: surface sources subsurface sources other sources Waste water received from third parties Clean water consumption, total including for: household and drinking needs production needs other (injection for reservoir pressure maintenance) *as per the Russian Federation Government Resolution No. 1148 of 08.11.2012 272 Unit 3 Report 2014 4 2015 5 tonnes tonnes 26926971 83868.674 28332674 81274.716 tonnes 1246.623 866.381 tonnes tonnes tonnes tonnes tonnes tonnes tonnes tonnes tonnes 82622.051 80408.335 9474.642 12749.562 1407.619 10258.428 48349.728 0.003 157.378 7831.484 9641.82 1389.957 11166.128 49947.481 0.005 144.082 tonnes 157.378 144.082 tonnes tonnes tonnes tonnes tonnes tonnes tonnes tonnes mln m3 mln m3 % mln m3 mln m3 thous m3 thous m3 thous m3 thous m3 thous m3 thous m3 thous m3 thous m3 thous m3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 946.941 899.538 95.17 47.403 1.651 978.471 941.242 96.44 37.229 2.357 28565.03 36357.06 1541.1 974.71 26058.87 515.6 28565.03 881.58 7867.95 19815.5 1795.02 973.11 33588.93 517.81 36357.06 844.68 14270.24 21242.14 1 11 12 2 Waste water used for reservoir pressure maintenance Water disposal in surface water bodies, total including: contaminated (without treatment) contaminated (insufficiently treated) regulatory clean water (without treatment) treated to standard quality: - on biological treatment plants - on physical-and-chemical treatment plant - on mechanical treatment plants 13 Water disposal into underground horizons, tota; including for reservoir pressure maintenance 14 15 16 Recycled water volume Sequentially reused water volume Existing wastes at year beginning, total including oil sludges (III class of hazard) at year end, total including oil sludges (III class of hazard) 17 Wastes generated during year including oil sludges (III class of hazard) 18 Wastes used, total including oil sludges (III class of hazard) 19 Waste detoxified on enterprise site, total including oil sludges (III class of hazard) 20 Wastes given to third parties, total including oil sludges (III class of hazard) 21 Disturbed land area: at year beginning at year end 22 Contaminated land area: at year beginning at year end 23 24 Remediated land area during year Number of accidents, total including with environmental implications 25 Area contaminated as a result of accidents: lands water body surfaces 26 Accidental loss quantity: oil, petroleum products natural gas 27 Process loss of hydrocarbons: oil natural gas 28 29 Environmental damage from accidents Commissioning of facilities for trapping and neutralizing harmful substances from waste gases 30 Commissioning of waste water treatment facilities 3 thous m3 thous m3 thous m3 thous m3 thous m3 thous m3 thous m3 thous m3 thous m3 thous m3 thous m3 thous m3 tonnes tonnes tonnes tonnes tonnes tonnes tonnes tonnes tonnes tonnes tonnes tonnes ha ha ha ha ha ea ea ha thous m2 tonnes m3 tonnes m3 thous rub. ths m3/h thous rub. ths m3/h thous rub. 4 515.6 94.6 5 517.81 106.08 94.6 106.08 42,14 52.46 164524.96 164524.96 91180.28 41,35 64.73 178345.1 178345.1 91185.39 143491.33 156585.15 0.8 0 0.8 0 61205.8 35274.8 6176.4 2607.8 148.5 146.1 78505.7 34488.9 261 325 0.0 0.0 1498 0 0 0 0 0 0 0.8 0 168.9 168.9 50211.0 21278.0 8045.7 116.4 0.0 0.0 79014.0 20992.7 325 439 0.0 0.0 1606 0 0 0 0 0 0 9603.9 4240.0 0 0 0 0 0 0 0 0 0.25 189 697.5 0 0 273 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYTHE CORPORATE ENVIRONMENTAL POLICY IS FOCUSED ON PREVENTING AND MITIGATING THE NEGATIVE IMPACT OF THE PRODUCTION PROCESSES ON THE ENVIRONMENT AS WELL AS ON RESTORING NATURAL ECOLOGICAL SYSTEMS, SAVING ENERGY RESOURCES, LOWERING EMISSIONS AND ENSURING ENVIRONMENTALLY SAFE WASTE HANDLING AND MANAGEMENT. THE COMPANY GIVES A HIGH PRIORITY TO DEVELOPMENT AND IMPLEMENTATION OF ENVIRONMENTALLY EFFICIENT TECHNOLOGIES ENSURING REPLACEMENT AND SUSTAINABLE USE OF NATURAL RESOURCES. The achievements of the Company in nature conservation and ecological security at production facilities were recog- nized at the “ECOleader” Competition in the Republic of Tatarstan Republic in 2016. • PJSC TATNEFT once again was designated as the Absolute Winner. • The TANECO Complex won the first place in the “Oil Producing and Petrochemical Industry” nomination category. 1 31 2 Commissioning of recycling water systems 32 Commissioning of waste neutralization and utilization 33 Equipping water intake facilities with meters to measure water volumes discharged into natural (water) bodies (total existing devices) incl. purchased and put into operation for year under report 34 Equipping water treatment facilities with meters to measure water volumes discharged into natural (water) bodies (total existing devices) incl. purchased and put into operation for year under report 35 Maintenance of associated petroleum gas (APG) metering units 36 Charges for negative impact on including: pollutant emissions: normative excess pollutant discharges into water bodies: normative excess waste disposal: normative excess 37 38 Charges for use of water bodies (water use charge) based on water use contracts Fixed capital expenditures committed to environment protection and sustainable natural resources management: planned actual, total including: water bodies conservation air protection protection of lands from production and consumption wastes land reclamation 39 Current (operating) expenditures for environment conservation and expenditures for major repairs of fixed production assets related to environment conservation, total: including: air protection and climate change control waste water collection and treatment waste handling conservation and remediation of lands, surface and subsurface waters environment protection from noise, vibration and other types of physical effects biodiversity preservation and natural areas conservation environmental radiation protection research and development activities to mitigate human impact on the environment other environmental activities 40 beautification (planting of trees and shrubbery) 3 ths m3/h thous rub. tonnes/year thous rub. pcs. pcs. thous rub. pcs. pcs. thous rub. pcs. thous rub. тыс. руб. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. thous rub. pcs. thous rub. 4 0 0 0 0 62 5 11,2 6 0 0 460 12 595.6 198 235 102 929 4 752 98 177 86 381 86 370 11 8 925 8 920 5 5 0 0 0 0 60 2 10 3 0 0 481 5 375.9 34222 5822 5675 147 22128 22128 0 6272 6271 1 517.045 740.292 937 945.9 937 945.9 1 232 214.4 1 196 477.0 34 811.6 63 498.5 828 305.9 1 016 702.0 0.0 74 828.5 5 703 779 0.0 116 276.5 6 072 672 370 168 133 486 157 045 371 289 130 901 137 085 4 937 652 5 317 435 0 27 924 1 143 74 516 1 845 15 194 31 916 0 497 1 704 112 532 1 229 15 023 27 824 274 275 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYLIST OF ACRONYMS The Public Joint Stock Company TATNEFT named after V.D. Shashin throughout the text of the Report is referred to as PJSC TATNEFT, TATNEFT, Company, and Society. BIA AGFS (AGZS) Business Idea Auction Autogas Fueling Station ASPI (AGNI) Almetyevsk State Petroleum Institute AB Anode bed FFS (AZS) Fuel Filling Station AIS JSC Automated information System Joint Stock Company BWMB Basin Water Management Board BMZ VOIR GMPS (GZNU) Bugulma Mechanical Plant (PJSC TATNEFT's Business Unit) All-Russian Society of Inventors and Innovators Group Metering Pump Station GMS (GZU) Group Metering Station STSI (GIBDD) SCNS HS GOST Frac F&L HEI BPS CHC EU State Traffic Safety Inspectorate State Complex Nature Sanctuary Horizontal Settler National State Standard Formation Hydraulic Fracturing Fuels and Lubricants Hydraulic Engineering Installations Booster Pumping Station Children's Holiday Camp European Union UNECE United Nations Economic Commission for Europe RCT ZAO IS CIS PPD KFU CSR Reinforced concrete tank Private Joint Stock Company Information System Corporate Information System Pad Pumping Station Kazan (Volga region) Federal University Corporate Social Responsibilty MGPP Minnibaevo Gas Processing Plant Moscow Interbank Currency Exchange Moscow Interbank Currency Exchange; MICEX MPP Metal-Plastic Pipes (MTBR) Mean Time Between Repair Enhanced Oil Recovery Multiphase Pump Ministry for Emergency Situations Oil and Gas Field Operating Division (PJSC TATNEFT's Business Unit) Mineral Resource Recovery Tax Value Added Tax Nizhnekamsk All Steel Tires Plant Research and Development Oil Well Tubing Intangible assets EOR MPP MES NGDU MRRT VAT NASTP R&D Tubing ITA 276 OR & PP Refinery OPU STC PCC OOO NCA PO PDC Oil Refining and Petrochemical Plants Oil Refinery Oil Processing Unit Science and Technology Centre Petrochemical Complex Limited Liability Company Nature Conservation Area Pilot Operations Production Dual Completion P&I DC Production and Injection Dual Completion IDC DC SEZ MPC APG RPM PCP PS CD VSST RIA RUSO RT RF SVO CPS CGS Injection Dual Completion Dual Completion Special Economic Zone Maximum Permissible Concentration Associated Petroleum Gas Reservoir Pressure Maintenance Polymer Coated Pipes Power Substation Chain Drive Vertical Stainless Steel Tank Result of Intellectual Activity Regional Youth Social organization Republic of Tatarstan Russian Federation, Super Viscous Oil Cathodic Protection Station Corporate Governance Standard EDMS Electronic Document Management System TD TTD TU FEC TPP DCU MC LHVR Trading House Trade Technical House Technical Specifications Fuel and Energy Complex Thermal Power Plant Delayed Coker Unit Management Company Light Hydrocarbon Vapour Recovery HSOTF High Sulfur Oil Treatment Facility OTF IWSU Oil Treatment Facility Initial Water Separation Unit OOO UPTZH dlya PPD (PJSC TATNEFT's Subsidiary) SRU UTNGP AS-tires PTC NGL EIC ECU NPV DPI Process Fluid Treatment Facility for Reservoir Pressure Maintenance Установка сероочистки Sulphur Recovery Unit TATNEFTEGAZPERERABOTKA Division (PJSC TATNEFT's Business Unit) All-Steel Tires Personnel Training Centre Natural Gas Liquids Electrical Insulating Connection ELectronic Corporate University Net Present Value Discounted Profitability Index 277 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUABOUT COMPANYBOARD OF DIRECTORS REPORTCORPORATE MANAGEMENTFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYCONTACT INFORMATION PUBLIC JOINT STOCK COMPANY TATNEFT NAMED AFTER V.D. SHASHIN REPORT PREPARATION TEAM: ABBREVIATED NAME: PJSC TATNEFT n.a. V.D. Shashin HEAD OFFICE: 75, Lenin Street, Almetyevsk 125047, Republic of Tatarstan, Russian Federation Phone: +7 (8553) 30-75-68 REPRESENTATIVE OFFICE IN MOSCOW: 125047, Russian Federation, 17, Tverskoy Boulevard, Moscow Phone: +7 (495) 937-55-78 REPRESENTATIVE OFFICE IN KAzAN: Russian Federation, Republic of Tatarstan 71, Karl Marx Street, Kazan Phone: +7 (843) 533-83-12 FOR SHAREHOLDERS: Corporate Secretary Office Phone: +7 (8553) 37-61-01 AUDITOR OF COMPANY’S FINANCIAL STATEMENTS ACCORDING TO RUSSIAN AND INTERNATIONAL STANDARDS Joint-Stock Company “PriceWaterhouseCoopers Audit” 125047, Russian Federation, 10, Butyrskiy Val Street, Moscow Belaya Ploshchad Business Centre. Phone: +7 (495) 967-60-00 COMPANY’S REGISTRAR: OOO Euro-Asian Registrar Russian Federation, Republic of Tatarstan 10, Mira Street, Almetyevsk, 423450 Phone: +7 (8553) 22-10-88 COMPANY WEB-SITE tatneft.ru REPORT RELEASE MONTH AND YEAR: May 2017 Voskoboinikov V.A. Gaifullina R.R. Gamirov D.M. Dinmuhamedov R.S. Dorpeko N.E. Zurbashev A.V. Karpov V.A. Kurochkin D.V. Matveev O.M. Mozgovoi V.A. Mukhamadeev R.N. Pavlov R.R. Rafikov R.P. Salahov R.A. Tikhturov E.A. Khisamov R.M. Khisamov R.S. Sharagina O.A. CONCEPTION AND COORDINATION Dorpeko N.E. Khisamov R.M DESIGN AND PRINTING Design To Business | Brand Assistance 278 279 PJSC TATNEFT ANNUAL REPORT 2016www.TATNEFT.RUFINANCIAL RESULTSSOCIAL RESPONSIBILITYINDUSTRIAL SAFETY AND ENVIRONMENTAL POLICYtatneft.ru

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