PJSC Tatneft Annual Report 2019

Plain-text annual report

YEARS OF SUSTAINABLE DEVELOPMENT AS A PUBLIC COMPANY 2019 ANNUAL REPORT 1 Contents ABOUT COMPANY Company mission and values Production assets and operating areas Business-Model TATNEFT Group Main Business Divisions and Enterprises BOD REPORT Joint Address to the Shareholders, Investors and Partners Company Capitalization Financial Performance Creating value for stakeholders Resource capacity 2019 Key operating performance Investment policy Growth Strategy System of key performance indicators Climate change Upstream Downstream Retail business Tire business Machinery Tatneft-Presscomposite Energy Energy and resource efficiency Macroeconomics and Competitive Environment Company’s membership in Industry Associations and Unions Support for International and National Economic, Environmental and Social Initiatives 4 6 8 10 12 14 16 20 22 26 28 30 40 48 50 52 54 62 68 72 76 77 78 80 82 102 103 The 2019 Annual Report of PJSC Tatneft n.a. V.D Shashin was approved by the Annual General Meeting of Shareholders on June 17, 2020, Protocol No.32. CORPORATE GOVERNANCE Corporate governance system Company management structure General Meeting of Shareholders Board of Directors Sole Executive Body Management Board Corporate Secretary Internal Audit Independent auditor Revision Commission Risk management and internal control Protection of insider information procedures and regulations Information policy Prevention and Regulation of potential Conflicts of Interest Anti-corruption policy Procurement and Logistics Anti-monopoly policy Hotline information system Corporate cyber security policy INTERACTION WITH SHAREHOLDERS AND INVESTORS Shareholders’ equity Protection and ensurance of shareholders’ rights Interaction with shareholders SUSTAINABLE DEVELOPMENT Management system in the field of sustainable development Human rights Responsibility to stakeholders Industrial safety, labor protection and environment taking into account climate changes Personnel ANNEX IFRS Consolidated Financial Statements and Independent Auditor’s Report Notes to the Consolidated Financial Statements Financial Statements under the Russian Accounting Standards Report on Non-Arm’s Length Transactions Made by PJSC Tatneft n.a. V. D. Shashin in 2019 Report on Compliance of PJSC Tatneft N. A. V. D. Shashin with the Corporate Governance Code Guidelines of the Bank of Russia Principal risks Register of the mandatorily dislosed information by PJSC Tatneft in 2019 On the Annual Report and the underlying regulatory documents constituting the framework for this annual report 104 106 112 114 116 140 141 150 152 153 156 158 164 165 168 170 173 174 174 175 176 178 184 186 188 190 192 193 194 200 208 210 226 292 312 316 334 340 340 344 2 3 2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT25About Company TATNEFT is one of the leading Russian oil and gas producers with more than 75 years of industry experience, including 25 years as a public company listed on the international stock market. In 2019, TATNEFT was recognized as the leader in corporate transparency, which was a milestone event for the Company in the year of the 5th anniversary of entering the international stock market as a public company and joining the UN Global Compact. The geography of shareholders spans over 30 countries. The securities of PJSC TATNEFT listed at the top-tier quotation level of the Moscow Exchange and at other leading international stock exchanges are the most sought-after and profitable investment instruments as well as capital accumulation forms. The Company makes a particular focus on maintaining a favorable environment and mitigating the climate change impacts while placing a high priority on the social aspects in its activities. The fundamental principles for the Company are corporate responsibility and security. The corporate business model is built in compliance with the long-term sustainable development strategy and provides a value chain based on the vertical integration of the full production cycle of the Group’s enterprises with an optimal distribution of the balance in oil and gas production, oil refining and petrochemicals to achieve maximum operation profitability. The landmark guidance for the Company is the UN Action Program “Transforming our World: The 2030 Agenda for Sustainable Development”. Being a party to the UN Global Compact, TATNEFT integrates 10 principles and 17 Sustainable Development Goals into its business model. 20 824 PUBLICATIONS WITH A REFERENCE TO TATNEFT WERE RELEASED IN FEDERAL MASS MEDIA IN 2019 By SCAN Interfax data OVER YEARS OF EXPERIENCE IN THE INDUSTRY YEARS OF OPERATION AS A PUBLIC COMPANY LISTED AT THE INTERNATIONAL STOCK MARKET 4 5 2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Company mission and values 2030 Strategy The implementation of the Company’s Strategy involves sustainable growth aspects and ensuring favorable economic and social conditions for business development based on the most efficient use of all types of resources and creating value for stakeholders at each stage of activity • Highly effective organizational structure • Best practice in governance forms and organization of business processes • Highly qualified and competent personnel • High-quality asset structure ATE G O R O P R O C A N C E N R E V BU SIN E S S P L A N N I N G STEADY GROWTH OF COMPANY VALUE HIGH DIVIDEND YIELD S U S T AIN A BLE DEV • Building strong technological basis • Digital integration in all production and management processes • Proprietary research and engineering complex P I H S R E D A E L Y G O TECHNOL EL O PMENT • Strategic planning • Efficient investment project management • High operating effectiveness • Gaining higher margin ratio in the value chain • Commitment to • the 17 UN Sustainable Development Goals • Corporate social responsibility • Keen sense of environmental responsibility • Human life and health priority The Company’s mission is to ensure continuing development in the status of one of the largest vertically integrated Russian producers of crude oil and gas, petroleum products and petrochemicals based on effective management of shareholders’ assets, rational use of natural resources and corporate social responsibility. The key objective of the Company is to ensure the most efficient monetization of reserves and direct earned profit to create new lucrative points of value growth, diversify business, which would help sustain a strong position and profitability of the Company beyond the 2030 horizon. Our priority is propelling growth of shareholder value of the Company through increased free cash flows and distributions to shareholders STRONG COMPETITIVE EDGE IN THE INDUSTRY WELL-DIRECTED INVESTMENT POLICY Scenario planning with built-in protection from sharp oil price fluctuations and macroeconomic volatility. Business growth and free cash flow planning with scenario planning variability STRONG FINANCIAL RESILIENCE — FOCUS ON PROFIT MARGIN GROWTH HIGH CORPORATE GOVERNANCE AND BUSINESS PLANNING STANDARDS GUARANTEED PROGRESSIVE DIVIDEND POLICY PROVISION OF INVESTMENT PROGRAMS IN LINE WITH DEVELOPMENT STRATEGY CAPITAL DISTRIBUTION POTENTIAL WITH OIL PRICE HIKES The Company is fully aware of its responsibility to its shareholders, investors, partners, employees and the publicas a whole, and recognizes its equal liability for operating performance, health, safety and environmental compliance and takes all measures to ensure long-term sustainable development. The Company’s stance pursues that only balancing between these aspects, abiding by high ethical principles, and developing social partnership can ensure harmonious and effective business development. Consistent program actions of the Company make it possible to ensure profitable oil and gas production, sustain a high level of hydrocarbon resource life, effectively develop our own oil refining and petrochemicals, as well as build-up our innovative potential and deploy advanced digital solutions to create a reliable technological basis for the Company. 6 7 ABOUT COMPANY252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Production assets and operating areas The Company provides management processes from obtaining resources development licenses to oil sale, oil and gas refining products and petrochemicals in the domestic market and for their export, as well as the manufacturing of equipment for oil production, oil and gas treatment and processing, and for providing engineering, supply and construction services for oil, gas and petrochemical projects. The structure of Tatneft Group also includes the banking segment - Banking Group Zenit. The resource base of the Company includes one of the world largest Romashkinskoye oil field. Major fields of the Company also include Novo-Elkhovskoye, Bavlinskoye, Bondyuzhskoye, Pervomaiskoye, Sabanchinskoye, Arkhangelskoye, and Ashalchinskoye oilfields. Outside Tatarstan, the exploration and production operations are conducted in the following areas: Nenets Autonomous District, Ulyanovsk Region, Samara Region, Orenburg Region, and Republic of Kalmykia. Our global reach LARGEST OIL FIELDS AND THE CORE OPERATIONS WITHIN THE REPUBLIC OF TATARSTAN TATNEFT Group encompasses the staff of nearly 60 thousand employees working at 105 enterprises in the Russian Federation and abroad. The key assets of the Company are located on the territory of the Russian Federation with the main focus in Tatarstan. The main subsidiaries operate in the Russian Federation, with the exception of Tatneft-Europe AG, operating in Switzerland. Business projects are implemented both in the domestic and foreign markets. The business infrastructure is formed by the geographical proximity of production facilities and efficiently built logistics. The headquarters of the Company is located in the city of Almetyevsk. The company has representation offices in Moscow, Kazan, the Republic of Ukraine, the Republic of Iraq, the Republic of Uzbekistan, as well as branches in Libya and Turkmenistan. The largest capacities, such as the TANECO refining complex and the KAMA TYRES production are located in Nizhnekamsk. EXPLORATION AND OIL PRODUCTION OUTSIDE THE RT The Company is currently developing a petrochemical complex in close proximity to these facilities. The retail chain for the sale of petroleum products includes more than 800 filling stations operating in Russia, as well as in Belarus, Uzbekistan and Ukraine. Tatneft supplies engineering, technology and equipment to Armenia, Kazakhstan, Libya, Turkmenistan, Turkey, Uzbekistan, and Estonia. Details on the structure of Tatneft Group, subsidiaries of PJSC Tatneft are provided further in the Annual Report, Financial Performance Section, IFRS. TATNEFT FILLING STATIONS REGIONAL PRESENCE Oil field development Oil and gas refining Tire business Distribution network Power Generation Machine building Equipment and technology supply, engineering Banking segment COMPANY EXPORTED By 2019 year-end data Bondyuzhskoye Pervomaiskoye NIZHNEKAMSK Arkhangelskoye Novo- Yelkhovskoye ALMETYEVSK Romashkinskoye Ashalchinskoye Sabanchinskoye Bavlinskoye RUSSIA KAZAKHSTAN UZBEKISTAN TURKMENISTAN Nenets AO Republic of Kalmykia Ulyanovsk Region K Samara Region K Orenburg Region ESTONIA BELARUS ARMENIA TURKEY LIBYA BELARUS RUSSIA UKRAINE UZBEKISTAN ENTERPRISES INCORPORATED IN TATNEFT GROUP AS OF 31.12.2019 COUNTRIES GLOBAL REACH OF COMPANY OPERATIONS 60% CRUDE OIL SOLD 43% PETROLEUM PRODUCT SOLD 40% TIRE PRODUCTS 50 COUNTRIES GLOBAL SUPPLY COVERAGE 8 9 ABOUT COMPANY252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Business-Model We keep developing our production and manufacturing capacities on an ongoing basis to make it possible to convert the hydrocarbon reserves into high value added products. Capital Capital (results) (results) Capital Capital (resources) (resources) Financial Financial 1,24 1,24 TRLN TRLN RUB RUB CONSOLIDATED CONSOLIDATED ASSET ASSET VALUE VALUE 129,6 129,6 INVESTMENTS INVESTMENTS BLN BLN RUB RUB 99,9 99,9 CAPEX CAPEX BLN BLN RUB RUB Social and Reputational Social and Reputational 10 10 COUNTRIES COUNTRIES COMPANY’S GLOBAL REACH COMPANY’S GLOBAL REACH JOINING THE UN GLOBAL JOINING THE UN GLOBAL COMPACT AND SOCIAL COMPACT AND SOCIAL DEVELOPMENT GOALS DEVELOPMENT GOALS Human Human 60 60 THOUSAND THOUSAND EMPLOYEES EMPLOYEES HIGHLY QUALIFIED HIGHLY QUALIFIED STAFF STAFF Intellectual Intellectual 2,5 2,5 BLN BLN RUB RUB INVESTMENTS IN R&D INVESTMENTS IN R&D AND PILOT TESTS AND PILOT TESTS Environmental Environmental 12,3 12,3 MLN MLN RUB RUB INVESTMENTS IN ENVIRONMENTAL INVESTMENTS IN ENVIRONMENTAL ACTIVITIES ACTIVITIES Operational Operational 105 105 ENTERPRISES ENTERPRISES DIVERSIFIED STRUCTURE DIVERSIFIED STRUCTURE OF FULL CYCLE ASSETS OF FULL CYCLE ASSETS Determination and list of capitals is provided under the International Integrated Reporting Standard published by the International Integrated Reporting Council (IIRC). 10 MACHINE BUILDING MACHINE BUILDING 5,6 5,6 BLN BLN RUB RUB PRODUCT PRODUCT OUTPUT OUTPUT RESOURCE BASE RESOURCE BASE UPSTREAM UPSTREAM DOWNSTREAM DOWNSTREAM 1,38 1,38 BLN BLN TONNES TONNES HYDROCARBON HYDROCARBON RESERVES RESERVES 29,8 29,8 MLN MLN TONNES TONNES OIL OIL PRODUCTION PRODUCTION 206,7 206,7 THOUS BBLS THOUS BBLS PER DAY PER DAY AVERAGE DAILY REFINING AVERAGE DAILY REFINING OF CRUDE OIL OF CRUDE OIL CRUDE OIL AND PETROLEUM PRODUCT SALES: CRUDE OIL AND PETROLEUM PRODUCT SALES: EXPORT AND DOMESTIC MARKET EXPORT AND DOMESTIC MARKET 21 21 MLN MLN TONNES TONNES OF CRUDE OIL SOLD OF CRUDE OIL SOLD 12 12 MLN MLN TONNES TONNES OF PETROLEUM PRODUCT SOLD OF PETROLEUM PRODUCT SOLD RETAIL NETWORK RETAIL NETWORK 4 142 4 142 THOUS. THOUS. TONNES TONNES RETAIL FUEL SALES RETAIL FUEL SALES VALUE VALUE CREATION CREATION 1,76 1,76 CAPITALIZATION CAPITALIZATION TLN TLN RUB RUB Upstream Upstream Oil production growth and reserve replacement Oil production growth and reserve replacement • strengthening the resource base • strengthening the resource base • geographical expansion of producing assets • geographical expansion of producing assets • hard-to-recover oil ﬁeld development including • hard-to-recover oil ﬁeld development including super-viscous oil ﬁelds super-viscous oil ﬁelds Downstream Downstream Production highly demanded and competitive Production highly demanded and competitive reﬁned oil products and petrochemicals through reﬁned oil products and petrochemicals through qualitative strengthening of asset structure and qualitative strengthening of asset structure and improved operating performance of business improved operating performance of business streams: streams: • Sales of crude and petroleum products, • Sales of crude and petroleum products, including export and domestic market including export and domestic market • Oil reﬁning • Oil reﬁning • Oil and gas production chemicals • Oil and gas production chemicals • Tire business • Tire business • Heat and power generation • Heat and power generation • Machine building • Machine building • Engineering • Engineering TIRE BUSINESS TIRE BUSINESS BANKING BANKING 10,3 10,3 MLN MLN PCS PCS TIRE OUTPUT TIRE OUTPUT 2,3 2,3 BLN BLN RUB RUB NET PROFIT FROM NET PROFIT FROM BANKING OPERATIONS BANKING OPERATIONS OIL & GAS CHEMICALS OIL & GAS CHEMICALS LUCRATIVE PRODUCTION LUCRATIVE PRODUCTION PROPELLING NEW GROWTH PROPELLING NEW GROWTH POINTS POINTS Building an effective banking structure with Building an effective banking structure with a high reputation in the ﬁnancial community a high reputation in the ﬁnancial community in key systems such as corporate, in key systems such as corporate, investment and private banking, including investment and private banking, including ZENIT Bank and its subsidiaries (ZENIT ZENIT Bank and its subsidiaries (ZENIT Banking Group). Banking Group). The ZENIT Banking Group has been The ZENIT Banking Group has been consolidated in the ﬁnancial statements of consolidated in the ﬁnancial statements of the TATNEFT Group since Q4 2016. the TATNEFT Group since Q4 2016. The business model of the Company is built on the full vertical integration principle on the basis of high discipline in the capital management, ensuring the most efficient monetization of reserves and directing profit to create new promising points of growth in value that would increase the Company’s profitability under the 2030 Strategy and beyond the horizon of 2030 taking into account all sustainable development aspects. HEAT & POWER GENERATION HEAT & POWER GENERATION bank/disclosure/annual-reports/ bank/disclosure/annual-reports/ 1,5 1,5 BLN KW*H BLN KW*H PER YEAR PER YEAR ELECTRICITY ELECTRICITY GENERATION GENERATION Financial Financial 328,4 328,4 ADJUSTED ADJUSTED EBIDTA EBIDTA BLN BLN RUB RUB 192 192 BLN BLN RUB RUB PROFIT ATTRIBUTABLE PROFIT ATTRIBUTABLE TO SHAREHOLDERS TO SHAREHOLDERS 24,8% 24,8% ROAСE ROAСE 152,8 152,8 BLN BLN RUB RUB FREE CASH FLOW FREE CASH FLOW Social and Reputational Social and Reputational 24 24 BLN BLN RUB RUB SOCIAL SOCIAL INVESTMENTS INVESTMENTS 509,6 509,6 BLN BLN RUB RUB ACCRUED TAXES, ACCRUED TAXES, CHARGES AND FEES CHARGES AND FEES 132,5 132,5 BLN BLN RUB RUB TATNEFT BRAND VALUE TATNEFT BRAND VALUE Human Human 23 23 THOUS THOUS EMPLOYEES EMPLOYEES TRAINED TRAINED 30 30 CORPORATE CORPORATE TRAINING TRAINING PROGRAMS PROGRAMS Intellectual Intellectual 5 444 5 444 INTELLECTUAL INTELLECTUAL PROPERTIES PROPERTIES Environmental Environmental REDUCING ENVIRONMENTAL IMPACTS REDUCING ENVIRONMENTAL IMPACTS TO ENSURE SELF-RESTORING CAPACITY TO ENSURE SELF-RESTORING CAPACITY OF ECOSYSTEMS OF ECOSYSTEMS Operational Operational +0,9% +0,9% PRODUCTION PRODUCTION GROWTH GROWTH 15,5% 15,5% CRUDE OIL REFINING CRUDE OIL REFINING GROWTH GROWTH 11 ABOUT COMPANY252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTTATNEFT Group Main Business Divisions and Enterprises Upstream Tatneft-Production NGDU Almetievneft NGDU Aznakaevskneft NGDU Bavlyneft NGDU Jalilneft NGDU Yelhovneft NGDU Leninogorskneft NGDU Nurlatneft NGDU Prikamneft NGDU Yamashneft Oil producing subsidiaries and affiliates Tatneft-Samara LLC PJSC Kalmneftegas Tatneft – NAO LLC JSC KalmTatneft * CJSC Yambuloil * New Oil Production Technologies LLC * Oil and gas refining and sales of crude oil and oil products Crude Oil and Petroleum Products Sales Department Tatneft Oil Gas Processing Division Yelkhov Oil Refinery JSC TANECO JSC Nizhnekamsktekhuglerod Tatneft-AZS Center LLC Tatneft-AZS -Zapad LLC Tatneft-AZS-Ukraine LLC Tatneft- AZS - Tashkent LLC Tatneft-AZS –Severo-Zapad LLC Tatneft-Trans LLC Tatbelnefteprodukt ILLC JV LLC TATNEFT-UNG* PJSC TATNEFT Group Corporate Center PJSC TATNEFT BOARD OF DIRECTORS MANAGMENT BOARD Executive Office Petrochemical production Electric Grid Management Center Social sector Social Asset Management Tatneft Charity Fund MC Tatneft-Neftekhim LLC PJSC Nizhnekamskshina Nizhnekamsk All-Steel Tire Factory LLC JSC Nizhnekamsk Mechanical Plant Trading House KAMA LLC JSC Yarpolimermash-Tatneft Tatneft-Prescomposite LLC JSC Tolyattisintez Tolyattikauchuk LLC Nizhnekamsk HPP LLC Tatneft-Energosbyt LLC JSC Almetyevsk Heating Networks Banking sector Bank ZENIT (PJSC) and its subsidiaries Support for core operations Tatneftesnab Business Unit Tatar Geological Exploration Division Well Service Business Unit Construction Projects Implementation Department Bugulma Mechanical Plant UPTZH for PPD LLC Trade and Technical House of Tatneft LLC Tatneft-Neftekhimservis LLC Tatneft-URS LLC Information, research and technology, and organizational support Branches and representative offices TatNIPIneft Technological Development Center Modeling Center Business Service Center STC Tatneft LLC (in Skolkovo) SPC Oil and Gas Technologies JSC Neftekhimproekt JSC TatNIIneftemash TatITneft LLC Processing Center LLC PEI CPE PTC-TATNEFT Representative Office in Moscow, Russian Federation Representation in the Republic of Iraq, Baghdad Representation in Ukraine, Kiev Representation in the Republic of Uzbekistan Branch in Libya Branch in Turkmenistan, Balkanabad * Enterprises based on partnership with other companies 12 PJSC TATNEFT is the corporate center of the Group, coordinating the activities of enterprises that form the business segments of the Company. The management is organized based on a single mission and development priorities, while respecting fair interests of all stakeholders of the Group. The main industry peers are all Russian oil majors, including Rosneft, PJSC LUKOIL, PJSC Surgutneftegas, PJSC Gazprom Neft and PJSC ANK Bashneft, as well as international oil companies. The company competes with oil companies for the right to supply crude oil and petroleum products, as well as tire products, technologies, equipment and engineering services, to Russia and the international market. In the domestic market, the Company is a supplier of heat and power energy, composite materials, etc. 13 ABOUT COMPANY252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTBoard of Directors Report on Company’s Development Performance by Core Business Streams +78,7 BLN RUB VS 2018 OPERATING AND BUSINESS PERFORMANCE PUBICATIONS IN FEDERAL MASS MEDIA IN 2019 6 850 1 224 5 287 COMPANY RATINGS’ PUBLICATIONS IN FEDERAL MEDIA IN 2019 PUBLICATIONS ABOUT COMPANY’S POSITION IN THE INDUSTRY IN THE FEDERAL MEDIA IN 2019 DATA FROM “SKAN Interfax” SYSTEM TRILLION RUBLES COMPANY’S CAPITALIZATION YEAR-END 2019 14 15 2019 ANNUAL REPORTJoint Address to the Shareholders, Investors and Partners of the President of the Republic of Tatarstan Rustam N. Minnikhanov and Chief Executive Officer, Chairperson of the Management Board Nail U. Maganov DEAR SHAREHOLDERS, INVESTORS AND PARTNERS! The reporting year 2019 was the year of the 25th anniversary of the Company’s status as a public joint stock company. Geography of our shareholders covers more than 30 countries. Securities of PJSC TATNEFT, presented at the highest quotation level of the Moscow Exchange and at leading international stock exchanges, are among the most popular and profitable investment instruments that increase the invested capital. This is evidence of effective corporate governance of the assets entrusted to us. Throughout its history, the Company has repeatedly overcome difficulties, always maintaining confident stability. Summing up the results of 2019, Tatneft shows good performance, despite the economic difficulties in the form of a decrease in global oil consumption and restrictions on production under the OPEC + Agreement, unstable oil and gas prices during the year, and a slowdown in global growth, and the national economy, and decrease in international trade. Tatneft was ranked the Top 10 of the rating “100 most expensive by capitalization of public Russian companies” and the Top 10 of the world leaders in the oil and gas industry by added value in shareholder value (BCG Rating). In 2019, we ensured a free cash flow of 152.8 billion rubles. This made it possible to pay interim dividends for the results of 6 and 9 months of 2019 in the amount of 149 billion 970 million rubles. In total, according to the results of 2019, taking into account previously accrued interim dividends, it is proposed to allocate 150 billion 118 million rubles to pay dividends. The value of consolidated assets of the Company by the results of 2019 increased by 3.1% and amounted to 1,238.6 billion rubles. The drivers for strengthening the structure and growth in the value of assets are the “Exploration and Production” and “Refining and Sale of Oil and Petroleum Products” segments. In the reporting year, assets were acquired in the retail business of -75 Neste filling stations located in the North-West of Russia and a terminal in St. Petersburg. Also, as part of strengthening the tire segment and implementing the Company’s petrochemical strategy, assets for the production of various types of synthetic rubber in Togliatti were acquired. The Tatneft Group year-end consolidated revenue amounted to 932.3 billion rubles, 2.4% growth to 2018. Net profit of the Group’s shareholders amounted to 192.3 billion rubles. The Company has consistently demonstrated a high level of profitability and a low level of debt burden. Adjusted EBITDA grew by 4.3% amounting to 328.4 billion rubles. Return on capital employed (ROACE) 24.8%%. The Company successfully implements the Strategy-2030 approved by the Board of Directors. In 2019, the Company consistently implemented planned production goals and reached a new level of performance, while maintaining leadership positions among Russian vertically integrated oil companies on a number of indicators. The total oil production across the Group in the reporting year amounted to 29.8 million tonnes with the average daily production of 581.5 thousand barrels a day. The company maintains one of the highest recovery factors in the industry at 44%. Due to the development of our own capacities, we increased the average daily processing to 206.7 thousand barrels with a total increase in oil refining by 15.5% compared to the previous year. 10.3 million tonnes of oil products and 1.2 million tonnes of gas products have been produced for the year. At the TANECO Complex, one of the best indicators in the industry was achieved in terms of refining depth - 98.98% and light oil products - 80.87%. In 2019, TANECO began comprehensive testing of the second distillation unit and vacuum distillation of crude oil CDU VDU-6 which allowed to increase the rated capacity of the oil refining complex to 15.3 million tonnes a year. Prior to the completion and launch of the additional deep processing unit, it is planned to use the expanded oil refining capacities at a level that ensures the maximum economic efficiency of the Complex. We are improving the structure and quality characteristics of the petroleum product basket. All products of the TANECO fuel line including gasoline grades AI-92, AI-95, AI-98, AI-100 and diesel fuel meets EURO-6 environmental standard and is one of our hallmarks. The petrol formulations according to this standard, selected and controlled by TANECO online, allow the production of gasolines with optimal operational and environmental characteristics. High-quality products of the TANECO fuel line have become the hallmark of the Tatneft petrol station network. Our generating capacities generate electricity of more than 1.5 billion kWh per year for industrial facilities and the community. We invest resources to modernize equipment to increase its reliability and diversify sources of raw materials. As new growth points, we are developing a petrochemical industry with large long-term potential. The Company maintains a high level of hydrocarbon resource availability, which allows it to confidently increase production. In early 2020, the hydrocarbon reserves of the Tatneft Group, according to an independent estimate by Miller & Lents, were 1,381.4 million tonnes of oil equivalent, including 998.3 million tonnes of oil equivalent - proved reserves. In the context of growing competition with developing shale oil production, the Company maximizes the existing potential of oil deposits by widely applying its accumulated technological experience and competencies to strengthen its positions both in the Russian and global energy markets. The Company’s tire business operating under the brand name «KAMA TYRES» holds one of the leading positions in Russia. In 2019, 10.3 million tires were produced on 400 product lines. We are expanding international distribution channels, Tires are shipped to 50 countries. At the same time, 64% of production goes to the domestic market. By selling the oil produced, the Company ensures an optimal balance of oil shipment distribution in order to increase operating profitability under the market conditions. In 2019, Tatneft Group exported to the near and far abroad about 60% of all crude oil sold. With that, the Company fully provides raw materials for loading its own refining capacity. 16 17 BOD REPORT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTIn order to improve profitability, the Company develops premium distribution routes and provides optimization for oil products logistics. Oil products, gas products and petrochemicals produced by the Company are sold in bulk both abroad and in the domestic market, and also delivered to the Company’s sales subsidiaries to be further sold in Russia. Significant for the Company is the consistency of corporate interests with the UN Global Compact Agenda, which Tatneft became a party to in 2019. We see a high potential in combining our common efforts - integrating experience, scientific and technical developments and concrete actions into achieving the Sustainable Development Goals. In the reporting year, sales of petroleum products through the Company’s retail network increased by 19.9%, consisting of 802 filling stations, and 111 filling stations outside the Russian Federation. We pay close attention to strengthening the technological base of the Company and digital solutions, moving to innovative patterns of management and organization of business processes. The value chain is constantly being improved and the margin of the business is increased due to the efficient building of business processes, a high share of added value, quality and safety standards. We carry out strict control of financial discipline, the level of costs and returns on existing assets. The Company implements a well-balanced investment policy that takes into account the interests of shareholders and the goals of future development of Tatneft Group. In 2019, the volume of investments amounted to 129.6 billion rubles, of which 99.9 billion rubles were capital investments. The activity of the Company, as one of the largest taxpayers in the main region of its presence, plays an important role in ensuring the revenues to the federal and regional budgets, which contributes to the stable socio-economic development of the territories where our enterprises are located. At the same time, as part of target corporate programs, the Company annually allocates over 20 billion rubles to the development of healthcare, science and education, the cultural environment, preservation of the spiritual heritage, and support of sports. The Tatneft Charity Fund plays a major role in this process. When making business decisions, we take into account the objectives of socio-economic growth, expanding innovative opportunities and improving the quality of life in our territories based on an open dialogue with stakeholders, including local communities. This increases the targeting of the Company’s initiatives and the transparency of decisions. Tatneft Group provides about 60 thousand jobs at 105 enterprises in the Russian Federation and abroad. Currently in order to ensure effective implementation of the personnel policy, the HR strategy of Tatneft Group is being formed. In the context of the development of operational activities, we focus on the tasks of training and enhancing staff competencies, improving the motivation system, and creating a talent pool. We pay great attention to corporate culture and youth policy. An important aspect of our work is our commitment to fundamental principles of human rights, including the right to a safe environment. Ensuring safety, protecting human life and health, and maintaining a favorable environment are among the key priorities of the Company. In 2019, the Board of Directors approved a new version of the Company’s Policy in industrial safety, labor protection and the environment with considerations to climate change, based on international best practice and a risk-based approach. Guidelines of the Company in this area are recognition of the priority of life and health of people to production activities; high level of industrial safety, ensuring the level for ecosystem restoration potential, reducing carbon footprint. Now we are successfully completing the implementation of the Environmental Program designed for the period of 2016–2020, and are setting ambitious goals for the future. In 2019, 12.3 billion rubles were allocated for environmental safety and environmental protection. At the same time, we are constantly increasing investments in the environment. Over the past years, the annual growth of investments in environment protection reached over one billion rubles. Behind these numbers are concrete actions and results. The Company clearly sees its contribution to a sustainable energy future in the context of the transition of global economy to a low-carbon path of development associated with the climate change and ensuring global economic growth. We are implementing a number of projects focused on the task of reducing the carbon footprint and integrating this task into the business processes of the Company. To this end, advanced international platforms and standards on climate initiatives are applied. High environmental characteristics of our products, energy efficiency indicators of production processes and a model of rational consumption of resources contribute to the continued reduction of specific greenhouse gas emissions into the air. In 2019, a detailed inventory of emission sources was started and a lot of work was done to analyze and select advanced techniques for reducing emissions, capturing and processing carbon dioxide. Renewable energy is indisputable for cleaner low-carbon energy generation, and we pay special attention to this development as part of our strategy. Compensation measures are equally important in combating the climate change. In order to create a favorable environment in the area of its activity and increase the absorption of greenhouse gases, Tatneft Group, since 2000, has been implementing a greening program. During this period, over 10 million seedlings of trees and shrubs have been planted. The area of continuous attention of the Company’s management is occupational safety and health. First, these are the programs for the prevention of industrial injuries, staff training, and a set of long-term and preventive measures. Over one billion rubles are allocated annually to labor protection measures. The beginning of 2020 was a turbulent challenge for all of us caused by spread of Covid-19 pandemic. This problem has affected people all over the world and has become an extreme test for sustainability and, most importantly, for our readiness for sustainable development of our society as a whole and business in particular. Tatneft did everything possible to stop the spread and consequences of the pandemic wherever we work. We aim to protect our employees, clients and the local population; we provide serious support to healthcare institutions and social assistance to vulnerable groups. At this stage, our goal, as a diversified energy company, was to ensure the sustainability and continuity of our production processes, including supply of fuel and energy resources to our consumers - industrial enterprises, social institutions and the population. We assess all current macroeconomic and industry risks and adjust our actions to move forward. We greatly appreciate your confidence and assure that we will continue to implement our strategic plans for further growth of shareholder value and sustainable development of the Company! We thank the shareholders, investors, partners, employees of Tatneft Group enterprises for their joint activities and we feel optimistic about the future! R.N. MINNIHANOV N.U. MAGANOV The President of the Republic of Tatarstan. Chairperson of the Board of Directors, PJSC Tatneft Chief Executive Officer, Chairperson of the Management Board, PJCS Tatneft 18 19 BOD REPORT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Company Capitalization Consolidated Assets of the Group At the end of 2019, the total market capitalization (market value of ordinary and preferred shares) of PJSC TATNEFT named after V.D. Shashin increased by 78.7 billion rubles (4.7%), versus the end of 2018, and amounted to 1.76 trillion rubles ($ 28.4 billion USD). In dollar terms, total market capitalization grew by 17.4% to $ 28.4 billion USD. CAPITALIZATION TREND, BLN RUB. bln rub +37,3 1,24 TRILLION RUB vs 2018 COST OF CONSOLIDATED ASSETS 1 684,7 1 763,4 ASSETS OF TATNEFT GROUP BY SEGMENTS, RUB BLN 299,8 307,6 344,6 475,0 471,6 513,4 1 097,0 965,0 716,6 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Capitalization is calculated according to the methodology used by the Moscow Exchange at the close of trading in the reporting year TATNEFT ranks among Top-10 of “100 most expensive public Russian companies by capitalization” (RIA Rating) +36,2% 132,5 BLN RUB vs 2018 COST OF TATNEFT BRAND IN 2019 TATNEFT ranks among top 10 of the global oil and gas industry leaders by shareholding value growth (BCG rating) TATNEFT ranks among top 10 rating of “50 most expensive brands of Russia”. (Evaluation by Brand Finance) 20 1 238 1 201 138 232 34 450 140 253 33 406 122 251 27 367 1 094 1 107 121 799 286 131 32 30 339 356 297 301 340 369 384 2015 2016 2017 2018 2019 Exploration & production Petrochemistry Refining/sale of oil and oil products Banking Corporate and other DEVELOPMENT OF TATNEFT GROUP CONSOLIDATED ASSETS STRUCTURE, % 11,1 % 31,0% 18,7 % 2,8 % 2019 36,4 % 13,8 % 4,3% 34,5 % 2011 47,4% TATNEFT GROUP CONSOLIDATED ASSETS VALUE, BLN. RUB. 138 384 2019 1 238 232 34 450 86 27 217 2011 298 628 Comparison for the period from 2011 is justified by the stage of development of proprietary oil refining capacity at TANECO complex 21 BOD REPORT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Financial Performance FREE CASH FLOW, BILLION RUB 147,7 152,8 105,3 47,6 45,7 2015 2016 2017 2018 2019 5,1 BLN RUB INCREASE OF FREE CASH FLOW 24,8% RETURN ON AVERAGE CAPITAL EMPLOYED (ROACE) BLN RUB BLN RUB FREE CASH FLOW IN 2019 PROFIT ATTRIBUTABLE TO TATNEFT GROUP SHAREHOLDERS IN 2019 Added Value ADDED VALUE INCREASE, BLN RUB 662 679 436 SHARE OF ADDED VALUE IN TOTAL OUTPUT, % 2019 2017 2018 2019 77% share of value added of the total output The Company has provided a steady increase in the value added amounted to RUB 243 bln in 3 years with the increased production up to RUB 883 bln. 679 BLN RUB ADDED VALUE OF TATNEFT GROUP IN 2019 77% SHARE OF ADDED VALUE Taxes on TATNEFT Group, Rub bln 62 2 7 284 60 2 7 299 16,2 % 0,5 % 2% 2019 81,3% Mineral extraction tax (MET) Others Corporate property tax Profit tax expense 40 2 6 187 32 2 6 130 35 2 6 119 22 23 For more information on financial results and comments please refer to the consolidated financial report — further in the Annual Report — page 210 2015 2016 2017 2018 2019 Excluding export duties, excise duties and insurance premiums Taxes included in non-bank transaction costs BOD REPORT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Consolidated Proceeds & EBITDA Revenue distribution by segment NET CONSOLIDATED PROCEEDS FROM NON-BANKING ACTIVITIES, BLN RUB 910,5 932,3 552,7 580,1 681,2 2,4% REVENUE GROWTH AS COMPARED TO 2018 2015 2016 2017 2018 2019 ADJUSTED EBITDA, BLN RUB 314, 8 328,4 155,6 174,4 200, 8 4,3% INCREASE IN ADJUSTED EBITDA AS COMPARED TO 2018 2015 2016 2017 2018 2019 BLN RUB CONSOLIDATED PROCEEDS IN 2019 24 PROCEEDS BY SEGMENT (LESS INTER-SEGMENT PROCEEDS), BLN RUB 712 13 31 50 257 361 13 8 45 241 281 588 553 18 39 247 249 934 955 16 23 52 371 24 23 48 399 2,5 % 2,37 % 5,1 % 41,8 % 472 461 2015 2016 2017 2018 2019 Exploration & production Refining and Sales of crude oil & petroleum products Petrochemicals Corporate and others Banking Activities PROCEEDS BY PRODUCT, BLN RUB 681 25 49 242 365 553 580 30 38 215 25 45 212 270 298 910 932 30 51 39 48 355 378 4,2 % 5,1 % 40,6 % 474 467 2015 2016 2017 2018 2019 Crude Oil Petrochemicals Petroleum Products Others 48,3 % 50,1 % 25 BOD REPORT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Creating value for stakeholders Shareholders and Investors The Company provides one of the highest rates of dividend yield DIVIDEND YIELDS ON SHARES, % (PREFERRED, ORDINARY) 17,68 The Company pursues the progressive dividend policy recognizing dividends as one of the key indicators of investment attractiveness for shareholders and strives to maximize the dividends through steady growth of business profit margins. The funds appropriated for dividends account for at least 50 % of the net profit defined under RAS or IFRS depending upon which one is the highest. 6,59 6,97 3,61 14,84 12,34 12,43 10,3 In 2019, we generated 152, 8 bln RUB of free cash flow. This made us possible to pay out the 2019 six and nine months’ interim dividends in the amount of 149 bln 970 mln rubles. Altogether, the 2019 dividends including the interim dividends previously earned are proposed to be distributed in the amount of 150 bln 118 mln rubles. Detailed dividend policy can be found on pages 180–181 96,2% NET PROFIT PER RAS FOR 2019 WILL BE 2019 DIVIDEND AMOUNT 2015 2016 2017 2018 DIVIDENDS PER SHARE, RUB 84,91 84,91 39,94 39,94 22,81 22,81 10,96 10,96 2015 Preferred 2016 2017 2018 Ordinary BLN RUB SHAREHOLDERS’ CAPITAL IN 2019 26 Context of Activities – Sustainable Development We are highly committed to maximize the shareholding value while keeping balance of interests of all stakeholders and create shared value. Strict compliance with the laws and the industry standards related to the Company operations. Adherence to the code of ethics, including dedication to support diversity and inclusive culture in the corporate environment. STAKEHOLDERS • Shareholders and investors • Business partners and clients • Employees • Contractors • Local communities • State • Regulators We are propelling the progress in sustainable development together with our communities taking into consideration of the standpoint of the stakeholders with regard to all aspects of the corporate, operating and social activities of the Company 509,6 BLN TOTAL ACCRUED TAXES, CHARGES AND FEES RUB 24 BLN SOCIAL INVESTMENTS RUB JOBS 60 THOUS 0,26 LOST TIME INJURY FREQUENCY RATE (LTIFR) 1,3 BLN SPENT FOR OCCUPATIONAL HEALTH AND SAFETY RUB 12,3 BLN SPENT TO PROTECT THE ENVIRONMENT RUB 12% GROWTH IN ENVORONMENTAL SPENDING VS. 2018 The activities of the Company as one of the major taxpayer in the region the Company operates in, play an important role in providing revenues to federal and regional budgets that promote the stable social and economic development of the regions, create quality jobs, improve living standards and welfare of the population, build social infrastructure, increase added value and develop related industries. TATNEFT GROUP ENVIRONMENTAL SPENDING FROM 2017 TO 2019, MLN RUB 12 325 11 002 10 275 Basic principles of the Company: recognizing that human life and health takes priority over production activities; high level of industrial safety; ensuring self-restoring capacity of ecosystems, mitigating negative impacts on the environment and carbon footprint for sustainable energy future. The Company reduces a man-induced burden on the environment across all its business streams. 2017 2018 2019 TOTAL RECYCLED AND REUSED WATER SUPPLY, MLN M3 DISTURBED LANDS, YOY HECTARES GROSS AIR POLLUTANT EMISSIONS THOUS. TONNES EFFECTIVE APG UTILIZATION RATE, % 1056,8 1683 1588 107,6 103,3 96,2 96,4 610,8 +73% -6% -4% +0,2% 2017 2019 2017 2019 2017 2019 2017 2019 27 BOD REPORT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Resource capacity The Company sustains high level of hydrocarbon resource life. Propelling improved reserve replacement performance is a key driver for the 2030 Strategy. The Company intends to replace its reserves at the rate of more than 100%. Current reserves replacement ratios (%) As of 31.12.2019 per Miller&Lents, Ltd. reserves estimates 151,82% OIL 1Р 152,19% OIL 2Р 154,96% OIL 3Р MLN TOE MLN TOE HYDROCARBON RESERVES FOR TATNEFT GROUP INCLDUING PROVED RESERVES 28 TATNEFT GROUP RESOURCE CAPACITY • proved reserves 940,329 mln tonnes, including unconventional oil reserves 33,254 mln tonnes; • probable reserves 328,180 mln tonnes, including unconventional oil reserves 43,379 mln tonnes; possible reserves 36,428 mln tonnes, including unconventional oil reserves 32,595 mln tonnes; • TATNEFT GROUP HYDROCARBON RESERVES • proved reserves - 998,294 mln toe, including unconventional oil reserves - 33,522 mln toe; • probable reserves - 346,446 mln toe, including unconventional oil reserves - 43,608 mln toe; • possible reserves - 36,672 mln toe, including • unconventional oil reserves - 32,596 mln toe; Total 1,305 bln tonnes, including unconventional oil reserves of 109,228 mln tonnes. Total 1,381 bln toe, including unconventional oil reserves of 109,726 mln toe. TATNEFT GROUP TOTAL NET CONTINGENT RESOURCES • 1C resources: 74 980 thous. tonnes (oil and condensate) and 7 396 mln m3 (gas); • 2С resources: 113 926 тыс. т (oil and condensate) and 12 531 mln m3 (gas); • 3С resources: 245 701 тыс. т (oil and condensate) and 60 760 mln m3 (gas); RESERVES REPLACEMENT RATIO (RRR) • TATNEFT Group 1Р Oil RRR - 151,82%. • TATNEFT Group 2Р Oil RRR - 152,19%. • TATNEFT Group 3Р Oil RRR - 154,96%. Hydrocarbon reserve additions are provided based on rational use of natural resources and strict compliance with environmental and industrial safety with application of cutting edge technologies and techniques to prospect and explore hydrocarbon fields. Exploration management processes are aimed to efficiently accomplish mineral resources base replacement program of the Company, accelerate and improve oil field development operations for further commercial production while integrating intellectual and high-tech capabilities. PROVED RESERVES LIFE (YEARS) Rosneft Lukoil Gasprom Neft Тatneft Source: Data from companies 20 19 15 30 45,15 MLN TONNES 2019 TOTAL INCREMENTAL OIL RESERVES FOR TATNEFT GROUP 29 BOD REPORT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT2019 Key operating performance Oil and gas production Refining and product output OIL PRODUCTION GAS PRODUCTION OIL REFINING PETROLEUM PRODUCT OUTPUT GAS PRODUCT OUTPUT Kbpd 600 500 400 300 200 100 0 30 558,3 28,7 564,8 28,9 576,4 29,5 581,5 29,8 531,8 27,2 15,5 959,3 16,0 997,8 15,2 945,3 14,9 925,3 Mln tonnes Kbpd 30 25 20 15 10 5 0 20 15 10 5 0 mln m3 1200 16,3 1009,6 1000 800 600 400 200 0 Kbpd 250 200 150 100 50 0 178,7 179,3 179,0 163,3 206,7 Mln tonnes 9,1 9,3 8,5 8,9 10,3 12 10 8 6 4 2 0 Mln tonnes 1,2 1,0 0,8 0,6 0,4 0,2 0 1,2 1,2 1,2 1,1 1,1 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 581,5 KBPD AVERAGE DAILY OIL PRODUCTION 16,3 KBOE AVERAGE DAILY GAS PRODUCTION 206,7 KBPM AVERAGE DAILY OIL REFINING 15% PETROLEUM PRODUCT OUTPUT GROWTH 0% FUEL OIL PRODUCTION 1,2 MLN TONNES GAS PRODUCT OUTPUT MLN TONNES OIL PRODUCTION OUTPUT MLN TONNES PETROLEUM PRODUCT OUTPUT 31 BOD REPORT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTTrading and logistics The Company ensures the optimum balance of distribution of oil supplies to increase operating profitability in the market environment. In 2019, TATNEFT Group exported 59,6% of all its crude oil sold to both the CIS and non-CIS countries (as compared to 62% in 2018), which was down 2.4% from 2018, with the oil sales revenue overall lowered by nearly 1,6%. The key driver for the lowered sales revenue was the plunge in global oil prices, thus, the average URALS quotes dropped by 10%. Meanwhile, the Company supplies its own refineries with the feedstock to load their capacities in full. The Company uses the JSC Transneft services, a state monopoly and the operator of the Russian system of main oil pipelines to transport its crude oil for export. In 2019, the total petroleum product sales for the Group overall amounted to 12,03 mln tonnes. In 2019, the revenue from petroleum product sales for the TATNEFT Group amounted to 378.5 billion rubles, which is up 6.6% from 2018. In 2019, nearly 77% of crude oil export was transported via the Druzhba pipeline (to Poland, the Czech Republic, Hungary, Slovakia, and Germany), 5% was shipped through the Russian ports of the Black Sea (Novorossiysk), and 18% was shipped through the Russian ports of the Baltic Sea (Primorsk, Ust-Luga). Oil products, gas products and petrochemical products produced by the Company are sold in bulk abroad and in the domestic market, as well as supplied to the marketing subsidiaries of the Company for subsequent sale in Russia. 6,6% PETROLEUM PRODUCT SALES REVENUE GROWTH Crude oil sales Petroleum product sales CRUDE OIL SALES, MLN TONNES CRUDE OIL SALES REVENUE, BLN RUB PETROLEUM PRODUCT SOLD, MLN TONNES PETROLEUM PRODUCT SALES REVENUE, BLN RUB 19,96 20,3 20,1 22,1 21,8 474,3 466,7 365,2 11,1 10,9 10,5 11,3 12,0 241,7 355,0 378,5 2015 2016 2017 2018 2019 2017 2018 2019 2015 2016 2017 2018 2019 2017 2018 2019 CRUDE OIL SALES SHARES BY SUPPLY DIRECTIONS CRUDE OIL SALES REVENUE SHARES EXCLUDING EXPORT DUTIES BY SUPPLY DESTINATIONS PETROLEUM PRODUCT SALES SHARES BY SUPPLY DIRECTIONS PETROLEUM PRODUCT SALES REVENUE SHARES УЧЕТА EXCLUDING EXPORT DUTIES AND EXCISE TAXES BY SUPPLY DIRECTIONS 67,2 % 27,2 % 56,0 % 38,0 % 53,88 % 40,41% 69,1 % 25,2 % 59,0 % 35,0 % 56,67 % 37,58 % 44,0 % 52,2% 45,0 % 49,8% 39,4 % 57,4 % 42,5 % 52,4 % 42,5 % 51,7 % 36,6 % 59,5 % 2017 2018 2019 2017 2018 2019 2017 2018 2019 2017 2018 2019 5,6 % 6,0 % 5,71% 5,7% 6,0% 5,75% 3,8 % 5,2 % 3,2% 5,1 % 5,8% 3,9% Domestic market CIS-countries Non-CIS countries export Domestic market CIS-countries Non-CIS countries export 32 33 BOD REPORT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Tire business Proprietary research and development solutions, cutting edge technologies and production capacities Over 45 years in the market. Full business cycle of production. TIRE MARKET SHARES IN RUSSIA 4% 9% 400 COMMODITIES 100 CONTRACTORS IN WORLD 17 CERTIFIED TRADE AND SERVICES CENTERS IN THE WORLD «T&S» 3300 CONTRACTORS IN RUSSIA 23% 53% Passenger car tires Combined truck tires Other tires Light truck tires All steel truck tires Key supply regions 50 COUNTRIES SUPPLY DESTINATIONS Saint-Petersburg and Leningrad Region RUSSIAN FEDERATION Kaluga Region Moscow and Moscow Region Nizhni Novgorod Region Perm Krai 20% Voronezh Region Rostov Region Udmurtia Tatarstan Nizhnekamsk Sverdlovsk Region Krasnoyarsk Krai Krasnodar Krai Stavropol Krai Ulyanovsk Region Volgograd Region Samara Region Novosibirsk Region Chelyabinsk Region Irkutsk Region Omsk Region SOUTH AMERICA NEAR ABROAD Belarus Kazakhstan Brazil Armenia Azerbaijan Uzbekistan EUROPE Belgium Italy Lithuania Poland Czechia Romania Serbia Bulgaria Greece Sales market 24 % 31 % 36 % MLN TIRES 2017 2018 2019 76 % 69 % 64 % MANUFACTURED IN 2019 г. Russian market Export market 34 35 14 BOD REPORT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTFuel Filling Station Network Petroleum product sales RETAIL PETROLEUM PRODUCT SALES, KTONNES AVERAGE DAILY SALES PER FILLING STATION1, TPD 4 142 7,6 8,0 3 455 7,0 9,9 9,1 2 435 2 575 2 677 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 19,9% RETAIL PETROLEUM PRODUCT SALES GROWTH 1 без учета ТАУ, ТАТ 8,8% GROWTH IN AVERAGE DAILY SALES PER STATION TATNEFT Fuel Filling Station Network Locations Saint Petersburg and Leningrad Region Pskov region Arkhangelsk Region Smolensk Region Tver Region Vologda Region Yaroslav Region Kaluga Region Moscow and Moscow Region Tula Region Vladimir Region Voronezh Region Nizhny Novgorod Region Chuvash Republic Mariy El Republic Penza Region Udmurtian Republic Ulyanovsk Region Tatarstan Rostov Region Krasnodar Krai Volgograd Region Samara Region Sverdlovsk Region Stavropol Krai Bashkortostan Chelyabinsk Region INCLUDING OUTSIDE RUSSIA STATOINS STATOINS RETAIL BUSINESS NETWORK 36 NEAR ABROAD Belarus Ukraine Uzbekistan Kemerovo Region Priorities for our fuel filling station network development are focused on continual improvement of environmental- friendly properties of products and operating processes of filling station complexes, rational consumption of resources and reduction of greenhouse emissions. 37 BOD REPORT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Heat and power energy Heat and power generation The installed electric capacity of generating power is integrated into the business model of the Company and provides a full cycle of generation, transmission and sale of thermal and electric energy. The generated energy is supplied to the Company’s facilities (providing generation), external consumers (commercial generation) and the households. 1,53 BLN KW•H PER YEAR ELECTRIC POWER SOLD IN 2019 4,2 MLN GCAL 2019HEAT ENERGY SALE ELECTRIC POWER GENERATION, BLN KW•H PER YEAR 1,45 1,2 1,53 2017 2018 2019 The energy capacities existing in the Group’s asset portfolio make it possible to increase the level of vertical integration through reducing the dependence of own energy needs on external market conditions and optimizing electricity costs at production facilities while developing commercial generation (supplies to external consumers) and new growth points, including clean energy. 3 418 876 GCAL ОБЪЕМЫ ОТПУСКА ТЕПЛОЭНЕРГИИ ООО «НИЖНЕКАМСКАЯ ТЭЦ» 22,3% Heat energy with hot water delivered to the city of Nizhnekamsk 13,9% PJSC Nizhnekamskneftekhim 63,8% JSC TANECO ELECTRIC POWER GENERATED BY NIZHNEKAMSKAYA HPP LLC THOUS KW • H 38 39 BOD REPORT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTInvestment policy The contribution to sustainable growth of the Company’s value is attained through investments in economically viable and highly competitive projects yielding high profit margin, as well as development and implementation of cutting-edge technologies. The Company’s investment program is focused on achieving strategic goals, including improved profitability of business operations, hydrocarbon production growth, additions to reserves, development of its own oil and gas processing and petrochemicals segment, tire business, fuel filling station network, and getting new projects launched on time and on budget. The key priority of investment activities is to increase investment and operational efficiency, providing technological solutions aimed at minimizing the negative impact on the environment and assessing the social impacts of the Company’s investment projects. 2019 Investment Program Implementation In 2019, the Company invested 129,6 billion rubles, including 99,9 billion rubles of capital expenditure in nature. The year on year growth of the investment program in 2019 amounted to 31,8 billion rubles (+32.5%). The key driver in the investment growth is the investments in the construction of the TANECO Complex of Oil Refineries and Petrochemical Plants in Nizhnekamsk, as well as acquisition of new assets in retail sales of petroleum products and in production of synthetic rubber for the tire business. Most of the Company’s investments is concentrated in Russia and is aimed at growing of the production within the traditional areas of the Company’s operations. The international projects account for about 3% of the investments made in the lucrative projects in the segments of Exploration and Production and Retail Sales Network of Fuel Filling Stations». COMPANY’S INVESTMENT AMOUNTS CAPEX FINANCING BLN RUB BLN RUB 129.6 89,4 97,8 82,3 91,2 99.9 150 120 90 60 2017 2018 2019 2017 2018 2019 150 120 90 60 40 Investment Portfolio In the structure of the 2019 investment program, the main investments are allocated to the Exploration and Production segment at the rate of 40% of total investments including the operations within the Russian Federation (34 billion rubles) and at the super-viscous oil fields (14,6 billion rubles), and to the Oil and Gas Refining and Petrochemicals at 43% of the total investments (55,6 billion rubles), accordingly. The Company keeps a balance of investments in strategic projects in the core business segments, which corresponds to the achievement of strategic and current operational and business goals. 40% INVESTMENTS IN OIL EXPLORATION AND PRODUCTION PROJECTS 31% GAINS IN INVESTMENT PROJECT EFFICIENCY FOR CONVENTIONAL OIL PRODUCTION PROJECTS 43% INVESTMENTS IN PROJECTS TO DEVELOP ITS OWN OIL AND GAS PROCESSING AND PETROCHEMI- CALS WITH HIGH RESULTS TO BE ACHIEVED 73% INVESTMENTS TO EXPAND THE RESOURCE BASE AND OIL PRODUC- TION OUTSIDE OF THE REPUBLIC OF TATARSTAN ARE DIRECTED TO DRILL- ING OF PRODUCTION AND EXPLORA- TION WELLS 2019 INVESTMENT PORTFOLIO STRUCTURE 2,5 % 14,6 % 40 % 42,9 % Exploration and production of oil and gas in the oil fields of the Republic of Tatarstan (including super-vis- cous oil fields), outside the Republic of Tatarstan and Russia Oil and gas refining and petrochemicals Development of power generation, tire, retail busi- nesses, mechanical engineering and service subsidiaries Social projects, corporate projects RUB 2019 CAPEX 100 BLN BLN RUB TOTAL INVESTMENTS TATNEFT GROUP OVERALL IN 2019 41 BOD REPORT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Investment projects in 2019 Exploration and production Oil and gas refining PROGRAM FOR CONVENTIONAL OIL EXPLORATION AND PRODUCTION WITHIN THE REPUBLIC OF TATARSTAN The Company has been a success in delivering the investment projects on well interventions and workover programs in the PJSC TATNEFT’s licensed areas. According to the results of 2019, the planned oil production target was outperformed by 9%, the efficiency of investment projects rose by 31%, with the planned target of 1 468 tonnes per million rubles of investment, the actual performance was achieved as high as 1 929 tonnes per million rubles. OIL REFINERIES AND PETROCHEMICAL PLANTS COMPLEX In 2019, as part of the JSC TANECO’s project to build the Oil Refineries and Petrochemical Plants Complex, the investments were spent in the total amount of 42,3 billion rubles. During 2019, the «gasoline scheme» facilities were put into commercial operation, such as: naphtha hydrotreatment unit, catalytic reforming, xylene fractionation, and off-site facilities; the project was implemented to increase the capacity of the hydrocracking unit up to 110%; the base oil plant capacity was ramped up to 120 %. The commissioning of the CDU-VDU-6 unit made it possible to bring the design oil refining capacity of the TANECO Complex up to 15,3 million tonnes per year. Moreover, with commissioning of the vacuum distillation unit of the visbreaker the refining oil capacity can reach 11,4 million tonnes per year with zero fuel oil produced. In the first half of 2019, the turnaround planned maintenance of the process equipment of the delayed coking unit was successfully completed. In October 2019, the kerosene hydrotreating and diesel fuel hydrotreating plants were put into commercial operation. The integrated testing of the automated gasoline blending system was initialized. The start- up and commissioning works began at the heavy coker gasoil hydrotreating plant in November 2019. In December 2019, the vacuum distillation unit of the visbreaker was brought onstream. TATNEFTGASPROCESSING BUSINESS UNIT AND ELKHOVSKY OIL REFINERY In 2019, investment spending for the business unit amounted to 0,714 billion rubles, including as follows: 0,67 billion rubles for the gas-processing plant’s projects; 0,045 billion rubles for the Elkhovsky Oil Refinery projects. The construction and installation operations were carried out as follows: reconstruction of the raw gas compressor unit; construction of the plant-wide flare system; retrofitting and upgrading of safety systems; tie-in of a pilot lab solvent deasphaltization unit (SDA); retrofitting and upgrading, re- equipping at the Elkhovsky Oil Refinery and others. The project to improve the Middle and Lower Carboniferous reservoir management efficiency is moving ahead through infill drilling. Since the start of the project in 2016, 1 297 wells were drilled and 1 965 thousand tonnes of oil were produced. The performance of wells drilled in 2019 showed better results than targeted, in particular: oil production – 192 thousand tonnes (126% of the production target), net present value (forecast for effect duration period ) – RUB 14,6 bln (114% of the target) and profitability index of the discounted costs – of 1,56 (111% of the target). DEVELOPMENT OF SUPER-VISCOUS OIL FIELDS In 2019, 14,6 billion rubles were invested in the development of super-viscous oil fields, of which 4,9 billion rubles were invested in drilling and 9 billion rubles in the surface facilities. Additionally, three (3) domes were brought into the development. Altogether, twenty (20) domes were in production. The surface facilities were about to be completed on four domes with the oil production expected to commence in 2020. Over 12 months, the super-viscous oil was actually produced in the amount of 2,735 million tonnes. The best opportunities and priorities for the project development are infill drilling and bringing new domes into production. The investment program worth of 13,3 billion rubles was shaped with consideration to prospective dome drilling. OIL EXPLORATION AND PRODUCTION PROGRAM OUTSIDE THE REPUBLIC OF TATARSTAN AND WITHIN THE RUSSIAN FEDERATION Strategically, the Company is focused on expanding its resource base and oil production outside of the Republic of Tatarstan. In 2019, 3,5 billion rubles were invested in the project. Of these, 73% accounted for drilling production and exploration wells, about 3% for seismic exploration and thematic exploration work, 9% for well interventions. In 2019, nine (9) production wells and six (6) exploration wells were drilled, and 329 thousand tonnes of oil were produced. Retail sales network of fuel filling stations Tire business The most significant existing investment projects: • • Increasing the all steel cord tire output by 300 thousand pieces per year. The 1st stage (assembling, blanking and curing) equipment were commissioned, serial production of outputs was commenced; as far as the 2-nd phase of the project ( pre-production reconstruction) is concerned, civil engineering construction works are underway, and the equipment is expected to be delivered. The project is worth 4,6 billion rubles. Increase in the Viatti tire output by 1,2 million tires per year (up to 6,2 million pieces per year by 2021). The goal of the project is to meet the market demand for modern high-quality passenger and light-duty tires. To date, the engineering design work is being completed, the production sites are getting prepared for the equipment installation, and the delivery of the process equipment is also expected. The investments are estimated in the amount of 1,6 billion rubles. • • Acquisition of an assembly complex to upgrade the facilities for manufacturing of passenger car tires and light-truck tires. Increase in the all steel cord tire output by 1,2 million pieces per year to bring the total all steel cord tire output to 2,8 million pieces per year. The estimated forward looking cost of the project is expected to amount 19,3 billion rubles. • Setting up of production of large-size tires and combined tires (from 25 to 35 inches). The project is estimated to cost 3,5 billion rubles. The assets (100%) of SIBUR Tolyatti LLC (later renamed Toliatikauchuk LLC), Tolyatti, were acquired which include production of various types of synthetic rubber used for the production of high-quality tires. As part of the projects to increase the output of all steel cord tires and set up the large- sized tire production, a loan was raised from ZENIT Bank, using the mechanism of subsidizing the interest rates in accordance with the Decree of the Government of the Russian Federation dated 23.02.2019 No.191 «On the state support for industrial enterprises implementing corporate programs to increase competitiveness». The investment program for the retail business of petroleum products sales is focused on the construction, purchase of new facilities, reconstruction, retrofitting and upgrading of existing retail sales network facilities in order to increase the margin profitability and competitive qualities of the retail network, including increasing motor fuel sales, as well as expanding the potential of related services. In 2019, 12,9 billion rubles were spent for those endeavours, including for the development of the retail network outside the Russian Federation (i.e. Uzbekistan) - 0,3 billion rubles. In 2019, the Company acquired a Neste retail network of 75 fuel filling stations located in the North-Western District of the Russian Federation and in Saint Petersburg. Power and heat generation In 2019, the power generation segment spending amounted to 3,7 billion rubles. The investment program seeks to develop, revamp and sustain the existing capacities of LLC Nizhnekamsk HPP and the Almetyevsk Heating Networks (JSC APTC). The most significant existing investment projects: • Reconstruction of the installed TGME-464 power boilers of the Nizhnekamskaya HPP for the petroleum coke combustion in the form of dust from the DCU of JSC TANECO. • Process pipeline rack for heat supply to households in the form of steam and hot water. In 2020, the investments are expected to be spent in the amount of 3,3 billion rubles. Composite materials In 2019, the composite materials business spending totaled 0,797 billion rubles. The investments are focused on implementing the projects to increase outputs and expand production operations. The Alabuga Fiberglass projects: modernization of glass furnace with 30% increased production capacity; expanded product portfolio; upscaling of fiberglass production to the full production cycle with 33% reduction in the production cost of fiberglass meshes). The implementation of the KAMATEK LLC project titled «Setting-up manufacturing of the exterior parts of the KAMAZ cabin» in December 2019 resulted in the output of the initial batch of finished products. The project is intended to increase the production of automotive components for automotive equipment by 70%. In 2019, the investment projects were implemented at the Tatneft-Presscomposite production facilities to enhance productivity and expand the range of product output, as well as automate management reporting. 42 43 BOD REPORT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTInvestment process organization The Company shapes a high-quality investment portfolio based on the ranking of target investment priorities and the selection of high-performance, least risky and forward-looking projects in accordance with internal established criteria in all business activities. As part of the implementation of the Sustainable Development Goals, the key environmental, climate and social impacts are factored into the investment planning. COMPANY’S INVESTMENT PORTFOLIO RANKING AND RATING CRITERIA • • • • • • • Alignment with the Strategy; Economic efficiency; Level of risk; Project readiness for implementation; A realistic timeline for project delivery Environmental, climate and social impacts; Best possible net present value.. PROJECT PORTFOLIO MANAGEMENT PROCESS The Company’s investment management process is integrated with planning for achieving strategic goals at the corporate level, business planning, budgeting, reporting and financial control, project management and corporate governance. INVESTMENT RISK MANAGEMENT In order to improve the efficiency of investments, there is an ongoing process in place to identify, analyze and evaluate risks, as well as develop measures to minimize them, so that the project could achieve a sustainable financial result. Currently, the work is moving ahead to improve the requirements for investment project passports with consideration made to the assessment of the impact of investment projects on greenhouse gas emissions. Multi-factor risk assessment is based on expert and statistical assessment of the most significant risks. Risk assessment and multivariate modeling of the investment project performance is carried out taking into account the correlation factors of inputs. INVESTMENT COMMITTEE In order to ensure the effective planning of the investment program and oversee putting it into practice as well as monitor risks the Company operates the Investment Committee. The process of preparing investment projects has a two-tier investment program reviewing system: the first corporate tier Investment Committee and the second-tier Investment committees by business streams such as «Exploration and Production», «Refining and Marketing», «Other structural divisions and subsidiaries». The Company’s standards for investment activities define the goals, tasks, scope of duties and powers of the investment committees, and introduce the requirements for the format of preparation, justification and defense of the materials on the investment programs and projects. The Investment committees approved business investment programs that meet the strategic development goals of the TATNEFT Group until 2030. During 2019, the First-Tier Investment Committee reviewed 27 projects, including three (3) projects for the acquisition of new assets, while the Second- Tier Investment Committees made decisions on more than 580 issues and projects. KEY PRINCIPLES FOR SOUND AND EFFECTIVE INVESTMENT DECISION-MAKING • Shaping of best and highly profitable project programs in alignment of the Company’s development goals, search (creation) and implementation of cutting edge technologies, and minimization of investment risks; • Substantiation and reasonable sufficiency in determining investment needs; Using of the state support instruments; Improving the level of performance discipline in the preparation and implementation of projects, Improving the skills and competence of personnel involved in the investment management process; Ensuring the Company’s accountability in environmental and industrial safety, ensuring safe working conditions, health protection, improving the quality of life of employees and their families, contributing to the economic and social development of the regions of operation and creating favorable living conditions therein; Management of changes including analysis of deviations which enables to maximize the managerial influence capabilities; Monitoring of the investment phase and post-investment monitoring is monitoring of performance indicators of investment projects, programs in the investment phase and during the operation of the investment targets up to the break-even point. Analysis of the results, which are used as the input data for the continuous improvement process. • • • • • • • 44 UNIFIED CORPORATE BANK FOR INVESTMENT PROJECTS The Company’s investment project bank consolidates current investment initiatives and investment projects in all business streams, enabling to provide comprehensive ranking of projects and predict net present value for future periods with the change modeling capability. Transparency and historical preservation of expert opinions on the current projects make it possible to improve the quality of decisions to be made in the future. In 2020, the Company would invest in the development of its projects, taking into account the risk assessment of external drivers influencing upon the oil market situation and the previously unpredictable consequences of the COVID-19 spread, while maintaining the main volume of investments in strategically important projects to ensure that the 2030 Strategy goals are fulfilled. Fund raising. Debt portfolio The Company takes a conservative approach to lending structuring with the focus on minimizing risks and benefiting from favourable financial leverage. The main criteria for selecting long- term credit facilities are as follows: the expected credit amount, its length, and target orientation. Raising long-term loans to finance the investment program assures that the loan terms meet the main investment parameters of a particular project. A high priority is given to the possibility of structuring loans with the repayments to be made out of additional cash flows generated from the implementation of new investment projects. The credit limits are open and maintained in nine (9) major Russian banks. The Company regularly monitors the main drivers affecting the lending market and, as appropriate, strives to take measures to manage market risks, including those related to interest rate changes. To date, the TATNEFT Group has the experience in structuring long-term debt financing: • Under the project financing concept (in particular, under the • • • TANECO Project Construction Loan); Raising debt funds against guarantees of Export Credit Agencies (in particular, Sache, EKF and Hermes); Raising debt funds from syndicates of international banks; Placement of classic and exchange-traded bonds, both in ruble and Eurobonds as well. In 2019, the Group’s debt portfolio (excluding ZENIT Banking Group) consisted mainly of loans secured by Export credit agencies (ECAS) that were raised by JSC TANECO during the construction of the Oil Refining Complex. The remaining debt as of 31.12.2019 was $US75,45 million. As matter of fact, the Group has not been borrowing a large amount of capital (apart from the ongoing efforts with the short- term debt) since 2011 operating all these years amid paying off the earlier raised funds. In December 2019, TATNEFT returned to the public debt market by placing exchange-traded bonds in the amount of RUB 15 billion for a period of 3 years. This transaction was the first placement for the Company since 2010 and the fifth in the Company’s history on the local market. The Company successfully placed the issue at the level of initial offerings of other first-tier issuers in the oil and gas sector in 2019. 45 BOD REPORT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Credit ratings CREDIT RATINGS AS OF 31.12.2019 Rating agency Fitch Level of long-term credit rating Long-Term Credit Rating “BBB-” Short-Term Credit Rating “F3” Moody’s Long-Term Credit Rating “Baa2” “RAEX (Expert RA) Credit rating -ruAAA per national scale for the Russian Federation Outlook on credit rating Stable Stable Stable Date of change (confirmation) 21.05.2019 13.02.2019 26.04.2019 2019 2020 Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of PJSC TATNEFT n.a.V.D. Shashin at the level of «BBB–», the rating outlook is «stable». The Moody’s Investors Service rating agency (Moody’s) upgraded the long-term credit rating of the Issuer of PJSC TATNEFT n.a.V.D. Shashin to Baa2, changing the rating outlook to «stable». The Moody’s decision is related to the Agency’s upgrade of the sovereign rating of the Russian Federation to Baa3 and the credit rating of the Republic of Tatarstan to Ba1. The Expert RA rating agency affirmed the credit rating of PJSC TATNEFT n.a.V.D. Shashin at ruAAA with a «stable» outlook. In May 2020, Fitch Ratings affirmed Tatneft’s BBB- credit rating with a stable outlook. According to Fitch Ratings, confirmation of the credit rating reflects, inter alia, the Company’s low debt level, significant oil production, as well as large proved reserves. The Fitch Ratings press-release confirming Tatneft’s credit rating (in English) is available at fitchratings.com/research/ corporate-finance/ fitch-affirms-pjsc-tatneft-at-bbb-outlook- stable-08-05-2020 In April 2020, the Expert RA rating agency affirmed the Tatneft credit rating at ruAAA. The rating outlook is stable. The current debt burden of the Tatneft Group is at a minimum level that is assessed as a positive impact on the Company’s ability to withstand the current stressful economic conditions. Foreign exchange risks arising from the presence of revenue in foreign currencies with predominantly ruble costs are assessed as acceptable thanks to natural hedge existence as a result of the specific taxation of companies in the industry. In the corporate risks, the agency continues to note a high level of information transparency of the Group and strategic support. The Expert RA press-release on the Tatneft rating confirmation is available at: raexpert.ru/ releases/2020/apr15a Ratings and nominations in sustainable development agenda in 2019 FTSE4GOOD Emerging Index TATNEFT is included in the authoritative international stock exchange index - FTSE4GOOD Emerging Index of companies that are benchmarks of efficiency and transparency in environmental, social and management (ESG) practices. The index is compiled by the analytical division of the London Stock Exchange - FTSE Russell - the leader in stock market indices, which calculates indices for more than 80 countries and for all asset classes, covering 98% of the global invested markets. The professional investment funds with a total asset management volume of about $16 trillion use the FTSE Russell indices as a standard for making investment decisions. Status of leader and top ranking among private companies according to corporate transparency survey results of largest Russian companies (Survey of the Russian integrated reporting network and the Da-Strategy Corporate Development Agency) The sampling included companies from the Expert-600 rating, as well as those listed on Moscow and leading foreign exchanges (LSE, NYSE, NASDAQ HKEX, Euronext NV, Deutsche Börse Group), system-forming organizations of the Russian Federation, state corporations and their controlled companies with at least three billion ruble revenue. First place and status of most socially effective oil and gas company in Russia in social efficiency rating of largest Russian companies among oil and gas industry enterprises (AK&M Rating) The criteria for evaluating this category include disclosure of information on socially significant measures of merit, such as the payroll size and social benefits fund, the amount of tax payments, expenditures on social programs, financing of social development of regions and charity, environmental protection costs, as well as the volume of purchases from small and medium-sized businesses, to name but a few. PJSC TATNEFT is listed among leaders of RSPP’s sustainable development index The Russian Union of Industrialists and entrepreneurs ranked TATNEFT among the 30 leaders of the Sustainable Development Vector index. In ESG — rating — RAEX rating, TATNEFT is named in top leaders’ group, ranking second position among largest Russian companies 99,9% transparency of Company’s environmental performance disclosure (Interfax-Era Rating) Openness Rating Diploma for oil and gas companies of the Russian Federation in environmental responsibility for most dynamic promotion in the rating (World Wildlife Fund (WWF) rating) 46 47 BOD REPORT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Growth Strategy TATNEFT is implementing its Strategy-2030 based on a stable financial structure and effective investment portfolio pursuing the goal of maximizing free cash flows and continuously improving operational results and asset performance. 1 Expanding the geographical reach and the resource¬ base outside the Republic of Tatarstan and the Russian Federation, including gaining the access to oil and gas reserves with the possibility¬ of forming strategic alliances, as well as developing new markets for selling¬ product outputs. 3 Strengthening the technological capacities and capabilities with effective investment in the development and modernization of the production operating base through the accumulation of digital high-tech solutions, development of new and novel tools and techniques and improving the efficiency of used equipment and technologies, as a single platform for managing the production operations of a new generation at all stages of the value chain. 2 Ramping up the output of profitable oil and gas production shifting from production stabilization to sustainable organic growth, enhanced oil recovery at licensed fields under development, and extensive development of new fields, including super-viscous oil and hard-to-recover oil, in the Republic of Tatarstan, while cutting down operating and investment costs per unit. • Asset life >30 years • • Reserve replacement rate >100 % Oil production growth up to 38,4 mln tonnes per year 7 Ensuring sustainable development based on a high level of corporate social responsibility, industrial and environmental safety and the environmental balance in the course of the production and business operations. 6 Keeping up with a leading position in the Russian tire market and developing new market niches through effective implementation of marketing programs, improving the quality and expanding the product slate. • Production output and sales growth according to market conditions in the 2030 horizon 5 Improving the efficiency of the retail network for the sale of petroleum products, ensuring the sale of more than 50 % of gasoline and diesel fuel produced at the Company’s refineries, through fuel filling stations and small wholesale; updating the brand concept and unique trading offer with increasing service standards and the development of accompanying services. 4 Boosting the output and sales of competitive finished products with high added value that meet the world environmental standards and future market requirements, development of Company’s own refining and petrochemical capacities. • Ramp-up of crude refining capacities • up to 15,7 mln tonnes per year • Oil conversion ratio 99% Light product yield 89% • Premium product output growth • Optimized sales logistics • Optimum balance of crude and petroleum • product sales 48 49 BOD REPORT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTSystem of key performance indicators The success of our strategic ambitions depends on the quality and timely assessment of the competitive environment, economic, political, social and environmental factors, trends and uncertainties, as well as the assessment of compliance with our business model. We develop competitive projects by constantly reviewing and monitoring our investment portfolio, while generating higher cash flows from operations and cutting down costs. The Company uses scenario planning, taking into account the multi-factor nature of forecast data. Our business plans are focused on creating and maintaining a competitive edge. We continuously develop our risk management and internal control system, which makes it possible to identify risk drivers and respond promptly to them. The Company’s management remuneration is aligned with evaluating the achievement of strategy goals based on the performance indicators that meet the expectations and serves the best interests of shareholders. System of key performance indicators and their achievement assessment Организация системы КПЭ в Группе Татнефть и основ- ные Setting up of the KPI system across the TATNEFT Group and the main principles of the long-term incentive program for key employees of the TATNEFT Group were approved by the Company’s Board of Directors (Decision No. 3 of 26.09.2018). The assessment of achievement of annual target levels, individual contribution and quality of management decision- making helps motivate employees to implement the 2030 Strategy goals on a step-by-step basis. The targets of the long-term development strategy take the form of specific performance indicators annually, which are reflected in the individual KPI maps of the management team as part of the cascading and top-down decomposition procedures. The library of current key performance indicators is fixed in the corresponding matrices across all business and functional streams of the TATNEFT Group, which provide for the procedure and methodology of calculation and are approved on an annual basis at the level of the Company’s top management. The number of participants in the program as at the reporting year-end is about 550 people. The list and target values of performance indicators for 2019 for each top manager of the Company were developed on the basis of a consolidated business plan approved by the Management Board in December 2018, which are divided into two (2) groups i.e. collective and individual ones. The collective indicators include top-tier financial and economic metrics, production objectives of the consolidated business plan and forecasts for the development of business streams. In 2019, as part of the improvement and development of the cash flow planning and controlling system and the quality of investment activities, an additional indicator such as free cash flow was introduced, which has been applied in the corporate incentive system since 2018. The individual KPIs are developed based on business initiatives, projected performance indicators, medium- term objectives and strategic goals set for a specific manager. The KPI system development service (with selective involvement of specialists from the internal audit department and functional experts) carry out an audit of the performance quality, focusing on the examination procedure in relation to those areas that may contain distortions.¬¬¬ The assessment results are submitted annually for review to and accepted by the decision of the members of the PJSC TATNEFT Management Board for annual remuneration payment at the reporting year-end. Factors that are not related to the scope of management of the company’s managers (geopolitics, growth in world oil prices, currency exchange rates) are subject to the KPI normalization procedure. The factor analysis, which reveals the controlled and uncontrolled impact zones, helps determine the objective zone of influence of the manager on the results of the activities.¬ Normalization is performed under the Regulation on normalization of performance indicators in the review and assessment of the Company’s management performance, which is an Annex to the Methodology for setting and assessing the fulfilment of key performance indicators «(approved By order of PJSC TATNEFT No. 09 of January 16, 2019). The use of the KPI system in the Company shows a significant contribution to the achievement of the strategic goals, demonstrating growth in both operating and financial performance indicators, and annually increasing the income of the Company’s shareholders. As at the end of 2019, the planned performance indicators, given normalization, had been fulfilled. 50 51 BOD REPORT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Climate change Under the Paris Agreement humanity must keep to global average temperature rise within 1.5–2 C from the pre-industrial level. The Company clearly sees its contribution to sustainable energy future in the context of transition of the global economy to a low-carbon development path associated with climate change and ensuring global economic growth. The Company shares the global climate change concern and the Caring for Climate Strategic Global Partnership initiative of the UN Global Compact and the secretariat of the Framework Convention on Climate Change (UNFCCC), embodied in the Paris Agreement. Given that energy companies generate significant greenhouse gas emissions during their production activities that can affect the climate and create climate risks, as well as an increase in energy demand to achieve and maintain a good quality of life, the Company seeks to contribute to sustainable development and building of innovative energy infrastructure.. László Gerecs Member of the Board of Directors of PJSC TATNEFT, independent director authorized by the Board of Directors on climate policy of the Company. From his report made at the II Science and Innovation International Forum, Almetyevsk, October 2019 «The Company shapes a clear-cut stance in planning its contribution to reducing carbon footprint. We set our goals, monitor and control greenhouse gas emissions on the basis of the international standards, best practice in the industry and ongoing progress. The human factor is crucial as we need to convince our communities that we are in the group of enterprises that will go forward on climate change agenda, because it is a serious responsibility to the public and the future.» COMPANY’S GREENHOUSE GAS EMISSIONS ACCOUNTING SINCE 2015. COMPANY PREVENTS AIR EMISSIONS OF NEARLY 3 MLN TONNES OF CO2-EQUIVALENT GREENHOUSE GASES PER YEAR THANKS TO HIGH APG UTILIZATION RATE. 5% LOWER GREENHOUSE GAS EMISSIONS FROM 2016 96,4% EFFECTIVE APG UTILIZATION RATE STRATEGIC GUIDELINES GOVERNANCE BUSINESS OPERATIONS GREEN TATNEFT BRANDS The Company recognizes the importance of meeting the needs and demand of the public for moving towards cleaner energy and takes into account the fundamental trend of rebalancing of energy mixes towards less carbon-intensive fuels, development of new energy sources to reduce greenhouse gas emissions, as well as a variety of possible long-term scenarios for global energy system transition to decarbonization. Although, the social and economic growth and better quality of life involve higher energy consumption. Being aware that there are a lot of uncertainties in the energy transition consumers are expected to continue using oil and gas for a long time to come. Not all types of economic activity can be easily, quickly, or cost- effectively electrified. We see a permanent role of oil and gas in the future along with renewable energy, hydrogen and new technologies. The key task in this direction is to develop our business model, which seeks to minimize and subsequently to zero emissions. These ambitions will be determined by specific goals for the long term with intermediate target values. Climate change issues are addressed at the strategic level of the Company's management. In September 2019, the Board of Directors adopted a new version of the Climate Change Environmental Policy. At the same time, the Board of Directors appointed a member of the Board of Directors, Independent Director László Gerecs to be responsible for overseeing the Company's climate change activities. In March 2020, the Board of Directors considered the Environmental Program Roadmap with considerations to the climate change to formulate target values for reducing greenhouse gas emissions. The topics of reducing the environmental impact and climate aspects are regularly reviewed by the Board of Directors and the Management Board. The Corporate Governance Committee of the Board of Directors under the leadership of the Chairman of the Committee - General Director of PJSC TATNEFT Nail U. Maganov routinely coordinates shaping of program actions with regard to the TATNEFT Group’s climate change policy and sustainable development. CONSUMERS AND PARTNERS INTERNATIONAL AND NATIONAL INITIATIVES A significant part of emissions associated with the Company activities are emissions from consumers of our products. We will work with our partners, contractors and customers so that they should also take steps to reduce their emissions to achieve the common goal of coming to zero emissions. The Company is committed to the international initiatives aimed at preventing climate change in accordance with SDG 13 of the UN Global Compact on Climate and related international and national programs. The IPIECA industry standard is being integrated into the Company's activities to improve the sustainable development practice in the oil and gas industry. It is planned to join the Company to the Science Based Targets Project (setting scientifically based goals to reduce greenhouse gas emissions) and a number of other effective platforms. The tasks to reduce greenhouse gas emissions are consistently integrated into business processes. We plan to assess the impact on the environment, including an anthropogenic one, throughout the entire value chain, including logistics and supply. IN 2019, WE LAUNCHED TWO SPECIAL TASK PROJECTS: • Implementation of initiatives and actions of the Company on climate aspects. Greenhouse gas management and accounting processes. • Analysis and selection of effective methods for reducing emissions, capturing and processing of carbon dioxide. We carry out a detailed inventory of emission sources, analysis and selection of promising methods for reducing emissions, carbon dioxide capture and processing. The Company intends to develop a product line with lower carbon emissions and to develop renewable energy (clean low-carbon energy generation) and biofuels. In order to improve the climate management system effectiveness, it is planned to integrate the standards, such as ISO14064–1: 2018; ISO 14064–2: 2019; ISO14064-3: 2019. INFORMATION DISCLOSURES The Company discloses financial climate-related information TCFD (Task Force on Climate-related Financial Disclosures) and intends to become one of the CO2 disclosure leaders of the Carbon Disclosure Project (CDP). REPORTING Climate information is disclosed in the Annual Reportand Sustainability Report. In 2020, an independent verification of greenhouse gas emissions is planned to be done by international standards. High environmental properties of the Company's products, energy efficiency and performance of the production processes and its model of rational consumption of resources that contribute to the continuous reduction of specific greenhouse gas emissions into the atmosphere form a single “green” brand of the Company. All products of the TANECO fuel line such as gasoline of grades AI-92, AI-95, AI-98, AI-100 and diesel fuel comply with the EURO-6 environmental standard and represent a “green” calling card of the Company. In order to create a favorable environment and increase the absorption of greenhouse gases TATNEFT has been implementing a landscaping program since 2000 with more than 10 million seedlings of trees and shrubs planted over this period. SCIENCE In order to reduce the negative impact on the environment and climate, increase the sustainability of ecosystems, the Company uses the best available technologies and solutions that have proved their effectiveness. At the same time, innovative methods are being sought. The development of new technologies is provided by the research and development unit of the TATNEFT Group, which interacts with the leading experts and specialists based on TatNIPIneft. SCIENCE AND INNOVATION INTERNATIONAL FORUM OF THE COMPANY In October 2019, TATNEFT organized the 2nd Science and Innovation International Forum in Almetyevsk, bringing together distinguished Russian and international experts, representatives of government agencies, and leading industry experts. Opening the plenary session of the Forum, the General Director of TATNEFT Nail U. Maganov noted the importance of contribution of industrial companies and joint efforts in solving the global agenda of reducing the carbon footprint. A panel discussion on Global Decarbonization and Green Technologies was held during the forum. 52 53 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Upstream Exploration Exploration operations within the Republic of Tatarstan Within the Republic of Tatarstan, the Company holds 67 licenses, of these, 36 mineral exploration and extraction licenses, 27 geological study licenses, including mineral prospecting and appraisal, mineral exploration and extraction, 4 geological study licenses, including mineral prospecting and appraisal. The exploration operations provided for in the license agreements for the Company's license areas are fully performed. In 2019, the exploration activities were carried out within the Cheremshano- Bastryksky, Tlyanchy-Tamaksky, Stepnoozersky exploration zones, and the Agbyazovsky, Yersubaikinsky, Sokolinsky subsoil areas located in the Republic of Tatarstan. The exploratory drilling carried out in Tatarstan in 2019 amounted to 41,0 thousand meters, including exploration drilling – 10,3 thousand meters, prospecting drilling – 30,7 thousand meters. The construction of 25 exploration wells was completed, of which 21 wells were proved productive. Based on the results of seismic surveys, one (1) new Adeyevskaya structure (the North-Eastern Dome) with prospective resources for the Do category (original oil in-place/recoverable) – 816/294 Ktonnes was prepared for deep drilling. In 2019, within Tatarstan, the quantity of 36,679 million tonnes of oil was added to the recoverable oil reserves for all categories (A+B1+C1+B2+C2), including the incremental reserves through exploration that amounted to 30,439 million tonnes. 84% SUCCESS RATIO OF EXPLORATORY DRILLING IN TATARSTAN 41,0 THOUS. M EXPLORATORY DRILLING METERAGE IN TATRSTAN IN 2019 IN 2019, THREE OIL FIELDS WERE DISCOVERED WITHIN THE REPUBLIC OF TATARSTAN, NAMELY: KANEVSKOYE, USINSKOYE AND MYUDOVSKOYE. THE TOTAL ADDITIONS TO THE RECOVERABLE OIL RESERVES FOR THE C1+C2 CATEGORY AMOUNTED TO 0,696 MILLION TONNES. KANEVSKOYE OIL FIELD The Kanevskoye oil field (Zainsky District) was discovered within subsoil license TAT 02263 NE Cheremshano-Bastrykskaya area by prospecting well No. 11927, that tapped the oil accumulations within Lower Carboniferous carbonate deposits of the Vereiskian horizon and the Bashkirian stage, as well as carbonate deposits of the Famennian stage, the Dankovo-Lebedyansky and Yeletsky horizons, with the water-free oil tested at flow rates of 2,7 and 21,6 tonnes. For the field, the C1+C2 category reserves totaled 779/216 thousand tonnes (OOIP/recoverable). USINSKOYE OIL FIELD The Usinskoye oi field (The Muslyumovsky District) was discovered in the southern part of the Agbyazovsky licensed area of the subsoil based on the results of drilling and testing of prospecting well No. 944, which tapped a 2,2 m thick net oil pay zone within in the sediments of the Upper Devonian Pashian horizon. The well tested oil with the flow rate of 12,5 tonnes per day. The initial reserves for the C1category were estimated at 579/272 Ktonnes (OOIP/recoverable). MYUDOVSKOYE OIL FIELD The Myudovskoye field (Nurlatsky, Aksubaevsky Districts) was discovered by prospecting well No. 1369, where the terrigenous Bobrikovsky horizon produced oil with a flow rate at 2,5 tonnes per day. The C1+C2 category reserves amounted to 934/208 thousand tons (OOIP/recoverable). Exploration operations outside the Republic of Tatarstan Outside the Republic of Tatarstan, the Company holds 35 licenses, of these, 16 mineral exploration and extraction licenses, 16 geological study licenses, including mineral prospecting and appraisal, mineral exploration and extraction, 3 geological study licenses, including mineral prospecting and appraisal. In 2019, the exploration operations were carried out by five (5) subsidiaries and affiliated companies within the Ulyanovsk, Orenburg, Samara regions, the Nenets Autonomous District and the Republic of Kalmykia. In 2019, the prospecting and exploratory drilling meterage outside Tatarstan was delivered in the amount of 23,2 thousand meters. The construction of two (2) prospecting wells and two (2) exploration wells was completed. The operations were carried out within the Samara, Orenburg Regions and the Nenets Autonomous District. Over 2019, the additions to the recoverable oil reserves for all categories (A+B1+C1+B2+C2) in the Nenets Autonomous District amounted to 2,997 million tonnes, all reserves were added through exploration efforts; in the Samara Region for all categories (A+B1+C1+B2+C2) - 3,667 million tonnes, including the reserves additions through exploration totaled 1,679 million tonnes; reserves additions for all categories (A+B1+C1+B2+C2) in the Orenburg region amounted to 1,807 million tonnes, including the reserves increment through exploration that amounted to 0,099 million tonnes. 100% SUCCESS RATIO OF EXPLORATORY DRILLING OUTSIDE TATARSTAN 23,2 THOUS. M EXPLORATORY DRILLING METERAGE OUTSIDE TATARSTAN IN 2019 SAMARA REGION In the reporting year , LLC Tatneft-Samara prepared five structures in the Samara Region for deep drilling with the D0-category prospective oil resources (original oil in-place/ recoverable) standing at 2631/1278 thousand tonnes based on the results of 3D CDP seismic surveys. LLC Tatneft-Samara purchased the Nugaykinsky area (based on the auction results), which contains 10 structures with in the D0 category prospective oil resources (OOIP/recoverable) – 12176/3450 thousand tonnes, and the D1-category inferred oil resources in the amount of 1,9 million tonnes, and the Otradnensky area with the inferred oil resources for the DL- category – 0,5 million tonnes, D1 cat. – 1,2 million tonnes. Five structures with prospective oil resources for the D0 category (OOIP/recoverable) – 23211/4350 thousand tonnes in the Ulyanovsk Region within the Popovkinsky area were transferred to be put on the books of Tatneft-Samara LLC. NENETS AUTONOMOUS DISTRICT In the Nenets Autonomous district, LLC Tatneft-NAO acquired the Jabotinsky area (at auction) where there are two (2) structures with the D0-category prospective oil resources (recoverable) – 1,184 million tonnes, inferred resources for DL – 1,8 million tonnes, D1 – 17,0 million tonnes and the license (flanks) of the Tibeivissky oil field the additions to the oil reserves for C2-category amounted to 1730/640 thousand tonnes. In 2020, the Company intends to drill 22 exploratory wells with a total meterage delivery of 28,1 thousand meters of rocks in its oil fields and exploration zones for the purpose of reserves replacement in Tatarstan, and to run 2D and 3D CDP seismic surveys with the delivery of 280 km and 558 km2, accordingly. In 2020, the Company intends to drill 22 exploratory wells with a total meterage delivery of 28,1 thousand meters of rocks in its oil fields and exploration zones for the purpose of reserves replacement in Tatarstan, and to run 2D and 3D CDP seismic surveys with the delivery of 280 km and 558 km2, accordingly. 54 55 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTGeological prospecting technologies The Company assiduously applies and implements new effective methods of exploration and study of reservoir properties, modern analytical equipment, and uses best practices of leading Russian and foreign companies. In 2019, new equipment with a thermal desorption unit was introduced to perform prospecting and exploration geochemical studies using the technology of passive adsorption of hydrocarbon components, which significantly improved productivity and led to the less amount of subcontracting work. In 2020, with the patented geochemical technology (patents of the Russian Federation No.2478944 2499285) the surveys are being completed at the Zapadno-Alexandrovsky, Irgizsky, Izyumovsky, Rubezhinsky licensed areas of Tatneft-Samara LLC. The obtained geochemical data will make it possible to evaluate the oil content and prioritize the most oil-prospective reservoir targets. At the end of 2019, a pyrolytic plant was introduced that allows performing a pyrolytic method to analyze core samples taken from unconventional reservoirs to assess the productivity of hard to recover reserves. This will help a lot in dealing with studying hydrocarbon generating properties of kerogen and substantiating the conditions of the Domanic reservoirs for estimating and updating oil field reserves. From 2014 to 2020, the Neuroseism Research and Production Center of TGRU (Tatar Geological Prospecting Division), which is part of PJSC TATNEFT, developed new software tools and methodological techniques to adapt and optimize the patented Neuroseism technology (Russian patents No.2094828 and No.2158939) - a special modification of the Neuroseism- Foreground. This modification is intended for predicting the oil content of the Domanic deposits within the Franco-Famen carbonate play. This neurocomputer prediction method was tested in 2015. In the period of 2017 through 2019, according to the Neuroseism- Foreground modification, the work was accomplished to study the Domanic deposits in the area of the Vostochno-Makarovsky field. Based on the results of the work performed in this area, the paperwork was prepared for patenting the software suite "The Domanic hydrocarbon probability determination method" (Proposal for patenting No. A-659 in KAS Edison). The prepared paperwork was filed to a federal government budgetary institution - the Federal Institute for Industrial Property. In parallel with the development of Neuroses-Foreground methodology, currently, the staff of the Neuroseism Scientific And Production Center of TGRU (Tatar Geological Prospecting Division), which is part of PJSC TATNEFT, has developed a new Wavelet-Selector software suite and methodological techniques that allow the adaptation and optimization the Wavelet analysis technology for seismic data to predict parameters of reservoir properties of productive deposits. From 2017 to 2019, this technology was applied to build a geological model of an oil field for the Tula horizon deposits of the Gareysky and Tatsuksinsky oil fields. Based on the results of the work performed in this area, the software patenting paperwork is also being prepared as follows: "The technique to determine porosity and permeability properties of rocks based on seismic survey data" (Proposal for patenting No. A-580 in KAS "Edison"). The technique of geo-radar electromagnetic pulse sensing for mapping structural highs and super-viscous oil accumulations within the upper part of the sedimentary cover (patent of the Russian Federation No. 2551261 of April 16, 2015) was implemented in 2019. The electromagnetic georadar pulse sounding surveys were accomplished within the Karamyshevsky high of the Cheremshano-Bastryksky zone. In the course of the project, the geological setting was studied using the borehole-to-borehole measurements and the outline of the bitumen reservoir was updated for the Karamyshevskaya high structure, that is confined to the terrigenous reservoirs of the Sheshminsky horizon of the Ufimian stage. The geo-radar and geochemical studies have improved the reservoir fluid saturation projections, while a comprehensive approach to exploration has reduced well drilling risks. Adoption of the innovative technique helps evaluate the capacity of the super-viscous resources and make estimates of average net oil pay thicknesses and oil saturation capacities. Technologies and solutions in oil field development FORMATION HYDRAULIC FRACTURING Hydraulic fracturing is the basic well stimulation technique in the Company. The Company has a great deal in hydraulic fracturing operations. Over the past few years, hydraulic fracturing operations have tripled in terms of their amount. At the year-end 2019, 859 frac jobs were completed (including 809 wells of the operating stock and 50 newly drilled wells), and more than 900 wells are planned to be fractured in the current year 2020. At the same time, along with the frac job amount growth, there are average daily oil rate gains on hydraulic fracturing, reaching its historical high of 5,3 tonnes per day. The incremental production using hydraulic fracturing in 2019, taking into account converted wells, reached 2,1 million tonnes of oil. Altogether, the Company performed more than seven (7) thousand hydraulic fracturing jobs (Fig.2) with cumulative additional oil production of 19,2 million tonnes. The dynamic growth of efficiency achieved through an integrated approach including: correct selection of technology tools for a specific reservoir treatments with the existing restrictions; the development of modern frac fluid and acid compositions for specific producing reservoir targets; modern analytical tools involved in hydraulic fracturing design implemented within hydraulic fracturing software simulators; assessment and consideration of the interwell space influence during frac operations. TECHNOLOGY TO BUILD LONG SMALL- SIZE LATERALS WITH SUBSEQUENT WELL STIMULATION (TAMYR) TATNEFT carries out drilling operations for small-size horizontal laterals with subsequent well stimulation using the TAMYR technology. A high priority for the Company is to deploy this technology in oil saturated reservoirs with nearby aquifers where the application of other technologies (such as multistage fracturing and selective large-volume acidizing) is highly risky and fraught with potential water production. The technology uses of downhole tools (whipstock and downhole motor assembled on a coil tubing) to sequentially make small-size side channels in the open hole of a horizontal well following with an acid treatment of the created channel. As a result of the implemented works, we managed to raise the incremental production from 1,6 to 3,8 tonnes per day thanks to the constant improvement of the technology. In 2020, the works will continue with the aim of reaching the technological limit of this technology. This year's program provides for improving the technology through the use of rotary steerable tools for drilling, the selective acid treatment of new channels and the use of new formulations of acid compositions. TECHNOLOGY OF DYNAMIC MATRIX ACID TREATMENT OF WELLS The Company continues to improve acid formulations to expand the applicability scope of well stimulation techniques for various mining and geological setting. In 2019, the Company developed and introduced its proprietary technology of dynamic matrix acid treatment of wells. A range of the research and practice works on matrix acid treatments in a dynamic mode was implemented in 53 wells. The oil flow rate of the wells treated using this technology increased by 106% of the similar wells that were not acidized. Be the project results it was decided to replicate this technology in wells after drilling. TECHNOLOGY OF APPLICATION OF HYDROPHOBIC (INVERT) EMULSION SYSTEMS FOR IMPROVED OIL RECOVERY FROM WATER- FLOODED HETEROGENEOUS RESERVOIRS (MGES-M) By the year-end 2019, the Company performed 701 EOR treatments (of these, 616 treatments were done in injection wells, and 85 - in the producing wells).¬ The incremental EOR production totaled 2,89 million tonnes of oil, including converted wells, the additional production from wells was 290 thousand tonnes in 2019 . The improved efficiency is achieved through a comprehensive approach, including introduction of new technologies, replacement of chemical components in the EOR technologies with better performing ones. The Company has developed and applied a technology for using hydrophobic (invert) emulsion systems to increase oil recovery from water-flooded heterogeneous reservoirs (MGES-M). The MGES-M technology is designed to manage the development of oil fields or their areas where the reservoirs have different permeability and water flooding was used for a long time with the technique of selective isolation of water-saturated interlayers. The technological process is implemented by pumping a two- component emulsion system developed at the TatNIPIneft Institute, based on an emulsifier and mineralized water with a step-by-step increase of water content. The mechanism of the MGES-M technology is based on in-situ creating of the emulsion with a high hydrophobic capability, resistant to erosion, increasing filtration resistance of the watered (most permeable) reservoir intervals, which leads to better conformance control and, consequently, improved. The MGES-M technology is implemented in injection wells that are under injection of both mineralized and fresh water. The target reservoirs are watered terrigenous reservoirs of pore and fracture-pore type, which have heterogeneous permeability in the cross-section or in the formation structure. As a result of the application of the MGES-M technology at 209 injection wells, the total current technological effect yielded 305,6 thousand tonnes (1462,5 tonnes per well job). 56 57 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTOil and gas production One of the Company's primary strategic goals is to shift oil production from stabilization to sustainable growth at its licensed fields in Tatarstan. The upstream business comprises the Company's oil and gas production divisions and subsidiaries. Most of the oil and gas exploration and production activities are concentrated within the Company and are centrally managed by the Tatneft-Upstream Division. The Company aims to change the structure of oil production in favor of high-margin products, improving the structure of the investment program in the direction of activities with the highest net present value for the duration of the effect and optimizing operating costs through the implementation of the IDP program, the improved IT projects complex efficiency, and implementation of innovative technologies. The Company maintains the production efficiency, including in terms of unit operating costs despite the industrial producer price inflation rate (2.9 %). EXTENDING ECONOMIC LIFE OF OIL FIELD DEVELOPMENT A favorable economic condition for the development of the Company's oil fields is the use of differentiated mineral extraction tax rates and benefits on the customs duty on oil. The application of lower MET rates and lower export customs duty rates for oil is a good incentive for the development of the Company's oil fields. In the subsoil areas in the NAO, the tax on excess profits from hydrocarbon production was applied. In 2019, oil production of these fields was more than 25 million tonnes (including the SVO with viscosity of more than 10,000 MPa*s - more than 2.7 million tonnes). Improved efficiency, oil and gas production profitability control The Company strives to unlock the maximum potential of oil accumulations, efficiently utilize the amassed knowledge and experience and to strengthen the Company's industry position with maintaining the balance of the ecosystem. As part of measures to improve the efficiency of oil and gas production, the high-margin production has increased by 4.5% over the past three years In 2019, the optimization of operating costs amounted to 1,7 billion rubles with a 14% over-fulfillment of the plan thanks to implementation of regulatory measures, optimization of the SAGD development process, and comprehensive optimization of workover processes. In 2019, The Group increased the oil production at its fields by 0,9 % as compared to 2018.¬ The total oil output for the Group was 29,8 million tonnes with an average daily production of 581,5 thousand barrels per day. The Company was abiding by the terms of oil output curbs under the current OPEC+ agreement, which hindered its production growth capabilities.¬ At the same time, the Company retains its potential to boost oil production after demand and prices have stabilized on the crude oil market. In order to ensure maximum efficiency of field development, digital modeling (digital twins) of producing assets is run, which enables to reliably determine their hydrocarbon potential and manage the oil field development with maximum efficiency. A digital twin of an oil field is a virtual analogue of a real development target, which reflects all main parameters and processing of oil field operation online using digital platform of 3D-visualization technology. This makes it possible to remotely manage the production facilities according to their specific features and peculiarities of the landscape. The Company uses advanced EOR techniques and intelligent production management methods. In 2019, the Company applied lowering MET rates: • • • • for subsoil areas with over 80% depletion rates, for super-viscous oil with viscosity of 10 000mPa*a and more (in situ conditions), for oil, for oil produced from the Domanic deposits, for small subsoil areas with reserves (STOOIP) less than 5 mln tonnes and depletion of less or equal to 5%, for SVO fields with in-situ viscosity of more than 200 and less than 10 000 mPa*s. In 2019, highly successful well interventions resulted in higher net present value per ruble of investment by 33% against actual performance of 2018. 44% RF THE COMPANY KEEPS DELIVERING ONE OF THE HIGHEST RECOVERY FACTOR (RF) IN THE INDUSTRY TATNEFT GROUP AVERAGE DAILY OIL PRODUCTION mln tonnes thous. bpd In the reporting year, the planned targets were fulfilled by 100,6%, including 100,6% for conventional oil production, 100,2% for super viscous oil, and 102,8% outside the main production areas (outside of Tatarstan). 30,0 29,5 29,0 28,5 28,0 27,5 27,0 26,5 26,0 22,5 531,8 27,2 581,5 29,8 576,4 29,5 564,8 28,9 558,3 28,7 580,0 570,0 560,0 550,0 540,0 530,0 520,0 510,0 500,0 TATNEFT GROUP TARGET VS ACTUAL OIL PRODUCTION PERFORMANCE, THOUS. TONNES target 26 562 2 730 320 29 612 +172 +5 +9 actual 26 734 2 735 329 29 798 2015 2016 2017 2018 2019 thous.t 24000 25000 26000 27000 28000 29000 30000 Oil production, mln tonnes Average daily oil production), Conventional Oil SVO Subsidiaries thous. bpd Production of associated petroleum gas for the Group in 2019 totaled 1 009,6 million m3 with the average daily gas production in oil equivalent at 16,3 thousand barrels of oil per day. TATNEFT GROUP WELL STOCK AS OF 01.01.2020 TATNEFT GROUP ASSOCIATED PETROLEUM GAS PRODUCTION, MLN. M3 2019 Operating producing wells Active producing wells Inactive producing wells Associated Petroleum Gas Production 2019 г. 1 009,6 Testing and waiting-on-testing producing wells Operating injectors Active injectors AVERAGE DAILY GAS PRODUCTION RATE, THOUS. BOE PER DAY Well Count 24 212 21 521 2 644 47 11 459 10 689 Average Daily Gas Production Rate PRODUCTION OF NGL*, KTONNES NGL Production 2017 TO 2019 DRILLING, THOUS. M Production drilling: PJSC TATNEFT Exploratory drilling: PJSC TATNEFT Subsidiaries Total Drilling: PJSC TATNEFT Subsidiaries 2019 г. 16,3 2019 г. 321,136 * excl. NGL of TANECO 2017 г. 2018 г. 2019 г. 942,6 750,7 835,9 934,4 738,3 801,2 20,2 11,5 8,7 28,6 20,3 8,3 25,0 15,3 9,7 945,9 758,6 835,9 16,9 20,6 25,0 TATNEFT GROUP AVERAGE DAILY OIL PRODUCTION RATE OF ACTIVE PRODUCING WELLS VS NEW WELLS, TONNES PER DAY tpd 12 10 8 6 4 2 0 11,5 10,2 8,6 4,5 4,5 4,2 2017 2018 2019 Average daily oil production rate Average daily oil production rate of active producers, tpd of new well, tpd In 2019, the TATNEFT Group fields' daily oil production per operating well averaged 4,5 tonnes per day, and per new well 10,2 tonnes per day 58 59 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Oil production in the Republic of Tatarstan The Company produces most of its oil output from conventional oil fields located within the Republic of Tatarstan. Currently, the major oil production comes from two unique and six largest oil fields, namely: Romashkinskoye, Novo-Elkhovskoye, Ashalchinskoye, Bavlinskoye, Bondyuzhskoye, Pervomayskoye, Sabanchinskoye, and Arkhangelskoye. Bondyuzhskoe 231 Ktonnes Pervomaiskoye 315 Ktonnes Romashkinskoe 14 789 Ktonnes Arkhangelskoye 262 Ktonnes OIL PRODUCTION BY MAJOR OIL FIELDS, KTONNES KAZAN NABEREZHNYE CHELNY Romashkinskoe Novo-Elkhovskoye Ashalchinskoye Bavlinskoye Bondyuzhskoe Pervomaiskoye Sabanchinskoye Arkhangelskoye 2017 2018 2019 15 184 15 494 14 789 2 827 2 780 2 938 1 234 1 071 1 205 1 255 1 207 1 163 246 319 570 250 239 310 537 237 231 315 558 262 Super-viscous oil field development The Company produces super-viscous oil at the Ashalchinsky field in the Republic of Tatarstan, using simultaneous injection of steam into production and injection wells. In 2019, super-viscous oil production totaled 2 735,09 thousand tonnes at Ashalchinsky and other fields (with an oil viscosity of more than 10,000 MPa*s). At the year-end, the daily oil production reached 8 492 tonnes.¬ In general, since the beginning of development, the total production of super-viscous oil has amounted to 8,309 million tonnes. Twenty four (24) super-viscous oil accumulations deposited within the Sheshminsky horizon are under development and in production.¬ In 2019, five (5) super-viscous oil (SVO) accumulations were brought into production (such as, Novo- Chagodaiskaya, Verkhnyaya, Karmalinskaya, Averianovskaya, South Ekaterinovskaya), six (6) SVO deposits were brought into steam injection (Arkhangelskaya, Gradinskaya, Moroznaya, Dimnaya, Podlesnaya, South Rodnikovskaya), drilling of infill horizontal wells and installation of surface facilities were commenced on two (2) SVO deposits (Ashalchinskoye, Melnichnaya). As at 01.01.2020, at the SVO fields the operating well stock comprised 938 horizontal wells (including 125 wells drilled in 2019), 2532 appraisal wells were drilled (including 270 wells drilled in 2019).¬ The operating producing well count consists of 362 wells, including 334 paired wells and 28 cyclic steam stimulation wells. The operating injection well count consists of 452 wells, including 434 paired, 18 cyclic steam stimulation wells. Ashalchinskoye 1 205 Ktonnes Novo-Elkhovskoye 2 938 Ktonnes Sabanchinskoye 558 Ktonnes Bavlinskoye 1 163 Ktonnes WELL COUNT Operating wells Active producers Injectors ALMETYEVSK 2017 2018 2019. 588 221 292 803 258 396 938 362 452 НThe work is proceeding at the super-viscous oil field facilities to deploy the existing technologies and seek new solutions focused on the improved super-viscous oil reservoir management.¬ Currently, the efficient technologies have been developed to bring wells to delivering the projected flow rate: thermogel compositions; reservoir acid treatment with a complex acid composition; pre-treatment with a solvent. Another promising area is technologies for increasing development efficiency. Currently, the areal injection of solvents, the use of catalysts are being tested, and the injection of foam systems is expected to be pilot tested. An important area of work to produce the reserves from less than 10 meter thickness and complex geology reservoirs is the development of technologies such as steam and gas injection, cold production and thermoshaft method of super-viscous oil recovery. It is planned to further develop the super-viscous oil project through a completion of the SVN-3200 project, as well as drilling, testing and completion of in-fill wells on existing super- viscous oil accumulations (Melnichnoye, South-Ashalchinskoye, Averyanovskoye, South-Ekaterinovskoye). Oil production outside the Republic of Tatarstan The TATNEFT Group operated nineteen (19) oil fields outside of Tatarstan, including sixteen (16) fields in the Samara Region, two (2) fields in the Orenburg Region, and one (1) field in the Nenets Autonomous District.. In the Samara region, the oil production comes from 133 wells and amounted to 329 thousand tonnes. In the Samara region, 8 new production wells were brought into operation after drilling and testing with the average flow rate of new wells drilled in 2019 at 15,2 tonnes per day. Within the Nenets Autonomous District, the pilot production was tested at the Severo-Khayakhinskoye field with the oil output of 390,2 tonnes in the reporting year. TURKMENISTAN As part of cooperation with the State Concern Turkmennebit, in 2019 the work was underway to implement the production program under the Additional Agreement No. 8 to the Contract No. T5-8-370 with the Turkmennebit Company. Nine (9) workover crews were organized to accelerate advancing the production program to boost oil production. At the year-end 2019, 12 crews of the PJSC TATNEFT Branch in Turkmenistan completed workovers in 60 wells, including running and setting downhole pumps in 53 wells, recovered 23 273 tonnes of incremental oil, and the average daily production of incremental oil reached the rate of 179 tonne per day. Pilot test operations to identify and develop oil accumulations in the Domanic deposits In the reporting year 2019, the study and development of subsurface resources containing unconventional hard-to-recover reserves were performed under the program for additional exploration of oil reservoirs in the Domanic deposits. The operations were carried out in the wells of the NGDUs Prikamneft, Jalilneft and Leninogorskneft. Based on the results of the work performed, the target efficiency was achieved. Within the Kuzminovsky area (the Bitumen testing site ), after evaluating and predicting the prospects for oil-bearing structural highs in the Permian play by geophysical and geochemical methods, five prospecting and appraisal wells were drilled on the Permian deposits with core sampling. At the end of 2019, a deep prospecting well were spudded (with a total depth of 1 955 m). The well drilling program will include logging and testing of both conventional reservoirs and the Domanic low-permeable deposits as well. Drilling and completion of the well will continue in the first quarter of 2020. UZBEKISTAN As part of implementation of the Cooperation Agreement with JSC Uzkimesanoat and the Memorandum of cooperation with JSC Uzbekneftegaz, the work has been organized to put in practice the decisions stipulated in the Minutes of meetings between PJSC TATNEFT, JSC Uzbekneftegaz and JSC Uzkimesanoat.¬¬ The projects are being implemented on the various activities. LIBYA Since 2014, the project in Libya has been under force majeure amid the political situation in the country.¬ At the moment, the main 3D seismic operations have been completed in the 82/4 area, and the seismic data are being processed and interpreted. SYRIA The Company, through its branch of TEPI AG, has contractual obligations for the Block 27 exploration and development in Syria.¬ Oil production has been suspended since 26.04.2011. For the time being contacts and consultations with the Ministry of energy of Russia and the Syrian side on the terms of resuming the project are continuing.¬¬ The Company does not plan to resume any production activities in the Syrian Arab Republic until the cessation of hostilities and stabilization of the political situation, There are no Russian personnel in Syria. The activities titled “The development of research and engineering solutions to develop unconventional reservoirs (the Domanic deposits) and hard-to-recover oil reserves (tar sands oil) on the basis of experimental researches” were carried out under the Federal target program (FTP) of the Ministry of education of the Russian Federation. The technologies developed during the project were tested in oil field conditions and positive results were obtained. These works have been accomplished by Almetyevsk Petroleum Institute. The development of hard-to-recover reserves from the low- permeable Domanic deposits is progressing as planned. In 2020, the oil prospective reservoirs are expected to be tested in the drilled wells at the producing fields to put oil reserves (hard to recover reserves) on the state balance sheet. 60 61 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Downstream The downstream business segment incorporates the production facilities of JSC TANECO (main oil refining output), TATNEFTEGAZPERERABOTKA Division (including the Elkhovsky Refinery), and JSC Nizhnekamsktehuglerod. The downstream operations are organized at four production sites in the immediate logistical proximity to the oil production operations in the Nizhnekamsk and Almetyevsk regions of the Republic of Tatarstan. TATNEFT GROUP CRUDE REFINING VOLUME, THOUSAND BARRELS PER DAY Oil refining volume 2017 2018 2019. 163,3 179,0 206,7 In 2019, oil refining growth showed 15,5%. 83,1% 98,98% 97% 95% 2019 TANECO Complex Main Product Slate stable natural gasoline • • unleaded gasoline • aviation kerosene • Diesel fuel EURO • DTfG (Diesel Oil Cut Hydrotreated) • hydrotreated fuel oil/base oil compound TANECO REFINERY CRUDE REFINING AND MAIN PRODUCT OUTUT industrial gas granulated sulphur • • anode grade petroleum coke • TATNEFT isoparaffin base oil HVI-2 (TANECO base 2) • TATNEFT isoparaffin base oil VHVI-4 (TANECO base 4) • • other middle distillates lubricants 7,1 7,6 0,0 2,1 0,0 5,0 8,5 0,0 1,9 1,0 5,6 0,0 1,9 0,0 5,7 8,7 8,7 0,0 2,2 1,4 5,1 0,0 1,3 1,6 5,9 7,8 0,0 1,4 8,6 0,08 2,3 6,4 6,2 10,1 1,13 3,66 5,3 mln tonnes 11 9 7 5 3 1 0 2012 2013 2014 2015 2016 2017 2018 2019 TANECO oil conversion ratio Oil conversion ratio in the Russian Federation Oil conversion ratio in the USA Oil conversion ratio in Europe TANECO Complex Main processing facilities 1. Crude oil distillation plant; 2. Hydrocracking and base oil plant; 3. Petroleum product hydrotreatment and sulphur recovery plant; 4. Heavy residue processing plant; 5. Aromatics plant; 6. Feedstock and product facility; 7. Processing waste water treatment, electric power and water supply, and sewerage utilities In 2019, more than 10,1 million tonnes of crude oil were processed at the TANECO Complex's facilities, the output of petroleum products amounted to 10,6 million tonnes. In addition, during the year, the vacuum gasoil was delivered from third parties in the amount of 0,230 million tonnes to operate the hydrocracking unit at higher process utilization rate. In 2019, the TANECO Complex oil refining capacity growth showed 15,5%. * data from the Record of Petroleum Refiners Association TANECO AI gasoline production TANECO Mazut Production TANECO diesel fuel production Other product output Oil product output TANECO COMPLEX OIL CONVERSION RATIO, % Oil conversion ratio LIGHT PRODUCT CUT, % 2017 2018 2019 99,27 99,05 98,98 Выход светлых нефтепродуктов 87,50 83,64 80,87 2017 2018 2019 TANECO COMPLEX REFINING OUTPUT, KTONNES Petroleum product output 8 190,8 8 703,5 10 053,5 2017 2018 2019 The TANECO fuel output slate including gasoline of grades AI-92, AI- 95, AI-98, AI-100 and diesel fuel meets the EURO-6 environmental standards. New product launch The AI-100 premium gasoline as per STO 78689379-32-2018 was launched in February 2019. The video-conference with the President of the Russian Federation Vladimir Putin and the Tatarstan Republic President Rustam Minnikhanov was held to officiate the ceremony of launching the commercial output of motor gasolines of the following grades: AI-92, AI-95, AI-98, AI- 100 Euro-5 that meet the Euro-6 engine specifications. In December 2019, the pilot field tests of TANECO Premium Ultra Eco Synth engine oil (made on the basis of TANECO base's own base oils) and TANECO diesel fuel were successfully completed on a Volkswagen Transporter Multivan car with an EA 288 (CXFA) Euro-6 diesel engine as part of a joint project of Tatneft and Volkswagen group Rus "FOR THE CLEAN TODAY. FOR THE HEALTHY TOMORROW." Based on the Tatneft HVI-2 lube basestock (TANECO base 2), the production of TANECO transformer oil as per STO 78689379-18-2018 was launched, which meets the requirements of the national standard GOST R 54331 and the International Electrotechnical Commission IEC 60296. In July 2019, based on the lube basestock Tatneft HVI-2 (TANECO base 2) and Tatneft VHVI-4 (TANECO base 4), all-season hydraulic oils of the VMGZ type (VMGZ-45, VMGZ-55, VMGZ-60), synthetic and semi- synthetic motor oils for gasoline and diesel engines of cars and trucks, as well as transmission oil for mechanical transmissions were brought onstream. The approval was received from Siemens for the TANECO Turbine 32 turbine oil, developed by the specialists of JSC TANECO, for use in Siemens turbine units. The KAMAZ-Motorsport non-commercial partnership completed bench tests of TANECO Premium Ultra Race Synth engine oil (made on the basis of TANECO base). The recommendations were made to continue the base oil tests in the truck at the races in real life. 62 63 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Key business projects and events in 2019 In February, the following facilities of the "gasoline scheme" were brought into commercial operation: naphtha hydrotreating, catalytic reforming, xylene fractionation and off-site facilities. In March, a project was implemented to boost the productivity of the hydrocracking unit to 110 %. In October 2019, the kerosene hydrotreating and diesel fuel hydrotreating plants were put into commercial operation. The integrated reliability tests of the automated gasoline mixing system and commissioning of the heavy coker gasoil hydrotreating unit are underway. The vacuum distillation unit of the visbreaker came onstream in December. Elkhovsky Oil Refinery of Tatneftgasprocessing Division Main processing facilities The new hydrotreatment unit for heavy coking gas oil is capable to produce modern ecological fuel that complies with the requirements of the international convention for prevention of pollution from MARPOL-2020 ships and provide feedstock for motor fuel production for cars with Euro-6 engines. The commissioning of this facility will allow to reduce emissions of sulfur oxides into the atmosphere through exhaust gases by 47 000 tonnes per year. In December 2019, the vacuum unit of the visbreaking plant was put into commercial operation. In April, the capacity of the base oil production unit was increased to 120 %. In the first half of 2019, the turnaround planned maintenance of the process equipment of the delayed coking unit was successfully completed. The commissioning of the CDU-VDU-6 unit made it possible to bring the design oil refining capacity of the TANECO Complex up to 15,3 million tonnes per year. Moreover, with commissioning of the vacuum distillation unit of the visbreaker the refining oil capacity can reach 11,4 million tonnes per year with zero fuel oil produced. The sulfolane extractive distillation unit was put to the integrated testing, which made it possible to boost the Euro-5 gasoline outputs that meet the Euro-6 engine specifications. The Complex development outlook The positive dynamics of the TANECO Сomplex development is steadily progressing through the improved efficiency of the current operations and timely new production launches, making it possible to expand the output and slate of refined products, enhance the oil conversion ratios as well as increase light product yield. PLANNED START-UPS AND PROCESS UNIT CAPACITIES: • Heavy coker gasoil hydrotreating unit - 850 Ktonnes per year • Catalytic cracking unit – 1 100 Ktonnes per year • Pilot tar hydroconversion unit - 50 Ktonnes per year • Middle distillate hydrotreating unit - 3 700 Ktonnes per year • Diesel fuel isodewaxing unit - 1 300 Ktonnes per year • Hydrogen production unit-3 – 100 Ktonnes per year • Gas fractionating unit - 350 Ktonnes per year • Hydrocracking unit-2 – 1 200 Ktonnes per year • Delayed coker unit-2 - 2 000 Ktonnes per year • Lube stock plant – 40 Ktonnes per year The design throughput capacity is 480 000 tonnes of crude oil per year. As of the end of 2019, the Elkhovsky Oil Refinery included the following main production facilities: The design capacity is 480 000 tonnes of crude per year. The Elkhovsky Oil Refinery is located on the site of the Kichuisky stock tank farm of NGDU Elkhovneft. straight-run gasoline hydrotreating; • atmospheric and vacuum distillation of crude oil; • • gasoline catalytic reforming; • benzene-free component unit for commercial gasoline production; • diesel fuel hydrotreating; • amine scrubbing of hydrocarbon gases; • elemental sulphur recovery; • road construction bitumen production The feedstock and product facility includes the following sites: • • • the refinery tank battery for commodity acceptance and storage consists of four (4) vertical steel tanks RVS-5000 and four (4) 200m3 - capacity tanks; commercial Regular-92 gasoline unit; two finished product release outlets. In 2019, the Elkhovsky Oil Refinery accepted 444 244 tonnes of crude oil for processing, including 439 245 tonnes from NGDU Elkhovneft and 4,999 tonnes from Tatneft-Samara LLC (Irgizskoye oil field), which resulted in the refining output of 198 197 tonnes of finished products. The targeted output of 192 755 tonnes of petroleum products was outperformed attaining 102.8%. The Tatneftegazpererabotka's gas collection system received gas in the amount of 1,823 mln m3. 2019 product slate 2019 key business projects • diesel fuel • Regular-92 gasoline • light vacuum gasoil • elemental sulphur straight-run gasoline • • industrial solvent • hydrocarbon solvent • benzene-containing fraction Over the reporting year, the projects were accomplished to raise diesel fuel output including winter-grade ones. According to the turnaround maintenance program, planned preventive repairs of the equipment of the oil-refining unit and the stock tank fleet were carried out with the technical inspection of the equipment diagnostics. 64 65 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Tatneftgasprocessing Division Nizhnekamsktekhuglerod Main processing facilities Product slate • Four (4) NGL pumping stations with a system of product pipelines; • The Minnibaevsky sour gas-sweeting plant with elemental sulphur recovery; • Bavlinsky sour gas-sweeting plant with elemental sulphur recovery; • Gas desulfurization unit with the capacity of 1 billion m3 per year (the unit includes a pilot plant for the sour gases utilization to produce elemental sulphfur); • Raw gas compressor unit 7/8 of the plant with K-380 type centrifugal compressors; • Gas dehydration and sweetening unit to remove moisture and carbon dioxide; • Low-temperature condensation and rectification plant; • Ccascade refrigeration unit; • Cryogenic plant for deep processing of dry topped gas; Tatneftgasprocessing Division (UTNGP) is engaged in processing of associated petroleum gas and wide fraction of light hydrocarbons (APG and NGL) extracted together with crude oil from the Company's oil fields ensuring the gas utilization at the rate of 95 % in accordance with the requirements of the legislation of the Russian Federation. The Tatneftgasprocessing Division is a single technological complex that provides the APG and NGL treatment, storage and processing operations as well as the shipment of processed products. The Tatneftgasprocessing Devision's existing capacities enable to provide the entire complex of gas processing operations: gas purification from hydrogen sulfide and carbon dioxide; dehydration; gas separation into individual fractions – ethane, propane, isobutane, isopentane, pentane-isopentane fractions, and fractions of normal butane and stable natural gasoline, as well as dry topped gas and gas sulfur. As part of implementing the Company's strategic goals and increasing oil production, UTNGP plans to revamp and upgrade its gas treatment and processing infrastructure to accommodate additional hydrocarbon feedstock volumes, including the reconstruction of the Minnibaevskaya and Bavlinskaya desulphurization plants and the construction of a new gas-fractionation plant. The ongoing upgrading efforts will enhance the reliability and resilience of the entire production process chain. In addition, to reduce the air pollutant emissions and mitigate the environmental impact the cryogenic plant reconstruction project was in a full swing. flammable natural gas • • hydrocarbon liquefied fuel gases • ethane fraction • propane fraction • isobutane fraction • normal butane fraction iso-pentane fraction • stable natural gasoline • technical-grade sulfur • technical-grade oxygen gas • technical-grade nitrogen gas • The Company's products of high quality, including the "A" and "Highest" grades, comply with GOST and international standards. The products are delivered to the domestic and foreign markets. In 2019, the supply of oil gas to the GPP amounted to 862,4 million m3 of gas, that is 16,8 million m3 more than in 2018. The integrated oil processing unit processed NGL in the quantity of 322,8 thousand tonnes, that is 3,6 thousand tonnes more than in 2018. The increased feedstock processing was driven by the organization of the GPP operation without its full stop at the scheduled preventive maintenance, as well as higher oil production as a result of the removal of OPEC curbs. In 2019, the sour gas was sent for treatment in the volume of 271,6 million m3, which is 8,0 million m3 more than in the same period of the previous year. The established standards for selecting target components from raw materials are met monthly. The quality of products meets the requirements of the standards. Processing of associated petroleum gas makes it possible to address important environmental challenges and reduce man-made impacts on the environment 96,4% EFFECTIVE APG UTILIZATION RATE 66 The Company's carbon black production capacity is one of the largest among the Russian industrial enterprises. The produced carbon black is highly competitive with its foreign counterparts, as a component in rubber manufacture and is used as a filler for plastic goods. The quality of the products corresponds to the world-class level. A wide range of carbon black grades contributes to the extensive geography of product sales both within the country and for export. The line of carbon black grades produced by the Company includes more than 14 commodity items. The plant produces the following carbon black grades: N-550, N-220, N-234, N-330, N-326, N-339, N-650, N-375, N-660, N-121, P-324, P-514, P-245, P-234. The finished product is delivered to consumers in special hopper-carbon black cars (42-47 tonnes each), packaged in plastic or paper bags (22-25 kg each) or in big-bags. The consumers of carbon black products are the enterprises that produce industrial rubber goods. Nizhnekamsktekhuglerod almost completely provides its production capacities with its own electric energy. Launched in 2018, the power plant works using recyclable resources. The transition to the self-generated power supply has significantly reduced the cost of production and helps to improve the environmental situation in the region. At the year-end 2019, the carbon black production amounted to 112,0 thousand tonnes. Total sales stood at 113,1 thousand tonnes, that is 100,7 % of the planned target. In 2019, the carbon black importers were more than 10 countries. The main deliveries were made to Belarus, Germany, Poland, the United Arab Emirates, Turkey, as well as to Bulgaria, China, Lithuania, Ukraine, the United States, Uzbekistan, and others. MAIN CARBON BLACK SUPPLY DESTINATIONS IN 2019 54% 32% 14% TATNEFT Group tire business Domestic market Export In 2019, a technical audit was accomplished with the participation of Doright Company, one of the leaders in the carbon black industry. The design and engineering solutions were developed improve technological process efficiency. CARBON BLACK PRODUCTION, KTONNES Carbon black production 2019 CARBON BLACK SALES, KTONNES Sales destination TATNEFT Group Tire Business Domestic Market Export Market 2017 133,7 2018 134,4 2019 112,0 61,3 16,0 35,8 67 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Retail business By the year-end 2019, the Company's retail sales network incorporated 802 fuel filling stations located in Russia, Ukraine, Uzbekistan and the Republic of Belarus, in particular: 23 regions of the Russian Federation - 691 fuel filling stations, the Republic of Belarus -18 stations, Ukraine - 91 stations, Uzbekistan - 2 stations. The Company considers its fuel filling station network as the main channel for selling gasoline and diesel fuel of its own production. In September 2019, The Company's Board of Directors approved the Retail Business Development Program that provides for expanding the fuel filling station network given the market conditions. As part of the Program, the Company acquired 75 Neste filling stations located in the North-West of Russia and a terminal in Saint Petersburg at the end of 2019. Under the separate agreement between TATNEFT and Neste, the Company is to continue to use the Neste brand at the acquired filling stations for five (5) years. With the asset acquisitions, the Company's retail network expanded its presence in the North-West of Russia and took the third position by the count of fuel filling stations among retail operators being one of the best in the region. The new assets will help increase the sales of fuel produced by the Company in the domestic market. In 2020, the Company looks to further expand the network of the TATNEFT fuel stations, including in Uzbekistan. The rapid development of the TATNEFT fuel stations is facilitated and supported by ongoing upgrading and modernization of the fuel filling station along with expansion of accompanying services. Additional control measures for petroleum products are being putting in place, such as the pilot operation of a new type of petroleum product measurement systems in the fuel storage tanks at the stations with use of lasers. The Company continues to build infrastructure to support electric vehicles by installing of the ABB and Electrociti Express electric charging stations. With the expert approaches to upgrading the concept of the fuel station formats, the projects were carried out for the construction of three flagship stations with a unique design, a wide range of services and premium solutions. FUEL FILLING STATIONS COUNT Total, including Russian Federation Ukraine Republic of Belarus Republic of Uzbekistan 2017 2018 2019 685 711 802 574 602 691 94 17 - 91 18 - 91 18 2 8,8% FILLING STATION AVERAGE DAILY SALES GROWTH 19,9% COMPANY’S RETAIL PETROLEUM PRODUCT SALES GROWTH RETAIL PETROLEUM PRODUCT SALES, KTONNES Sales of petroleum products through retail network 2015 2016 2017 2018 2019 2 435 2 575 2 677 3 455 4 142 AVERAGE DAILY SALES AT OPERATING FILLING STATIONS, TPD PER STATION Average daily sales at operating filling stations 2017 2018 2019 8,0 9,1 9,9 The output produced at the TANECO Complex such as diesel fuel and a slate of gasolines, which are delivered directly from the Refinery, is one of the signature lines of the TATNEFT Company. The assured quality and environmental characteristics meet high standards of petroleum products. The quality level of petroleum products at the TATNEFT fuel filling stations is ensured by strict compliance with technological discipline and passes through ten (10) stages of quality control, as well as compliance with the requirements of regulatory documents when accepting, storing, transporting and selling petroleum products. 2017 2018 2019 2017 2018 2019 1 580 904 599 44 33 1 858 1 106 653 68 31 Small Wholesale 1 096 1 597 2 006 690 387 2 18 849 719 5 24 898 1 083 4 21 Retail 2 075 1 221 749 76 28 0,3 FUEL SALES THROUGH TATNEFT FILLING STATION NETWORK, KTONNES Indicators Sales: Retail sales network Tatneft-AZS-Centre Tatneft-AZS-Zapad Tatbelnefteproduct Tatneft-AZS-Ukraine Tatneft-AZS-Tashkent Accompanying services In the strategic concept for the development of the fuel filling station network of the Company, one of the ways to improve efficiency and competitiveness is the development of accompanying services. During the reconstruction of existing facilities and construction of new ones, novel formats are implemented in the gas station complexes with the retail space areas of 60, 90 and 150 m2, including cafe zones, drive- throughs, convenience stores, as well as new forms of additional service rendering. In 2019, the first robotic carwash in Russia started operating at the Tatneft filling station. As a highly promising direction, the Company develops digital gas station services: the concept of "smart home"; telehealthcare services, pickup points where one collect parcels bought on-line. There are also a number of other services that are convenient for customers. In 2019, to improve customer service throughout the network, a system of uniform standards is in place, with regular employee training and control checks. 68 69 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT The Environment ISO standards compliance and fuel filling station certification Informing consumers of goods and services In order to control environmental indicators and reduce the impact on the environment, the Company implements comprehensive measures covering the entire fuel station network. In particular, the measures are aimed at reducing emissions to the atmosphere through the capturing and processing of hydrocarbon vapors. The first stage of the project is to equip fuel stations with a system for recirculating hydrocarbon vapors (vapors are gathered while loading petroleum products into tank trucks and stock tank farms, then the vapors are captured in the light hydrocarbon vapor recovery unit). The second stage is equipping oil depots and refineries with installations for collecting and processing vapor-air mixture. Then all fuel-filling pumps at gas stations will be equipped with gas return systems. The effectiveness of the vapor recirculation system was proved by researches conducted by the specialists of the A.E. Arbuzov Kazan Institute of Organic and Physical Chemistry. When analyzing air samples at gas stations before and during tank truck discharges using a vapor recirculation system and without using it, the saturated hydrocarbons are recorded to lower from 1,09 and 2,86 to less than 1 mg per m3 at various gas stations. In order to optimize energy consumption, pellet boilers are installed at gas stations that operate on wood wastes. All products sold within the fuel filling station network have the necessary certificates and permits. Over the past year, non- conformities were not found. Currently, the Company is working on the action item plan for shifting to environmentally friendly packaging and labels. Currently, the retail chain enterprises are taking measures to ensure compliance with ISO standards - Environmental Management Systems (ISO 14001:2015) and Occupational Safety and Health Management Systems (ISO 45001:2018). The priority direction for the fuel station network development is to constantly improve the environmental characteristics of products and processes of fuel station complexes, taking into account the corporate model of responsible resource consumption and reducing the negative impact on the environment. The customers buying our goods and services at our fuel stations are fully informed through the quality certificates for petroleum products and goods being sold, proactive information plates and signage, promotional or publicity material (printed materials, models on the video monitors, audio and video advertising) that are easily available at our fuel stations and describe the composition and properties of the products being sold, the procedures for the safe use and disposal, the impacts on the environment, etc. There are ten prompt feedback channels in place throughout the Company to ensure the quality control and quality assurance of our fuel filling station network operation Feedback During the reporting period, there was no discrepancy between the quality of products sold and the impact of products and services on health and safety. In order to ensure quality control of the filling station network operation, the feedback mechanisms are set up and maintained in a fast track manner (reception, processing and response): Customer satisfaction surveys Regular surveys to assess customer satisfaction and brand health indicators (knowledge-consumption-loyalty) are performed once a quarter using a statistical database of media studies and monitoring of advertising and mass media. Personal data of customers The Company strictly oversees the mechanisms for ensuring the principle of consumer privacy right and protection of personal data of our customers in our fuel filling stations and is guided by the Constitution and Federal Laws of the Russian Federation regulating these activities.¬¬ The customer information base is formed as part of the loyalty program to notify customers of marketing promotions and inform them on the network operation.¬ The information database comprises the persons who have given their consent to the personal data processing and subsequent receipt of notifications from the fuel filling station network. • Customer feedback book that is available in all our gas stations. • 24/7 hotline of the TATNEFT retail sales network – 8-800-5555-911 • 24/7 PJSC TATNEFT hotline – 8-800-100-4-112 Feedback form on the retail sales network website azs. tatneft.ru • Email – tn@88001004112.ru • Official accounts of the retail sales network in social media (vk.com/azs.tatneft, facebook.com/azs.tatneft, twitter. com/AZS_TATNEFT, ok.ru/azs.tatneft, instagram.com/azs. tatneft) • PJSC TATNEFT home page in social media. • • Corporate social network (CSN) – https://kss.tatneft.ru/ Collecting reviews from third-party platforms (maps, navigators, and response sites) • Polls of customers All motivated inquiries are registered in the Terrasoft system with further breaking down into one of 4 types (comment, request, complaint, claim) and classification by one of 15 parameters (payment calculations for fuel, related service, service culture, promotions, serviceability of equipment, fuel filling accuracy, etc.). The customer is provided with our feedback via the received information channel (phone call, email, etc.) within 6 business days. The response time in social media for requests and inquires that do not require registration and subsequent official verification may take from a few hours to 2-3 calendar days. A full review of the correctness of providing feedback is performed monthly with a random check of customer satisfaction with the response. 70 71 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Tire business The Company's tire business operates under the single KAMA TYRES production brand and combines a range of tire brands. The tire production complex incorporates the tire manufacturing plants, such as PJSC Nizhnekamskshina, Nizhnekamsk All-Steel Tire Plant LLC (LLC "NZSH CMK"), Nizhnekamsk All-Steel Tire Plant LLC (LLC "NZGSH")1, LLC Kamaretred. The tire service enterprises include LLC UK Tatneft-Neftekhim, JSC "NMZ", JSC Yarpolimermash-Tatneft, LLC STC Kama, LLC Energoshinservice. The KAMA Trading House LLC (LLC TH KAMA) with separate regional divisions and a subsidiary provide procurement and supply of feedstock and materials, and tire sales as well. Moreover, in 2019, the tire complex included social enterprises - LLC SBO Shinnik, LLC KP Shinnik2, ChUSK Shinnik3 and the carbon black plant - JSC Nizhnekamsktekhuglerod4. Production capacities PJSC NIZHNEKAMSKSHINA: • passenger car and light truck tires; • agricultural and industrial tires. NIZHNEKAMSK ALL-STEEL TIRE PLANT LLC: • all-steel truck tires; • • agricultural tires. combined truck tires; The compact location of tire plants makes it possible to provide semi-finished products to the KAMA TYRES enterprises (production of rubber compounds, textile wing belts, etc.), ensuring the smooth operation of the KAMA TYRES group of enterprises. In the reporting year, the Nizhnekamsk All-Steel Tire Plant accomplished the first stage of the project to increase all-steel tire output: 18 curing molds were put into operation in stages from January to May 2019, which allowed to add the production capacities for manufacturing 300 thousand pieces of all steel tires per year. In early 2019, the functions of the sole executive body of JSC Nizhnekamsktekhuglerod were transferred from LLC Tatneft- Neftekhim to the oil and gas processing segment of JSC TANECO for improved specialization profile of the Tatneft Group's business streams.¬¬¬ The LLC Nizhnekamsk Truck Tire Plant was merged in the Nizhnekamsk All-Steel Tire Plant LLC to improve the management efficiency; the functions of the sole executive body of LLC Macbar were transferred to LLC MC Tatneft-Neftekhim to improve the production management efficiency and the management processes of production of components and spare parts; the functions of the sole executive body of LLC SBO Shinnik were passed to LLC MC Tatneft-Neftekhim to improve the management efficiency and effectiveness. In the reporting year, 100% of shares of SIBUR Togliatti LLC (later renamed Tolyattikauchuk LLC) and 100% of shares of JSC Tolyattisintez were purchased from a third party of PJSC SIBUR Holding¬. The enterprises are located in Tolyatti, including the production of various types of synthetic rubber used for the The competitive edge of the KAMATYRES Manufacturing Complex is secured through proprietary research and engineering solutions, advanced technologies and production capacities, high quality standards and control throughout all production phases, as well as a high level of after-sale service. production of high-quality tires by leading Russian and world manufacturers, the production of MTBE, butadiene, isoprene and other intermediate products, as well as the infrastructure of the Industrial Park, where a number of technological companies of chemical and other specialization profiles carry out their business operations.¬¬¬ The acquisition of these assets will ensure vertical integration of the KAMA TYRES tire business, which is part of the TATNEFT Group. The company intends to continue developing its acquired assets as part of its petro-gas-chemical strategy. On November 26, 2019, TATNEFT and UZKIMESANOAT JSC signed an agreement to establish a joint venture on the basis of Birinchi Rezinotexnika Zavodi LLC (Republic of Uzbekistan) with the following ownership interests: PJSC TATNEFT – 51%, JSC UZKIMESANOAT – 49%.¬¬ The setting up of this joint venture gives TATNEFT the opportunities to diversify and expand its production and sales of tire products in the lucrative markets in Central Asia. The 2020 Tire Complex Development Plans call for accomplishment of three major investment projects: expanding the output capacities of all-steel and Viatti tires, large-size tire production launch; removing the KAMA EURO brand from the portfolio; developing a new brand of KAMA PRO all-steel tires; improving the sales system through the development of retail and direct small-wholesale sales, including deployment of its own on-line sales channel. 1 Termination of the legal entity by reorganization in the form of merger into the Nizhnekamsk All-Steel Tire Plant LLC on 30.05.2019. 2 Liquidation of the legal entity 25.12.2019. 3 Termination of participation in the legal entity due to the change of the legal entity's owner on 29.10.2019. 4 Termination of the sole executive body's authorities on 21.02.2019. Main types of tire commodities TIRE SUPPLY DIRECTIONS, MLN PCS. Sales market After market Parts assemblage Export Total sales 2017 2018 2019 9,2 0,7 3,2 13,1 8,8 0,6 4,2 5,8 0,6 3,6 13,6 10,0 Tire deliveries for parts assemblage The tires are supplied for parts assemblage to the automobile assembly plants. The main consumers are KAMAZ, UAZ, GAZ Automobile plant, URAL Automobile Plant, Volkswagen Group Rus, and FS Elabuga. In 2019, the parts assemblage supply route increased due to growth in deliveries to the automobile assembly plants of the GAZ Group, LLC Volkswagen Group Rus, LLC FS Elabuga. MAJOR CONSUMERS OF PARTS ASSEMBLAGE MARKET TIRE MARKET SHARES IN RUSSIA 4% 9% 23% 20% 25% 6% 7% 23% 20% 7% 12% PJSC KAMAZ VOLKSWAGEN Group Rus UAZ LLC LLC Automobile plant GAZ JSC AZ URAL LLC FS Elabuga Others 53% Passenger car tires Light truck tires Combine truck tires All-steel truck tires Others Export After market The near-abroad market share is 69%. The far-abroad market share is 31%. The global reach of the KAMA TYRES deliveries covers about 50 countries, including near and far abroad. The main tire sales are carried out through the wholesale channel and the separate divisions of the Kama Trading House LLC as well. In 2019, 4 new export markets were captured such as Jordan, Spain, Lebanon, and Finland. In the Republic of Kazakhstan, there is a subsidiary of the Kama Trading House LLC, which sells KAMA TYRES products. 72 73 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Quality assurance of tire goods Tire quality control system The product quality management system being in place at the Tire Complex's enterprises assures the sale of tire goods that meet the needs of consumers and comply with the requirements of the current legislation. The quality control of tire goods is carried out at all stages of the product life cycle (from input control of raw materials to output control of finished products and its testing) in accordance with the internal regulatory documents. The system of product management and quality control is specified in the production management plans developed based on the results of risk analysis of products and manufacturing processes in accordance with the FMEA methodology (analysis of the types and consequences of potential failures). The quality of tire products is assured by the quality certificates and the certificates of compliance with the requirements of technical regulations of the Customs Union. Tire compliance with the established requirements is verified by the results of the annual audit of finished products, including by consumers. All products manufactured by the KAMA TYRES enterprises meet the requirements of regulatory documents (GOST, TU), as well as the requirements of UN Regulations No.30, 54, 106 and 117 (international standards), TR CU 018/2011 On the safety of wheeled vehicles, TR CU 031/2012 On the safety of agricultural and forestry tractors and their trailers. A safety data sheet is developed for each component in the tire. Tests of the feedstock, materials and finished products are carried out in the laboratories of the Testing Center of LLC STC Kama. No information or claims regarding the product adverse impacts on human health, as well as corresponding fines and warnings were received in 2019. Mandatory input control of raw materials is carried out in accordance with the approved plan, which sets controlled parameters and check-up frequency. The procedure for input quality control of raw materials and their release into production is regulated by a special standard of the enterprise. Customer awareness Customer complaint responding system The Company gives the information to its consumers regarding product composition, safe use and disposal procedure, and product impacts on the environment Our tire consumers are informed through the official websites of the Tire Complex and the TATNEFT Company and various publicity and advertising channels. User's guidance and operational instructions for automobile tires, their correct installation and dismantling on the rim are posted on the corporate website www.td-kama.com/ru/, in the "Useful links" section. There are no cases of non-compliance with regulatory requirements and voluntary codes concerning information on the properties of products and services at the KAMA TYRES enterprises. Customer satisfaction assessment Monitoring of information related to consumers' perception of tire goods, the fulfillment of their requirements and expectations is carried out routinely through: • receiving inquiries from consumers through the customer feedback system on the websites and bidding site of LLC KAMA Trading House; • getting information from social media; • • • • surveys of consumers of goods and services in the Tyre&Service trade and service centers; surveys of retailers and members of the Viatti on-line club; target-focused survey of consumers (parts assemblage, secondary market, export) at least once every six months in accordance with the requirements of IATF 16949: 2016 and specific requirements of consumers. All consumer complaints regarding products during the warranty period are subject to review in accordance with the procedure established in the regulatory documents, which provide for: registration of information; examination of claimed products at the manufacturer or directly at the consumer's place with resolving the matter based on the results of analysis corresponding to the consequences (or potential consequences) of non-compliance; determining the causes of non-compliance; initiating corrective actions, if necessary. The tire manufacturers together with LLC Kama Trading House and LLC STC Kama, examine consumer's complaints and operational failures, including any returned parts, and initiate problem solving and corrective actions to prevent recurrence. The 8D method is used to solve problems with configuration claims. The 8D reports are brought to the consumer and the relevant departments of the KAMA TYRES enterprises. When making communications with tire consumers, the KAMA TYRES enterprises follow the feedback practice according to all the rules and regulations of the Advertising Law. There were no complaints with regard to advertising campaigns, and there was no such practice. In the reporting year, no fines were imposed for non-compliance with legislation and regulatory requirements related to the provision and use of tire products. Enterprises are fully complaint with the tire waste disposal standards. 74 75 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Machinery The development strategy of the TATNEFT Group's machine-building business is focused on providing the Company's enterprises with the specialized equipment. The Bugulma Mechanical Plant (BMZ) manufactures the mechanical goods for oil and gas production, petrochemicals, power energy generation and other industries. The manufactured equipment include air cooling units, heat exchangers, oilfield equipment, anti-corrosion coatings, pressure vessels, process operating units for the gas and oil industry. The goods (equipment) are supplied to the Company's production sites, as well as to the domestic market and for export. In 2019, the Bugulma Mechanical Plant produced goods, works and services worth 5,6 billion rubles. This is up 15,7% from 2018. The plant provided maintenance and repair services for 826 million rubles. The plant launched an electric-welded pipe manufacturing line and developed the manufacture of the dual completion equipment. Altogether, 818 dual completion units have been manufactured in Bugulma thus far. The main tasks of BMZ for 2020 include digitalization of production, modernization of the plant, expansion of the range of services, and use of innovative educational tools of TATNEFT. The creation of a single information space for BMZ and JSC TatNIIneftemash (Kazan) made it possible to master the production of flare systems. Together, 51 projects were implemented for the production of tanks and vessels, and packaged modular equipment. A robotic complex for welding tube bundles was launched at the Bugulma Mechanical Plant. Also, the installation for cutting holes in pipes was launched in the commercial operation. A horizontal boring-and-turning mill with higher power capacity was put into service. The laser marking technology for the equipment was mastered. At the same time, labor productivity grew by 17% in 2019. In 2020, the BMZ Plant intends to modernize the pipe production with improved pipe coating productivity twice as much, master the application of new types of coatings and the manufacture of new types of heat exchangers and tanks. New robotic welding systems are being deployed. Currently, the plant is manufacturing the second Delayed Coker Unit for the TANECO Refinery Complex. The first DCU was manufactured in 2013-2014. 5,6 BILLION RUB 2019 PRODUCT OUTPUT 17% 2019 IMPROVED PRODUCTIVITY Tatneft-Presscomposite In order to increase the added value in the product supply chain, the Company develops a high-tech production of composite materials at its Tatneft-Prescomposite facilities located in the Alabuga Special Economic Zone. The production uses fiberglass manufactured by P-D Tatneft Alabuga-Fiberglass. The composite materials have a variety of advantages such as strength, corrosion resistance, light weight, durability, low electrical and thermal conductivity, do not interfere with the propagation of electromagnetic fields and radio frequency waves, etc. The Company selects the technologies and product range to gain the maximum synergistic effect and import substitution of foreign analogues in the Russian market. The Company uses its output products (such as pipes, cable systems) in the development of oil fields, construction of the TANECO Oil Refinery plants and units, and building of infrastructure facilities. The production planning takes into account the current demand for composite materials on the domestic market with the medium term goal set to increase the sales to third-party customers up to 70% of the total production capacity and become the market leader in Russia and the CIS in the represented product segments. The key sales markets are oil and gas and petrochemical industry, infrastructure projects implemented in the sea climate and the Far North conditions, automobile, train-car building, and electrical industries. FIBERGLASS PIPE MARKET VS. TNPC SHARE IN RUSSIAN OIL AND GAS INDUSTRY, MLN RUBLES AND % mln rub 1200 900 600 300 100 69% 90 90 180 836 59% 90 162 180 678 54% 54 180 162 517 50% 42% 48% 45% 36 216 126 354 180 90 278 180 54 277 180 90 293 2019 2020 2021 2022 2023 2024 2025 Tatneft-Presscomposite Tatneft-Presscomposite market share, % Fiber Glass Rus Fiberglass Pipes Plant Others Output products SMC COMPOUNDS (GLASS FIBER FILLED PRESS MATERIALS) The design capacity of the equipment is a single (1) line with a capacity of 8000 tonnes per year. SMC is used primarily in production of low-profile products with high mechanical strength requirements (elements of cabins and bodies of automobiles, interior elements of passenger transport, electrical cabinets, seats, lamp cases and parts of products for electrical engineering, medical and household appliances). Tatneft-Presscomposite participates in the program for the modernization of the KAMAZ truck model range, since the SMC material is used in the manufacturing of the main elements of the K5 cabin exterior of KAMAZ trucks. FIBERGLASS PULTRUSION PROFILES The design capacity of the equipment is five (5) lines with a total capacity of 1000 tonnes per year. The enterprise makes various fiberglass structures using fiberglass profiles. FIBERGLASS PUMP AND COMPRESSOR, CASING, LINEAR PIPES AND FITTINGS The design capacity of the equipment is a single (1) line with a capacity of 300 km per year. Fiberglass pipes and fittings are designed for the petrochemical industry and are used as downhole tubular (pump-compressor and casing), injection, production, for disposal of chemical waste and observation wells; as part of oilfield pipelines (linear), for transportation of oil emulsions, gas-saturated oil, gas condensate, including those with a high content of H2S and CO2; as well as for chemical production pipelines for transportation of salts, acids and other chemicals. In 2018–2019, 30 % improved equipment productivity measures yielded 20 % product unit cost reduction. Fiberglass products have become highly competitive compared to their metal counterparts in anti-corrosion performance not only due to the cost of ownership and durability but also in the course of construction phase. The most significant benefit of composite materials is their environmental friendly properties and low carbon footprint. Carbon dioxide emissions from the composite material use are several times less as compared to the steel use. CO2 emissions from construction of fiberglass pipelines an average of 6.5 times lower than emissions from construction of steel pipelines, taking into account production of pipes and construction and installation works. 76 77 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Energy The utilities are integrated into the business model of the Company and provide a full cycle of generation, transmission and sale of heat and electric energy. The power and heat energy is supplied to provide its own facilities (supplying generation), external consumers (commercial generation) and households. The development of the Company's electric grid capacities is aimed at increasing the network equipment loads through connecting third-party consumers to the Company's networks; improving the reliability of the external power supply scheme and power supply of internal networks of the businesses of the TATNEFT Group. The main generating facilities of the Group are located in the south-east of Tatarstan and include the capacities of the Nizhnekamsk HPP and the Almetyevsk Heating Networks. The installed electric power capacity at the beginning of 2019 was 748 MW, and heat capacity was 2 272,51 Gcal per hour. The power energy capacities operated by the Tatneft Power Grid Management Center consists of 17 694 substations, including 313 substations with 35–110 kV voltage, 17 381 transformer substations with 6 (10) kV voltage. At 35–110 kV substations, power transformers with a total capacity of 2 858,6 MVA are in operation. The total length of 6–220 kV overhead (aerial-cable) lines is 16 823,.0 km. In 2019, the total power generation amounted to 1,53 billion kW*hour, including 1,41 billion kW*hour supplied to Nizhnekamsk HPP, and 0,124 billion kW*hour to the Almetyevsk Heating Networks. In 2019, the heat energy was generated in the amount of 4 199 785 Gcal. 4% less of thermal energy supply was caused by 1,3°C higher average annual outdoor temperature from 2018 and reduced power take-off of PJSC Nizhnekamskneftekhim. In 2019, the internal transformation of the electric power equipment operation enterprise was completed. The Power Grid Management Center business unit was formed within the Company’s organizational structure. The power generating facilities including 110/35/6 (10) kV substations and 220–6 (10) kV overhead power transmission lines are concentrated within one business unit. The existing energy capacities in the Group’s asset portfolio make it possible to increase the vertical integration level and to reduce the dependence of its own energy needs on external market conditions and optimize power energy costs at the production facilities with the simultaneous development of commercial power generation (power energy supplies to external consumers) and new growth points, including clean energy. INSTALLED ELECTRIC POWER AND HEAT CAPACITIES Enterprise Installed Capacity At the power generation facilities, the work was underway to increase the energy conservation efficiency and perform retrofitting and upgrading of existing capacities. The programs were aimed at improving the technical and economic performance of the main and auxiliary equipment, increasing reliability and ensuring competitive edge in the electric power market. Dispatch control was provided on the basis of an automated system of a single digital platform, which made it possible to control the functions of reliable and economical supply of electric and thermal energy of the required quality to all its consumers, taking into account the potential for load growth and compliance with regulatory requirements to the quality of electricity in a normal grid scheme and during repair schemes. The intelligent Smart Grid technologies were used, combining management, control and monitoring tools, information technologies and communication tools that simultaneously provide the flow of electricity and information from power source to consumers. These included a predetermined level of reliability and quality of power supply to consumers, reduction of electricity losses in the power grid elements, minimum operating costs, creating conditions for consumers to optimize their electricity use costs. At the Nizhnekamsk HPP, programs were being implemented to diversify sources of raw materials to increase the operational efficiency of the plant and reduce its dependence on the market conditions for raw materials. One of the directions for deployment of intelligent generation support platforms is the Digital Substation creation, which allows creating automated substations where control, relay protection, automation, measurement and metering functions are provided in digital format, including power and switching equipment control devices, as well as self-diagnostics of their technical conditions. The heat management system uses the “Smart Heat” integrated supervisory control system, the purpose of which is to provide the necessary parameters for heat supply to consumers, optimize the load between sources, and monitor and deal with accidents. As a result, this will help curb rising tariffs for households. NIZHNEKAMSK HPP HEAT AND POWER OUTPUTS Fuel and Energy Resource Type Unit of measure 2017 2018 2019 Electric power generated Heat energy output incl.: Nizhnekamskneftekhim incl. by parameters: – steam 15 atmabs – steam 30 atmabs TANECO Complex incl. by parameters: – steam 45 atmabs – steam 15 atmabs – steam 30 atmabs thous.kW*h Gcal Gcal Gcal Gcal 1 361 216 3 364 611 1 428 214 1 428 214 0 1 186 784 562 008 624 776 0 1 167 444 3 590 659 973 486 973 486 0 1 768 848 939 495 739 618 89 735 1 407 573 3 418 876 473 870 436 826 37 044 2 182 774 586 770 872 004 724 000 749 613 848 325 762 232 Electric power, MW Heat, Gcal per hour – output of thermal energy with hot water in Nizhnekamsk Nizhnekamsk HPP LLC, including Nizhnekamsk HPP (PTK-2) Almetyevsk Heating Networks (JSC APTS) incl. Super-viscous oil production 724 724 24 - TATNEFT GROUP POWER AND HEAT SALES Fuel and Energy Resource Unit of measure Electric power sales Heat sales bln kWh mln Gcal 2017 1,45 4,8 2018 1,23 4,4 1 580,0 1 580,0 692,5 142,1 2019 1,5 4,2 HEAT AND POWER ENERGY GENERATED BY THE ALMETYEVSK HEATING NETWORKS No. Parameters а) b) Heat energy generation (heat carrier – hot water) Power energy generation (MV1 and HV voltage level ) Unit of measure Gcal 2017 768 173 2018 791 151 2019 780 909 thous.kW*h 123 504 87 939 124 171 78 79 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Energy and resource efficiency Improved Energy Efficiency and Energy Saving Policy Renewable energy TATNEFT Group Fuel and Energy Consumption The Company's strategy gives weight to the renewable energy sources (RES) and recognizes their significance for bringing a cleaner, low-carbon energy future. The development of renewable energy, such as solar and wind power, is of undisputed importance. TATNEFT intends to develop these activities and is considering best opportunities and lucrative projects. As part of the Company's innovation activities, the scientific research project with Kazan State Energy University is planned for 2020 to determine the wind and solar potential at the Company's facilities for renewable energy investment opportunities. Currently, the main share (93,2%) of RES energy production in the TATNEFT Group is accounted for heat generation from pellet boilers, 6,7% - electricity generation from small hydroelectric power plants at the Karabash water-storage basin, and 0,05% - from solar power plants in the company's retail and sales network. In 2019, the total energy produced from RES was 1 282,9 tonnes of oil equivalent or 0,18 % of the Tatneft Group's total energy production. The company is implementing the target-focused resource saving program 2010-2020, which includes the energy saving program. The program goal is to curb the costs for fuel and energy resources through their rational use and improved energy efficiency of the production operations. As a result of the program activities implemented during the period from 2017 to 2019, the Company's demand for energy resources (in tonnes of oil equivalent) decreased by an average of 1% per year or 2 billion rubles of the accumulated effect. As a result of the implementation of the Energy Saving Program for 2019, the TATNEFT Group's enterprises saved more than 40,7 thousand tonnes of oil equivalent, which amounted to 561 million rubles. The best saving performance showed the following areas of activity: oil and gas treatment and processing, transportation, oil and gas production technology, and reservoir pressure maintenance. In 2019, the Company approved and put into effect a unified policy to improve energy efficiency and energy saving, the Standard of Energy Efficiency and Energy Saving in the TATNEFT Group, and also adopted the Program to improve energy efficiency and energy saving for 2020-2022. The documents are aimed at achieving the Company's strategic goals, establish general requirements for the system of energy efficiency and energy saving, and formalizes uniform principles and approaches in this area. The main goals in this area are as follows: continuous improvement of energy efficiency, improvement of energy efficiency and energy saving management processes in all types of production activities; cost reduction through the deployment of advanced innovative energy-efficient technologies and rational use of energy resources; development, implementation, operation and continuous improvement of the Energy Management System that meets the requirements of GOST R ISO 50001 and ISO 50001. The 2020 Improved Energy Efficiency and Energy Saving Program is targeted to attain not less 1.5% of the baseline of 2019 (in tonnes of oil equivalent), which amounts to 620 million rubles. Fuel and Energy Resource Type Unit of measure 2017 2018 2019 Consumption in kind Costs, mln Rub Consumption in kind Costs, mln Rub Consumption in kind Costs, mln Rub Electric power, incl. hous kWh 4 251 700 Industrial consumption hous kWh 4 160 900 Heat energy*, incl. Industrial consumption Natural gas, incl. Industrial consumption Gasoline (total) including: АI-80 АI-92 АI-95 АI-98 Diesel fuel GAS Gcal Gcal thous m3 thous m3 tonnes tonnes tonnes tonnes tonnes tonnes tonnes 2 854 742 2 807 674 1 859 051 1 858 600 3 957,0 254,0 2 227,5 1 458,0 17,46 3 858,74 590,3 * thermal energy for super-viscous oil production is included in the natural gas purchases 11 560, 000 2 550,897 7 768, 476 155,749 9,242 85,666 60, 028 0,813 136,610 14,043 6 027 682 5 990 446 3 468 154 3 421 156 1 990 178 1 989 696 3 917,0 217,3 2 386,4 1 308,8 4,52 4 170,32 757,5 16 833, 077 3 314,468 8 732,258 168,398 8, 574 99,844 59,741 0,239 170,713 21,226 6 267 991 6 126 577 3 722 179 3 683 207 2 126 429 2 126 023 3 868,4 102,0 2 632,7 1 120,5 13,25 4 811,08 971,8 18 775, 841 3 739,357 9 649, 622 168,339 4,294 112,170 51, 154 0,721 201,585 26,337 In order to improve rational energy consumption of the Company advances its energy efficiency and energy saving management processes in all production activities through advanced innovative energy- efficient technologies and rational use of energy resources. >2 BLN RUB CUMULATIVE EFFECT FROM ENERGY SAVING PROGRAM >40,7 KTONNES OIL EQUIVALENT SAVED IN 2019 80 81 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Macroeconomics and Competitive Environment Company’s leadership indicators Refining Up to 2030, the Company will maintain the highest rates of refining depth and light oil product yield In 2019, the oil refining depth in Russia reached 83.1%, slightly decreasing by the end of 2018 (83.6%). The yield of light oil products also decreased slightly from 61.9% in 2018 to 61.7% in 2019. In oil refining, the Company has one of the best indicators in the industry: the refining depth, yield of light oil products, while there is no production of heating oil. Resources RESERVES LIFE (YEARS) 20 19 15 30 The Company has the highest indicator on proves reserves life amongst Russia vertically integrated oil companies – (for the period of 30 years) The company maintains one of the highest ORF among Russia vertically integrated oil companies — at the level of 44% Rosneft Lukoil Gasprom Neft Tatneft 2030 Source: Data from companies ORF 45 % 40 % 35% 30% 20 % 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Lukoil Surgutneftegas Rosneft Tatneft Gaspromneft Bashneft Neftegasholding Average across the country Slavneft Russneft Source: REA calculations at oil price of 40 USD/barrel 82 FUEL OIL PRODUCTION TRENDS IN THE RUSSIAN FEDERATION AND PJSC TATNEFT, REFINING DEPTH TRENDS STRATEGIC PLANS FOR REFINING: YIELD OF LIGHT OIL PRODUCTS AND DEPTH OF 99 % 99 % 99 % % % mln tonnes 21 2,1 70 90 80 70 60 50 40 30 71 % 20 70 % 10 0 1,9 73 71 % 71 % 1,9 71 78 % 72 % 2,2 69 74 % 88 % 50 1,3 85 % 54 78 % 100 % 95 % 90 % 84 % 83 % 85 % 80 % 46 46 75 % 70 % 65 % 60 % 2012 2013 2014 2015 2015 2017 2018 2019 Production commercial fuel oil in Refining depth total in RF (right the RF, mln tonnes scale) % Production of fuel oil TANECO, Refining depth at Tatneft (right mln tonnes scale) % 95 % 80 % 99 % 89 % 75 % 86 % 58 % 76 % 100 90 80 70 60 50 40 30 20 10 0 Роснефть 2022 Лукойл 2027 Газпром Нефть 2025 Татнефть 2030 Depth of refining, % Yield of light oil products, % Source: Ministry of Energy. Data from com-panies One of the fundamental external factors affect-ing the long-term price of oil is global oil consumption. Despite the current crisis in the global economy, it is expected that demand for oil will continue to grow until the end of the 2030s. During this period, monetization of oil reserves is expected to bring maximum returns to oil companies. The promotion of the oil and gas industry includes the goals to increase long-term sta-bility, ensure effectiveness fpr activities and goals of reducing the carbon footprint, the search for new environmentally friendly ener-gy solutions. Solving these problems requires investments that will provide new ways for economic growth. According to the baseline scenario, the peak of global oil demand will be reached by the mid-30s, after which a long period of stabili-zation of global oil consumption is projected. Prospects for the development of the oil and gas industry in Russia will be based on inter-national prices, tax payments, volumes of domestic consumption, promotion of the transport sector, technological solutions in the research of new oilfields. The global cost of hydrocarbon resources will depend on the degree of development of the international economy and the activity of introducing other sources of energy. The Company’s Strategy 2030 is primarily aimed at solving these priority tasks: • Focus and intensification of production on the territory of Russia; • Acceleration of reserves involvement in de-velopment, increase in ORF (Tatneft has one of the highest ORF level of 35%, across Rus-sia 27%); 100% replacement of proved reserves • • Ensuring safe operations; • Reducing the negative impact on environ-ment and greenhouse gas emissions; • Reducing costs and losses at all stages of processes; • High-quality oil refining; • Petrochemicals development 83 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Main challenges and assessment of their impact on the Company’s development While setting ambitious goals, the Company evaluates a complex of external challenges: • high volatility in oil prices • escalation of competition between producers in the markets as a result of technology development (including those in shale • • oil and gas produc-tion); tightening of non-competitive meth-ods of economic struggle, including US sanctions and its allies slowing the growth and changing the structure of global energy demand, including the gradual replacement of hydrocarbons with other types of en-ergy • direct or indirect discrimination of Russian FEC companies in foreign markets by changing regulations, in-cluding under the pretext of climate and environmental policies, as well as politically motivated diversification of energy imports The most significant global business chal-lenges are the decline in global oil consump-tion, which is not comparable to previous crises – a decline in demand in 2020 is pro-jected to reach 22 million barrels/day in the 2nd quarter and up to 10 million barrels/day at the year-end as a result of the pandemic coronavirus and crisis factors in the global economy. • oil production cut by 10 million barrels/day as part of the historic new OPEC+ Agree-ment, which covers the period from May 1, 2020 to May 1, 2022. In total, production is expected to be reduced by the OPEC+ Agreement participants and some of the G20 producers by 20 million barrels/day; the greatest volatility in oil prices in recent years and price uncertainty until 2025 amid an unstable market; • • uncertainty with the timing of recovery from the global economic crisis and restoration of pre-crisis levels of hydrocarbon consumption; • drop in oil production margins; • tightening non-competitive methods of economic struggle, including sanctions of the USA and its allies; increasing the importance of the global cli-mate agenda; • • escalating competition of producers in the markets as a result of • technology develop-ment (including in the field of shale oil and gas production); slowing the growth and changing the struc-ture of global energy demand, including the gradual replacement of hydrocarbons with other types of energy; • decline in the conventional crude oil quali-ty, field depletion, the need to involve in the development unconventional/hard-to- recover oil reserves; introduction of restrictions on sulphur in marine fuels of International Maritime Organ-ization (IMO); • • direct or indirect discrimination of Russian FEC companies in foreign markets by chang-ing regulations, including under the pretext of climate and environmental policies, as well as politically motivated diversification of en-ergy imports. The key influence on the Company’s opera-tions in 2020 and the next few years will be exerted by new OPEC + agreement. A de-crease in demand for oil and oil products is pushing refiners to reduce the load on their refineries. Many oil companies in Russia have scheduled major repairs at their refiner-ies. Main challenges and risks for the domestic oil market are: • • • reduction of oil production in Russia (ex-cluding condensate) by 2.5 million bar-rels/day from May 1, 2020; reduction of oil refining by up to 26% as a result of drop in demand in the key market-European, and falling demand in the domes-tic market (reduction of supplies to export and domestic markets will total ~ 24.6 mil-lion tons); increase in tax burden on the oil industry in the Russian Federation, revision of tax bene-fits; • deterioration of the FEC mineral resource base as existing fields • • are becoming depleted, increased costs, including transport and cap-ital ones, as well as risks of mining projects due to the need to develop remote oil and gas provinces with undeveloped infrastruc-ture, increased demand for highly qualified per-sonnel that meet the current and future level of technological development in the FEC sector; introduction of the Oil Quality Bank in RF; introduction of new sanctions against the RF. • • To a varying degree, all of the above chal-lenges and threats can have an impact on the Company’s financial and economic perfor- mance. Most experts believe that after the market passes the bottom in 2020, recovery will begin in 2021 and by 2023, demand level will return to the level of 2018-2019. De-mand growth will slow down and consump-tion will peak in the late 2030s. The development of technologies also changes the power balance, for example, the USA turns from net importer into exporter; the situation with the supply of oil in the oil market has changed dramatically with the beginning of rapid development of shale oil production in the USA – if the US share in world oil production was only 6% in 2010, then the share was 13% in 2019, which al-lowed the USA to become a leader of world oil production amid of declining production by OPEC+ Agreement countries and, while maintaining the current economic «model» by the end of 2019, the United States had every chance to become the main source of oil supply growth in the world market in the next decade (according to experts, with oil prices at not lower than 60USD/barrel, the USA are able to grow to 5.5 million bar-rels/day to2025). GROWTH IN GLOBAL CONSUMP-TION BYS TYPES OF PETROLEUM PRODUCTS Million barrels/day for corresponding period Key drivers MOTOR TRANSPORT PETROCHEMICALS 5,9 0,4 1,4 0,7 1,6 0,6 0,8 4,6 2,3 1,2 0,4 1,5 0,5 -1,4 3,5 0,4 0,6 0,4 1,2 0,5 1,6 0,3 1,1 0,4 2012-2020 2020-2025 2025-2030 2030-2035 Diesel fuel Gasoline Jet kerosene LPG Naphtha Fuel oil Others 0,2 0,9 0,3 0,4 0,8 -0,2 2035-2040 Among the key expected events in the global liquid hydrocarbon market in 2020, which can significantly affect the balance of supply and demand, should include, first of all, de-velopment of the situation with the corona-virus pandemic, the rate of recovery of eco-nomic activity of countries in the world and the restoration of demand for liquid hydro-carbons, stabilization of oil production under the new OPEC + agreement. On the horizon to 2035, consumption will grow by 15% (15 million barrels per day) ver-sus 2019, but the demand growth drivers for LH * will change - leadership in maintaining the growth in demand will shift from motor fuels to petrochemicals (naphtha and LHG), while vehicles will re-main a key consumer of liquid hydrocarbons The refining market is expected to recover after the oil market by 2023, but at this time additional refining capacity will be intro-duced in the world, with an excess of 7 mil-lion barrels/day. This will increase competi-tion in the world market of petroleum prod-ucts and between regions, create prerequisites for reducing the margin of refiners and the need to modernize/repurpose capacities in the future. Also in the medium term, the hydrocarbon feedstock market will be influenced by the introduction of restrictions on sulphur content in marine fuels (IMO). * Liquid Hydrocarbon New consumer preferences, technological progress and a new energy policy will in-creasingly influence the global energy land- scape and the oil market. These global factors are changing the architecture of the economy, increasing competition, and increasing price volatility. Environmental and climatic factors, due to the goals of the Paris Agreement and the goals to reduce the negative impact on the environment, will have a significant impact on the development of the oil industry. 84 85 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTIMO Climate aspects TOTAL GREENHOUSE GAS EMISSIONS PER THOUSAND TONS OF O. E. IN HY-DROCARBON PRODUCTION In 2005, IMO requirements for reducing harmful emissions from ships came into force in accordance with Annex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL Convention). Since then, restrictions on marine emissions have been gradually tightened. One of the main pollutants that are subject to restrictions is sulfur oxide (SOx). The last significant tightening of restrictions on its content in marine fuel began in 2015 – its content was limited to 0.1 % in the emission control areas (Emission Control Areas, ECA – the Baltic and North Seas, certain coastal areas of the United States and Canada, the Caribbean Sea area (around Puerto Rico and the Virgin Islands)). For shipping activities outside the ECA zone, the sulfur content of marine fuel was allowed to be up to 3.5%, but new requirements from January 1, 2020 limited it to 0.5%. This change affects temporarily the economy of production of all types of petroleum products. Global demand for marine fuel at the beginning of 2020 is on average about 15.6 million tons per month. It is estimated that almost 2.5 million tons of high-sulfur fuel oil (HSFO) will be consumed by vessels equipped with scrubbers, the number of which may exceed 4,000 by the end of 2020. The increase in freight rates in October 2019, caused by the US sanctions against the largest Chinese shipping company Cosco, led to the fact that ship owners postponed temporarily the installation of scrubbers. The rest of the demand should be provided by very- low sulphur fuel oil (VLSFO) or marine gas oil (MGO). In the long term, LNG bunkering can become an alternative to traditional fuel. As a result of the introduction of IMO restrictions on the sulfur content in marine fuel in the range of 0.5%, the global market in 2020-2022 was expected to increase the spreads on average distillates to oil. At the same time, it should be noted that the consequences of the impact of the COVID-19 global pandemic on the global market, including the oil refining market, are currently difficult to predict. The role of the Paris Agreement and the measures taken by its participants in reducing the impact on climate and reducing green-house gas emissions is significantly increas-ing. The Paris Agreement* aims to prevent the global average annual temperature on the planet from exceeding by more than 2°C from pre-industrial levels by 2100 and to do everything possible to keep warming within 1.5°C (currently the average temperature is 0.75°C higher than the average annual rates in 1850-1900). The commitment adopted by RF under the Agreement is to ensure that greenhouse gas emissions should not exceed 75% by 2020 versus the emissions in 1990, and 70% by 2030. The largest air pollutants according to the World Bank (WB data) are China, the USA, India and Russia. * The Russian Federation ratified the Paris Agreement. The Paris Climate Agreement was adopted on December 12, 2015, following the 21st conference of the UN Framework Convention on Climate Change (UNFCCC) in Paris. The document was signed by 175 countries, including Russia. September 23, 2019 - Prime Minister Dmitry Medvedev signed a Government Decree on adoption of the Paris Climate Agreement. The Agreement will come into force in 2021, but even since 2020 it obliges all public compa-nies and investment funds to disclose their carbon footprint and measures to reduce it, as well as plans to enter a low-carbon future. TOP 10 GREENHOUSE GAS EMIT-TERS IN 2018 % of global emissions 27,8 % 15,2 % China USA India Russia Japan Germany South Korea Iran Saudi Arabia Canada 7,3 % 4,6 % 3,4 % 2,1 % 2,1 % 1,9 % 1,7 % 1,6 % Source: Ministry of Energy, the Company data GREENHOUSE GAS EMISSION TRENDS IN 1990-2018 mln t CO2-equivalent 2020: 25 % of 1990 level 2030: 20 % of 1990 level 2018: 69.,4 % of 1990 level 0 9 9 1 2 9 9 1 4 9 9 1 6 9 9 1 8 9 9 1 0 0 0 2 2 0 0 2 4 0 0 2 6 0 0 2 8 0 0 2 0 1 0 2 2 1 0 2 4 1 0 2 6 1 0 1 8 1 0 1 t e g r a T 0 2 0 2 2 2 0 2 4 2 0 2 6 2 0 2 8 2 0 2 t e g r a T 0 3 0 2 2500 2000 1500 1000 500 0 86 т СО2 1000 900 800 700 600 500 400 300 200 100 0 2014 Rosneft Eni 2015 Gazprom Neft Sunsor Energy Tatneft Shell 2016 Lukoil Source: REA calculations at the oil price of 40 USD/barrel CARBON PRICE IN EXISTING MECH-ANISMS OF CHARGING FOR GREENHOUSE GAS EMISSIONS, USD PER TONS OF CO2-EQ 36 29 27 25 23 21 21 16 15 Sweden Switzerland, Liechtenstein Finland Norway (maximum) France Iceland Denmark (fossil fuels) British Columbia (Canada) Great Britain, Spain, Ireland, Denmark Alberta (Canada) South Korea Slovenia EU New Zealand, California (USA); Ontario, Quebec (Canada) Beijing (China) Switzerland Portugal Shenzhen (China) Colombia, Latvia Shanghai (China), Saitama, Tokyo (Japan) Chile Norway (minimum) Mexico (maximum), Japan Estonia Tianjin (China) Mexico (minimum), Poland, Ukraine 9 8 8 7 6 6 5 4 3 2 1 < 1 Carbon tax Emissions trading scheme 2017 2018 101 77 64 55 139 According to the World Bank, in 2019, there were 50 mechanisms of carbon emission fees, which covered 15% of the world’s green-house gas emissions. Carbon fees are charged at both the national and regional levels. In this case, mechanisms for the introduction of a carbon tax or an emissions trading scheme can be used. The maximum emission fee for 1 ton of CO2 is charged in Sweden and is USD 139, while the average global carbon fee is estimated by the IMF to be USD 2 per ton of CO2-eq. Russia has not yet introduced a mechanism of carbon emission fees. With the introduc-tion of a carbon fee, the main losses for com-panies will not be related to the emission tax, but to a decrease in demand for products with a high carbon footprint and for shares of companies that produce such products/ As a result of environmental requirements global oil producers are adjusting their strate-gies. 87 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Oil Market In recent years the global oil market has undergone significant changes: the boom of shale production in the United States, consumption growth in the Asia-Pacific Region, the development of a trade war between the major oil consumers, the USA and China, the conclusion of OPEC+ Agreement, the depletion of resources in conventional plays in Europe, the tense military situation in the Middle East and Africa – Libya, Nigeria and Syria, the aggravation of political confrontation between Iran and the United States, the introduction of US sanctions against the largest oil producers – Russia and Iran. The period of high oil prices contributed to a significant increase in production in a number of countries with expensive production in various geographies – North and South America, the North Sea, Africa and a number of countries in the Middle East began to increase production. In total, these factors led to overproduction of oil. To balance the market at the end of 2016, the OPEC member countries (14 countries), as well as 11 non-cartel countries that joined the agreement, including Russia, signed the OPEC+ Agreement and agreed to reduce production by 1.8 million barrels per day compared to the level of October 2016. The agreement showed its effectiveness and the OPEC+ member countries reviewed the volume of cuts periodically. The OPEC+ Agreement, as well as production cuts in Iran and Venezuela, helped stabilize the global oil market, eliminate excess reserves, and maintain a balance between supply and demand, which in turn helped keep Brent price in the range of 60-70 dollars/barrel in 2019. At the same time, the parties to the agreement lost gradually their share in the world oil production to countries outside the agreement, primarily to the United States. The main source of oil supply growth was shale oil – the United States is one of the few countries in the world where liquid hydrocarbon production had a stable and distinct growth trend during 2016-2019, the country overtook its main competitors – Russia and Saudi Arabia in production volumes, reaching the level of 12.97 million barrels/day at the end of 2019. The increase in oil production in the United States was facilitated by the expansion of pipeline capacity and increased demand for low-sulfur feedstock in Europe due to the transition of refineries to the production of marine fuel with a sulfur content of no more than 0.5% due to the entry of new requirements of the International Maritime Organization (IMO*) from January 2020. According to forecasts (actual for January 2020), production in 2020 at American fields was expected to reach 13.2 million barrels/day. To balance oil and keep the price of Brent oil at least of 60 USD /barrel, it was decided at a meeting in Vienna on December 6, 2019 to extend the OPEC+ Agreement to reduce oil production until the end of March 2020. The volume of production cuts compared to October 2018 was 1.7 million barrels/day, which corresponded to approximately 1.7% of global oil demand. Geopolitical factors came to the fore again in 2019 in determining the market conditions and economic development of countries and regions – the trade conflict between the United States and China was a key reason for reducing Chinese exports in the past year and contributed to the slowdown in the global economy and reduced demand for oil. In 2019, there was a turning point in the positive dynamics of world trade, which began in 2016. In the first half of the year, many countries recorded a negative increase in exports year on year. This was particularly true in the United States, Germany, Brazil, China, Japan, and Russia. According to experts, the decline in exports occurred as a result of import-limiting duties and weakening global demand. In 2019, several events occurred that could potentially become a «Black Swan»**, i.e. significantly shift the supply-demand balance on the world market and affect the price of oil. These events include increased sanctions against Iran and Venezuela, drone attacks on oil fields in Saudi Arabia, potential threat of closing the Strait of Hormuz, contamination of the Druzhba oil pipeline, a tropical storm in the Gulf of Mexico that brought a significant part of oil production platforms to a standstill, and so on. However, these events did not have a significant impact – price fluctuations were quickly smoothed out, and there was no significant deficit/ surplus of oil on the market due to the response of OPEC+ member countries Early in 2020, the global economy was experiencing a crisis, which was characterized simultaneously by interruptions in the work of manufacturers and suppliers in China, the mass closure of factories led to a disruption in the supply of automotive parts, components for electronic devices and clothing. The introduction of a mass quarantine regime led to a decrease in consumer demand for oil products. The emergence of a huge supply surplus on the market (according to experts, in the second quarter, the excess supply of liquid hydrocarbon can reach up to 22-30 million barrels/day) in the near future will be limited by the existing infrastructure for storage and transportation of oil (oil storage facilities around the world are rapidly filling up due to a significant excess of supply over demand). In total, the impact of the coronavirus on energy markets and the global economy will be highly uncertain until the pandemic recedes. With this instability, a stronger global recession is expected in 2020 than in 2009. * The International Maritime Organization (IMO) is a specialized agency in the UN sys-tem in the field of maritime safety and protec-tion of the marine environment. In accord-ance with the IMO-approved 0.5% limit on sulphur emissions for all vessels, which will come into force from 2020, the shipping in-dustry has started to equip its vessels with either exhaust gas cleaning systems (scrub-bers) or switching to low-sulphur bunker fuels. ** «Black Swan» is an unlikely event (force majeure), which is impossible to predict, but which often entails large-scale consequences. BALANCE OF OIL MARKET IN 2010-2019 WITH A FORECAST UNTIL 2021 million barrels/day 5,0 4,0 3,0 2,0 1,0 0,0 0,0 87,35 -1,0 -2,0 100,75 99,83 98,45 -3,9 95,50 96,94 95,87 90,33 0,1 89,10 -0,6 93,88 0,3 92,31 -1,0 1,1 0,5 0,8 -0,4 -0,2 101,95 -1,8 103,0 101,0 99,0 97,0 95,0 93,0 91,0 89,0 87,0 85,0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Balance of world supply and demand Global demand for liquid hydrocarbon Global supply of liquid hydrocarbon Source: Energy information administration of the US Department of Energy as of 07.04.2020 OIL RESERVES OF THE OECD COUNTRIES Mln bbl 3,62 3,4 3,2 3,0 2,8 2,6 2,4 2,2 2,0 112 64 81 69 67 48 47 45 46 31 57 55 32 33 USD/bbl 120 100 80 60 40 20 0 48 2014 2015 2016 2017 2018 2019 2020 2021 Commercial oil and oil products reserves of OECD countries, bln bbl Brent, USD/bbl (right hand scale) 5-year average of oil and oil products com-mercial reserves of OECD Brent forecast since April 2019 – futures, USD/bbl (right habd scale) countries, bln bbl Source: Energy information administration of the US Department of Energy DYNAMICS OF OIL DEMAND BY COUNTRY/REGION IN 2014-2019 AND IEA FORECAST UNTIL 2040, MILLION TONNES Million tonnes 98,45 0,38 0,04 1,15 0,75 0,04 5,65 106,40 -0,01 120 100 80 60 40 20 0 2017 USA Europe Other countries OECD China the Rest of Asia Other countries World 2019 2040 World oil Source: Energy information administration of the US Department of Energy 88 89 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Dynamics of world oil prices (Brent, Urals). Over the past five years, the dynamics of oil prices have been highly volatile. In 2019, the oil price was moderately volatile in the range of 53-75 dollars per barrel. The average price of Urals crude in 2019 de-creased by 8.4% compared to the previous year and amounted to 64 dollars per barrel. Quotes growth in the first half of the year from 53 dollars per barrel up to a maximum of 75 dollars per barrel was due to a reduction in supply amid implementation of the OPEC + agreement and increased geopolitical risks. The net price of Urals crude oil (after deduc-tion of the mineral extraction tax (MET) and export duty) decreased to a lesser extent (about 6%) due to the positive effect of the time lag and a progressive scale of MET and export duties calculation. BRENT AND URALS OIL PRICE USD/bbl 108,9 115 110 105 100 95 90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 78,9 71,4 63,5 57,8 46,9 45,9 January 2014 July 2014 January 2015 July 2015 January 2016 July 2016 January 2017 July 2017 January 2018 July 2018 January 2019 July 2019 January 2020 Brent, долл./барр Urals, долл./барр Source: Refinitiv Dynamics of RUB/USD and RUB/EUR exchange rate In 2019, the average annual exchange rate of the ruble against the US dollar increased by 3.2%, to 64.7 rubles/dollar, which positively affected the dynamics of the price of Urals oil in ruble terms, which decreased by 5.4% compared to 2018 year. Net price in ruble terms decreased by 2.8%. The steps of the Bank of Russia on the for-eign exchange market in February-March 2020 consisted of curbing volatility risks by canceling purchases of foreign currency by the Bank of Russia under the budget rule and then selling it. DYNAMICS OF RUB/USD AND RUB/EUR EXCHANGE RATE Despite the fact that according to the budget rule, the sale of foreign currency had to be carried out with a time lag (after the average oil price fell beyond the base level at the end of the reporting month), the Bank of Russia began conducting these operations in ad-vance (from March 10, 2020), so that they were proactive. Rubles 100 80 60 40 20 2014 2015 2016 2017 2018 2019 2020 The dynamics of the US dollar to Ruble The dynamics of the Euro to Ruble Source: Central Bank of Russia USD/barrel 120 100 80 60 40 20 111,8 34,4 65,2 47,8 4 1 y a M 4 1 r p A 4 1 l y u J 4 1 t c O 5 1 n a J 5 1 r p A 5 1 l y u J 5 1 t c O Brent Ruble to US dollar rate 77,9 30,7 6 1 n a J 65,8 64,3 57,9 46,7 44,7 46,4 81,0 67,3 65,9 65,1 57,4 73,7 31,8 6 1 r p A 6 1 l y u J 6 1 t c O 7 1 n a J 7 1 r p A 7 1 l y u J 7 1 t c O 8 1 n a J 8 1 r p A 8 1 l y u J 8 1 t c O 9 1 n a J 9 1 r p A 9 1 l y u J 9 1 t c O 0 2 n a J Source: RUB exchange rate – Central Bank of the Russian Federation, Brent quotes – Thomson Reuters 29,0 20,8 DYNAMICS OF RUB EXCHANGE RATE IN COM-PARISON WITH THE DYNAMICS OF OIL PRICE 90 91 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT GDP Dynamics of Key Economies Global GDP growth in 2019 was 2.9%, down from 3.7% in 2018. The IMF at the end of 2019 projected global GDP in 2020 at 3.4%. However, as a result of the shock caused by the spread of the COVID-19 pandemic in the 1st half of 2020, the world economy will face a serious sharp decline, the extent of which is to be assessed. According to preliminary estimates, the de-cline in global GDP in 2020 from the forecast level will be 6.4 p.p. and will reach -3%, which is much more than the decline during the financial crisis of 2008-2009. It is ex-pected that the economies will begin to re-cover in 2021. DYNAMICS OF GDP GROWTH RATE The decline in GDP at the end of the year in the Euro Zone is projected at -7.65%, the United States -5.9%, Russia -5.5%, China’s GDP growth will fall to 1.2%, India - to 1.9%. In 2019, the GDP of Russia in real terms decreased to 1.3% from the level of 1.7% of the previous year. The slowdown in gross output was due to a decrease in exports (-2.1%), and was also accompanied by a de-crease in the growth rate of household final consumption expenditure (+2.3% in 2019 after +3.3% in 2018). % 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Russia USA Eurozone China India Sources: Refinitiv, IMF, IHS Dynamics of consumer price growth in key economies Core inflation, which is a key indicator for the Central Bank and allows it to identify better inflationary risks, has reduced below targets in the developed countries, and it is below the historical average of core inflation in many developing countries and in emerg-ing markets. In 2019, the growth rate of consumer prices in Russia reduced from 4.3% in 2018 to 3.0% in 2019 (December to December). Food inflation reduced to 2.6% from 4.7% in the previous year (December to December). The main factors for reducing inflation in 2019 were a decrease in external demand for Russian export goods in the context of a slowing global economy, restraining inflation in Russia’s trading partner countries, as well as weak consumer demand. Since the slowdown in inflation in 2019 was faster than it was forecasted, the Central Bank of the Russian Federation reduced its key rate five times during the period from May to De-cember 2019. DYNAMICS OF CONSUMER PRICE GROWTH IN KEY ECONOMIES month to the corresponding month of last year According to the survey data conducted in the first decade of March 2020 by the Central Bank of the Russian Federation, the popula-tion’s inflation expectations for the year ahead have not changed in comparison with Febru-ary. The forecast of inflation for 2020 by pro-fessional analysts also remained virtually un- changed (in February 2020, the range of in-flation forecasts for 2020 made by profession-al analysts - Interfax, Bloomberg, Refinitiv - continued to decline and amounted to 3.5%). According to the Bank of Russia, the weak-ening of the ruble in February-March, due to the changes in external conditions, will lead to a temporary acceleration of annual infla-tion in the coming months. Inflation expecta-tions of the population and business may also temporarily increase. However, the slowdown in domestic demand growth is a significant deflationary factor. It will have a restraining effect on inflation. Under these conditions, taking into account the current monetary pol-icy, annual inflation will return to 4% in 2021. Expectations of inflation in 2020 and in the three-year term have not changed much compared to previous months. The Bank of Russia maintains a target inflation rate of 4% following the results of 2020. Inflation expectations of the population and price expectations of enterprises in general remained stable, on February 7, 2020 the Bank of Russia decided to reduce the key rate by 25 b.p., to 6.00% per annum, on April 24, 2020 it decided to reduce the key rate by 50 b.p. to 5.50% per annum 18 16 14 12 10 8 6 4 2 0 -2 92 93 2014 2015 2016 2017 2018 2019 2020 Russia USA Eurozone China (including Hong Kong) India Sources: Refinitiv 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Oil and Condensate Production in Russia In 2019, the Russian Federation achieved historic figures for oil and gas production and electricity generation, and set new national records. Oil production following the results of the year was about 560 million tons, gas – 737 billion cubic meters. Production growth was 0.8% or 4, (in 2018 - 555.9 million tons). The growth was achieved, among other things, due to the production at new fields (green fields): Verkhnechonskoye (PJSC Rosneft Oil Company) and Talakanskoye (PJSC Surgutneftegas) fields in Eastern Sibe-ria, as well as due to the start of commercial oil production at the Suzunskoye and Tagulskoye (PJSC Rosneft Oil Company) fields. In addition, PJSC LUKOIL increases oil production at the V. Filanovsky field, and PJSC Gazprom Neft - at the Prirazlomnoye and Novoportovskoye fields. The largest increase in production was achieved in Western Siberia + 2.5 million tons (+0.8%) and amounted to 319.5 million tons or 56.9% of the total level for the coun-try. The growth was due to the increase in production by Kondaneft at the new Kon-dinskoye field (+1.2 million tons compared to the previous year), Gazprom Dobycha Urengoy (+1.1 million tons), RN-Nyaganneftegaz (+1.0 million tons) and at certain fields of KhMAD: Novoportovskoye (+0.6 million tons, Gazprom Neft), Zapadno-Chatylkinskoye (+0.5 million tons, Gazprom Neft), Russkoye (+0.5 million tons, Rosneft). In 2019, Rosneft reversed the trend of falling production at the Samotlorskoye field, which declined by an average of 5% annually until 2018. Due to the investment incentives, pro-duction was reduced to 1.2%, reaching the level of 18.4 million tons at the end of the year. Production growth in 2019 occurred in almost all vertically integrated oil companies with the exception of PJSC Gazprom Neft (minus 0.9% or 0.34 million tons), whose production decreased, though slightly, but for the first time in recent years, as well as PJSC Bashneft, which has a decrease for the third consecutive year – minus 1.5% compared to the previous year (in 2019, decrease to the level of 2018 was 8.1%). According to the year results of the vertically integrated oil companies, Rosneft (+0.9 million tonnes or 0.5%) and Tatneft (+0.3 million tonnes or 0.9%) became the production growth leaders. In the European part of the country, oil pro-duction with gas condensate increased by 1.4 million tons (+0.8%) to 165.7 million tons compared to 2018. The main growth was due to the development of offshore fields named after V. Fili, named after Yu. Korchagin (+0.5 million tons, LUKOIL) and the development of old fields of Samaraneftegaz in the Samara region (+0.5 million tons), LUKOIL-Komi - in the Komi Republic (+0.3 million tons). In the Orenburg region, Sladkovsko-Zarechnoye and Koshinskoye (total +0.7 mil-lion tons, Sladkovsko-Zarechnoye) fields also helped to compensate for the decline in other districts of the region. In the Eastern Siberia and Far East region, production increased by 1.3 million tons (+1.7% compared to 2018). In 2019, 76.0 million tons of oil were produced, which was due to the increase in production at the Kuyumbinskoye field (+0.5 million tons, Slavneftkrasnoyarskneftegaz) in Eastern Sibe- ria and the Far East: Srednebotuobinskoye (+1.1 million tons, TAAS-Yuryakh-Neftegazdobycha), the Eastern blocks of the Srednebotuobinskoye field (+0.7 million tons, Rostneftegaz) and Exxon NL (Sakhalin-1) Arktun-Dagi and Odoptu offshore fields (total +2.2 million tons). At the end of April 2019, the Belarusian company Belneftekhim reported the deliver-ies of low-quality oil from Russia via the Druzhba pipeline with a high content of or-ganic chlorides in naphtha (a fraction that boils to a temperature of 204 °C) – about 20 ppm (according to market participants), which exceeds the maximum threshold stipu-lated by GOST of the Russian Federation by 2 times - 10 ppm. Oil exports via the North-ern route of the pipeline to Poland and Ger-many were stopped for 45 days. Cleaning of contaminated oil volumes continued until the end of the year. The situation with oil contamination caused the need to revise GOST for oil – to reduce the maximum content of organic chlorides in the oil fraction, which boils to a temperature of 204°C (nafta), from the current 10 ppm to 6 ppm. The new level corresponds to the technical regulation of the Eurasian Econom- ic Union on oil safety, which was adopted in December 2017 TATNEFT GROUP’S SHARE OF OIL AND CONDENSATE PRODUC-TION IN RUSSIA OVER THE PAST 3 YEARS HAS BEEN STABLE AT 5.3% TATNEFT GROUP’S SHARE OF OIL AND CONDENSATE PRODUCTION IN RUSSIA Tatneft Group oil and condensate production, million tons Conventional oil, mln tonnes Share of Tatneft Group oil production in the all-Russian oil and condensate production 2012 26,3 2013 26,4 2014 26,5 26,2 26,3 26,3 5,08% 5,05% 5,04% 2015 27,2 26,9 5,10% 2016 28,7 2017 28,9 27,8 27,3 5,24% 5,29% 2018 29,5 27,6 5,31% 2019 29,8 27,1 5,32% 94 RUSSIA’S OIL MARKET BALANCE million tonnes 600 526,7 500 400 300 292,1 200 100 240,9 2014 534,0 289,1 261,6 2015 547,5 546,7 555,9 560,3 286,3 254,2 2016 286,6 257,0 2017 291,4 257,7 2018 290,1 266,2 2019 Oil and condensate production, mln tonnes Export from the Russian Federation Deliveries to the domestic market of RF Sources: CCA for FEC COMPANIES’S PRODUCTION SHARE 5,1 % 100 80 60 40 20 0 21,0 11,9 6,1 16,3 36,7 5,3 2012 2013 2014 2015 2016 2017 2018 2019 Rosneft Lukoil Gazprom Neft Surgut NG Tatneft Bashneft Other Sources: CCA for FEC OIL PRODUCTION GROWTH (YEAR-TO-YEAR) % 35,0 30,0 25,0 20,0 15,0 10,0 5,0 0,0 -5,0 -10,0 -15,0 1 0,4 0,3 4,1 1,7 0,4 1,4 5,3 5,7 11,0 2,1 0,7 11,6 4,5 2,7 0,7 2,5 7,8 7,3 1,7 10,0 0,9 2,1 1,3 4,6 -3,6 0,8 0,9 3,0 -0,9 -1,5 3,1 0,0 -8,1 2013 2014 2015 2016 -0,1 2017 2018 2019 Rosneft Tatneft Lukoil Bashneft Gazprom Neft Other Surgut NG Russia total (right scale) Sources: CCA for FEC 24,0 10,8 7,0 14,7 34,8 3,0 2,5 2,0 1,5 1,0 0,5 0,0 -0,5 95 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTOil export from the Russian Federation and deliveries to the domestic market Despite the restrictions imposed on the indus-try by the OPEC+ Agreement, oil exports from Russia in 2019 increased by 3.3% or 8.5 million tons. US sanctions against ex-porters of medium- heavy oil from Iran and Venezuela have caused an increase in interest in Urals in many regions over the past year. Demand began to decline only towards the end of the year, when many refiners chose to increase purchases of low-sulfur feedstock due to the introduction of restrictions on the content of sulfur in marine fuel. The trend of increasing deliveries outside the pipeline system of PJSC Transneft continued - the growth was 3.2% or 1.5 STRUCTURE OF OIL EXPORT FROM RF Mln tonnes 254,2* 18,1 34,88 257,0* 18,1 41,72 257,7* 18 45,12 266,2* 17,6 46,6 201,2 197,2 194,6 202,0 2016 2017 2018 2019 Far Abroad via pipeline Near Abroad via non-pipe Near Abroad * Export from Russia total Sources: CCA for FEC SHARE OF OIL EXPORT FROM RF (MLN T) million tons, although the increase significantly decreased in comparison with 2018 – 8.2% or 3.4 mil-lion tons. The main increase came from shipments from the port of De Castries (1 mil- lion tons) and deliveries to CPC (0.6 million tons). The trend of increasing shipments of feed-stock in the Eastern direction via main pipe-lines continued – the growth amounted to 4.5 million tonnes or 6.6% and reached 73.2 million tonnes. Exports to the West via the pipeline also increased by 3 million tons or 2.4% and reached 128.8 million tons (in 2018, the decline in pipeline exports to the West was 12.9 million tons or -9.3%). The growth of shipments in the Western direction was not stopped even by the situation with chlorinated organics. A decrease in the vol-ume of shipments to the near abroad (Belarus) contributes to an increase in deliveries to the far abroad. Last year, the export of Urals marine ship-ments significantly increased by (9.2 million tonnes) versus 2018, to (97.7 million tonnes), which was facilitated by the suspension of export through the Druzhba pipeline in the second quarter due to organic contamination of oil with organic chlorides and accumula-tion of excess oil volumes in the Transneft system. Shipments approached the indicator of 2017, when they amounted to about 101 million tonnes. In addition, the volume of rail-road transpor-tation increased. The increase in “wheeled” exports was the result of several factors: the need for redistribution of flows due to oil con-tamination in the Druzhba pipeline, and an increase in delivery of Rosneft’s crude oil to the Caspian Pipeline Consortium system due to a protracted repair at the Tuapse refinery, and oil shipment to Belarus PJSC ‘NK‘ RussNeft ’. According to the results of 2019, Tatneft’s crude oil export decreased by 5.4% or 0.7 million tonnes, the share in the volume of crude oil export from Russia by the end of 2019 decreased to 4.4% (in 2018 - 4.8%), while shipments for processing on the domes-tic market increased by 11% or 1.7 million tonnes, a larger share of growth was account-ed for by Taneko our own refinery - ship-ments increased by 1.2 million tonnes or 3,2 % Total exports from RF Far abroad countries resources of the RF Far Abroad via pipeline Far Abroad off pipeline Pipeline transit resources to far abroad Near Abroad - through pipeline - off pipeline 2012 262,5 234,3 189,6 21,83 21,2 28,2 27,8 0,4 2013 256,6 228,5 184,1 22,71 21,7 28,1 26,4 1,6 2014 240,9 218,4 176,3 22,8 19,3 22,5 21,5 1,0 TATNEFT GROUP SHARE IN THE VOLUME OF OIL EXPORT FROM THE RF TATNEFT Group oil export from the Russian Feder-ation, million tonnes Far abroad export Near abroad export Share of Tatneft Group oil export to the share of total export from the Russian Federation 2012 12,5 11,9 0,62 4,8% 2013 12,5 11,4 1,05 4,9% 2014 9,7 8,4 1,3 4,0% 2015 261,6 239,0 192,1 28,19 18,7 22,6 22,0 0 2015 11,6 10,3 1,3 4,4% 2016 254,2 236,1 201,2 34,88 19,9 18,1 18,1 0 2016 13,0 11,9 1,1 5,1% 2017 257,0 238,9 197,2 41,72 19,6 18,1 18,1 0 2017 15,5 14,2 1,2 6,0% 2018 257,7 239,7 194,6 45,12 18,6 18,0 18,1 0 2018 12,4 11,2 1,2 2019 266,2 248,6 202,0 46,6 19,9 17,6 17,6 0 2019 11,7 10,5 1,2 4,8% 4,40% RATIO OF TATNEFT GROUP OIL SUPPLIES TO DOMESTIC/ EXPORT MARKET TO OWN PRODUCTION % 100 50 0 47,5 47,1 36,4 42,6 45,4 53,4 41,9 39,3 52,1 51,9 58,8 55,0 50,9 44,7 55,8 61,1 2012 2013 2014 2015 2016 2017 2018 2019 Export share to own production The share of oil supplies to domestic market (to own production) SHARE OF EXPORT AND OIL SUP-PLIES OF TATNEFT GROUP TO THE DOMESTIC MARKET % 6,0 5,0 4,0 5,1 4,8 6,0 4,5 5,7 4,8 6,3 4,4 5,0 4,9 5,3 4,0 5,2 4,4 5,1 5,1 2012 2013 2014 2015 2016 2017 2018 2019 The share of Tatneft Group’s oil exports to the share of total exports from the Russian Feder-ation Share of Tatneft Group’s oil supply to the to-tal supply to the domestic market of the Rus-sian Federation SHARE OF TATNEFT GROUP IN OIL SHIP-MENT TO THE DOMESTIC MARKET OF THE RUSSIAN FEDERATION Tatneft Group Oil supplies to domestic market of the Russian Federation (to be refined) TAIF-NK OJSC TANECO JSC Other refineries, including Kichui refinery Share of Tatneft Group oil supply to the to-talsupply to the domestic market of the R ussian Federation 2012 13,7 2013 13,7 2014 15,6 2015 15,0 2016 14,6 5,8 7,5 0,4 5,4 7,7 0,7 6,2 8,4 1,0 6,2 8,6 0,1 6,9 7,4 0,3 2017 12,9 4,7 7,3 0,9 2018 16,5 4,9 8,6 3,0 2019 18,2 4,8 9,8 3,6 5,1% 5,0% 5,3% 5,2% 5,1% 4,5% 5,7% 6,3% 96 97 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Fuel consumption and vehicle fleet GLOBAL PRIMARY CONSUMPTION OF ENERGY RESOURCES BY TYPES OF ENERGY TREND OF NEW CAR SALES IN THE RUSSIAN FEDERATION Billion toness of oil equivalent per year pcs. 6 5 4 3 2 1 0 36 % 26 % 19 % 10,5 % 6 % Oil Gas 2 % 0,5 % 32 % 26 % 23 % 9 % 5 % 3 % 2 % 27 % 27 % 18% 12% 9% 5% 3% 1995 2000 2005 2010 2015 1020 2025 2030 2035 2040 2045 2050 Coal Hydro Nuclear RES Biot Sources: IHS Markit GASOLINE CONSUMPTION Mln bbl/d 25,7 26,5 27,0 27,6 28,1 28,6 29,0 29,5 29,8 30,1 30,3 30,5 30,7 30,8 30,8 30,7 30,6 30,4 30,1 35 30 25 20 15 10 5 0 +11 7 8 7 2 98 +32 5 1 5 2 +26 1 1 9 1 66 73 +30 0 3 8 1 80 -50 7 0 4 1 63 +11 5 2 8 2 -5 4 7 6 2 +39 9 4 5 2 -10 8 9 3 2 111 109 100 110 -36 7 3 5 1 54 +12 0 2 5 1 -12 7 5 3 1 47 55 +13 4 2 7 1 73 -8 2 8 5 1 63 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 9 1 0 2 +18 0 2 5 1 55 5 0 0 2 +17 4 8 2 1 38 4 0 0 2 +15 0 0 1 1 29 3 0 0 2 -3 4 1 9 29 0 0 0 2 +12 2 2 0 1 24 1 0 0 2 -6 8 5 9 25 2 0 0 2 7 4 9 18 9 9 9 1 Growth dynamics Car sales Oil Sources: ASM-Holding OJSC, Avtostat LLC, Help Portal “Calculator” NEW CARS SALES STRUCTURE BY TYPES OF ENGINES IN THE WORLD 1% 15% 83% % 100 90 80 70 60 50 40 30 20 10 0 6% 12% 11% 71% 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2018 2019 2020 2021 2022 2023 2024 2025 2030 2035 USA Europe China Other Sources: REA DIESEL CONSUMPTION Mln bbl/d 25 20 15 10 5 0 17,5 18,0 18,2 18,4 18,5 18,7 18,9 18,8 19,0 18,9 18,7 18,5 18,3 18,0 17,7 17,4 17,1 16,8 16,4 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 USA Europe China Other Sources: REA 98 All gasoline auto sales Total sales EV Total sales of diesel cars Total sales PHEV Sources: REA DYNAMICS OF THE CAR FLEET DY-NAMIC BY TYPES OF CONSUMPTED OIL PRODUCTS amount + 24% 50 328 5 535 55 472 6 048 59 463 6 432 62 315 6 739 + 10% 329 639 329 628 - 20% 159 525 160 443 309 860 153 216 44 793 49 424 53 031 55 576 170 114 169 185 156 644 0% 263 848 132 625 131 223 2018 2025 2030 2035 2018 2025 2030 2035 Diesel Petrol Sources: REA RF Europe 99 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Oil Products production and supply in Russian Federation OIL REFINING AND PRODUCTION OF BASELINE PRODUCTS IN RF Mln tonnes 265,4 272,5 71,9 69,4 38,2 74,5 72,0 38,7 300 250 200 250 150 100 50 0 289,0 76,3 77,3 38,3 282,9 280,6 279,9 287,0 285,2 71,1 76,1 39,2 54,9 76,3 40,0 49,8 76,9 39,2 46,4 77,5 39,5 45,8 78,4 40,2 2012 2013 2014 2015 2016 2017 2018 2019 Oil refining in Russia in total, mln tonnes Production of commercial Fuel oil in RF, Mln tonnes Production of diesel fuel in the RF, Mln tonnes Gasoline production in the RF, Mln tonnes In 2019, the volume of primary oil refining decreased by 0.6% or 1.8 million tons com-pared to 285.2 million tons in 2018. In oil refining, the trend of reducing the share of dark oil products in the production struc-ture of Russian refineries remained as a result of modernizing production capacities and improving the quality of the product basket. Production of fuel oil in 2019 decreased by 0.6 million tons or 1.3% compared to the corresponding period in 2018 and reached a record low of 45.8 million tons. The decline in the rate of production of fuel oil is due to the IMO, at the same time, low prices and vessels equipped with scrubbers increased the demand for high-sulfur fuel oil. The drop in prices arouse interest to high-sulfur fuel oil as feedstock for refining at complex refineries, especially in the United States. PRODUCTION AND EXPORT OF OIL PRODUCTS Petrol production (hereinafter RON) increased by 1.9% or 0.8 million tonnes and reached 40.2 million tons due to the commissioning of large oil refining units at the end of 2018 at the Antipinsky oil refinery and the TAN-ECO plant and the growth of gasoline pro-duction at the Gazprom Neftekhim Salavat plant. Production of diesel fuel (hereinafter DF) in 2019 reached the level of 78.4 mln tonnes, an increase was 1.2% or 0.9 mln tonnes. In 2019, the regulation of domestic gasoline prices legislated, which led to a drop in do-mestic fuel prices below export parity. The introduced damper only partially compen-sated for the decline below the level of export parity GASOLINES Gasoline production in the RF, mln t Gasoline export from the RF Gasoline deliveries to the domestic market in the RF 2012 2013 38,2 3,6 34,3 38,7 4,3 34,1 2014 38,3 4,3 33,1 2015 2016 39,2 4,7 34,6 40,0 4,9 34,9 2017 39,2 4,1 35,2 2018 2019 39,5 3,8 35,6 40,2 5,2 35,0 DIESEL FUEL 2012 2013 2014 2015 2016 2017 2018 2019 DF production in the RF, mln tonnes DF export from the RF, mln tonnes DF supplies to the domestic market in the RF, mln tonnes 69,4 34,9 32,5 72,0 37,5 32,3 77,3 44,1 31,5 76,1 45,1 31,3 76,3 43,7 32,5 76,9 43,7 32,8 77,5 42,0 35,7 78,4 39,4 38,9 FUEL OIL 2012 2013 2014 2015 2016 2017 2018 2019 Fuel oil production in the RF, mln tonnes Fuel oil export from the RF, mln tonnes Fuel oil supplies to the domestic market in the RF, mln tonnes JET KEROSENE Jet kerosene production in RF, mln tonnes Export of jet kerosene from the RF, mln tonnes Supplies of jet kerosene to the domestic mar-ket of the RF, mln tonnes 71,9 56,9 11,4 2012 10,0 2,7 7,3 74,5 57,3 12,8 76,3 53,5 19,8 71,1 53,8 15,3 54,9 42,0 12,8 49,8 39,4 10,3 46,4 32,8 12,3 45,8 33,0 12,9 2013 2014 2015 2016 2017 2018 2019 10,3 1,5 8,9 10,9 0,8 10,0 9,7 1,1 8,6 9,6 1,1 8,5 11,1 1,0 10,1 12,7 1,3 11,4 12,5 0,9 11,6 Key factors of oil industry growth in 2019 • Prolongation of OPEC+ Agreement until the end of 2019; • Approval of the program for the formation of common EEU oil and petroleum product markets; Introduction of tax on additional income from hydrocarbon production from January 1, 2019; • In order to complete the «tax maneuver», a step-by-step reduction of export duties has been initiated over 6 years, and excise • rates have been set for excisable goods (No. 305-FZ and No. 301-FZ); • • Development of the largest fields in Eastern Siberia, the Yamal-Nenets Autonomous area, and the Arctic continued; • Falling production in Western Siberia poses a challenge to develop incentive measures; • Contamination of export volumes of oil with organochlorine compounds in the Dru-zhba pipeline; • In accordance with the four-way agreement, work was completed at 5 Russian refineries in 2018, including the commissioning of a 1.6 million-ton diesel hydrotreatment unit at JSC TANECO, as well as the completion of a 0.7 million-ton catalytic reforming unit; • The project to develop a pipeline system to increase the supply of diesel fuel to Primorsk to 25 million tons has been completed • (the «Sever» project); In November, the State Duma adopted the law on extraction of hard-to-recover minerals in the third reading. In early December, the President of the Russian Federation approved a document that allowed removing adminis-trative barriers in the development of tech-nologies for involving such reserves in com-mercial development. The law applies primar-ily to HTR reserves in the Abalak, Khadum and Bazhenov strata in Western Siberia and the Urals Key factors of industry development in 2020 • Reduction of oil production under the OPEC+ Agreement; • Encouragement of oil production in West-ern Siberia; • The Artic development (the Northern Sea route) is almost half as long as the traditional routes for exporting hydrocarbons to the at-tractive APR market, and its development has been declared one of the key tasks of the Arc-tic development. According to the May De-cree of the President, the cargo flow through the NSR should grow to 80 million tons per year by 2024); • Monitoring of the implementation of the «big tax maneuver» completion and the in-troduction of tax on additional income; • Stabilization of oil quality in the system of main oil pipelines in order not to worsen the quality of supplies to domestic refineries; • Meeting the growing requirements for re-ducing the carbon footprint and preserving the environment; • Adapting to new IMO requirements. In mid-2020, a legislative package providing a set of tax incentives for investors in the Arc-tic zone should come into force. One of the main projects that the upcoming changes in legislation are largely focused on is Vostok Oil. It includes the fields of Rosneft, in par-ticular the actively developed Vankorsky cluster, and Neftegazholding in the North of the Krasnoyarsk Territory. The project is de-signed to help solve the tasks declared strate-gic for the country – the development of the Arctic and the Northern Sea route. Technical difficulties and high cost of work can be compensated by tax incentives, as well as by the synergy of complex development of new territories. This year, condensate exports may increase due to the expectation of commissioning of new large gas fields, despite the fact that con-densate is not subject to restrictions under the new OPEC+ Agreement. 100 101 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTCompany’s membership in Industry Associations and Unions The Company is involved in the activity of certain industry associations and unions with the aim of constructive interaction with other industry participants and position development on key issues of the fuel and energy sector. • The Company is a member of the Union of Oil and Gas Producers of Russia (SNP), the General Director of the Company is a member of the Council of the Union Board. The SNP Union Board makes proposals to the State Duma and the Government of the Russian Federation on reforming the industry, strengthening state regulation in the fuel and energy sector, amending the legislation and preparing the government decisions. • Since 1998, the Company has been a member of the Russian National Committee of the World Petroleum Council on organizing and holding World Petroleum Congresses (WPC RNC). In particular, two World Petroleum Congresses were organized with the participation of PJSC TATNEFT representatives - the 21st Congress in 2014 in Moscow and the 22nd Congress in 2016 in Istanbul. • On June 24-26, 2019, the 6th Future Leaders Forum of the World Petroleum Council was held in Saint-Petersburg, where the Company’s delegation of young specialists took an active part. • Currently, preparations are underway for the 23rd World Petroleum Congress scheduled for December 2020, to be held in Houston, in which the TATNEFT delegation is planning to participate. • Since 2003, PJSC TATNEFT has been cooperating with the Russian Union of Industrialists and Entrepreneurs (RSPP). The General Director of PJSC TATNEFT is a member of the Board of the Russian Union of Industrialists and Entrepreneurs, representatives of the Company are included in the RSPP Committees: Energy Policy and Energy Efficiency Committee; Labor Market and Social Partnership Committee; Industrial Safety Committee. • The Company cooperates with the NP Miners of Russia. The General Director of PJSC TATNEFT is a member of the Supreme Mining Council • Since 2008, A.F. Yagafarov, Deputy General Director of PJSC TATNEFT has been a member of the Board of Directors of JSC Saint- Petersburg International Mercantile Exchange (SPIMEX), which allows the Company to promptly obtain information about the activities of the SPIMEX Exchange and make relevant proposals. The Company in collaboration with the Trade Union Organization, cooperates with the All-Russian Industrial Association of Oil and Gas Industry Employers. (PJSC TATNEFT is not a member of the Association.) On December 11, the Industrial Agreement on the oil & gas industry organizations for 2020-2022 was solemnly signed with the participation of A.V. Novak, Minister of Energy of the Russian Federation in Ministry of Energy of the Russian Federation. In 2011, the Company signed the quadripartite agreement with the Federal Antimonopoly Service of Russia, Federal Service for Environmental, Technological and Nuclear Oversight of Russia and Federal Agency on Technical Regulation and Metrology with the aim of quality improvement of petroleum products supplied to the Russian commodity markets and efficient refinery modernization. The Company fulfills its obligations under the agreement ahead of schedule. • • 102 • Since 2011, the Company’s representatives have been in the Working Group of the Ministry of Energy of the Russian Federation on monitoring the situation related to the production and consumption of petroleum products in the Russian Federation with the goal of preventing an uncontrolled increase in the price of petroleum products and ensuring stable and uniform supply of petroleum products to the domestic market of the Russian Federation. • Since 2011, the Company has been cooperating with the Chamber of Commerce and Industry of the Russian Federation. • Since 2014, the Company has been an active participant of the Consumers Council work on the activities of natural monopolies in the crude oil and petroleum products transportation via trunk pipelines, which functions as a communications platform of PJSC TRANSNEFT and its services consumers. As part of the work of this organization, issues of tariff formation of PJSC TRANSNEFT, its investment program, and financial results are discussed. The Company makes relevant proposals and is considering initiatives discussed at the Consumer Council • Since 2015, the representatives of the Company have been in the Working Group established under the Ministry of Energy of the Russian Federation for monitoring the crude oil quality transported through the oil trunk pipeline system, created to stabilize the crude oil quality in the oil trunk pipeline system and to prevent deterioration of the crude oil quality supplied to domestic refineries. The active position of PJSC TATNEFT in the Working Group work helped to deliver several positive results, including increased limit values of sulfur content in the export lines within the regular traffic scheme. In 2019, the Ministry of Energy of Russia and TANECO JSC entered into an Agreement on modernization of oil refinery facilities for oil re-refining in the amount of RUB 106.5 billion investments, and later (in the same year) they signed an additional agreement to amend the current agreement on modernization of oil refinery facilities with TANECO JSC regarding the timing of the commissioning of several facilities and corresponding scope of funding. • • • In 2019, the Company joined the Working Group on transition of oil and gas companies to the Goods Labeling and Traceability System in the Russian Federation. The Company’s specialists participate in the work of the Eurasian Union of Subsoil Use Experts (ESOEN) to enable the full use of existing competencies to ensure fair and high-quality appraisal of mineral reserves. The Company joined the All-Russian Industrial Association of Oil and Gas Industry Employers of the Russian Federation in order to improve the regulation of social and labor relations between employers and employees. On December 11, 2019, the Industrial Agreement on the oil & gas industry organizations for 2020- 2022 was signed between the Trade Unions and the All-Russian Industrial Association of Oil & Gas Industry Employers of the Russian Federation. Support for International and National Economic, Environmental and Social Initiatives UNITED NATIONS GLOBAL COMPACT In 2019, the Company joined the Global Compact UN as a participant, having accepted the obligations to implement 10 principles and 17 Sustainable Development Goals. We are aware that the enterprises of the fuel and energy complex play one of the key roles in ensuring sustainable development. First of all, this is the production of energy, which is necessary to ensure the livelihoods of mankind, improve the quality of life and socio-economic growth in general. Given the specific nature of activities related to natural resources and environmental impact, the Company focuses its efforts on environmental goals. Our fundamental priority is to reduce our environmental footprint and ensuring ecosystem self-healing potential. One of our key tgoals is 13 SDG “Taking action to combat climate change and its impacts”. We started the action on this goal several years ago, taking into account the content of the UN Framework Convention on Climate Change (Paris Agreement), which regulates measures to reduce carbon dioxide in the atmosphere since 2020. Accessible and clean energy, clean water, good health and well-being, rational consumption and production, decent work and economic growth, quality education, industrialization and the development of social infrastructure are inextricably linked in achieving sustainable development. We comprehensively consider these goals when making our business decisions and implementing targeted corporate programs. HUMAN RIGHTS AND LABOUR RELATIONS ENVIRONMENT AND CLIMATE The Company adheres to and shares the principles of fundamental international declarations and conventions in the field of human rights and labour relations, including: The Company takes into account a number of fundamental initiatives and standards in its activities and supports for the environment and climate safety: • UN Universal Declaration of Human Rights; • UN Environment and Development Declarations; • OECD Guidelines for Multinational Enterprises; • Declarations of Fundamental Labour Rights and Principles of the International Labour Organization (ILO); ILO Convention No.87 on Freedom of Association and Protection of the Right to Organise Convention; ILO Convention No. 98 concerning the application of the principles of the right to organise and to bargain collectively; ILO Convention No.111 on Discrimination in Employment and Occupation. • • • • Global Oil and Gas Industry Standard for Improving Environmental and Social Performance (IPIECA) • Oil and Gas industry Climate Initiative (OGCI); • TCFD Recommendations for companies to disclose information on financial risks arising from global climate change; • Setting Science Based Targets to reduce greenhouse gas emissions; • CDP - global climate rating; • The Greenhouse Gas Protocol of the World Business Council for Sustainable Development (WBCSD) and the World Resources Institute (WRI). ANTI-CORRUPTION ACTIVITIES SOCIAL CHARTER OF RUSSIAN BUSINESS The Company adheres to the principles and norms contained in the following documents: • The United Nations Convention against Corruption, (adopted by the UN General Assembly Resolution in New York on 31 October 2003); • The Convention of the Economic Cooperation and Development Organization on Combating Bribery of Foreign Public Officials in International Business Transactions, adopted in Istanbul, on November 21, 1997); • Criminal Law Convention on Corruption (concluded in Strasbourg on January 27, 1999 ETS No. 173); • Anti-corruption Charter of Russian Business community. The Company adheres to the responsible business principles defined by the Social Charter, covering aspects of economic and financial sustainability, product quality, respect for human rights, business ethics and relationships with partners, consumers, employees, environmental safety, participation in the development of the local community. 103 25BOD REPORT2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTCorporate Governance 2 977 PUBLICATIONS ON THE COMPANY’S CORPORATE ACTIONS IN THE FEDERAL MEDIA IN 2019 4 191 PUBLICATIONS ON THE COMPANY’S TRANSACTIONS,PROJECTS, INVESTMENTS COMPANIES IN THE FEDERAL MEDIA IN 2019 according to the SCAN Interfax system TRILLION RUB VALUE OF CONSOLIDATED ASSETS AS OF 31.12.2019 104 105 2019 ANNUAL REPORTCorporate governance system In 2019, the TATNEFT’s status of a publicly traded company with the listing on the international stock market had marked its 25-th anniversary. Over this period, the Company has continuously demonstrated sustainability and high corporate governance performance ensuring trust and confidence for its shareholders. The corporate governance model of the Company is built upon on the strong engagement of its shareholders, the Board of Directors, top managers, executive bodies, employees, business partners and local communities in the areas of which the Company operates, in order to make strategically aligned decisions, ensure effective asset management, and high operational and financial performance, increase investment attractiveness and gain competitive edge for long- term continuous creation of economic value and sustainable development. The corporate governance system complies with the legislation of the Russian Federation and meets the requirements for the issuers of the securities whose shares are included in the top-tier quotation list of the Moscow Exchange, and the rules of other stock exchanges, where the Company’s securities are traded, as well as observes the legal rights of its shareholders and maintains a high level of information disclosure. The Company maintains a clear division of powers and delineation of responsibilities of the governance bodies, assessment of the performance of their functions and duties, effective risk management and internal control mechanisms, prevention of corporate conflicts, counteraction of corruption and corporate fraud, and respect for the fundamental principles of human rights and ethical standards. The Company maintains best corporate practices following the guidance of the Bank of Russia’s Corporate Governance Code and the G20/OECD principles of corporate governance, and takes into account the international and national standards and regulatory documents relevant to various aspects of good governance. In December 2019, TATNEFT was granted the official status of the UN Global Compact participant. Historically, TATNEFT has been strongly committed to the principles of high corporate responsibility providing the alignment of the corporate interests with the UN Global Compact Agenda for sustainable development. This means that business decision-making abides by the fundamental ethical principles and human rights, the objectives of preserving a favorable environment, reducing the carbon footprint, improving social infrastructure, expanding innovation opportunities, ensuring economic growth and improving the quality of life in the regions and the areas the TATNEFT Group enterprises carry out their operations. The goal-oriented programs are implemented on the basis of an open dialogue with the local community and stakeholders, which improves the targeting of the Company’s initiatives and decision-making transparency. The Company sees a lot of potential for combining the efforts of all participants in the Global Compact to integrate corporate experience and actions in achieving the sustainable development goals, which increases the effectiveness of corporate practice in general. The management of the sustainable development pillars is based upon the consistency of the Company’s actions with the UN fundamental principles and sustainable development goals, global trends in sustainable development and priorities for national and regional development. CORPORATE GOVERNANCE PRINCIPLES 1 2 3 4 Serving the legitimate interests of shareholders and pari passu in exercising their rights in the management of the Company. A highly professional and efficient Board of Directors that is accountable to the shareholders with the sufficient membership of independent directors. Progressive and transparent dividend policy. Disclosure of information on all material facts and the most significant aspects of the Company’s activities for the shareholders and all interested parties. 5 6 7 8 Effective risk management and internal control. Oversight of major corporate actions, including those in the controlled organizations. Leadership and innovative development. Decision-making based on consistency and collegiality. 9 10 11 12 Commitment to the fundamental human rights principles and high ethical business principles. Counteracting corruption and corporate fraud. Implementation of sustainable development Goals, development of ESG practices and socially responsible investment. Decision-making through engagement with stakeholders. STRATEGIC PRIORITIES OF CORPORATE GOVERNANCE 1 2 3 4 Improving the Company’s investment attractiveness and shareholder value through the long-term sustainable development with integration of the 17 Sustainable Development Goals of the UN Global Compact and ESG factors. Constructive engagement of shareholders and investors with the Board of Directors and executive bodies for joint task-setting and effective decision-making. Building an efficient process of strategic and investment planning, implementation of production and business plans and operational performance. Professional and ethical responsibility of members of the Board of Directors and executive management, officers and employees of the Company. 5 6 7 8 An integrated system to ensure a high level of staff competence, effective incentive mechanisms and KPI system. Safeguarding and improving the quality and structure of assets by improving the ownership and organizational structure. Development of an integrated risk management and internal control system. Integration of social aspects, industrial and environmental safety issues into the Company’s Strategy and its current operations. 9 10 11 12 Maintaining a high business reputation of the Company. Prevention and resolution of corporate conflicts. Providing high quality products and services. Ensuring transparency of the Company’s activities and information openness. 106 107 CORPORATE GOVERNANCE252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTMain Internal documents In 2019, in accordance with changes in the Russian law and recommendations of the Bank of Russia’s Corporate Governance Code the Management Board made changes to the following Internal documents: Articles of Association, Regulations on the General Meeting of Shareholders, Regulations on the Board of Directors, Regulations on the Director General, Regulations on the Management Board, Regulations on the Revision Commission. Also, as part of the improvement of the corporate governance mechanisms, the new internal documents have been formed and approved. Articles of Association of PJSC TATNEFT Regulations on the General Meeting of Shareholders of PJSC TATNEFT Regulations on the Board of Directors of PJSC TATNEFT Corporate Governance Code of PJSC TATNEFT Regulations on the Corporate Governance Committee of the Board of Directors of PJSC TATNEFT Regulations on the Audit Committee of the Board of Directors of PJSC TATNEFT Regulations on the HR and Remuneration Committee of the Board of Directors of PJSC TATNEFT Regulations on the Revision Commission of the Board of Directors of PJSC TATNEFT Regulations on the General Director of PJSC TATNEFT Regulations on the Management Board of PJSC TATNEFT Regulations on the Internal Audit Management of PJSC TATNEFT Regulations on the Corporate Secretary of PJSC TATNEFT Regulations on the Dividend Policy of PJSC TATNEFT Regulations on the Information Policy of PJSC TATNEFT Regulations on Information Disclosure to Shareholders of PJSC TATNEFT Health, Safety and Environmental Policy with the consideration to the climate change of PJSC TATNEFT Improving corporate governance practices in 2019 In the reporting year, a great deal of efforts was made to improve the internal corporate procedures and practices, as well as to develop the sustainable development practices. Within 3 years, the Company has raised its compliance with the Corporate Governance Code by 7%. In 2019, pursuant to the Bank of Russia’s Corporate Governance Code guidance, the Company’s Articles of Association were amended by the decision of the General PJSC TATNEFT shareholders’ meeting in 2018 as follows: • the time frame within which the stockholders can propose items to be included in the agenda of the Annual general shareholders’ meeting after the end of the fiscal year was extended from 55 to 60 days; • decisions with regards to the most important items specified in the recommendation 170 of the Code shall be taken at a meeting of the Board of Directors via open ballot by a qualified majority of not less than three-quarters of the votes of all members of the Board of Directors, with the votes of the retired members of the Board of Directors of the Company not to be counted. The corporate governance of the Company is 94% of the full compliance with the provisions of the Corporate Governance Code recommended by the Bank of Russia. The partial compliance of the Company is 6% of the Code guidance. For more details on the assessment of the compliance with the guidance of the Bank of Russia’s Corporate Governance Code, please refer to 330-349 pages. As far as the partial compliance with the Code guidance is concerned, the Company sticks to the principle of «explanation» and provides a detailed commentary on the current practices. COMPLIANCE WITH THE COMPANY’S CORPORATE PRACTICES WITH THE BANK OF RUSSIA’S CORPORATE GOVERNANCE CODE GUIDANCE 13% 87% 9% 91% 6% 94% 2017 2018 2019 Full compliance Partial compliance 108 109 CORPORATE GOVERNANCE252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTKey Focus Items for Corporate Practice Development of the Company in 2019 TATNEFT Group Development Strategy The Board of Directors comprehensively reviews the Company’s planning and the performance of the current operating and financial activities of the Company as part of the Strategy 2030 implementation. The analysis of the influence of macroeconomic factors, conditions for limiting oil production under the OPEC + Agreement, market price fluctuations and other factors associated with the analysis of long-term trends in the hydrocarbon market and their impact on the development of the Company is carried out. The focus is on issues related to programs to increase efficiency, increase margins in the value chain and optimize costs. The issues of human resources management, motivation system and KPI are considered. Close attention is paid to ensuring industrial and environmental safety, labor protection. The Company expands the strategic planning taking into account aspects of sustainable development. The Company did succeed in meeting the targets set for as well as in achieving the key goals in the reporting year, despite external constraints. For more information to the issues reviewed by the Board of Directors please refer to pages 128–113 Assessment of Corporate Practice Efficiency For more information on the Corporate Practice Efficiency, please refer to Page 132 Sustainable development in compliance with the UN 17 Sustainable Development Goals and ESG practice The topics of the Sustainable Development Goals are included in the Company’s Corporate Policy priorities. In 2019, the efforts were made to enhance the integration of the SDGs and ESG aspects into business planning and the KPI system. The development of a number of internal procedures and regulations was initiated, including liaising with stakeholders, contractors and suppliers. In December 2019, the Company was officially granted the status of a participant in the UN Global Compact. The Company’s position and actions in implementation of the Sustainable Development Goals and ESG aspects are further described in the Sustainable Development Section and the Company’s Sustainability Report for 2019 KPI system development For more information on the KPI System, please refer to Pages 50-51. The key performance indicators system The Company seeks to maximize the assessment efficiency of the corporate practice quality and the work of the Board of Directors and its committees, individual members of the Board of Directors and the management to determine the efficiency of the overall corporate practice and the work of the Board of Directors, the members of the Board and the management and their consistency with the Company’s development needs and identify the areas to improve the corporate governance. In 2019, the Company regularly interacted with its shareholders, investors, analysts and other stakeholders on the corporate practice issues, taking into account their expectations for improving the corporate governance system and ESG. The Company constantly analyzes the development of the corporate The key performance indicators system development is intended to transform the Company’s Strategy and Planning into the specific operational management performance indicators with the assessment of the current state of their achievement and to provide a systematic approach for making effective management decisions. This approach provides for building the process for the Company’s employees motivation to bring the Company’s strategic goals to realization on a step-by step basis. In 2019, the coverage of duty positions in the main business areas and business blocks was expanded to include ESG aspects. legislation and international standards. These factors are taken into account in the internal assessment of the corporate governance in order to further improve the system and mechanisms of the corporate governance. The internal regular assessment of the corporate practices falls within the competence of the Corporate Governance Committee of the Board of Directors and the Corporate Secretary’s Office. The performance of the Board of Directors, its committees, and members of the Board is evaluated annually in the self-assessment form. Health, Safety & Environmental Policy with considerations to the climate change For more information on the Company’s position and actions related to the HSE Policy with considerations to the climate change, please refer to the Sustainable Development Section and the Company’s Sustainable Development Report for 2019. Governance of subsidiaries For more information on the Corporate Governance Structure please refer to Pages 112–113 Development of Risk Management & Internal Control System For more information on the Risk Management and Internal Control System please refer to Pages 158-163 Ensuring the safety, protecting the lives and health of people, and preserving a favourable environment are among the Company’s key priorities. In 2019, the Board of Directors approved the restated version of the Company’s HSE Policy with the considerations to the climate change, based on the international best practices and a risk-based approach. The Policy takes into account the risks and opportunities associated with the impact on the environment and the climate change, and determines the Company’s comprehensive position in this domain. The Company integrates the international standards covering the environmental and climate management. The Company develops the mechanisms for interaction of the controlled companies as the participants in the corporate environment of the TATNEFT Group, as significant strategic management tools, including the oversight of significant corporate actions in the controlled organizations. In 2020, the internal regulations for engagement with subsidiaries and affiliates were updated such as the Regulation on the procedure for the PJSC TATNEFT corporate engagement with controlled and related organizations (approved by the Board of Directors in January 2020). Currently, the Company develops a unified corporate information platform for managing the controlled companies and expanding the integration of the unified corporate standards for the organizations of the TATNEFT The Company develops the Risk Management and Internal Control System (RMS and IC) in order to provide reasonable confidence in achieving the goals set for the Company. The principles and approaches to the setting up of the risk management and internal control system are based on the Bank of Russia’s Corporate Governance Code guidance with taking into account generally accepted concepts and practices in risk management and internal control: «Integrated concept for an internal control framework» COSO ERM, The Enterprise Risk Management Concept (COSO). Integrated Model», Committee of Sponsoring Organizations of The Treadway Commission; ISO31000 International standards «Risk Management. Principles and guidelines», ISO31010 «Risk Management. Risk Currently, the organizational structure of industrial and environmental safety management is being reformed taking into account climatic factors. Group, including in the ESG practice and consolidation of actions for implementation of the Sustainable Development Goals. Assessment Techniques», corresponding GOST standards et al. In 2019, the efforts were made to improve the effectiveness of integrating risk management processes into investment and operational activities, as well as drafting the internal documents on the integrated risk management and internal control system (pending approval by the Company’s Board of Directors in 2020). 110 111 CORPORATE GOVERNANCE252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTCompany management structure The Company operates a two-tier model of the governance bodies, which contemplates dividing management functions between the Board of Directors and executive bodies. The Board of Directors of PJSC TATNEFT performs the key functions for strategic management of the joint-stock company and oversight of the executive bodies, and plays a key role in the process of improving the system and practice of the corporate governance based on the principle of continuity and advanced international standards. The chief executive officer of the Company is the General Director of PJSC TATNEFT. The collegial executive body of the Company is the Management Board headed by the General Director. The General Director and the Management Board report to the Board of Directors and the General Meeting of Shareholders. The general oversight of the financial and economic activities of the Company is carried out by the Revision Commission. the management system and transparency of the controlled companies, the Company operates appropriate mechanisms and a system of uniform corporate standards. Planning of financial and operational targets is integrated into a unified corporate governance system of the Group in accordance with the Development Strategy and key decisions made by the Board of Directors with considerations to sustainable development aspects. The authority to implement the production plans, economic, environmental and social goals and objectives is delegated to the management of the Company with overseeing at the level of the Board of Directors and its Committees, the Management Board, and the General Director. The Company operates as a Group. PJSC TATNEFT is the corporate center of the Group, with the organizational structure that ensures all levels of interaction between the members of the Group’s corporate environment. In order to ensure Insurance of liability risks of members of governance bodies The Company insures liability risks of members of the Company’s governance bodies, including abroad, under the terms and in the amounts that are consistent with the insurance market for such risks in the Russian Federation. During 2019, JSC SOGAZ was the insurer of such risks for the Company. REVISION COMMITTEE INDEPENDENT AUDITOR GENERAL MEETING OF SHAREHOLDERS BOARD OF DIRECTORS CHAIRMAN OF BOARD OF DIRECTORS CORPORATE SECRETARY INTERNAL AUDIT MANAGEMENT GENERAL DIRECTOR MANAGEMENT BOARD CHAIRMAN MANAGEMENT BOARD COMMITTEES OF THE BOARD OF DIRECTORS AUDIT COMMITTEE HR AND REMUNERATION COMMITTEE CORPORATE GOVERNANCE COMMITTEE INVESTMENT COMMITTEE HUMAN RESOURCES MANAGEMENT COMMITTEE ETHICS AND CORPORATE CULTURE COMMITTEE The day-to-day activities of the Company are handled by the services of the executive office, structural business divisions, facilitators of the business streams and business blocks, as well as by the authorized representatives in the governing bodies of the subsidiaries and affiliates. 112 113 CORPORATE GOVERNANCE252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTGeneral Meeting of Shareholders The General meeting is the supreme governing body of the Company and acts in accordance with the regulatory legal acts of the Russian Federation, the Articles of Association of the Company and these Regulations. The General meeting of shareholders make decisions on major issues of the Company’s activities. The General meeting may be held in the form of a joint attendance gathering of shareholders to discuss items on the agenda and make decisions on matters put to the vote, or in the form of an absentee voting meeting. The General meeting of shareholders may be held by the Company with an option to fill out electronic ballots online via the Internet. The General meeting of shareholders delegates the overall management of the Company to the Board of Directors. The procedure for holding the General meeting of shareholders fully ensures observance the rights of shareholders. The procedure for preparation, convening, holding and summing-up of the General meeting of shareholders is defined by the Regulations on the General meeting of shareholders of PJSC TATNEFT n.a. V.D. Shashin approved as amended by the decision of the annual General meeting of shareholders of PJSC TATNEFT n.a. V.D. Shashin, Minutes No. 29 from 25.06.2019. The Company holds an annual General meeting of shareholders once a year not earlier than two and not later than six months after the end of the fiscal year. In addition to the annual general meeting, extraordinary meetings of shareholders may be convened. The information is made available to the shareholders with regard to the general shareholders’ meeting agenda items in the amount and within the timeframe sufficient for them to choose a well-grounded stance on the considered matters as well as make decisions on participation in the meeting and the form of such participation. The annual General meeting at all times must consider issues related to the election of members of the Board of Directors and the Revision Commission, approval of the auditor, approval of the annual report, annual accounting (financial) statements, appropriation of profit, including payments (declarations) of dividends, and losses as of reporting year-end, and approval of internal documents regulating the activities of the Company’s governing bodies. Shareholders make decisions on the most important issues of the Company’s activities. The full list of matters reserved to the General meeting of shareholders is specified by the requirements of Federal Law No. 208-FZ of December 26, 1995 «On Joint-Stock Companies». When electing the Board of Directors, the Company gives its shareholders the detailed background of each candidate such as biography, experience and skills, and strives to ensure that the candidates are personally present at the General meeting of shareholders held in the form of joint attendance of shareholders. Each shareholder has the right to participate in the meeting in person or by proxy. At the General Meeting, shareholders receive a detailed and reliable report on the ongoing corporate policy and production and business activities of the Company from the Board of Directors and executive bodies. The Board of Directors of the Company prepares reports for shareholders on each agenda item, presenting its position, as well as dissenting opinions of members of the Board of Directors, if any. Decisions on the agenda items of the General meeting of shareholders are made by voting by ballots in accordance with the current legislation and the Company’s Articles of Association. When drafting the decisions of the meeting, it is mandatory to indicate by what majority of votes the decisions were made and dissenting opinions are recorded. The minutes are signed by The Chairman and Secretary of the meeting. During the preparation for and holding of the general meeting, the shareholders can freely and timely receive information about the meeting and its materials, pose questions to members of the company’s executive bodies and the board of directors, and communicate with each other. The Company provides its shareholders with any available means of communication such as hotline and e-mail options, making it possible for the shareholders to ask questions about their share ownership, dividend payout procedure, etc., as well as express opinions and send questions about the agenda during the preparations for the General meeting of shareholders. THE GENERAL MEETINGS OF SHAREHOLDERS HELD IN 2019 Annual General Meeting of Shareholders June 21, 2019 (in the form of joint attendance) The decisions taken by the extraordinary General meeting of shareholders: 1. Approve the annual report of PJSC TATNEFT n.a. V.D.Shashin for 2018. 2. Approve the annual accounting (financial) statements of PJSC TATNEFT n.a. V. D. Shashin for 2018. 3. Approve the appropriation of profit (including payment (declaration) of dividends) of PJSC TATNEFT n.a. V. D. Shashin by the reporting year-end results. Pay out the 2018 dividends taking into account the nine- and-six- months dividends paid out earlier. a) on the preferred stock in the amount of 8491% to the par value; b) on the ordinary stock in the amount of 8491% to the par value. Set July 05, 2019 as the record date when the persons entitled to dividends are determined. The dividends are to be paid in cash. 4. Elect the following individuals to the Board of Directors of PJSC TATNEFT n.a.V. D. Shashin: • Gaizatullin Radik Raufovich • Gerecs Laszlo • Levin Yuri Lvovich • Maganov Nail Ulfatovich • Muslimov Renat Khaliullovich • Nurmukhametov Rafail Saitovich • Sabirov Rinat Kasimovich • Sorokin Valery Yurievich • Syubaev Nurislam Zinatulovich • Takhautdinov Shafagat Fakhrazovich • Khalimov Rustam Khamisovich • Khamaev Azat Kiyamovich • Khisamov Rais Salikhovich • Steiner Rene Frederick 5. Elect the following individuals to the Revision Commission of PJSC TATNEFT n.a.V. D. Shashin: • Borzunova Ksenia Gennadievna • Galeyev Azat Damirovich • Gilfanova Guzal Rafisovna • Zalyaev Salavat Galiaskarovich • Kuzmina Venera Gibadullovna • Rakhimzyanova Liliya Rafaelovna • Farkhutdinova Nazilya Rafisovna • Sharifullin Ravil Anasovich 6. Approve the Joint-Stock Company PricewaterhouseCoopers Audit as the auditor for PJSC TATNEFT named after V. D. Shashin to perform the statutory audit of the 2019 annual financial statements prepared in accordance with the Russian and international accounting standards for a period of one year. 7. Approve the amended and restated Articles of Association of the Public Joint Stock Company TATNEFT n.a. V. D. Shashin. 8. Approve the amended and restated Regulations On General Meeting of Shareholders of the Public Joint Stock Company TATNEFT n.a. V. D. Shashin. 9. Approve the amended and restated Regulations On the Board of Directors of the Public Joint Stock Company TATNEFT n.a. V. D. Shashin. 10. Approve the amended and restated Regulations On the General Director of the Public Joint Stock Company TATNEFT n.a. V. D. Shashin. 11. Approve the amended and restated Regulations On the Management Board of the Public Joint Stock Company TATNEFT n.a. V. D. Shashin. 12. Approve the amended and restated Regulations On the Revision Commission of the Public Joint Stock Company TATNEFT n.a. V. D. Shashin. Extraordinary General meeting of shareholders (in the form of absentee voting) September 13, 2019 The decisions taken by the extraordinary General meeting of shareholders: 1. Make the dividend payment for the six (6) months of 2019: а) on the preferred stock in the amount of 4011% to the par value; б) on the ordinary stock in the amount of 4011% to the par value. 2. Set September 27, 2019 as the record date when the persons entitled to dividends are determined. The dividends are to be paid in cash. Extraordinary General meeting of shareholders (in the form of absentee voting) December 19, 2019 The decisions taken by the extraordinary General meeting of shareholders: 1. Pay out the 2019 nine-month’s dividends taking into account the 2019 six-month’s dividends paid out earlier: a) on the preferred stock in the amount of 6447% to the par value; b) on the ordinary shares in the amount of 6447% to the par value. 2. Set December 30, 2019 as the record date when the persons entitled to dividends are determined. The dividends are to be paid in cash. THE QUORUM OF GENERAL MEETINGS OF SHAREHOLDERS FROM 2015 TO 2019 62,04% 63,53% 61,97% 66,69% 59,91% 63,66% 66,35% 62,97% 65,44% 67,67% Annual General Meeting of Shareholders Annual General Meeting of Shareholders Annual General Meeting of Shareholders Extraordinary General Meeting of Shareholders Annual General Meeting of Shareholders Extraordinary General Meeting of Shareholders Extraordinary General Meeting of Shareholders Annual General Meeting of Shareholders Extraordinary General Meeting of Shareholders Extraordinary General Meeting of Shareholders June 26, 2015 June 24, 2016 June 23, 2017 December 12, 2017 June 22, 2018 September 28, 2018 December 21, 2018 June 21, 2019 September 13, 2019 December 19, 2019 114 115 CORPORATE GOVERNANCE252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTBoard of Directors On June 21, 2019 the General meeting of shareholders elected the Board of Directors of PJSC TATNEFT from the candidates who have sufficient professional background in strategic management, the level of knowledge and skills, as well as personal qualities to adopt well-balanced and objective decisions on the Company’s growth and development with the membership that meets the scope of activities, interests and needs of the Company. Composition of the Board of Directors Chairman of the Board of Directors At the first meeting of the Board of Directors of PJSC TATNEFT following the annual General meeting of shareholders held on June 21, 2019, Rustam N. Minnikhanov was unanimously elected the Chairman of the Board of Directors by all members of the Board of Directors, as the most influential member of the Board of Directors with high level of professional skills and knowledge, significant background in management positions, and impeccable business and personal reputation. The Chairman of the Board of Directors is a non-executive director, nor is a member of any of the committees of the Board of Directors. The procedure of composing the membership, status, structure, functions, goals and objectives, competences, powers of the Board of Directors, the work procedures and engagement with other governing bodies of the Company are determined by the Articles of Association and the Regulations on the Board of Directors of PJSC TATNEFT n.a. V. D. Shashin, and clearly distinguished from the competences of the executive bodies of the Company, which govern its current activities. Fourteen (14) members of the Board of Directors are elected by the general shareholders’ meeting by cumulative voting (the candidates receiving the largest number of votes are deemed elected to the Board of Directors. One member of the Board of Directors is designated under the special Golden Share right. The Company is to include the matter of electing the members of the Board of Directors in the agenda of the annual general shareholders’ meeting. The Company provides a transparent procedure for electing members of the Board of Directors and discloses information on the current composition of the Board of Directors and candidates to the Board of Directors in advance. When nominating members of the Board of Directors and its committees, criteria and factors of professional skills and expertise are considered, including in the economic, environmental and social areas. The Board of Directors at its first meeting following the establishment of membership of the Board, elect the Chairman of the Board of Directors, whose powers are set out in the Regulations on the Board of Directors of PJSC TATNEFT n.a. V. D. Shashin, and set up committees of the Board of Directors. Information on the composition of the Board of Directors and its activities is disclosed on the Company’s official website. The Chairman of the Board of Directors plays a pivotal role to ensure that the Board of Directors and its committees work effectively and efficiently. The Chairman of the Board of Directors of the Company is elected by the members of the Board of Directors from among them by a majority vote of the total number of members of the Board of Directors and carries out his duties in accordance with the Company’s Articles of Association, the Regulations on the Board of Directors of PJSC TATNEFT n.a. V. D. Shashin, and the Corporate Governance Code. The Chairman of the Board of Directors organizes its work, convenes and presides over meetings of the Board of Directors, and arranges for minutes to be kept at such meetings. In the absence of the Chairman of the Board of Directors his duties are performed by one of the members of the Board of Directors upon the decision of the Board of Directors of the Company. The competences of the Chairman of the Board of Directors include drawing up proposals regarding activity tasking among members of the Board of Directors and committees of the Board of Directors; ensuring open discussion of the agenda items while duly reflecting the views of all members of the Board of Directors; determining key issues to be considered by the Board of Directors and choosing the optimum form of meeting for discussion of matters; representing the Board of Directors in the relationship with shareholders, management and other stakeholders. The activity of the Chairman of the Board of Directors is focused on creating a constructive atmosphere for holding meetings, free discussion of issues considered by the Board of Directors in order to develop the most thoughtful and effective decisions. Powers and competencies of the Board of Directors The Board of Directors provides overall charge of the Company’s activities, sets up priorities, strategy and policy of the Company, authorizes and approves the strategic, long-term and medium- term plans and programs of development of the TATNEFT Group, including investment, borrowings and asset management, main principles and approaches to organization of the system of internal control and risk management, is responsible for the management of key risks of the Company affecting the achievement of its strategic targets and takes decisions on key projects and major transactions, oversees the achievement of strategic objectives, plans and programs of the Company, promotes timely disclosure of full and reliable information on the activities of the Company. When considering the Company’s Strategy, shaping and approving plans, budgets and investment programs, the Board of Directors takes into account the sustainable development aspects and goals in HSE, social policy, and human resource management. One of the key duty of the Board of Directors is to establish effective executive bodies and ensure oversight of their activities. The competence of the Board of Directors pertains to the following matters: • election of executive bodies, termination of their powers and motivation of executive bodies; • oversight of the Company’s activities based on regular • • progress reports of the executive bodies on the implementation of Strategy and business plans; improving the corporate governance system and practice in the Company; convocation of the annual and extraordinary general meeting of shareholders, as well as matters related to the preparation of general meeting of shareholders; • approval of internal documents of the Company, except for internal documents with the approvals which are reserved to the competence of general meeting of shareholders and executive bodies of the Company; • approval of the Company’s registrar and the contract terms with the registrar, and termination thereof. The Company ensures that the candidates to the Board of Directors and its committees are nominated and selected based on criteria of diversity, independence, professional skills and expertise. The Board of Directors and executive bodies play a key role in shaping, setting, approving, and updating the Company’s goals, values, and mission, as well as the strategies, policies, and objectives to achieve the economic, environmental, and social well-being. The Board of Directors works under the approved plans, inter alia, summarizing the results of activities, determining the Company’s priorities, preparing general meetings of shareholders, making decisions on authorization or subsequent approval of non-arm’s length transactions and other transactions in accordance with the Articles of Association. In order to ensure the effective work of the Board of Directors the Company accomplishes the following comprehensive actions: • Provision of information technology resources with a secure corporate communication link for rapid remote delivery of information materials to members of the Board of Directors regarding Board’s meeting agendas; • Making it possible to hold meetings of the Board of Directors and its committees in a video-conference; • Archive storage of minutes of meetings; • Ensuring that members of the Board of Directors are aware of and familiar with the internal documentation and business operations of the Company, including production, financial and economic, environmental and social aspects of its operations; • Procedures for keeping the Board of Directors informed, including critical issues if they arise. The Board of Directors plays a key role in procuring that the Company is transparent, discloses information in full and in due time, and provides its shareholders with unhindered access to its documents. The Company has mechanisms in place to provide members of the Board of Directors with information in the amount and within the timeframe sufficient for them to make balanced and objective decision on the agenda items of the Board of Directors. 116 117 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTComposition of the Board of Directors of PJSC TATNEFT The composition of the Board of Directors of the Company is based on the balance of key knowledge, skills and experience necessary for efficient work. Minnikhanov Rustam Nurgalievich Non-executive Director Chairman of the Board of Directors of PJSC TATNEFT • Born in 1957. • In 1978, graduated from Kazan Agricultural Institute. In 1986, graduated from the Soviet Trade Institute. • Maganov Nail Ulfatovich Executive Director General Director of PJSC TATNEFT Member of the Board of Directors of PJSC TATNEFT Chairman of the Management Board of PJSC TATNEFT Chairman of the Corporate Governance Committee of the Board of Directors of PJSC TATNEFT • Born in 1958. • From July 2000 to November 2013, First Deputy General Director – Head of Crude Oil and Petroleum Products Sales Department of OJSC TATNEFT Gaizatullin Radik Raufovich Non-executive Director Member of the Board of Directors of PJSC TATNEFT Member of the Audit Committee of the Board of Directors of PJSC TATNEFT Participation in governing bodies of other organizations: • Chairman of the Board of Directors • Born in 1964. • In 1985, graduated from Kazan Agricultural Institute. of PJSC Bank ZENIT • From June 2002 to present, Minister • Chairman of the Board of Directors of Finance of the Republic of Tatarstan • From 1996 to 1998, Minister of Finance of the Republic of Tatarstan. • From July 1998 to March 2010, presided over the Government of the Republic of Tatarstan. • President of the Republic of Tatarstan since March 2010. • From November 2013 to present, of INKO-TEK LLC General Director of PJSC TATNEFT • Member of the Board of Directors of PJSC Nizhnekamskneftekhim • Member of the Board of Directors of OJSC Tatneftekhiminvest-holding • Member of the Board of Directors of JSC Svyazinvestneftekhim • Member of the Board of Directors of KHL LLC • Member of the Board of Directors of Tatneft Oil AG • Chairman of the Board of Directors of TNA-Services NV • Member of the Board of Directors of TAL OIL Ltd • General Partner, who is entrusted to run business affairs (without a power of attorney) of LP TATNEFT, Solid and Co • Chairman of the Board of Directors of TATNEFT Charitable Fund. • Deputy Chairman of the Supervisory Board of ANO Academy of Hockey AK BARS n.a. Y. I. MOISEEV 118 Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % none none Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % 0,000176 none Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % none none 119 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Gerecs Laszlo Independent Director Ibragimov Nail Gabdulbarievich Executive Director until June 21, 2019 Levin Yuri Lvovich Independent Director Muslimov Renat Khaliullovich Non-executive Director Sabirov Rinat Kasimovich Non-executive Director Sorokin Valery Yurievich Non-executive Director Member of the Board of Directors of PJSC TATNEFT Member of the Audit Committee of the Board of Directors of PJSC TATNEFT Member of the HR and Remuneration Committee of the Board of Directors of PJSC TATNEFT Member of the Board of Directors of PJSC TATNEFT until June 21, 2019 First Deputy General Director for Operations – Chief Engineer of PJSC TATNEFT until February 18, 2020 Member of the Management Board of PJSC TATNEFT until February 28, 2020 Member of the Board of Directors of PJSC TATNEFT Chairman of the Audit Committee of the Board of Directors of PJSC TATNEFT Member of the HR and Remuneration Committee of the Board of Directors of PJSC TATNEFT Member of the Board of Directors of PJSC TATNEFT Member of the Board of Directors of PJSC TATNEFT Member of the Board of Directors of PJSC TATNEFT Member of the Corporate Governance Committee of the Board of Directors of PJSC TATNEFT Member of the HR and Remuneration Committee of the Board of Directors of PJSC TATNEFT • Born in 1953. • In 1977, graduated from Moscow Institute of Petrochemical and Gas Industry named after Academician I.M. Gubkin In 1995, graduated from Oxford Business University • • From 2012 to December 31, 2016 - Managing Director of MOL Oman, Oman Branch Office in Muscat • From January 1, 2017 to present - Managing Director of G Petroconsulting Ltd Participation in governing bodies of other organizations: • Independent Advisor (Member of Reserves Estimation Committee), MOL GROUP • Born in 1934. • In 1957, graduated from Kazan State University • From June 2007 to present, Adviser to the President of the Republic of Tatarstan on development of crude oil and gas fields, Professor of the Crude Oil and Gas Geology Department of Kazan (Volga Region) State University • Born in 1955. • In 1977, graduated from Moscow Institute of Petrochemical and Gas Industry named after Academician I.M. Gubkin • From 2000 till February 18, 2020 — First Deputy General Director for Operations - Chief Engineer of PJSC TATNEFT • Born in 1953. • • In 1975, graduated from Moscow Finance Institute In 1979, post-graduate studies at the Institute of World Economy and International Relations • From 2001 to present – Managing Partner of BVM Capital Partners Ltd Participation in governing bodies of other organizations: • Managing Director, Member of the Management Board of B.V. Murray&Co. Inc • Member of the Board of Directors of Joint-Stock Commercial Bank AK BARS (Public Joint Stock Company) • Member of the Board of Directors of Winter Finanz AG • Born in 1967. • • • • In 1991, graduated from Kazan State University In 1994, graduated from the postgraduate course of Kazan State Technological University In 1998, completed a course in the framework of the President’s Program of Management Training In 2012, training under the Master Business Administration program of the State University of Colorado (USA) • From 2006 to June 2010, Head of Petrochemical Complex Department of the Office of the Cabinet of Ministers of the Republic of Tatarstan • From June 2010 to present, Assistant to the President of the Republic of Tatarstan Participation in governing bodies of other organizations: • Member of the Board of Directors of PJSC Nizhnekamskshina • Born in 1964. • In 1986, graduated from Kazan State University • From 2003 to present, General Director of JSC Svyazinvestneftekhim Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % none none Share in the authorized capital of the Company, % 0,019831 Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % 0,020873 Share of the Company’s ordinary stocks owned by the person, % none none Share in the authorized capital of the Company, % 0,047618 Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % 0,050282 Share of the Company’s ordinary stocks owned by the person, % none none Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % 120 none none 121 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Syubaev Nurislam Zinatulovich Executive Director since June 21, 2019. Member of the Board of Directors of PJSC TATNEFT from June 21, 2019, Member of the Corporate Governance Committee of the Board of Directors of PJSC TATNEFT Deputy General Director for Strategic Development of PJSC TATNEFT Member of the Management Board of PJSC TATNEFT • Born in 1960. • In 1982, graduated from Moscow Institute of National Economy n.a. G.V. Plekhanov • From 2001 to July 17, 2016, Head of Strategic Planning Department - Advisor to General Director for Foreign Economic Affairs and Financial/Banking Issues • From July 18, 2016 to present, Khalimov Rustam Khamisovich Executive Director Member of the Board of Directors of PJSC TATNEFT First Deputy General Director for Oil and Gas Exploration and Production of PJSC TATNEFT, Head of Tatneft-Production Takhautdinov Shafagat Fakhrazovich Non-executive Director Member of the Board of Directors of PJSC TATNEFT Advisor to the Chairman of the Board of Directors of PJSC TATNEFT Khamaev Azat Kiyamovich Non-executive Director Member of the Board of Directors of PJSC TATNEFT Participation in governing bodies of other organizations: • Member of the Board of Directors of CJSC Kara Altyn Enterprise • Member of the Board of Directors • Born in 1965. • In 1987, graduated from the Moscow Institute of Petrochemical and Gas Industry named after Academician I.M. Gubkin • Born in 1946. • In 1971, graduated from Moscow Institute of Petrochemical and Gas Industry named after Academician I.M. Gubkin Participation in governing bodies of other organizations: • Member of the Board of Directors of JSC National Non-Governmental Pension Fund • • Born in 1956. • In 1985, graduated from Kazan Aviation Institute In 2000, graduated from Kazan State University, Law Faculty of Karbon-Oil LLC • From 2010 to 2011, Head of the PJSC • From 1999 to November 2013, • Member of the Board of Directors • From December 2008, First Deputy • Member of the Board of Directors TATNEFT’s Branch in Libya of JSC Aznakaevsky Neftemash plant • Chairman of the Board of Directors • From 2011 to 2015, Head of NGDU Elkhovneft of OJSC TATNEFT of JSC IDELOIL General Director of OJSC TATNEFT of PJSC Bank ZENIT • From November 2013 to present, • Member of the Board of Directors Assistant to the President of the Republic of Tatarstan on oil industry issues, Advisor to the Chairman of the Board of Directors of PJSC TATNEFT of OJSC Tatneftekhiminvest-holding • Chairman of the Board of Directors of JSC Tatoilgas • Member of the Board of Directors • From 2015 to May 20, 2018, Deputy General Director for Oil and Gas Development and Production of PJSC TATNEFT • From May 21, 2018 to present, First Deputy General Director for Oil and Gas Exploration and Production, Head of Tatneft-Production Participation in governing bodies of other organizations: • Member of the Board of Directors of CJSC Yambuloil • Member of the Board of Directors of CJSC Troitskneft Deputy General Director for Strategic Development of PJSC TATNEFT • Member of the Board of Directors of Blagodarov-Oil LLC • Chairman of the Board of Directors of Zavod Elastic LLC • Member of the Board of Directors of URS - Trading House LLC • Member of the Board of Directors of PJSC Bank ZENIT • Member of the Board of Directors of P-D Tatneft-Alabuga Fiberglass LLC • Chairman of the Board of Directors of JSC National Non-Governmental Pension Fund • Member of the Supervisory Board of Tatneft International Cooperatie U.A. (the Netherlands) • Member of Self-regulating Organization - National Association of Non-State Pension Funds Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % none none 122 Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % 0,000056 none Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % 0,116503 0,123914 of JSC Tatex • Member of the Board of Directors of CJSC Neftekonsorzium • Chairman of the Board of Directors • of JSC Bulgarneft • Chairman of the Board of Directors of CJSC Kara Altyn Enterprise • Chairman of the Board of Directors of JSC Tatnefteprom-Zyuzeevneft • Chairman of the Board of Directors of JSC Tatnefteprom • Chairman of the Board of Directors of Karbon-Oil LLC • Chairman of the Board of Directors of Blagodarov-Oil LLC • Chairman of the Board of Directors of PAKER-BIS LLC • Member of the Board of Directors of CJSC Selengushneft • Member of the Board of Directors of CJSC VELLoil Minister of Land and Property Relations of the Republic of Tatarstan • From March 2009 to September 2019, Minister of Land and Property Relations of the Republic of Tatarstan • From September 2019 - National Council deputy of the sixth session of the Republic of Tatarstan, Chairman of RT State Council Committee on Ecology, Nature Management, Agro- Industrial and Food Policy Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % none none 123 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Khisamov Rais Salikhovich Executive Director Steiner Rene Frederick Independent Director Nurmukhametov Rafail Saitovich Executive Director Member of the Board of Directors of PJSC TATNEFT Chief Geologist– Deputy General Director of PJSC TATNEFT Member of the Board of Directors of PJSC TATNEFT Chairman of the HR and Remuneration Committee of PJSC TATNEFT Member of the Audit Committee of the Board of Directors of PJSC TATNEFT Member of the Board of Directors of PJSC TATNEFT Head of NGDU Leninogorskneft of PJSC TATNEFT Member of the Management Board of PJSC TATNEFT until December 23, 2019 • Born in 1949. • In 1974, graduated from Ufa Petroleum Institute. • From January 30, 1998 to January 31, 2020, Head of NGDU Leninogorskneft • Born in 1950. • In 1978, graduated from Moscow Institute of Petrochemical and Gas Industry named after Academician I.M. Gubkin • From October 1997 to present, Chief Geologist –Deputy General Director of PJSC TATNEFT • Born in 1964. • In 1989, graduated from Technical High School in Zurich. • Bachelor of Swiss Banking, Zurich since 1992 • Co-founder, Program Director of Direct Private Investments of FIDES Business Partner AG, Switzerland, since 2011. Participation in governing bodies of other organizations: • Member of the Board of Directors of CJSC Kalm Tatneft • Member of the Board of Directors Participation in governing bodies of other organizations: • Vice Chairman of the Board of Directors of FC Zurich Football Club • Member of the Board of Directors of of OJSC Kalmyk Oil and Gas Company HB Group SA • Chairman of the Board of Directors of CJSC Yambuloil • Member of the Board of Directors of Karbon-Oil LLC • Member of the Board of Directors of Blagodarov-Oil LLC Balanced composition of the Board of Directors Independent Directors Participation of independent directors with high professional backgrounds in the discussion of the issues considered by the Board of Directors, including those within the scope of the Board of Directors’ Committees and interaction with the management, has a very positive effect on the work of the Board of Directors and the development of corporate governance. In 2019, the independent directors made a strong focus upon the Company’s risk management and internal control system, as well as other issues in accordance with the Agenda of meetings of the Board of Directors and its committees. As part of the development of the Company’s climate planning system in 2019, Mr Laszlo Gerecs, the independent member of the Board of Directors, was appointed responsible for overseeing the Company’s activities related to the climate change. Mr. Gerecs has a good relevant expertise in this area and interacts with the Company’s management to discuss actions and plans to reduce the carbon footprint. The composition of the Board of Directors is well balanced in terms of membership of independent, non-executive and executive directors. The participation of three independent directors and seven non-executive directors in the work of the Board of Directors maintains a balance between the interests of different groups of shareholders, which facilitates objectivity in decision-making, and inspire investors, shareholders, and other stakeholders with a high confidence in the Company. The participation of five executive directors ensures a deep integration of the activities of the Board of Directors and executive bodies. In the Company’s opinion, three independent directors are sufficient to have a significant influence the decision-making process and ensure flexibility and objectivity in resolving issues. Moreover, the independence of these directors’ judgments enhance the effectiveness of the Board of Directors. The company regularly evaluates whether independent members of the Board of Directors meet the independence criteria. Three of the fifteen members of the Board of Directors are foreign citizens (20% of the total membership of the Board of Directors). The presence of foreign directors promotes the integration of international business contacts and best practices in the Company. Members of the Board of Directors of PJSC TATNEFT have high skills and knowledge, and professional background in strategic management, financial activities, risk management, accounting and audit, as well as in the Company’s industry areas, sufficient to make balanced and objective decisions in the best interests of the Company and its shareholders. Participation in governing bodies of other organizations: • Member of the Board of Directors of CJSC Okhtin-Oil BOARD OF DIRECTORS 7 NON-EXECUTIVE DIRECTORS Rustam Nurgalievich Minnikhanov Radik Raufovich Gaizatullin Renat Khaliullovich Muslimov Rinat Kasimovich Sabirov Valery Yurievich Sorokin Shafagat Fakhrazovich Takhautdinov Azat Kiyamovich Khamaev 3 INDEPENDENT DIRECTORS Laszlo Gerecs Yuri Lvovich Levin Rene Frederick Steiner 5 EXECUTIVE DIRECTORS Nail Ulfatovich Maganov Nail Gabdulbarievich Ibragimov (until June 21, 2019) Rafail Saitovich Nurmukhametov Rustam Khamisovich Khalimov Rais Salikhovich Khisamov Nurislam Zinatulovich Syubaev (from June 21, 2019) Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % 0.020341 0.021433 Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % none none Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % 0,010465 0,010107 124 125 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT NUMBER OF THE BOARD OF DIRECTORS MEMBERS BY TENURE Changes in the membership of the Board of Directors Enhancing the collective ESG knowledge of the Board members Onboarding 1 person 5 persons 9 persons less than a year one to seven years over seven years AGE PROFILE OF THE BOARD OF DIRECTORS 45–55 y.o. 56–65 y.o. 66+ y.o. 33,3% 26,7% 40% 5 persons 4 persons 6 persons In 2019, there were the following changes in the Board of Directors’ membership: • the authorities of the member of the Board of Directors Nail Gabdulbariyevich Ibragimov were terminated; • Nurislam Zinatullovich Syubayev was elected to the Board of Directors by the decision of the General meeting of shareholders (the AGM Minutes No. 29 of 25.06.2019). The Company takes appropriate procedures to develop and improve the collective knowledge of the Board of Directors on economic, environmental and social issues, including the implementation of the Sustainable Development Goals of the UN Global Compact and the Paris Agreement signed under the United Nations Framework Convention on Climate Change, which regulates the measures to reduce carbon dioxide emissions in the air from 2020. All members of the Board of Directors have significant work experiences in the Company, high professional reputation and knowledge, which have a strong positive impact on consistent and balanced decision-making. The current composition of the Company’s Board of Directors is well diversified and balanced. THE COMPANY USES THE MODERN INFORMATION RESOURCES AND CHANNELS, INCLUDING DEDICATED SOFTWARES, TO ENSURE EFFECTIVE COMMUNICATION TO THE BOARD MEMBERS IN RUSSIAN AND ENGLISH In order to ensure effective and fast introduction of new members to the Board of Directors and maximize their efforts in the best interests of the Company, the latter provides the onboarding procedure for the newly elected directors to learn in-house procedures of the work of the Board of Directors and its committees, meeting agenda preparation and delivery of information materials, and other matters depending on the extent to which a new member of the Board of Directors is aware of and familiar with the strategy and current business operations, as well as corporate and organizational structure of the Company. Adherence to the rules of confidentiality and insider information protection is thoroughly explained in a mandatory manner. The onboarding procedure for the newly elected members of the Board of Directors of PJSC TATNEFT is implemented by the Corporate Secretary, who coordinates interaction of all the parties involved with the assistance and supervision of the Human Resources & Remuneration Committee and the Corporate Governance Committee. In 2019, Nurislam Zinatulovich SYUBAYEV, Deputy General Director for Strategic development of PJSC TATNEFT, joined the Board of Directors for the first time. Tenure of the Board of Directors membership Minnikhanov Rustam Nurgalievich Maganov Nail Ulfatovich Gaizatullin Radik Raufovich Gerecs Laszlo Ibragimov Nail Gabdulbarievich / until June 21, 2019 Syubaev Nurislam Zinatulovich / from June 21, 2019 Levin Yuri Lvovich Muslimov Renat Khaliullovich Sabirov Rinat Kasimovich Takhautdinov Shafagat Fakhrazovich Sorokin Valery Yurievich Khalimov Rustam Khamisovich Khamaev Azat Kiyamovich Khisamov Rais Salikhovich Steiner Rene Frederick Nurmukhametov Rafail Saitovich 126 127 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTNUMBER OF MEETINGS HELD 3 ABSENTEE MEETINGS 12 ATTENDEE MEETINGS 2019 Board of Directors’ Activities In 2019, the agenda of items reviewed by the Board of Directors included the implementation of Strategy 2030, long-and medium-term development plans and programs of the TATNEFT Group, oversight of their implementation, including the investment, financial position, production operations, sustainable development, industrial safety and occupational health, environmental protection, interaction with controlled companies, and making decisions on major transactions. A strong focus was made on improving margin ratio in the value chain, strengthening the Company’s technological base, and switching to innovative forms of governance and business process management. In 2019, the Board of Directors held fifteen (15) meetings with a total of 93 issues that were considered therein, including twelve (12) meetings in presentia (88 issues) and three (3) meetings in absentia (5 issues). In-person meetings addressed issues related to the Company’s strategy and corporate governance, authorization of non-arm’s length transactions, decision-making in preparations for the Company’s annual and extraordinary general meetings of shareholders, and significant operational issues. Participation of members of the Board of Directors in meetings of the Board of Directors in 2019 Surname, Name, Patronymic Maganov Nail Ulfatovich Minnikhanov Rustam Nurgalievich Ibragimov Nail Gabdulbarievich Until June 21, 2019 Syubaev Nurislam Zinatulovich From June 21, 2019 Levin Yuri Lvovich Gaizatullin Radik Raufovich Gerecs Laszlo Muslimov Renat Khaliullovich Sabirov Rinat Kasimovich Sorokin Valery Yurievich 15/15 15/15 6/6 9/8 15/15 15/14 15/15 15/12 15/15 15/15 Takhautdinov Shafagat Fakhrazovich 15/15 Khalimov Rustam Khamisovich Khamaev Azat Kiyamovich Khisamov Rais Salikhovich Steiner Rene Frederick Nurmukhametov Rafail Saitovich 15/15 15/15 15/15 15/15 15/15 28.01 13.02 27.02 23.03 26.04 22.05 21.06 19.07 05.08 26.08 30.09 24.10 13.11 28.11 23.12 in absentia in absentia in absentia NUMBER OF ISSUES CONSIDERED BY THE BOARD OF DIRECTORS FOR THE PERIOD OF 2017-2019 STRUCTURE OF THE MAIN ISSUES CONSIDERED BY THE BOARD OF DIRECTORS IN 2019 7 1 0 2 8 1 0 2 9 1 0 2 8 5 5 In-person In absentia 14% 74 79 88 25,8% 28% 8,6% 23,6% 93 NUMBER OF ISSUES CONSIDERED Corporate practice Strategy Interested-party transactions Finances Production THE REVISED VERSIONS OF PJSC TATNEFT INTERNAL DOCUMENTS WERE APPROVED BY THE BOARD OF DIRECTORS IN THE REPORTING YEAR 1 2 3 4 Regulations on a branch office of the Public Joint-Stock Company TATNEFT n. a. V.D. Shashin in Turkmenistan. The regulations on the interaction of the departments and offices of the Executive office, structural subdivisions of PJSC TATNEFT n.a. V.D. Shashin to make disclosures, recognized as the insider information and material facts of the Issuer’s securities under the legislation of the Russian Federation and the European Union and/or UK. The Health, Safety, and Environment Policy of PJSC TATNEFT n.a. V.D. Shashin with considerations to the climate change Regulations on the procedure for corporate engagement of PJSC TATNEFT n. a. V. D. Shashin with controlled and related organizations (approved in January 2020). The Board of Directors is in constant interaction with the executive bodies of the Company and the Committees of the Board of Directors on all key management issues, including auditing, evaluating the performance of members of the Board of Directors, human resources development, KPI system, sustainable development aspects and others. 128 129 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Key topics in core business streams addressed by the Board of Directors COMPANY STRATEGIC DEVELOPMENT. STRATEGY 2030 • Opportunities for strategic diversification based on the Company’s core competencies and competitive advantages. • Reserves-to-production ratio trends pursuant to the adopted Strategy 2030 for oil reserve replacement by field. • Market strategy related to oil and gas processing amid • increasing the quantity and slate of new products as a result of higher capacity of TANECO. Implementation of the construction project for the gas-and- petrochemical complex and the gas-and- petrochemical business development. • The tire project development. • The Company’s strategy in the energy sector of the future. Implementation of the IT-Strategy goals and projects: 2018 • actual results and plans for 2019-2020. • Accomplishment of the innovation and technology strategy goals and projects: 2018 actual results, medium-and long- term projects. • Retail business: market strategy and development plans for the next few years. • Strategy and plans for non-core assets (banking, loan portfolio, etc.). INTERNATIONAL PROJECTS • The Company’s development strategy in external regions: production and financial goals, projects and activities. HEALTH, SAFETY, AND ENVIRONMENT WITH CONSIDERATIONS TO THE CLIMATE CHANGE AND CARBON FOOTPRINT REDUCTION • Health, Safety, and Environment Policy with considerations to the climate change • About the member of the Board of Directors of PJSC TATNEFT responsible for overseeing activities related to the climate change. INVESTMENT AND FINANCIAL ACTIVITIES • The investment program progress report. • The 2018 Budget performance report. • The 2018 Financial and operating performance report including the 2018 accounts receivable and accounts payable report. • The report of the Revision Commission on the audit of the 2018 financial and business operations. • The 2018 summary report of the Board of Directors, the annual report, the annual accounting (financial) statements, including appropriation of retained earnings. • Approval of the 2019 budget by month. • The financial and operating performance for the first quarter, the first six months and the nine months of 2019. • Approval of the 2020 budget. • The 2020 financial and operating forecasts. • Approval of the program of exchange-traded bonds of PJSC TATNEFT n. a. V. D. Shashin. • On status of the development of external projects outside the • Approval of the Securities Prospectus of PJSC TATNEFT n. a. Russian Federation. V. D. Shashin. • The analysts’ assessment of the TATNEFT Group’s financial performance in comparison with other leading companies in the industry. AUDIT • The 2018 TATNEFT Group’s consolidated financial statements prepared as per IFRS and the auditor’s report on the financials and business operations audit performed by the Joint Stock Company PricewaterhouseCoopers Audit. • The Internal Audit Department performance for 2018 and the work plan of the Internal Audit Department for 2019. PRODUCTION OPERATIONS • Efficiency of exploration operations. • Reaching predicted oil production targets and reservoir management performance • Application of enhanced oil recovery techniques, including scientific researches and practical application of various oil production methods. Current status and future plans. • Fulfilment of the TANECO Complex construction plan. • The oil production outlook, opportunities and objectives for Exploration and Production business segment. Forecast performance indicators of the Exploration and Production business stream for 2020. SOCIAL POLICY • Social investments of the Company. • The TATNEFT Charity Fund’s activities • Development of a unified management system for social projects and programs of the TATNEFT Group. The decisions made by the Board of Directors can be found on the Company’s website www.tatneft.ru. The 2020 Board of Directors’ work plans THE KEY ISSUES OF THE BOARD OF DIRECTORS’ WORK PLAN FOR THE FIRST HALF OF 2020 INCLUDE AS FOLLOWS: • Report on the Internal Audit Department performance for the past year and the internal audit plans for 2020. • The IT strategy implementation results in the core business streams of the Company. The potential projects for 2020 include digitalization of the processes for reserve estimates, well planning and construction, managing workover operations; replication of digital twins technology at the TANECO hydrocracking plants and CDU-VDU-6; development of tools for multi-period optimized planning in the tire business; deployment of business analysis tools for cost management, digitalization of efficiency management processes, etc. • Organizational and financial effects expected from the introduction of the personnel satisfaction assessment system in the TATNEFT Company. The key indicators cover the main aspects of employee satisfaction, including working conditions, social climate among the staff, brand loyalty, and commitment to the corporate culture and values. • Approval of the amended and restated «Regulations on the procedure for the corporate engagement of PJSC TATNEFT n.a. V. D. Shashin with the controlled and related organizations», which regulates the mechanism of engagement with organizations of the TATNEFT Group. • Financing the 2019 investment program. The 2020 investment program parameters aimed at implementing the Company’s objectives as part of the Strategy - 2030. • The 2019 performance results of the Exploration and Production business-segment, taking into account the improved business processes to ensure environmental friendliness and sustainability of the Company. As part of the operational program, the Company continues to implement projects aimed at ensuring sustainable development and improving the environmental friendliness of production operations, including reducing the carbon footprint. Implementation of the Company’s Exploration Strategy. Additions to reserves. • • The Company’s initiatives to further implement the international Health, Safety and Environment standards such as ISO 14001:2015 and ISO 45001:2018 across the TATNEFT Group were given the green light. • The Company’s actions to address the climate change challenges and the Company’s contribution to the achievement of the relevant Sustainable Development Goals under the UN Global Compact. These endeavours are primarily focused on the development of professional skills. The next step will be motivation system development to attain the sustainable development goals and mitigate the anthropogenic impact on the climate. • The Company’s actions to prevent the COVID-2019 spread, measures to support the regional health system and provide social aid under the lockdown and stay-at-home orders. • The 2019 performance results of the TATNEFT Group’s companies. • The 2019 TATNEFT Group’s consolidated financial statements prepared as per IFRS and the auditor’s report on the financials and business operations audit performed by the Joint Stock Company PricewaterhouseCoopers Audit. • Dividends for 2019 based on the operating performance results. • On the annual meeting of shareholders of PJSC TATNEFT named after V. D. Shashin. • The results of the internal assessment (self-assessment) of the quality of work of the Board of Directors and its committees. • The statement of the Board of Directors of PJSC TATNEFT n. a. V. D. Shashin with regard to the independent directors. • The report of the Revision Commission on the audit of the 2019 financial and business operations of the PJSC TATNEFT n.a. V.D. Shashin. • The key priorities for the work of the committees of the Board of Directors of PJSC TATNEFT n. a. V. D. Shashin. • The 2019 summary report of the Board of Directors, the annual report, the annual accounting (financial) statements, including appropriation of retained earnings of PJSC TATNEFT n.a. V.D.Shashin. • Other issues. The Board of Directors approves the work plan with the agenda for every half-year period. Plan of matters at issue is drafted based on the proposals of members of the Board of Directors, executive bodies and top management including at all times as follows: • oversight of implementation of the Strategy and success • in achieving targets; review of plans and results of financial and business activities; • evaluating performance of the Board of Directors; • preparation for general meetings of shareholders, etc. 130 131 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Performance Assessment of the Board of Directors and its Committees The Company has a practice in place to assess the performance of the Board of Directors, its members and committees as a whole. It is a regular assessment carried out at least once a year using a self-assessment procedure. In 2019, the Board of Directors ‘ self-assessment was conducted for the reporting corporate year. The results of the self- assessment and its analysis were reviewed at an in-person meeting of the Board of Directors. (Minutes No. 12 of 24.04.2019). The assessment is carried out by fifty (50) criteria in five (5) key components: competence and powers of the Board of Directors; composition of the Board of Directors; committees of the Board of Directors; the procedures of the Board of Directors; the annual General meeting of shareholders. The assessment technique uses a polling survey of the members of the Board of Directors with regard to their activities during their tenure of office as members of the Board of Directors of PJSC TATNEFT since their election in the reporting corporate year. The survey is based on the RAEX rating scale (RAEX is included in the register of credit rating agencies of the Bank of Russia, RAEX ratings are included in the list of the official requirements for issuers and are used by the Central Bank of Russia, the Moscow Exchange, and professional experts.) Based on the self-assessment results, a positive conclusion was made regarding the work performance of the Board of Directors in the reporting corporate year. Meanwhile, the Board of Directors’ self-assessment process reflects the opinion on further improvement of the Board of Directors’ working mechanisms and development of the corporate practices. Brief comments on the Board of Directors’ activities were submitted to the Corporate Governance Committee and the HR and Remuneration Committee. Committees of the Board of Directors The membership of the Audit Committee and the Human Resources and Remuneration Committee has a significant proportion of the independent directors. In order to improve the effectiveness and efficiency of the decisions taken by the Board of Directors, the Board of Directors operates three committees in the Company, which preliminary review the most important issues on the agenda of the Board of Directors and prepare appropriate recommendations within their competence: • Audit Committee • Human Resources and Remuneration Committee • Corporate Governance Committee The activities of the committees are governed by the relevant regulations approved by the Board of Directors: • Regulations on the Audit Committee of the Board of Directors of PJSC TATNEFT n.a. V. D. Shashin • Regulations on the HR and Remuneration Committee of the Board of Directors of PJSC TATNEFT n.a. V. D. Shashin • Regulations on the Corporate Governance Committee of the Board of Directors of PJSC TATNEFT n.a. V. D. Shashin The committees are fully accountable to the Board of Directors in their activities. The members of the committees are approved by the Board of Directors, taking into account the relevant knowledge and skills, and professional background of each candidate for a committee membership. The Company furnishes the Board of Directors with the curriculum vitae details, as well as expertise, knowledge and skills of each candidate. COMMITTEES OF THE BOARD OF DIRECTORS DISTRIBUTION OF AVERAGE SCORES BY KEY COMPONENTS AUDIT COMMITTEE 4,17 4,21 4,00 4,24 4,54 Competences and powers of the Board of Directors Composition of the Board of Directors Committees of the Board of Directors Work procedure of the Board of Directors Annual General Meeting of Shareholders HUMAN RESOURCES AND REMUNERATION COMMITTEE CORPORATE GOVERNANCE COMMITTEE SELF-ASSESSMENT INCLUDES 50 CRITERIA FOR 5 KEY PRACTICE COMPONENTS OF CORPORATE GOVERNANCE The work quality assessment of the Board of Directors is intended to determine how effectively and efficiently the Board of Directors, its Committees and members perform their duties, how their service aligns with the Company’s development needs, and to promote better performance of the Board of Directors and identify the areas in which their activities can be improved. QUANTITATIVE REPRESENTATION OF THE DIRECTORS’ COMMITTEES 4 AUDIT COMMITTEE 4 HUMAN RESOURCES AND REMUNERATION COMMITTEE 8 CORPORATE GOVERNANCE COMMITTEE 132 133 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT CHAIRMAN MEETINGS OF THE COMMITTEE IN 2019 NUMBER OF MEETINGS OF THE AUDIT COMMITTEE AND ISSUES CONSIDERED FOR THE PERIOD OF 2017-2019 Activities of Committee in 2019 Audit Committee The Committee makes recommendations with regard to verifying the completeness, accuracy and fairness of accounting (financial) statements and other reporting, the reliability and effectiveness of the internal control and risk management system, and the independence and objectivity of internal and external audit functions. It is a permanent committee. There were no changes in the composition of the Audit Committee during the corporate year. The Audit Committee consists of three independent directors. Chairman of the Committee Yu.L. Levin has experience and knowledge in the field of preparation, analysis, evaluation and audit of accounting (financial) statements. The members of the Committee possess the necessary knowledge and competencies for the preliminary consideration of issues related to the control over the financial and economic activities of the Company. The Board of Directors has decided to increase the composition of the Committee by including an additional one non-executive director who also has experience and knowledge in the preparation, analysis, evaluation and audit of the accounting (financial) statements (R.R. Gaizatullin). Yuri Lvovich Levin Independent Director Member of the Board of Directors of PJSC TATNEFT Managing Partner of BVM Capital Partners Ltd Member of the HR and Remuneration Committee of the Board of Directors of PJSC TATNEFT COMMITTEE MEMBERS Radik Raufovich Gaizatullin Member of the Board of Directors of PJSC TATNEFT Non-executive Director Minister of Finance of the Republic of Tatarstan Laszlo Gerecs Member of the Board of Directors of PJSC TATNEFT Independent Director Managing Director of G Petroconsulting Ltd Member of the HR and Remuneration Committee of the Board of Directors of PJSC TATNEFT Rene Frederik Steiner Member of the Board of Directors of PJSC TATNEFT Independent Director Program Director of Direct Private Investments of FIDES Business Partner AG Chairman of the HR and Remuneration Committee of the Board of Directors of PJSC TATNEFT MAIN FUNCTIONS OF THE AUDIT COMMITTEE • Control over ensuring the completeness, accuracy, and reliability of the accounting (financial) statements of PJSC TATNEFT, including the preparation of the consolidated financial statements of PJSC TATNEFT Group with the integration of the financial statements of ZENIT Bank into the consolidated financial statements. • Coordination of the work of external auditors and the internal audit department, as well as regular review of their reports. • Organization of an independent assessment of the performance of the internal audit function and making suggestions for improving the work of the internal audit department. • Check on the external auditor’s independence. • Consideration and analysis of the quarterly, semi-annual and annual financial statements of PJSC TATNEFT, including the results of inspections by its external auditor. • Assessment of candidates for auditors and submission of recommendations to the Board of Directors on the election of independent auditors of the financial statements of PJSC TATNEFT in accordance with IFRS and RAS. • Assistance to the Board of Directors in exercising control over the work of the internal control and risk management systems of PJSC TATNEFT. • Preliminary consideration of non-arm’s length transaction and transactions with parties related to PJSC TATNEFT that are submitted for approval by the Board of Directors of PJSC TATNEFT 1 IN ABSENTIA MEETING 48 ISSUES WERE CONSIDERED 7 1 0 2 8 1 0 2 9 1 0 2 7 7 7 41 46 48 6 IN-PERSON MEETING Number of issues considered Number of meetings held KEY ISSUES CONSIDERED BY THE AUDIT COMMITTEE FOR THE PERIOD OF 2017-2019: Topic Review of the consolidated financial statements with participation of external auditors Issues related to the selection of external auditors and confirmation of the independence of external auditors Issues related to the work of the Internal Audit Department (IAD) Issues related to a preliminary consideration of non-arm's length transactions and transactions with parties related to PJSC TAT- NEFT that are submitted for approval by the Board of Directors of PJSC TATNEFT Review of the MSCI Report on Risks in Accounting and Corporate Governance. Issues on disclosure of information on financial condition of PJSC TATNEFT in annual report for 2018 On assessment of the current condition of corporate governance of PJSC TATNEFT Other 2017 2018 2019 12 5 12 4 - - - 8 14 3 15 4 - - - 10 4 14 3 1 1 1 10 14 PARTICIPATION IN AUDIT COMMITTEE MEETINGS IN 2019 Levin Yuri Lvovich Gaizatullin Radik Raufovich Gerecs Laszlo Steiner Rene Frederik 7/7 7/7 7/7 7/7 29.01 22.03 25.04 3.07 18.07 1.10 27.11 in absentia 134 135 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTHuman Resources and Remuneration Committee Activities of Committee in 2019 CHAIRMAN NUMBER OF MEETINGS OF THE HR AND REMUNERATION COMMITTEE AND ISSUES CONSIDERED FOR THE PERIOD OF 2017-2019 The Committee puts together recommendations to the Board of Directors on the effectiveness of the human resources policy, the system of nominations and remuneration, the evaluation of candidates for the membership to the Board of Directors and the Company’s management, the compliance of independent directors with the independence criteria, as well as the effectiveness and efficiency of the Board of Directors, executive bodies and top managers of the Company. The Committee combines duties in terms of performing functions on human resources (nominations) and functions on remuneration. It is a permanent committee. There were no changes in the composition of the HR and Remuneration Committee during the corporate year. The HR and Remuneration Committee of the Board of Directors consists of three independent directors. Rene STEINER, Independent Director, is the Chairman of the Committee. Due to the fact that the Committee combines the tasks of the Remuneration Committee and the Nominations (Appointments, Staff) Committee, the Board of Directors decided to increase the composition of the Committee by including an additional non-executive director (R.К. Sabirov). All members of the Committee have the relevant knowledge, competence, and experience for the tasks of the Committee. COMMITTEE MEMBERS The meetings of the Committee were held in-person and in absentia in 2019. The meetings were attended by all members of the Committee. Committee member Sabirov R.K. took part in meetings in absentia by sending a written opinion on agenda items and decisions made. Rene Frederik Steiner Independent Director Member of the Board of Directors of PJSC TATNEFT Program Director of Direct Private Investments of FIDES Business Partner AG Member of the Audit Committee of the Board of Directors of PJSC TATNEFT 9 NUMBER OF ISSUES CONSIDERED 7 1 0 2 8 1 0 2 9 1 0 2 4 4 5 2 3 Number of issues considered Number of meetings held Laszlo Gerecs Member of the Board of Directors of PJSC TATNEFT Independent Director Managing Director of G Petroconsulting Ltd Member of the Audit Committee of the Board of Directors of PJSC TATNEFT Yuri Lvovich Levin Member of the Board of Directors of PJSC TATNEFT Independent Director Managing Partner of BVM Capital Partners Ltd Chairman of the Audit Committee of the Board of Directors of PJSC TATNEFT Rinat Kasimovich Sabirov Member of the Board of Directors of PJSC TATNEFT Assistant to the President of the Republic of Tatarstan Member of the Corporate Governance Committee of the Board of Directors of PJSC TATNEFT • MAIN FUNCTIONS OF THE AUDIT COMMITTEE In terms of performing functions on human resources (nominations): • Evaluation of the Board of Directors membership in terms of professional specialization, experience, independence of its members, participation in the work; Identification of priority areas for strengthening the composition of the Board of Directors; Interaction with all groups of shareholders in the selection of candidates for the Board of Directors and regarding voting on the election of candidates for the Board of Directors, bearing in mind the most comprehensive coverage of the goals and objectives of the Company; • • Analysis of professional qualifications and independence of candidates nominated to the Board of Directors, etc. In terms of performing functions on remuneration: • Development and periodic review of the Company’s policy on remuneration of members of the Board of Directors, executive bodies and other key managers, including development of program parameters for short-term and long- term motivation of members of the executive bodies; • Control over the implementation and progress implementation of the Company’s policy on remuneration and incentive programs; • A preliminary assessment of the work of the executive bodies of the Company and other key executives at the end of the year and an assessment of the achievement of goals in the framework of the motivation program, etc. KEY ISSUES CONSIDERED BY THE HR AND REMUNERATION COMMITTEE IN 2019 Topic On salary increase in the current financial year. Review of the effectiveness of external and internal human resource management consultations. Strategic development of the functional area “HR Management” of TATNEFT Group Key HR metrics. Change in IT line of HR area. Work-flow process the Committee’s work for job evaluation. Implementation of a satisfaction rating system at PJSC TATNEFT. Updated information on projects progress in key functional areas. Approval of the Committee meeting schedule and work plan for 2020. PARTICIPATION IN HR AND REMUNERATION COMMITTEE MEETINGS IN 2019 Steiner Rene Frederick Sabirov Rinat Kasimovich Levin Yuri Lvovich Gerecs Laszlo 3/3 3/3 3/3 3/3 22.03 26.08 27.11 136 137 9 1 1 1 1 1 1 1 1 1 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTCorporate Governance Committee Activities of Committee in 2019 CHAIRMAN NUMBER OF MEETINGS OF THE CORPORATE GOVERNANCE COMMITTEE AND ISSUES CONSIDERED FOR THE PERIOD OF 2017-2019 The Committee assists the Board of Directors in developing and improving the corporate governance system and practice across the Company by prior reviewing the corporate governance issues that fall within the competence of the Board of Directors, regulating relationship between shareholders, the Board of Directors and Executive bodies of the Company, as well as the issues of interaction with legal entities controlled by the Company and other stakeholders. It is a permanent committee. There were no changes in the composition of the Committee in 2019. Members of the Committee have relevant knowledge and skills, expertise in the corporate law, requirements of stock market regulators to issuers of the securities market, international standards of corporate governance, socially responsible investment, ESG practices and Sustainable Development Goals of the UN Global Compact. Nail Ulfatovich Maganov General Director Member of the Board of Directors of PJSC TATNEFT Chairman of the Management Board of PJSC TATNEFT COMMITTEE MEMBERS Nurislam Zinatulovich Syubaev Deputy General Director for Strategic Development, Member of the Board of Directors of PJSC TATNEFT, Member of the Management Board of PJSC TATNEFT Vasili Aleksandrovich Mozgovoi Assistant to the General Director for Corporate Finance of PJSC TATNEFT Evgeny Aleksandrovich Tikhturov Head of the Finance Department (until February 12, 2020), Member of the Management Board of PJSC TATNEFT (until February 28, 2020). Natalia Evgenievna Dorpeko Corporate Consultant to the General Director of PJSC TATNEFT Damir Maratovich Gamirov Acting Corporate Secretary – Deputy Head of the Office of the Corporate Secretary of PJSC TATNEFT Rinat Kasimovich Sabirov Member of the Board of Directors of PJSC TATNEFT Assistant to the President of the Republic of Tatarstan Member of the HR and Remuneration Committee of the Board of Directors of PJSC TATNEFT Nuriya Zufarovna Valeyeva Head of Technical and Economic Information and Best Practices Department of PJSC TATNEFT MAIN FUNCTIONS OF THE AUDIT COMMITTEE Preparation of recommendations to the Board of Directors regarding the corporate practice issues: • Securities policy; • Dividend policy; • Convening, preparing and conducting annual and extraordinary general meetings of shareholders; • Amendments to the Articles of Association and other internal documents of the Company, the approval of which is within the competence of the general meeting of shareholders and the Board of Directors; • Analysis and evaluation of the implementation of the Conflicts of Interest Management Policy of the Company; • Monitoring system reliability and performance 138 The Committee held two (2) joint attendance meetings, where the targets were set. During the year, the day-to- day work was carried out with the direct interaction of the Committee members with the Company’s management in the form of meetings, business correspondence, joint drafting of event plans and internal documents with further submission to the Board of Directors through the Corporate Secretary’s Office. 54 NUMBER OF ISSUES CONSIDERED 7 1 0 2 8 1 0 2 9 1 0 2 2 2 2 2 13 Number of issues considered Number of meetings held MAIN ISSUES CONSIDERED BY THE CORPORATE GOVERNANCE COMMITTEE IN 2019: Topic Making amendments to the Company’s internal documents Self-assessment procedure of the members of the Board of Directors Compliance with the investors’ expectations for corporate ESG practice. Climate policy, carbon footprint reduction, favourable environment. Social investments Involvement of the Company in the UN Global Compact and integrating the Sustainable Development Goals Development of the management system of controlled companies Improvement of the risk management and internal control Compliance of the corporate practice to the Bank of Russia Code of Corporate Governance and international standards Preparation for the general meeting of shareholders PARTICIPATION IN THE MEETINGS OF THE CORPORATE GOVERNANCE COMMITTEE IN 2019 Maganov Nail Ulfatovich Gamirov Damir Maratovich Valeyeva Nuriya Zufarovna Dorpeko Natalia Evgenievna Mozgovoi Vasili Aleksandrovich Sabirov Rinat Kasimovich Syubaev Nurislam Zinatulovich Tikhturov Evgeny Aleksandrovich 54 4 2 12 7 6 9 11 3 2/2 2/2 2/2 2/2 2/2 2/2 2/2 2/2 04.04 26.04 139 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTGOVERNING BODIES Sole Executive Body GENERAL DIRECTOR Nail Ulfatovich Maganov Since November 2013 to present, the General Director of TATNEFT The PJSC TATNEFT operations are run under the leadership of the General Director who acts as the sole executive body. The General Director is appointed by the Company’s Board of Directors. The General Director is accountable to the Company’s Board of Directors and the Shareholders’ Meeting. The General Director is the Chairman of the Management Board. The Director General is guided by the current legislation, the Articles of Association of the PJSC TATNEFT and the Regulations on the General Director of PJSC TATNEFT and the Company’s internal documents and decisions of the General meeting of shareholders and the Board of Directors. The General Director is in charge of the Company’s day-to-day operations, determines the Company’s organizational structure, oversees the soundness of the Company’s assets and their effective use, addresses organizational issues related to the management of the Company’s business structure, the health, safety, and environmental protection, the development of human resources and social guarantees for employees, as well as the sustainable development and corporate responsibility. In accordance with the Regulations, the General Director has the right to entrust certain matters to the charge of his deputies. The Company’s organizational and administrative documents delineate the duties and responsibilities between the General Director and the Deputy General Directors in terms of organizing the work in the following areas: • Strategic development; • Core business activities: oil and gas production, geological exploration, development of oil and gas fields; • Geological prospecting and exploration, and management of external oil and gas projects; • Workover and drilling, and enhanced oil recovery; • Power generation, mechanics, logistics and transport, corporate engineering policy; • Telecommunications, information infrastructure, information • security; Industrial and environmental safety, labor protection and environmental protection; • Capital construction; • Economics and finance; • Social development; • Engagement with the Federal authorities of the Russian Federation, representative offices of foreign countries and companies; • Representation and upholding of interests in the Federal Executive Bodies of the Republic of Tatarstan, legislative and executive authorities, institutions, organizations and enterprises of the Republic of Tatarstan. The Deputy General Directors of PJSC TATNEFT manage the work and bear responsibility for the relevant business streams of the Company with regard to the strategic and long term planning, fulfillment of technical and economic targets, the effective and efficient use of fixed assets, raw materials, fuel and power, and other resources, production engineering and workplace management, occupational health and safety and other business areas of the Company. The distribution of duties and responsibilities between the General Director and Deputy General Directors is determined by the Company’s internal organizational and administrative documents. The Deputy General Directors manage the operations and bear responsibility for the relevant business streams. GOVERNING BODIES Management Board The Management Board is a collegial executive body, which is in charge of day-to- day management of the TATNEFT Company, development and implementation of the overall development strategy of the Company’s subsidiaries. EXECUTIVE BODIES OF THE COMPANY GOVERNING DAY-TO-DAY OPERATIONS OF THE COMPANY WITHIN THE COMPETENCE DEFINED BY THE ARTICLES OF ASSOCIATION OF TATNEFT THE GENERAL DIRECTOR (CHIEF EXECUTIVE OFFICER) IS THE SOLE EXECUTIVE BODY THE MANAGEMENT BOARD IS A COLLEGIAL EXECUTIVE BODY The Management Board is guided by the current legislation, the Articles of Association of PJSC TATNEFT n. a. V. D. Shashin and the Regulations on the Management Board of PJSC TATNEFT n.a. V. D. Shashin (approved as amended and restated by the decision of the annual general meeting of shareholders of PJSC TATNEFT on June 21, 2019) and the internal documents of the Company. The procedure for forming the Management Board, the rights, duties and responsibilities of the Management Board members, and the Management Board operating regulations are established by the Regulations on the Management Board of PJSC TATNEFT n.a. V. D. Shashin. The rights and duties of the Management Board members are also determined by the contracts entered into on behalf of the Company by the Chairman of the Board of Directors with each member of the Management Board. The Management Board membership is represented by the heads of the Company’s core business streams and corporate areas. The Management Board consists of senior managers of the Company and its subsidiaries who have the necessary professional background and managerial experience in the Company’s activities. The Management Board meetings are held in accordance with the work schedule thereof. The size of the Management Board is determined by the Board of Directors. 140 141 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTComposition of the Management Board of PJSC TATNEFT in 2019 Maganov Nail Ulfatovich General Director of PJSC TATNEFT Member of the Board of Directors of PJSC TATNEFT Chairman of the Management Board of PJSC TATNEFT • Born in 1958. • In 1983, graduated from Moscow Institute of Petrochemical and Gas Industry named after Academician I.M. Gubkin • From July 2000 to November 2013, First Deputy General Director – Head of Crude Oil and Petroleum Products Sales Department of OJSC TATNEFT • From November 2013 to present, General Director of PJSC TATNEFT Participation in governing bodies of other organizations: • Chairman of the Board of Directors of PJSC Bank ZENIT • Chairman of the Board of Directors of INKO-TEK LLC • Member of the Board of Directors of PJSC Nizhnekamskneftekhim • Member of the Board of Directors of OJSC Tatneftekhiminvest-holding • Member of the Board of Directors of JSC Svyazinvestneftekhim • Member of the Board of Directors of KHL LLC • Member of the Board of Directors of Tatneft Oil AG • Chairman of the Board of Directors of TNA-Services NV • Member of the Board of Directors of TAL OIL Ltd • General Partner, who is entrusted to run a business (without a power of attorney) of LP TATNEFT, Solid and Co • Chairman of the Board of Directors of TATNEFT Charitable Fund. • Deputy Chairman of the Supervisory Board of ANO Academy of Hockey AK BARS n.a. Y. I. MOISEEV Voskoboinikov Vladlen Aleksandrovich Glazkov Nikolay Mikhailovich Ibragimov Nail Gabdulbarievich Member of the Management Board of PJSC TATNEFT until November 28, 2019 Head of the Consolidated Financial Statements Department of PJSC TATNEFT until November 1, 2019 Member of the Management Board of PJSC TATNEFT Deputy General Director for Capital Construction of PJSC TATNEFT • Born in 1965. • In 1993, graduated from the Southern Alberta Institute of Technology in Calgary • Born in 1960. • In 1988, graduated from Kazan Institute of Engineering and Construction • From 2005 to November 1, 2019, • From 2008 to 2010, Head of the Head of the Consolidated Financial Statements Department of PJSC TATNEFT Capital Construction Department of OJSC TATNEFT • From 2010 to present, Deputy General Director for Capital Construction of PJSC TATNEFT Member of the Board of Directors of PJSC TATNEFT until June 21, 2019 First Deputy General Director for Operations – Chief Engineer of PJSC TATNEFT Member of the Management Board of PJSC TATNEFT until February 28, 2020 • Born in 1955. • In 1977, graduated from Moscow Institute of Petrochemical and Gas Industry named after Academician I.M. Gubkin • From 2000 to February 18, 2020, First Deputy General Director for Operations – Chief Engineer of PJSC TATNEFT Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % 0,000176 none Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % none none Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % none none Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % 0,019831 0,020873 142 143 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Mukhamadeev Rustam Nabiullovich Nurmukhametov Rafail Saitovich Tikhturov Evgeny Aleksandrovich Syubaev Nurislam Zinatulovich Member of the Management Board of PJSC TATNEFT Deputy General Director for Social Development of PJSC TATNEFT • Born in 1952. • In 1977, graduated from Moscow Institute of Petrochemical and Gas Industry named after Academician I.M. Gubkin • From 2001 to December 4, 2017, Deputy General Director for HR and Social Development of PJSC TATNEFT • From December 4, 2017 to January 31, 2020, Deputy General Director for General Issues of PJSC TATNEFT • From February 1, 2020 to present, Deputy General Director for Social Development of PJSC TATNEFT Participation in governing bodies of other organizations: • Member of the Board of Directors of JSC IC Chulpan • Chairman of the Governing Board of PEE Tatneft-School Member of the Board of Directors of PJSC TATNEFT Head of NGDU Leninogorskneft of PJSC TATNEFT Member of the Management Board of PJSC TATNEFT until December 23, 2019 • Born in 1949. • In 1974, graduated from Ufa Petroleum Institute. • From January 30, 1998 to January 31, 2020, Head of NGDU Leninogorskneft Member of the Management Board of PJSC TATNEFT until February 28, 2020 Head of the Finance Department of PJSC TATNEFT Member of the Corporate Governance Committee of the Board of Directors of PJSC TATNEFT • Born in 1960. • In 1992, graduated from Moscow Institute of Management named after S. Ordzhonikidze • From 1999 to February 12, 2020, Head of the Finance Department of PJSC TATNEFT Participation in governing bodies of other organizations: • Member of the Board of Directors of Participation in governing bodies of other organizations: • Chairman of the Board of Directors CJSC Okhtin-Oil of JSC IC Chulpan • Member of the Board of Directors of PJSC AK BARS Bank until June 20, 2019 • Member of the Board of Directors of PJSC Bank ZENIT • Member of the Board of Directors of JSC Tatoilgas • Member of the Board of Directors of CJSC Tatex • Member of the Board of Directors of JSC Tatnefteprom-Zyuzeevneft • Member of the Board of Directors of JSC Tatnefteprom • Member of the Board of Directors of Tatneft Oil AG From June 21, 2019, Member of the Board of Directors of PJSC TATNEFT Deputy General Director for Strategic Development of PJSC TATNEFT Member of the Management Board of PJSC TATNEFT Member of the Corporate Governance Committee of the Board of Directors of PJSC TATNEFT • Born in 1960. • In 1982, graduated from Moscow Institute of National Economy n.a. G.V. Plekhanov • From 2001 to July 17, 2016, Head of Strategic Planning Department - Advisor to General Director for Foreign Economic Affairs and Financial/Banking Issues • From July 18, 2016 to present, Deputy General Director for Strategic Development of PJSC TATNEFT Participation in governing bodies of other organizations: • Member of the Board of Directors of CJSC Kara Altyn Enterprise • Member of the Board of Directors of Karbon-Oil LLC • Member of the Board of Directors of JSC Aznakaevsky Neftemash plant • Chairman of the Board of Directors of JSC IDELOIL • Member of the Board of Directors of Blagodarov-Oil LLC • Chairman of the Board of Directors of Zavod Elastic LLC • Member of the Board of Directors of URS - Trading House LLC • Member of the Board of Directors of PJSC Bank ZENIT • Member of the Board of Directors of P-D Tatneft-Alabuga Fiberglass LLC • Chairman of the Board of Directors of JSC National Non- Governmental Pension Fund • Member of the Supervisory Board of Tatneft International Cooperatie U.A. (the Netherlands) • Member of Self-regulating Organization - National Association of Non-State Pension Funds Share in the authorized capital of the Company, % 0,004204 Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % 0,004264 Share of the Company’s ordinary stocks owned by the person, % 0,010465 0,010107 Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % none none Share in the authorized capital of the Company, % Share of the Company’s ordinary stocks owned by the person, % none none 144 145 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Changes in the Management Board membership Activities of the Management Board in 2019 STRUCTURE OF ISSUES CONSIDERED BY THE MANAGEMENT BOARD IN 2019 In 2019, the Management Board considered several production and corporate issues and made the appropriate decisions. 33,9% NUMBER OF MEETINGS OF THE MANAGEMENT BOARD FOR THE PERIOD OF 2017-2019 30,4% 8,9% 7 1 0 2 8 1 0 2 9 1 0 2 6 22 12 31 28 Number of issues considered Number of meetings held 56 10,7% 3,6% 1,8% 10,7% Corporate issues Strategy Budget Production Local acts Social issues Governance of subsidiaries and affiliates 56 NUMBER OF ISSUES CONSIDERED Maganov Nail Ulfatovich Voskoboinikov Vladlen Aleksandrovich (until November 28, 2019) Glazkov Nikolay Mikhailovich Ibragimov Nail Gabdulbarievich (until February 28, 2020) Nurmukhametov Rafail Saitovich (until December 23, 2019) Mukhamadeev Rustam Nabiullovich Tikhturov Evgeny Aleksandrovich (until February 28, 2020) Syubaev Nurislam Zinatulovich DURATION OF WORK IN THE MANAGEMENT BOARD 0 person 2 persons 6 persons less than a year one to seven years over seven years AGE PROFILE OF THE MANAGEMENT BOARD MEMBERS 45–55 y. o. 56–65 y. o. 66+ y. o. 25% 50% 25% 2 persons 4 persons 2 persons In 2019, there were the following changes in the Management Board’s membership: The powers of the following members of the Management Board were terminated: Vladlen Aleksandrovich Voskoboynikov due to the resignation mutually agreed by the Parties (Minutes of the Board of Directors No. 7 of 28.11.2019), Raphail Saitovich Nurmukhametov due to his retirement form service (Minutes of the Board of Directors No. 8 of 23.12.2019). In 2020, the powers of the Management Board members Yevgeny Aleksandrovich Tikhturov and Nail Gabdulbarievich Ibragimov (Minutes of the Board of Directors No. 10 dated 28.02.2020) were terminated due to their retirement from service. All the members of the Management Board have relevant work experience in the Company, professional knowledge and high business reputation. Duration of work in the Management Board of PJSC TATNEFT Participation of the Management Board members in meetings of the Management Board in 2019 Surname, name, patronymic Maganov Nail Ulfatovich Voskoboinikov Vladlen Aleksandrovich Glazkov Nikolay Mikhailovich Mukhamadeev Rustam Nabiullovich Tikhturov Evgeny Aleksandrovich Syubaev Nurislam Zinatulovich Ibragimov Nail Gabdulbarievich Nurmukhametov Rafail Saitovich 28/28 28/20 28/28 28/28 28/28 28/28 28/27 28/28 19.02 19.02 20.02 20.02 20.02 07.03 11.04 16.05 21.05 03.06 07.06 10.06 25.06 17.07 15.08 20.08 25.09 15.10 22.10 29.10 12.11 29.11 29.11 06.12 10.12 16.12 12.12 23.12 extraordinary extraordinary extraordinary extraordinary 146 147 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTRemuneration of members of governing bodies Remuneration of the PJSC TATNEFT Board of Directors’ members Remuneration of the Management Board members The Board of Directors sets the Company’s policy on remuneration and/or reimbursement of costs (compensations) to the members of the Board of Directors, members of its executive bodies and other key managers of the Company. THE SYSTEM OF THE MANAGEMENT STAFF REMUNERATION IS FORMED IN ALIGNMENT WITH THE COMPANY’S STRATEGIC GOALS 2030. Remuneration of the members of the executive bodies and other key managers is determined in such a way as to provide a reasonable and justified ratio between the fixed part of the remuneration and the variable part of the remuneration, which depends upon the performance results of the Company and the personal (individual) employee’s contribution to the final result. The Remuneration Committee consisting of independent directors and headed by an independent director who is not the Chairman of the Board of Directors has been set up for preliminary review of issues related to establishing the effective and transparent remuneration practices. When forming a remuneration system and determining the specific amount of remuneration to the members of the Company’s governing bodies, it is assumed that the amount of the remuneration paid should be sufficient to engage, motivate and retain persons with the relevant professional background, knowledge and skills required for the Company. The remuneration system is based on the principles and guidance of the Corporate Governance Code in alignment with the Company’s current practice of remuneration and compensation accrual. The company seeks to establish the remuneration for the members of the Board of Directors based on the contribution they make to the Company’s growth and development. An adequate level of remuneration helps attract highly qualified candidates and provides compensations for the time and effort they spend to get prepared for and participate in the meetings of the Board of Directors. The remuneration is paid out to the PJSC TATNEFT Board of Directors’ members under the Regulations on payment of monetary remuneration to the members of the Board of Directors and the Revision Commission of PJSC TATNEFT. The remuneration of the members of the Board of Directors is made up of the fixed and variable parts. The fixed part of remuneration is established by the Regulations and is indexed concurrently with changes in tariffs and salaries of employees of PJSC TATNEFT. The variable part of remuneration for the members of the Board of Directors is formed depending on fulfilment of the following key performance indicators: year-on-year ratio of the Company’s capitalization; • • dividend costs to net profit ratio (year-on-year); • amount of additional profitability versus basic profitability. The amounts of remuneration to be paid to the members of the Board of Directors is established by a decision of the General meeting of shareholders and provides for, inter alia, as follows: • remuneration for performing the duties of the Chairman of the Committee of the Board of Directors; • emuneration for performing the duties of the Chairman of the Committee of the Board of Directors. In 2019, the total remuneration paid out to the members of the Company’s Board of Directors amounted to 231 162 449,70 rubles, including the remuneration for participation in the work of the Management Board, salaries, bonuses and other types of remuneration. The compensations to members of the Company’s Board of Directors amounted to 10 258 895,66 rubles. The payments are made to the Management Board members under the basic terms of the concluded contracts for the duties performed by a Management Board member, that include, inter alia, putting decisions in practice made by the General meeting of shareholders and the Board of Directors, participating in making plans for the Company growth and development, improving efficiency and productivity of the Company and its individual business units. In 2019, the total remuneration paid out to the members of the Company’s Management Board amounted to 214 854 636,56 rubles, including the remuneration for participation in the work of the Management Board, salaries, bonuses and other types of remuneration. The compensations to the members of the Company’s Management Board amounted to 82 621,00 rubles The Company’s management staff motivation policy is aimed at creating a unified remuneration system with its variable part linked to the key performance indicators that reflect the success in achieving the Company’s strategic goals. Name of indicator Rubles Name of indicator Rubles Remuneration for participation in the work of the management body 115 558 159,00 Remuneration for participation in the work of the management body Salary Bonus Commissions 16 595 433,38 Salary 98 955 714,91 Bonus 0,00 Commissions Other types of remuneration 53 142,41 Other types of remuneration TOTAL Compensation 231 162 449,70 TOTAL 10 258 895,66 Compensation 6 303 695,00 69 603 106,34 122 311 250,40 0,00 16 636 584,82 214 854 636,56 82 621,00 Note: The amount of the remuneration under the IFRS methodology is indicated in Note 26 «Related-party transactions» in the consolidated financial statements prepared in accordance with international financial reporting standards and the independent auditor’s report. For more information, please refer to the Annual Report, Annex 1. 148 149 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTCorporate Secretary The main task of the Corporate Secretary is the efficient implementation of the Corporate policy and the organization of efficient communications among shareholders, management and control bodies and the Company itself. The Corporate Secretary ensures the efficient interaction of the members of the Board of Directors with the Company’s shareholders and their representatives, with the executive bodies of the Company, heads and employees of the divisions of the Company, coordination of the Company’s actions to protect the rights and interests of the shareholders, conducting meetings and keeping minutes of meetings of the Board of Directors. CORPORATE SECRETARY Damir Maratovich Gamirov Acting Corporate Secretary – Deputy Head of the Office of the Corporate Secretary of PJSC TATNEFT Member of the Corporate Governance Committee of the Board of Directors of PJSC TATNEFT • Born in 1980. • In 2003, graduated from Ufa State Petroleum Technical University • From 2013 to April 16, 2017, Economist at the Securities Section of the Property Management Department of PJSC TATNEFT • From April 17, 2017 to present, Deputy Head of the Office of the Corporate Secretary of PJSC TATNEFT The Corporate Secretary reports to the Board of Directors, is appointed and dismissed by the General Director based on the decision of the Board of Directors. Share in the authorized capital of the Company, % 0,000028 Share of the Company’s ordinary stocks owned by the person % none The duties of the Corporate Secretary are assigned to Damir Maratovich GAMIROV by the Decision of the Board of Directors dated November 6, 2017. The Corporate Secretary enjoys appropriate level of independence from the executive bodies of the Company and has necessary powers and resources to perform his tasks. The Corporate Secretary acts in accordance with the Company’s Articles of Association and the Regulations on the Corporate Secretary of PJSC TATNEFT, which takes into account all the requirements of the Moscow Exchange PJSC and the recommendations of the Bank of Russia Code regarding the activities of the Corporate Secretary. Key functions of the Corporate Secretary Office of the Corporate Secretary The scope of competence of the Corporate Secretary Office includes maintaining an efficient system of interaction between all participants of corporate relations, including subsidiaries and affiliates, monitoring the implementation by the Company, subsidiaries, and affiliates of corporate procedures relating to the exercise of the rights of shareholders and other participants in corporate relations, ensuring the Company’s interaction with a specialized registrar, depositories, with government bodies authorized to regulate corporate relations and the securities market as well as with other participants of the securities market. The Office of the Corporate Secretary ensures the organization and control of compliance with the requirements of legislation on public disclosure of information, including the preparation and disclosure of information in the form of an annual report, issuer’s quarterly reports, material facts, as well as documents and information related to the issuance and circulation of securities for organized stock market, provision of documents and information requested by shareholders, proper storage of corporate documents of the Company. As part of improving corporate practice, the Office of the Corporate Secretary monitors the effectiveness of the Company’s current procedures and ensures that an annual report to the Board of Directors on the state of corporate governance in the Company and its development prospects is prepared. • To ensure the efficiency of the mechanisms for implementation by the Company, subsidiaries, and affiliates of the corporate procedures related to the exercise of the rights of shareholders and other participants of the Company’s corporate relations. • To ensure the preparation and holding of General Meetings of Shareholders and meetings of the Board of Directors, including the preparation of materials for meetings of the Board of Directors in accordance with the internal documents of the Company. • To ensure the work of committees of the Board of Directors of the Company, coordination of their activities. • To provide the interaction of the Company with the exchanges, registrar, depositories, government bodies supervising corporate relations and securities market, and with other professional participants of the securities market within the scope of authorities vested in the Corporate Secretary. • To ensure compliance with the requirements for disclosure of information, provision of documents and information upon shareholders’ requests, efficiency control of corporate mechanisms for disclosure of information, and proper storage of corporate documents of the Company. • To compile a list of information classified as insider information, work with insiders, control over insiders’ transactions with securities of the Company. • To ensure the Company’s interaction with its shareholders and participate in preventing the corporate conflicts. • To monitor the Company’s compliance with the requirements of corporate legislation, terms of internal documents of the Company, and shareholders’ rights in the part related to the competence of the Corporate Secretary, take the necessary measures to eliminate such violations, minimize the consequences of such violations. • To prepare an annual report to the Board of Directors on the status of corporate governance in the Company and its development prospects. • To monitor the Company’s compliance with the requirements of corporate legislation, terms of internal documents of the Company, and shareholders’ rights in the part related to the competence of the Corporate Secretary, take the necessary measures to eliminate such violations, minimize the consequences of such violations. • To participate in improving the system and practice of corporate governance of the Company, formation of mechanisms and regulations of corporate practice, monitoring their efficiency. To assess efficiency of the corporate governance system of the Company. To promote development of the corporate governance system in the subsidiaries and affiliates in the interests of TATNEFT Group. 150 151 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTInternal Audit Independent auditor In order to independently assess the reliability of the accounting (financial) statements, the Company annually engages an external auditor to conduct an audit of statements prepared under IFRS and RAS. The external auditor is approved by the General Meeting of Shareholders on the recommendation of the Board of Directors of the Company, adopted on the basis of the assessment carried out by the Audit Committee. AO PricewaterhouseCoopers Audit was approved as an auditor for compulsory audit of the annual financial accounting statements for 2019 prepared in accordance with Russian and International Accounting Standards by the decision of the Annual General Meeting of Shareholders (Minutes No.29 dated June 25, 2019). The internal audit of the Company is aimed at assessing the reliability of the Company’s business processes, provides for identification of internal reserves to improve the efficiency of the financial and economic activities of PJSC TATNEFT, including the Group’s entities, and is carried out in accordance with a plan approved by the Board of Directors. The scope areas of the internal audit in 2019: • Current asset management. • Procurement and standards of raw material balances of Tatneft-Neftekhim Management Company. • Development of the regulations for sample audits in risk areas. • Procurement management office of PJSC Bank ZENIT. • Cost management of the super-viscous oil project. • Crude oil metering by wells. • Social asset management. • Railway transportation of crude oil and petroleum products by Tatneft-Trans LLC. When preparing the annual plan, the proposals received and risks identified as a result of the managers survey of the business segments and divisions of the Company, the results of previous audits are taken into account. As part of the audit, the system of internal control over the operational efficiency of processes, compliance with the legislation, property safety is considered. The audit is conducted on a risk-based approach. The report on the results of the internal audit is sent to the management of the Company and the Audit Committee. Subsequently, the Internal Audit Department monitors the implementation of measures and informs the management of the Company and the Audit Committee of the Board of Directors on the progress of elimination of the identified deficiencies. Internal Audit and Control Principles Regulations on the Internal Audit Department of PJSC TATNEFT was approved by the Board of Directors of PJSC TATNEFT (Decision No. 3, Minutes No.9 of January 29, 2016). The internal audit function is isolated by the nature of its activities, it has the necessary independence status. The internal audit, together with the Board of Directors of PJSC TATNEFT and the Executive Management of the Company, is involved in improving the system of internal control and risk management. Control inspections In 2019, 9 audits were conducted in accordance with the annual plan. In addition, on the instructions of the Company’s executive management, the internal audit department participated in unscheduled projects on various issues of financial and economic activity. Reports on the completed projects were sent to the Audit Committee and Executive Management of the Company. For all projects, the implementation of action plans is monitored. The quality assessment of the internal audit function implemented by the Internal Audit Department of PJSC TATNEFT was successfully conducted. According to the results of the evaluation provided by the experts of CJSC Deloitte & Touche CIS, it was concluded that the management activities generally comply with the International Professional Standards of Internal Audit and the Code of Ethics of the Institute of Internal Auditors 152 153 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTCONTROL INSPECTIONS Audited Item Subject of Audit Key Recommendations Current Asset Management Procurement and balance standards of raw materials of Tatneft-Neftekhim Management Company • Analysis of warehouse inventories, • Conduct work with the inventory balance with the curators measures for stock balances involvement. • Target indicators of current assets norms. Actual calculations of their achievement. and customers. • Develop accounts payable management regulations. • Introduce tools to control the actual payment due dates regarding contractual obligations. • Update the Methodology for determining the indicators • Management of receivables and of accounts receivable turnover. payables. • Expand the perimeter of corporate control in all major business • Advance payments management. areas (including Tire business). • The effect of eliminating these shortcomings may amount to RUB 200-300 million. • Results of the project • Monitor purchases of other tire companies using customs “Development of the competitive procurement environment for the Tire complex of PJSC TATNEFT. • Optimum cost & quantity ratio of raw materials procured for the Tire manufacturing complex. • Efficiency of raw materials stock management. statistics. • Scientific & Technical Center Kama LLC, when carrying out test schedules for testing new types of raw materials and materials, must conduct a factor analysis of fulfillment of homologation deadlines, identification of delay causes and work on their reduction. • As part of the performance assessment, the Deputy Director of Logistics of Trading House KAMA for the reporting year must additionally establish a key performance indicator “The share of non-alternative purchases in the total volume of purchases of raw materials for the year”. • Ensure a systematic approach to the analysis of the reasons for the occurrence of excess reserves of raw materials, determine the Tatneft-Neftekhim as a service responsible for performing a factor analysis of implementation of working capital standards based on the results of the next reporting period. • The effect of eliminating deficiencies can be up to RUB 250 million. Development of Regulations for sampling audits in risk areas Consulting project. Objective of the project: • updating of Anti-Corruption Policy • Coordinate and approve the updated Anti-Corruption Policy and ensure the implementation of the anti-corruption activities described in the Anti-Corruption Policy. of the Company; • development of inspection regulations for risk areas and identification of indicators of negative events. • According to the newly developed regulations, determine the responsible services for the audit and put the documents into action. Procurement Department, Bank ZENIT PJSC • Compliance with procurement • The Bank’s Internal Audit Service should include audits of the procedures. procurement process in annual plans. • Compliance of procurement • Technical and commercial parts of offers must be submitted only procedures with the best practices. through the electronic trading platform. • Ensuring transparency of the procurement process and creating conditions for competition. • Include in the Regulations on contractual work the requirement of mandatory availability of justification (procurement decision) for concluding a contract. • Compliance of concluded contracts • To regulate the procedure for increasing volumes and changing with procurement decisions. • Automation of the procurement process. the contract value without a new tender. • To strengthen control over compliance of the terms of the contract with the terms of the procurement decision. • The minimum effect of eliminating these shortcomings may be RUB 100-150 million. Measures taken Activities are approved. Activities are being implemented. Activities are approved. Activities are being implemented. The Anti-Corruption Policy has been updated and transferred to the Economic Security, Information Protection, Civil Defense and Emergency Situations Department for approval by the Board of Directors of PJSC TATNEFT. Activities are approved. Activities are being implemented. Cost Management of Super-Viscous Oil Production Project (SVO Project) • Optimum procurement of materials, equipment and services by contractors under the turn-key construction contracts as part of SVO production project. • The contract template must include the terms for selection of subcontractors to perform works, services, including the obligation of contractors to conduct all tenders only with the use of the tender procedure of PJSC TATNEFT. Activities are approved. Activities are being implemented. • Approve schedules for works performance on the infrastructure • Compliance with scheduled facilities at the time of signing contracts. construction deadlines of the infrastructure facilities in SVO fields. • Formation of the investment program for development of SVO fields. • Document all the cases of violation of contractual obligations by contractors as per the deadlines for construction and installation works and apply sanctions for violation of due dates of facilities construction. • Transfer of investment sources within the approved limits of the investment program and the calendar deadlines for implementation of the SVO project stage shall be carried out on the basis of a decision of the First Deputy General Director for Oil & Gas Exploration and Production in coordination with the Investment Department. • The effect of eliminating deficiencies can be up to RUB 180 million. Audited Item Subject of Audit Key Recommendations Oil metering by wells • Oil metering process by wells • To develop and approve a methodology that excludes (water cut data and data on the additional oil production resulting from well interventions) calculations of additional oil production from inefficient well interventions on injection wells. • The concerned departments must increase the number of Measures taken Activities are approved. Activities are being implemented. inspections conducted, water cut data of well products (conduct monthly). In the event that, based on the results of inspections, it is revealed that there is a distortion of data on water cut of well products, apply disciplinary measures to employees who have committed violations. • Based on the results of data reliability checks on water cut of well products, analyze and develop action plans to prevent data distortion. Social assets management • Centralization of the social assets • Set a strategic objective to make profitable certain areas of the management. Complex of Social facilities. • Cost optimization. • Quality of services and service • Reduce the structure of supported social assets based on the outlook analysis. provision. • Establish the management accounting and monitoring of key • Marketing, pricing policy. • Customer satisfaction, feedback performance indicators • Carry out factor analysis of changes in revenue and facility and improvement. loading indicators. Activities are approved. Activities are being implemented. • Unify approaches to services pricing and loyalty programs, create a unified catalog of prices for services. • Develop sales channels, establish rates of commission fees of agencies taking into account their interest in promoting TATNEFT facilities. • Introduce customer-oriented thinking, begin practical implementation of quality management principles. Railway Transportation of crude oil and petroleum products by Tatneft-Trans LLC • Supervision of financial and • Organize the management accounting of reasons of railway economic activities of TN-Trans LLC by curators. wagons bunching on railway lines and identify the party guilty of excess downtime. • Fulfillment of requirements on • Analyze the option of shunting out of loaded wagons without provision of railway operation and organization of railway trains traffic on private rail lines of TANECO JSC. • Coordination of TN-Trans and JSC TANECO services in the process of oil products shipment. • Fulfillment of industrial and workplace safety requirements by TN-Trans employees and their subcontractors. shipping details for paid storage in sidings on public railways of Russian Railways JSC. • Bring the contractor agreements in line with the corporate requirements. • Organize the implementation of procedure requirements for testing staff knowledge of contractors on industrial and workplace safety. Industrial safety & workplace safety activities are approved. Activities are being implemented. The action plan to address remaining issues is being developed. Works with idle well stock • Investments in well intervention • Ensure the implementation of regulatory documents establishing services for idle wells. • Efficiency of using different well categories. the requirements for wells included in the environmental program. • When tripping a pump c/w packer (in production wells) Activities are approved. Activities are being implemented. and packer (in injection wells), according to the results of unsuccessful isolating works, consider the repair to be technologically unsuccessful and reflect this fact in the act of well acceptance after the repair. • Regulate the procedure for preventive maintenance on injection wells, taking into account a working agent, injection volume, operating time, category, condition and internal coating of the tubing. 154 155 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTRevision Commission On June 21, 2019, the following composition of the Revision Commission was elected at the Annual General Meeting of Shareholders of PJSC TATNEFT for the reporting corporate year: CHAIRPERSON Nazilya Rafisovna Farkhutdinova • Year of birth: 1963 • In 1985, graduated from Kazan Financial and Economic Institute • From 2010 to present, Deputy Director for Economics and Finance of TagraS-RemService LLC MEMBERS OF THE REVISION COMMISSION Ksenia Gennadievna Borzunova • Year of birth: 1980 • In 2003, graduated from Kazan State Financial and Economic Institute • From 2006 to present, Head of the Economics Department of the Ministry of Land and Property Relations of the Republic of Tatarstan Salavat Galiaskarovich Zalyaev • Year of birth: 1975 • In 1999, graduated from Moscow Military Institute of the Federal Border Service of the Russian Federation • From 2002 to present, Leading Legal Counsel of the Corporate and Legal Section of the Legal Department in PJSC TATNEFT Liliya Rafaelovna Rakhimzyanova • Year of birth: 1967 • In 1988, graduated from Kazan Financial and Economic Institute • From 2010 to August 2012, Head of the Oil and Gas Production Section of the Hydrocarbons Department of the Ministry of Energy of the Republic of Tatarstan • From August 2012, Head of the Oil Production and Refining Department of the Ministry of Industry and Trade of the Republic of Tatarstan Venera Gibadullovna Kuzmina • Year of birth: 1946 • In 1972, graduated from Moscow Institute of Petrochemical and Gas Industry named after Academician I.M. Gubkin • From 2002 to 2014, Economist at NIS OJSC TATNEFT • From 2014 to present, Veteran of labor Ravil Anasovich Sharifullin • Year of birth: 1961 • In 1990, graduated from Kazan Financial and Economic Institute • From 2009 to 2012, Chief Accountant of NGDU Yamashneft • From 2012 to present, Head of the Control and Auditing Department • of PJSC TATNEFT 156 Azat Damirovich Galeyev • Year of birth: 1977 • In 1999, graduated from Kazan State Agricultural Academy In 2008, graduated from Ufa State Petroleum Technical University • From 2007 to 2018, Head of the Investment Department at NGDU Aznakayevskneft of PJSC TATNEFT • • From 2018 to December 1, 2019, Deputy Head of NGDU «Jalilneft» of PJSC TATNEFT on Economics • From December 1, 2019 to present, Head of the Investment Projects Analysis Office of the Investment Department **since June 21, 2019 Guzal Rafisovna Gilfanova • Year of birth: 1967 • In 1993, graduated from Saint Petersburg State University In 2005, graduated from Kursk Regional Finance and Economics Institute • • From 2013 to present, Deputy Head of the Control and Auditing Department Sariya Kashibulkhakovna Yusupova • Year of birth: 1965 • In 1986, graduated from Kazan Financial and Economic Institute • From 1991, Deputy Head of the Economic Analysis Department of the Ministry of Finance of the Republic of Tatarstan During the work of the Revision Commission of the Company in 2020, the reliability of the data contained in the annual accounting (financial) statements and the Annual Report of the Company for 2019, and the data contained in the Report on interested-party transactions concluded by PJSC TATNEFT in 2019. The findings of the Revision Commission are communicated to the Annual General Meeting of Shareholders. Changes occurred in the composition of the Revision Commission By the decision of the Annual General Meeting of Shareholders (Minutes No. 29 dated June 25, 2019), the powers of the member of the Revision Commission of PJSC Tatneft R.R.Gizatova were terminated, and A.D. Galeev was elected to the Revision Commission. The Revision Commission monitors the financial and economic activities of the Company, officials, subdivisions and services, branches and representative offices. The Revision Commission is a permanently elected body of the Company. The Revision Commission is elected by the General Meeting of Shareholders and accountable thereto. Members of the Revision Commission may not simultaneously be members of the Board of Directors of the Company, as well as occupy other positions in the management bodies of the Company. The Revision Commission activities are regulated by the Company’s Articles of Association. The Revision Commission is an elected body of eight members by the General Meeting of Shareholders for a term until the next Annual General Meeting of Shareholders. One member of the Audit Commission of the Company is appointed on the basis of the special right of the “golden share”. Any shareholder or any person nominated by a shareholder may be a member of the Revision Commission. The audited items of the Revision Commission are the Company’s activities, including the identification and assessment of risks arising from the results and in the process of the financial and economic activity. The Revision Commission inspects the legality of the agreements concluded by the Company, settlements with counterparties, develops recommendations to the Company to improve the management efficiency of the Company’s assets and other financial and economic activities of the Company, reduce financial and operational risks, improve the internal control system, and confirms the accuracy of the data included in the Annual Report of PJSC TATNEFT and annual accounting (financial) statements of the Company, and also confirms the reliability of the data contained in the report on interested-party transactions concluded in the reporting year. The Revision Commission submits the conclusion on the annual audit results in accordance with the regulations and procedures of financial reporting and accounting statements to the Board of Directors no later than forty days before the Annual Meeting. Remuneration of the Revision Commission members Name of indicator Remuneration for participation in the work of the control body In 2019, the total amount of remuneration to the members of the Company’s Revision Commission amounted to RUB 15 582 458,19, including remuneration for participation in the work of the Revision Commission, wages, bonuses and other types of remuneration. Compensation to the members of the Company’s Revision Commission amounted to RUB 0.00. Salary Awards Other types of rewards TOTAL Compensation RUB 2 784 625,46 4 306 060,00 8 358 906,79 132 865,94 15 582 458,19 0,00 157 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTRisk management and internal control Risk management is the process carried out by the Board of Directors, CEO, Managing Board, management and other employees, affecting all the Company’s activities, starting from the development of its strategy, and is aimed at identifying events that may affect the Company and managing the risk associated with these events, as well as ensuring that risk appetite is not exceeded and that a reasonable guarantee for achieving the Company’s goals is provided. The Company’s risk management and internal control system is based on a set of organizational measures and procedures taken to achieve an optimal balance between the growth of the Company’s value, profitability and risks, to ensure financial stability and safety of assets, to conduct business effectively, to comply with legislation, the Company’s Articles of Association and other internal documents, to prepare timely reliable reports and disclose significant information. In 2019, the internal document «Company Policy of Risk Management and Internal Control» was developed (approved by the Board of Directors in 2020), which defines the goals, objectives and principles of risk management, the functions of participants in the corporate risk management system, as well as the relationship of the risk management process with the processes of strategic and investment planning, operational planning, human resources and labor relations management, supply chain, aspects of industrial safety, environmental and social activities. The risk management and internal control system is aimed at providing reasonable confidence in achieving the Company’s goals: • Strategic goals; • Operational goals aimed at ensuring the effectiveness of the Company’s financial and economic activities and the safety of assets • Ensuring full compliance of the Company’s activities with the applicable legal requirements and requirements of local regulatory documents, protection of legal rights of shareholders; • Ensuring timely preparation of reliable financial and non- financial information; • Timely and complete disclosure of information and protection of insider information; • Ensuring labor protection, industrial safety, regulatory documents on environmental impact, as well as information and cyber security, personal data protection. Risk management is aimed at identifying, assessing and monitoring all significant risks, as well as taking measures to reduce the level of risks that may have a negative impact on the current results of activities and long-term work. The opportunities offered by the risk management process help the management to achieve profitability and efficiency targets, as well as to prevent irrational waste of resources. Taking into account the dynamic development of the business environment, the constant change in the composition, quality and intensity of factors that can affect the Company’s activities, the risk management system is being constantly improved to ensure prompt response to such processes. The company continuously develops the risk management and internal control system based on the generally accepted concepts and practices, including in accordance with the «Integrated Concept of Building an Internal Control System» COSO ERM, the Concept (COSO) “Risk Management of organizations. Integrated Model», the Committee of sponsored organizations of the Treadway Commission; international standards ISO31000 «Risk Management. Principles and Guidelines», ISO31010 «Risk Management. Risk Assessment Methods», relevant GOST standards and others. The opportunities offered by the risk management process help the management to achieve profitability and efficiency targets, as well as to prevent irrational waste of resources. Risk management allows the management to effectively operate under conditions of uncertainty and associated risks and to use opportunities increasing the potential for the Company’s value growth. The Company uses the three line protection model. Target focus • Development of a risk management system based on integration of risk identification and control into the processes of strategic planning, formation and implementation of the investment program, operational and financial activities, as well as identification of economic, environmental and social risks. Interaction with stakeholders to identify financial, industrial, technological, legal, economic, environmental and social impacts that can create risks and effective opportunities in the risk management • • Analysis of the effectiveness of the risk management methods used LEVELS OF ENSURING THE RELIABILITY AND EFFICIENCY OF THE RISK MANAGEMENT AND INTERNAL CONTROL SYSTEM Strategic level of management • Board of Directors of PJSC TATNEFT • Audit Committee of the Board of Directors • Corporate Governance Committee of the Board of Directors • Defining the main principles and approaches to the organization of the Company’s risk management and internal control system. • Control over the implementation of the risk management and internal control system, organization of analysis and evaluation of the RMICS effectiveness. • Approval of the main directions of development of RMICS, control of their implementation. • Approval of reports on risks of financial and economic activities at the corporate level. • Approval of risk appetite. • Control of the RMICS performance and reliability. Operational level of rmics management • Director General of PJSC TATNEFT • Management Board of PJSC TATNEFT • Corporate Governance Committee of the Board of • Formation and maintenance of a control environment that contributes to the effective functioning of the RMICS. • Support for the introduction and implementation of programs to Directors, the Company’s Management improve the RMICS. • Authorized person of the Company on coordination the functioning and development of the risk management and internal control system • Coordination of risk management and internal control processes. • Development and updating of the methodological base in the field of ensuring the RMICS processes. • Department of economic security, information • Coordination of the RMICS processes in the field of controlling protection, civil defense and emergency situations corporate fraud and corruption. • Structural divisions of PJSC TATNEFT that perform separate functions of risk management and internal control for business / functional units within the framework of the RMICS. • The Company’s employees • Implementation of the RMICS elements in business/functional units, in the business processes of the business/functional units. • Constant participation in the control environment of the RMICS, in the identification and assessment of risks, development and implementation of risk management measures, control procedures, and implementation of programs to improve the RMICS. Independent monitoring and assessment of the RMICS effectiveness • Revision Commission of JSC TATNEFT • Control of the financial and economic activities of the Company. • The internal audit service of JSC TATNEFT • Provision of an independent assessment of the RMICS reliability and effectiveness at the corporate and business process level. 158 159 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTThe key principle of the risk management system is a precautionary principle The principal approach of the Company is to assess the likelihood of a risk event occurring and the priority of preventive measures over reactive ones. The Company adheres to the precautionary principle, which is one of the basic principles in the system of strategic and current planning of activities in all areas. This principle defines a risk control mechanism to prevent the occurrence of risk or its minimization in circumstances beyond the control of the Company. In order to ensure the Company’s sustainable development, risk management is integrated into the decision-making mechanisms and management system and in all areas of the activities ORGANIZATIONAL SUSTAINABILITY BUSINESS CONTINUITY SAFETY • Strategy and planning • Compliance with legal requirements • Corporate governance • Safety and efficiency of assets • Information technologies • HR issues • Corporate governance • Investment policy • Production processes • Technology and intangible assets • Financial results • Quality of products and services • Information security Industrial safety • Corporate governance • • Occupational health and safety • Environmental protection Reducing climate impact • Information and cyber security • • Anti-corruption 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. When analyzing potential risks, external and internal factors are considered. • External factors: market, industry, socio-economic, political, financial, market and other conditions of the Company and its subsidiaries and affiliates. Internal corporate factors: managerial, production, personnel, social, environmental and others. • The Company uses software forecasting tools that allow it to take measures to minimize potential risks. In particular, corporate planning uses various scenarios that allow responding quickly to external changes and unpredictable impacts An important component of the risk management system is ensuring the implementation of uniform corporate standards governing the main processes of production and financial and business activities of PJSC TATNEFT and the Group’s enterprises. The Company’s management system includes the relationship between management KPIs and goals of the risk management and internal corporate control. Risk management and internal control system MANAGEMENT OF TATNEFT GROUP ENSURING THE EFFICIENCY OF BUSINESS PROCESSES QUALITY CONTROL OF BUSINESS PROCESSES CORPORATE RISK MANAGEMENT KEY ELEMENTS OF THE RISK MANAGEMENT The mechanism for the qualitative assessment of all possible factors that can significantly affect the indicators of production and financial and business activities of the Group, have direct or indirect impact on the current activities and strategic plans of the Company, the social environment. The system of unified corporate standards governing • the main processes of production and financial and economic activities of the Company, structural subdivisions, and enterprises of the Group; • ESG aspects; supply chain. • RISK IDENTIFICATION ENSURING INTERNAL REGULATIONS ELIMINATION OR MINIMIZATION OF RISKS AVOIDING RISKS WITHIN THE FRAMEWORK OF REGULATIONS RISK MANAGEMENT MONITORING. INTERNAL CONTROL • Quality control of corporate standards performance • • Evaluation of personal responsibility of officials (KPI) Identification of new risks in the course of business processes and the implementation of new projects RISK CONTROL. COMPLIANCE CORPORATE GOVERNANCE PRODUCTION ACTIVITIES APPROACHES IN RISK ASSESSMENT: • Risk identification • Planning of risk reduction measures • Risk monitoring and control of risk reduction measures 160 161 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Risk management and internal control principles Internal control The Company carries out works to identify risks of business processes and introduce control procedures, which contribute to improving the efficiency of business processes, ensuring the accuracy of financial reporting, compliance with the legislation and internal regulatory documents of the Company. Internal control supports the executive bodies in improving the efficiency of the Company’s management, the implementation of financial and economic activities. The risk management and internal control process helps to ensure an effective financial reporting process, as well as compliance with laws and regulations, to avoid damage to the Company’s reputation and related consequences. To minimize the possible negative impact on the results of financial and economic activities, the Company develops and implements appropriate measures. To keep risks at an acceptable level, some of the risks are insured. compensating UNIFORMITY OF THE COMPANY’S METHODOLOGICAL BASE The risk management system is based on uniform approaches and standards for all structural subdivisions and subsidiaries of the Company. CONTINUITY The risk management system operates on an ongoing basis. INTEGRITY The risk management system covers all lines of the Company’s business and all types of risks arising within their framework. Control procedures exist in all business processes of the Group at all levels of management. ACCOUNTABILITY The risk management system defines the competence for decision- making and control in the field of risk management at all levels of TATNEFT Group. AWARENESS AND PROMPT COMMUNICATION The risk management process is accompanied by the availability of objective, reliable, and relevant information. EFFICIENCY The Company makes efficient use of resources to implement the risk management measures. REASONABLE CONFIDENCE The risk management system can provide only reasonable guarantees for the achievement of the Company’s goals but cannot provide an absolute guarantee due to the inherent limitations of the external and internal environment. ADAPTABILITY The risk management system is regularly improved to identify all possible risks of activities and maximize the use of risk control and management methods. STRICT REGULATION All operations are conducted in accordance with the procedure for their implementation, established by the internal regulatory documents. ACTIVE MANAGEMENT INVOLVEMENT The management of the Company and its subsidiaries and affiliates participates actively and provides support in implementation and improvement of the risk management system of TATNEFT Group. Risk management system infrastructure The distribution of responsibilities, the availability and improvement of internal regulatory framework, organizational measures and coordination allow the risk management process to be carried out on the company-wide basis. The risk management infrastructure integrates the risk management process with all the Company’s business processes, including business planning, internal control, and audit. The Company develops a set of components and mechanisms that provide the basis for effective risk management and internal control. A unified register of risks and control procedures (risk map) is being formed, quantitative models are being developed to assess the key risks of the Company. The development, implementation and unification of control procedures in the Company’s business processes is underway on an ongoing basis The Company adheres to the principle of continuous improvement of the infrastructure and process of the risk management system based on: • CURRENT PLANS TO IMPROVE THE RISK MANAGEMENT AND INTERNAL CONTROL SYSTEM • Further improving the effectiveness of mechanisms for a systematic approach to identifying and assessing risks. • Development of internal procedures for reporting business process risks. • Determination of risk appetite based on the Company’s planned business goals. • Determination of risk appetite based on the Company’s impacts on environment, climate, and social factor. • Development of communication mechanisms of the KPI management system with the objectives in the field of risk • management and internal corporate control. • Further integration of the risk management and internal control system into the supply chain at the level of suppliers and contractors. Implementation of the risk management standards of the international system ISO 31000:2018. Improving the internal standard and regulatory base Relationship of the RMICS with all business processes Sequence of actions Internal control • Distribution of responsibilities for the RMICS • • • • • Monitoring • Development and implementation of measures for the quality of risk management. Operational and other risks The Company updates systematically operational risks for business divisions involved in achieving the Company’s strategic goals. Identification and assessment of operational risks is aimed at increasing the probability of achieving medium-term goals and indicators of business plans of company divisions within 1-3 years, including EBITDA and production indicators. The list of planned financial and economic indicators is standardized for the entire scope of the Company’s business planning. When forming business plans and sources of financing, the Company takes into account financial risks, credit risks - when selling products and services, and applies various financial instruments and insurance. The Company provides centralized allocation and monitoring of investment performance, taking into account liability limits, feasibility and risk information. Strategic risks The Company forecasts systematically and takes into account the main trends, challenges and risks that may have a significant impact on access to the resource base, services, equipment and technologies, qualified personnel, sales markets, etc. over the long term. Global socio-economic processes, climate change, the state of foreign policy and government regulation, infrastructure and other conditions and restrictions that may affect the Company’s future profile are taken into account. 162 163 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTProtection of insider information procedures and regulations PJSC TATNEFT, the securities of which are traded on organized markets not only in Russia but also in the UK, pays special attention to measures aimed at preventing and controlling inadmissibility of misuse of insider information. (EU) 596/2014 of the European Parliament and the Council “On Market Abuse” dated April 16, 2014. The Company’s website contains the Insider Calendar. In its activities the Company is guided by Federal Law No. 224-FZ “On Preventing the Illegal Use of Insider Information and Market Manipulation and on Amending Certain Legislative Acts of the Russian Federation” dated July 27, 2010, other legislation of the Russian Federation, and Regulation (EC) 596/2014 of the European Parliament and of the Council “On Market Abuse” dated April 16, 2014. The Company provides all necessary procedures for the protection of insider information with the relevant internal regulatory documents: The Company has enacted the Regulations for Access to Insider Information of PJSC TATNEFT named after V.D. Shashin, Rules for protection of its confidentiality and monitoring compliance with the legislation of the Russian Federation and the European Union and internal documents adopted thereunder, the List of information relating to insider information of PJSC TATNEFT named after V.D. Shashin, the Rules of interaction of departments and offices of the Executive office, structural divisions of PJSC TATNEFT named after V.D. Shashin, when disclosing the information recognized in accordance with the laws of the Russian Federation and the European Union and/or the UK as insider information and material facts of the issuer of securities governing the procedure: circulation of insider information within the Company; • • access to insider information; • disclosure of insider information; • making transactions with the Company’s securities, including the procedure for informing the Company by insiders about such transactions. In accordance with the requirements of the EU Regulation “On Market Abuse”, a special procedure applies to the implementation of transactions with the Company’s securities by members of the Board of Directors and the Management Board. Members of the Company’s governing bodies are informed of the requirements for handling insider information, procedure and deadlines for notifying the regulatory authorities and the Company of securities transactions; a ban on transactions with the Company’s securities in closed periods. In accordance with international best practices, insiders who are not members of the Company’s governing bodies also establish restrictions on carrying out transactions with securities in the so- called closed periods. The Company annually develops a Calendar of periods available to the insider for transactions with the Company’s securities and their derivative securities in accordance with Regulation On an ongoing basis, the explanatory work is being conducted on the requirements of the applicable legislation by informing the Company’s employees with the access to insider information, including through the corporate website of the Company. The Board of Directors decided to appoint Damir Maratovich Gamirov, Acting Corporate Secretary – Deputy Chief of the Office of the Corporate Secretary, as a person responsible for monitoring compliance with the requirements of the legislation of the Russian Federation on countering the unlawful use of insider information and market manipulation. D.M. Gamirov was appointed the Chairman of the Committee for Insider Information Protection by the Decision of the Committee (Minutes No. 1/2018 dated April 16, 2018). The Insider Information Protection Committee CHAIRMAN Damir Maratovich Gamirov — Acting Corporate Secretary — Deputy Head of the Office of the Corporate Secretary, the responsible person for monitoring compliance with the Law on Countering the Misuse of Insider Information. COMMITTEE MEMBERS • Alexey Petrovich Bespalov — Head of the Corporate Technical Policy Department of PJSC TATNEFT • Petr Andreevich Glushkov — Advisor to the General Director for International Legal Issues of PJSC TATNEFT • Vasili Aleksandrovich Mozgovoi — Assistant to the Director • General for Corporate Finance of PJSC TATNEFT Ildar Asylgaraevich Rakhmatullin — Head of the Internal Audit Department of PJSC TATNEFT • Rifdar Rifkatovich Khamadyarov — Deputy Chairman of Trade-Union Committee of PJSC TATNEFT The list of insiders of PJSC TATNEFT is updated upon inclusion or exclusion of insiders of the Company from it. As of December 31, 2018, the list of insiders of PJSC TATNEFT included 13 legal entities and 249 individuals. During 2019, 33 individuals were included in the list of insiders, eight individuals were excluded. Notifications on the inclusion of persons in the list/ on the exclusion of persons from the list of insiders of PJSC TATNEFT are timely sent to insiders of the Company. During 2019, 41 notifications were sent to Company insiders. In accordance with the requests of the trade organizer (Moscow Exchange PJSC) to transfer the list of insiders to it, Tatneft in 2019 transferred 5 lists of insiders to the trade organizer as of the dates indicated in the requests. Information policy Information disclosure The Company follows the principles of information transparency, guarantees the timely provision of essential information to its shareholders, the investment community and all interested parties based on: • Regular and consistent disclosure of information regarding the main areas of activity • Efficient disclosure of relevant information on the material events and facts in the Company’s activities; • Guaranteed accuracy and completeness of the disclosed information about the Company and its controlled entities which are of substantial importance within the framework of the TATNEFT Group • • Availability of the information to the stakeholders and equal access to information for similar categories of stakeholders Integrity and consistency of the information disclosed by various means and/or in various forms, as well as comparability of disclosed indicators for different periods of time; • Provision of the financial and other information free from influence of any persons or their groups The Company discloses material information about its activities and avoids a formal approach to information disclosure. At the same time, the Company does not evade from disclosing negative information about itself, if such information is essential for shareholders, investors and other stakeholders. The Company seeks to provide simultaneous and equivalent disclosure of material information in the Russian Federation and abroad in accordance with the circulation of the Company’s securities in overseas organized securities markets, including in the form of foreign depositary receipts. The equivalence of information disclosure means that if it is disclosed in an organized market in one country, the same content should be disclosed in other countries where the Company’s securities circulate in organized markets Disclosure, dissemination, and provision of information are carried out in the volume, manner, and within the time limits established by applicable Russian and applicable foreign law in the field of information disclosure by issuers of securities. In the field of information disclosure, PJSC TATNEFT is guided by the Federal Law No. 39-FZ dated April 22, 1996 “On the Securities Market,” the Federal Law No. 208-FZ dated December 26, 1995 “On Joint Stock Companies,” Bank of Russia Regulations No. 454-P dated December 30, 2014 “On Information Disclosure by Issuers of Equity Securities,” and is also guided by the requirements of PJSC Moscow Exchange and London Stock Exchange, recommendations of the Corporate Governance Code of the Bank of Russia. Information subject to mandatory disclosure in accordance with the legislation of the Russian Federation is disclosed in the information and telecommunication network on the Company’s official website (tatneft.ru) in the Russian and English languages as well as in the news feed and on the website of the Internet information agency (JSC Screen) authorized to carry out actions to disclose information of the Company. Disclosure of Statements Transparency of financial statements is one of the key elements of the corporate governance. The Company has published the audited RAS annual accounting statements for 2018 on March 27, 2019, and audited IFRS consolidated annual financial statements for 2018 on March 29, 2019. The Company has published the audited RAS annual accounting statements for 2019 on March 27, 2020, and audited IFRS consolidated annual financial statements for 2019 on March 31, 2020. DISCLOSURE, DISTRIBUTION, AND PROVISION OF INFORMATION ARE CARRIED OUT IN THE VOLUME, MANNER, AND WITHIN THE TIME LIMITS ESTABLISHED BY CURRENT RUSSIAN AND APPLICABLE FOREIGN LAW ON INFORMATION DISCLOSURE BY ISSUERS OF SECURITIES COMPANY DISCLOSES MATERIAL INFORMATION ABOUT ITS ACTIVITY AND AVOIDS THE FORMAL APPROACH TO INFORMATION DISCLOSURE. 199 PRESS RELEASES PUBLISHED ON THE COMPANY OFFICIAL SITE 115 MESSAGES DISCLOSED IN INFORMATION AGENCY «SCREEN» 164 165 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTNOTICE ON DISCLOSURE OF INFORMATION SUBJECT TO MANDATORY DISCLOSURE Content of the information disclosed in information agency Screen Quantity Publication of the Terms and Conditions of Issuing the Exchange-Traded Bonds (Series 001P of PJSC Tatneft V.D. Shashin.) under the Program of Exchange-Traded Bonds of Documentary Interest Bearing and/or Discount Non-Convertible to the Bearer with Mandatory Centralized Storage Information on the placement (securities placement commencement and completion) Notice of the Essential Fact “Inclusion of the Issuer's Equity Securities In the List of Securities Admitted to the Organized Trading by the Russian Securities Trade Market Operator. Notice of the essential fact “Completion of the Securities Placement” Publication of the 2018 annual consolidated financial reporting in accordance with IFRS. Publication of the three-months 2019 consolidated interim concise financial reporting in accordance with IFRS (non-audited). Publication of the six-months 2019 consolidated interim concise financial reporting in accordance with IFRS (non-audited). Publication of the nine-months 2019 consolidated interim concise financial reporting in accordance with IFRS (non-audited). Publication of the list of Affiliated Entities owned by PJCS Tatneft n.a. V.D. Shashin Publication of Quarterly Report of PJCS Tatneft n.a. V.D. Shashin Publication of Annual Report of PJCS Tatneft n.a. V.D. Shashin Publication of the integrated report of PJSC TATNEFT named after V.D. Shashin Articles of Association Internal documents governing the activities of the Management and Control Bodies of the Company 31 32 33 22 23 24 25 26 27 28 29 30 31 INFORMATION ON VOLUNTARY DISCLOSURES Name 1 2 3 4 5 6 7 8 Information on decisions made by the Board of Directors (in the form of a press release) Presentations for investors • Forecast of operating results for 2018 and plans for 2019 • Review of IFRS results for 3Q / 9 months of 2018 • Operating activities, results of 2018, plans for 2019. • IFRS results for the 1st Q of 2019 IFRS messages (statements) (in the form of a press release) Production performance of the Company (in the form of a press release) Recommendations of the Board of Directors on the payment of dividends (in the form of a press release) Announcement of the Annual General Meeting (in the form of a press release) Announcement of the PJSC TATNEFT workers’ collective conference News (in the form of a press release) 1 1 1 1 1 1 1 1 4 4 1 1 1 5 Quantity 15 3 4 11 3 1 1 155 Content of the information disclosed in information agency Screen Quantity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 20 21 Notice of Disclosure of the List of Affiliated Entities Owned by the Joint Stock Company on the Web Site Notice of Essential Fact "Holding the issuer’s Board of Directors’ Meeting (Supervisory Board) and its agenda" Notice On the Access Procedure to the Information Contained in the Quarterly Statement. Notice on the Essential Fact “Certain Decisions Made by the Issuer's Board of Directors (Supervisory Board)” Notice on the Essential Fact “Convening and Holding the General Meeting of the Issuer’s Participants (shareholders)” Notice on the Essential Fact “The Date on Which Persons Entitled to Exercise the Rights on Issued Securities Are Determined” Notification of a Essential fact on information forwarded or provided by the issuer to the relevant authority (relevant organization) of a foreign country, to foreign stock exchange and (or) other organizations in compliance with foreign law for the purpose of their disclosure or forwarding to foreign investors in connection with the placement or circulation of the issuer's securities outside the Russian Federation Notice on Disclosure of the Annual Accounting Statement of the Joint Stock Company on The Web Site Notice of the essential fact on the issuer's disclosure of consolidated financial statements as well as on providing an audit report prepared for such statements Notice on the access procedure to the insider information contained in the issuer’s document (disclosure of the Joint Stock Company’s interim accounting report on the Web Site). Notice on the issuer's disclosure on the Web Site of the interim (quarterly) consolidated financial statements prepared in compliance with the International Financial Reporting Standards Notice On the Essential Fact “Other Notice” Notice on the essential fact “Holding the general meeting of participants (shareholders) of the issuer and the decisions made” Notice on the essential fact “Accrued Income on Equity Securities” Notice on the Access Procedure to the Information Contained In the Annual Report Notice on the Essential Fact “Rating Change or Rating Assignment to the Issuer by a Rating Agency Based on the Signed Agreement” Notice on the essential fact “Paid Income on the Issuer's Equity Securities” Notice on the essential fact “The Non-Arm’s Length Transaction Completed by the Issuer” Notice on the Essential Fact "Adopting a Decision About Restructuring by Organization Controlled by the Issuer Which is of the Vital Importance to the Issuer” Notice of the Essential Fact “Making Entries Into the Unified Legal Entities State Register about Reorganization, Termination of Business or Liquidation of Organization that Controls the Issuer, Organization Under Control to the Issuer that is of a Major Importance to the Issuer or of an Entity That Provided Security for the Bonds of this Issuer” 22. Notice of the Essential Fact “change in the share size of a member of the issuer's management body in the issuer's authorized capital 23 24 25 26 27 28 Notice of the Essential Fact “Changing (Adjusting) the Information Contained in a Previously Published News Feed” Notice of the Essential Fact “Stages of the Issuer’s Securities Issuance Procedure»: • Making a decision on approval of the bond program; • Assignment of identification number to the stock exchange program or commercial bond program; • Assignment of identification number to the issuance (additional issuance). Notice of the Essential Fact “acquisition by a joint-stock company of more than 20 percent of the voting shares of another joint-stock company” Notice of the Essential Fact “Obtaining by the Issuer the Right to Dispose of a Certain Number of Votes Attributable to Voting Shares (Stakes) Constituting the Authorized Capital of Individual Organization Notice of the Essential Fact “Information that, in the issuer's opinion, has a significant impact on the value of its equity securities” Notice of the Essential Fact about approval of a document containing the terms of a separate issue of bonds placed under the bond program 29 Notification of the procedure to access insider information contained in the issuer’s document • The program of exchange-traded bonds (001Р series of PJSC TATNEFT named after V.D. Shashin) for documentary interest-bearing and/ or discounted non-convertible to the bearer with mandatory centralized storage • Prospectus of securities of PJSC TATNEFT named after V.D. Shashin. Identification number of the Program of exchange-traded bonds (001Р series of PJSC TATNEFT named after V.D. Shashin 4-00161-A-001R-02E dated December 09, 2019) of documentary interest-bearing and/or discounted non-convertible to bearer with mandatory centralized storage. • The terms of issuing exchange-traded bonds under the Program of exchange-traded bonds (of 001Р series of PJSC TATNEFT named after V.D. Shashin) of documentary interest-bearing and/or discounted non-convertible to bearer with mandatory centralized storage. 30 Publication of the Securities Program 4-00161-A-001R-02E of December 9, 2019, and the Bonds Program 4-00161-A-001R-02E of December 9, 2012 4 15 4 15 3 6 2 1 1 3 3 1 3 4 1 1 3 1 2 4 1 1 1 1 1 1 1 2 1 1 1 1 1 166 167 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTPrevention and Regulation of potential Conflicts of Interest The Board of Directors applies procedures aimed at preventing and managing conflicts of interest. The Company provides disclosure of information about conflicts of interest in case of their occurrence. The Company follows the conviction that one of the most important conditions for sustainable development is the existence of internal corporate measures to counteract a conflict of interests, based on strict observance of the requirements of the legislation in this area and generally accepted international corporate practice. The Company adheres to the following principles of: complete rejection of a conflict of interest; • • mandatory disclosure of information about real or potential • • conflict of interest; individuality of consideration and assessment of reputational risks for the Company in identifying each conflict of interest and its settlement; confidentiality of conflict of interest disclosure process and its settlement process; • maintaining a balance of interests of the Company and the employee when resolving a conflict of interest; • protection of an employee from prosecution in connection with a report of a conflict of interest that was timely disclosed by the employee and settled (prevented) by the Company, including the unlawful dismissal of the employee, infringement of the rights and legitimate interests of the employee in the performance of official duties. The corporate governance system of the Company includes a set of rules and procedures aimed at regulating and eliminating possible conflicts of interest at all management levels - between management bodies and shareholders, as well as between shareholders, if the conflict affects the interests of the Company, identifying and resolving all possible general and specific problems, related to the rights of shareholders at the level of the Board of Directors, Executive bodies, top managers and employees of the Company. This work is carried out in collaboration with the Office of the Corporate Secretary with Committees of the Board of Directors, the Legal Department, the Office of Economic Security, the Office of Internal Audit and other competent divisions of the Company. In the event of conflict of interests, the Company provides mechanisms for taking all the necessary and possible measures for its full regulation, as well as creating conditions that preclude conflict in the future. The Regulation on Settlement of Conflict of Interest establishes the procedure for identifying and resolving conflicts of interest arising from employees of the Company in the course of fulfilling their labor duties; the formation among the employees of the Company, subsidiaries and affiliates, shareholders, investors, counterparties, representatives of state and municipal bodies, other interested parties of a single representation on the merits of a conflict of interest. The Regulation applies to all persons who are employees of the Company, regardless of their position and functions, as well as to individuals on the basis of civil law contracts concluded with the Company, in cases where the respective duties are expressly fixed in agreements with them or directly derive from the law. Shareholders Executive bodies In order to prevent possible conflicts at the level of shareholders, the Company provides equal opportunities for shareholders to exercise the rights provided for by applicable law. Ensuring the interaction of the Company with shareholders and participation in the prevention of corporate conflicts are within the competence of the Board of Directors of the Company. In addition, the Company organized work on interaction with shareholders, including clarification of the position of the Company at the request of shareholders. Board of Directors The Chief Executive Officer and members of the Management Board of the Company should refrain from taking actions that could lead to conflict of interest, and in the event of such a conflict should immediately inform the Chairman of the Management Board/ Chairman of the Board of Directors. Top managers and employees The function of conflict of interest management in the Company is assigned to the Board of Directors, which is enshrined in the Regulation on the Board of Directors. To prevent possible conflicts of interest among members of the Board of Directors, the Company introduced certain restrictions and requirements for members of the Board of Directors. In accordance with the Regulation on Board of Directors, a member of the Board of Directors must refrain from actions that will or may lead to a conflict of interest. When considering agenda items, members of the Board of Directors assess their possible conflict with the interests of the Company. On issues that, in the opinion of a member of the Board of Directors, may result in such a conflict of interest, the director does not participate in the vote, and if necessary, does not participate in its discussion. A member of the Board of Directors shall notify the Chairman of the Board of Directors of a conflict of interest or the possibility of its occurrence. Monitoring compliance with the mechanism to prevent a conflict of interests of members of the Board of Directors is carried out by the Chairman of the Board of Directors and independent directors. Independent directors are required to take all necessary and possible measures to prevent and resolve conflicts, minimize the consequences of conflicts between the Company and its shareholders, provide effective protection for all shareholders in case of violation of their rights. In the reporting year, there were no conflicts of interest among the members of the Board of Directors. The Company considers the conflict of interests at the level of top managers and employees as situations and circumstances in which the private interests of an employee or his/her close persons and/or relatives contradict or may contradict the interests of the Company and, thus, affect or may affect the proper performance of their job functions/official duties, including the objective decision-making within the framework of official duties, as well as those that can lead to harm to the rights, legitimate interests, property and (or) business reputation of PJSC TATNEFT. Preventive measure and prevention of conflicts of interest at the level of employees of the Company is regulated by the Code of Corporate Governance of the Company, the Code of Corporate Culture, which defines the concepts of conflict of interest, corruption actions and regulates the prevention of conflicts of interest, as well as the Anti-Corruption Policy of the Company and a number of other internal documents. To prevent a conflict of interest at the level of the Company’s employees, the rules for transactions with financial instruments by persons included in the list of insiders and the rules for disclosing insider information have been established and their implementation is regularly monitored. This procedure is governed by the «Regulation on the procedure for access to insider information of PJSC TATNEFT named after V.D. Shashin, the rules for protecting its confidentiality and monitoring compliance with the requirements of the legislation of the Russian Federation and the European Union and internal documents adopted in accordance with it. In 2019, the Company approved an internal document — the Regulation on Settlement of Conflict of Interest. The Company has established the Conflict of Interest Settlement Commission, which is a permanent body. Also, conflict of interest settlement is included in the tasks of the Ethics and Corporate Culture Development Committee of the Company and Ethics Commissions in structural divisions. 168 169 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Anti-corruption policy Principles, rules, procedures aimed to prevent corruption in all aspects of the company activities Company policy against corruption and fraud. Approved documents Existance of the Company’s public stance on anti-corruption The Anti-corruption Policy Standard applies to all areas of the Company’s activities. The Company has enacted the Anti-corruption Policy adopted by the Board of Directors of PJSC TATNEFT in 2014 (Minutes No. 3 dated July 25, 2014). In addition, the appropriate corporate standard has been approved, setting out the basic principles aimed at preventing corruption. In its anti-corruption activities, the Company is guided by: • Legislation of the Russian Federation • Standard for Organization of the Anti-Corruption Policy of JSC Tatneft named after V.D. Shashin • Regulation on Settlement of Conflict of Interests in PJSC TATNEFT named after V.D. Shashin • Regulations on accepting and giving gifts in PJSC TATNEFT named after V.D. Shashin • Regulations on compliance with anti-corruption norms and rules in the process of fulfilling contractual obligations, • Rules of operation of the Hot Line corporate system, • Code of Corporate culture for PJSC TATNEFT employees, • Regulation on verification of suppliers of goods, works and services on economic security criteria, • Regulation on organization of the contractual work in PJSC TATNEFT named after V.D. Shashin. In accordance with the Council of Europe Convention on Criminal Liability for Corruption, Federal Law No. 273-FZ of December 25, 2008 “On Combating Corruption”, Decree of the President of the Russian Federation “On the National Plan for Combating Corruption for 2018-2020” and the Standard “Anti-corruption policy of PJSC TATNEFT named after V.D. Shashin” the Company strictly complies with the anti-corruption legislation of the Russian Federation, as well as the anti- corruption legislation of other countries in the territories of the operation. Information on anti-corruption activities is available on the official website of PJSC TATNEFT - www.tatneft.ru The Company’s position in the field of anti-corruption is public. Setting the responsibility for implementation of Company’s anti- corruption policy Responsibility for the implementation of the anti-corruption policy of the Company lies with the Economic Security, Information Protection, Civil Defense and Emergency Situations Department, Legal Department, Internal Audit Department, Control and Audit Department, Human Resources Department, Personnel Audit Service. In the entities of TATNEFT Group – the responsibility is laid on the management of organizations of TATNEFT Group. INFORMATION AND TRAINING The Company informs and clarifies the principles and norms of the applicable law, the Anti-Corruption Policy and other local regulatory documents in relation to counteracting involvement in corruption, including the training of the employees on the basics of countering engaging in corruption and explains its policies in this area to counterparties. MONITORING The Company carries out continuous monitoring of the implemented procedures to combat and prevent involvement in corruption activities and monitors their compliance. The Company periodically makes an independent assessment of the state of the system for counteracting involvement in corruption, as well as evaluating the compliance of the Company’s activities with the applicable laws and the Anti- Corruption Policy. The results of the assessment are reported to shareholders and the public in the annual report, press releases and other information materials. Messages about violations of the Anti-Corruption Policy can be transmitted in the following ways: • • • to the line manager or superior manager; to the round-the-clock telephone of the hot line of the Company; to law enforcement agencies. PROTECTING THE INTERESTS OF WORKERS No sanctions can be applied to an employee for: • refusal to participate in corruption activities, even if as a result of such refusal the Company incurred losses, lost profits, and commercial and / or competitive advantages were not obtained; • bona fide reporting of alleged violations, facts of corruption, other abuses or insufficient effectiveness of existing control procedures. If an employee of the Company or another person provides information that is knowingly false or is trying, using anti- corruption procedures, to obtain personal gain that is contrary to the interests of the Company or applicable law, then such a person may be held liable in accordance with the current legislation and local regulatory documents of the Company. ANTI-CORRUPTION AND PROHIBITION OF CORRUPTION The activities of the Company are based on the prevention of corruption in all forms and manifestations. All employees, members of the management bodies of the Company and other persons acting on behalf of the Company or in its interests, are prohibited directly or indirectly, personally or through any mediation, from participating in corruption actions regardless of the practice of doing business in a particular country or region. TATNEFT does not allow corruption, including the manifestation of conflict of interest, both in relation to representatives of the state, public organizations, organizations of any form of ownership, political figures and other third parties, and in relation to employees of the Company, in any way, including through abuse of official position in order to derive any personal benefit. INEVITABILITY OF PUNISHMENT The Company investigates all reasonably substantiated reports of violations of the appropriate procedures to counteract involvement in corruption activities and prosecutes those responsible without taking into account their position, term of work, status with the Company and other relationships with it in the manner established by applicable law and local regulatory documents of the Company. The Company makes every possible reasonable and legal effort to prevent violations as quickly as possible. The Company makes public information about individuals who violate the requirements of applicable law and the Anti-Corruption Policy. LEGITIMACY The Company and its employees are obliged to comply with the norms of the Russian anti-corruption legislation, as well as the applicable norms of foreign anti-corruption legislation when they enter into legal relations falling within the scope of such legislation. TOP MANAGEMENT TONE The Company Executives, including the members of management bodies, heads of departments, departments and other divisions of the Company, must declare a strong stand against any forms and manifestations of corruption at all levels, demonstrate, implement and comply with it in practice. CONSISTENCY AND PROPORTIONALITY The Company develops and implements a system of appropriate procedures to counteract and prevent involvement in corruption activities. The Company strives to make the procedures as transparent, clear, feasible and reasonably consistent with the identified risks. PRINCIPLE OF DUE DILIGENCE The Company carries out monitoring and verification of counterparties and candidates for positions in the Company before making a decision on starting or continuing business relations, or hiring them for reliability, rejection of corruption and risk of conflict of interest. 170 171 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Responsibility Regular risk assessment related to involvement in corruptions The Company identifies, evaluates and periodically re-assesses corruption risks characteristic of its potentially vulnerable business processes. When identifying and assessing risks, the Company takes into account the fullness of information on activities and plans, including investment and strategic ones, available at the time of the assessment and reassessment. The Company guarantees confidentiality to all Employees and other persons who in good faith report corruption risks and violations. Messages can be sent to: the line manager or superior manager, the hot line of PJSC TATNEFT, law enforcement agencies. Informing and personnel training on anti-corruption methods Informing using the Internet is carried out by releasing a statement in the Anti-Corruption section of the official website of PJSC TATNEFT. Anti-corruption conditions are included in all types of agreements in a separate section. The Company informs the staff and clarifies the principles and norms of the applicable law, the Anti-Corruption Policy and other local regulatory documents in relation to counteracting involvement in corruption. Availability of the regulatory framework contributes to formation of employee behavior rules and counteracts their involvement in corrupt activities. In 2019, 11 security officers were trained in programs that included areas for preventing and combating the corporate corruption. Responsibility for implementation of the Company’s Anti- corruption policy and combating corruption in all areas of the Company’s business is provided by the Economic Security, Information Protection, Civil Defense and Emergency Situations Department of PJSC TATNEFT. All employees, regardless of their position, are liable under the current legislation of the Russian Federation for compliance with the principles and requirements of the Anti-Corruption Policy, as well as for actions (inaction) of their subordinates who violate these principles and requirements. Persons responsible for violations of the requirements of the Anti-Corruption Policy may be brought to disciplinary, administrative, civil or criminal liability on the initiative of the Company, law enforcement agencies or other persons in the manner and on the grounds provided for by the legislation of the Russian Federation, the Articles of Association of the Company, local regulations and employment contracts. Results of the anti-corruption programs implementation for the period of 2017-2019 Continuous efforts to combat corruption in PJSC TATNEFT allowed to minimize corruption cases. As a result of continuous activity to identify risks associated with corruption, 30% of divisions were selectively analyzed. No significant risks were identified. Confirmed incidents of corruption and actions taken in 2019: • Total number and nature of confirmed cases of corruption - 1; • Total number of confirmed cases of dismissal or punishment of employees because of corruption - 2; • • Number of confirmed cases of non-renewal or termination of contracts with business partners due to violations related to corruption - 0; Information on legal cases related to corruption and initiated cases against the organization or its employees during the reporting period, as well as the outcome of such cases – a criminal case is being currently investigated in respect of two fuel station operators of Tatneft-AZS-Zapad LLC, which are suspected of application fraud using electronic means of payment (Article 159 of the Criminal Code of the Russian Federation). For both suspects the court has chosen a preventive measure in the form of a recognizance not to leave. Employees of the Company, including employees of the Economic Security, Information Protection, Civil Defense and Emergencies Department, adhere to fundamental principles in the field of Human Rights. Human Rights Aspects Included in Company Personnel Development Programs. Procurement and Logistics Trading & Procurement Platform of Company The Company’s trading and procurement platform provides a unified trading system for all the TATNEFT Group companies, service and contracting organizations, being the only free platform for participation in competitive procedures in the Russian Federation. The Сompany conducts electronic tenders in an open form on an anonymous description of the properties of the goods. This feature allows to create an active competitive environment during each purchase. In order to control the procurement transparency on the trading platform, there is a module for controlling the timing and effectiveness of the procurement process in accordance with the regulated indicators, a supplier audit module, and a counterparty verification module until the contract conclusion stage. Optimization of the terms of competitive procedures was achieved with the transition to one-stage tenders. Registered participants of the Trading and procurement platform — 45 thousand contractors (existing suppliers), of which 7.5 thousand suppliers were registered in 2019, and more than 8 thousand suppliers participated in tenders for the supply of goods. In 2019, 58 thousand competitive offers were received at the site. IN THE 10 YEARS SINCE ESTABLISHMENT OF THE TATNEFT TRADING & PROCUREMENT PLATFORM, THE OPERATORS HAVE CONDUCTED MORE THAN 117,000 ELECTRONIC TRADING PROCEDURES FOR OVER 150 PURCHASING ORGANIZATIONS, THE BUSINESS TURNOVER EXCEEDED RUB 460 BILLION. Procurement activities PROCUREMENT STRUCTURE In 2019, the Company concluded 11,808 contracts and specifications with 1,041 suppliers for RUB 36.9 billion (excluding VAT). 48% of all the orders were placed at enterprises of the Republic of Tatarstan, import contracts amounted to 0.5%. The low proportion of import contracts indicates a firm reduction of the Company’s import dependence. The bulk of the procurement structure is a supply on price books: framework and long-term contracts. Today, there are more than 900 price books that cover about 150 thousand items and on which 81% of the total volume of purchases were purchased in 2019 ( for 2018 - 78%). As part of the improvement of the procurement system, the Company implements categorization tools for purchasing, delegating authority and personalizing responsibility. The Company created and published a library of technical requirements and conditions for goods; the parametric classifier is used to systematize the selection of analogues of goods from stocks in the Electronic Store. There is a mechanism of «reorder points» - the creation of stocks of goods at regularly consumed and critical positions. A process approach to the procedure for concluding contracts was introduced; an optimal framework was established for the time for concluding contracts with suppliers. To control contract work, the task setting tool is actively used in the Tatneft Corporate Social Network. Logistics of direct deliveries is developed from a supplier to a customer. 4% 3% 4% 6% 29% 10% 8% 8% 9% Pipe production Oilfield equipment Chemical products 20% Transport, special equipment Well construction equipment Shutoff valves Rolled metal products &structures Construction materilas Energy / electrical equipment Others USE OF MATERIALS, TONNES Carton Packaging Material Wood Packaging Mateial Total Packaging Wastes Completely recycled waste from packaging materials 1,4 5,0 6,4 1,4 172 173 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTAnti-monopoly policy The Company operates in strict accordance with the anti- monopoly state regulation, legislation, recommendations of the Federal Antimonopoly Service (FAS Russia), and the best international practices. The Company follows the principles of competitive business conduct and provides for rules of conduct for employees aimed at preventing violations of anti-monopoly legislation. Corporate cyber security policy The Company is constantly improving the internal procedures aimed at alerting and preventing violations of the current anti- monopoly legislation, including training of employees in anti- monopoly regulation. Provision of cyber security is a zone of increased attention of the top management of the Company. Hotline information system The main topics of inquiries: labor issues and wages, tender procedures, proposals for improvement, requests for assistance to veterans and employees, signals of possible violations and abuses. Each inquiry was considered with adoption of appropriate measures, including those aimed at reducing the risks of violations in production and economic activity, as well as at increasing labor discipline and employee responsibility. Additional control measures have been introduced to prevent previously identified violations in the future. The Company effectively operates a special-purpose confidential channel, through which an employee or an outsider can report facts of various violations related to the Company’s activities — professional activities, corporate governance and corporate ethics issues, respect for human rights, work schedule, social aspects, industrial and environmental safety, labor protection, quality of products and services, other issues, including those of corruption nature – Hotline. Calls are received by an independent operator. All messages are checked. There is an option of an electronic form submission on the Company’s website at tatneft.ru/goryachaya-liniya with a choice of the message subject. When sending a message on the hot line, you can choose to receive feedback. HOTLINE INFORMATION SYSTEM 8 800 100 4112 TELEPHONE tn@88001004112.ru E-MAIL In the context of the transition to digital transactions and increased electronic communications traffic, the Company takes a responsible approach to controlling the risks of cyber intrusions into corporate information systems, which can damage the safety of assets, operating and financial activities, and the interests of shareholders and investors. The company takes measures to ensure a highly protected internal cybersecurity system and seeks to convey confidence in its quality to all the stakeholders. The company takes into account global cyber security challenges that pose potential risks and provide new opportunities in the development of information technology. The Company’s key cybersecurity initiatives are based on analyzing the synergy potential of digital solutions and reducing operational risks. The Company follows regulatory requirements and considers cyber security in three main aspects: • Integration of information protection processes and tools into ongoing digital transformation strategic initiatives • Security using advanced technologies • Improving the efficiency of cybersecurity functions The Company forms a transparent holistic multi-level cyber risk management system and integrates it into the overall risk management system. PLANS FOR 2020 • Updating the internal regulations on the Cyber security for TATNEFT Group Improving the Cyber risk control procedures • • Development of cyber security elements integration in the business processes Corporate Cyber Security Operations Center KEY ELEMENTS OF CYBER SECURITY Blockchain Artificial intelligence and robotics Personal Data Protection The Company ensures the protection of personal data by implementing internal procedures in accordance with the law. The Company takes into account the European General Data Protection Directive (GDPR), which was entered into force in 2018. Biometrics Internet of Things 174 175 25CORPORATE GOVERNANCE2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTInteraction with shareholders and investors SECURITIES PUBLICATIONS IN FEDERAL MASS MEDIA IN 2019 7 902 1 183 PUBLICATIONS ON COMPANY’S FINANCIAL PERFORMANCE IN FEDERAL MASS MEDIA IN 2019 by SCAN Interfax data GROUP’S SHAREHOLDER RETURN IN 2019 BLN RUB 176 177 2019 ANNUAL REPORTShareholders’ equity Shareholders’ capital of PJSC Tatneft is 2 326 199 200 rubles. Securities of PJSC TATNEFT named after V.D. Shashin have been represented on the Russian and international stock markets for over 20 years including the Moscow and London stock exchange. EQUITY HOLDING STRUCTURE (PARTICIPATION INTEREST IN THE SHAREHOLDERS’ EQUITY) Ensuring the confidence for shareholders and investors in the efficiency of their investments, long-term and steady growth in shareholder value is a key aspect of the corporate practice of Tatneft Company. 39% 34% 3% The geography of shareholders covers the Russia (the major part of shareholders), North America, Europe and Asia. The Company’s shares are one of the most liquid and representative tools in the securities market. Republic of Tatarstan Treasury groups ADR program Other shareholders 24% Ordinary and preferred shares in the quotation list of the First level participate in trading of the PJCS Moscow Exchange. The Tatneft shares are included in the calculation base of the RTS and MICEX indices which are the main indicator of the Russian stock market The Company’s depositary receipts are listed on the London Stock Exchange and are traded in the Xetra system of the Deutsche Börse group of companies INFORMATION ON EACH CATEGORY (TYPE) OF SHARES Full name of securities (Kind and Type) Security issue form Quantity issued, pcs Par value of one (1) security (in rubles) State registration number of the issue of securities State registration date ISIN code Exchange and trading code Ordinary registered shares Preferred registered shares Exchange-traded bonds Uncertificated 2 178 690 700 1 ruble 1-03-00161-А 26.10.2001 Uncertificated Certificated exchange-traded bonds in bearer form 147 508 500 1 ruble 15 000 000 1 000 rubles 2-03-00161-А 4В02-01-00161-А-001З 26.10.2001 20.12.2019 RU0009033591 RU0006944147 RU000А1018К1 PJSC Moscow Exchange, TATN PJSC Moscow Exchange, TATNP PJSC Moscow Exchange, RU000A1018K1 In accordance with the depositary agreement between PJSC TATNEFT n.a. V.D. Shashin and the Bank of New York Mellon the depositary receipts (ADRs) for the Company’s ordinary stocks have been issued for circulation in foreign markets, 6 ordinary shares in one ADR, with ISIN code US8766292051. The main trading platform of the Company’s ADRs trading is the London Stock Exchange (trading code - ATAD). The Company does not have any information about the possible acquisition by certain shareholders of the degree of control disproportionate to their participation in the authorized capital of the Company, including on the basis of shareholder agreements or by other means. TOTAL NUMBER OF SHARES, OF THEM: 2 326 199 200 ORDINARY SHARES Total In possession of foreign persons In possession of Russian persons PREFERRED SHARES Total In possession of foreign persons In possession of Russian persons * without ownership through Russian nominees Investment potential of the securities 2 178 690 700 605 300* 2 178 085 400 147 508 500 104 119* 147 404 381 AS OF DECEMBER 31, 2019, 40,392 SHAREHOLDERS WERE REGISTERED IN THE REGISTER OF SHAREHOLDERS OF PJSC TATNEFT. OF THESE, THE LARGEST OWNERS (NOMINAL HOLDERS) OF SHARES IN THE COMPANY ARE: № 1. 2. Full name of legal entity Type of registered person In % of the authorized capital In % of voting (ordinary) shares Svyazinvestneftekhim Joint Stock Company The Bank of New York Mellon Owner, is in the nominal holding of Joint Stock Company, Central Deposi- tory of the Republic of Tatarstan Depositary Programs Account is located in the central depository Non- bank Credit Organization, National Settlement Depository Joint Stock Company 27,232389 29,071778 22,740282 24,279916 The Company has no information on the existence of shares of ownership in excess of 5%, other than those disclosed in this table. PJSC TATNEFT Securities have been circulating in the Russian and international stock markets for more than 20 years. The Company’s shares are traded at the Moscow Exchange PJSC (first level quotation list), and at the London Stock Exchange as the American Depositary Receipts (ADRs). Shares (ordinary, including ADRs and preferred) of PJSC TATNEFT are included in many stock indices, reflecting both the size of Tatneft as a Company with a large capitalization and high rates of return, including: Ordinary and preferred shares Ordinary shares ADR Moscow Exchange Index, Moscow Exchange Oil and Gas Index, RTS Index, RTS Oil and Gas Index. Moscow Exchange blue chip index, MSCI Russia, MSCI Russia 10/40, MSCI Emerging Markets EMEA, MSCI Emerging Markets Quality Index. FTSE Russia IOB, MSCI Russia ADR / GDR Index, S & P / BNY Mellon Russia Select DR Index, MVIS Russia Index. 178 179 25INTERACTION WITH SHAREHOLDERS AND INVESTORS2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTThe total trading volume of ordinary shares during the main trading amounted to 307 176 855 623 rubles; the average daily volume - 1 218 955 776 rubles. The volume of over-the-counter transactions with preferred shares amounted to 21 473 696 650 rubles; the average daily turnover - 86 587 486 rubles. DIVIDENDS PER SHARE, RUB. The volume of over-the-counter transactions with ordinary shares amounted to 34 712 149 462 rubles; the average daily turnover - 139 968 345 rubles. The total trading volume of preferred shares through the Moscow Exchange, taking into account over-the-counter transactions, amounted to 96 603 028 949 rubles The total trading volume of ordinary shares through the Moscow Exchange, taking into account over-the-counter transactions, amounted to 341 889 005 085 rubles. The total trading volume of preferred shares during the main trading amounted to 75 129 332 299 rubles; the average daily volume - 298 132 271 rubles. The volume of the main exchange trading on Tatneft’s ADRs amounted to 2 765 099 469 US dollars (average daily turnover – 10 929 246,91 US dollars); including over-the-counter transactions and other transactions through the London Stock Exchange, the total trading volume amounted to 3 118 532 418 US dollars or 12 277 686,68 US dollars per day. VALUE OF SHARES (PREFERRED, ORDINARY) OF PJSC TATNEFT FOR THE PERIOD OF 2006 THROUGH 2019 522,00 737,90 736,60 759,40 0,15 0,60 1,00 1,00 1,00 0,10 0,30 0,10 0,10 0,30 1,00 1,00 4,60 0,90 1,00 4,60 5,65 5,65 4,42 4,42 6,56 6,56 7,08 8,60 8,60 5,02 7,08 5,02 84,91 84,91 65,47 64,47 39,94 39,94 22,81 22,81 10,96 10,96 10,58 8,23 10,58 8,23 77,31 121,99 87,00 148,00 20,35 55,25 76,35 139,48 86,65 145,06 105,15 88,02 218,00 121,70 208,20 134,60 226,55 158,16 365,00 235,00 478,80 427,00 198,10 315,50 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Preferred Ordinary Closing price on the last day of the trading year Dividend policy The Board of Directors of the Company determines the recommended for the general meeting of shareholders amount of dividends on the basis of economically sound approach to the distribution of profits and maintaining a balance of short- term (income generation) and long-term (development of the Company) interests of shareholders. The principles and conditions for making decisions on payment (announcement) of dividends, the procedures used to determine the amount and dividends payment are specified by the Regulation on the Dividend Policy of PJSC TATNEFT approved by the Board of Directors of the Company (Minutes No. 9 Decision No. 7 dated 01/30/2018). The Regulation is based on observance of the rights of shareholders stipulated by the legislation of the Russian Federation and best corporate governance practices. The Board of Directors of the Company, when determining the amount of dividend recommended to the general meeting of shareholders (per share), is governed by the amount of the Company’s net profit and assumes that the amount allocated to dividends is at least 50% of the net profit determined in accordance with Russian Accounting Standards (RAS) or IFRS, whichever is the larger. With that, the Board of Directors takes into account, based on information received from the executive The company adheres to a progressive dividend policy recognizing dividends as one of the key indicators of investment attractiveness for shareholders, and seeks to increase dividends based on the consistent growth of business profitability. bodies, the duties and investment program of the Company, the need in working capital and required reserves for normal business operations, and assumes that free cash that is formed after funding the specified investment program, execution liabilities and other needs of the Company can be distributed in the form of dividend In June 2019, dividends were approved at the level of 100% of net profit according to IFRS (by 2018 year-end results), and according to the results of 6 and 9 months of 2019, the level of dividend payments amounted to 100% of net profit per RAS. 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019* Preferred Ordinary * with the dividends recommended for approval by the annual general shareholders’ meeting DIVIDEND YIELD ON SHARES FOR 2015 TO 2018 (PREFERRED, ORDINARY) 17,68 14,84 12,34 12,43 10,3 6,59 6,97 3,61 According to the 2019 year-end results, it was recommended to allocate 150 billion 118 million rubles to pay dividends which is 96,2% of the net profit obtained per RAS (with the rounding to two decimal places after the comma of the dividend per share). With that, the amount of dividends was secured by the amount of free cash flow across the Tatneft Group, which amounted to 152,8 billion rubles according to IFRS reporting. As such, the amount of dividends is to amount: • per 1 ordinary share for 2019 – 6 447% of the par value or 64,47 rubles per share, taking into account previously paid dividends; • per 1 preferred share for 2019 — 6 547% of the par value or 65,47 rubles per share, taking into account previously paid dividends. Considering the fact that according to the decision of the general meetings of shareholders, interim dividends in the amount of 149 billion 970 million rubles were allocated in accordance with the decision of the general meetings of shareholders based on the results of 6 and 9 months of 2019, the additional allocation of 2019 year-end dividends will amount to 147,5 million rubles. 2015 2016 2017 2018 Preferred Ordinary The Company generates one of the highest levels of dividend yield. 180 181 25INTERACTION WITH SHAREHOLDERS AND INVESTORS2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTHISTORY OF DIVIDEND PAYMENTS FOR THE LAST 5 ENDED FISCAL YEARS Year (period) for 2014 for 2015 for 2016 For 9 months of 2017 For the 4. Q 2017 For 2017 Total for 6 months of 2018 Year (period) for 9 months of 2018 For the 4. Q 2018 For 2018 Total 6 months 2019 9 months 2019 4 Q of 2019 For 2019 Total:* Total amount of accrued dividends (billion rubles) Total amount of dividends paid (billion rubles) Ordinary shares (% of par value) Ordinary shares (Dividends amount) (rubles) Preferred shares (% of par value) Preferred shares (Dividends amount) (rubles) Dividends (% of net profit) Date of the decision to pay dividends The date on which persons that have (had) the right to receive dividends are (were) determined Date of actual payment 24,611 25,495 53,061 64,622 28,287 92,909 70,414 24,587 25,468 53,006 64,561 28,26 92,821 70,342 1058% 1096% 2281% 2778% 1216% 3994% 3027% 10,58 10,96 22,81 27,78 12,16 39,94 30,27 1058% 1096% 2281% 2778% 1216% 3994% 3027% 10,58 30% 10,96 22,81 27,78 30% 50,6% 75% 12,16 75% 39,94 30,27 75% 75% Annual General Meeting of Shareholders at the end of 2014, which was held on 26.06.2015, Minutes No. 22 dated 30.07.2015 Annual General Meeting of Shareholders at the end of 2015, which was held on 24.06.2016, Minutes No. 23 dated 29.06.2016 Annual General Meeting of Shareholders at the end of 2016, which was held on 23.06.2017, Minutes No. 24 dated 28.06.2017 Extraordinary General Meeting of Shareholders based on the results of 9 months of 2017, which took place on 12.12.2017, Minutes No. 25 dated 14.12.2017 Annual General Meeting of Shareholders at the end of 2017, which was held on 22.06.2018, Minutes No. 26 dated 27.06.2018 Extraordinary General Meeting of Shareholders based on the results of 6 months of 2018, which was held on 28.09.2018, Minutes No. 27 dated 29.09.2018. 15.07.2015 08.07.2016 07.07.2017 23.12.2017 06.07.2018 12.10.2018 To nominal holder - 29.07.2015 To shareholders registered in the register of shareholders - 19.08.2015 To nominal holder - 22.07.2016 To shareholders registered in the register of shareholders - 12.08.2016 To nominal holder - 21.07.2017 To shareholders registered in the register of shareholders - 11.08.2017 To nominal holder - 15.01.2018 To shareholders registered in the register of shareholders - 05.02.2018 To nominal holder - 20.07.2018 To shareholders registered in the register of shareholders - 10.08.2018 To nominal holder - 26.10.2018 To shareholders registered in the register of shareholders - 20.11.2018 Total amount of accrued dividends (billion rubles) Total amount of dividends paid (billion rubles) Ordinary shares (% of par value) Ordinary shares (Dividends amount) (rubles) Preferred shares (% of par value) Preferred shares (Dividends amount) (rubles) 51,781 75,322 197,517 93,304 56,666 51,725 75,247 197,314 93,206 56,612 2226% 3238% 8491% 4011% 2436% 0% 6447% 22,26 32,38 84,91 40,11 24,36 0 64,47 2226% 3238% 8491% 4011% 2436% 100% 6547% Dividends (% of net profit) 75% 100% 22,26 32,38 84,91 100% 40,11 100% 24,36 100% Date of the decision to pay dividends Annual General Meeting of Shareholders at the end of 2018, which was held on 21.06.2019, Minutes No. 29 dated 25.06.2019. Extraordinary General Meeting of Shareholders based on the results of 9 months of 2018, which was held on 21.12.2018, Minutes No. 28 dated 24.12.2018. Extraordinary General Meeting of Shareholders based on the results of 6 months of 2019, which was held on 13.09.2019 Minutes No. 30 dated 16.09.2019. Extraordinary General Meeting of Shareholders based on the results of 9 months of 2019, which was held on 19.12.2019, Minutes No. 31 dated 23.12.2 019. 1,00 65,47 Annual General Meeting of Shareholders at the end of 2019 The date on which persons that have (had) the right to receive dividends are (were) determined Date of actual payment 09.01.2019 05.07.2019 27.09.2019 30.12.2019 30.06.2020 To nominal holder - 19.07.2019 To shareholders registered in the register of shareholders - 09.08.2019 To nominal holder - 23.01.2019 To shareholders registered in the register of shareholders - 13.02.2019 To nominal holder - 11.10.2019 To shareholders registered in the register of shareholders- 01.11.2019 To nominal holder - 21.01.2020 To shareholders registered in the register of shareholders - 11.02.2020 * The PJSC TATNEFT Board of Directors (Minutes No. 12 dated 04/20/2020) made a decision to recommend to the General Meeting of Shareholders to: - determine that the size of ordinary shares dividends by the 2019 year-end results is to amount to 0% of the par value of a share, excluding previously paid dividends by the results of the six and nine months of 2019 in the amount of 6447% of the par value of a share; - pay dividends on preferred shares according to the results of 2019 in the amount of 100% of the par value of a share, excluding previously paid dividends according to the results of the six and nine months of 2019 in the amount of 6447% of the par value of a share. 182 183 25INTERACTION WITH SHAREHOLDERS AND INVESTORS2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Protection and ensurance of shareholders’ rights The Company has created a multi-level system for protecting the shareholders’ rights of the Company. Guarantees of the shareholders’ rights provided by law and listing rules IN ACCORDANCE WITH THE LEGISLATION OF THE RUSSIAN FEDERATION, THE SHAREHOLDERS OF THE COMPANY ARE ENTITLED TO: • • vote at the General Meeting of Shareholders on the principle of “one share - one vote” when voting on issues in respect of which they have the right to vote; submit issues to the agenda of the General Meeting of Shareholders and candidates for members of the Board of Directors (if the shareholders have at least 2% of voting shares); • exercise the preemptive right when placing shares and • equity securities convertible into shares; receive dividends declared by the Company in proportion to the number of shares owned by the shareholder; • get acquainted with the information and materials presented in preparation for the General Meeting of Shareholders; • obtain information on the Company’s activities of the upon request and in accordance with the conditions established by the legislation of the Russian Federation; investment power to freely dispose of shares; exercise other rights established by the legislation of the Russian Federation. • • The company provides all the terms for the shareholders to implement their rights • The right to participate in the management of the Company by voting at the General Meeting of Shareholders of PJSC TATNEFT. • The right to participate in the formation of the Board of Directors of PJSC TATNEFT in accordance with the conditions stipulated by the legislation of the Russian Federation. • The right to receive part of the Company’s profits in the form of dividends. • The right to receive the necessary information about the Company on a timely and regular basis. • The right to free and unhindered disposal of shares, reliable methods of recording rights to shares. Key principles of interaction with the company shareholders Guaranteed equal provision and observance of the legal rights and interests of all shareholders of the Company, regardless of the size of the block of shares they own, established by the current legislation of the Russian Federation, requirements and recommendations of stock market regulators in which the Company’s shares circulate. Constant interaction of the Company’s management with all shareholders in order to effectively manage the Company and ensure its sustainable and dynamic development. Constant improvement of existing and development of new mechanisms and forms of interaction with shareholders, increasing the efficiency and quality of interaction, taking into account the emergence of new shareholders, setting new tasks by shareholders. Identification and resolution of all possible general and specific problems associated with the exercise of the shareholders’ rights. Taking all necessary and possible measures in the event of a conflict between the bodies of the Company and its shareholders (shareholder), as well as between shareholders, if the conflict affects the interests of the Company, to fully resolve the conflict, as well as creating conditions that preclude future conflicts. Guarantees to customers are provided by Ingosstrakh comprehensive insurance policy for the compensation of property damage as a result of the registration activity. Information about the registrar, the procedure for transferring the rights to the shares of PJSC TATNEFT, obtaining extracts from the register of shareholders and performing other actions is available at http://eard.ru The Company along with the Registrar regularly informs shareholders about the need to update the information on shareholders contained in the register of shareholders of PJSC TATNEFT. The Company together with the Registrar annually sends shareholders letters notifying them of the need to amend the register of shareholders of the Company in the event that the shareholder has changed address and bank details, or other data necessary for payment of dividends to shareholders. The Company also searches for shareholders or their heirs. So, in 2019 - 2020, the Company sent more than 6.5 thousand letters to shareholders whose dividends were returned to the Company by the Russian Post due to their non-receipt by recipients more than 2 times, to the heirs of shareholders whose accounts were blocked on the basis of death certificates sent by notaries, to the shareholders Devon-Credit Bank the settlement accounts of which must be changed due to the reorganization of the bank. The Company has enacted the Regulations on providing information to the shareholders. The Regulation establishes the procedure and deadlines for providing the shareholders and persons exercising share rights, as well as their representatives of documents and copies of such documents. Protection of share rights The Company provides reliable and secure methods of recording share rights, involving a professional registrar to keep records. The Company’s Registrar The organization that registers the rights to equity securities of PJSC TATNEFT is Eurasian Registrar Limited Liability Company, which has been conducting professional activities on the Russian securities market as a specialized registrar for more than 20 years. Eurasian Registrar is in the top 10 largest Russian registrars and maintains registers of more than 600 issuers, the rights to shares of which are recorded on 169,844 personal accounts of securities owners. Shareholder service centers and transfer-agent points are open in 52 regions of the greatest presence of the Company’s shareholders: this is the central office, 6 branches, 50 transfer-agent points in partner registrars. The Registrar is a member of the self-regulatory organization Professional Association of Registrars, Transfer Agents, and Depositories (SRO PARTAD). The high degree of reliability and security of maintaining electronic databases is ensured by the use of the Zenit registry management system, which has the certificate of SRO PARTAD. The software and hardware capacity of the Registrar allows servicing over 1 million personal accounts of the owners of securities. 184 185 25INTERACTION WITH SHAREHOLDERS AND INVESTORS2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Interaction with shareholders The Company’s interaction with shareholders and investors is based on availability of the responsible executives and key employees of the Company to communicate with shareholders, investors and analysts of the stock market, as well as consultants to institutional investors in voting, discussing development plans and results of the Company’s operations. The Company’s interaction with shareholders and investors is provided through telephone conferences, group and individual meetings, including investment conferences, Company visits’ and special trips (road shows) of the Company’s authorized representatives to major international financial centers. THE KEY PRIORITY OF THE COMPANY’S INTERACTION WITH SHAREHOLDERS AND THE INVESTMENT COMMUNITY AS A WHOLE IS BUILDING A DIALOGUE AND EFFECTIVE FEEDBACK FROM INVESTORS AND ANALYSTS, REVIEWING AND DISCUSSING THEIR OPINIONS ABOUT THE COMPANY AND ITS INVESTMENT HISTORY BY RESPONSIBLE MANAGERS, MAKING APPROPRIATE DECISIONS. 3 732 INQUIRES FORWARDED TO THE CORPORATE SECRETARY OFFICE OF PJSC TATNEFT IN 2019 > 1000 RESPONSES GIVEN THROUGH ENGAGEMENT WITH INVESTORS AND ANALYSTS > 50 MEETINGS HELD WITH PORTFOLIO MANAGERS AND ANALYSTS OF INTERNATIONAL INVESTMENT COMPANIES AND FUNDS STATISTICS OF THE SHAREHOLDERS’ INQUIRIES IN 2016-2019 № Name Number of inquiries Updating personal data Registration of inheritance rights Selling and redemption of shares Dividend payment Providing certificate under 2-NDFL form Issues related to the General Meeting of Shareholders Inquiries of notary, court Other issues Total 1. 2. 3. 4. 5. 6. 7. 8. 186 2016 203 150 57 1 265 103 43 61 83 2017 228 169 70 1 466 119 50 69 96 1 965 2 266 2018 317 228 92 2 008 158 71 96 131 3 101 2019 349 257 100 2496 98 168 61 203 3732 Interaction with institutional investors PJSC TATNEFT shares are one of the most attractive investment instruments among the Russian issuers. The Company’s international institutional shareholders are located in the main centers of business and financial activity, including New York, London, Frankfurt, and Singapore. Meetings allow investors, analysts, representatives of international rating agencies to receive information on the strategic vector of the Company’s development, production activities and financial resources management directly from the Company’s management. The Company actively interacts with institutional investors and stock market analysts. During 2019, more than 50 meetings were held with portfolio managers and analysts of investment companies and funds from many countries of the world. The meetings were held in one-on-one format with the support of investment banks or on their own initiative, as well as in the framework of investment conferences in which the Company participated in accordance with the plan of work with investors and analysts. In particular, in 2019, Tatneft representatives participated in ATON Oil Day conferences, the Moscow Exchange Exchange Forum, The Inside Track Sberbank CIB, the Renaissance Capital Annual Investment Conference, and VTB Russia Calling! and others. The Company quarterly after the publication of the consolidated financial statements under IFRS holds a conference call with investors and analysts to discuss the results of operations for the reporting period. The Company has organized a special telephone line and email address for investors. A dialogue is regularly conducted with analysts of the “selling side” of investment companies and banks. In 2019, TATNEFT shares were covered (recommendations were given on actions on the stock market in relation to shares and a target price was determined) by more than 15 analysts of Russian and international investment companies and banks. In general, in the course of interaction with investors and analysts STRUCTURE OF INVESTORS AND ANALYSTS QUESTIONS IN 2019: TOTAL NUMBER OF QUESTIONS - MORE THAN 1000 Topic of the question Performance indicators and plans (production and refining) Strategy of the Company and its implementation Financial results Refining profitability Development of the TANECO complex Investment program and its change Dividends and dividend policy Debt financing and plans to attract it Participation in the banking business and work with distressed assets Sustainable development (social policy, ecology and climate change mitigation, corporate governance) Macroeconomic conditions and development of the industry as a whole. % 5 15 5 10 10 10 20 5 5 10 5 during 2019, answers were provided on more than 1000 inquiries related to the Company. Most of the questions of investors and analysts were related to the Strategy of TATNEFT Group and its implementation, financial investment and dividend policy, development of the oil refining segment, prospects for the petrochemical sector, production and financial results, indicators and goals in the field of sustainable development (ESG). The opinions of investors and analysts obtained in the course of interaction with them are promptly brought to the attention of the responsible executive managers, discussed and taken into account when making decisions. The Board of Directors of the Company and the Audit Committee of the Board of Directors are constantly informed about work on the investor relations. Most of the inquiries were answered during direct communications and correspondence with investors and analysts based on the published information; answers to some questions were prepared with the involvement of responsible services of the Company and were sent in writing or communicated orally. The main language of communication with investors and analysts is English. The opinions of investors and analysts regarding the activities of the Company, its Strategy and plans, investment and dividend policies on ESG and other topics are promptly brought to the attention of responsible managers, discussed and taken into account when making decisions. The Company has organized the process of prompt preparation of answers to investor requests in various areas of activity. Responses are provided in written and oral form with the mandatory disclosure and publication of any information that is material and may affect the value of the Company’s securities. Comments received from investors are regularly reported to the executive management of the Company. On a quarterly basis, the Company holds conference calls for investors with detailed coverage of performance results for the reporting period. During 2019, 4 presentations were prepared and published for shareholders, investors and analysts on the Company’s website, including plans for 2019 and 2020, on the results of operations for the reporting periods: • Presentation for investors (Forecast of operating results for 2018 and plans for 2019. Review of IFRS results for Q3/ 9 months of 2018), January 2019. • Presentation for investors (Operating activities results of 2018, plans for 2019), April 2019. • Presentation for investors (IFRS results for Q1 of 2019), July 2019. • Presentation for investors (Forecast of operating results for 2019 and plans for 2020 Review of IFRS results for Q3/ 9 months of 2019), November 2019. IN ORDER TO ACHIEVE THE HIGHEST POSSIBLE QUALITY OF INTERACTION WITH THE SHAREHOLDERS, THE COMPANY STRIVES TO USE THE MOST RELIABLE METHODS AND FORMS OF COMMUNICATION, INCLUDING ADVANCED INFORMATION TECHNOLOGIES. 187 25INTERACTION WITH SHAREHOLDERS AND INVESTORS2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTSustainable development 7 000 PUBLICATIONS ON COMPANY’S SUSTAINABLE DEVELOPMENT ACTIVITIES IN MASS MEDIA IN 2019 by SCAN Interfax data Tatneft pays special attention to preserving a favorable environment and reducing the impact on climate aspects, and attaches high importance to social factors. The basic principles for the Company are corporate responsibility and security. A significant landmark of the Company is the UN Action Program «Transforming our World. The 2030 Agenda for Sustainable Development”. Tatneft integrates 10 Principles and 17 Goals of sustainable development into its business model as a member of the United Nations Global Compact. AND PRINCIPLES OF SUSTAINABLE DEVELOPMENT GOALS 188 189 2019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTManagement system in the field of sustainable development The Company adheres to 10 Principles and 17 Goals of sustainable development of the UN Global Compact. The Company’s strategy includes aspects of sustainable growth and ensuring of favorable economic and social conditions for business development based on the most rational use of all types of resources and creating of value for stakeholders at each stage of activity. We have been continually improving our footprint performance related to our ongoing and projected operations, products and services that impact on the staff, public and the environment. FOCUS 2019 The Company continued to work on improving corporate governance, focusing on international best practices and principles of socially responsible investing (SOI). FOCUS 2020 Formation of target values in the field of sustainable development. SOCIAL ASPECT Compliance with the UN goals • • • • • • • • • • • • • • • • • • • Law compliance. Respect for human rights. Positive public opinion. Quality management. Provision of high quality goods and services. Continuous improvement of product quality. Strive to follow changing demands of consumers. Provision of reliable information about the Company’s products Assistance in the social and economic development of the regions of the Company’s operation. Support of local communities in the areas of presence. Development of human capital in the territories of the Company’s operation. Solving socially significant issues in the territories of the Company’s operation through cooperation with local communities. Promotion of education, culture, and sports. Support for vulnerable social groups Ensuring competitive compensation and social benefits for employees. Development and training of personnel, formation of personnel reserve. Good working conditions. Development of effective corporate communication with all stakeholders. Implementation of best social practices. ECONOMIC ASPECT Compliance with the UN goals INNOVATIONS Compliance with the UN goals ENVIRONMENTAL ASPECT Compliance with the UN goals • • • • • • • • • Participation in the development of the national fuel and energy complex infrastructure. Job creation Added value creation. Assistance to local economies. Introduction of innovations. Ensuring financial and economic stability of the Group’s enterprises. Development of the in-house research and production base integrated with the leading industry research centers. The Company’s strategy is based on the principles of innovative development. The target focus includes the technologies required to implement the Strategy for overcoming challenges that hinder its achievement. The Company develops and implements consistently the most cutting-edge solutions, many of which are unique in the industry and in the technology supply market. Interaction with the national and foreign leading scientific, technical, and technological centers allows for the integration of production tasks and extensive experience with innovative scientific potential in all areas of the Company’s operation. • • • • • • • Environment protection. Use of recyclable materials. Use of environment-friendly energy sources. Energy saving. Waste treatment. Ensuring safe working conditions, protection of health of the personnel and the population living in the areas of the Company’s operation. Reduction of man-caused impact on environment and prevention of environmental damage from economic activities. • • • • Rational use of natural resources. Implementation of a set of measures to maintain the environment in the regions of the Company’s operation at the standard admissible level complying with the potential of natural ecosystems for self-recovery. Increasing the level of industrial safety and labor protection, reducing injuries, accidents, occupational diseases. • Reduction of man-caused impact and maintenance of natural environment and human habitat in a favorable state. • Rational use, restoration, and protection of natural resources, biodiversity conservation. • Combating climate change. 190 191 SUSTAINABLE DEVELOPMENT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTHuman rights TATNEFT has historically recognized the importance and value of the fundamental human rights and freedoms proclaimed by the UN and throughout its activities it is responsibly committed to the principles of human rights, labor relations and the fight against corruption as reflected in international declarations and conventions: • UN Universal Declaration on Human Rights; • UN Declaration on the Environment and Development; • Guiding Principles on Business and Human Rights endorsed by the resolution of the UN Human Rights Council; • OECD Guidelines for Multinational Enterprises; • Declarations and Conventions of the International Labor Organization concerning multinational corporations and social policy, labour, freedom of association and protection of the right to organize and bargain collectively, as well as the Social Charter of the Russian Business The Company uses its best endeavours to prevent any adverse human rights impacts that is directly related to its business activities, products or services, business relations, as well as to preserve the national cultural identity of ethnic groups living in the regions of the Company’s operations, and takes all available measures to eliminate the consequences of such an impact, should it happen. When carrying out business projects in the countries with different political systems and cultural traditions, the Company believes that everyone should enjoy all the rights and freedoms proclaimed, including the right to work, the right to a favorable environment, the rights of indigenous minorities and special groups of the population, without any distinction, regardless of race, color, sex, age, language, religion, political or other beliefs, national or social origin, disability, property, class or other status, as well as equal opportunities for women and men, excluding any forms of harassment or discrimination in the field of work and employment. The company recognizes and respects the rights of each employee to collective representation, freedom of association, the right to organize employees into trade unions, and collective bargaining. The Company strives to prevent any adverse impact on human rights that is directly related to its activities, products or services, business relationships, as well as the preservation of the national and cultural identity of the peoples living in the regions of the Company’s operation, and takes all available measures to eliminate the consequences of such impact, if it occurred. MAIN AREAS OF MONITORING IN RELATION TO HUMAN RIGHTS ASPECTS: • internal audit in terms of compliance with corporate procedures and standards according to business lines; conducting procedures for assessing the impact of production activities on environment and the effectiveness of industrial safety and labor protection measures; interaction with a trade union organization and monitoring the implementation of a Collective Agreement; analysis of feedback, including that within the scope of «hotline». • • • Responsibility to stakeholders Key principles of interaction with stakeholders In 2019, no cases of noncompliance of the Company’s activities with the legislation in the field of promoting products and services, advertising, and marketing were registered. In the reporting year, the Company was not charged with fines for noncompliance with the legislation and regulatory requirements relating to the provision and use of products. Safety Compensation for damage Consumer health and safety protection includes the provision of products and services that are safe and do not pose an unacceptable risk of harm when used or consumed. The Company controls strictly the compliance with all regulatory requirements governing the quality of products and services. At all life-cycle stages of the offered products and services, the Company assesses their impact on health and safety in order to identify opportunities for improvement. No cases of noncompliance with the regulatory requirements concerning the impact of products and services on health and safety were registered in 2019. Obtaining information The Company provides consumers with the access to complete, accurate, and comprehensible information that enables them to make informed decisions according to their individual expectations. Contracts concluded for the supply of products are set out in a clear, precise and plain language, do not contain unfair contractual obligations, and provide clear and sufficient information about the price, product features and terms of the contract. No cases of noncompliance with the regulatory requirements in respect of informing consumers about the features of products and services were registered in 2019. Fair and responsible marketing practices The Company uses only fair marketing practices and protects consumers from unfair or misleading advertising or labeling. The Company’s activities in the field of promoting products and services, advertising, and marketing comply with the legislation of the Russian Federation. The Company has clear mechanisms for resolving claims and disputes with consumers, as well as measures to prevent them. All cases of receiving complaints from consumers are registered, the reasons are analyzed and, if objective claims are identified, appropriate measures are developed. The Company takes preventive measures to avoid damage to the interests of consumers. Privacy The Company ensures respect for privacy and protection of personal data through the use of reliable and secure systems for the collection and protection of consumer data. Information about consumers is collected only in legal ways. The collection of personal data of consumers of the Company’s products and services is limited to the information required for the provision of products or services or is provided on a voluntary basis with the consumer’s consent. Protection of the collected personal data of consumers is ensured with the use of the effective security measures. In 2019, there were no complaints regarding violations of consumer privacy and loss of consumer data. The Company strives for a consensus with suppliers, contractors and business partners in the field of fundamental human rights principles and makes certain efforts to prevent human rights violations in the practices related to the Company’s activities. 192 193 SUSTAINABLE DEVELOPMENT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTIndustrial safety, labor protection and environment taking into account climate changes Strategic priorities The Company is one of the leaders of the fuel and energy complex of the Russian Federation and is aware of the nature and scale of the impact of its activities, correlates them with the importance of rational use of natural resources, ensuring safe working conditions, protecting the health of personnel employed in all business segments and the population living in the areas of activity of Tatneft Group organizations, as well as preserving a favorable environment and reducing climate risks. In 2019, the Company’s Board of Directors adopted a new version of the Policy in the field of industrial safety, labor protection and environment, taking into account a climate change, based on the international best practices and a risk- based approach. The Company’s guiding principles in this area are: recognition of the priority of life and health of people to industrial activities, a high level of industrial safety, ensuring the level of potential for self-restoration of ecosystems, reducing the negative impact on the environment and the carbon footprint for a sustainable energy future. To achieve this goal the Company undertakes the following obligations: • Ensuring safe and healthy working conditions for employees • • • • in order to prevent injuries and deterioration of health. Improving the level of industrial safety, labor protection and environment, minimizing the risk of accidents at hazardous production facilities. Continuous improvement of performance indicators in the field of ensuring ISLPE. Ensuring control of potentially negative impacts on the environment, health and safety, industrial and environmental safety in the supply chain and implementation of appropriate measures to minimize/ eliminate such impacts. Implementation of effective measures for production control and audit of the implementation of current norms and rules of the ISLPE, emergency prevention based on the introduction of modern information technologies, methods of technical diagnostics and remote monitoring. The Company aims to achieve leadership positions in ensuring accident-free production activities, safe working conditions for the Company’s employees, as well as rational use of natural resources, minimizing the negative impact on environment and preserving a favorable environment for the present and future generations. The Company implements international standards ISO 14001:2015 «Environmental Management System» and ISO 45001: 2018 «Occupational Health and Safety Management System». In order to improve management practicesin addressing the climate change challenges it is planned to integrate the standards of system ISO14064-1: 2018; ISO 14064-2: 2019; ISO14064–3: 2019 Industrial safety and labor protection The Company’s key priority is to ensure life and work safety. Systematic work is being carried out to improve working conditions in the workplace. The main tool for assessing and managing working conditions is the procedure regulated for this purpose by the Russian legislation - the special assessment of working conditions (SAWC), which replaced the previous certification of workplaces according to working conditions in 2014. The SAWC procedure conducted during 2014-2019 covers all workplaces of Tatneft Group enterprises. Following the results of the special assessment, measures are being developed to improve working conditions in the workplaces. The dynamics of the number of days of temporary incapacity for work as a result of industrial accidents at Tatneft Group for the period of 2017- 2019 had a positive trend. Over the past three years, this indicator has decreased by 1.5 times. In 2019, the Lost Time Injury Frequency Rate LTIFR (the number of cases of working time loss attributed to the total working time in the organization for the reporting year and normalized per 1 million people/ hour) for Tatneft Group was 0.26. The systematic work of the Committee on ensuring occupational health and safety requirements and joint commissions on occupational health and safety, which include representatives of the employer and primary trade union organizations of enterprises, contributes to the positive solution of occupational health and safety issues. The committees develop a program of joint actions of the management and the trade union committee to improve occupational health and safety, prevent industrial injuries and occupational diseases. Members of the committees participate in the preparation of the Section «Occupational Health and Safety», the collective agreement and agreement on occupational health and safety, inform employees about the state of conditions and occupational health and safety in the workplace, the existing risk of health damage and due protection equipment, compensation and benefits for employees. PRODUCTION CONTROL OVER COMPLIANCE WITH THE INDUSTRIAL SAFETY AND LABOR PROTECTION REQUIREMENTS FOR TATNEFT GROUP In-process monitoring in Tatneft Group provides the involvement of chief specialists and specialists of operations and process services and departments in carrying out preventive measures. The work of the Permanent Commission (PC) on occupational health and safety, the Process Monitoring Committee, the Fire Safety Commission and the internal audit group of the integrated management system has been organized. The Company aims to achieve leadership positions in ensuring accident-free production activities, safe working conditions for the Company’s employees, as well as rational use of natural resources, minimizing the negative impact on environment and preserving a favorable environment for the present and future generations. 0,26 LOST TIME INJURY FREQUENCY RATE (LTIFR) >1,3 RUB BILLION WAS ALLOCATED FOR OCCUPA- TIONAL SAFETY MEASURES IN 2019 OCCUPATIONAL HEALTH AND SAFETY EXPENSES FOR TATNEFT GROUP, INCLUDING PER EMPLOYEE FOR THE PERIOD OF 2017- 2019, RUB THOUSAND. Year Funds spent on occupational health and safety Funds spent on occupational health and safety per 1 employee 2017 2018 2019 981 449,29 1 060 052,66 1 327 699,50 22,3 23,9 26,8 IDENTIFICATION AND SOLUTION OF SIGNIFICANT ISSUES OF PERSONNEL HEALTH In addition to the voluntary medical insurance programs for outpatient services, inpatient services, rehabilitation treatment and comprehensive medical care operating under the contract, a program of sanatorium rehabilitation of employees involved in harmful and (or) dangerous occupational risk operates in the Company. 194 195 SUSTAINABLE DEVELOPMENT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTEnvironment The Company takes measures to prevent environmental pollution, reduce and prevent negative impacts on it, including on natural objects with increased vulnerability and objects the protection and preservation of which is of particular importance; to increase the energy efficiency of production processes, to ensure resource saving, rational use of natural resources, and to minimize their losses. Production and investment planning include the identification of all significant impacts on the environment, including reduction of losses of oil, gas and products of oil and gas and the prevention of their entry into the environment; increasing efficiency of associated petroleum gas; reducing greenhouse gases; reducing significant impacts of the Company’s activities, products, and services on biodiversity of protected natural areas and areas of high biodiversity value outside of protected natural areas; conducting additional risk assessment in the ecologically valuable area. The Company implements integrated environmental impact assessment (EIA) approaches for the project from the construction stage to the liquidation stage within the project implementation and its affiliated projects; strategic environmental assessment (SEA) in the case of major infrastructure projects. A necessary condition for effective performance in this area and in reducing production risks is greater involvement of employees and maintaining an open dialogue with stakeholders on the ISLPE issues. In 2019, Tatneft Group enterprises continued their targeted systematic work in the field of improving the environmental safety of technological processes. EXPENSES FOR THE ENVIRONMENTAL ACTIVITY IN ACCOR- DANCE WITH THE EUROPEAN CLASSIFICATION OF ENVIRON- MENTAL ACTIVITIES (CEPA 2000) EXPENSES FOR ENVIRONMENTAL PROTECTION IN TATNEFT GROUP FOR THE PERIOD OF 2017-2019, RUB MLN For land protection and rehabilitation (reclamation) of surface and underground water 35.345% For waste management 3.526% For waste water collection and treatment (protection of water bodies) 30.162% For open air protection of atmospheric air and climate change prevention 30.498% For environmental protection from noise, vibration and other physical impacts 0.002% For other business lines in the field of environ- mental protection 0.139% For biodiversity preservation and natural areas conser- vation 0.063% For research and devel- opment activities aimed at reducing negative anthro- pogenic impacts on the environment 0.242% For ensuring radiation safety of the environment 0.023% 196 12500 12000 11500 11000 10500 10000 9500 12 325 11 002 10 275 2017 2018 2019 Atmospheric air Special attention is paid to reducing emissions of harmful substances into the atmosphere, which is achieved through the implementation of the following measures: • • construction and technical re-equipment of gas collection systems (flare facilities). Re-equipment of Tatneftegazpererabotka flare control system will reduce the company’s annual emissions by 0.94 thousand tonnes. introduction of technology of light hydrocarbon vapor recovery (LHVR) allowed reducing carbon emissions by more than 4 times as compared with emissions in 1991. Currently, the facilities of PJSC TATNEFT operate 44 LHVR units. In 2019, the amount of carbon recovered by the LHVR units amounted to 31.1 thousand tonnes. Rational use of associated petroleum gas 44 31,1 THOUSAND TONNES NUMBER OF ACTIVE LHVR NUMBER OF RECOVERED LHVR PJSC Tatneft has started creating a system for automatic monitoring of atmospheric air quality in its area of operation, identifying and eliminating sources of pollution. In 2019, automatic air quality control stations as well as a monitor for displaying information about the state of environment were installed in Almetyevsk. A significant share of emissions of pollutants into the air is accounted for by the business line «Exploration and Production» (71%), one of the main air protection measures of which is the rational use of associated petroleum gas (APG), reducing its flared volume. Over the period of 2017 through 2019, the TATNEFT Group had flared 20 % less of associated petroleum gas. For the period pf 2017-2019, Tatneft Group reduced the APG flared volume by 20%. APG FLARED VOLUMES OF TATNEFT GROUP, MLN M3 Due to the purposeful work to reduce APG flaring at flare facilities, in 2019, the level of APG use for Tatneft Group was 95.93%. This allowed reducing emissions of pollutants and greenhouse gases from APG flaring and dispersion. 2019 2018 2017 45 42 55 The implementation of technological solutions contributes to the achievement of this indicator. The main ones are overhaul and expansion of the gas collection system from the facilities of PJSC Tatneft, construction of facilities intended for the utilization of associated petroleum gas, as well as works on their technical re-equipment, reconstruction and modernization. In 2019, more than 21 km of Tatneft gas pipelines were overhauled. Design and survey work on the object «Expansion of the Gas Collection Aystem of Yamashinsky and Tyugeyevsky Fields (GZNU-110, DNS-2S)» of Oil and Gas Production Department Yamashneft was completed. Construction and installation works are planned for 2020. PJSC Tatneft is responsible for monitoring the efficiency of operation of gas treatment plants, their current and planned preventive repairs. DYNAMICS OF THE LEVEL OF APG UTILIZATION IN TATNEFT GROUP 96,24% 96,09% 95,93% 1010 1000 990 980 970 960 950 940 930 920 2017 2018 2019 Production of APG, mln m3 APG utilization, mln m3 APG utilization rate, % 197 SUSTAINABLE DEVELOPMENT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTGreenhouse gas The Company implements comprehensive measures to reduce the impact on the climate, taking into account the content of the UN Framework Convention on climate change (Paris Agreement), which regulates measures to reduce the content of carbon dioxide in the atmosphere from 2020. Since 2015, the Company has been accounting for greenhouse gas emissions. Since 2016 (base year), greenhouse gas emissions have been reduced by 5%. Only due to the high level of APG utilization, the Company prevents emissions into the atmosphere of about 3 mln tonnes of CO2-equivalent greenhouse gas per year. Useful APG utilization is 96.4%. IN 2019, THE COMPANY OPENED 2 TARGETED PROJECTS TO REDUCE THE CARBON FOOTPRINT: • Implementation of the Company’s initiatives and actions on climate aspects. Greenhouse gas management and accounting processes. • Analysis and selection of promising methods for reducing emissions, recovering and processing carbon dioxide. Within the framework of these projects, it is planned to develop effective and promising technologies that are applicable in Tatneft Group to reduce greenhouse gas emissions, as well as to improve the system of accounting and management of climate aspects. In 2019, the mass of direct greenhouse gas emissions of Tatneft Group amounted to 4.1 mln tonnes of CO2-equivalent, which is 20% higher than in 2018 (3.4 mln tonnes of CO2- equivalent). The growth of greenhouse gas emissions in 2019 is caused by the increased consumption of natural gas (steam generation) for the production of SVO, increase in the production of products of JSC TANECO, increase in the volume of fuel flared during the production process of Tatneft - Presskomposite, LLC. * According to the recommendations of the “GHG Protocol Corporate Standard” for making a consistent comparison of emissions over time, the TATNEFT Group selected 2016 as the baseline for the earliest year for which reliable data are available. The dynamics of emissions by business lines shows that most of the emissions are accounted for by the business area «Energy». In 2019, emissions from the business line “Exploration and Production” increased by 1.5 times. The business line “Tire Business” managed to reduce its carbon footprint in 2019. Of the total amount of Tatneft Group’s greenhouse gas emissions, 99.79% is carbon dioxide. In addition, greenhouse gases such as methane (8.4 thousand tons) and nitrous oxide N2O (0.002262 tons) are present in the emissions. Tasks to reduce greenhouse gas emissions are consistently integrated into the Company’s business processes. Currently, within the framework of the project «Formation of the Company’s Sales Strategy», it is planned to assess the environmental impact, including anthropogenic, along the entire value chain of the product - at each stage of its life cycle (development, including laboratory, production, sales and consumption), including the assessment of impact by contractors and suppliers. The Company directs significant efforts to the measures for preserving «clean water», «ecosystems» and ensuring «responsible consumption and production». Tatneft Group’s enterprises are city-forming for many settlements in Tatarstan, so we have always understood our responsibility for the well-being of these cities. Our efforts ensure the implementation of the goal «Sustainable Cities and Settlements». Compensatory measures are the most important elements in reducing climate risks. In order to create a favorable environment in the area of its operations and increase the absorption of greenhouse gases, Tatneft Group has been implementing a Lawning Program since 2000. During this period, about 11 mln saplings of trees and bushes were planted. In 2020, it is planned to plant more than 3 mln saplings. DYNAMICS OF GREENHOUSE GAS (GHG) EMISSIONS OF TATNEFT GROUP, MLN M3 (CO2-EQUIVALENT) DYNAMICS OF GREENHOUSE GAS EMISSIONS BUSINESS LINES-WISE, TONS 4,3 4,1 • Energy 3,5 3,4 • Exploration and production • Oil and gas processing • Tire business 1,6 0,8 0,5 1,6 0,8 0,5 1,7 1,4 0,7 0,002 0,001 0,001 2016 2017 2018 2019 2017 2018 2019 Protection of water resources and rational water use Water use in Tatneft Group is in compliance with the «Water Code of the Russian Federation» and Federal law «On Subsoil» on the basis of contracts on the use of water bodies, decisions on providing water bodies for use, licenses for the right to use subsoil for groundwater extraction. To ensure the standard level of wastewater treatment and complete exclusion of discharge of polluted effluents into the environment, the mechanical wastewater treatment unit was re-equipped in Tolyattikauchuk, LLC in 2019; the biological treatment unit of system 1 was commissioned in JSC TANECO; technological standards for the content of pollutants in wastewater are observed; the territories of sites and places of wastewater discharge are kept in proper sanitary and ecological condition. During 2019, a significant amount of work was performed to improve the reliability of pipelines for various purposes. Anti- corrosion pipes are used to ensure reliable operation of oilfield pipelines. In order to protect land, surface and underground waters, PJSC Tatneft has completed overhaul of more than 93 km of oil pipelines for oil collection and treatment systems, and more than 80 km of water pipelines for the reservoir pressure maintenance (RPM) system using anti- corrosion pipes. Emergencies prevention and recovery The system of prevention and recovery of emergency caused by oil and petroleum spills, protection of the population and the environment from their harmful effects is carried out in two main business lines: a set of engineering and organizational measures aimed at improving the reliability of production equipment, timely detection of oil spills and minimizing losses from them, as well as a set of measures aimed at rapid response to this type of emergency. Irreducible reserves of natural resources have been secured, including for the elimination of oil spills into water bodies, there are 2,298 meters of booms and 16 skimmers. WATER DISPOSAL INTO SURFACE WATER BODIES, MLN M3 16,2 2019 2018 2017 16,6 16,5 Land reclamation In Tatneft Group, a comprehensive approach is applied to the reclamation of land affected during the construction and operation of facilities, taking into account the categories of land use, soil types, types of violations and pollution. To support the reclamation process, PJSC Tatneft developed and implemented standards for the permissible residual content of oil and petroleum products (PRCOPP) for 9 types of soils of industrial significance in 2019. Comprehensive field and laboratory studies on the comparative analysis of the effectiveness and environmental safety of new technologies for reclamation of oil-contaminated and saline lands were conducted. Based on the results of scientific research, a list of the most effective biotechnologies has been formed, using native strains in combination with nanosorbents (based on local agrominerals), as well as humic products. The Company’s standards for land reclamation affected during the construction and operation of oilfield facilities, loss of piping integrity, the use of biotechnologies and the preparation of reclamation projects have been updated. Biodiversity conservation The largest specially protected natural area of federal importance located in the region of Tatneft Group’s activity is FSBI National Park Nizhnyaya Kama. Tatneft Group does not have an irreversible impact on biodiversity. The main impacts on biodiversity are associated with the exploration, production, preparation, transportation and retail sale of petroleum products. In order to prevent the pollution of surface watercourses (rivers) and water bodies (reservoirs) with oil, 512 stationary oil recovery structures (ORU), booms, and lagoons are maintained in working condition . The Biodiversity Conservation Program is being implemented - it sets goals for the conservation of biodiversity in the territories of activity at a level that ensures their sustainable existence and inexhaustible use. 198 199 SUSTAINABLE DEVELOPMENT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENT Personnel Tatneft Group provides about 60 thousand jobs at 105 enterprises in the Russian Federation and abroad. TATNEFT GROUP MAIN STAFF CATEGORIES AS OF 31.12.2019, PEOPLE Remuneration plan Managers Specialists and clerical staff Workers TOTAL WORKFORCE: TATNEFT GROUP HEADCOUNT AS OF 31.12.2019, BROKEN DOWN BY GENDER, PEOPLE Men Women TOTAL: TATNEFT GROUP STAFF BREAKDOWN BY COUNTRY AND GENDER AS OF 31.12.2019, PEOPLE men women men women men women men women men women men women men women men women men women men women Russian Federation Canada China Libya Republic of Belarus Republic of Kazakhstan Republic of Moldova Republic of Turkmenistan Republic of Uzbekistan Ukraine 200 5 959 16 367 37 434 59 760 The Company considers remuneration as a part of an integrated system of financial and non-financial encouragement of personnel, which allows the Company to maintain high competitiveness by attracting and retaining qualified and motivated employees. The personnel basic income is formed from wages and employment benefits. Wages include a tariff- based (fixed) part, according to the Unified Rate Schedule, and bonus-based (variable) part. The employment benefits provide employees with a relevant scope of medical and other social guarantees. 32 527 27 233 59 760 Based on the outcome of 2019: the ratio of wage to the minimum consumer budget in the Republic of Tatarstan constituted 4.21, the ratio of the tariff rate (wage) of the first class with standard working conditions and the minimum wage for the RT (Minimum Wage Rate of the RT) constituted 1.29. PAYROLL FUND OF EMPLOYEES OF PJSC TATNEFT 15 665 16 646 17 820 2017 2018 2019 AVERAGE MONTHLY WAGE OF PJSC TATNEFT 61 796 63 795 66 439 2017 2018 2019 55% 45% 33% 67% 100% - 100% - - 100% 73% 27% - 100% 96% 4% 80% 20% 58% 42% The HR management policy is aimed at attracting and retaining responsible and professional employees. Career development, incentives and employee performance assessment are one of the key areas of the corporate personnel development system. Currently, in order to ensure efficient implementation of the personnel policy, the HR strategy of Tatneft Group until 2030 is being formed. With the development of operational activities and the assessment of the need in human resources specialists and operating personnel, the tasks of forming personnel reserve, training and development, the system of financial and non- financial incentives, corporate culture and youth policy have been focused on. Level of competence The Company has built a system for assessing the professional knowledge and skills of its employees, as well as a comprehensive system for evaluating the competencies of managers and specialists. Taking into account the requirements, candidates for senior positions are evaluated in several stages: 1. assessment of employees’ qualifications, 2. evaluation of the Key Performance Indicator (KPI) and Pro- activity (participation in projects) of the candidates 3. professional interview with the company’s experts, 4. assessment of reliability, 5. assessment of professionally important qualities. In total, 509 persons passed a comprehensive assessment in 2019. Based on the results of the comprehensive assessment, the competence development specialists provide feedback to each candidate and assist them in developing Individual Development Plans (IDPs). Personnel certification Formation of the personnel reserve In accordance with the Company’s Personnel Certification Standard, the executive personnel certification process under the Director General of PJSC Tatneft has been organized to determine whether the employees’ competence meets the job and qualification requirements, as well as to assess the opportunities for their further career growth. In 2019, employees of 12 departments and services of the executive office of PJSC Tatneft – 199 employees - were certified. The Certification Commission issued 138 recommendations aimed at improving skills, developing professional and corporate competencies, applying financial incentives of employees and developing career, organizing rotation, as well as updating organizational and administrative documents. In 2019, the Company spent 214 273, 2 thousand rubles to train its personnel. In 2019, work on the formation of the Company’s personnel reserve was resumed within the framework of an open competition for the personnel reserve of Tatneft Group. The Company has a clear hierarchy of management positions and the following levels are allocated - TOP 100, TOP 300 and TOP 1000. In order to create and maintain the human resource potential of business assets in the context of structural transformations, in 2019, first of all, applications related to the personnel reserve for positions of line managers of the TOP-1000 level were processed. In 2019, more than 30 corporate training programs were organized. Within the framework of the program for the development of the personnel reserve, the Corporate University conducts modular training «Leaders-300» under the target educational MBA program, «Leaders-100» under the Executive MBA program, «Leaders-1000». Much attention is paid by the Company’s management to the development of unique (losing) competencies of employees for the implementation of promising projects NUMBER OF EMPLOYEES WHO HAVE COMPLETED TRAINING, BROKEN DOWN BY CATEGORY OF EMPLOYEES AND BY GENDER, PERSONS Employee category Managers Specialists Officers Workers Total Total 2 619 7 000 70 13 464 23 153 including men 2 167 2 801 7 9 535 14 510 including women 452 4199 63 3929 8643 201 SUSTAINABLE DEVELOPMENT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTWork with veterans One of the most important activities of a trade union organization of its elected body, is to work with non-working pensioners - members of the Trade Union. Today, the number of non-working pensioners is 47,326 persons. Each enterprise has a Council of Veterans, and each primary trade union organization has a Commission for working with non- working pensioners. An elaborated system of cooperation between trade unions, together with the administration, the Council of Veterans, the youth organization enables targeted work with non-working pensioners – members of the Trade Union in many areas of activity and their social protection. According to the Articles of Association of the trade union organization, employees who dismiss at his/her own request due to the retirement and do not continue their work are registered in the primary trade union organization. In accordance with the work plans of the Trade Union and its commissions, approved at a meeting of the Trade Union and agreed with the administration, veterans, retirees, an extensive work on the organization of social protection and carrying out mass cultural, sports and recreational activities is performed, and special attention is paid to employment, moral, patriotic education of youth in workforces. Tatneft Group does a lot in terms of social protection and improving the standard of living of pensioners. The work is performed jointly with the Trade Union Committee and the Council of Veterans. In 2019, a survey of the living conditions of veterans, identification of apartments and houses in need of repair, provision of financial assistance, allocation of sanatorium and health-resort vouchers, and organization of other necessary activities was organized. According to the Collective Agreement, financial assistance is provided through Tatneft Charitable Foundation to: • participants of the Second World War on Victory Day; • widows; • homefront workers. Corporate university In 2019, 7,697 persons (intramural and extramural programs) were trained in 28 courses at the Corporate University. In addition, training was organized for 656 persons by external providers. As a result, the total training plan was exceeded by 71%. 7 697 TRAINED PERSONS In order to develop business administration competencies, managers are implementing: «EMBA Target Educational Program for Personnel Reserve «TOP 100», «MBA Target Educational Program for Personnel Reserve «TOP 300» and «Target Educational Program Leaders-1000». To date, more than 200 managers of various levels have been trained in these programs. 4 300 REMOTE TRAINING EMPLOYEES In 2019, more than 4,300 employees completed remote training. In 2020, it is planned to implement the Development of E-Learning System in TATNEFT Group project. In 2019, 13 corporate professional standards were developed and implemented, and 2 professional standards are being updated. It is planned to develop 18 corporate professional standards for 2020-2021. In 2019, 675 employees were evaluated using the 360-degree method. Large-scale work is underway to introduce a culture of self-learning organization. Currently, more than 50, 000 users, 27 courses have been launched in the virtual environment Mirapolis - the Single Platform for Employee Training and Development of Tatneft Group. Work with youth In 2019, the Youth Organization of Tatneft numbered 25,270 thousand young employees, of which 7,346 were employees of structural divisions, 7,212 were employees of subsidiaries, 10,712 were employees of oil service enterprises and organizations, etc. The share of young employees was 34% in structural divisions, 29% - in subsidiaries, and 32% - in oil service enterprises. In 2019, the Youth Organization implemented a number of new initiatives aimed at increasing the efficiency of work with young people, reducing inefficient costs, and increasing the involvement of young people in scientific, creative, and innovatory work. In July 2019, the first International Oil and Gas Youth Forum organized by the Ministry of Energy of the Russian Federation, PJSC Tatneft and the Youth Council of the oil and gas industry under the Ministry of Energy of Russia, was held. 250 persons - young managers and specialists of Russian and foreign fuel and energy enterprises, young scientists and experts, representatives of the authorities of the Russian Federation and the Republic of Tatarstan, young teachers, graduate students and students of Russian and foreign universities - took part in the Forum. The Company’s Youth Committee took a direct part in the Forum. Young employees of Tatneft Group participate actively in the Company’s innovation processes, in 2019, young people submitted more than 3,000 innovation proposals and received more than 30 patents. 202 The global task was to form a progressive youth team to solve the urgent problems facing the fuel and energy complex of Russia and neighboring countries. In 2019, Tatneft was awarded a diploma for efficient implementation of the youth policy at the enterprise in the competition for the best socially-oriented company in the oil and gas industry held by the Ministry of Energy of the Russian Federation. As part of the IX Saint Petersburg International Gas Forum, Tatneft was encouraged by a Gratitude Letter from the Federal Agency for Youth Affairs of the Russian Federation for assistance in the implementation of the state youth policy in the oil and gas industry. In addition, in 2019, the Youth Committee of PJSC Tatneft won the award «On One Wave» organized by the Ministry of Youth Affairs of the Republic of Tatarstan in the category «Team of the Year». As well as for all non-working pensioners: International Day of Older Persons; • • Day of Invalids; • financial assistance on a personal application. In addition, non-working pensioners, participants of a non-state fund, receive a pension for the period specified in the contracts after termination of employment. Creative and meaningful leisure time is of great importance for the elderly. Any form of leisure time extends the creative activity of pensioners, preserves internal energy and optimism, changes the attitude to life, is an environment for new acquaintances, gives communication with people of interest. According to the Collective Agreement and the Regulations on financing cultural and sports events, funds from enterprises and trade unions have been allocated and efficiently used for these events. Green Fitness classes and other types of physically active leisure time occupies a significant place in health-improving work with veterans. At the initiative of the Director General of PJSC Tatneft, N.U. Maganov, «Active Longevity Centers» have been opened, which are equipped with modern simulators. Pensioners are active participants in the creative competition «Talents’ Festival» organized annually by Tatneft Trade Union Committee. For the purpose of social protection of non-working pensioners, the Chairman of the Council of Veterans of the executive office of PJSC Tatneft was elected from the trade union organization as a member of the Commission for the preparation of a Collective Agreement. Tatneft, a trade union organization, together with the Council of Veterans, makes every effort to make our veterans feel confident in the future. All events held with pensioners are covered in the media. 203 SUSTAINABLE DEVELOPMENT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTCollective agreement The Company provides its employees with a package of social benefits and guarantees. Obligations for their provision are stated in the Collective Agreement annually concluded between PJSC Tatneft and the workforce and covering all employees and non- working pensioners of the Company. The enterprises belonging to Tatneft Group have concluded their own Collective Agreements, which seek to comply with the Collective Agreement of PJSC Tatneft in terms of the content and amount of benefits and guarantees. A Collective Agreement contains the mutual obligations of the employer and the Trade Union Committee in 12 sections. They reflect the tasks of efficient production management, organization of safe labor and its decent remuneration, social benefits for employees and support for non-working pensioners, and a section on guarantees of the trade union organization. A separate section is dedicated to social benefits for young employees. In order to monitor the implementation of collective agreements, the Chairman of the Trade Union Committee of Tatneft, his deputies and chief specialists of the Trade Union Committee, chairmen of the Trade Union Committees of enterprises visited workplaces regularly, got acquainted with living and working conditions, and met with the collectives of workshops and teams. Based on the results of personal meetings, shop meetings of workforces and conferences at the enterprises of Tatneft, a set of proposals from employees on improving the Collective Agreement, improving the organization of labor, and problematic areas in the course of structural changes in the Company was formed. This list was sent for consideration and search for solutions to the relevant services and the Conciliative Commission of PJSC Tatneft on the development of a Collective Agreement. The Trade Union Committee of Tatneft took an active part in this work A COLLECTIVE AGREEMENT PROVIDES: • benefits and guarantees for employees; social protection of young workers; • support for veterans and pensioners. • THE TOTAL AMOUNT OF SOCIAL PAYMENTS TO EMPLOYEES UNDER SECTIONS 6,7 OF THE COLLECTIVE AGREEMENT OF PJSC TATNEFT (EXCLUDING LUMP-SUM HOLIDAY PAYMENTS AND INTEREST-FREE LOANS TO YOUNG EMPLOYEES), RUB MLN THE TOTAL AMOUNT OF SOCIAL PAYMENTS TO NON-WORKING PENSIONERS UNDER SECTIONS 6, 7 OF THE COLLECTIVE AGREE- MENT OF PJSC TATNEFT, RUB MLN RUB mln 250,0 200,0 150,0 100,0 166,5 223,6 190,7 RUB mln 58,0 57,0 56,0 55,0 54,0 55,8 57,8 56,9 2017 2018 2019 2017 2018 2019 Source: CDU TEK The increase in the amount of payments in 2018 was due to the amount of financial assistance provided to the management of PJSC Tatneft under the articles of the Collective Agreement: «Financial assistance to employees due to their retirement» and «Financial assistance in connection with any anniversary date». Non-state pension provision program The increase in the amount of social payments to non-working pensioners is due to the annual indexation of the amount of financial assistance under the Collective Agreement. One of the most important areas of the Company’s social policy is a non-state pension provision for employees. The pension program of PJSC Tatneft is based on the principle of social partnership, in accordance with which the Company and its employees form a future corporate pension by joint efforts on a parity basis. The number of employees of PJSC Tatneft participating in the corporate program of non-state provision is 8,409 persons. The actual expenses of PJSC Tatneft for non-state pension provision in 2019 amounted to RUB 86,541 thousand. The number of pensioners of PJSC Tatneft receiving non-state pensions is 9,508 persons. In Tatneft Group - 17,135 persons. Payments of non-state pension to pensioners of PJSC Tatneft through National NPF, JSC for 2019 amounted to RUB 349,195 thousand. In accordance with the Collective Agreement of PJSC Tatneft, non-working pensioners who retired before the establishment of NNPF, JSC receive quarterly financial assistance. The total amount of financial assistance provided to non-working pensioners of PJSC Tatneft who retired before the creation of NNPF in 2019 amounted to RUB 19,430 thousand. The number of non-working pensioners of PJSC Tatneft receiving this financial assistance is 3.2 thousand persons. Optional health insurance Voluntary medical insurance programs aimed at preventing diseases and improving health of employees (vmi, health resort rehabilitation, vaccination, involvement in physical education and sports). 385,2 MLN RUB TOTAL AMOUNT OF OPTIONAL HEALTH INSURANCE CONTRACTS In accordance with Voluntary Medical Insurance Contracts, the total number of insured employees was 22,234 persons. The total amount of VMI agreements is RUB 385.2 million. The Company provides organization and payment of medical and other services under 4 programs: «Outpatient Services», «Inpatient Services», «Rehabilitation Treatment» and «Comprehensive Medical Care». In order to reduce infectious diseases, annual seasonal immunoprophylaxis was conducted at the expense of the VMI funds. In 2019, employees of PJSC Tatneft were vaccinated against seasonal flu (3,910 persons were vaccinated) and tick- borne encephalitis (3,493 persons). A medical examination of employees of PJSC Tatneft was also conducted in order to detect cancer related diseases at an early stage. The Company has 11 health care centers on its balance sheet. In 2019, 2,081 employees of structural divisions of PJSC Tatneft engaged in work with harmful and (or) dangerous production factors rested and improved in health care centers. 666 employees underwent sanatorium rehabilitation in the «Yuzhny Obyekt». 127 employees of Belokurikha Resort, JSC («Siberia», «Katun» and «Belokurikha») underwent sanatorium rehabilitation. A preferential category of citizens of the Russian Federation, children and citizens who, if medically required, need rehabilitation are treated in the Company’s sanatoriums. High-tech medical care Thanks to the significant organizational contribution of Tatneft, a Regional Medical Diagnostic Center of Tatneft Medical Unit (Almetyevsk) operates in the South-East of Tatarstan, providing high-tech medical care in cardiovascular surgery, traumatology and orthopedics, ophthalmology and urology. This is a large and modern multi-field Health Care Center, which has a highly qualified personnel potential and is equipped with the latest medical equipment. The clinic uses a complex of high-tech methods of diagnostics and treatment: hybrid cardiac surgery; radiofrequency ablation of heart rhythm disorders using CARTO 3 non- fluoroscopic navigation system; neurosurgical operations using neuronavigation equipment. Every year, state quotas are allocated for the Medical Unit to perform high-tech operations for residents of 10 districts of the South-East of the Republic of Tatarstan in the fields of cardiovascular surgery, traumatology and orthopedics and neurosurgery, which are successfully implemented. As part of the implementation of the state order on provision of high-tech medical care for residents of the South-East of the Republic of Tatarstan, funds in the amount of RUB 291.7 million were disbursed. The state order by the specialists of the Medical Unit was fulfilled in full. 204 205 SUSTAINABLE DEVELOPMENT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTFor 2018, funds for the implementation of the state task to provide VMP for residents of the South-East of the Republic of Tatarstan were allocated in the amount of RUB 314 million. For 2019, funds for the implementation of the state task to provide HTMC for residents of the South-East of the Republic of Tatarstan were allocated in the amount of RUB 328,9 million. For 2020, an application was submitted for the provision of HTMC for residents of the South-East of the Republic of Tatarstan in the amount of RUB 346.8 million, at the moment RUB 182.7 million have already been allocated. Since the opening of the Regional Medical Diagnostic Center in 2008, 2,365 open heart surgeries, 21,378 coronary angiographies, 7,503 stenting of coronary arteries, 980 implantation of electrocardiostimulators, 842 radiofrequency ablation operations, more than 589 endoprosthesis replacements of large joints, as well as more than 8,878 microinvasive operations on the anterior and posterior eye segments have already been performed. New efficient and minimally invasive surgical treatment using hybrid technologies is being developed and implemented, such as transcatheter aortic valve replacement, installation of stent grafts to eliminate aortic aneurysms, and other vascular and heart operations. To date, 96 such operations have been performed. Organization of summer and winter holidays for employees’ children in recreation camps The Company has 11 children’s recreation camps for 2,723 places located on the territory of the Company’s activities, which meet modern requirements for comfortable living and recreation. In 2019, in accordance with the children’s health program, 11,510 children had a rest in the Company’s children’s recreation camps during four shifts. Much attention is paid to children’s recreation programs, the purpose of which is the comprehensive development of a child. During the holidays, qualified teachers, trainers who conduct various informative and educational activities take care of children. Housing policy PJSC Tatneft is an active participant and main payer of the social mortgage housing construction program in the Republic of Tatarstan. In 2019, 519 apartments with a total space of 31.7 thousand m2 at the amount of RUB 1,149.2 million were built and commissioned for the Company’s employees. The number of applicants in the oil region for housing under the social mortgage program as of January 1, 2020 constituted 4,646 persons. TATNEFT is an industrial partner of the AGNI and provides comprehensive support for the development of the Institute’s material and technical facilities, organizational structure, and the improved professional competence of teaching staff. The leaders and specialists of the Company as part of the educational process share their professional knowledge and experience with students and graduate students, act as experts in their scientific works. The scientific and educational activities of the Almetyevsk State Petroleum Institute, along with traditional specialties, are connected with digital technologies for reservoir management and innovative mineral resources management. As part of the strategy implementation, the AGNI together with the Company developed the projects aimed at accelerating the modernization and improvement of educational programs, attracting and recruiting talented applicants, raising the level and volume of research and development activities, attracting and developing the key staff, developing the infrastructure and laboratory base. Development of the Company’s main activity region The Company sets a high priority on the innovative growth of the territories of its presence on the basis of smart and environmentally friendly technologies. The main region of the Company’s activity is the South-East of the Republic of Tatarstan with the executive corporate center located in the city of Almetyevsk. There are also a significant number of the Company’s production facilities in close proximity to Almetyevsk, including upstream operations. Almetyevsk was assigned a role of the state-of-the-art fifth technological zone with advanced information technologies integrated into all spheres of life, including social infrastructure, medicine and education. Education Development Support The Company pays great attention to the educational development by investing material, organizational and intellectual resources at all levels of the educational processes. The Company financed the reconstruction, repair and improvement of material and technical facilities of educational institutions in the South-East of Tatarstan: from kindergartens to universities. The Company supports development of the high-quality educational environment by facilitating open professional interaction of educators. Since 2018, the Company has been involved in the implementation of the Development Strategy of the Almetyevsk State Petroleum Institute (AGNI) as a higher oil school. The Strategy covers the period to 2030 and is aimed at creating a modern smart educational environment in line with the advanced world trends at the level of leading research and educational centers of the oil & gas profile with the priority goals of: better education; advanced science; modern infrastructure and management system. The Institute is located in the region of the Company’s core business and is the basic educational institution for training of professional personnel for the enterprises of the TATNEFT Group, and also has a high potential for a scientific branch school, advanced training and supplementary education. TATNEFT Public Council The Company practices Public Councils to improve the efficient interaction with the stakeholders, including the awareness level of stakeholders on socially important aspects of the TATNEFT Group’s activities and the feedback effectiveness. The Public Council is a collegial body with the participation of the top management of the Company and representatives of the public concerned - leaders of civil associations and trade unions, industry experts, media representatives, and the local population. The Public Council includes N.U. Maganov, General Director of PSJC TATNEFT. The Public Council brings together the stakeholders to discuss topical issues and further work out appropriate decisions by the Company. The Company lays special emphasis on building inclusiveness of local people in the social policy of the Company. Development projects of the TATNEFT Medical Treatment Facility and a new campus of the higher education institution of Almetyevsk State Petroleum Institute were submitted for discussion. The Public Council work in 2019-2020 has been devoted to socially important infrastructure projects of the Company in healthcare and education. In the process of discussion the constructive proposals were developed taking into account the proposals received from participants in the public discussion. Public councils enable the Company to get more precise information on the demand and expectations of the social environment, more efficiently distribute the corporate resources in implementation of the social policy, and also increase the stakeholders’ awareness level about the activities of TATNEFT Group. 206 207 SUSTAINABLE DEVELOPMENT252019 ANNUAL REPORTYEARS OF SUSTAINABLE DEVELOPMENTAnnex 208 209 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25 Annex 1 Independent Auditor’s Report Independent Auditor’s Report IFRS Consolidated Financial Statements and Independent Auditor’s Report 31 December 2019 Independent Auditor’s Report To the Shareholders and Board of Directors of PJSC Tatneft: Our opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of PJSC Tatneft and its subsidiaries (together – the “Group”) as at 31 December 2019, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS). What we have audited The Group’s consolidated financial statements comprise:      the consolidated statement of financial position as at 31 December 2019; the consolidated statement of profit or loss and other comprehensive income for the year then ended; the consolidated statement of changes in equity for the year then ended; the consolidated statement of cash flows for the year then ended; and the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) and the ethical requirements of the Auditor’s Professional Ethics Code and Auditor’s Independence Rules that are relevant to our audit of the consolidated financial statements in the Russian Federation. We have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. AO PricewaterhouseCoopers Audit White Square Office Center 10 Butyrsky Val Moscow, Russian Federation, 125047 T: +7 (495) 967 6000, F:+7 (495) 967 6001, www.pwc.ru 210 211 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25 Independent Auditor’s Report Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How our audit addressed the key audit matter Business combinations Refer to Note 29 to the consolidated financial statements We performed the following procedures to assess the appropriateness of valuation methods and methodology of accounting of acquired businesses used by the Group’s management:  examination of documents on acquisition of control over the subsidiaries, including purchase payment agreements, documents, other agreements with the sellers;  analysis of key assumptions and input data used by the Group’s management when preliminary assessment of the fair values of acquired assets and liabilities; performing a  analysis of reasonableness and review of the mathematical accuracy of preliminary calculations of purchase price allocation of the assets and liabilities of the acquired entities;  assessment of compliance with IFRS of the consolidated the disclosures in financial statements. In the 4th quarter of 2019, the Group acquired 100 % of the charter capital of LLC Neste Saint-Petersburg (later renamed to LLC Tatneft-AZS-Severo-Zapad) from the third party Neste Oyj (Neste Corporation). LLC Neste Saint-Petersburg owns a premium retail chain of 75 petroleum stations, a tank farm of oil products and an office building in Saint-Petersburg. The acquired subsidiary will increase the Group’s presence in the fuel and retail market of the North- West Federal district of Russia. The purchase price was RR 9,139 million (net of cash received), cash consideration was fully paid in 2019. In the 4th quarter of 2019, the Group also acquired 100 % of the charter capital of LLC SIBUR-Togliatti (later renamed to LLC Togliattikauchuk) and 100 % of the share capital of JSC Togliattisintez from the third party PJSC SIBUR Holding. The acquired subsidiaries form a petrochemical complex and contribute to the further development of the Group’s petrochemical and tires business. The purchase price was RR 11,378 million (net of cash received), cash consideration was fully paid in 2019. As of 31 December 2019, fair value measurement of the assets and liabilities of the acquired entities is preliminary and will be finalised within 12 months from the date of acquisition. Preliminary fair value of the acquired net assets of LLC Neste Saint-Petersburg is RR 10,832 million, net and JSC Togliattisintez is RR 12,801 million. We focused on this matter due to significance of the acquired businesses financial for position. LLC SIBUR-Togliatti the Group’s assets the of Our audit approach Overview Materiality Group scoping Key audit matters Overall Group materiality: Russian Roubles (“RUB”) 12,600 million, which represents 5.0 % of profit before tax.  We conducted audit work at 4 significant reporting entities.  The Group engagement team visited Group’s operations in Almetievsk, Nizhnekamsk and Moscow.  Our audit scope addressed 95 % of the Group’s revenues and 94 % of the Group’s absolute value of underlying profit before tax. Key audit matter  Business combinations  Impairment of assets As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements. Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, if any, both individually and in aggregate on the consolidated financial statements as a whole. Overall Group materiality RUB 12,600 million How we determined it 5.0 % of profit before tax Rationale for the materiality benchmark applied We chose profit before tax as the benchmark because, in our view, it is the benchmark against which the performance of the Group is most commonly measured by users, and is a generally accepted benchmark. We chose 5.0 % which is consistent with quantitative materiality for profit-oriented companies in this industry sector and previous year approach. thresholds used 2 3 212 213 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25 Independent Auditor’s Report Other information Management is responsible for the other information. The other information comprises “Management’s discussion and analysis of financial condition and results of operations for the three months ended 31 December and 30 September 2019 and years ended 31 December 2019 and 2018” (but does not include the consolidated financial statements and our auditor’s report thereon), which we obtained prior to the date of this auditor’s report, and PJSC Tatneft Annual Report 2019 and Quarterly Report of the Equity Securities Issuer for the 1st quarter 2020, which is expected to be made available to us after that date. Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read PJSC Tatneft Annual Report 2019 and Quarterly Report of the Equity Securities Issuer for the 1st quarter 2020, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. Key audit matter How our audit addressed the key audit matter Impairment of assets Refer to Note 12 to the consolidated financial statements As a result of assessment performed in 2019 the Group recognised net impairment losses and losses on disposal of certain property, plant and equipment and construction in progress in the amount of RR 30,875 million (line “Impairment losses and disposal of property, plant and equipment and other non-financial assets net of the consolidated statement of profit or loss and other comprehensive income). Impairment losses are primarily related to the following:  exploration and evaluation assets;  social assets and construction in progress in respect of which no future economic benefits are expected. reversal” of We focused on this matter due to significance of impairment charges, estimates and judgements involved in the calculations. We performed the following audit procedures to assess the appropriateness of valuation methods and calculations used in estimating recoverable values:  examination, on a sample basis, of the models and calculations used for the assessment of impairment losses;  analysis of key assumptions used by the Group’s management when estimating the recoverable values;  verification of the mathematical accuracy of discounted cash (if applicable); flow models  analysis of collective labor agreements with respect to Group’s social obligations to employees;  assessment of compliance with IFRS of the consolidated the disclosures in financial statements. How we tailored our Group audit scope We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates. In establishing the overall approach to the group audit, we determined the type of work that needed to be performed at reporting units by us, as the group engagement team, or component teams operating under our instruction. Where the work was performed by the component team of ZENIT Banking Group, we determined the level of involvement we needed to have in the audit work at this reporting unit to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the Group’s consolidated financial statements as a whole. We identified the following significant reporting units where we performed full-scope audit procedures: PJSC Tatneft (parent holding company, located in Almetievsk), JSC TANECO (oil refinery subsidiary, located in Nizhnekamsk) and ZENIT Banking Group (banking subsidiaries, holding company is located in Moscow). In addition, we performed specified audit procedures over selected financial statements line items at a number of less significant reporting units in order to increase the level of audit comfort. in Nizhnekamsk), PJSC Nizhnekamskshina (tires producing subsidiary, located 4 5 214 215 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25 Independent Auditor’s Report From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The certified auditor responsible for the audit resulting in this independent auditor’s report is Maxim E.Timchenko. 31 March 2020 Moscow, Russian Federation M.E. Timchenko, certified auditor (licence No. 01-000267), AO PricewaterhouseCoopers Audit Audited entity: PJSC Tatneft Independent auditor: AO PricewaterhouseCoopers Audit Record made in the Unified State Register of Legal Entities on 18 July 2002 under State Registration Number 1021601623702 Registered by the Government Agency Moscow Registration Chamber on 28 February 1992 under Nо. 008.890 Taxpayer Identification Number 1644003838 Record made in the Unified State Register of Legal Entities on 22 August 2002 under State Registration Number 1027700148431 423450, Russian Federation, Republic of Tatarstan, Almetievsk, Lenina str., 75 Taxpayer Identification Number 7705051102 Member of Self-regulatory organization of auditors Association “Sodruzhestvo” Principal Registration Number of the Record in the Register of Auditors and Audit Organizations – 12006020338 As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.  Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. 6 7 216 217 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25 IFRS Consolidated Financial Statements IFRS Consolidated Financial Statements CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IN MILLIONS OF RUSSIAN RUBLES) ASSETS Cash and cash equivalents Banking: Mandatory reserve deposits with the Bank of Russia Short-term accounts receivable, net Banking: Loans to customers Other short-term financial assets Inventories Prepaid expenses and other current assets Prepaid income tax Banking: 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 Right-of-use assets 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 Dividends payable Banking: Other financial liabilities at fair value through profit and loss Banking: Due to banks and the Bank of Russia Banking: Customer accounts 218 Note 31 December 2019 31 December 2018 6 7 8 9 10 11 7 8 9 12 13 14 15 16 20 17 18 25,157 1,572 84,706 33,880 27,713 53,379 20,770 4,838 1,112 253,127 7,861 102,572 80,578 774 768,735 13,658 2,712 8,622 985,512 1,238,639 19,592 60,289 55,865 4,451 20,293 158,671 65,489 1,875 80,762 53,797 32,901 50,606 23,090 852 2,360 311,732 2,930 92,508 81,513 637 701,922 - 3,548 6,498 889,556 1,201,288 11,953 42,989 50,711 1,190 13,765 183,654 Note 14 15 17 18 12 13 14 19 20 20 Taxes payable Income tax payable Other short-term liabilities Total current liabilities Long-term debt, net of current portion Banking: Due to banks and the Bank of Russia Banking: Customer accounts Decommissioning provision, net of current portion Lease liabilities, net of current portion Deferred income tax liability Other long-term liabilities Total non-current liabilities Total liabilities SHAREHOLDERS’ EQUITY Preferred shares (authorised and issued at 31 December 2019 and at 31 December 2018 – 147,508,500 shares; nominal value at 31 December 2019 and at 31 December 2018 – RR1.00) Ordinary shares (authorised and issued at 31 December 2019 and at 31 December 2018 – 2,178,690,700 shares; nominal value at 31 December 2019 and at 31 December 2018 – RR1.00) Additional paid-in capital Accumulated other comprehensive income Retained earnings Less: Ordinary shares held in treasury, at cost (75,636,735 shares at 31 December 2019 and 75,483,000 at 31 December 2018, respectively) Total Group shareholders’ equity Non-controlling interest Total shareholders’ equity Total liabilities and equity 31 December 2019 31 December 2018 37,465 598 869 358,093 21,657 2,522 1,381 50,347 11,578 33,419 7,512 128,416 486,509 38,771 3,254 533 346,820 3,084 4,660 682 34,338 - 31,486 3,437 77,687 424,507 746 746 11,021 84,437 1,073 658,614 (10,359) 745,532 6,598 752,130 1,238,639 11,021 84,437 1,804 683,508 (10,251) 771,265 5,516 776,781 1,201,288 219 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME (IN MILLIONS OF RUSSIAN RUBLES) Note Year ended 31 December 2019 Year ended 31 December 2018 Note Year ended 31 December 2019 Year ended 31 December 2018 IFRS Consolidated Financial Statements Sales and other operating revenues on non-banking activities, net 25 932,296 910,534 COSTS AND OTHER DEDUCTIONS ON NON-BANKING ACTIVITIES Operating expenses Purchased crude oil and refined products Exploration Transportation Selling, general and administrative Depreciation, depletion and amortization 12,13,25 Impairment losses on financial assets net of reversal Impairment losses and losses on disposal on property, plant and equipment and other non-financial assets net of reversal Taxes other than income taxes Maintenance of social infrastructure and transfer of social assets Total costs and other deductions on non-banking activities Loss on disposal of interests in subsidiaries and associates, net Other operating gain, net Operating profit on non-banking activities 7,9 12 14 12 (140,040) (58,112) (1,006) (37,356) (52,637) (35,165) (6,737) (30,875) (307,654) (9,340) (678,922) (41) 993 254,326 (132,215) (76,080) (688) (36,952) (49,700) (30,520) (14,955) (5,874) (293,162) (5,613) (645,759) (1,842) 488 263,421 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 Net expense on creating provision for credit losses associated with debt financial assets Operating expenses Gain/(loss) arising from dealing in foreign currencies, net Other operating income/(expense), net Total net interest, fee and commission and other operating income/ (expenses) and gains/(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 capitalised Share of results of associates and joint ventures, net 23,24,25 23,24 8 30 22 22 22,584 (12,118) (462) (9,871) 70 2,099 2,302 (207) 1,201 (5,407) 127 23,259 (11,132) (1,310) (10,019) (205) (36) 557 7,936 5,497 (3,590) (32) Total other (expense)/income, net Profit before income tax INCOME TAX Current income tax expense Deferred income tax expense Income tax expense Profit for the period OTHER COMPREHENSIVE INCOME/(LOSS) NET OF INCOME TAX Items that may be reclassified subsequently to profit or loss: Foreign currency translation adjustments Gain on debt financial assets at fair value through other comprehensive income, net Items that will not be reclassified to profit or loss: Gain/(loss) on equity financial assets at fair value through other comprehensive income, net Actuarial (loss)/gain on employee benefit plans Other comprehensive income Total comprehensive income for the period 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) Ordinary Preferred Weighted average shares outstanding (millions of shares) Ordinary Preferred 14 20 20 (4,286) 252,342 (57,626) (1,898) (59,524) 192,818 (509) 170 1,225 (377) 509 193,327 192,260 558 192,818 192,343 984 193,327 85.43 85.43 2,103 148 220 9,811 273,789 (58,015) (4,226) (62,241) 211,548 (76) 44 (150) 334 152 211,700 211,812 (264) 211,548 211,964 (264) 211,700 94.11 93.89 2,103 148 221 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (IN MILLIONS OF RUSSIAN RUBLES) Attributable to Group shareholders Number of shares (thousands) Share capital Additional paid-in capital Treasury shares Actuarial (loss)/gain on employee benefit plans Foreign currency translation adjustments Gain/(loss) on financial assets at fair value through other compre-hensive income, net Retained earnings Total shareholders’ equity Non-con-trolling interest Total equity IFRS Consolidated Financial Statements 2,250,716 11,767 84,437 (10,251) (1,871) 1,677 1,846 617,295 704,900 4,822 709,722 Balance at 1 January 2018 Profit/(loss) for the year Other comprehensive income/(loss) for the year Total comprehensive income/(loss) for the year Acquisition of non-controlling interest in subsidiaries Disposal of non-controlling interest in subsidiaries Dividends declared (Note 20) Balance at 31 December 2018 Balance at 1 January 2019 Profit for the year Other comprehensive (loss)/income for the year Total comprehensive (loss)/income for the year Treasury shares - Additions - Disposals Acquisition of non-controlling interest in subsidiaries Disposal of non-controlling interests in subsidiaries Dividends declared (Note 20) Disposal of equity financial assets at fair value through other comprehensive income - - - - - - - - - - - - - - - - - - 2,250,716 2,250,716 11,767 11,767 84,437 84,437 - - - (154) (156) 2 - - - - - - - - - - - - - - - - - - - - - - - - - - - - (10,251) (10,251) - - - (108) (109) 1 - - - - - 334 334 - - - (1,537) (1,537) - (377) (377) - - - - - - - (76) (76) - - - 1,601 1,601 - (509) (509) - - - - - - - (106) (106) - - - 1,740 1,740 - 969 969 - - - - - (814) 1,895 211,812 - 211,812 - - (145,599) 683,508 683,508 192,260 - 192,260 - - - 211,812 152 211,964 - - (145,599) 771,265 771,265 192,260 83 192,343 (108) (109) 1 - (217,968) (217,968) 814 - (264) - (264) (48) 1,052 (46) 5,516 5,516 558 426 984 - - 113 (14) (1) - 211,548 152 211,700 (48) 1,052 (145,645) 776,781 776,781 192,818 509 193,327 (108) (109) 1 113 (14) (217,969) - 658,614 745,532 6,598 752,130 Balance at 31 December 2019 2,250,562 11,767 84,437 (10,359) (1,914) 1,092 222 223 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS OF RUSSIAN RUBLES) Note Year ended 31 December 2019 Year ended 31 December 2018 Note Year ended 31 December 2019 Year ended 31 December 2018 IFRS Consolidated Financial Statements OPERATING ACTIVITIES Profit for the year Adjustments: Net interest, fee and commission and other operating income and gains on banking activities Depreciation, depletion and amortization 12,13,25 Income tax expense Impairment losses on financial assets net of reversal Impairment losses and losses on disposal on property, plant and equipment and other non-financial assets net of reversal Loss on disposals of interests in subsidiaries and associates, net Effects of foreign exchange Equity investments gain net of dividends received Interest income on non-banking activities Interest expense on non-banking activities, net of amounts capitalised Other Changes in operational working capital, excluding cash: 14 7,9 12 22 22 Accounts receivable Inventories Prepaid expenses and other current assets Securities at fair value through profit or loss Accounts payable and accrued liabilities Taxes payable Net cash provided by non-banking operating activities before income tax and interest Net interest, fee and commission and other operating income and gains on banking activities Adjustments: Net expense on creating provision for credit losses associated with debt financial assets 8 Reversal of provision for losses on credit related commitments Change in fair value of financial assets through profit or loss Other Changes in operational working capital on banking activities, excluding cash: Mandatory reserve deposits with the Bank of Russia Due from banks Banking loans to customers Due to banks and the Bank of Russia Customer accounts Debt securities issued 224 192,818 211,548 Securities at fair value through profit or loss Net cash used in banking operating activities before income tax (2,302) 35,165 59,524 6,737 30,875 41 23 (127) (1,201) 5,407 (958) (7,252) (1,462) 1,901 - 13,909 (1,603) 331,495 2,302 462 (84) (1,148) (1,737) 303 (6,393) 5,542 5,094 (17,408) (186) (557) 30,520 62,241 14,955 5,874 1,842 1,445 32 (5,497) 3,590 807 (27,786) (11,015) 132 504 4,011 10,939 303,585 557 1,310 (551) 917 165 41 (589) (11,107) (16,149) 18,413 (2,298) 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 outflow on acquisition of subsidiaries 29 Cash (outflow)/inflow from disposal of subsidiaries and associates, net of disposed cash Purchase of securities at fair value through other comprehensive income Purchase of securities at amortised cost Proceeds from disposal of securities at fair value through other comprehensive income Proceeds from redemption of securities at amortised cost Proceeds from sale of non-current assets held for sale Proceeds from investments in associates and joint ventures Proceeds from redemption of bank deposits Placement of bank deposits Proceeds from redemption of loans and notes receivable Issuance of loans and notes receivable (Purchase)/proceeds from disposal of other non-current assets Net cash used in investing activities FINANCING ACTIVITIES Proceeds from issuance of debt from non-banking activities Repayment of debt from non-banking activities Repayment of principal portion of lease liabilities Issuance of bonds Redemption of bonds Repayment of subordinated debt Dividends paid to shareholders Dividends paid to non-controlling shareholders Proceeds from government grants 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 year Cash and cash equivalents at the end of the year 9 9 30 30 30 30 20 20 19 6 6 (3,948) (17,201) (64,268) (2,222) 1,002 248,806 (95,994) 1,678 (20,438) (10) (48,186) (1,263) 48,724 9,087 1,118 - 27,198 (27,936) 3,981 (642) (1,209) (103,892) 115,346 (107,212) (1,352) 21,790 (1,053) (2,140) (212,814) (1) 3,231 (184,205) (39,291) (1,041) 65,489 25,157 4,989 (4,302) (58,150) (846) 5,396 245,683 (97,945) 1,693 (173) 20 (35,086) (20,965) 36,574 43,658 170 10 21,314 (21,053) 4,282 (24,068) 73 (91,496) 25,920 (49,466) - - (6,979) (1,359) (100,920) (46) - (132,850) 21,337 1,355 42,797 65,489 225 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25Notes 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, devel- opment and production principally in the Republic of Tatarstan (“Tatarstan”), a republic within the Russian Federation. The Group also engages in refining of crude oil and associated petroleum gas processing, marketing of crude oil and refined products as well as production and marketing of petrochemicals, and since October 2016, with the acquisition of controlling interest in PJSC Bank ZE- NIT, including its subsidiaries (jointly referred to as “Bank ZENIT”), the Group is also engaged in banking activities. See Note 28 for the information about the Group’s principal subsidiaries. The Company was incorporated as an open joint stock compa- ny (now referred to as a public 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. 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 of the President of the Russian Federation No. 1403 on Privat- ization 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 at 31 December 2019 and 2018 the government of Tatarstan controls about 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 represent- ative 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 exer- cises 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 preparation 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 financial instru- ments categorised at fair value through profit or loss (“FVTPL”) and at fair value through other comprehensive income (“FVOCI”). 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 state- ments 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) valua- IFRS Consolidated Financial Statements tion (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) accounting for oil and gas properties and fixed assets related to oil refining; (7) recognition and disclosure of guarantees, contingencies and commitments; (8) accounting for decommissioning provision; (9) pensions and other post-re- tirement benefits; (10) business combinations and goodwill and (11) lease liabilities and right-of-use assets recognition. 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. Note 3 Summary of significant accounting policies The key accounting policies used in preparing these consoli- dated financial statements are presented below. In addition to changes in accounting policies as a result of the transition to IFRS 16 “Leases” from January 1, 2019, as well as the reflection of changes in the Tax Code of the Russian Federation (“Tax Code”) in connection with the introduction of the reverse (“negative”) excise tax calculation, these principles have been applied con- sistently to all periods presented in the statements. FUNCTIONAL AND PRESENTATION CURRENCY The presentation currency of the Group is the Russian Ruble. Management has determined the functional currency for the Company and 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 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”. For operations of major subsidiaries located outside of the Rus- sian Federation, that primarily use US Dollar as the functional cur- rency, adjustments resulting from translating foreign functional currency assets and liabilities into Russian Rubles are recorded in other comprehensive income. Revenues, expenses and cash flows are translated at average exchange rates (unless this aver- age 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 rates of exchange, as published by the Central Bank of the Russian Federation (“the Bank of Russia”), of the Russian Ruble (“RR”) to the US Dollar (“US $”) at 31 December 2019 and 31 December 2018 were RR 61.91 and RR 69.47 to US $, respec- tively. Average rates of exchange for the years ended 31 Decem- ber 2019 and 31 December 2018 were RR 64.74 and RR 62.71 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 in- volvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consoli- dated 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 consid- eration arrangement. Acquisition-related costs are expensed as incurred. Identifiable acquired assets and liabilities and contin- gent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis at the non-controlling interest’s proportionate share of the acquiree’s net assets 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 within non-current assets as goodwill. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured is less than the fair value of the net as- sets of the subsidiary, the difference is recognised directly in the profit and loss for the year. Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are eliminat- ed. Unrealised 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 account- ing and are initially recognised at cost. Dividends received from associates and joint ventures reduce the carrying value of the investment in associates and joint ventures. Other post-acquisi- tion changes in Group’s share of net assets of an associate and joint ventures are recognised 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 recognised in other comprehensive income and presented separately, (iii) all other changes in the Group’s share of the carrying value of net assets of associates or joint ventures are recognised in 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 ven- ture, including any other unsecured receivables, the Group does 226 227 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate or joint venture. Unrealised gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in the associates and joint ventures; unrealised losses are also eliminated unless the transaction provides evi- dence 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. FINANCIAL INSTRUMENTS – KEY MEASUREMENT TERMS Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The best evidence of fair value is the price in an active market. An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. Fair value of financial instruments traded in an active market is measured as the product of the quoted price for the individual asset or liability and the number of instruments held by the Group. This is the case even if a market’s normal dai- ly trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price. Valuation techniques such as discounted cash flow models or models based on recent arm’s length transactions or consider- ation of financial data of the investees are used to measure fair value of certain financial instruments for which external market pricing information is not available. Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabil- ities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either di- rectly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on solely observable market data (that is, the measurement requires significant unobservable inputs). Transfers between levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period. Refer to Note 30. Transaction costs are incremental costs that are directly attribut- able to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Amortised cost (“AC”) is the amount at which the financial instru- ment was recognised at initial recognition less any principal re- payments, plus accrued interest, and for financial assets less any allowance for expected credit losses (“ECL”). Accrued interest includes amortisation of transaction costs deferred at initial rec- ognition and of any premium or discount to the maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of the related items in the consolidated statement of financial position. The effective interest method is a method of allocating interest income or interest expense over the relevant period, so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the gross carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date, except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate. For assets that are purchased or originat- ed credit impaired (“POCI”) at initial recognition, the effective interest rate is adjusted for credit risk, i.e. it is calculated based on the expected cash flows on initial recognition instead of con- tractual payments. FINANCIAL INSTRUMENTS – INITIAL RECOGNITION Financial instruments at FVTPL are initially recorded at fair value. All other financial instruments are initially recorded at fair value adjusted for transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. After the initial recognition, an ECL allowance is recognised for financial assets measured at AC and investments in debt instruments measured at FVOCI, resulting in an immediate accounting loss. All purchases and sales of financial assets that require deliv- ery within the time frame established by regulation or market convention (“regular way” purchases and sales) are recorded at trade date, which is the date on which the Group commits to deliver a financial asset. All other purchases are recognised when the entity becomes a party to the contractual provisions of the instrument. FINANCIAL ASSETS – CLASSIFICATION AND SUBSEQUENT MEASUREMENT – MEASUREMENT CATEGORIES The Group classifies financial assets in the following measure- ment categories: FVTPL, FVOCI and AC. The classification and subsequent measurement of debt financial assets depends on: (i) the Group’s business model for managing the related assets portfolio and (ii) the cash flow characteristics of the asset. FINANCIAL ASSETS – CLASSIFICATION AND SUBSEQUENT MEASUREMENT – BUSINESS MODE The business model reflects how the Group manages the as- sets in order to generate cash flows – whether the Group’s ob- jective is: (i) solely to collect the contractual cash flows from the assets (“hold to collect contractual cash flows”,) or (ii) to collect IFRS Consolidated Financial Statements both the contractual cash flows and the cash flows arising from the sale of assets (“hold to collect contractual cash flows and sell”) or, if neither of (i) and (ii) is applicable, the financial assets are classified as part of “other” business model and measured at FVTPL. Business model is determined for a group of assets (on a port- folio level) based on all relevant evidence about the activities that the Group undertakes to achieve the objective set out for the portfolio available at the date of the assessment. Factors con- sidered by the Group in determining the business model include the purpose and composition of a portfolio, past experience on how the cash flows for the respective assets were collected, how risks are assessed and managed, how the assets’ performance is assessed and how managers are compensated. Refer to Note 4 for critical judgements applied by the Group in determining the business models for its financial assets. FINANCIAL ASSETS – CLASSIFICATION AND SUBSEQUENT MEASUREMENT – CASH FLOW CHARACTERISTICS Where the business model is to hold assets to collect contractual cash flows or to hold contractual cash flows and sell, the Group assesses whether the cash flows represent solely payments of principal and interest (“SPPI”). Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are consistent with the SPPI feature. In making this assessment, the Group considers whether the con- tractual cash flows are consistent with a basic lending arrange- ment, i.e. interest includes only consideration for credit risk, time value of money, other basic lending risks and profit margin. Where the contractual terms introduce exposure to risk or volatility that is inconsistent with a basic lending arrangement, the financial asset is classified and measured at FVTPL. The SPPI assessment is performed on initial recognition of an asset and it is not subsequently reassessed. Refer to Note 4 for critical judgements applied by the Group in performing the SPPI test for its financial assets. FINANCIAL ASSETS – RECLASSIFICATION Financial instruments are reclassified only when the business model for managing the portfolio as a whole changes. The reclassification has a prospective effect and takes place from the beginning of the first reporting period that follows after the change in the business model. The Group did not change its business model during the current and comparative period and did not make any reclassifications. FINANCIAL ASSETS IMPAIRMENT – CREDIT LOSS ALLOWANCE FOR ECL The Group assesses, on a forward-looking basis, the ECL for debt instruments measured at AC and FVOCI and for the expo- sures arising from loan commitments and financial guarantee contracts, for contract assets. The Group measures ECL and rec- ognises Net impairment losses on financial and contract assets at each reporting date. The measurement of ECL reflects: (i) an unbiased and probability weighted amount that is determined by evaluating a range of possible outcomes, (ii) time value of money and (iii) all reasonable and supportable information that is avail- able without undue cost and effort at the end of each reporting period about past events, current conditions and forecasts of future conditions. Debt instruments measured at AC and contract assets are presented in the consolidated statement of financial position net of the allowance for ECL. For loan commitments and financial guarantees, a separate provision for ECL is recognised as a lia- bility in the consolidated statement of financial position. For debt instruments at FVOCI, changes in amortised cost, net of allow- ance for ECL, are recognised in profit or loss and other changes in carrying value are recognised in OCI as gains less losses on debt instruments at FVOCI. The Group applies a three stage model for impairment, based on changes in credit quality since initial recognition. A financial instru- ment that is not credit-impaired on initial recognition is classified in Stage 1. Financial assets in Stage 1 have their ECL measured at an amount equal to the portion of lifetime ECL that results from default events possible within the next 12 months or until contrac- tual maturity, if shorter (“12 Months ECL”). If the Group identifies a significant increase in credit risk (“SICR”) since initial recognition, the asset is transferred to Stage 2 and its ECL is measured based on ECL on a lifetime basis, that is, up until contractual maturity but considering expected prepayments, if any (“Lifetime ECL”). Refer to Note 30 for a description of how the Group determines when a SICR has occurred. If the Group determines that a financial asset is credit-impaired, the asset is transferred to Stage 3 and its ECL is measured as a Lifetime ECL. The Group’s definition of credit impaired assets and definition of default is explained in Note 30 For financial assets that are purchased or originated credit-im- paired (“POCI Assets”), the ECL is always measured as a Lifetime ECL. Note 30 provides information about inputs, assumptions and estimation techniques used in measuring ECL. The Group applies the IFRS 9 simplified approach for measuring expected credit losses which uses a lifetime expected loss allow- ance for all trade and other receivables. To measure the expected credit losses, trade and other receivables have been grouped based on shared credit risk characteristics and the days past due. The Group calculates expected credit losses on trade receivables based on historical data assuming reasonable approximation of current losses rates adjusted on forward-looking information. FINANCIAL ASSETS – WRITE-OFF Financial assets are written-off, in whole or in part, when the Group exhausted all practical recovery efforts and has concluded that there is no reasonable expectation of recovery. The write- off represents a derecognition event. The Group may write-off financial assets that are still subject to enforcement activity when the Group seeks to recover amounts that are contractually due, however, there is no reasonable expectation of recovery. FINANCIAL ASSETS – DERECOGNITION The Group derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expire or (b) the Group has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass- through arrangement whilst (i) also transferring substantially all the risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all the risks and rewards of ownership but not retaining control. Control is retained if the counterparty does not have the prac- tical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale. FINANCIAL ASSETS – MODIFICATION The Group sometimes renegotiates or otherwise modifies the contractual terms of the financial assets. The Group assesses whether the modification of contractual cash flows is substantial 228 229 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25considering, among other, the following factors: any new con- tractual terms that substantially affect the risk profile of the asset (e.g. profit share or equity-based return), significant change in interest rate, change in the currency denomination, new collat- eral or credit enhancement that significantly affects the credit risk associated with the asset or a significant extension of a loan when the borrower is not in financial difficulties. If the modified terms are substantially different, the rights to cash flows from the original asset expire and the Group derecognises the original financial asset and recognises a new asset at its fair value. The date of renegotiation is considered to be the date of initial recognition for subsequent impairment calculation pur- poses, including determining whether a SICR has occurred. The Group also assesses whether the new loan or debt instrument meets the SPPI criterion. Any difference between the carrying amount of the original asset derecognised and fair value of the new substantially modified asset is recognised in profit or loss, unless the substance of the difference is attributed to a capital transaction with owners. In a situation where the renegotiation was driven by financial difficulties of the counterparty and inability to make the origi- nally agreed payments, the Group compares the original and revised expected cash flows to assets whether the risks and rewards of the asset are substantially different as a result of the contractual modification. If the risks and rewards do not change, the modified asset is not substantially different from the original asset and the modification does not result in derecognition. The Group recalculates the gross carrying amount by discounting the modified contractual cash flows by the original effective interest rate (or credit-adjusted effective interest rate for POCI financial assets), and recognises a modification gain or loss in profit or loss. FINANCIAL LIABILITIES – MEASUREMENT CATEGORIES Financial liabilities are classified as subsequently measured at AC, except for (i) financial liabilities at FVTPL: this classification is applied to derivatives, financial liabilities held for trading (e.g. short positions in securities), contingent consideration recognised by an acquirer in a business combination and other financial liabilities designated as such at initial recognition and (ii) financial guarantee contracts and loan commitments. FINANCIAL LIABILITIES – DERECOGNITION Financial liabilities are derecognised when they are extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires). An exchange between the Group and its original lenders of debt instruments with substantially different terms, as well as substan- tial modifications of the terms and conditions of existing financial liabilities, are accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discount- ed present value of the remaining cash flows of the original financial liability. In addition, other qualitative factors, such as the currency that the instrument is denominated in, changes in the type of interest rate, new conversion features attached to the instrument and change in loan covenants are also considered. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguish- ment. If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability. Modifications of liabilities that do not result in extinguishment are accounted for as a change in estimate using a cumulative catch up method, with any gain or loss recognised in profit or loss, un- less the economic substance of the difference in carrying values is attributed to a capital transaction with owners. FINANCIAL LIABILITIES DESIGNATED AT FVTPL The Group may designate certain liabilities at FVTPL at initial recognition. Gains and losses on such liabilities are presented in profit or loss except for the amount of change in the fair value that is attributable to changes in the credit risk of that liability (determined as the amount that is not attributable to changes in market conditions that give rise to market risk), which is record- ed in OCI and is not subsequently reclassified to profit or loss. This is unless such a presentation would create, or enlarge, an accounting mismatch, in which case the gains and losses attribut- able to changes in credit risk of the liability are also presented in profit or loss. OFFSETTING FINANCIAL INSTRUMENTS Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously. Such a right of set off (a) must not be contingent on a future event and (b) must be legally enforceable in all of the following circumstances: (i) in the normal course of business, (ii) in the event of default and (iii) in the event of insolvency or bankruptcy. CASH AND CASH EQUIVALENTS Cash represents cash on hand and in bank accounts and the Bank of Russia, other than mandatory reserves deposits with the Bank of Russia, 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 AC because: (i) they are held for collection of contractual cash flows and those cash flows represent SPPI, and (ii) they are not designated at FVTPL. Features mandated solely by legislation, such as the bail- in legislation in certain countries, do not have an impact on the SPPI test, unless they are included in contractual terms such that the feature would apply even if the legislation is subsequently changed. MANDATORY RESERVE DEPOSITS WITH THE BANK OF RUSSIA Mandatory cash balances with the Bank of Russia are carried at AC and represent non-interest bearing mandatory reserve de- posits, which are not available to finance the Group’s day to day operations, and hence are not considered as part of cash and cash equivalents for the purposes of the consolidated statement of cash flows. DUE FROM BANKS Amounts due from banks other than those that are part of the Group are recorded when the Group advances money to coun- terparty banks due on fixed or determinable dates. Amounts due from other banks are carried at AC when: (i) they are held IFRS Consolidated Financial Statements for the purposes of collecting contractual cash flows and those cash flows represent SPPI, and (ii) they are not designated at FVTPL. Due from banks that mature within three months or less from the date of placement are included in cash and cash equivalents. INVESTMENTS IN DEBT SECURITIES Based on the business model and the cash flow characteristics, the Group classifies investments in debt securities as carried at AC, FVOCI or FVTPL. Debt securities are carried at AC if they are held for collection of contractual cash flows and where those cash flows represent SPPI, and if they are not voluntarily desig- nated at FVTPL in order to significantly reduce an accounting mismatch. Debt securities are carried at FVOCI if they are held for collection of contractual cash flows and for selling, where those cash flows represent SPPI, and if they are not designated at FVTPL. Interest income from these assets is calculated using the effec- tive interest method and recognised in profit or loss. An impair- ment allowance estimated using the expected credit loss model is recognised in profit or loss for the year. All other changes in the carrying value are recognised in OCI. When the debt security is derecognised, the cumulative gain or loss previously recog- nised in OCI is reclassified from OCI to profit or loss. Investments in debt securities are carried at FVTPL if they do not meet the criteria for AC or FVOCI. The Group may also irrevoca- bly designate investments in debt securities at FVTPL on initial recognition if applying this option significantly reduces an ac- counting mismatch between financial assets and liabilities being recognised or measured on different accounting bases. INVESTMENTS IN EQUITY SECURITIES Financial assets that meet the definition of equity from the issu- er’s perspective, i.e. instruments that do not contain a contractual obligation to pay cash and that evidence a residual interest in the issuer’s net assets, are considered as investments in equity securities by the Group. Investments in equity securities are measured at FVTPL, except where the Group elects at initial recognition to irrevocably designate an equity investments at FVOCI. The Group’s policy is to designate equity investments as FVOCI when those investments are held for strategic purpos- es other than solely to generate investment returns. When the FVOCI election is used, fair value gains and losses are recog- nised in OCI and are not subsequently reclassified to profit or loss, including on disposal. Impairment losses and their reversals, if any, are not measured separately from other changes in fair value. Dividends continue to be recognised in profit or loss when the Group’s right to receive payments is established except when they represent a recovery of an investment rather than a return on such investment. LOANS AND ADVANCES TO CUSTOMERS Loans and advances to customers are recorded when the Group advances money to purchase or originate a loan due from a cus- tomer. Based on the business model and the cash flow character- istics, the Group classifies loans and advances to customers into one of the following measurement categories: (i) AC: loans that are held for collection of contractual cash flows and those cash flows represent SPPI and loans that are not voluntarily designat- ed at FVTPL, and (ii) FVTPL: loans that do not meet the SPPI test or other criteria for AC or FVOCI are measured at FVTPL. Note 30 provides information about inputs, assumptions and estimation techniques used in measuring ECL. LOAN COMMITMENTS The Group issues commitments to provide loans in the course of its banking activities. These commitments are irrevocable or revocable only in response to a material adverse change. Such commitments are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life of the commitment, except for commitments to originate loans if it is probable that the Group will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination; such loan commitment fees are deferred and included in the carrying value of the loan on initial recognition. At the end of each reporting period, the commit- ments are measured at (i) the remaining unamortised balance of the amount at initial recognition, plus (ii) the amount of the loss allowance determined based on the expected credit loss model, unless the commitment is to provide a loan at a below market interest rate, in which case the measurement is at the higher of these two amounts. The carrying amount of the loan commitments represents a liabil- ity. For contracts that include both a loan and an undrawn com- mitment and where the Group cannot separately distinguish the ECL on the undrawn loan component from the loan component, the ECL on the undrawn commitment is recognised together with the loss allowance for the loan. To the extent that the combined ECLs exceed the gross carrying amount of the loan, they are recognised as a liability. FINANCIAL GUARANTEES Financial guarantees require the Group in the course of its bank- ing activities to make specified payments to reimburse the holder of the guarantee for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. Financial guarantees are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life of the guarantee. At the end of each reporting period, the guarantees are measured at the higher of (i) the amount of the loss allowance for the guaranteed exposure determined based on the expected loss model and (ii) the remaining unamortised balance of the amount at initial recognition. In addition, an ECL loss allowance is recognised for fees receivable that are recognised in the statement of financial position as an asset. SALE AND REPURCHASE AGREEMENTS AND LENDING OF SECURITIES Sale and repurchase agreements (“repo agreements”), which ef- fectively provide a lender’s return to the counterparty, are treated as secured financing transactions. Securities sold under such sale and repurchase agreements are not derecognised. Securi- ties sold under repo agreements are presented as other financial assets carried at FVTPL, FVOCI, AC. The corresponding liability is presented within amounts “Due to other banks and the Bank of Russia” or “Customer accounts”. Securities purchased under agreements to resell (“reverse repo agreements”), which effectively provide a lender’s return to the Group, are recorded as “Due from other banks” or “Banking loans and advances to customers”, as appropriate. The differ- ence between the sale and repurchase price, adjusted by inter- est and dividend income collected by the counterparty, is treated as interest income and accrued over the life of repo agreements using the effective interest method. 230 231 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25NOTES RECEIVABLE Notes receivable are included in “Other financial assets” and are carried at AC if: (i) they are held for collection of contractual cash flows and those cash flows represent SPPI, and (ii) they are not designated at FVTPL. TRADE AND OTHER RECEIVABLES Trade and other receivables are recognised initially at fair value and are subsequently carried at AC using the effective interest method. TRADE AND OTHER PAYABLES Trade payables are accrued when the counterparty performs its obligations under the contract and are recognised initially at fair value and subsequently carried at AC using the effective interest method. DUE TO OTHER BANKS AND THE BANK OF RUSSIA Amounts due to other banks and the Bank of Russia are record- ed when money or other assets are advanced to the Group by counterparty banks. The non-derivative liability is carried at AC. If the Group purchases its own debt, the liability is removed from the consolidated statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from retirement of debt. CUSTOMER ACCOUNTS Customer accounts are non-derivative liabilities to individuals, state or corporate customers and are carried at AC. SUBORDINATED DEBT Subordinated debt can only be paid in the event of a liquidation after the claims of other higher priority creditors have been met. Subordinated debt is carried at AC. 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 carried at AC. If the Group purchases its own debt, it is removed from the consolidat- ed statement of financial position and the difference between the carrying amount and the amount paid is recognised as a gain or loss on redemption of debt. current period’s statement of financial position are not reclas- sified or re-presented in the comparative statement of financial position to reflect the classification at the end of the current period. Non-current assets held for sale are measured at the lower of its carrying amount and fair value less costs of disposal. If the fair value less costs of disposal of an asset held for sale is lower than its carrying amount, an impairment loss is recognised in the con- solidated 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 of disposal is recog- nised to the extent of the cumulative impairment loss that was previously recognised in relation to that specific asset. PRECIOUS METALS The Group has a practice of taking delivery of precious metals and selling them within a short period after delivery, for the pur- pose of generating a profit from short-term fluctuations in price or dealer’s margin. Precious metals are carried at purchase price from the Bank of Russia and are subsequently measured at fair value based on London precious metals exchange. 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 prepay- ments are received. If there is an indication that the assets, goods or services relating to a prepayment will not be received, the carrying value of the prepayment is written down accordingly and a corresponding impairment loss is recognised in the profit or loss for the year. NON-CURRENT ASSETS CLASSIFIED AS HELD FOR SALE Non-current assets are classified in the statement of financial position as “Non-current assets held for sale” if their carrying amount will be recovered principally through a sale transaction within twelve months after the end of the reporting period. Assets are reclassified when all of the following conditions are met: (a) the assets are available for immediate sale in their present condition; (b) the Group’s management approved and initiated an active programme to locate a buyer; (c) the assets are actively marketed for sale at a reasonable price; (d) the sale is expected within one year and (e) it is unlikely that significant changes to the plan to sell will be made or that the plan will be withdrawn. Non-current assets classified as held for sale in the MINERAL EXTRACTION TAX Mineral extraction tax (MET) on crude oil is defined monthly as an amount of volume produced per fixed tax rate (RR 919 per ton in 2019 and 2018, respectively) adjusted depending on the monthly average market prices of the Urals blend and the RR/US $ aver- age exchange rate for the preceding month, taking into account the features of oil production. MET liabilities are lower for fields whose depletion rate exceeds 80% of their proved reserves as per the Russian classification of reserves and resources, as a result of using a reduction factor that depends on the level of depletion. The Company saves 3.5% at a field for each percent of depletion above the 80% threshold. In addition, lower MET is en- visaged for small fields via application of a factor that characteris- es the volume of reserves. The amount of tax relief for depleted IFRS Consolidated Financial Statements and small fields is calculated using the base MET rate of RR 559 per tonne (in 2018 - RR 559 per tonne). Furthermore, the reduced MET tax rate is applied to the produc- tion of highly viscous crude oil (with viscosity of 10,000 Meg- apascal second in reservoir conditions) and oil produced from Domanic productive sediments. In addition, another relief in the form of a lower MET is available for production of highly viscous oil with viscosity in the range from 200 to 10,000 Megapascal second (in reservoir conditions). The saving in these circumstances is calculated using the base MET tax rate of RR 559 per tonne (in 2018 - RR 559 per tonne). Furthermore, the reduced MET tax rate is applied in the Nenets Au- tonomous Okrug (in view of the calculation in relation to such oil of the tax on additional income from the extraction of hydrocarbons). MET is recorded within Taxes other than income tax in the con- solidated statements of profit or loss and other comprehensive income. REVERSE EXCISE ON CRUDE OIL REFINED AND NEGATIVE EXCISE ON GASOLINE AND DIESEL FUEL SOLD ON DOMESTIC MARKET The Russian Government tax maneuver in the oil industry involves gradual reduction of crude oil and oil products export duty rates with a corresponding increase in crude oil mineral extraction and excise tax rates. To eliminate the negative effect of export duty reduction on refining margins, a reverse (“neg- ative”) excise on refinery feedstock was introduced. To reduce domestic fuel prices sensitivity to international prices fluctuations “damper coefficient” component was included into the reverse (“negative”) excise tax calculation. Reverse (“negative”) excise is recognised as a reduction in excise tax expense deducted from sales and other operating revenues on non-banking activities in the statement of profit and loss and other comprehensive income and is presented in prepaid expenses and other current assets line in the statement of financial position. VALUE ADDED TAX Value added tax (VAT) at a standard rate of 20% (at 2018 – 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 ad- vance 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. Where provision has been made for the ECL of receivables, the impairment loss is recorded for the gross amount of the debtor, including VAT. Export of goods and rendering certain services related to ex- ported goods are subject to 0% VAT rate upon the submission of confirmation documents to the tax authorities. VAT related to sales and purchases is recognised in the Con- solidated Statements of Financial Position on a gross basis and disclosed separately within 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 capitalised. Other exploration expenses, including geological and geophys- ical expenses and the costs of carrying and retaining unde- veloped properties, are expensed as incurred. The costs of exploratory wells that find oil and gas reserves are capitalised as exploration and evaluation assets on a “field by field” basis pend- ing determination of whether proved reserves have been found. Exploration and evaluation costs are subject to technical, com- mercial 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. If subsequently commercial reserves are discovered, the carrying value, less losses from impairment of respective exploration and evaluation assets, is classified as development assets. How- ever, if no commercial reserves are discovered, such costs are expensed after exploration and evaluation activities have been completed. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at historical cost of acquisition or construction less accumulated depreciation, deple- tion, 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 re- placement of minor items of property are expensed when incurred within operating expenses; renewals and improvements of assets are capitalised and depreciated during the remaining useful life. Cost of replacing major parts or components of property, plant and equipment items are capitalised and the replaced part is retired. Advances made on construction of property, plant and equip- ment are accounted for within Construction in progress. Non-current 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 non-current as- sets 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 of disposal 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 petrol stations. Impairment losses are recognised 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. Non-current assets committed by management for disposal within one year, and meet the other criteria for held for sale, are 232 233 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25accounted for at the lower of amortised cost or fair value, less cost of disposal. 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. From 1 January 2019, leases are recognised as a right-of-use as- set and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. The estimated useful lives of right-of-use assets are determined on the same basis as those of property, plant and equipment. Oil and gas licenses for exploration of unproved reserves are capitalised within property, plant and equipment; they are depre- ciated on the straight-line basis over the period of each license validity. Depreciation of all other property, plant and equipment is de- termined 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 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 impairment losses and losses on disposal on property, plant and equipment and other non-financial assets net of reversal in the consolidated statement of profit or loss and other comprehensive income. LEASES At inception of a contract, the Group assesses whether a con- tract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. An asset is identified by being explicitly specified in a contract, or implicitly specified at the time that the asset is made available for use by the customer. The Group does not have the right to use an identi- fied asset if the supplier has the substantive right to substitute the asset throughout the period of use. To assess whether a contract conveys the right to control the use of an identified asset for a period of time, the Group assessed whether both of the following met: • The Group has the right to obtain substantially all of the eco- nomic benefits from use of the identified asset, and • The Group has the right to direct the use of the identified asset. The Group leases service equipment used in oil extraction, land plots, railway tanks and other assets. Some of service agree- ments include lease component for a heavy and special vehicles used in oil production, drilling rigs, pipeline. The lease payments on heavy and special vehicles, drilling rigs, pipelines, land plots and railway tanks comprise of variable payments that are not based on an index or rate and therefore are recognised in profit or loss in the period in which those payments occur. Service equipment lease contracts are typically made for fixed periods from 1 to 3 years, but have extension options as described below. Previously leases of equipment were classified as operating leases. Payments made under operating leases (net of any incen- tives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present val- ue of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee’s incremental borrowing rate is used. Generally, the Group determines its incremental borrowing rate as possible borrowing rate offered by banks for the funds, necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. The right-of-use asset is initially measured at cost, which com- prises the amount of the initial measurement of lease liability adjusted for any lease payments made at or before the com- mencement date less any lease incentives received, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located. The right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability. The term used to measure a liability and an asset in the form of a right of use is defined as the period during which the Group has sufficient confidence that it will lease the asset. Any option for renewal or termination is taken into account when estimating the term. Extension options are included in a number of equip- ment leases across the Group. The majority of extension options held are exercisable only by the Group and not by the respective lessor. The Group considers monetary and non-monetary aspects to determine the lease term of the contract, such as business plans, past practices and economic incentives to extend or ter- minate the contract (the presence of inseparable improvements, integration to the production process, potentially high conse- quential termination costs, etc.) and other factors that may affect management’s judgment on the lease term. Extension options and termination options are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). Potential future cash outflows that have not been included in the lease liability because it is not reasonably certain that the leases will be extended (or not terminated) are not significant. Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an ex- pense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. The Group presents right-of-use assets and lease liabilities in the separate lines in the Consolidated Statement of Financial Position. DEBT Debt is recognised initially at fair value, net of transaction costs incurred and is subsequently carried at AC using the effective interest method. IFRS Consolidated Financial Statements INTEREST INCOME ON NON-BANKING ACTIVITIES Interest income on non-banking activities is recognised on a time-proportion basis using the effective interest method. This method defers, as part of interest income, all fee received be- tween the parties to the contract that are an integral part of the effective interest rate, all other premiums. Fees integral to the effective interest rate include origination fees received by the Group relating to the creation or acquisition of a financial asset. For financial assets that are originated or purchased credit-im- paired, the effective interest rate is the rate that discounts the expected cash flows (including the initial expected credit losses) to the fair value on initial recognition (normally represented by the purchase price). As a result, the effective interest is credit-adjusted. Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for (i) finan- cial assets that have become credit impaired (Stage 3), for which interest revenue is calculated by applying the effective interest rate to their AC, net of the ECL provision, and (ii) financial assets that are purchased or originated credit impaired, for which the original credit-adjusted effective interest rate is applied to the AC. 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 recognised using the projected unit credit method. The cost of providing pensions is accrued and charged to staff expense within operating expenses in the Consolidated State- ment of Profit or Loss and Other Comprehensive Income reflect- ing the cost of benefits as they are earned over the service lives of employees. Remeasurements of the net defined benefit liability arising as the actuarial gains or losses from changes in assumptions and from experience adjustments with regard to post employment benefit plans are recognised immediately in other comprehensive income. Actuarial gains and losses related to other long-term benefits are recognised immediately in the profit or loss for the year. Past service costs are recognised as an expense immediately. Plan assets are measured at fair value and are subject to certain limitations. Fair value of plan assets is based on market prices. When no market price is available the fair value of plan assets is estimated by different valuation techniques, including discounted expected future cash 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 employ- ees. Mandatory contributions to the Fund are expensed when incurred and are included within staff costs in operating ex- penses. DECOMMISSIONING PROVISIONS The Group recognises a liability for the fair value of legally required or constructive decommissioning provisions associat- ed with non-current 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 rec- lamation 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 capitalises the associated decommissioning costs as part of the carrying amount of the non-current assets. Changes in obligation, reassessed regularly, related to new circumstances or changes in law or technology, or in the estimated amount of the obligation, or in the pre-tax discount rates, are recognised as an increase or decrease of the cost of the relevant asset. The Group’s petrochemical, refining and marketing and distribu- tion operations are carried out at large manufacturing facilities and fuel outlets. 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 decommission- ing or other disposal of these assets. INCOME TAXES Effective 1 January 2012, the Company has established the Consolidated Taxpayer Group which currently includes 5 com- panies 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 pe- riod. The income tax charge comprises current tax and deferred tax and is recognised in profit or loss for the year, except if it is recognised in other comprehensive income or directly in equity because it relates to transactions that are also recognised, in the same or a different period, in other comprehensive income or directly in equity. Current tax is the amount expected to be paid to, or recovered from, the taxation authorities in respect of taxable profits or loss- es 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. In accordance 234 235 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combi- nation if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax balances are meas- ured 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 for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is prob- able that the temporary difference will reverse in the future and there is sufficient future taxable profit available against which the deductions can be utilised. Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of the reporting period, which are expected to apply to the period when the temporary differ- ences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets and liabilities are netted only within the Con- solidated Taxpayer Group or individual companies of the Group outside the Consolidated Taxpayer 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 or extraordinary sharehold- ers’ meeting. Dividends are recorded as a liability and deduct- ed 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 re- porting 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 hold- ers 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 ordinary 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 divi- dends and the amount allocated for a participation feature. REVENUE FROM CONTRACTS WITH CUSTOMERS Revenue is income arising in the course of the Group’s ordinary activities. Revenue is recognised in the amount of transaction price. Transaction price is the amount of consideration to which the Group expects to be entitled in exchange for transferring control over promised goods or services to a customer, exclud- ing the amounts collected on behalf of third parties. Revenue is recognised net of discounts, value added taxes, export duties and excise tax. The Group’s business activities include sales of crude oil and refined products, sales of tires and petrochemical raw materi- als. Revenues are recognised at a point in time when control over such products has transferred to a customer, which refers to ability to direct the use of, and obtain substantially all of the remaining benefits from the products. Transfer occurs when the products have been shipped to the specific location, the risks of obsolescence and loss have been transferred to the customer, and either the customer has accepted the products in accord- ance with the sales contract, the acceptance provisions have lapsed, or the group has objective evidence that all criteria for acceptance have been satisfied. The Group considers indicators that customer has obtained con- trol of an asset, which include, but are not limited to the follow- ing: the Group has a present right to payment for the products; the Group has transferred physical possession of the products; the customer has legal title to the products; the customer has the significant risks and rewards of ownership of the products; the customer has accepted the products. Not all of the indicators need to be met for management to conclude that control has transferred and revenue could be recognised. Management uses judgement to determine whether factors collectively indicate that the customer has obtained control. If the contract includes variable consideration, revenue is recog- nised only to the extent that it is highly probable that there will be no significant reversal of such revenue. The Group operates a chain of own petrol (gas) stations selling refined products. Revenue from the sale of products is rec- ognised when a group entity sells a product to the customer. Payment of the transaction price is due immediately when the customer purchases the fuel. Since no right of return, no refund liability recognised. Revenues from providing services are recognised in the period in which the services are rendered. A receivable is recognised when the goods are delivered as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due. No significant element of financing is deemed present as the sales are made with short-term credit terms consistent with market practice. As a consequence, the group does not adjust any of the transaction prices for the time value of money. RECOGNITION OF INTEREST, FEE AND COMMISSION INCOME AND EXPENSE ON BANKING ACTIVITIES Interest income and expense are recognised on an accrual basis calculated using the effective interest method. This method IFRS Consolidated Financial Statements defers, as part of interest income or expense, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Fees integral to the effective interest rate include origination fees received or paid by the entity relating to the creation or acquisition of a financial asset or issuance of a financial liability, for example fees for evaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms of the instrument and for processing transaction documents. Commit- ment fees received by the Group to originate loans at market interest rates are integral to the effective interest rate if it is probable that the Group will enter into a specific lending arrange- ment and does not expect to sell the resulting loan shortly after origination. The Group does not designate loan commitments as financial liabilities at FVTPL. For financial assets that are originated or purchased credit-im- paired, the effective interest rate is the rate that discounts the expected cash flows (including the initial expected credit losses) to the fair value on initial recognition (normally represented by the purchase price). As a result, the effective interest is credit-ad- justed. Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for (i) financial assets that have become credit impaired (Stage 3), for which interest revenue is calculated by applying the effective interest rate to their AC, net of the ECL provision, and (ii) financial assets that are purchased or originated credit impaired, for which the original credit-adjusted effective interest rate is applied to the AC. Fee and commission income is recognised over time on a straight line basis as the services are rendered, when the customer simultaneously receives and consumes the benefits provided by the Group’s performance. Such income includes recurring fees for account maintenance, account servicing fees, account subscription fees, premium service package fees, portfolio and other asset management advisory and service fees, wealth management and financial planning services, or fees for servicing loans on behalf of third parties, etc. Variable fees are recognised only to the extent that management determines that it is highly probable that a significant reversal will not occur. Other fee and commission income is recognised at a point in time when the Group satisfies its performance obligation, usually upon execution of the underlying transaction. The amount of fee or commission received or receivable represents the transaction price for the services identified as distinct performance obliga- tions. Such income includes fees for arranging a sale or purchase of foreign currencies on behalf of a customer, fees for processing payment transactions, fees for cash settlements, collection or cash disbursements, as well as, commissions and fees arising from negotiating, or participating in the negotiation of a transac- tion for a third party, such as the acquisition of loans, shares or other securities or the purchase or sale of businesses. TRANSPORTATION EXPENSES Transportation expenses recognised in the consolidated statements of profit or loss and other comprehensive income represent all expenses incurred by the Group to transport crude oil and refined products to end customers (they may include pipeline tariffs and any additional railroad costs, handling costs, port fees, sea freight and other costs). Compounding fees are included in selling, general and administrative expenses. Note 4 Critical accounting estimates and judgements in applying accounting policies The Group makes estimates and assumptions that affect the amounts recognised in the consolidated financial statements and the carrying amounts of assets and liabilities within the next fi- nancial year. Estimates and judgements are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management of the Group also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognised 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; • • Accounting of investments in JSC “National Non-State Pen- Impairment of property, plant and equipment; sion Fund”; • Presentation of Revenue net of excise tax, including reverse excise; • Financial assets impairment; • Financial assets classification; • 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 of 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 capitalised 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 reserves are estimated by reference to available geo- logical and engineering data and only include volumes for which access to market is assured with reasonable certainty. Estimates of oil and gas reserves are inherently imprecise, require the application of judgment and are subject to regular revision, either upward or downward, based on new information such as from the drilling of additional wells, observation of long-term reservoir performance under producing conditions and changes in economic factors, including product prices, contract terms or development plans. The Group estimates its oil and gas re- serves 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 developed reserves affect prospectively the amounts of depreciation, depletion and 236 237 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25amortization 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 relat- ed capitalised 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 addi- tional 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. Management reviews the appropriateness of the assets’ useful economic lives and residual values at the end of each reporting period. The review is based on the current condition of the assets, the estimated period during which they will continue to bring eco- nomic benefit to the Group and the estimated residual value. DECOMMISSIONING PROVISIONS Management makes provision for the future costs of decom- missioning 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 judg- ments 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 recognised 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 subjectiv- ity of these provisions there is uncertainty regarding both the amount and estimated timing of such costs. Sensitivity analysis for changes in discount rate: Impact on decommissioning provision At 31 December 2019 At 31 December 2018 Discount rate Change in +1% -1% (11,243) 14,954 (7,207) 9,353 Information about decommissioning provision is presented in Note 12. IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT At 31 December 2019 management assessed whether there is any indication of impairment of on-current assets. As the result the impairment of certain exploration and social assets was recognised (Note 12). ACCOUNTING OF INVESTMENTS IN JSC “NATIONAL NON- STATE PENSION FUND” As at 31 December 2019 and 2018 the Group has 74.46% of shares of JSC “National Non-Governmental Pension Fund”. The Group does not exercise either control or significant influence over JSC “National Non-Governmental Pension Fund” based on corporate governance and pension legislation. These invest- ments are presented within financial assets carried at FVOCI as at 31 December 2019 and 2018 (refer to Note 9). PRESENTATION OF REVENUE NET OF EXCISE TAX, INCLUDING REVERSE (NEGATIVE) EXCISE For the years ended 31 December 2019 and 2018 the Group’s revenue is presented net of excise taxes, including reverse (neg- ative) excise on crude oil refined, gasoline and diesel fuel. For the years ended 31 December 2019 and 2018 excise on refinery products amounted to RR 38,900 million and RR 18,156 million respectively, reverse (negative) excise on crude oil refined, gas- oline and diesel fuel amounted to RR 23,307 million for the year 2019 (2018: not applicable). FINANCIAL ASSETS IMPAIRMENT ECL measurement. Calculation and measurement of ECLs is an area of significant judgement, and implies methodology, models and data inputs. The following components of ECL calculation have the major impact on credit loss allowance for ECLs: default definition, significant increase in credit risk (SICR), probability of default (PD), exposure at default (EAD), loss given default (LGD), macromodels and scenario analysis for credit impaired loans. The Group regularly reviews and validates models and inputs to the models to reduce any differences between expected credit loss estimates and actual credit loss experience. Refer to Note 30. Significant increase in credit risk (SICR). In order to determine whether there has been a significant increase in credit risk, the Group compares the risk of a default occurring over the life of a financial instrument at the end of the reporting date with the risk of default at the date of initial recognition. The assessment considers relative increase in credit risk rather than achieving a specific level of credit risk at the end of the reporting period. The Group considers all reasonable and supportable forward looking information available without undue cost and effort, which includes a range of factors, including behavioural aspects of particular customer portfolios. The Group identifies behaviour- al indicators of increases in credit risk prior to delinquency and incorporated appropriate forward looking information into the credit risk assessment, either at an individual instrument, or on a portfolio level. Refer to Note 30. FINANCIAL ASSETS CLASSIFICATION Business model assessment. The business model drives clas- sification of financial assets. Management applied judgement in determining the level of aggregation and portfolios of financial instruments when performing the business model assessment. When assessing sales transactions, the Group considers their historical frequency, timing and value, reasons for the sales and expectations about future sales activity. Sales transactions aimed at minimising potential losses due to credit deterioration are con- sidered consistent with the “hold to collect” business model. Oth- er sales before maturity, not related to credit risk management IFRS Consolidated Financial Statements activities, are also consistent with the “hold to collect” business model, provided that they are infrequent or insignificant in value, both individually and in aggregate. The Group assesses signifi- cance of sales transactions by comparing the value of the sales to the value of the portfolio subject to the business model as- sessment over the average life of the portfolio. In addition, sales of financial asset expected only in stress case scenario, or in re- sponse to an isolated event that is beyond the Group’s control, is not recurring and could not have been anticipated by the Group, are regarded as incidental to the business model objective and do not impact the classification of the respective financial assets. The “hold to collect and sell” business model means that assets are held to collect the cash flows, but selling is also integral to achieving the business model’s objective, such as, managing liquidity needs, achieving a particular yield, or matching the du- ration of the financial assets to the duration of the liabilities that fund those assets. The residual category includes those portfolios of financial assets, which are managed with the objective of realising cash flows primarily through sale, such as where a pattern of trading exists. Collecting contractual cash flow is often incidental for this business model. Assessment whether cash flows are solely payments of principal and interest (“SPPI”). Determining whether a financial asset’s cash flows are solely payments of principal and interest required judgement. The time value of money element may be modified, for example, if a contractual interest rate is periodically reset but the frequen- cy of that reset does not match the tenor of the debt instrument’s underlying base interest rate, for example a loan pays three months interbank rate but the rate is reset every month. The effect of the modified time value of money was assessed by comparing relevant instrument’s cash flows against a benchmark debt instrument with SPPI cash flows, in each period and cumu- latively over the life of the instrument. The assessment was done for all reasonably possible scenarios, including reasonably possi- ble financial stress situation that can occur in financial markets. The Group identified and considered contractual terms that change the timing or amount of contractual cash flows. The SPPI criterion is met if a loan allows early settlement and the prepayment amount substantially represents principal and accrued interest, plus a reasonable additional compensation for the early termination of the contract. The asset’s principal is the fair value at initial recognition less subsequent principal repayments, i.e. instalments net of interest determined using the effective interest method. As an exception to this principle, the standard also allows instruments with prepayment features that meet the following condition to meet SPPI: (i) the asset is originated at a premium or discount, (ii) the prepayment amount represents contractual per amount and accrued interest and a reasonable additional com- pensation for the early termination of the contract, and (iii) the fair value of the prepayment feature is immaterial at initial recognition. The Group’s loans, primarily to real estate developers, have cash flows that highly depend on performance of the underlying assets. The loans are carried at FVTPL where management de- termined that such loans are in substance non-recourse. The instruments that failed the SPPI test are measured at FVTPL are described in Note 8. FINANCIAL INSTRUMENTS FAIR VALUE ESTIMATION Financial instruments carried at FVTPL or FVOCI and all deriv- atives are stated at fair value. If a quoted market price is avail- able 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 param- eters, 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 recognised in the consol- idated statement of profit or loss and other comprehensive in- come on initial recognition unless the value is based on valuation technique that uses only data from observable markets. Subse- quent gains or losses are only recognised 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 ADOPTION OF IFRS 16, LEASES The Group decided to use the modified retrospective method when applying the standard from its mandatory adoption date of 1 January 2019, without restatement of comparatives and using certain simplifications allowed by the standard. Right-of-use assets were measured at the amount of the lease liability on adoption (adjusted for any prepaid or accrued expenses). On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as “op- erating leases” under the principles of IAS 17 Leases. These liabil- ities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as at 1 January 2019. The borrowing rate was determined by the information on possible borrowing rates offered by banks. The lessee’s incremental borrowing rate applied to the lease lia- bilities on 31 December 2019 was ranged from 7.4% to 8.4% and from 10.5% to 10.8% on a 1 January 2019. 238 239 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25Total future minimum lease payments for non- cancellable operating leases Future lease payments that are due in periods subject to lease extension options that are reasonably certain to be exercised Effect of discounting to present value Total lease liabilities Of which are: Current lease liabilities Non-current lease liabilities At 1 January 2019 6,932 20,886 (11,750) 16,068 2,919 13,149 The associated right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 1 January, 2019. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application. Segment assets at 31 December 2019 increased as a result of the change in accounting policy. The following segments were affected by the change in policy: At 31 December 2019 ASSETS Exploration and production Refining and marketing Petrochemicals Banking Corporate and other Total assets 11,323 314 1,422 516 83 13,658 Earnings per share for the year ended 31 December 2019 de- creased by RR 0.25 as a result of the adoption of IFRS 16. Applica- tion of this Standard did not have an effect on retained earnings (or other component of equity) at the date of initial application. PRACTICAL EXPEDIENTS APPLIED In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard: • • • • • the use of a single discount rate to a portfolio of leases with reasonably similar characteristics; reliance on previous assessments on whether leases are onerous; the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application; the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease, and the accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short- term leases. The following amended standards became effective for the Group from 1 January 2019, but did not have any material impact on the Group: • IFRIC 23 Uncertainty over Income Tax Treatments (issued on 7 June 2017 and effective for annual periods beginning on or after 1 January 2019); • Prepayment Features with Negative Compensation - Amend- ments to IFRS 9 (issued on 12 October 2017 and effective for annual periods beginning on or after 1 January 2019); • Long-term Interests in Associates and Joint Ventures - Amendments to IAS 28 (issued on 12 October 2017 and effec- tive for annual periods beginning on or after 1 January 2019); • Annual Improvements to IFRSs 2015-2017 cycle - amend- ments to IFRS 3, IFRS 11, IAS 12 and IAS 23 (issued on 12 December 2017 and effective for annual periods beginning on or after 1 January 2019); • Plan Amendment, Curtailment or Settlement - Amendments to IAS 19 (issued on 7 February 2018 and effective for annual periods beginning on or after 1 January 2019). The following other new standards and interpretations are not expected to have any material impact on the Group’s consolidat- ed financial statements when adopted: • • Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments to IFRS 10 and IAS 28 (issued on 11 September 2014 and effective for annual periods beginning on or after a date to be determined by the IASB); IFRS 17 “Insurance Contracts” (issued on 18 May 2017 and effective for annual periods beginning on or after 1 January 2021). IFRS 17 replaces IFRS 4, which has given companies dispensation to carry on accounting for insurance contracts using existing practices. As a consequence, it was difficult for investors to compare and contrast the financial performance of otherwise similar insurance companies. IFRS 17 is a single principle-based standard to account for all types of insurance contracts, including reinsurance contracts that an insurer holds. • Amendments to the Conceptual Framework for Financial Reporting (issued on 29 March 2018 and effective for annual periods beginning on or after 1 January 2020). • Definition of a business – Amendments to IFRS 3 (issued on 22 October 2018 and effective for acquisitions from the beginning of annual reporting period that starts on or after 1 January 2020). The amendments revise definition of a business. • Definition of materiality – Amendments to IAS 1 and IAS 8 (issued on 31 October 2018 and effective for annual periods beginning on or after 1 January 2020).The amendments clarify the definition of material and how it should be applied by including in the definition guidance that until now has featured elsewhere in IFRS. In addition, the explanations accompanying the definition have been improved. Interest rate benchmark reform - Amendments to IFRS 9, IAS 39 and IFRS 7 (issued on 26 September 2019 and effective for annual periods beginning on or after 1 January 2020). • Classification of liabilities as current or non-current – Amend- ments to IAS 1 (issued on 23 January 2020 and effective for annual periods beginning on or after 1 January 2022). • IFRS Consolidated Financial Statements 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 2019 At 31 December 2018 24,730 350 77 25,157 42,340 22,078 1,071 65,489 Term deposits with original maturity of less than three months represent deposits placed in banks in the course of non-bank- ing 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. Note 7 Accounts receivable Short-term and long-term accounts receivable comprise the following: Short-term accounts receivable: Trade receivables Other financial receivables Other non-financial receivables Less credit loss allowance Total short-term accounts receivable Long-term accounts receivable: Trade receivables Other financial receivables Less credit loss allowance Total long-term accounts receivable Total trade and other receivables At 31 December 2019 At 31 December 2018 81,950 9,516 161 (6,921) 84,706 333 10,301 (2,773) 7,861 92,567 79,088 8,150 144 (6,620) 80,762 1,569 3,063 (1,702) 2,930 83,692 Fair value of short-term and long-term accounts receivable is presented in Note 30. The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allow- ance for all trade and other receivables. below. The provision matrix is based on the number of days that an asset is past due, with a distribution to portfolios of receivables, homogeneous in terms of credit risk. In addition to the number of days that an asset is past due, types of products sold, geograph- ical specificity of distributional channels and other factors were taken into account. The credit loss allowance for trade and other receivables is determined according to provision matrix presented in the table Analysis by credit quality of trade and other receivables is as follows: 240 241 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25At 31 December 2019 At 31 December 2018 At 31 December 2019 At 31 December 2018 IFRS Consolidated Financial Statements TRADE RECEIVABLES - current - less than 90 days overdue - 91 to 180 days overdue - over 180 days overdue Total trade receivables (gross carrying amount) Credit loss allowance Total trade receivables (carrying amount) OTHER RECEIVABLES - current - less than 90 days overdue - 91 to 180 days overdue - over 180 days overdue Total other receivables (gross carrying amount) Credit loss allowance Total other receivables (carrying amount) Loss rate Gross carrying amount Lifetime ECL Loss rate Gross carrying amount Lifetime ECL 0.065% 0.92% 3.51% 88.93% 75,614 2,946 969 2,754 82,283 (2,559) 79,724 (49) (27) (34) 0.197% 89.34% 0.59% (2,449) 89.68% 78,244 798 88 1,527 80,657 (2,240) 78,417 0.254% 12,617 100% 100% 98.65% 12 1 7,187 19,817 (7,135) 12,682 (32) (12) (1) (7,090) 0.735% 5,168 100% 0% 100% 12 - 6,033 11,213 (6,082) 5,131 (157) (713) (1) (1,369) (37) (12) - (6,033) The following table explains the changes in the credit loss allow- ance for trade and other receivables under simplified ECL model between the beginning and the end of the annual period: Trade receivables Other receivables Trade receivables Other receivables 2019 2018 Expected credit loss allowance at 1 January New originated or purchased Other movements Total credit loss allowance charge in profit or loss for the period Write-offs FX movements (2,240) (319) - (319) - - (6,082) (1,095) 53 (1,042) (11) - (1,676) (734) - (734) 228 (58) (2,419) (3,635) (53) (3,688) 25 - Analysis by credit quality of trade and other receivables is as follows: At 31 December 2019 At 31 December 2018 Trade receivables Other receivables Trade receivables Other receivables Trade receivables Other receivables Trade receivables Other receivables Russian construction companies unrated including related parties Not past due 327 7,521 1,003 75,614 PAST DUE BUT NOT INDIVIDUALLY ASSESSED FOR CREDIT LOSS ALLOWANCE less than 90 days overdue 91 to 180 days overdue over 180 days overdue Total past due but not individually assessed for credit loss allowance 2,946 969 305 4,220 INDIVIDUALLY ASSESSED FOR CREDIT LOSS ALLOWANCE (GROSS) less than 90 days overdue 91 to 180 days overdue over 180 days overdue Total individually assessed for credit loss allowance Less credit loss allowance Total - - 2,449 2,449 (2,559) 79,724 - 12,617 435 12,617 - - 65 65 12 1 7,122 7,135 (7,135) 12,682 325 8,322 2,697 78,244 85 88 - 173 713 - 1,527 2,240 (2,240) 78,417 - 5,168 369 5,168 12 - - 12 - - 6,033 6,033 (6,082) 5,131 Note 8 Banking: Loans to customers Loans to legal entities Loans to individuals Loans to customers measured at amortised cost before impairment Credit loss allowance Total loans to customers measured at amortised cost Loans to customers measured at fair value through profit and loss Less: long term loans at measured at fair value through profit and loss Less: long term loans measured at amortised cost Less: credit loss allowance for long term loans Total short term loans to customers and current portion of long term loans to customers Less: short term loans at measured at fair value through profit and loss Total short term loans to customers and current portion of long term loans to customers measured at amortised cost At 31 December 2019 At 31 December 2018 92,147 41,836 133,983 (10,478) 123,505 12,947 136,452 (12,740) (94,165) 4,333 33,880 (207) 33,673 106,538 39,935 146,473 (13,069) 133,404 12,901 146,305 (12,901) (85,905) 6,298 53,797 - 53,797 NOT PAST DUE International traders of crude oil, oil products and petrochemicals Russian crude oil and oil products traders Russian oil and petrochemicals refineries Central and Eastern Europe refineries Russian tire dealers and automotive manufacturers Natural monopoly entity 242 23,349 1,501 22,603 15,249 3,430 1,634 - - - - - - 21,373 8,252 14,160 15,910 4,732 5,170 - - - - - - As at 31 December 2019 and 2018 the Group granted loans to 19 and 20 customers totalling RR 57,435 million and RR 51,743 million respectively, which individually exceeded 5% of the Bank ZENIT equity. As at 31 December 2019 and 2018, the total amount of pledged loans to legal entities is RR 783 million and RR 1,742 million and loans to individuals is RR 4,425 million and RR 5,442 million respectively. The loans are pledged against the funds accounted within due to banks and the Bank of Russia. The Group holds a portfolio of loans and advances to customers that does not meet the SPPI requirement for measured at am- ortised cost classification under IFRS 9. Dominant features that 243 Expected credit loss allowance at 31 December (2,559) (7,135) (2,240) (6,082) Total loans to customers 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25failed SPPI test were the following: the amount of net operating cash flows according to business-plan is not sufficient to fully re- payment of loans within the period specified in loan contract; the time value of money is not compensated to the Group, interest payments will be performed in the end of loan contract; amount of collateral is not sufficient for repayment of loan. As a result, these loans and advances were measured at fair value through profit and loss from the date of initial recognition. credit risk. The carrying amount presented in the consolidated statement of financial position best represents the Group’s max- imum exposure to credit risk arising from loans and advances to customers. The fair value of loans and advances to customers, including a breakdown by fair value hierarchy level, is disclosed in Note 30. Information on related party balances is disclosed in Note 26. Loans and advances to customers measured at fair value through profit and loss are measured taking into account the Movements in the credit loss allowance during the year ended 31 December 2019 are as follows: Credit loss allowance as at 1 January 2019 Net reversal/(provision) for credit loss allowance during the period Reclassification in the credit loss allowance for other long-term loans Other changes Credit loss allowance as at 31 December 2019 (11,533) 698 2,780 264 (7,791) Movements in the credit loss allowance during the year ended 31 December 2018 are as follows: Loans to legal entities Loans to individuals (1,536) (1,160) - 9 Total (13,069) (462) 2,780 273 (2,687) (10,478) Credit loss allowance as at 1 January 2018 Net provision for credit loss allowance during the period Credit loss allowance as at 31 December 2018 Loans to legal entities Loans to individuals (10,605) (928) (11,533) (1,154) (382) (1,536) Total (11,759) (1,310) (13,069) Risk concentrations by customer industry within the customer loan portfolio are as follows: IFRS Consolidated Financial Statements Note 9 Other financial assets Other short-term financial assets comprise the following as at 31 December 2019 and 31 December 2018: FINANCIAL ASSETS MEASURED AT AMORTISED COST Notes receivable (net of credit loss allowance of RR 240 million and 249 million as at 31 December 2019 and 31 December 2018 respectively) Other loans (net of credit loss allowance of RR 3,615 million and 261 million as at 31 December 2019 and 31 December 2018 respectively) Bank deposits (net of credit loss allowance of RR 5,547 million and 5,544 million as at 31 December 2019 and 31 December 2018 respectively) Due from banks REPO with banks Securities held by the Group (net of credit loss allowance of RR 9 million and 47 million as at 31 December 2019 and 31 December 2018 respectively): Russian government and municipal debt securities Corporate debt securities Securities pledged under sale and repurchase agreements (net of credit loss allowance of RR 22 million and 37 million as at 31 December 2019 and 31 December 2018 respectively): Russian government and municipal debt securities Corporate debt securities FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH PROFIT AND LOSS Due from banks Securities held by the Group: At 31 December 2019 At 31 December 2018 Russian government and municipal debt securities Gross book value Share in customer loan portfolio, % Gross book value Share in customer loan portfolio, % Trade Manufacturing Construction Services Food Finance Agriculture Oil and gas Individuals, including: mortgage loans consumer loans car loans plastic cards overdrafts other Other 19,485 29,191 15,908 17,895 633 10,173 1,041 5,013 41,836 22,843 14,202 4,178 572 41 5,755 Total loans to customers before credit loss allowance 146,930 244 13.26% 19.87% 10.83% 12.18% 0.43% 6.92% 0.71% 3.41% 28.47% 15.55% 9.67% 2.84% 0.39% 0.02% 3.92% 100% 28,943 24,471 16,542 22,877 1,474 12,080 1,538 2,533 39,936 25,333 13,247 846 479 31 8,979 159,373 18.16% 15.35% 10.38% 14.35% 0.92% 7.58% 0.97% 1.59% 25.06% 15.90% 8.31% 0.53% 0.30% 0.02% 5.63% 100% Corporate debt securities Corporate shares Derivatives FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME Securities held by the Group: Russian government and municipal debt securities Corporate debt securities Corporate shares Total short-term financial assets Other long-term financial assets comprise the following as at 31 December 2019 and 31 December 2018: At 31 December 2019 At 31 December 2018 112 227 659 1,222 4,081 1,562 30 1,532 9,044 2,609 6,435 1,238 7,658 460 6,865 165 168 1,910 695 1,000 215 27,713 136 3,220 11 997 537 4,632 675 3,957 8,267 2,272 5,995 - 4,017 287 2,018 186 1,526 11,084 176 10,719 189 32,901 245 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25At 31 December 2019 At 31 December 2018 Credit loss allowance Gross carrying amount IFRS Consolidated Financial Statements FINANCIAL ASSETS MEASURED AT AMORTISED COST Notes receivable (net of credit loss allowance of RR 318 million as at 31 December 2019 and 31 December 2018) Loans to employees (net of credit loss allowance of RR 1,804 million and 1,776 million as at 31 December 2019 and 31 December 2018 respectively) Other loans (net of credit loss allowance of RR 22,392 million and 17,746 million as at 31 December 2019 and 31 December 2018 respectively) Bank deposits Due from banks Securities held by the Group (net of credit loss allowance of RR 31 million and 138 million as at 31 December 2019 and 31 December 2018 respectively): Russian government and municipal debt securities Corporate debt securities FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH PROFIT AND LOSS Other loans Securities held by the Group: Corporate debt securities FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME Securities held by the Group: Russian government and municipal debt securities Corporate shares Corporate debt securities Investment fund units Total long-term financial assets - 928 21,281 - 2,027 13,132 1,272 11,860 - 293 293 42,917 15,236 12,440 2,176 13,065 80,578 320 1,046 25,450 646 1,018 19,867 2,301 17,566 117 757 757 32,292 36 12,317 6,851 13,088 81,513 The fair value of financial assets and valuation techniques used are disclosed in Note 30. Corporate bonds consist of Russian Ruble and US Dollar de- nominated bonds and Eurobonds issued by Russian banks and companies. 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. Municipal bonds consist of Russian Ruble denominated bonds issued by regional and municipal authorities of the Russian Federation. Corporate shares at FVTPL include quoted and unquoted shares of Russian companies and banks. At 31 December 2019 and 31 De- cember 2018 unquoted securities measured at fair value through other comprehensive income include investment in AK BARS Bank ordinary shares (17.24%) in the amount of RR 7,300 million. Investment fund units are solely presented with investment in closed mutual investment rental fund AK BARS – Gorizont (45.45% of the total amount a shares). The main assets of this fund are the land plots located in Tatarstan Republic. The Group does not exercise significant influence over this investment and therefore accounts for it as a financial asset measured at fair value through other comprehensive income. In 2019 the Group recognised an impairment losses on financial assets net of reversal in the amount of RR 6,737 million. These losses consist of expected credit loss allowance for accounts receivable in the amount of RR 1,361 million, other loans issued in the amount of RR 5,220 million and other financial assets in the amount of RR 156 million. The following table discloses the changes in the credit loss allow- ance and gross carrying amount for other loans carried at amor- tised cost between the beginning and the end of the reporting period: Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit impaired) Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit impaired) Total OTHER LOANS At 31 December 2018 - (543) (17,464) (18,007) 83 26,217 20,377 46,677 Movements with impact on credit loss allowance charge for the period: Transfers: - to credit-impaired (from Stage 1 and Stage 2 to Stage 3) Net remeasurement of credit loss allowance within the same stage Loans repaid or derecognised (excluding write-offs) New originated or purchased Total movements with impact on credit loss allowance charge for the period - - - - - 302 (302) - - - - (6,608) (6,608) 1,388 - 1,388 - - - (10) - (23,021) 23,021 - - - - (1,849) 184 (1,756) 439 (3,615) 623 302 (5,522) (5,220) (10) (24,686) 21,704 (2,992) Movements without impact on credit loss allowance charge for the period: Reclassification from other financial assets At 31 December 2019 At 1 January 2018 - - - - (2,780) (2,780) (241) (232) (25,766) (26,007) (8,827) (9,059) Movements with impact on credit loss allowance charge for the period: - 1,531 1,768 3,830 45,911 15,435 3,830 47,515 17,252 Transfers: - to credit-impaired (from Stage 1 and Stage 2 to Stage 3) Net remeasurement of credit loss allowance within the same stage New originated or purchased Total movements with impact on credit loss allowance charge for the period - - - - 36 (36) - (17) (323) (8,273) (703) (8,290) (1,026) (195) 195 - 34 22,407 - 751 - - 23,192 (304) (9,012) (9,316) 34 22,212 946 23,192 - 73 49 - - Movements without impact on credit loss allowance charge for the period: Disposals Reclassification from other financial assets At 31 December 2018 - - - 6 (13) 1,296 1,302 (921) (934) (543) (17,464) (18,007) - - 83 (263) (3,171) (3,434) 2,500 26,217 7,167 20,377 9,667 46,677 In December 2018 the Group entered into a transaction to acquire from a number of Russian government-controlled banks their rights of claim under the credit facilities with NEFIS Group, a leading Russian household chemicals, oil and fats manufacturer. Total rights in the amount of RR 19,861 million and RR 21,506 million were accounted as other loans in other long-term financial assets carried at amortised cost at 31 De- cember 2019 and 31 December 2018 respectively. 246 247 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25Note 10 Inventories Materials and supplies Crude oil Refined oil products Petrochemical supplies and finished goods Total inventories Note 11 Prepaid expenses and other current assets Prepaid expenses and other current assets are as follows: Prepaid export duties Value added tax Advances Prepaid transportation expenses Reverse (negative) excise Other Prepaid expenses and other current assets Note 12 Property, plant and equipment At 31 December 2019 At 31 December 2018 18,916 9,905 13,197 11,361 53,379 17,640 12,003 11,621 9,342 50,606 At 31 December 2019 At 31 December 2018 2,233 6,006 6,176 1,465 1,942 2,948 20,770 3,818 7,873 8,670 1,752 - 977 23,090 COST As at 31 December 2017 Additions Disposals Changes in Group structure Transfers Changes in decommissioning provision As at 31 December 2018 DEPRECIATION, DEPLETION AND AMORTISATION As at 31 December 2017 Depreciation charge Disposals Changes in Group structure Transfers As at 31 December 2018 248 Oil and gas properties Buildings and constructions Machinery and equipment Construc-tion in progress Total 382,326 196,072 144,939 - (3,060) - 24,377 (6,253) - (1,453) (726) 26,969 - - (1,669) (679) 14,938 - 195,168 95,761 (4,832) 103 (66,284) - 397,390 220,862 157,529 219,916 168,356 33,764 64,925 14,363 (2,156) - (1,204) 179,359 6,783 (454) (216) 3,699 43,576 9,999 (982) (607) (2,495) 70,840 - - - - - - 918,505 95,761 (11,014) (1,302) - (6,253) 995,697 267,045 31,145 (3,592) (823) - 293,775 IFRS Consolidated Financial Statements NET BOOK VALUE As at 31 December 2017 As at 31 December 2018 COST As at 31 December 2018 Additions Disposals Changes in Group structure (Note 29) Transfers Changes in decommissioning provision Oil and gas properties Buildings and constructions Machinery and equipment Construc-tion in progress Total 213,970 218,031 162,308 177,286 80,014 86,689 397,390 220,862 157,529 415 (6,266) - 46,157 13,072 - (1,506) 10,356 39,944 - - (3,369) 7,631 43,137 - 195,168 219,916 219,916 100,094 (1,353) 1,231 (129,238) - 651,460 701,922 995,697 100,509 (12,494) 19,218 - 13,072 As at 31 December 2019 450,768 269,656 204,928 190,650 1,116,002 DEPRECIATION, DEPLETION AND AMORTISATION As at 31 December 2018 Depreciation charge Impairment Disposals Changes in Group structure Transfers As at 31 December 2019 NET BOOK VALUE As at 31 December 2018 As at 31 December 2019 179,359 43,576 6,441 4,090 (683) 2 280 53,706 70,840 9,394 - (2,386) (48) 1,810 79,610 - - 24,391 - - - 293,775 33,131 29,240 (8,833) (46) - 24,391 347,267 177,286 215,950 86,689 125,318 219,916 166,259 701,922 768,735 17,296 759 (5,764) - (2,090) 189,560 218,031 261,208 Additions for years 2019 and 2018 years include construction of TANECO refinery complex and superviscous oil fields facilities. to the end of the economic lives of the fields, provided certain conditions are met. Within construction in progress there are advances for construc- tion of RR 14,862 million and RR 15,318 million at 31 December 2019 and 2018, respectively. As stated in Note 3, the Group calculates depreciation, de- pletion and amortization for oil and gas properties using the units-of-production method over proved developed oil and gas reserves. The 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 Group’s oil and gas fields are located principally on the territory of Tatarstan. The Group obtains licenses from the gov- ernmental 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 2038 and 2090, with other production licenses expiring between 2019 and 2105. The economic lives of several of the Group’s licensed fields extend beyond the dates of licenses expiration. Under Russian law, the Group is entitled to renew the licenses 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 stand- ard for defining proved reserves under the SEC’s Regulation S-X, Rule 4-10. Changes in the net book value of exploration and evaluation assets are presented below: At 1 January 2018 Additions Reclassification to development assets Charged to expense At 31 December 2018 Additions Reclassification to development assets Charged to expense At 31 December 2019 18,520 2,018 (642) (3,178) 16,718 3,194 - (17,818) 2,094 249 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25For the years ended 31 December 2019 and 2018, operating and investing cash flows used for exploration and evaluation activi- ties amounted to RR 924 million and RR 688 million and RR 3,194 million and RR 2,018 million, respectively. LIBYA As a result of destabilisation of the political situation in Libya, in February 2011 the Group had to entirely suspend its operations in that country and evacuate all its Russian personnel. After improvement of the situation in the country, in early 2013 the Group returned its staff to Libya and began preparatory work. In May 2014, exploration was resumed in accordance with contrac- tual obligations. 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 at the date of these consolidated financial statements. As at 31 December 2019 the Group recognised an impairment loss in the amount of RR 6,492 million related to exploration and evaluation assets associated with its operations in Libya, including RR 4,899 million recognised for the year ended 31 December 2019. The Group is constantly monitoring the security and political situation in Libya to assess the possibility of geological exploration, and plans to resume its operations once the conditions permit to do so. ASSETS OUTSIDE THE REPUBLIC OF TATARSTAN As at 31 December 2019 the Group recognised an impairment loss for certain other exploration and evaluation assets in the amount of RR 19,104 million, including RR 12,919 million for the year ended 31 December 2019, related mainly to the oilfields located in Nenets Autonomous District and Republic of Kalmykia. The Group rec- ognised this impairment loss due to adverse conditions in the oil market affecting the current assessment of respective projects. SOCIAL ASSETS During the years ended 31 December 2019 and 2018 the Group transferred social assets with a net book value of RR 345 million and RR 21 million, respectively, to local authorities. At 31 Decem- ber 2019 and 2018 the Group held social assets with a net book value net of impairment provision of RR 6,378 million and RR 9,232 million, respectively. The Group recognised an impairment loss on social assets not providing future economic benefits, in the amount of RR 7,208 million for the year ended 31 December 2019; no impairment loss on such assets was recognised for the year ended 31 December 2018. 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 infrastruc- ture expenses of RR 8,995 million and RR 5,592 million for the years ended 31 December 2019 and 2018, respectively, for maintenance that mainly relates to housing, schools and cultural buildings. In 2019 the Group recognised an impairment losses and losses on disposal on property, plant and equipment and other non-fi- nancial assets net of reversal in the amount of RR 30,875 million. These losses consist of impairment losses on property, plant and equipment in the amount of RR 29,240 milllion and other non-current assets in the amount of RR 360 million, losses on creation of provision for impairment of inventories in the amount of RR 320 million and losses on disposal of property, plant and equipment in the amount of RR 950 million. DECOMMISSIONING PROVISIONS The following table summarizes changes in the Group’s decom- missioning provision for the year: IFRS Consolidated Financial Statements Note 13 Right-of-use assets and lease liabilities Starting from January 1, 2019, a lease is recognised as a right-of-use assets and a lease liabilities on the date the asset becomes available for use by the Group. Right-of-use assets comprise the following: As at 1 January 2019 Additions Disposals Depreciation Revaluation and modification As at 31 December 2019 The reconciliation between undiscounted lease liabilities and their present value presented in the table below: Service equipment Other assets 13,654 78 - (1,784) (896) 11,052 2,414 1,648 (925) (316) (215) 2,606 Total 16,068 1,726 (925) (2,100) (1,111) 13,658 Balance at the beginning of period Unwinding of discount New obligations Release of existing obligations Changes in estimates Balance at the end of period Less: current portion of decommissioning provisions (Note 16) Long-term balance at the end of period In 2019 and 2018 the Group recorded the change in estimate for oil and gas properties decommissioning primarily due to the change in discount rate and expected long-term inflation rate. Key assumptions used for evaluation of decommissioning provi- sion were as follows: Discount rate Inflation rate 250 2019 34,457 3,015 1,349 (70) 11,723 50,474 (127) 50,347 2018 38,081 2,936 629 (307) (6,882) 34,457 (119) 34,338 LEASE LIABILITIES Less than one year Between one and five years More than five years Total undiscounted lease liabilities Lease liabilities Of which are: Current lease liabilities, presented in Accounts payable and accrued liabilities (Note 16) Non-current lease liabilities Note 14 Taxes Income tax expense comprises the following: Presented below is reconciliation between the provision for At 31 December 2019 At 31 December 2018 6.69% 4.00% 8.75% 4.21% Current income tax expense Deferred income tax expense Income tax expense for the year At 31 December 2019 3,024 9,443 11,078 23,545 14,191 2,613 11,578 Year ended 31 December 2019 Year ended 31 December 2018 (57,626) (1,898) (59,524) (58,015) (4,226) (62,241) 251 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25income taxes and taxes determined by applying the statutory tax rate 20% to income before income taxes: Profit before income tax Theoretical income tax expense at statutory rate Increase due to: Non-deductible expenses, net Income tax withheld at source on dividends for treasury shares Deferred income tax liability increase as a result of business combinations (Note 29) Other Income tax expense Year ended 31 December 2019 Year ended 31 December 2018 252,342 (50,468) (6,705) (733) (1,703) 85 273,789 (54,758) (7,653) (394) - 564 (59,524) (62,241) IFRS Consolidated Financial Statements Deferred tax assets are recognised 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 utilised. Tax losses carry forward. At 31 December 2019, the Group had recognised deferred income tax assets of RR 3,057 million (RR 3,281 million at 31 December 2018) in respect of unused tax loss carry forwards of RR 15,285 million (RR 16,405 million at 31 December 2018). 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 2021. 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 realised. The Group does not have any unrecognised potential deferred tax assets in respect of deductible temporary differences. The Group is subject to a number of taxes other than income taxes, which are detailed as follows: Deferred income taxes reflect the impact of temporary differenc- es between the amount of assets and liabilities recognised for financial reporting purposes and such amounts recognised for statutory tax purposes. Deferred tax assets (liabilities) are com- prised of the following: Mineral extraction tax Property tax Other Total taxes other than income taxes Year ended 31 December 2019 Year ended 31 December 2018 298,592 7,320 1,742 307,654 284,118 6,680 2,364 293,162 At 31 December 2019 no deferred tax liabilities has been rec- ognised for taxable temporary differences of RR 68,729 million (2018: RR 62,453 million) on undistributed earnings of certain subsidiaries. These earnings have been and will continue to be reinvested. These earnings, except for undistributed earnings of subsidiaries operating in a tax free jurisdictions, could become subject to additional tax of approximately RR 1,203 million (2018: RR 1,185 million) if they were remitted as dividends. Tax loss carry forward Decommissioning provision Prepaid expenses and other current assets Accounts receivable Long-term loans and certificates of deposits Long-term investments Other Deferred income tax assets Property, plant and equipment Inventories Long-term investments Other liabilities Deferred income tax liabilities Net deferred tax liability Deferred income taxes are reflected in the consolidated state- ment of financial position as follows: Deferred income tax asset Deferred income tax liability Net deferred tax liability 252 At 31 December 2019 At 31 December 2018 3,057 7,318 189 425 1,773 366 94 13,222 (41,908) (2,021) - - (43,929) (30,707) 3,281 6,868 278 230 2,131 395 1,333 14,516 (39,602) (2,824) (15) (13) (42,454) (27,938) At 31 December At 31 December 2018 2,712 (33,419) (30,707) 3,548 (31,486) (27,938) For mineral extraction tax for fields whose depletion rate ex- ceeds a certain threshold the Group received a tax relief of RR 50.4 billion and RR 52.2 billion for the years ended 31 December 2019 and 2018, respectively. Taxes other than income taxes exclude the export duties paid on the sale of crude oil and refined products as the Group sales and other operating revenues are presented net of such export duties. At 31 December 2019 and 2018 taxes payable were as follows: At 31 December 2019 At 31 December 2018 Mineral extraction tax Value Added Tax Excise Export duties Property tax Other Total taxes payable 21,172 8,369 2,863 425 1,975 2,661 37,465 21,692 7,622 2,683 2,493 1,549 2,732 38,771 253 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25Note 15 Debt SHORT-TERM DEBT Bonds issued Subordinated debt Debt securities issued US $75 million 2011 credit facility US $144.5 million 2011 credit facility EUR 55 million 2013 credit facility RR credit facilities Other debt Total short-term debt Сurrent portion of long-term debt Total short-term debt, including current portion of long-term debt LONG-TERM DEBT Bonds issued Subordinated debt Debt securities issued Other debt Total long-term debt Less: current portion of long-term debt Total long-term debt, net of current portion At 31 December 2019 At 31 December 2018 1,850 21 884 816 2,090 1,652 10,142 938 18,393 1,199 19,592 20,007 1,266 39 1,544 22,856 (1,199) 21,657 1,056 2,160 1,061 1,397 2,932 2,353 - 994 11,953 - 11,953 - 1,420 69 1,595 3,084 - 3,084 Fair value of debt is presented in Note 30. Maturity and currency analysis of debt is presented in Note 30. Debt issued by related parties is presented in Note 26. CREDIT FACILITIES 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. The loan agreement requires compliance with certain financial covenants including, but not limited to, minimum levels of con- solidated tangible net worth and interest coverage ratios. In May 2016 this credit facility was assigned to Citibank Europe plc, UK Branch with credit facility details remaining. During 2019, to cover cash gaps the Group received short-term loans under the existing credit facilities with PJSC Sberbank, JSC ALFA-BANK, PJSC Bank Otkrytie FC and PJSC MOSCOW CREDIT BANK in total amount of 113,200 million Rubles at rates ranging from 6.33% to 8.54%, which were repaid early. The short-term debt under these loans at the end of 2019 amounted to 10,142 million Rubles and was fully repaid in January 2020. 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 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 consol- idated 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. In accordance with credit facility terms repayment of the debt is performed in USD. BONDS ISSUED In December 2019 the Company issued Russian Ruble denomi- nated bonds in the amount of RR 15,000 million with the maturity in 3 years at a rate of 6.45% per annum. At 31 December 2019 and 2018 bonds issued include bonds denominated in Russian Rubles issued by Bank ZENIT in the aggregate amount of RR 6,857 million and RR 1,056 million, respectively, that mature between 2020 and 2025 and between 2019 and 2025, respectively. At 31 December 2019 and 2018 the annual coupon rates on these securities range from 7.0% to 8.85% (excluding bonds issued on emission BO-13 at amount RR 1 million and coupon rate 0.1%) and 7.5% to 8.0% respectively. The majority of bonds issued by Bank ZENIT allow early repurchase at the request of the bond holder as set in the respective offering documents. IFRS Consolidated Financial Statements SUBORDINATED DEBT At 31 December 2019 and 2018 subordinated debt is present- ed by one and two subordinated loans raised by Bank ZENIT respectively (excluding subordinated debt under the direct re- purchase agreement with Deposit Insurance Agency (DIA), Note 30). At 31 December 2019 the subordinated loan bears interest at the rate of 8.9% and matures in 2024. At 31 December 2018 the subordinated loans bear interest at rates ranging from 6.5% to 9.5% and mature from 2019 to 2024. this covenant. At 30 June 2019 the lender granted Bank ZENIT a waiver until 1 March 2020. Starting from 1 March 2020 Bank ZENIT pays a higher interest rate until the violation is rectified or a new waiver is received. Information about subordinated loans received by Bank ZENIT from Deposit Insurance Agency (DIA) within the Russian Federa- tion Government program for additional capitalisation of Russian banks is presented in Note 30. Bank ZENIT is obliged to comply with eight financial covenants in relation to the subordinated loan maturing in December 2024. At 31 December 2019 and at 31 December 2018 Bank ZENIT was in compliance with these covenants, except one (Cost-to- income ratio). At 30 June 2019 Bank ZENIT did not comply with two covenants (Cost-to-income ratio and Liquid assets to Total assets). This violation does not entail claims for early repayment of the subordinated loan. Failure to comply with these covenants may result in a deterioration of the commercial terms of the loan in the event of failure to obtain a waiver from the lender. At 31 December 2018 the lender granted Bank ZENIT a waiver relating DEBT SECURITIES ISSUED At 31 December 2019 and 2018 debt securities are promisso- ry notes issued by Bank ZENIT at a discount to nominal value and interest bearing promissory notes denominated in Russian Rubles and US Dollars. Maturity dates of these promissory notes vary from 2020 to 2028. As at 31 December 2019 and 2018 non-interest-bearing promis- sory notes of the aggregate nominal value of RR 641 million and RR 469 million respectively were issued by Bank ZENIT for settle- ment purposes and mature primarily on demand. Note 16 Accounts payable and accrued liabilities Trade payables Current portion of lease liabilities (Note 13) Other payables Total financial liabilities within trade and other payables Salaries and wages payable Advances received from customers Current portion of decommissioning provisions (Note 12) Other accounts payable and accrued liabilities Total non-financial liabilities Accounts payable and accrued liabilities At 31 December 2019 At 31 December 2018 36,150 2,613 1,809 40,572 8,267 7,828 127 3,495 19,717 60,289 25,728 - 1,013 26,741 7,282 6,197 119 2,650 16,248 42,989 For the current reporting period revenue of RR 6,197 million was recognised in respect of contract obligations as of 1 January 2019 related to advances received. The fair value of each class of financial liabilities included in short-term trade and other payables at 31 December 2019 and 2018 is presented in Note 30. For the previous reporting period revenue of RR 8,003 million was recognised in respect of contract obligations as of 1 January 2018 related to advances received. 254 255 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25Note 17 Banking: Due to banks and the Bank of Russia Term deposits from other banks Term deposits from the Bank of Russia REPO Correspondent accounts and other banks’ overnight deposits Total due to banks and the Bank of Russia Less: long term due to banks and the Bank of Russia Total short term of due to banks and the Bank of Russia At 31 December 2019 At 31 December 2018 5,364 2,630 13,259 1,562 22,815 (2,522) 20,293 4,073 2,731 10,083 1,538 18,425 (4,660) 13,765 Within due to banks and the Bank of Russia at 31 December 2019 and 2018 there are RR 18,778 million and RR 16,523 million respectively of correspondent accounts and term deposits, bor- rowed from the Bank of Russia and from three and four Russian banks respectively, which individually exceeded 5% of the Bank ZENIT equity. As at 31 December 2019 and 31 December 2018 financial liabili- ties which are subject to offsetting include RR 13,260 million and RR 10,083 million of due to banks collateralised by securities, fair value of which is RR 14,446 million and RR 11,098 million respec- tively. Note 18 Banking: Customer accounts 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 At 31 December 2019 At 31 December 2018 1,014 90 16,986 22,653 14,265 105,044 160,052 (1,381) 158,671 577 347 22,385 37,679 14,958 108,390 184,336 (682) 183,654 IFRS Consolidated Financial Statements Within customer accounts at 31 December 2019 and 2018 there are RR 38,557 million and RR 48,549 million of current/settle- ment accounts and term deposits from 12 and 19 customers respectively, which individually exceeded 5% of the Bank ZENIT equity. Risk concentrations by customer industry within customer ac- counts are as follows: Individuals Finance Oil and gas Trade Services Manufacturing Construction Other Total customer accounts Note 19 Other long-term liabilities Other long-term liabilities are as follows: Pension liability Government grants Other long-term liabilities Total other long-term liabilities At 31 December 2019 At 31 December 2018 Carrying value Share in customer loan portfolio, % Carrying value Share in customer loan portfolio, % 119,309 74.54% 9,292 2,195 4,798 12,331 4,306 3,620 4,201 160,052 5.81% 1.37% 3.00% 7.70% 2.69% 2.26% 2.63% 100% 123,348 20,479 3,659 8,097 10,886 5,801 4,741 7,325 184,336 66.91% 11.11% 1.99% 4.39% 5.91% 3.15% 2.57% 3.97% 100% At 31 December 2019 At 31 December 2018 4,062 3,231 219 7,512 3,287 - 150 3,437 PENSION LIABILITIES 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 condi- tions of these plans are regulated by the “Statement of Organ- ization of Non-Governmental Pension Benefits for JSC Tatneft Employees” and the contracts concluded between the Company or its subsidiaries, management, and the JSC “National Non-Gov- ernmental 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 of service upon reaching official retirement age (according to the Law 350-FZ on amending the appointment and payment of pensions), and for management are based upon employment contract terms. In accordance with the provisions of collective agreements concluded on an annual basis between the Compa- ny or its subsidiaries and their employees, the Group is obliged to pay other certain post-employment benefits, the amounts of which are generally based on salary grade and years of service at the time of retirement. GOVERNMENT GRANTS At the end of 2019, the Group received grants from the Republic of Tatarstan for the creation, modernization and reconstruction of energy facilities and infrastructure. 256 257 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25Note 20 Shareholders’ equity AUTHORISED SHARE CAPITAL At 31 December 2019 and 2018 the authorised, issued and paid 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 on 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 repre- sentative 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 Char- ter, 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 sharehold- ers meeting, preferred shares earn dividends equal to their nominal value. The amount of a dividend for a preferred share may not be less than the amount of a dividend for a common share. Preferred shareholders may vote at meetings only on the following decisions: • • • the amendment of the dividends payable per preferred share; the issuance of additional shares with rights greater than the current rights of preferred shareholders; and the liquidation or reorganization of the Company. The decisions listed above can be made only if approved by 75% of preferred shareholders. Holders of preferred shares acquire the same voting rights as holders of common shares in the event that preferred dividends are either not declared, or declared but not paid. On liquida- tion, 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). 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 2019 and 2018, the Company had a statutory current year profit of RR 156,046 million and RR 192,766 million, respectively. 258 In December 2019, the shareholders of the Company approved the payment of interim dividends for the nine months ended 30 September 2019, in the amount of RR 64.47 per preference and ordinary share (the “9 months 2019 Dividends”), including previously paid interim dividends for the six months ended 30 June 2019, in the amount of RR 40.11 per preference and ordinary share. The 9 months 2019 Dividends are reported as dividends payable as at 31 December 2019 and were paid in the beginning of 2020. In September 2019, the shareholders of the Company approved interim dividends for the six months ended 30 June 2019 in the amount of RR 40.11 per each preference and ordinary share. The dividends were paid in the fourth quarter of 2019. In June 2019, the shareholders of the Company approved divi- dends for the year ended 31 December 2018 in the amount of RR 84.91 per each preference and ordinary share with the consid- eration of earlier paid interim dividends for the nine months ended 30 September 2018 in the amount of RR 52.53 per each preference and ordinary share. The dividends were paid in the third quarter of 2019. In December 2018, the shareholders of the Company approved the payment of interim dividends for the nine months ended 30 September 2018 in the amount of RR 52.53 per each preference and ordinary share (the “9 months 2018 Dividends”), including previously paid interim dividends for the six months ended 30 June 2018 in the amount of RR 30.27 per each preference and ordinary share. The 9 months 2018 Dividends are reported as dividends payable as at 31 December 2018 and were paid in the beginning of 2019. In September 2018, the shareholders of the Company approved the payment of interim dividends for the six months ended 30 June 2018 in the amount of RR 30.27 per each preference and ordinary share. The dividends were paid in the fourth quarter of 2018. In June 2018 the shareholders of the Company approved the payment of dividends for the year ended 31 December 2017 in the amount of RR 39.94 per each preference and ordinary share, including previously paid interim dividends for the nine months ended 30 September 2017 in the amount of RR 27.78 per each preference and ordinary share. The dividends were paid in the third quarter of 2018. 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 num- ber 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 ordinary and preferred shares to the extent that each class may have share in earnings if all the earnings for the period had been distributed. Treasury shares are excluded from calculations. The total earnings allo- cated to each class of shares are determined by adding together the amount allocated for dividends and the amount allocated for a participation feature. IFRS Consolidated Financial Statements Profit attributable to Group shareholders Ordinary share dividends Preferred share dividends Income available to ordinary and preferred shareholders, net of dividends Basic and diluted: Weighted average number of shares outstanding (millions of shares): Ordinary Preferred Combined weighted average number of ordinary and preferred shares outstanding Basic and diluted earnings per share (RR) Ordinary Preferred Year ended 31 December 2019 Year ended 31 December 2018 192,260 (203,682) (14,286) (25,708) 2,103 148 2,251 85.43 85.43 211,812 (136,057) (9,542) 66,213 2,103 148 2,251 94,11 93,89 Non-controlling interest. Non-controlling interest is adjusted by dividends declared and paid by the Group’s subsidiaries amount- ing to RR 1 million and RR 46 million at 31 December 2019 and 2018, respectively. Note 21 Employee benefit expenses Wages and salaries Statutory insurance contributions Pension costs – defined benefit plans Other employee benefits Total employee benefit expense Year ended 31 December 2019 Year ended 31 December 2018 41,045 11,474 736 1,801 55,056 39,079 10,949 - 1,901 51,929 Employee benefit expenses are included in operating expenses, selling, general and administrative expenses and maintenance of social infrastructure and transfer of social assets, other expenses and operating expenses on banking activities in the consolidated statement of profit or loss and other comprehen- sive income. Note 22 Interest income and interest expense on non-banking activities Interest income on non-banking activities comprises the fol- lowing: Year ended 31 December 2019 Year ended 31 December 2018 Interest income from financial assets measured at amortised cost Unwinding of the present value discount of long-term financial assets Total interest income on non-banking activities 1,128 73 1,201 5,225 272 5,497 259 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25Interest expense on non-banking activities comprises the following: Bank loans Unwinding of the present value discount of decommissioning provision Interest expense on lease liabilities Unwinding of the present value discount of long-term financial liabilities Total interest expenses on non-banking activities Note 23 Interest income and expense on banking activities INTEREST INCOME Loans to customers Due from banks Securities measured at amortised cost Correspondent accounts Securities measured at fair value through profit and loss Securities measured at fair value through other comprehensive income Total interest income on banking activities INTEREST EXPENSE Term deposits of individuals Term deposits of legal entities Russian Ruble-denominated bonds issued Expenses directly associated with deposit insurance (DIA) Subordinated debt Term placements of banks Debt securities issued Total interest expense on banking activities Net interest income on banking activities Year ended 31 December 2019 Year ended 31 December 2018 (755) (3,015) (1,571) (66) (5,407) (593) (2,936) - (61) (3,590) Year ended 31 December 2019 Year ended 31 December 2018 14,216 313 1,737 40 412 1,439 18,157 (5,889) (2,270) (182) (789) (310) (1,049) (2) (10,491) 7,666 15,518 436 2,286 39 339 867 19,485 (5,082) (2,304) (616) - (464) (1,463) (48) (9,977) 9,508 IFRS Consolidated Financial Statements Note 24 Fee and commission income and expense on banking activities Settlement transactions Cash transactions Agency services Operations with foreign currencies Guarantees issued Transactions with securities Asset management Other Settlement transactions Cash transactions Transactions with securities Operations with foreign currencies Commission on guarantees received Other Total fee and commission expense on banking activities Net fee and commission income on banking activities Year ended 31 December 2019 Year ended 31 December 2018 2,664 488 431 331 235 71 5 202 (1,352) (158) (29) (23) (11) (54) (1,627) 2,800 2,499 501 - 392 234 37 8 103 (874) (164) (34) (24) (12) (47) (1,155) 2,619 Note 25 Segment information Operating segments are components that engage in business activities that may earn revenues or incur expenses, whose op- erating 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: • Exploration and production consists of exploration, devel- opment, extraction and sale of own crude oil. Intersegment sales consist of transfer of crude oil to refinery and other goods and services provided to other operating segments; • Refining and marketing comprises purchases and sales of 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 tax not including interest in- come, expense on non-banking activities, and gains from equity investments, other income (expenses) and foreign exchange loss or gain. Intersegment sales are at prices that approxi- mate 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 2019, revenues of RR 104,506 million or 11% of the Group’s total sales and operating revenues are derived from one external customer. For the year ended 31 December 2018, revenues of RR 98,183 million or 11% of the Group’s total sales and operating revenues are derived from one external customer. crude oil and refined products from third parties, own refining activities and retailing operations; • Petrochemical products include production and sales of tires, These revenues represent sales of crude oil and are attributa- ble to the exploration and production segment and refining and marketing segment. technical carbon; • Banking segment includes operations of Banking Group ZENIT. Management does not believe the Group is dependent on any particular customer. Other sales include revenues from ancillary services provided by the specialised subdivisions and subsidiaries of the Group, such as sales of oilfield equipment, revenues from the sale of auxiliary petrochemical related services and materials as well as other SEGMENT SALES AND OTHER OPERATING REVENUES Reportable operating segment sales and other operating reve- nues are stated in the following table: 260 261 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25Year ended 31 December 2019 Year ended 31 December 2018 175,402 26,818 255,602 3,151 208,886 669,859 225,137 225,137 14,866 14,866 8,900 138,496 147,396 11,426 1,461 400,286 11,466 4,124 3,647 1,028 49,601 18,157 4,427 22,584 1,142,330 23,925 (211,375) 954,880 167,694 28,395 270,966 4,908 191,912 663,875 183,497 183,497 20,565 20,565 7,282 150,960 158,242 8,579 1,239 372,122 10,418 3,806 4,248 994 52,782 19,485 3,774 23,259 1,112,038 15,900 (194,145) 933,793 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 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 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 Elimination of intersegment sales Total sales and other operating revenues 1 2 CIS is an abbreviation for Commonwealth of Independent States (excluding the Russian Federation). 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. 262 IFRS Consolidated Financial Statements SEGMENT EARNINGS SEGMENT EARNINGS Exploration and production Refining and marketing Petrochemicals Banking Total segment earnings Corporate and other Other (expenses)/income Profit before income tax Year ended 31 December 2019 Year ended 31 December 2018 241,891 59,407 1,345 1,279 303,922 (47,294) (4,286) 252,342 267,320 33,867 3,634 269 305,090 (41,112) 9,811 273,789 For the years ended 31 December 2019 and 2018 «Corporate and other» line includes Head Office administrative expenses, impairment losses on financial assets net of reversal, impairment losses and losses on disposal on property, plant and equipment and other non-financial assets, charity expenses, maintenance of social infrastructure and transfer of social assets. ASSETS Exploration and production Refining and marketing Petrochemicals Banking Corporate and other Total assets At 31 December 2019 At 31 December 2018 384,022 450,191 34,324 232,101 138,001 1,238,639 368,991 406,407 32,923 252,854 140,113 1,201,288 SEGMENT ASSETS As at 31 December 2019 corporate and other includes RR 50,102 million of property, plant and equipment, RR 24,413 million of securities measured at fair value through other comprehensive income, RR 20,626 million loans receivable, RR 331 million of bank deposits measured at amortised cost, RR 3,277 million of cash. income, RR 27,799 million loans receivable, RR 49 million of debt securities measured at amortised cost, RR 22,378 million of bank deposits measured at amortised cost and RR 420 million of cash. The Group’s assets and operations are primarily located and con- ducted in the Russian Federation. As at 31 December 2018 corporate and other includes RR 41,059 million of property, plant and equipment, RR 24,341 million of securities measured at fair value through other comprehensive SEGMENT DEPRECIATION, DEPLETION AND AMORTISATION AND ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT Year ended 31 December 2019 Year ended 31 December 2018 DEPRECIATION, DEPLETION AND AMORTIZATION Exploration and production Refining and marketing Petrochemicals Banking Corporate and other Total depreciation, depletion and amortization ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT Exploration and production Refining and marketing Petrochemicals Banking Corporate and other Total additions to property, plant and equipment 22,037 9,885 1,538 349 1,356 35,165 57,708 48,609 2,264 665 23,553 132,799 15,797 11,595 1,687 326 1,115 30,520 39,361 41,235 1,731 596 6,585 89,508 263 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25For the years ended 31 December 2019 and 2018 additions to property, plant and equipment of exploration and production segment were adjusted for changes in decommissioning provi- sion. For the year ended 31 December 2019 additions to proper- ty, plant and equipment of refining and marketing segment and corporate and other assets took into account changes in Group structure (Note 29). 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. The Group enters into transactions with related parties based on market or regulated prices. 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: Year ended 31 December 2019 Year ended 31 December 2018 REVENUES AND INCOME Sales of refined products Other sales Interest income COSTS AND EXPENSES Other services Other purchases ASSETS Accounts receivable, net Banking: Loans to customers Other financial assets Securities measured at fair value through profit and loss Notes receivable Other loans receivable Prepaid expenses and other current assets Due from related parties short-term Long-term accounts receivable Banking: Loans to customers Other financial assets Securities measured at fair value through other comprehensive income Other loans receivable Due from related parties long-term LIABILITIES Accounts payable and accrued liabilities Banking: Customer accounts Due to related parties short-term 264 21 122 57 844 501 14 250 302 905 579 At 31 December 2019 At 31 December 2018 231 293 42 - 51 268 885 198 50 4,070 978 5,296 (37) (910) (947) 148 193 - 249 51 276 917 114 - 5,249 912 6,275 (61) (1,668) (1,729) IFRS Consolidated Financial Statements GOVERNMENT RELATED COMPANIES For the years ended 31 December 2019 and 2018 the outstand- ing balances with Government related companies were as follows: ASSETS Cash and cash equivalents Banking: Mandatory reserve deposits with the Bank of Russia Accounts receivable Banking: Loans to customers Other financial assets Notes receivable Bank deposits Securities measured at fair value through other comprehensive income Securities measured at amortised cost Securities measured at fair value through profit and loss Other loans receivable Prepaid expenses and other current assets Due from related parties short-term Long-term accounts receivable Banking: Loans to customers Other financial assets Bank deposits Securities measured at fair value through other comprehensive income Securities measured at amortised cost Other loans receivable Advances for construction Due from related parties long-term LIABILITIES Accounts payable and accrued liabilities Banking: Due to banks and the Bank of Russia Banking: Customer accounts Debt RR credit facilities Other debt Due to related parties short-term Banking: Due to banks and the Bank of Russia Government grants (Note 19) Due to related parties long-term The amounts of transactions for each period with Government related companies are as follows:follows: At 31 December 2019 At 31 December 2018 10,044 1,572 4,416 6,563 4 310 505 3,325 3,915 41 3,185 33,880 - 4,994 - 24,193 7,898 148 14 37,247 (1,519) (2,445) (2,959) (10,142) (881) (17,946) (2,763) (3,231) (5,994) 16,810 1,875 6,795 7,496 - - 10,209 8,349 1,679 40 5,067 58,320 1,221 500 346 11,001 8,192 192 1,430 22,882 (1,420) (100) (6,298) - (3,121) (10,939) (2,631) - (2,631) 265 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25 Year ended 31 December 2019 Year ended 31 December 2018 At 31 December 2019 At 31 December 2018 IFRS Consolidated Financial Statements Sales of crude oil Sales of refined products Other sales Interest income Interest expense Purchases of refined products Purchases of electricity Purchases of transportation services Other services Other purchases - 30,662 5,302 2,852 764 20,715 18,479 26,987 5,830 2,366 1,132 20,965 4,287 4,988 1,019 34,184 16,691 23,831 4,485 3,822 In December 2018 the Group entered into a transaction to acquire from a number of Russian government-controlled banks their rights of claim under the credit facilities with NEFIS Group (Note 9). COMPENSATION TO KEY MANAGEMENT PERSONNEL The key management personnel of the Group includes members of the Board of Directors and the Management Board of PJSC Tatneft. For the years ended 31 December 2019 and 2018 total remunera- tion, including pension cost, for key management personnel was RR 988 million and RR 1,089 million, respectively. At 31 December 2019 and 2018 key management personnel customer accounts in Bank ZENIT amounted to RR 31,738 million and RR 31,290 million, respectively. 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 challeng- es faced by companies operating in the Russian Federation. The Russian economy continues to be negatively impacted by ongoing political tension in the region and international sanc- tions against certain Russian companies and individuals. Firm oil prices, low unemployment and rising wages supported a modest growth of the economy in 2019. 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 recog- nised 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. The future economic development of the Russian Federation is dependent upon external factors and internal measures under- taken 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. As with any economic forecast, however, the projections and likelihoods of their occurrence are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different from those projected. Note 31 provides more information about changes in economic environment after reporting date. CAPITAL COMMITMENTS As at 31 December 2019 and 2018 the Group has outstanding capital commitments of approximately RR 46,804 million and RR 38,327 million, respectively, mainly for the construction of the TANECO refinery complex and superviscous oil fields facilities construction. These commitments are expected to be paid be- tween 2020 and 2022. Management believes the Group’s current and long-term capital expenditures program can be funded through cash flows gener- ated 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 facil- ities (Note 15). Management believes the Company has the ability to obtain syndicated loans and other financings as needed to continue funding the own projects, refinance any maturing debts as well as finance business acquisitions and other transactions that may arise in the future. 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 collat- eral 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 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 28,973 12,739 129 (324) (19) (130) 41,368 18,810 20,467 271 (426) (29) (806) 38,287 TAXATION The Russian tax legislation is subject to varying interpreta- tions 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. In 2017, tax authorities completed inspections of the Company and its subsidiaries for the years ended December 31, 2013 and 2014. In 2019, tax authorities completed inspections of the Com- pany and its subsidiaries for the years ended December 31, 2015, 2016, 2017. The available results of tax inspections, in particular, the income tax of the consolidated group of taxpayers of PJSC TATNEFT do not significantly affect the financial results and cash flows of the Group. 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 deter- mined using actual transaction prices. It is possible, with the evo- lution 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 ob- ligations 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. In addition, the Group is introducing and applying best health, safety and environmental protection practices and standards which might go beyond any existing and potential legal require- ments in the Russian Federation. LEGAL CONTINGENCIES The Group is subject to various lawsuits and claims arising in the ordinary course of business. The outcomes of such contin- gencies, 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, devel- opment and maintenance of housing, hospitals and transport services, recreation and other social needs. Such funding is periodically determined by the Board of Directors after consulta- tion with governmental authorities and recorded as expenditures when incurred. TRANSPORTATION OF CRUDE OIL The Group transports substantially all of the crude oil that it sells in export and local markets through trunk pipelines in Russia that are controlled by Transneft, the state-owned monopoly owner and operator of Russia’s trunk crude oil pipelines. The Group’s crude oil is blended in the Transneft pipeline system with other crude oil of varying qualities to produce an export blend commonly referred to as Urals. There is currently no equalization scheme for differences in crude oil quality within the Transneft pipeline system and the implementation of any such scheme or the impact of it on the Group’s business is not currently determi- nable. 266 267 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25 Note 28 Principal subsidiaries Set out below are the Group’s principal subsidiaries at 31 De- cember 2019. The joint-stock companies as listed below (except for PJSC «Nizhnekamskshina») have share capital consisting solely of ordinary shares. 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 busi- ness. 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 Bank ZENIT Tatneft Europe AG TANECO Nizhnekamskshina Principal activity Banking operations Export oil sales Oil refinery 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 At 31 December 2019 At 31 December 2018 % 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 72 100 100 82 100 100 100 100 28 - - 18 - - - - 72 100 100 82 100 100 100 100 28 - - 18 - - - - The summarised financial information relating to the subsidiaries with material non-controlling interest was as follows: Year ended 31 December 2019 Bank ZENIT Nizhnekamskshina PJSC Total Year ended 31 December 2018 Bank ZENIT Nizhnekamskshina PJSC Total Current assets Non-current assets Current liabilities Non-current liabilities Revenue Profit 84,220 1,033 85,253 121,300 1,576 122,876 149,286 3,575 152,861 133,315 3,783 137,098 195,643 5,223 200,866 224,675 6,567 231,242 13,184 22,873 - 13,184 8,233 - 8,233 14,918 37,791 23,347 20,368 43,715 1,480 623 2,103 322 237 559 Note 29 Business combinations LLC Neste Saint-Petersburg In 4th quarter of 2019 the Group acquired 100% of the charter capital of LLC Neste Saint-Petersburg (subsequently renamed to LLC Tatneft-AZS-Severo-Zapad) from third party Neste Oyj (Neste Corporation) and obtained control becoming its sole partici- pants. LLC Neste Saint-Petersburg owns a chain of 75 premium retail petroleum stations, an oil products tank farm and an office building in Saint-Petersburg, Russia. The acquired subsidiary will increase the Group’s presence in the fuel and retail market of the North-West Federal District of the Russian Federation. The purchase price was RR 9,139 million (net of cash on the acquired entity’s balance sheet) and the cash consideration was fully paid in 2019. The consideration paid by the Group was based on the results of the evaluation of the business value of the acquired entity as a whole. As at 31 December 2019 the fair value measurement of the assets and liabilities of LLC Neste Saint-Petersburg was not com- pleted. The purchase price allocation of the assets and liabilities of the acquired entity will be completed within 12 months from the date of acquisition. Details of preliminary assessment of the fair value of acquired assets and liabilities performed by the Group are as follows: 268 IFRS Consolidated Financial Statements Cash and cash equivalents Property, plant and equipment Inventories Other assets Accounts payable Other liabilities Fair value of identifiable net assets of subsidiary Total purchase consideration Сash and cash equivalents of subsidiary acquired Purchase price, net Preliminary fair value 1,693 8,680 915 620 (900) (176) 10,832 10,832 (1,693) 9,139 The acquired subsidiary contributed revenue of RR 3,557 million and profit of RR 67 million to the Group for the period from the date of acquisition to 31 December 2019. If the acquisition had occurred on 1 January 2019, without taking into account any other acquisitions, the Group revenue for 2019 would have been RR 950,015 million, and the profit for 2019 would have been RR 193,741 million. PETROCHEMICAL COMPLEX IN TOGLIATTI In the 4th quarter of 2019 the Group acquired 100% of the charter capital of LLC SIBUR Togliatti (subsequently renamed to LLC To- gliattikauchuk) and 100% of the share capital of JSC Togliattisintez from the third party PJSC SIBUR Holding and obtained control of these entities becoming the sole participant of LLC SIBUR Togliatti and through its ability to cast a majority of votes in the general meeting of shareholders of JSC Togliattisintez. The acquired com- panies form a petrochemical complex for the production of various types of synthetic rubbers, as well as the high-octane component MTBE for motor fuel, butadiene, isoprene, and other intermediate products. The acquired subsidiaries contribute to the further de- velopment of the Group’s petrochemical and tires business. The purchase price was RR 11,299 million (net of cash on the targets’ balance sheets), and cash consideration was fully paid in 2019. The consideration paid by the Group was based on the results of the evaluation of the business value of the acquired entities as a whole. As at 31 December 2019 the fair value measurement of the as- sets and liabilities of LLC SIBUR Togliatti and JSC Togliattisintez was not completed. The purchase price allocation of the assets and liabilities of the acquired entity will be completed within 12 months from the date of acquisition. Details of preliminary assessment of the fair value of acquired assets and liabilities performed by the Group are as follows: Preliminary fair value Cash and cash equivalents Property, plant and equipment Inventories Other assets Accounts payable Other liabilities Fair value of identifiable net assets of subsidiaries Total purchase consideration Сash and cash equivalents of subsidiaries acquired Purchase price, net The acquired subsidiaries contributed revenue of RR 4,016 million and loss of RR 122 million to the Group for the period from the date of acquisition to 31 December 2019. If the acquisition had occurred on 1 January 2019, without taking into account any other acquisitions, the Group revenue for 2019 would have been RR 944,050 million, and the profit for 2019 would have been RR 193,847 million. 1,502 10,452 1,542 664 (790) (569) 12,801 12,801 (1,502) 11,299 269 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25Note 30 Financial risk management The Group takes on exposure to market risks. Market risks arise from open positions in (a) foreign currencies, (b) interest rate risk and (c) financial instruments price risk. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group‘s activities expose it to a variety of financial risks: mar- ket risk (including foreign currency risk, interest rate 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 per- formance. 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. a) Currency risk The Group operates internationally and is exposed to currency risk arising from various currency exposures primarily with re- spect to the US Dollar. 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 at 31 December 2019. В таблице ниже представлен риск Группы в отношении изменения обменного курса валют по состоянию на 31 декабря 2018 г.: Russian Ruble US Dollar Other Total 16,472 350 - 1,572 42,019 12,633 109,895 350 29 4,081 112 928 21,198 7,079 43,798 12,586 273,102 5,853 2,405 - - - 36,895 29 19,897 309 1,450 - - - 310 716 850 11,152 77,461 - 77 - 810 20 6,660 - 3,008 - - - - 156 179 - 13,315 24,730 350 77 1,572 79,724 12,682 136,452 659 4,487 4,081 112 928 21,508 7,951 44,827 23,738 363,878 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 Banking: Mandatory reserves with the Bank of Russia Accounts receivable Trade receivables Other financial receivables Banking: Loans to customers Other financial assets Bank deposits Due from banks REPO with banks Notes receivable Loans to employees Other loans Securities at FVTPL Securities at FVOCI Securities at AC Total financial assets 270 IFRS Consolidated Financial Statements FINANCIAL LIABILITIES Trade and other financial payables Trade payables Dividend payable Current portion of lease liabilities Lease obligations, net of current portion Other payables Banking: Other finance liabilities at FVTPL Debt Bonds issued Subordinated debt Debt securities issued Credit facilities Other debt Banking: Due to banks and the Bank of Russia Banking: Customer accounts Total financial liabilities Net balance sheet position The table below summarises the Group’s exposure to foreign currency exchange rate risk as at 31 December 2018. 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 Banking: Mandatory reserves with the Bank of Russia Accounts receivable Trade receivables Other financial receivables Other financial assets Bank deposits Due from banks REPO with banks Notes receivable Loans to employees Other loans Securities at FVTPL Securities at FVOCI Securities at AC Russian Ruble US Dollar Other Total 35,109 55,865 2,613 1,764 4,337 21,857 - 809 10,142 1,734 12,951 128,750 287,509 (14,407) 496 - - - 45 114 - 1,287 114 4,558 272 9,557 25,982 42,425 35,036 545 - - - - - - - - - 476 307 5,320 6,648 6,667 36,150 55,865 2,613 11 578 1,809 4,451 21,857 1,287 923 14,700 2,482 22,815 160,052 336,582 27,296 Russian Ruble US Dollar Other Total 25,249 22,078 29 1,875 42,750 5,130 131,907 310 168 537 456 1,046 28,517 3,149 38,773 18,718 14,353 2,738 - 657 - 35,299 1 8,220 347 428 - - - 270 1,625 4,603 14,048 79,851 - 385 - 368 - 6,178 - 1,419 - - - - - - - 11,088 42,340 22,078 1,071 1,875 78,417 5,131 146,305 657 2,015 537 456 1,046 28,787 4,774 43,376 32,766 411,631 271 Total financial assets 320,692 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25 FINANCIAL LIABILITIES Trade and other financial payables Trade payables Dividend payable Other payables Banking: Other finance liabilities FVPL Debt Bonds issued Subordinated debt Debt securities issued Credit facilities Other debt Banking: Due to banks and the Bank of Russia Banking: Customer accounts Other short-term liabilities Total financial liabilities Net balance sheet position Russian Ruble US Dollar Other Total 25,727 50,711 933 1,190 1,056 2,160 981 - 1,754 15,212 144,070 533 244,327 76,217 1 - 80 - - 1,420 149 6,682 835 3,087 33,764 - 46,018 33,833 - - - - - - - - - 126 6,502 - 6,628 4,460 25,728 50,711 1,013 1,190 1,056 3,580 1,130 6,682 2,589 18,425 184,336 533 296,973 114,510 For the year ended 31 December 2019 the Group recognised RR 12,892 million and RR 13,099 million foreign exchange gains and losses respectively in the consolidated statement of profit or loss and other comprehensive income (for the year ended 31 Decem- ber 2018: RR 21,483 million and RR 13,547 million, respectively). 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: IFRS Consolidated Financial Statements Treasury departments of Bank ZENIT 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 of Bank ZENIT review current interest rate gaps and assess resulting effects of interest rate risk on the Group’s interest margin and economic capital. The interest rate risk measurement system provides the ability to evaluate a risk profile from two different, but complementary points of view. From the economic value point of view the effect of changes in interest rates and the associated volatility of the present value of all future cash flows is considered and is calculated as the change in the sensitivity of fair value using a shock effect on the interest rate curve. From the profit point of view the effect generated by measuring interest rates on net profit in the form of interest and, therefore, on the associated effect on net interest income on a 1-year horizon is analysed. Interest rate risk reporting is compiled and reported to the Bank ZENIT’s Management Board on a quarterly basis. 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: Demand and less than 1 month From 1 to 6 months From 6 to 12 months From 1 to 5 years More than 5 years Non-sensitive Total 31 December 2019 Total financial assets Total financial liabilities Net interest sensitivity gap 31 December 2018 Total financial assets Total financial liabilities 22,101 58,220 (36,119) 73,319 41,385 19,095 65,700 16,043 46,762 (46,605) (30,719) 41,463 46,508 20,961 57,113 96,644 39,911 56,733 92,419 44,540 76,635 9,668 66,967 54,469 1,560 133,360 116,321 17,039 129,000 105,867 363,878 336,582 27,296 411,631 296,973 Net interest sensitivity gap 31,934 (5,045) (36,152) 47,879 52,909 23,133 114,658 Year ended 31 December 2019 Year ended 31 December 2018 Impact on profit before tax Impact on equity Impact on profit before tax Impact on equity The table below summarises the effective average year end interest rates, by major currencies (US Dollars, Russian Rubles), for financial instruments outstanding as at 31 December 2019 and 2018. The analysis has been prepared on the basis of weighted average effective interest rates for the various financial instru- ments using year-end contractual terms and conditions. US Dollar strengthening by 20% US Dollar weakening by 20% 7,007 (7,007) 5,606 (5,606) 6,767 (6,767) 5,413 (5,413) b) Interest rate risk. Banking operations interest rate risk management The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase as a result of such changes, but may reduce or create losses in the event that unexpected movements arise. Management monitors on a daily basis and sets limits on the level of mismatch of interest rate repricing that may be undertaken. 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. 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 repricing 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 below, the maturity dates applicable to the majority of the Bank ZENIT’s as- sets and liabilities are relatively short-term and that provides the Bank ZENIT 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. 272 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 REPO with banks Notes receivable Loans to employees Other loans Securities at FVTPL Securities at FVOCI Securities at AC At 31 December 2019 At 31 December 2018 Russian Ruble US Dollar Russian Ruble US Dollar - 7.21% 4.41% 10.13% 13.00% 4.41% 6.05% 0.10% 3.19% 9.22% 7.11% 8.67% 8.35% 1.00% - - 4.60% 6.26% 7.96% 1.20% 8.30% 1.60% 13.00% - - - - - 3.66% 6.57% 6.57% 1.20% 8.21% 0.10% 3.19% 9.25% 5.56% 7.76% 9.18% 0.30% - - 6.60% 1.60% - - - - - 7.89% 5.86% 6.11% 273 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25FINANCIAL LIABILITIES Debt Bonds issued Subordinated debt Debt securities issued Credit facilities Other debt Banking: Other financial liabilities at fair value through profit and loss Banking: Due to banks and the Bank of Russia Banking: Customer accounts At 31 December 2019 At 31 December 2018 Russian Ruble US Dollar Russian Ruble US Dollar 6.89% 0.00% 5.00% 6.47% 4.57% 7.46% 6.41% 6.00% - 8.92% 1.20% 4.19% 0.01% - 1.60% 2.30% 7.73% 6.50% 2.92% - 5.24% 7.90% 7.58% 5.46% - 9.50% 2.30% 4.18% 2.91% - 2.00% 2.80% The following table presents a sensitivity analysis of interest rate risk on banking and non-banking financial assets and liabilities: Year ended 31 December 2019 Year ended 31 December 2018 Impact on profit before tax Impact on equity Impact on profit before tax Impact on equity Increase by 100 basis points Decrease by 100 basis points (273) 273 (218) 218 (1,147) 1,147 (917) 917 c) Financial instruments price risk Financial instruments price 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 price risk for financial instruments held within 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 restrict- ing 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 price risk is managed primarily through daily mark-to-market procedures, sensitivity analysis and control of limits established for various types of financial instruments. Sensitivity to changes in other prices is estimated using the Val- ue at Risk (VaR) methodology. This is a way to assess potential losses that may occur at a risk position as a result of changes in market rates and prices in a certain period of time with a given level of confidence. VaR estimates in respect of financial assets at fair value through profit or loss and available-for-sale financial assets as at 31 De- cember 2019 and 2018 are as follows: Year ended 31 December 2019 Year ended 31 December 2018 Impact on profit before tax Impact on equity Impact on profit before tax Impact on equity Fixed income securities price risk Equity securities price risk Total price risk 301 6 307 240 5 245 104 12 116 83 10 93 IFRS Consolidated Financial Statements CREDIT RISK The Group exposes itself to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to meet an obligation. Exposure to credit risk arises as a result of the Group’s lending and other transactions with counterparties, giving rise to financial assets and off-balance sheet credit-related commitments. The Group’s maximum exposure to credit risk is reflected in the carrying amounts of financial assets in the consolidated statement of financial position. For financial guarantees issued, commitments to extend credit, undrawn credit lines and export/ import letters of credit, the maximum exposure to credit risk is the amount of the commitment. The estimation of credit risk for risk management purposes is complex and involves the use of models, as the risk varies depending on market conditions, expected cash flows and the passage of time. The assessment of credit risk for a portfolio of assets entails further estimations of the likelihood of defaults occurring, the associated loss ratios and default correlations between counterparties. Expected credit loss (ECL) measurement ECL is a probability-weighted estimate of the present value of future cash shortfalls (i.e., the weighted average of credit losses, with the respective risks of default occurring in a given time period used as weights). An ECL measurement is unbiased and is determined by evaluating a range of possible outcomes. ECL measurement is based on four components used by the Group: Probability of Default (“PD”), Exposure at Default (“EAD”), Loss Given Default (“LGD”) and Discount Rate. EAD is an estimate of exposure at a future default date, tak- ing into account expected changes in the exposure after the reporting period, including repayments of principal and interest, and expected drawdowns on committed facilities. The EAD on credit related commitments is estimated using Credit Conversion Factor (“CCF”). CCF is a coefficient that shows the probability of conversion of the committed amounts to an on-balance sheet exposure within a defined period. PD an estimate of the likelihood of default to occur over a given time period. LGD is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including from any collateral. It is usually expressed as a percentage of the EAD. The expected losses are discounted to present value at the end of the reporting period. The discount rate represents the effective interest rate (“EIR”) for the financial instrument or an approximation thereof. Expected credit losses are modelled over instrument’s lifetime period. The lifetime period is equal to the remaining contractual period to maturity of debt instruments, adjusted for expected prepayments, if any. For loan commitments and financial guaran- tee contracts, it is the contractual period over which an entity has a present contractual obligation to extend credit. Management models Lifetime ECL, that is, losses that result from all possible default events over the remaining lifetime period of the financial instrument. The 12-month ECL, represents a portion of lifetime ECLs that result from default events on a financial instrument that are possible within 12 months after the reporting period, or remaining lifetime period of the financial instrument if it is less than a year. The ECLs that are estimated by management for the purposes of these financial statements are point-in-time estimates, rather than through-the-cycle estimates that are commonly used for regula- tory purposes. The estimates consider forward-looking informa- tion, that is, ECLs reflect probability weighted development of key macroeconomic variables that have an impact on credit risk. The ECL modelling does not differ for Purchased or Originated Credit Impaired (“POCI”) financial assets, except that (a) gross carrying value and discount rate are based on cash flows that were recoverable at initial recognition of the asset, rather than based on contractual cash flows, and (b) the ECL is always a lifetime ECL. POCI assets are financial assets that are credit-im- paired upon initial recognition, such as impaired loans acquired in a past business combination. Credit risk management Credit risk is the single largest risk for the Group’s business; man- agement therefore carefully manages its exposure to credit risk. An assessment is performed at each reporting date to identify a significant increase in credit risk since initial recognition of a financial instrument. Such assessment is performed on the basis of qualitative and quantitative information: • Quantitative assessment is performed on the basis of a change in risk of default arising over the expected lifetime of a financial asset. • Qualitative assessment implies that a number of factors are important for assessing significant increase in credit risk (restructuring indicative of problems, establishing favourable schedule for repaying loan interest and principal, significant changes in expected results of operations and behaviour of a borrower and other material changes). Financial assets move from Stage 1 to Stage 2 if there is one or a combination of the following factors: • financial assets are over 30 days overdue; • • credit rating deteriorates; there are early warning indicators of an increase in credit risk; a need to change previously agreed on terms of the agree- ment to create more favourable environment for a customer due to his inability to meet current liabilities because of the customer’s financial position; full or partial refinancing of the current debt which would not be required if the client did not experience financial difficulties; • a customer has no rating at the reporting date; • information on future changes in assets that may result in credit losses not considered in the rating systems is identified (e.g. military conflicts in the region that may have a significant impact on future credit quality). A default is recognised if one or a combination of the following events occur: • financial assets are over 90 days overdue (a rebuttable pre- sumption); • a default rating is assigned; • • a favourable schedule for repaying interest and principal with restructuring indicative of problems is undertaken; payments to be made at the end of the term is granted. 274 275 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25Non-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 cus- tomers 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 expected credit losses. 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 collec- tion 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. Credit risk analysis for accounts receivable is presented in Note 7. The Group performs an ongoing assessment and monitoring of the risk of default. In addition, as part of its cash management and credit risk function, the Group regularly evaluates the credit- worthiness of financial and banking institutions where it deposits cash. The Group deposits available cash mostly with financial institu- tions 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’s credit risk policies prescribe its acceptance only through formalized procedures and only based on decisions of the authorized collegial body. The Bank ZENIT has a system of credit committees responsible for making credit decisions, the main objective of which is to create a high-quality loan portfolio that ensures the implementation of the strategy, credit policies and risk management policies. The credit committees of Bank ZENIT, authorized to make credit decisions, have a clear seg- mentation according to business lines, lending segments and the amount of authority. Credit committees and their level of responsibility in respect of approval of maximum exposures on a borrower or group of relat- ed borrowers are as follows: Name of committee Credit committee Credit committee on small and medium- sized business borrowers Credit committee on retail lending * Within the limits of standards N6 and N25 Maximum exposure allowed to be approved, RR million Not limited* 400 90 IFRS Consolidated Financial Statements Rating group I II III IV V PD interval Corresponding ratings of external international rating agencies Description <0.36% [0.36%; 1.51%) [1.51%; 7.51%) [7.51%; 100%) 100.00% S&P \ Fitch «AAA»…«BBB-» «BB+»…«BB-» «B+»…«B-» «CCC»…«C» «D» Moody`s «Aaa»…«Baa3» Minimal credit risk «Ba1»…«Ba3» «B1»…«B3» «Caa1»…«C» «D» Low credit risk Medium credit risk High credit risk Default assets The Group does not enter into transactions with an initial rating of III or IV. In order to monitor the credit risk, responsible employees of credit departments prepare regular reports based on a struc- tured analysis of the Client’s business and financial performance. Management obtains and analyses all information about signif- icant risks related to customers with deteriorating creditworthi- ness. Credit risk monitoring has an important role in maintaining the quality of loans at least as good as at the moment of credit limits approval, in preventing losses on the formed portfolio in excess of planned norms and consists in: • maintaining constant contact and holding regular risk-fo- • • • • • cused discussions (meetings) with the borrower by business managers; structured and continuous monitoring of the implementation of financial and non-financial covenants using the control register; carrying out, with an established frequency, regular inspec- tions of the volume, type and conditions of maintenance of the pledged items, its validity and insurance; conducting a quarterly analysis of the financial and economic activities of the borrower and monitoring its financial position; monitoring of proper loan maintenance and repayment (tranches); compulsory comprehensive annual review of the risk limit established for the Client in order to re-approve, increase or reduce it (in case of negative trends in the borrower’s activity, in its sector, in the economy as a whole, etc.); • analysis of actual exposures versus established limits; • control over compliance with internal policies, procedures, instructions and orders issued by respective management bodies; • monitoring of macroeconomic parameters in order to check the adequacy of risk assessment and forecast; • portfolio analysis showing trends in levels of default, concen- trations, diversifications by borrowers or groups of borrowers, products, industries, countries, etc. In order to ensure financial stability, forecast expected losses, plan capital requirements, calculate risk-appetite limits, the Group performs periodic stress-testing of credit risk. The stress-test- ing tool includes regression models based on macroeconomic factors. A mandatory condition for the application of regression models is their high quality, confirmed by the results of validation. The Group’s divisions carry out loan maturity analysis and fol- low-up control over overdue balances. For more detailed analyses please refer to www.zenit.ru/rus/about_bank/disclosure/financial-statements/ Credit risk analysis on banking and non-banking operations of the Group 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 Fitch Rating and as AAA to BBB- for Standard and Poor’s Rating, respectively; • non-investment (speculative) grade ratings classification re- ferred to as Ba1 to C for Moody’s Investment Services, as BB+ to B- for Fitch Rating and as BB+ to D for Standard and Poor’s Rating, respectively. The following table contains an analysis of the credit risk expo- sure of cash and cash equivalents including mandatory reserve deposits with the Bank of Russia. The carrying amount as at 31 December 2019 and 2018 also represents the Group’s maximum exposure to credit risk on these financial assets. The Group structures the level of credit risk it undertakes by placing the appropriate limits. Limits are set by the Group on an individual (for example, for specific customers and counterpar- ties), group and portfolio basis (for example, industry and region- al limits, limits on types of operations, etc.). Internal regulations on financial analysis and risk assessment are created and applied to each segment of the lending activity, including lending to legal entities, individuals, small and medi- um-sized businesses and other categories of borrowers. To reduce the level of risk, the Group accepts collateral in the form of pledges, sureties and guarantees. In case of accept- ance of a surety, the Group performs a financial analysis of the guarantor. The assessment of collateral is performed internally by special division 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. Credit risk for off-balance sheet financial instruments is defined as the possibility of sustaining a loss as the result of another par- ty to a financial instrument failing to perform in accordance with the terms of the contract. The Group uses the same credit poli- cies in assuming conditional obligations as it does for on balance sheet financial instruments, through established credit approvals, risk control limits and monitoring procedures. Risk management departments monitor compliance with the requirements of external and internal polices of risk assessment, credit decision making, authority to make credit decisions, and work with collaterals. To quantify the credit risk, the Group uses internal models (rating systems). In the absence of a model, the assessment can be carried out in one of the alternative ways: • based on the average values obtained on the internal statis- tics; • using external ratings of international rating agencies (S&P, Fitch, Moody`s), mapped to the internal scale of the Bank ZENIT. The system of internal ratings has been applied by Bank ZENIT since 1999 and is continuously updated and developed. The in- formation accumulated over this period provides a sound ground for assessment of ratings migration and allows the Group to calibrate corresponding parameters of default probability. The Group updates and validates internal models and approach- es on a periodic basis, but at least once a year. For the purpose of information disclosure, assets are grouped in one of the 4 credit quality rating categories in order of credit quality deterio- ration (credit risk increase) in accordance with the approaches outlined below: 276 277 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25Stage 1 (12-months ECL) At 31 December 2019 Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit impaired) POCI Total На 31 декабря 2018 Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit impaired) POCI Total IFRS Consolidated Financial Statements CASH ON HAND AND CASH IN BANKS Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount 22,999 10 1,721 24,730 - 24,730 TERM DEPOSITS WITH ORIGINAL MATURITY OF LESS THAN THREE MONTHS Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount DUE FROM BANKS Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount 128 222 - 350 - 350 77 - - 77 - 77 BANKING: MANDATORY RESERVE DEPOSITS WITH THE BANK OF RUSSIA Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount 1,572 - - 1,572 - 1,572 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 22,999 10 1,721 24,730 - 24,730 128 222 - 350 - 350 77 - - 77 - 77 1,572 - - 1,572 - 1,572 278 CASH ON HAND AND CASH IN BANKS Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount 31,721 4,030 6,589 42,340 - 42,340 TERM DEPOSITS WITH ORIGINAL MATURITY OF LESS THAN THREE MONTHS Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount DUE FROM BANKS Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount 6,468 15,610 - 22,078 - 22,078 - 1,071 - 1,071 - 1,071 BANKING: MANDATORY RESERVE DEPOSITS WITH THE BANK OF RUSSIA Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount 1,875 - - 1,875 - 1,875 The following table contains an analysis of the credit risk exposure of other financial assets measured at amortised cost and measured at fair value through other comprehensive income for which ECL allowance is recognised other than cash and cash equivalents in- cluding mandatory reserve deposits with the Bank of Russia, loans to customers and accounts receivable. The carrying amount as at 31 December 2019 and 2018 also represents the Group’s maximum exposure to credit risk on these financial assets. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 31,721 4,030 6,589 42,340 - 42,340 6,468 15,610 - 22,078 - 22,078 - 1,071 - 1,071 - 1,071 1,875 - - 1,875 - 1,875 279 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25At 31 December 2019 At 31 December 2019 Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit impaired) POCI Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit impaired) POCI Total IFRS Consolidated Financial Statements - - - - - - - - 7 158 7 158 - 7 158 - - - - - - 309 12 338 659 - 659 - - 112 112 - 112 - - 4 551 4 551 (3 322) 1 229 - - - - - - - - - - - - - - 240 240 (240) - - - 35 806 35 806 (22 685) 13 121 - - 2,732 2,732 (1,804) 928 - - 5,547 5,547 (5,547) - - - - - - - - - - - - - - - - - - - - - - - - - 352 352 (240) 112 - - 47 515 47 515 (26 007) 21 508 2,732 2,732 (1,804) 928 309 12 5,885 6,206 (5,547) 659 DUE FROM BANKS Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount REPO WITH BANKS Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount 1,475 3,121 - 4,596 (109) 4,487 4,081 - - 4,081 - 4,081 DEBT SECURITIES MEASURED AT AMORTISED COST Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount 16,354 5,087 2,359 23,800 (62) 23,738 - - - - - - - - - - - - - - - - - - DEBT SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount 16,476 797 1,848 19,121 (34) 19,087 - - 20 20 - 20 - - 32 32 (32) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,475 3,121 32 4,628 (141) 4,487 4,081 - - 4,081 - 4,081 16,354 5,087 2,359 23,800 (62) 23,738 16,476 797 1,868 19,141 (34) 19,107 281 NOTES RECEIVABLE Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount OTHER LOANS Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount LOANS TO EMPLOYEES Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount BANK DEPOSITS Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount 280 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25At 31 December 2018 At 31 December 2018 Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit impaired) POCI Total Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit impaired) POCI Total IFRS Consolidated Financial Statements - - - - - - - - 83 83 - 83 - - - - - - 346 - 311 657 - 657 - - 456 456 - 456 - - 26,217 26,217 (543) 25,674 - - - - - - - - - - - - - - 566 566 (566) - - - 20,377 20,377 (17,464) 2,913 - - 2,822 2,822 (1,776) 1,046 - - 5,544 5,544 (5,544) - - - - - - - - - - - - - - - - - - - - - - - - - 1,022 1,022 (566) 456 - - 46,677 46,677 (18,007) 28,670 2,822 2,822 (1,776) 1,046 346 5,855 6,201 (5,544) 657 DUE FROM BANKS Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount REPO WITH BANKS Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount 333 1,599 83 2,015 - 2,015 537 - - 537 - 537 DEBT SECURITIES MEASURED AT AMORTISED COST Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount 32,938 35 - 32,973 (221) 32,752 - - - - - - - - - - - - 3 10 1 14 - 14 DEBT SECURITIES MEASURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount 15,662 1,677 478 17,817 (124) 17,693 - - 89 89 - 89 Within short term bank deposits there are RR 5,540 million of deposits placed with Tatfondbank. In March 2017, by the order of the Bank of Russia the license to conduct banking operations was withdrawn from Tatfondbank. At 31 December 2019 and 2018 the Group created a provision for impairment of deposits placed with Tatfondbank in the amount of RR 5,540 million. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 333 1,599 83 2,015 - 2,015 537 - - 537 - 537 32,941 45 1 32,987 (221) 32,766 15,662 1,677 567 17,906 (124) 17,782 283 NOTES RECEIVABLE Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount OTHER LOANS Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount LOANS TO EMPLOYEES Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount BANK DEPOSITS Investment grade rating Non-investment grade rating Unrated Gross carrying amount Credit loss allowance Carrying amount 282 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25The resulting models allow for the assessment of future expect- ed cash flows due to projected future business and different crisis scenarios. While managing liquidity risk treasury depart- ments of the Group distinguish liquidity required within a current business day and term liquidity. For managing current liquidity (with a 1-day horizon) the following methods are used: • • reallocation of cash between accounts with other banks; collection of information from business and other supporting units on large transactions (both proprietary and customer based); • purchase and sale of certain financial assets in liquid portfo- lios; • accelerating closure of trade positions; • estimation of minimum expected cash inflow during a busi- ness day; and • daily control over the balance of cash and estimated liabilities to be settled on demand. In order to optimize liquidity management procedures, Bank ZENIT allocates instant (intraday) and emergency liquidity man- agement. The monitoring of the current and forecasted state of urgent liquidity is carried out by the Bank’s Treasury daily on the basis of calculating the sufficiency of highly liquid assets to cover planned and unplanned outflows and meeting resource requirements for a period of up to 30 days. In the normal course of business, liquidity reports reflecting the current and projected structure of assets and liabilities, taking into account the model of daily minimum balance on current accounts by currency based on an analysis of historical dynamics, as well as expected future cash flows are regularly reported to ALCO. Liquidity management decisions made by the ALCO are implemented by treasuries as part of their duties. The share of liquid assets is maintained at a level sufficient to meet obligations to customers and counterparties of Bank ZENIT, which can significantly reduce liquidity risks and non-market funding rates. To maintain instant liquidity, limits are open on Bank ZENIT by a significant number of Russian banks. In addition, the liquidity risk is minimized by the Bank ZENIT’s ability to raise funds from the Bank of Russia within the framework of the refinancing system and state support for the financial sector, as well as established liquidity management policies and technologies that provide for stress approaches in estimating future cash flows. In accordance with the Group’s Liquidity Management Policy, the basic principle of liquidity management is risk limiting, in particu- lar, using the required liquid assets limit. If necessary (changing the financial situation in the markets or at Bank ZENIT), other limits (for counterparties, financial instruments, etc.) included in the Bank ZENIT’s limit structure can be used to manage liquidity. Liquidity analysis for banking and non-banking operations of the Group The following tables summarise the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments, including interest payments as at 31 December 2019 and 2018: LIQUIDITY RISK 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 in- curring unacceptable losses or risking damage to the Group‘s reputation. In managing its liquidity risk, the Group maintains ad- equate cash reserves and debt facilities, continuously monitors forecast and actual cash flows and matches the maturity profiles of financial assets and liabilities on non-banking activities. 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 ob- ligations 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 The objective of liquidity risk management is to ensure the stable operations of all banks of the Group, the possibility of uninter- rupted operations in accordance with the Group’s business plans, including the timely fulfilment of all obligations to custom- ers and counterparties related to making payments, as well as minimising the negative impact on financial results, own funds (capital), the Group’s reputation for a possible liquidity deficit. Also, the priority objective of liquidity risk management is to ensure that all banks of the Group comply with the mandatory liquidity ratios established by the Central Bank of Russia. The Group’s approach to banking operations liquidity manage- ment 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. In respect to the banking segment The Group endeavors to main- tain 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 unfore- seen liquidity requirements in an efficient and timely manner. Key parameters in liquidity risk management such as the struc- ture of assets and liabilities, composition of liquid assets and acceptable liquidity risks are established by Assets and Liabilities Management Committee (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 pro- jected by business units; current and projected characteristics of liquid assets which in- clude, apart from cash and cash equivalents, amounts due from other banks and certain financial assets held-for-trading; and relevant external factors. • • 284 IFRS Consolidated Financial Statements FINANCIAL LIABILITIES Trade and other financial payables Trade payables Dividend payable Current portion of lease liability Lease obligations, net of current portion Other payables Banking: Other financial liabilities at fair value through profit and loss Debt Bonds issued Subordinated debt Debt securities issued Credit facilities Other debt Banking: Due to banks and the Bank of Russia Banking: Customer accounts Credit related commitments (Note 27) Total At 31 December 2019 Less than 1 year Between 1 and 5 years Over 5 years Total 36,150 55,865 3,024 - 1,660 4,451 3,232 292 880 14,700 475 20,727 134,315 36,114 311,885 - - - 9,443 149 - 22,323 3,137 40 - 2,007 2,827 29,486 5,725 75,137 - - - 11,078 - - 7 509 3 - 3 8 - 11,608 36,150 55,865 3,024 20,521 1,809 4,451 25,562 3,938 923 14,700 2,482 23,557 163,809 41,839 398,630 At 31 December 2018 Less than 1 year Between 1 and 5 years Over 5 years Total FINANCIAL LIABILITIES Trade and other financial payables Trade payables Dividend payable Other payables Banking: Other financial liabilities at fair value through profit and loss Debt Bonds issued Subordinated debt Debt securities issued Credit facilities Other debt Banking: Due to banks and the Bank of Russia Banking: Customer accounts Other short-term liabilities Credit related commitments (Note 27) Total 25,728 50,711 1,013 1,190 945 2,498 1,051 6,682 964 15,386 170,869 533 38,929 316,499 - - - - 59 1,966 76 - 1,625 4,660 38,753 - - - - - - 193 2,125 4 - - - 8 - - 47,139 2,330 25,728 50,711 1,013 1,190 1,197 6,589 1,131 6,682 2,589 20,046 209,630 533 38,929 365,968 285 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25FAIR VALUES Fair value is the price that would be received to sell an asset or paid to transfer a liability in an ordinary transaction between market participants at the measurement date. The estimat- ed fair values of financial instruments are determined with reference to various market information and other valuation techniques as considered appropriate. Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 – Unobservable inputs for the asset or liability. These inputs reflect the Group‘s own assumptions about the assump- tions a market participant would use in pricing the asset or liability. The different levels of fair value hierarchy have been defined as follows: Recurring fair value measurements Level 1 – Quoted prices in active markets for identical assets or liabilities that Group has the ability to assess at the measure- ment date. The levels in the fair value hierarchy into which the recurring fair value measurements are categorised are as follows: At 31 December 2019 Fair value Carrying value Level 1 Level 2 Level 3 - 7,015 - 18,325 - (4,425) 20,915 - 643 1,238 10,407 - (26) 12,262 12,947 293 - 16,095 1,323 - 30,658 12,947 7,951 1,238 44,827 1,323 (4,451) 63,835 At 31 December 2019 Fair value Carrying value Level 1 Level 2 Level 3 - 2,320 - 18,056 - (1,190) 19,186 - 2,265 - 9,227 - - 11,492 13,043 189 117 16,092 918 - 30,359 13,043 4,774 117 43,375 918 (1,190) 61,037 Banking: Loans to customers measured at fair value through profit and loss Securities measured at fair value through profit and loss Banking: Due from banks Securities measured at fair value through other comprehensive income Investment property Banking: Other financial liabilities measured at fair value through profit and loss Total Banking: Loans to customers measured at fair value through profit and loss Securities measured at fair value through profit and loss Other loans measured at fair value through profit and loss Securities measured at fair value through other comprehensive income Investment property Banking: Other financial liabilities measured at fair value through profit and loss Total 286 IFRS Consolidated Financial Statements The description of valuation technique and description of inputs used in the fair value measurement for Level 2 and Level 3 meas- urements at 31 December 2019 и 2018: Fair value hierarchy Valuation technique and key input data Banking: Loans to customers at FVTPL Level 3 Securities at FVOCI Level 2, Level 3 Publicly available information, comparable market prices/ discounted cash flow models adjusted at credit risk Уровень 2, Уровень 3 Securities at FVTPL Level 2, Level 3 Discounted cash flow models adjusted at credit risk Quoted prices for similar investments in active markets, net assets valuation, comparative (market) approach / Рыночная цена аналогичных инвестиций на открытом рынке, метод чистых активов сравнительный (рыночный) подход/ Использование публично доступной информации, сопоставимых рыночных цен/ Дисконтированные денежные потоки, скорректированные на кредитный риск Quoted prices for similar investments in active markets, net assets valuation, comparative (market) approach / Publicly available information, comparable market prices / discounted cash flow models adjusted at credit risk Уровень 3 Дисконтированные денежные потоки, скорректированные на кредитный риск Banking: Due from banks Other loans at FVTPL Investment property Level 2 Level 3 Level 3 Quoted prices for similar investments in active markets adjusted at credit risk Discounted cash flow models adjusted at credit risk Market data on comparable objects adjusted in case of differences from similar objects There were no changes in valuation technique for Level 2 and Level 3 recurring fair value measurements during the years ended 31 December 2019 and 2018. There have been no transfers between Level 1, Level 2 and Level 3 during 2019 and 2018 year. 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: 287 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25At 31 December 2019 At 31 December 2018 At 31 December 2019 At 31 December 2018 Fair value Carrying value Fair value Carrying value Fair value Carrying value Fair value Carrying value Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 IFRS Consolidated Financial Statements 6,365 18,365 350 35,800 36,150 272 25,456 25,728 - - - - 24,730 5,451 36,889 350 77 - - 22,078 1,071 1,572 1,875 - - - - - - 42,340 22,078 1,071 1,875 78,417 78,417 LIABILITIES Trade and other financial payables Trade payables Dividend payable Current portion of lease liabilities Other payables Non-current lease liabilities Debt - - - - - Bonds issued 20,032 ASSETS Cash and cash equivalents Cash on hand and in banks Term deposits Due from banks Banking: Mandatory reserve deposits with the Bank of Russia Accounts receivable Trade receivables Other financial receivables Banking: Loans to customers measured at amortised cost Other financial assets Bank deposits Due from banks REPO with banks Notes receivable Loans to employees Other loans measured at amortised cost - - 1,572 - - - - - - - - - 350 77 - - 659 3,283 4,081 - - - - 79,724 79,724 1,176 11,506 12,682 - 122,842 123,505 - - - 112 928 659 3,249 4,081 112 928 21,508 21,508 - - - - - - - - - 596 4,535 5,131 - 133,404 133,404 657 2,015 537 - - - - - - 456 1,046 657 2,015 537 456 1,046 28,670 28,670 - - 332 - 1,825 1,287 923 - - - - - - 55,865 55,865 2,613 1,809 11,578 - - - - - 21,857 1,056 1,287 923 14,700 2,482 - - - - 2,613 1,477 11,578 - - - 14,700 2,482 - - - - - 500 - - 3,580 1,130 - - 50,711 50,711 - 513 - - - - 6,682 2,589 - 1,013 - 1,056 3,580 1,130 6,682 2,589 - - 18,425 182,970 1,527 21,288 - - 156,578 - 22,815 1,526 16,899 160,052 - - - 182,970 - 533 533 Total financial liabilities 21,559 182,583 124,515 332,131 2,582 205,351 86,484 294,417 Subordinated debt Debt securities issued Credit facilities Other debt Banking: Due to banks and the Bank of Russia Banking: Customer accounts Other short-term liabilities Securities measured at amortised cost 24,777 - 23,738 31,276 1,490 - 32,766 Total financial assets 32,714 27,991 236,620 296,915 38,602 65,333 246,528 350,463 288 289 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25Reconciliation of liabilities arising from financing activities Banking operations capital management Note 31 IFRS Consolidated Financial Statements The Bank ZENIT’s objectives when managing capital are (i) to comply with the capital requirements set by the Central Bank of the Russian Federation, (ii) to safeguard the Group’s ability to continue as a going concern and (iii) to maintain a sufficient cap- ital base to achieve a capital adequacy ratio based on the Basel Accord of at least 8%. Compliance with capital adequacy ratios set by the Central Bank of the Russian Federation is monitored by the Management of Bank ZENIT on a daily basis. Other objec- tives of capital management are evaluated annually. Under the current capital requirements set by the Central Bank of Russia, banks have to maintain a ratio of regulatory capital to risk weighted assets (“statutory capital ratio”) above a prescribed minimum level. Bank ZENIT is also subject to minimum capital requirements established by loan covenants, including capital adequacy level of 8% calculated in accordance with Basel I and IFRS, and Tier 1 capital adequacy ratio of 6%. Bank ZENIT has complied with all externally imposed capital requirements throughout 2019 and 2018. 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 subor- dinated loans mature from January 2025 to November 2034 and bear interest equal to OFZ coupon rate plus 1%. In accordance with IFRS 9 and IAS 39 if securities are loaned under an agreement to return them to the transferor, they are not derecognised because the transferor retains substantially all the risks and rewards of own- ership. Accordingly, the obligation to return the securities should not be recognised. Therefore, OFZ and the subordinated loan received from DIA are not recognised within assets and liabilities in the consolidated statement of financial position. These subordi- nated loans are accounted for in capital adequacy ratio calculation in accordance with Bank of Russia’s Regulation No. 395-P. Subsequent events In the first quarter of 2020 the Group borrowed RR 101,960 mil- lion in total from Russian banks at the current market rates under existing credit facilities. The Group repaid RR 72,320 million of these loans by the date of this report. Since the end of 2019, the spread of a new coronavirus, called COVID-19, which can cause serious consequences leading to human death, has begun. At the end of 2019, the World Health Organization reported a limited number of cases of COVID-19 infection, but on January 31, 2020 declared a public health emergency of international concern, and on March 13, 2020, announced a pandemic due to the rapid spread of COVID-19 in Europe and other regions. The measures taken around the world to combat the spread of COVID-19 result in limitation of business activity, which affects the demand for energy resources and other products of the Group, as well as the need for protective meas- ures aimed at preventing the spread of infection. In addition, in March 2020, no agreement was reached on the OPEC+ limitation of crude oil production and the existing arrangement expires on April 1, 2020, which leads to the possibility of an increase in the supply of crude oil and refined products in the market from producing countries. Against the backdrop of these events, there has been a significant drop in stock markets, commodity prices fell, in particular, crude oil prices declined significantly, the Russian Ruble weakened against the US dollar and the Euro, and the lending rates for many companies in the emerging markets increased. While this is still an evolving situation at the time of is- suing these consolidated financial statements, it appears that the impact on the global economy and uncertainty regarding further economic growth may negatively affect the financial position and financial results of the Group in the future. Management is closely monitoring the situation and implements measures to reduce the negative impact of these events on the Group, while the excess of supply over demand and the associ- ated decrease in world oil prices will directly affect the revenues of the Group and other financial results if prices do not recover within the near term. Management considers the reduction in oil demand due to the outbreak of COVID-19 coronavirus infection to be a non-adjusting event after the reporting period. 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. The table below sets out an analysis of the movements in the Group’s liabilities from financing activities for each of the periods presented. The items of these liabilities are those that are report- ed as financing in the statement of cash flows: Liabilities arising as a result of financing activities Short-term and long-term debt Bonds issued Subordinated debt 31,150 7,742 4,492 At 31 December 2017 Cash flow movement, including: Proceeds from issuance of debt Repayment of debt Redemption of bonds Interest paid Foreign exchange adjustments Interest accrued Other non-cash flows At 31 December 2018 Cash flow movement, including: Proceeds from issuance of debt Repayment of debt Issuance of bonds Redemption of bonds Interest paid Foreign exchange adjustments Interest accrual Other non-cash flows At 31 December 2019 Total 43,384 25,920 (49,466) (8,338) (602) 993 1,734 281 - - (6,979) (602) - 614 281 - - (1,359) - (19) 466 - 1,056 3,580 13,906 - - 21,790 (1,053) (119) - 182 1 - - - (2,140) (286) (160) 310 (17) 1,287 115,346 (107,212) 21,790 (3,193) (2,627) 553 1,247 516 40,326 25,920 (49,466) - - 1,012 654 - 9,270 115,346 (107,212) - - (2,222) 713 755 532 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 adjust- ments to it, in light of changes in economic conditions. The Group defines capital under management as the total Group shareholders’ equity as shown in the consolidated statement of financial position. The amount of capital that the Group man- aged as at 31 December 2019 was RR 745,532 million (2018: RR 771,265 million). The Group manages capital for banking and non-banking operations separately. Consolidated total borrowings excluding borrowings of Bank ZENIT: Bonds issued Credit facilities Other debt Consolidated shareholders’ equity Debt to capital employed ratio, % (Consolidated total borrowings / Consolidated shareholders’ equity) 17,182 21,857 Non-banking operations capital management The Group considers equity and debt to be the principal ele- ments 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 assets. The Group monitors capital on the basis of its gearing ratio. Year ended 31 December 2019 Year ended 31 December 2018 32 182 15 000 14 700 2 482 745,532 4.3% 9 271 - 6 682 2 589 771,265 1.2% 290 291 2019 ANNUAL REPORTANNEX 1YEARS OF SUSTAINABLE DEVELOPMENT25Annex 2 Independent Auditor’s Report Independent Auditor’s Report Financial Statements under the Russian Accounting Standards Independent Auditor’s Report To the Shareholders and Board of Directors of PJSC TATNEFT named after V.D. Shashin: Our opinion In our opinion, the enclosed accounting statements present fairly, in all material respects, the financial position of PJSC TATNEFT named after V.D. Shashin (hereinafter referred to as the “Company”) as of December 31, 2019, as well as its financial results and cash flows for the year ended on that date, in compliance with the accounting rules established in the Russian Federation. Subject of audit We have audited the Company’s accounting statements, which include: • Balance Sheet as of December 31, 2019; • Profit & Loss Statement for the year then ended; • Statement of Changes in Equity for the year then ended; • Statement of Cash Flows for the year ended on that date; • Notes to the Balance Sheet and Profit & Loss Statement. Basis for our opinion We conducted our audit in accordance with the International Standards on Auditing (ISA). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the audit of the accounting statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent in respect of the Company, in accordance with the Code of Ethics for Professional Accountants developed by the International Ethics Standards Board for Accountants (IESBA Code) and the ethical requirements of the Code of Professional Ethics for Auditors and Auditors & Audit Organizations Independence Rules, applicable to our audit of the accounting statements in the Russia Federation. We have fulfilled our other ethical obligations in accordance with these requirements and the IESBA Code. Joint Stock Company PricewaterhouseCoopers Audit (JSC PwC Audit) 10 Butyrsky Val Str., Business Center Belaya Ploschad, Moscow, 125047, Russia Telephone: +7(495) 967-6000, Fax: +7(495) 967-6001, www.pwc.ru 292 1 293 ANNUAL REPORT 2019ANNEX 2YEARS OF SUSTAINABLE DEVELOPMENT25 Independent Auditor’s Report Materiality at the level of the overall Company’s accounting statements RUB 11,600 million How we determined it 5% of adjusted profit before tax Rationale for the materiality benchmark applied We decided to use profit before tax as a base indicator to determine the level of materiality because we believe that this base indicator is most often considered by the users to assess the Company’s activities results and, furthermore, is a generally accepted base indicator. The use of adjusted profit before tax provides a more stable basis for determining the level of materiality, since it reduces the effect of volatility (which can be significant) caused by factors of a one-time nature, such as impairment losses on exploration assets, financial investments, receivables, and other non-current assets, associated with oil and gas exploration activities provides a more stable basis for determining the level of materiality, taking into account, mainly, basic profitability of the Group's operations. We established materiality at the level of 5%, which falls within the range of acceptable quantitative thresholds of materiality applicable to profit-driven companies in this industry sector and corresponds to the approach used in the previous year. Key audit matters Key audit matters are those matters, which according to our professional judgment, were of the most significant in our audit of the annual accounting statements for the current period. These matters were addressed in the context of our audit of the accounting statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 3 Our auditing approach Overview Materiality • Materiality at the level of the Company's accounting statements in total: Russian Rubles 11,600 million (RUB mln), which represents 5% of the adjusted profit before tax, excluding one- time effects from impairment of exploration assets, financial investments, account receivables for loans issued and other noncurrent assets related to oil and gas exploration activities. Key audit matters • Changes in accounting policies as regards to recognition of changes in evaluation of liabilities related to decommissioning fixed assets and restoring natural resources • Provision for impairment of assets When planning the audit, we determined the materiality and assessed the risks of material misstatements in the accounting statements. In particular, we analyzed, in which areas the management made subjective judgments, for example, with respect to significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. We defined the scope of the audit in such a way, that we could perform the works sufficient 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 the specifics of the industry, in which the Company operates. Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the accounting statements are free from material misstatement. Misstatements may arise due to fraud or error. Misstatements are considered material if they could reasonably be expected to affect, individually or collectively, the economic decisions of users made on the basis of these accounting statements. Based on our professional judgment, we determined certain quantitative thresholds for materiality, including for materiality at the level of the Company’s accounting statements as a whole, as indicated in the table below. Using these values and taking into account qualitative factors, we determined the scope of our audit, as well as the nature, timing, and scope of our audit procedures, and evaluated the impact of misstatements (those individual and taken in aggregate), if any, on the accounting statements as a whole. 2 294 295 ANNUAL REPORT 2019ANNEX 2YEARS OF SUSTAINABLE DEVELOPMENT25 Independent Auditor’s Report Key audit matter How our audit addressed the key audit matter Key audit matter Change in accounting policy with respect to reflecting changes in the evaluation of estimated liabilities for liquidation of fixed assets and restoration of natural resources Refer to Note II, III, IV.20 (text part) to the Balance Sheet and the Profit & Loss Statement. The Company's accounting statements recognise estimated liabilities for liquidation of fixed assets related to exploration, development and production in the end of their life and restoration of natural resources (i.e. Asset Retirement Obligations hereinafter referred to as “ARO”). to the management due ARO are evaluated annually by the management and involves the use of various estimates and judgments of the complexity inherent in estimating future costs. The amount of estimated liabilities is significant for the balance sheet of the Company, as of December 31, 2019 it amounted to RUB 50,490 million, for December 31, 2018 – RUB 34,471 million, at 31 December 2017 - RUB 38,092 million (lines 1430 and 1540 “Estimated liabilities” of the Balance Sheet). We paid considerable attention to the issue of ARO evaluation, given the materiality of these liabilities and, especially, in connection with the ARO increase by RUB 16,019 million during 2019, which affected the financial results and the value of the Company's assets for the year and as of the end of 2019. This increase was due to several multidirectional factors, the most significant of which was the revision of the assumptions used in the calculation, in particular, of the discount rate. Other changes are mainly related to ARO creation for newly introduced facilities of fixed assets. Expenses of RUB 3,017 million from the discount accrual due to the increase in the present value of ARO are reflected in the statement of financial results in line 2330 " Interest payable". We performed the following procedures in relation to calculation models for the ARO valuation: • Verification of the arithmetic accuracy of calculations and the completeness of the data used, such as a list of objects to be decommissioned, the cost of conservation and liquidation of wells, the number of wells the cost of and other reclamation and the area of land, the field decommissioning period (discount period); fixed assets, • Analysis of the validity of the assumptions used in the ARO calculations, such as both the inflation rate and discount rate. Our procedures for verifying the reasonableness of the cost values used by the management to evaluate ARO of well liquidation costs, other fixed assets and soil recultivation included discussions with the Company's technical specialists of the list and works order procedure for carrying out liquidation and reclamation works, reconciliation with standard estimates of the Company for liquidation of fixed assets, as well as comparison with the prices of the contractors' proposals. The most significant effect on the change in the ARO value during 2019 was the change in the discount rate used to estimate the future cost of decommissioning fixed assets. We compared the discount rate applied by the management of the Company with the level of profitability of government securities, the maturity of which is comparable with the expected deadline of fulfillment of provisions for decommissioning fixed assets and restoring natural resources. Increase in assets amounting to RUB 8,011 million, and decrease in the additional paid-in capital regarding revaluation of non-current assets on fixed assets facilities valued at current (replacement) value by RUB 4,214 million, are recognised in the balance sheet and the statement of financial results according to lines 1190 “Other non-current assets” and 1340 “Revaluation of non-current assets”, respectively. Starting from January 1, 2019, the Company reflects ARO changes because of changes in basic assumptions in the manner prescribed by requirements (IAS) 37 “Estimated Liabilities, Contingent Liabilities and Contingent Assets” and IFRIC 1 “Changes in Existing Decommissioning, Restoration and Similar Obligations”. The right to create an accounting policy taking into account the requirements of the International Financial Reporting Standards by organizations which disclose consolidated in accordance with the International Financial Reporting Standards (IFRS) is provided for by the accounting regulations 1/2008 "Accounting policies of the organization." The Company believes that the transition from the accounting model the basic assumptions through "Other income" and Other expenses" indicators of the financial results statement to the accounting model stipulated by IFRS provides users with more relevant and reliable information on the Company's performance results, which helps to reduce volatility of financial results and avoid multidirectional effects on the Company's net profit as a result of changes in basic assumptions, and also contributes to greater comparability of indicators of accounting (financial) statements of the Company with financial statements of the Group. statements prepared the consolidated indicators of for changes financial in How our audit addressed the key audit matter We analyzed the adjusted accounting registers of the Company’s ARO for comparable periods. Our procedures related to the Company’s change in the accounting policy and recalculation of the effect of ARO changes on the balance sheet and statement of financial results included the following: • Analysis of the validity of the Company's judgments made in relation to changes in accounting policies; and testing relevance • Validation the methodology used by the Company for adoption of the new model of accounting for ARO changes in accordance with IFRS; • Data verification of the recalculated ARO registers for compliance with the selected transition methodology, as well as the mathematical accuracy of the calculations; • Receipt and analysis of the written statements by the Company regarding changes in the accounting policies in terms of ARO and its impact on the accounting (financial) statements. the management of In addition, we checked the compliance of the information disclosed in Sections 11, 111 and IV of the Notes to the Balance sheet and the Statement of financial results with the requirements for the presentation and disclosure of information of accounting regulation 1/2008 "Accounting policies of the organization" and accounting provisions 4/99 "Accounting statements of the organization." 4 5 296 297 ANNUAL REPORT 2019ANNEX 2YEARS OF SUSTAINABLE DEVELOPMENT25 Key audit matter How our audit addressed the key audit matter In connection with the retrospective application of the new accounting policy, comparable indicators of accounting (financial) statements have been changed. The impact of changes in accounting policies on the indicators of the accounting (financial) statements of the Company is disclosed in detail in Section III of the Notes to the Balance sheet and Profit & Loss statement. We paid considerable attention to the change in the accounting policy of the Company in relation to ARO, since the process of switching to another methodology of liabilities accounting is complicated, and this change in accounting policy has a significant impact on the accounting (financial) statements of the Company. Provision for assets impairment Refer to Note IV.15 (text part) to the Balance Sheet and the Profit & Loss Statement. According to the results of December 31, 2019 valuation, the Company created provisions for bad debts, impairment financial investments and assets related to oil and gas exploration in the amount of RUB 14,863 million, RUB 11,206 million and RUB 15 182 million. (in 2018 - RUB 16,881 million, RUB 150 million and RUB 591 million. respectively) reflected in line 2350 “Other expenses” of the report on financial results for the following assets: - tangible and intangible exploratory assets for the search and exploration of oil and gas fields, as well as the costs of exploration as part of other non-current assets; We evaluated the methodology for calculating the provision for doubtful debts, the methodology for impairment of the provision for calculating financial to related investments and assets prospecting and exploration used by the Company, for rules its compliance with accounting established in the Russian Federation. We performed the following procedures: • Analysis of the validity of critical assumptions used in the feasibility study models by field, such as production volume, hydrocarbon prices, production costs; Independent Auditor’s Report Key audit matter carrying out search and exploration of oil and gas fields. - other interest-free loans granted to subsidiaries. In terms of exploration assets, exploration expenses and debts of subsidiaries and affiliates engaged in the search and exploration of oil and gas, the Company analyzes the feasibility studies for each of the fields. The company also analyzes discounted expected cash flow models of subsidiaries. In accordance with Accounting Regulation 24/2011, “Accounting for Expenditures for Development of Natural Resources”, if there are signs of impairment, the Company reviews assets for impairment and takes into account changes in value due to impairment in accordance with International Financial Reporting Standards (IAS) 36 Impairment of Assets, (IFRS) 6 Exploration and Evaluation of Mineral Resources. In accordance with the Provision on Accounting and Reporting in the Russian Federation approved by Order of the Ministry of Finance of the Russian Federation No. 34n dated July 29, 1998, in order to identify doubtful receivables, the Company analyzes information on each debtor’s solvency, obtains experts’ opinions on market values of property provided as collateral under loan agreements ( where possible) and analyzes the models of discounted expected cash flows, requests other relevant information, based on which the Company can assess probability of failure to repay debts within the terms established by contracts. The analysis revealed the need to recognize impairment reserves in connection with adverse conditions in the oil market that affect the current assessment of relevant projects. We paid special attention to this matter due to significance of impairment provisions, as well as significance of judgements and estimates involved in the calculations. How our audit addressed the key audit matter • Analysis of critical assumptions used by the management of the Company in assessing the current market value of the property and rights of claim provided as collateral under loan agreements; • Verification of mathematical accuracy of models expected funds; • Verification of the correctness of determining the recoverable amount of assets and calculating accrued impairment amount the of price hydrocarbons We evaluated the macroeconomic assumptions used by the management, which include, for example, forecasts, comparing them with the consensus forecast of investment banks. Our procedures for verifying the reasonableness of the value of production costs used by management included a discussion with the Company's the composition of the relevant costs, sources of information and their for reconciliation with these sources. We also performed an assessment of compliance with RAS requirements for the disclosure of information in accounting statements. forecasting specialists technical on 6 7 298 299 ANNUAL REPORT 2019ANNEX 2YEARS OF SUSTAINABLE DEVELOPMENT25 Other information The management shall be responsible for the other information. The other information comprises the Company’s Annual Report 2019 and the Issuer’s Quarterly Report Q1 2020 (but excludes the accounting statements and our audit report on these accounting statements), which are expected to be provided to us after the date of this audit report. Our opinion on the accounting statements does not cover the other information, and we will not express any form of assurance conclusion thereon. In connection with our audit of the accounting statements, our responsibility is to read the above- mentioned other information upon its provision and, in doing so, consider whether the other information is materially inconsistent with the accounting statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we conclude that the Company’s Annual Report 2019 and the Issuer’s Quarterly Report Q1 2020 contain material misstatements, we are required to communicate the matter to those persons charged for corporate governance. Responsibility for accounting statements of the management and persons responsible for corporate governance The management is responsible for the preparation and fair presentation of these accounting statements in accordance with the accounting rules established in the Russian Federation and for such internal control system as the management determines appropriate to enable the preparation of accounting statements that are free from material misstatement, whether due to fraud or error. In preparing the accounting statements, the management is responsible for assessing the ability of the Company to continue as a going concern, disclosing, as applicable, matters related to going concern, and using the going concern basis of accounting, unless the management either intends to liquidate the Company or to cease the operations, or has no realistic alternative but to do so. The persons responsible for corporate governance are responsible for the supervision of the preparation of the Company’s accounting statements. Independent Auditor’s Report Auditor’s responsibilities for the audit of accounting statements Our objective is to obtain reasonable assurance about whether the accounting statements are free from material misstatements, whether due to fraud or error, and to issue an auditor’s report that represents our opinion. Reasonable assurance is a high degree of assurance, but it is not a guarantee that the audit conducted in accordance with ISAs will always detect material misstatements, if any. Misstatements may result from fraud or errors and they are considered material if they could reasonably be expected to affect, individually or collectively, economic decisions of users made on the basis of these accounting statements. Within the scope of the audit conducted in accordance with ISA, we exercise professional judgment and maintain professional skepticism throughout the audit. Besides, we perform the following: • Identify and assess the risks of material misstatement of accounting statements, due to fraud or error; design and perform audit procedures to respond to those risks; obtain audit evidence that is sufficient and appropriate to provide the grounds for our opinion. The risk of failure to detect a material misstatement resulting from fraud is higher than the risk of failure to detect a material misstatement resulting from an error, since fraud may involve collusion, forgery, intentional omissions, misrepresentation, or circumventing the internal control system; • Obtain insight of the internal control system relevant to the audit in order to develop audit proce- dures 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 appropriateness of the accounting policies applied and the reasonableness of accounting estimates and the corresponding disclosure of information prepared by the management; • Conclude on the appropriateness of the application by the management of the going concern assumption and, on the grounds of the audit evidence obtained, conclude on the existence of a material uncertainty related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we come to the conclusion that a material uncertainty exists, we must draw attention in our audit report to the appropriate disclosures in the accounting statements or, if such disclosures are inadequate, modify our opinion. Our conclusions are based on the audit evidence obtained prior to the date of our audit report. However, future events or conditions may lead to the Company losing its ability to continue as a going concern. • Evaluate the overall presentation, structure, and content of the accounting statements, including disclosures, and whether the accounting statements present the underlying transactions and events in a manner ensuring their fair presentation. We share information with persons responsible for corporate governance by communicating to them, inter alia, the information about the planned scope and timing of the audit as well as major comments on the audit results, including on significant deficiencies in the internal control system, identified by us in the course of the audit. 8 9 300 301 ANNUAL REPORT 2019ANNEX 2YEARS OF SUSTAINABLE DEVELOPMENT25 We also provide the persons responsible for corporate governance with a statement that we have complied with all relevant ethical requirements for independence and have informed these persons about all relationships, as well as on other matters that can reasonably be considered to have an influence on the auditor’s independence and, where necessary, about the relevant precautions. Among the issues, which we have communicated to the parties responsible for corporate governance, we identify the issues that were the most significant for the audit of the accounting statements for the current period and, therefore, were key audit matters. We describe these matters 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 presented in our report, as it can be reasonably assumed that the negative consequences of the disclosure of such information will exceed the socially significant benefit from its disclosure. Maksim Evgenievich Timchenko is the Head of the Assignment, which resulted in the issuance of this auditor report of an independent auditor March 27, 2019 Moscow, Russian Federation M.E. Timchenko, Head of the Assignment (Qualification Certificate No. 01-000267), Joint Stock Company PricewaterhouseCoopers Audit Audited entity: Public Joint Stock Company TATNEFT named after V.D. Shashin Registered by the Ministry of Finance of the Republic of Tatarstan under No. 632 on January 21, 1994 Record made in the Unified State Register of Legal Entities on July 18, 2002, under State Registration Number 1021601623702 Taxpayer Identification Number 1644003838 75 Lenin Str., Almetyevsk, 423450, Republic of Tatarstan, Russian Federation Independent auditor Joint Stock Company “PricewaterhouseCoopers Audit” Registered by the Government Agency Moscow Registration Chamber on February 28, 1992 under No. 008.890 Record made in the Unified State Register of Legal Entities on August 22, 2002, under State Registration Number: 1027700148431 Taxpayer Identification Number 7705051102 Member of Self-regulatory Organization of Auditors Association “Sodruzhestvo” Primary Registration Number of Entry in the Register of Auditors and Audit Organizations: 12006020338 10 2019 PJSC Tatneft Financial Statements Balance Sheet Report 2019 PJSC Tatneft Financial Statements Balance Sheet Report BALANCE SHEET REPORT (RUB ‘000) Notes ASSETS Line Code As of 31.12.2019 As of 31.12.2018 As of 31.12.2017 VI-2, 8 VI-2, 8 VI-3, 8 VI-3, 8 I. NON-CURRENT ASSETS Intangible assets Research and development results Intangible development assets Tangible development assets VI-1, 7,8 Fixed assets VI-1 VI-8 VI-1, 8 VI-5 VI-4 VI-4 VI-7 VI-7 VI-7 VI-7 VI-7 VI-7 VI-8 VI-8 including capital investments in progress advances issued for the acquisition and construc- tion of fixed assets Income-bearing investments in tangible assets Financial investments Deferred tax assets Other non-current assets including asset retirement obligations Total for Section I II. CURRENT ASSETS Inventories including raw materials and supplies work in progress costs finished products and goods for resale goods shipped other inventories and expenses Value added tax on acquired valuables Receivables including noncurrent nondelinquent accounts receivable (that are due beyond 12 months after the reporting date) VI-8 including buyers and customers 1110 1120 1130 1140 1150 1151 1152 1160 1170 1180 1190 1191 1100 1210 1211 1212 1213 1214 1215 1220 1230 1231 1232 1 854 480 1 519 494 882 443 1 144 240 939 972 792 200 82 200 4 265 212 4 320 885 624 333 2 292 250 2 561 503 266 569 521 256 510 046 233 442 786 107 760 624 115 195 430 100 782 153 14 856 513 8 920 829 4 760 324 392 259 4 323 952 4 199 156 99 328 503 92 381 756 92 578 452 - - - 25 777 779 26 959 839 42 820 400 25 211 401 17 053 844 21 027 007 395 773 315 389 192 521 381 597 825 41 210 116 65 781 674 48 115 981 6 465 505 12 085 489 9 873 466 2 199 449 1 518 853 971 862 26 352 269 27 274 632 24 839 505 5 519 803 22 724 492 7 669 809 673 090 2 178 208 4 761 339 1 902 349 3 617 822 3 919 516 373 794 549 332 674 500 267 690 805 242 747 758 203 639 972 163 426 232 48 655 104 673 718 656 302 303 ANNUAL REPORT 2019ANNEX 2YEARS OF SUSTAINABLE DEVELOPMENT25 Balance sheet report, RUB ‘000 (continuation) 2019 PROFIT AND LOSS STATEMENT Notes ASSETS Line Code As of 31.12.2019 As of 31.12.2018 As of 31.12.2017 Notes Line Item Line Code For 12 months of 2019 For 12 months of 2018 2019 PJSC Tatneft Financial Statements Balance Sheet Report 2019 VI-14 VI-14 VI-14 VI-14 VI-15 VI-15 VI-12 VI-12 VI-12 Revenue Cost of sales Gross profit (loss) Selling expenses Administrative expenses Mineral exploration and evaluation expenses Profit (loss) on sales Income from shareholdings Interest receivable Interest payable Other income Other expenses Profit (loss) before taxation Current income tax including permanent tax liabilities (assets) Changes in deferred tax liabilities Changes in deferred tax assets Other Income tax redistribution within the consolidated group of taxpayers Net profit (loss) 2110 2120 2100 2210 2220 2230 2200 2310 2320 2330 2340 2350 2300 2410 2421 2430 2450 2460 2465 2400 VI-1 Surplus on revaluation of fixed assets not included in net profit (loss) for the period 2510 Result from other operations not included in net profit (loss) for the period Total profit / loss for the period VI-19 For reference only Basic earnings (loss) per share, RUB Diluted earnings (loss) per share 2520 2500 2900 2910 827 026 695 793 237 174 (505 680 797) 321 345 898 (46 078 486) (9 885 505) (260 092) 265 121 815 4 751 697 1 234 120 (473 760 104) 319 477 070 (46 274 869) (8 022 792) (40 291) 265 139 118 2 931 884 5 073 049 (3 261 408) (3 094 329) 60 085 765 58 616 522 (124 843 535) 203 088 454 (80 732 987) 247 933 257 (54 568 624) (55 494 136) (8 080 557) (5 676 807) 5 870 376 230 677 – 61 774 – 77 890 1 594 066 17 946 156 046 046 192 765 634 (3 665 536) 3 899 319 (29 589) 9 501 152 350 921 196 674 454 67,26 - 82,73 - VI-8 VI-8 VI-8 VI-8 VI-8 VI-8 VI-5 VI-6 VI-10 VI-10 VI-10 VI-10 VI-11 VI-9 VI-9 VI-9 VI-9 VI-9 VI-9 VI-9 advances paid other debtors including current nondelinquent accounts receiv- able (that are due in the next 12 months after the reporting date) including buyers and customers advances paid other debtors 1233 1234 1235 1236 1237 1238 66 350 98 572 205 258 242 632 753 203 436 727 162 502 318 131 046 791 129 034 528 104 264 573 71 570 267 77 536 010 61 981 366 3 721 492 3 266 296 5 373 018 55 755 032 48 232 222 36 910 189 Financial investments (except for cash equivalents) 1240 545 117 3 340 306 28 418 509 Cash and cash equivalents Other current assets Total for Section II Balance (assets) III. CAPITAL AND RESERVES Authorized capital (contributed capital, authorized fund, contributions of partners) Shares repurchased Revaluation of non-current assets Additional capital (without revaluation) Reserve capital Retained profit (uncovered loss) Total for Section III IV. LONG-TERM LIABILITIES VI-11 Borrowings Deferred tax liabilities VI-20 Estimated liabilities Other liabilities Total for Section IV V. SHORT-TERM LIABILITIES Borrowings Payables including suppliers and contractors debt in respect of insurance premiums taxes and duties payable advances received Other creditors Deferred revenues VI-20 Estimated liabilities Other liabilities Total for Section V Balance 1250 1260 1200 1600 1310 1320 1340 1350 1360 1370 1300 1410 1420 1430 1450 1400 1510 1520 1521 1522 1523 1524 1 723 345 28 850 530 10 866 389 1 595 321 5 097 762 1 735 899 420 770 797 439 362 594 360 747 099 816 544 112 828 555 115 742 344 924 2 326 199 2 326 199 2 326 199 - - - 13 389 408 17 477 427 13 665 476 298 820 328 409 318 908 116 310 116 310 116 310 556 625 941 625 404 234 582 990 845 572 756 678 645 652 579 599 417 738 15 370 000 370 000 370 000 2 177 796 8 048 172 8 278 850 50 360 737 34 346 312 38 026 536 – – – 67 908 533 42 764 484 46 675 386 32 893 591 16 036 104 32 212 379 140 151 901 121 654 847 61 779 884 34 404 264 22 081 257 17 057 659 710 227 594 348 172 200 28 211 874 32 121 047 25 945 577 8 515 291 5 095 325 6 957 711 1526 1530 1540 1550 1500 1700 10 787 637 9 540 032 5 615 231 251 966 238 436 136 631 2 581 443 2 208 665 2 122 906 – – – 175 878 901 140 138 052 96 251 800 816 544 112 828 555 115 742 344 924 dividends or profit due to shareholders (owners) 1525 57 522 608 52 222 838 6 031 506 304 305 ANNUAL REPORT 2019ANNEX 2YEARS OF SUSTAINABLE DEVELOPMENT25Significant Aspects of Accounting Policies and Presentation of Information in the Financial Statements BASIC APPROACHES TO PREPARING THE ANNUAL FINANCIAL STATEMENTS The Company keeps its accounting records as per the Feder- al Law N 402-FZ of December 6, 2011 “On Accounting”, and the Regulations for Accounting and Reporting in the Russian Federation approved by Order of the Ministry of Finance of the Russian Federation No. 34n dated July 29, 1998, the current Russian Accounting Standards (RAS), as well as the accounting policy of the Company. The financial statements of the Compa- ny for 2019 were prepared in accordance with the above Law, the regulations and the accounting policy. The annual financial statements for 2019 were prepared as per the forms developed and approved by the Company in accordance with the Order of the Ministry of Finance of the Russian Federation dated 02.07.2010 No. 66n «On Accounting Forms of Organizations». The reporting financials statements are presented in thousands of rubles. FOREIGN CURRENCY DENOMINATED ASSETS AND LIABILITIES The foreign currency denominated assets and liabilities are rec- ognized in the accounting records in accordance with the RAS 3/2006 «Accounting for Foreign Currency Denominated Assets and Liabilities», approved by Order of the Ministry of Finance of the Russian Federation No. 154n dated November 27, 2006. The exchange rate difference is recorded in the accounting records and reporting in that reporting period which the payment due date pertains to or which the financial statements have been prepared for. The exchange difference arising from the translation of the foreign currency denominated assets and liabilities of an entity used for carrying out its business operations outside of the Russian Federations into rubles is recognized in the additional paid-in capital of the entity. When accounting for business transactions made in foreign cur- rencies, the official exchange rate of the foreign currency to ruble, which was in effect on the day of the transaction, was applied. Cash in foreign currency accounts at banks and cash on hand, financial deposits (except for stocks) and funds in settlements in foreign currency (except for funds received and issued for advanc- es and front payments, deposits) are reflected in the accounting statements in amounts calculated on the basis of the official exchange rates in effect at the reporting date. The exchange rates amounted RUB 61,9057 per USD as at 31 December 2019 (as at 31 December 2018 – RUB 69,4706, as at 31 December 2017 – RUB 57,6002), and RUB 69,3406 per Euro (as at 31 December 2018 – RUB 79,4605, as at 31 December 2017 – RUB 68,8668). INTANGIBLE ASSETS Intangible assets include computer software programs; data- bases; inventions; utility models; trademarks and service marks; licenses for mineral geological exploration and production; licenses for mineral production, mineral prospecting, appraisal and exploration costs (transferred from the intangible prospect- ing assets after the commercial viability of oil production at the field has been confirmed). Intangible assets are recognized for accounting purposes at their historical cost in the reporting period when the documents are received confirming the Company’s rights to the result of intellec- tual activity or a means of individualization, regardless of the use of intangible assets to produce goods, perform works or render services for management needs. The value of intangibles is repaid by a straight-line method of depreciation at the rates determined based on their estimated useful life. No depreciation is charged for intangible assets with an indefi- nite useful life. The exchange rate difference for the rest of the transaction is recognized in the profit and loss account as other income and expenses. The foreign exchange gains and losses are record- ed in the Profit and Loss Report, netted under the lines «Other Income» or «Other Expenses». Depreciation is charged by accumulating the corresponding amounts on a separate account. Intangible asset depreciation charge is recognized in the accounting period which they pertain to, and it is accrued regardless of the company’s performance results in the reporting period. The useful life of intangible assets is annually verified for the purpose of clarification. If the duration period is substantially changed (by more than twenty percent) within which the asset is intended to be used, its useful life period should be updated. The resulting adjustments are reflected in the accounting records and reporting as changes in estimates. Intangible assets of homogeneous groups at fair market value are not revaluated. RESEARCH, DEVELOPMENT, AND ENGINEERING COSTS Research, development, and engineering costs are included in the amount of actual expenditure incurred to perform these operations. The research, development, and engineering costs that yielded positive results and started to be deployed in the operations are written off as normal business expenses beginning from the month following the month in which the results obtained in carrying out the above mentioned activities to produce goods (perform works or render services) or for the company’s manage- rial needs are started to be used in a real life. in the cost of mineral prospecting, appraisal and exploration for relevant subsurface areas. Expenditures incurred for the purpose of acquiring the licenses for geological study and production of minerals, as well as costs for prospecting, appraisal and exploration of minerals, are not subject to depreciation until the commercial feasibility of oil production within the relevant licensed area of mineral resourc- es is confirmed and the order to bring the field into commercial development is approved. The commercial feasibility of oil production is considered sub- stantiated at the time of approval of the reservoir management plan for the field within the licensed subsurface area of mineral resources. The Company runs impairment testing for its prospecting assets on a yearly basis as of December 31 as well as in case of their derecognition when the commercial feasibility of oil production has been substantiated within the licensed subsurface area. For the purpose of testing the assets for impairment, these assets are grouped by the mineral subsurface areas specified in the licenses. The costs associated with each performed research, develop- ment, and engineering activity with positive result yielded are written off evenly on a straight-line basis over the useful life of the R&D deliverables (which should not exceed five (5) years). The prospecting asset impairment loss is recognized in the profit and loss report in the line of «Other expenses». In addition, the Company applies a reversal of impairment loss to prospecting assets. The costs associated with the research, development, and engineering activities resulted in a failure are expensed to the financial result in other expenses account in the reporting period. PROSPECTING ASSETS The Company recognizes the prospecting costs in tangible pros- pecting assets including as follows: • • costs for the acquisition and construction of prospecting, exploratory and early production wells and other oilfield facili- ties; costs for buying and installing the equipment for prospecting, exploration and early production wells. • The Company recognizes the prospecting costs in intangible • • prospecting assets including as follows: costs for acquisition of licenses for geological study of the subsurface, licenses for geological study and production of minerals; costs for minerals prospecting, appraisal and exploration: costs for geological, geochemical and geophysical surveys, costs for acquisition of geological information related to the subsurface from third parties including government agencies and costs for drilling of stratigraphic test wells, parametric and structural wells. Tangible prospecting assets are depreciated on a straight-line basis over their useful lives. Depreciation charges for the tangible prospecting assets are included in the cost of mineral prospecting, appraisal and explo- ration for relevant subsurface areas. Intangible prospecting assets in the form of licenses for geolog- ical study of the subsurface are depreciated on a straight-line basis over the period of validity of the respective licenses. De- preciation charges for the above mentioned assets are included The Company derecognizes prospecting assets in relation to a certain licensed subsurface area of mineral resources when the commercial feasibility of oil production is substantiated within the relevant licensed subsurface area or the prospects of mineral resources production in this area have no chance of success. When the commercial feasibility of oil production is substantiated within the licensed subsurface area the Company reclassifies its prospecting assets as follows: • • tangible prospecting assets included in fixed assets at their depreciated book value; intangible prospecting assets included in intangible assets at their depreciated book value. FIXED ASSETS Fixed assets include land plots, buildings, plants, machinery, equipment, vehicles and other relevant facilities with their service life of more than 12 months and worth more than 40,000 rubles. The Company runs revaluation of its fixed assets ( industrial purpose buildings, plants and constructions such as the pipe- lines, machinery and equipment (except information technology equipment)) at the current (replacement) cost once a year (as at the end of the reporting year). The fixed assets that were commissioned before January 1, 2002 are depreciated based on uniform depreciation rates approved by Decree of the USSR Council of Ministers dated October 22, 1990, No. 1072 “On Uniform Depreciation Rates of Fixed Assets of the USSR National Economy” and those commissioned after January 1, 2002 – at the rates calculated on the basis of useful life determined according to the classification of fixed assets included in the depreciation groups, approved by the Decree of the Government of the Russian Federation No. 1 dated January 1, 2002, except for fixed assets acquired for lease, as well as 306 307 2019 ANNUAL REPORTANNEX 2Significant Aspects of Accounting Policies and Presentation of Information in the Financial StatementsYEARS OF SUSTAINABLE DEVELOPMENT25those included in the production and technological complex for generating electrical energy by low-grade steam turbines and aircraft, the useful life of which is determined on the basis of the lease period and the planned period of their operation according to the reports of a special committee. Depreciation is calculated on a straight-line basis. Group of fixed assets Before 01.01.2002 After 01.01.2002 Useful lives of facilities (number of years)* Buildings Facilities, including: Wells Machinery and equipment 25-50 10-25 10-15 5-15 8-31 2,5-31 6-14 1-26 * СThe useful lives of fixed assets acquired for leasing, as well as those included in the produc- tion and technological complex for generating electric power by low-grade steam turbines and aircraft, may differ from the useful life value indicated in the table above. No depreciation is charged for land plots and sites for the use of natural resources. The historical value of fixed assets at which they were included in the accounting records can be changed in the cases of further construction, further equipping, renovation, modernization, par- tial retirement and revaluation of the fixed assets. Renovation costs of fixed assets are included at actual costs and are reflected in the reporting period in which they were incurred. The “Capital expenditures in progress” line includes the costs of construction and installation works, acquisition of buildings, plants and equipment (including equipment requiring assembly) and other tangible durable assets, materials for the construction of fixed assets, and other capital works and expenses. This line reflects the cost of capital facilities before they are commis- sioned or decided to be sold, after which these assets are trans- ferred into fixed assets, income-yielding investments in tangible assets or other non-current assets. Fixed assets intended for lease are reflected in the “Income yielding investments into tangible assets” line. OTHER NON-CURRENT ASSETS Other non-current assets include asset retirement obligations, costs of implementing the exploration and production sharing agreement, and construction-in-progress items to be disposed of upon the decision of the management. FINANCIAL INVESTMENTS Financial investments are recognized for accounting purposes at historical cost. Financial investments defining the current market value are re- flected in the financial statements as of the end of the reporting year at current market value by adjusting their valuation as at the previous reporting date. Financial investments for which the current market value cannot be measured are recorded in the financial statements as of the reporting date at historical cost less less the amount of the pro- vision made for their impairment. A provision for impairment of financial investments is created for the amount of the difference between the carrying value and their estimated value, if the im- pairment testing results confirm a sustained significant decrease in the value of these financial investments. Financial investments are recorded as current assets if their anticipated holding period does not exceed twelve (12) months after the reporting date. Other financial investments are recorded as non-current assets. Depending on the nature of financial investments and the proce- dure for their acquisition and use, the accounting unit of financial investments may be a contribution to the authorized capital, a loan agreement, bank deposit agreement, a block of securities issue, etc. When the financial investments for which the current market value cannot be determined, their value is formed on the basis of the valuation determined: • at the historical value of the first-time purchased financial assets (FIFO method) upon disposal of shares or bonds; • at historical value of each accounting unit of financial invest- ments upon disposal of promissory notes. When the financial investments for which the current market val- ue can be determined, their value is determined by the company on the basis of the last valuation. Gains and losses from the disposal of financial investments are recognized in the profit and loss statement as part of other income and expenses. MATERIALS AND SUPPLIES INVENTORIES The “Raw materials and supplies” line of the balance sheet reflects feedstocks, basic and auxiliary materials, purchased semi-finished products and components, fuel, packaging materi- als, spare parts, construction and other materials. The materials and supplies inventories also include assets that meet the conditions necessary for them to be recognized as fixed assets valued at no more than RUB 40 000 per unit. The materials and supplies inventories are recognized in the amount of the actual costs of their acquisition, except for value added tax and other recoverable taxes (except as provided for by the legislation of the Russian Federation). Inventories are disposed of at average cost. The materials and supplies inventories that are obsolete, wholly or partially have lost their original quality, or whose current mar- ket value has decreased, are reflected in the balance sheet less the inventory reserve. The raw materials and supplies transferred to processing on an as-needed basis continue to be accounted for in raw materials and supplies of the Company separately. Every month, the raw materials and supplies that have passed through all processing stages are recognized as part of finished products. FINISHED PRODUCTS, GOODS AND SALES EXPENSES Finished products are recorded in the balance sheet based on actual direct costing of production excluding administrative expenses When shipping crude oil, petroleum products and gas products, the valuation is carried out based on the average cost method for each group of products. Sales expenses are written off to the Company’s profit and loss account without their distribution between sold and unsold products. GOODS SHIPPED The «goods shipped» balance sheet item reflects the shipped products with no ownership title that has been passed to the buyers. • This line also shows immovable property that has been trans- ferred to the buyer under the acceptance and transfer act before the state registration of the ownership title transfer. OTHER INVENTORY AND COSTS The Other inventories and costs line includes expenses associ- ated with super viscous oil production that were incurred before commencement of production. These costs are written off evenly over the period of oil production at the relevant oil field develop- ment site, but not for more than two (2) years, starting from the first day of the month following the month oil production starts. RECEIVABLES Trade receivable (recognized in the accounts receivable) is determined on the basis of the prices established by contracts concluded between the Company and its buyers (customers) tak- ing into account all discounts (markups). Non-recoverable debt is written off from the balance sheet as it is recognized as such. Accounts receivable, which are overdue or would be most likely outstanding as stipulated by the contract terms as well as not secured by respective guarantees, are shown after deduction of accrued provisions for doubtful debts. The provision is set up for each doubtful debt (depending on the financial condition (solven- cy) of the debtor and an estimated recoverability of debt in whole or in part) on the basis of the receivables inventory made for the last day of the reporting quarter. Income and expenses incurred in the formation and recovery of the doubtful debts provision within one financial year are reflect- ed in the profit and loss statement minimized in “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) to be deducted (paid) in accordance with tax legislation. CASH AND CASH EQUIVALENTS As per RAS 23/2011 “Statement of Cash Flows” approved by Or- der of the Ministry of Finance of Russia No. 11n dated February 2, 2011, 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 changes in value. The Company qualifies bank deposits placed for a maximum period of three (3) months as cash equivalents. In the Statement of Cash Flows: • balances of cash and cash equivalents in foreign currency at ny’s cash flows and balances of cash and cash equivalents in foreign currency at the exchange rates on different dates are reflected in the statement of cash flows as the effects of changes in foreign exchange rates against the ruble; indirect taxes (VAT and excise duties) in the proceeds from buyers and customers, payments to suppliers and contrac- tors, and payments to the budget system of the Russian Federation or refunds therefrom are recognized as balanced result in the other income (payments) from the current opera- tions in the line “Other income” (“Other payments”); • proceeds from compensation for refundable (negative) excise tax on crude oil and negative excise tax on motor gasoline and diesel fuel are reflected in a separate sub-line in the line «Other income»; • proceeds from the sale of products and goods include cus- • toms duties; interest-free loans granted to subsidiaries and affiliates are mainly related to the capital investment financing, and there- fore, based on the principle of rationality, the movement of all loans issued to subsidiaries and affiliates is reflected in cash flows from investment activities. Cash flows are reflected in the statement of cash flows on a net basis in the following cases: • • • cash inflows coming from certain entities provide for relevant cash outflows going to other entities (cash flows of the com- mission 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 making these pay- ments 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 investments, short-term investments (up to three months) using the proceeds from borrowed funds, cash flows on loans received by the Company from subsidiaries – participants of the Treasury system, etc.); cash flows on short-term deposits (more than three months but less than one year) that are classified as financial invest- ments. Cash flows on deposits are disclosed in Note 5 “Fi- nancial Investments” in the Notes to the balance sheet report and profit and loss statement. AUTHORIZED CAPITAL, ADDITIONAL PAID-IN CAPITAL AND RESERVE CAPITAL The authorized capital is reflected in the amount of the par value of ordinary and preferred shares. Additional paid-in capital of the Company include foreign curren- cy to ruble translation differences of the assets and liabilities de- nominated in foreign currencies of an entity used to carry out its operating activities outside the Russian Federation. In addition, the «Revaluation of non-current assets» line shows the amount of additional valuation less subsequent writedowns of fixed assets as a result of revaluation, attributed to the additional paid-in cap- ital. The amount of additional valuation when an item of property, plant and equipment is disposed of is transferred from the addi- tional paid-in capital to the Company’s retained earnings. the beginning and at the end of the reporting period are ex- pressed in rubles in the amount which is determined in accord- ance with RAS 3/2006 “Accounting for Assets and Liabilities Denominated in Foreign Currencies” approved by Order of the Ministry of Finance of Russia No. 154n dated November 27, 2006. Differences arising from the translation of the compa- In accordance with the legislation, the Company has created a Reserve Fund in the amount of five (5%) percent of the author- ized capital, formed out of the Company’s net profit. The Reserve fund is intended to cover losses of the Company, repay bonds and buy back the Company’s shares in the event that there are no other assets available. 308 309 2019 ANNUAL REPORTANNEX 2Significant Aspects of Accounting Policies and Presentation of Information in the Financial StatementsYEARS OF SUSTAINABLE DEVELOPMENT25tax on motor gasoline and diesel fuel. This excise tax is account- ed for as a decrease in the cost of sales of the reporting period, in the line «Cost of sales» of the Statement of profit and loss. Other expenses include expenses which are not related to the manufacture and sales of products, completion of work, render- ing of services, purchase and sale of goods. The outstanding amount of CGT income tax on the CGT as a whole, to be paid by the Company as a responsible CTG member to the budget, is reflected in the Company’s balance sheet in line 1523 “Taxes and fees payable.” The overpaid amounts of CGT income tax to the budget is re- flected in the balance sheet in line 1238 “Other debtors.” PROFIT TAX ACCOUNTING The Company has been a responsible member of the consoli- dated group of taxpayers (hereinafter referred to as the “CGT”) from January 1, 2012. As of the date of the agreement, the CGT included four members. Since 2016, the list of CGT participants has been expanded to five members. The Company independently generates the accounting informa- tion on income tax as per RAS 18/02 “Corporate Profit Tax Ac- counting” approved by Order of the Ministry of Finance of Russia dated November 19, 2002 No. 114n. In this regard, the temporary and permanent differences are determined by the Company based on its revenues and expenses included in the tax base in accordance with the norms of the Tax Code of the Russian Fed- eration. The amount of the current income tax is determined on the basis of the Company’s accounting information and reflected in the profit and loss statement in line 2410 “Current income tax”. The difference between the amount of the current income tax cal- culated by the Company for inclusion in the consolidated tax base of the CGT and the amount of funds due and payable by the Com- pany based on the terms of the contract on CGT establishment in the profit and loss statement, is reflected in line 2465 “Adjusted tax on profit for the consolidated group of taxpayers” and included in the determination of net income (loss) of the Company without participating in generating profit (loss) before taxation. The outstanding amount upon settlements with the CGT mem- bers on CGT income tax (interim payment) is reflected in the balance sheet separately in the items of the current assets in line 1238 “Other debtors” and short-term liabilities in line 1526 “Other creditors” of the balance sheet, respectively. The Company as a responsible CGT member reflects the in- come tax assessment and payments to the members under the contract on CGT establishment with account 78 “Settlements with CGT members.” When preparing financial statements, the balanced (net) amounts of deferred tax asset and deferred tax liability are reflected in the balance sheet. CORRECTION OF ERRORS IN ACCOUNTING RECORDS AND FINANCIAL REPORTING An error identified in accounting records and financial statements is recognized to be significant if the ratio of the error to the numerical 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 a minimum of five percent. In all other cases, the error is considered insignificant. ESTIMATED LIABILITIES The Company recognizes an estimated liability to pay year- end- performance-based remuneration. The amount of monthly deductions for the estimated liability is determined based on the monthly percentage of deductions and the actual amount of labor costs. The percentage of deductions for the estimated lia- bility is calculated on the basis of the ratio of the annual planned amount of year-end performance-based remuneration expenses to the planned amount of labor costs. The Company also recognises in its accounting records the esti- mated liability for vacations not used by employees. The amount of the estimated liability for unused vacation is de- termined based on the total number of days of unused vacation for each employee, average daily earnings and insurance contri- butions accrued for this amount. The actual amount of vacation pay (including the amount of unused vacation compensation) accrued to the employee in the accounting records is attributed to the recognized amount of the estimated liability to pay for unused vacation. calculation parameters (such as forecast inflation rate, discount- ed rate, discounted period) is recorded according to the proce- dure set out in the Section III of the Notes. LOANS AND CREDITS As per RAS 15/2008 “Accounting of Expenses on loans and credits” approved by Order of the Ministry of Finance of Russia No. 107n dated October 6, 2008, the principal amount of the loan (credit) received from the lender is accounted for in accordance with the terms of the loan agreement (credit agreement) in the amount of actually received monetary assets or in the cost esti- mate of other items stipulated by the contract. Indebtedness with regard to the received loans and credits, and outstanding bonds, as well as accrued interest are reflected in the balance sheet in the “Borrowings” line. Loan and credit indebtedness, as well as accrued interest is subdivided in the accounting into short-term indebtedness (with repayment period that does not exceed 12 months under the contract terms) and long-term indebtedness (with repayment period that exceeds 12 months under the contract terms). As at the last day of each quarter, an inventory of the estimated liability to pay for unused vacations is done which results in mak- ing adjustments to the amount of the estimated liability. The long-term indebtedness is transferred to short-term indebt- edness at the moment when there are 365 days left before repayment of the principal amount. In accordance with the requirements of the regulations (Federal Law No. 2395-1 “On Subsoil” No. 7-FZ “On Environmental Protec- tion”, 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 provisions for decommissioning liabilities 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 immovable oil and gas assets. Estimated decommissioning and restoration liabilities are calculated by groups of oil fields. The estimated liability is recorded at the present (discounted) cost. In order to calculate the estimated liability as of December 31, 2019, the Company used the following key assumptions: dis- count rate – 6,69% (as of December 31, 2018 – 8,75%), inflation rate – 4,0% (as of December 31, 2018 – 4.21%), discount period – from 14 to 32 years depending on the field (as of December 31, 2018 – from 15 to 31 years). Accrued estimated liabilities at initial recognition, as well as the newly commissioned fixed assets are included in the “Other non-current assets” line. Depreciation of assets on decommissioning liabilities is accrued on a monthly basis in proportion to the oil production output. The amount of monthly depreciation is determined for each group of oil fields and Oil & Gas Production Divisions (NGDUs) based on the amount of oil produced during the current month and the amount of assets on the decommissioning liabilities attributable to one (1) tonne of oil reserves for a group of oil fields at the end of the previous reporting period. The discount that accrued with increase in the present value as the estimated liability matures is reflected in the profit and loss statement in the «Interest payable» line. Interest on received loans and credits is recognized as other expenses of that period in which they are accrued, except for the part to be included in the value of the investment asset. Expenses on received loans and credits directly attributable to the acquisition and/or construction of the investment asset are included in the value of this asset and are repaid through depre- ciation. Inclusion of expenses on received loans and credits in the origi- nal value of the investment asset is terminated on the first day of the month following the month of termination of the acquisition, construction and (or) manufacturing of the investment asset, or the start of using the investment asset. REVENUE RECOGNITION Revenue from the sale of goods and products (performance of work, provision of services) is recognized as the title to the product is transferred to customers (performance of work, provision of services to customers). Revenues are reflected in the accounting statements less value added tax, excise duties and customs fees. Other income includes income which is not included in the revenue: revenue from the sale of fixed assets, construction in progress assets and other assets, foreign currency, income from changes in estimates of decommissioning of fixed assets and restoration of natural resources, exchange differences, and other similar income. EXPENSES Administrative expenses include the Headquarter Office expenses. At the end of the month the indicated expenses are fully written off to the debit of account 90 “Sales”, i.e. are fully recognized in the reporting period without distribution to the balances of work in progress and finished products. Adjustment of estimated liabilities for decommissioning of fixed assets and restoration of natural resources due to revision of key From January 1, 2019, the Company gets a refund for the «re- turnable (negative) excise tax» on crude oil and negative excise 310 311 2019 ANNUAL REPORTANNEX 2Significant Aspects of Accounting Policies and Presentation of Information in the Financial StatementsYEARS OF SUSTAINABLE DEVELOPMENT25Annex 3 Report on Non-Arm’s Length Transactions Made by PJSC Tatneft n.a. V. D. Shashin in 2019 List of Non-arm’s Length Transactions Made by the Company in 2019 List of Non-arm’s Length Transactions Made by the Company in 2019 Counterparty Non-arm's length party Transaction approval or ratification date TANECO Joint Stock Company 28.01.2019 PJSC TATNEFT n.a. V.D. Shashin as a controller of JSC TANECO Governance body of the Company which made the transaction approval decision Board of Directors of PJSC TATNEFT n.a. V. D. Shashin TANECO Joint Stock Company 28.01.2019 PJSC TATNEFT n.a. V.D. Shashin as a controller of JSC TANECO Board of Directors of PJSC TATNEFT n.a. V. D. Shashin Essential transaction terms Subject matter of the transaction: purchase and sale of immovable property. Immovable property: distribution transformer substation (Title 124/39). Transaction value: 916 037 270 rubles 32 kopecks. Transaction date: 21.11.2018. Subject matter of the transaction: purchase and sale of immovable property. Immovable property: feedstock depot of the aromatics production (Title 028/1). Transaction value: 799 049 864 rubles 04 kopecks. Transaction date: 21.11.2018. TANECO Joint Stock Company 13.02.2019 PJSC TATNEFT n.a. V.D. Shashin as a controller of JSC TANECO Board of Directors of PJSC TATNEFT n.a. V. D. Shashin Subject matter of the transaction: conclusion of the supplementary agreement to the agency contract with JSC TANECO. This Report presents a list of transactions made by PJSC TATNEFT named after V. D. Shashin (hereinafter referred to as the Company, PJSC TATNEFT) in 2019 that are recognized as non-arm’s length transactions in accordance with Federal Law № 208-FZ of 26.12.1995 «On Joint-Stock Companies». The parties listed in this Report are recognized as being interested in making transactions as at the date of transactions. 312 TANECO Joint Stock Company 21.06.2019 PJSC TATNEFT n.a. V.D. Shashin as a controller of JSC TANECO Board of Directors of PJSC TATNEFT n.a. V. D. Shashin TANECO Joint Stock Company 21.06.2019 PJSC TATNEFT n.a. V.D. Shashin as a controller of JSC TANECO Board of Directors of PJSC TATNEFT n.a. V. D. Shashin Scope of contract: increase in the amount. Transaction value: 8 333 333 334 rubles 00 kopecks. Transaction date: 06.02.2019. Subject matter of the transaction: purchase and sale of immovable property. Immovable property: CDU-6 plant (Plant 1007, Section 1102). Transaction value: 12 066 448 537 rubles 22 kopecks. Transaction date: 18.06.2019. Subject matter of the transaction: purchase and sale of immovable property. Immovable property: vacuum distillation unit of the visbreaker stable cracked residue (Title 012, Section 3510). Transaction value: 4 642 642 706 rubles 43 kopecks. Transaction date: 18.06.2019. 313 2019 ANNUAL REPORTANNEX 3YEARS OF SUSTAINABLE DEVELOPMENT25List of Non-arm’s Length Transactions Made by the Company in 2019 EXPLANATORY NOTES The present report is to be published by the Company pursuant to the Articles 52 and 81 of the Federal Law No. 208-FZ of 26.12.1995 «On Joint-Stock Companies». The report is to be included in the materials to be distributed among the persons entitled to participate the Company’s annual general meeting of shareholders for information purposes. The report on PJSC TATNEFT’s non-arm’s length transactions carried out in 2019 is to be signed by the General Director of the Company and is subject to approval by the Board of Directors during preparation for the annual general meeting of shareholders. The accuracy and validity of the information presented in the report is to be verified by the Company’s Auditing Committee. MAJOR TRANSACTIONS IN THE REPORTING YEAR In 2019, the Company carried out no transactions that the Federal Law on Joint-Stock Companies No 208-FZ of 26/12/1995 would treat as major transactions. Counterparty Non-arm's length party Transaction approval or ratification date TANECO Joint Stock Company 19.07.2019 PJSC TATNEFT n.a. V.D. Shashin as a controller of JSC TANECO Governance body of the Company which made the transaction approval decision Board of Directors of PJSC TATNEFT n.a. V. D. Shashin TANECO Joint Stock Company 19.07.2019 PJSC TATNEFT n.a. V.D. Shashin as a controller of JSC TANECO Board of Directors of PJSC TATNEFT n.a. V. D. Shashin Essential transaction terms Subject matter of the transaction: purchase and sale of immovable property. Immovable property: sulfolane extractive distillation unit (Title 011, Section 2500). Transaction value: 1 204 847 976 rubles 85 kopecks. Transaction date: 01.08.2019. Subject matter of the transaction: purchase and sale of immovable property. Immovable property: processing units control center of deep conversion refinery (Title 092). Transaction value: 681 108 862 rubles 06 kopecks. Transaction date: 01.11.2019. LLC Nizhnekamsk CHP 30.09.2019 PJSC TATNEFT n.a. V.D. Shashin as a controller of LLC Nizhnekamsk CHP Board of Directors of PJSC TATNEFT n.a. V. D. Shashin Subject matter of the transaction: alienation of PJSC TATNEFT n.a. V.D. Shashin as the additional contribution to the authorized capital of the “NIZHNEKAMSK CHP”. Transaction value: 3 919 454 700 rubles 00 kopecks. Transaction date: 19.11.2019 TANECO Joint Stock Company 28.11.2019 PJSC TATNEFT n.a. V.D. Shashin as a controller of JSC TANECO Board of Directors of PJSC TATNEFT n.a. V. D. Shashin Subject matter of the transaction: purchase and sale of immovable property. Immovable property: water unit No. 3 (Title 176/2, Section 7660). Transaction value: 1 688 699 000 rubles 00 kopecks. Transaction date: 12.11.2019. TANECO Joint Stock Company 28.11.2019 PJSC TATNEFT n.a. V.D. Shashin as a controller of JSC TANECO Board of Directors of PJSC TATNEFT n.a. V. D. Shashin Subject matter of the transaction: purchase and sale of immovable property. Immovable property: heavy coker gasoil hydrotreatment unit (Title 008, Section 4200). TANECO Joint Stock Company 23.12.2019 PJSC TATNEFT n.a. V.D. Shashin as a controller of JSC TANECO Board of Directors of PJSC TATNEFT n.a. V. D. Shashin Transaction value: 8 782 698 608 rubles 94 kopecks. Transaction date: 01.12.2019. Subject matter of the transaction: purchase and sale of immovable property. Immovable property: loading dock section with a floating botaport (Title 160). Transaction value: 694 026 387 rubles 17 kopecks. Transaction date: 06.12.2019 314 315 2019 ANNUAL REPORTANNEX 3YEARS OF SUSTAINABLE DEVELOPMENT25Annex 4 Item No. Corporate Governance Principle Compliance Assessment Criteria Corporate Governance Principle Status of compliance with the corporate governance principle Explanations for deviations from the criteria for assessing compliance with the corporate governance principle Report on Compliance of PJSC Tatneft N. A. V. D. Shashin with the Corporate Governance Code Guidelines of the Bank of Russia based on the results of the reporting calendar year 2019 and the end of the corporate year (June 2019 / June 2020) The present report has been prepared pursuant to the Bank of Russia’s Regulation on Disclosure by Securities Issuers No 454-P of 30/12/2014, Chapter 70 and describes how the Company is compliant with the guidelines of the Corporate Governance Code of the Bank of Russia (hereinafter the Code) for joint- stock companies with listed securities. Full text of the Corporate Governance Code is available at the website of the Bank of Russia at http://www.cbr.ru/finmarkets/files/ common/letters/2014/ inf_apr_1014.pdf. The Corporate Governance Code compliance is assessed by PJSC TATNEFT according to the guidance of the Bank of Russia provided in its Letter No IN-06-52/8 of 17 February 2016 “On Dis- closure of the report on compliance with the Corporate Govern- ance Code guidelines in the annual report of a public joint stock company”. This Corporate Governance Compliance Report was considered by the Board of Directors of PJSC TATNEFT n.a. V.D. Shashin at the meeting in May 18, 2020. (Minutes No. 4-z dated May 18, 2020) as part of the 2019 Annual report. The Board of Directors acknowledges that the information and data disclosed herein contain complete and accurate information with regard to the PJSC TATNEFT compliance with the guidance of the Corporate Governance Code in 2019. The Company’s corporate governance model and practice is set out in the Corporate Governance Section of this Report. THE COMPANY SHALL ENSURE EQUAL AND FAIR TREATMENT OF ALL ITS SHAREHOLDERS IN THE COURSE OF EXERCISE BY THEM OF THEIR RIGHTS TO PARTICIPATE IN THE MANAGEMENT OF THE COMPANY 1.1. 1.1.1. The Company creates most favour- able conditions for its shareholders enabling them to participate in the general meeting and develop informed positions on issues on its agenda, as well as provide them with the opportunity to coordinate their actions and express their opin- ions on issues being discussed. 1.1.2. Procedures for notification of the general meeting and provision of materials for it should enable the shareholders to get properly pre- pared for participation therein. 1.1.3. During the preparation for and holding of the general meeting, the shareholders could freely and timely receive information about the meeting and its materials, pose questions to members of the com- pany’s executive bodies and the board of directors, and communi- cate with each other. 1.1.4. There were no unjustified difficul- ties preventing shareholders from exercising their right to demand that a General meeting be con- vened, nominate candidates to the company’s governing bodies, and to place proposals on its agenda. 1.1.5. Each shareholder could freely exer- cise their right to vote in a straight- forward and most convenient way. 1. The Company’s internal document ap- full compliance proved by the General meeting of share- holders and regulating the procedures for holding the General meeting is publicly available. 2. The Company provides an accessible means of communication with the Com- pany, such as a hotline, e-mail or Internet forum to allows shareholders to express their opinions and send their questions regarding the agenda during preparation for the General meeting. These actions were taken by the Company ahead of each General meeting held during the reporting period. 1. The notification of the General meeting of shareholders is posted (published) on the website on the Internet at least 30 days before the date of the General meeting. 2. The notification indicates the venue of the meeting and the documents to be pre- sented permitting access to the premises. 3. Shareholders have been provided with an access to the information about who pro- posed agenda items and who nominated candidates to the Board of Directors and the Audit Committee of the Company. partial compliance noncompliance full compliance partial compliance noncompliance 1. During the reporting period, the share- full compliance holders were given the opportunity to ask questions to the members of the Compa- ny’s executive bodies and the Board of Directors before and during the annual General meeting. 2. The standpoint of the Board of Directors (including dissenting opinions record- ed in the minutes) on each item on the agenda of General meetings held during the reporting period was included in the proceedings for the General meeting of shareholders. 3. The Company provided the eligible shareholders with an access to the list of persons entitled to participate in the General meeting, starting from the date when it was received by the Company, in all cases when General meetings were held in the reporting period. 1. During the reporting period, shareholders could submit their proposals to be includ- ed in the agenda of the annual General meeting within at least 60 days after the end of the relevant calendar year. 2. In the reporting period, the Company did not reject any proposals for the agenda or nominees to the Company’s govern- ance bodies if there were typos and other slight insufficiencies in the shareholder’s proposal. 1. The internal document (internal policy) of the company contains provisions according to which each participant of the General meeting may request a copy of the completed ballot, certified by the ballot-counting committee, before the end of the relevant meeting. partial compliance noncompliance full compliance partial compliance noncompliance full compliance partial compliance noncompliance 316 317 2019 ANNUAL REPORTANNEX 4YEARS OF SUSTAINABLE DEVELOPMENT25Corporate Governance Principle Compliance Assessment Criteria Corporate Governance Principle Status of compliance with the corporate governance principle Explanations for deviations from the criteria for assessing compliance with the corporate governance principle Item No. Corporate Governance Principle Compliance Assessment Criteria Corporate Governance Principle Status of compliance with the corporate governance principle Explanations for deviations from the criteria for assessing compliance with the corporate governance principle Item No. 1.1.6. 1.2. 1.2.1. Procedures for holding a gener- al meeting set by the company provide equal opportunity to all persons present at the general meeting to express their opinions and ask questions that might be of interest to them. 1. When holding General meetings of full compliance partial compliance noncompliance shareholders in the form of a meeting ( joint attendance of shareholders) in the reporting period, sufficient time was provided to speakers for their presenta- tions and discussions with regard to the agenda items. 2. Candidates for the governance and control bodies of the Company were available to answer questions asked by the shareholders at the meeting, at which their nominations were put to the vote. 3. When making decisions regarding preparation and holding of the general meetings of shareholders, the Board of Directors considered the option of using telecommunications so that the share- holders could remotely participate in the general meetings in the reporting period. SHAREHOLDERS HAVE EQUAL AND FAIR OPPORTUNITIES TO PARTICIPATE IN THE PROFITS OF THE COMPANY BY MEANS OF RECEIVING DIVIDENDS The Company has developed and put in place a transparent and clear mechanism for determining the amount of dividends and their payment. 1. The Company has developed its dividend policy that has been approved by the Board of Directors and disclosed. 2. If the dividend policy of the Compa- ny uses the Company’s performance indicators from its accounting reports to determine the size of dividends, then relevant provisions of the dividend policy take into account consolidated figures of the financial statements. full compliance partial compliance noncompliance 1.2.2. The company does not make a 1. The Company’s dividend policy contains full compliance decision to pay dividends if such decision, while formally compliant with laws, is unjustified from the economic point of view and may lead to misrepresentation of the company’s performance. clear indications of financial and economic circumstances when the Company should not pay dividends. partial compliance noncompliance 1.2.3. The Company does not allow 1. In the reporting period, the Company full compliance deterioration of dividend rights of its existing shareholders. 1.2.4. The Company strives to rule out any ways through which its shareholders can obtain any profit or gain at the Company’s expense other than dividends and distribu- tions of its liquidation value. partial compliance noncompliance full compliance partial compliance noncompliance did not take any actions that would lead to deterioration of dividend rights of its existing shareholders. 2. The history record of dividend payments reflects the Company’s consistency in terms of ensuring high level of dividend yield while maintaining a balance between short-term (earnings in the form of divi- dend payouts) and long-term (investment into the development of the Company) interests of shareholders. 1. In order to rule out any ways for its share- holders to obtain any profit or gain at the company’s expense other than dividends and distributions of its liquidation value, the internal documents of the Company set out controls that ensure timely identi- fication and approval procedure for trans- actions with persons affiliated (associated) with substantial shareholders (persons who have the right to exercise their voting shares rights), when the law formally does not recognize such transactions as non- arm’s length transactions. 1.3. 1.3.1. THE SYSTEM AND PRACTICES OF CORPORATE GOVERNANCE ENSURE EQUAL TERMS AND CONDITIONS FOR ALL SHAREHOLDERS OWNING SHARES OF THE SAME CLASS (CATEGORY) IN THE COMPANY, INCLUDING MINORITY AND FOREIGN SHAREHOLDERS AS WELL AS THEIR EQUAL TREATMENT BY THE COMPANY The Company has created con- ditions, which would enable its governing bodies and controlling persons to treat each shareholder fairly, in particular, which would rule out the possibility of any abuse of minority shareholders by major shareholders. In the reporting period, the procedures for managing potential conflict of interest of substantial shareholders have been effec- tive, and the conflicts among shareholders, if they took place, were given sufficient attention by the Board of Directors. full compliance partial compliance noncompliance 1.3.2. The company does not take any actions, which will or might result in artificial reallocation of corporate control therein. There were no quasi-treasury shares, nor did they participate in voting in the reporting period. full compliance partial compliance noncompliance The company prevents all actions, which will or might result in artificial re- allocation of corporate control therein. The structure of the shareholder capital is such that 61 % of voting shares are in free circulation of minority sharehold- ers. Total quasi-treasury stock of the Company makes up minimal 3.47 % of voting shares, and voting with this stake cannot significantly affect the overall voting result. Voting for candidates for the governance and control bodies is carried out in equal proportions between each candidate, which does not give an advantage to any candidate. The voluntary nature of such approach is equivalent of voluntary renunciation of voting under quasi-treasury stock in principle. Based on the above, the Company believes that in essence, it fully complies with the requirement not to undertake any actions that result or may result in artificial reallocation of control. The Company regularly considers various ways of using the financial instrument of quasi-treasury shares, This instrument is currently planned to be worked out thoroughly. 1.4. 1.4.1. 2.1. 2.1.1. THE SHAREHOLDERS ARE PROVIDED WITH RELIABLE AND EFFICIENT MEANS OF RECORDING THEIR RIGHTS IN SHARES AS WELL AS WITH THE OPPORTUNITY TO FREELY DISPOSE OF SUCH SHARES IN A NON-ONEROUS MANNER The shareholders are provided with reliable and efficient means of recording their rights in shares as well as with the opportunity to freely dispose of such shares in a non-onerous manner. 1. The quality and reliability of the activities carried out by the Registrar of the Com- pany to maintain the register of holders of securities meet the needs of the Company and its shareholders. full compliance partial compliance noncompliance THE BOARD OF DIRECTORS IS IN CHARGE OF STRATEGIC MANAGEMENT OF THE COMPANY, DETERMINE MAJOR PRINCIPLES OF AND APPROACHES TO CREATION OF A RISK MANAGEMENT AND INTERNAL CONTROL SYSTEM WITHIN THE COMPANY, MONITOR THE ACTIVITY OF THE COMPANY’S EXECUTIVE BODIES, AND CARRY OUT OTHER KEY FUNCTIONS The Board of Directors is responsi- ble for making decisions with regard to appointments and dismissals of members of executive bodies, in- cluding those related to their failure to properly perform their duties. The Board of Directors also procures that the Company’s executive bodies act in accordance with an approved development strategy and main business goals of the Company. 1. The Board of Directors is vested with the powers embodied in the Articles of Asso- ciation to appoint, dismiss and determine the terms of contracts with respect to members of Executive bodies. 2. The Board of Directors has considered the progress report of the sole execu- tive body and members of the collegial executive body on implementation of the Company’s strategy. full compliance partial compliance noncompliance 318 319 2019 ANNUAL REPORTANNEX 4YEARS OF SUSTAINABLE DEVELOPMENT25Item No. Corporate Governance Principle Compliance Assessment Criteria Corporate Governance Principle Status of compliance with the corporate governance principle Explanations for deviations from the criteria for assessing compliance with the corporate governance principle Item No. Corporate Governance Principle Compliance Assessment Criteria Corporate Governance Principle Status of compliance with the corporate governance principle Explanations for deviations from the criteria for assessing compliance with the corporate governance principle 2.1.2. The Board of Directors sets the Company’s main guidelines and targets for its business activities in the long term, evaluates and approves the Company’s key performance indicators and main business goals, as well as evalu- ates and approves the Company’s strategy and business plans for its core business activities. 1. In the reporting period, the Board of full compliance Directors addressed the matters related to implementation and updating of the strategy, approval of the Company’s financial and economic plan (budget), as well as reviewed criteria and performance indicators (including interim ones) for the implementation of the Company’s strategy and business plans. partial compliance noncompliance 2.1.3. The Board of Directors defines 1. The Board of Directors defined the full compliance the principles and approaches to setting up of the risk management and internal control system in the company. principles and approaches to setting up of the risk management and internal control system in the company. partial compliance 2. The Board of Directors assessed the noncompliance 2.1.4. The board of directors defines the company’s policy on remunera- tion due to and/or reimbursement of costs incurred by its board members, members of its executive bodies and other key managers. 2.1.5. The Board of Directors plays a key role in preventing, detecting and resolving internal conflicts between the company’s governance bodies, shareholders and employees. Company’s risk management and internal control system during the reporting period. 1. The Company has developed and put in place the policy (policies) on remu- neration due to and/or reimbursement of costs incurred by its board members, members of the executive bodies of the company and other key managers, which has been approved by the Board of Directors. 2. During the reporting period, matters related to this policy (s) were considered at meetings of the Board of Directors. 1. The Board of Directors plays a key role in the prevention, detection and resolution of internal conflicts. 2. The Company has established a system for identifying transactions related to conflicts of interest and a set of measures aimed at resolving such conflicts. full compliance partial compliance noncompliance full compliance partial compliance noncompliance 2.1.6. The Board of Directors plays a key role in procuring that the company is transparent, discloses information in full and in due time, and provides its shareholders with unhindered access to its documents. 2.1.7. The Board of Directors oversees corporate governance practices in the company and plays a key role in significant corporate events of the company. 1. The Board of Directors has approved the full compliance Information Policy Regulation. 2. There are designated persons in the partial compliance Company, who are responsible for implementation of the information policy. 1. In the reporting period, the Board of Directors considered the matter of corporate governance practices in the Company. noncompliance full compliance partial compliance noncompliance 2.2. THE BOARD OF DIRECTORS IS ACCOUNTABLE TO THE SHAREHOLDERS OF THE COMPANY 2.2.1. Information with regard to the work of the Board of Directors is disclosed and provided to the shareholders. 1. The Annual report of the Company for the reporting period includes information on attendance at meetings of the Board of Directors and committees by individual directors. 2. The Annual report contains information on the main results of the Board of Directors’ performance assessment conducted in the reporting period. full compliance partial compliance noncompliance 2.2.2. The Chairman of the Board of Di- rectors is available to communicate with the Company’s shareholders. 1. There is a transparent procedure in place in the Company that allows the sharehold- ers direct all their queries to the Chairman of the Board of Directors as well as their own points of view thereupon. full compliance partial compliance noncompliance 2.3. THE BOARD OF DIRECTORS IS AN EFFICIENT AND PROFESSIONAL GOVERNING BODY OF THE COMPANY, WHICH IS ABLE TO MAKE OBJECTIVE AND INDEPENDENT JUDGEMENTS AND PASS RESOLUTIONS IN THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS 2.3.1. Only persons who have an im- peccable business and personal reputation and have knowledge, skills, and experience necessary to make decisions that fall within the jurisdiction of the board of directors and to perform its functions effi- ciently are elected to the Board of Directors. 2.3.2. Members of the Company’s Board of Directors are elected using a transparent procedure enabling the shareholders to obtain the sufficient information with regard to respective candidates so that they could form their opinion of the can- didates’ personal and professional qualities. 2.3.3. The composition of the Board of Directors is well balanced, including in terms of the qualifications of its members, their experience, knowledge and business acumen, which enjoy the confidence of shareholders. 1. The Company’s procedure for assessment of the performance of the Board of Di- rectors includes, inter alia, evaluating the professional qualifications of the members of the Board of Directors. 2. Over the reporting period, the Board of Directors (or its Nomination Committee) evaluated candidates for the Board of Directors in terms of their necessary expe- rience, knowledge, business reputation, lack of conflicts of interest, etc. 1. In all general meetings of shareholders held in the reporting period, where the meeting agenda items called for the election of the Board of Directors, the Company furnished its shareholders with biographical details of all candidates for the Board of Directors, results of evaluation of the candidates performed by the Board of Directors (or its Nomination Committee), as well as the information on whether candidates meet independence criteria as per recommenda- tions 102–107 of the Code, and the written consent of the candidates to be elected for the Board of Directors. 1. In the course of assessment of the Board of Directors’ performance carried out in the reporting period, the Board analyzed its own needs in terms of professional qualifications, experience and business skills. full compliance partial compliance noncompliance full compliance partial compliance noncompliance full compliance partial compliance noncompliance 2.3.4. The membership of the Board of 1. As part of the Board of Directors’ as- full compliance Directors of the Company makes it possible to organize the operation of the Board of Directors in the most efficient way, in particular, to create committees of the Board of Directors, as well as to enable substantial minority shareholders of the Company to elect a candidate to the Board of Directors for whom they would vote. sessment procedure conducted in the reporting period, the Board of Directors addressed the matter of whether the num- ber of members of the Board of Directors meets the company’s needs and interests of shareholders. partial compliance noncompliance 2.4. THE BOARD OF DIRECTORS INCLUDES A SUFFICIENT NUMBER OF INDEPENDENT DIRECTORS 1. During the reporting period, all independ- ent members of the Board of Directors met all the independence criteria speci- fied in Recommendations 102–107 of the Code, or were deemed independent by the decision of the Board of Directors. full compliance partial compliance noncompliance 2.4.1. A person is qualified as an independent director, if he/she has required professional skills, experience and independence to form his/her own position, is able to make objective and bona fide judg- ments, free from the influence of the executive bodies of the Company, certain groups of shareholders or other stakeholders. However, it should be noted that, under normal circumstances, a candidate (an elected member of the Board of Directors) may not be deemed to be independent, if he/she is associ- ated with the Company, any of its substantial shareholders, material counterparties or competitors to the Company, or connected with the government. 320 321 2019 ANNUAL REPORTANNEX 4YEARS OF SUSTAINABLE DEVELOPMENT25Item No. Corporate Governance Principle Compliance Assessment Criteria Corporate Governance Principle Status of compliance with the corporate governance principle Explanations for deviations from the criteria for assessing compliance with the corporate governance principle Item No. Corporate Governance Principle Compliance Assessment Criteria Corporate Governance Principle Status of compliance with the corporate governance principle Explanations for deviations from the criteria for assessing compliance with the corporate governance principle 1. In the reporting period, the Board of full compliance 2.5.2. The Chairman of the Board ensures 1. The performance of the Chairman of the full compliance 2.4.2. It is evaluated whether candidates nominated to the Board of Directors meet the independence criteria as well as it is reviewed, on a regular basis, whether independent members of the Board meet the in- dependence criteria. When carrying out such evaluation, the content should prevail over form. partial compliance noncompliance Directors (or the Committee on nomina- tions of the Board of Directors) made an opinion on the independence of each candidate to the Board of Directors and presented the relevant opinion to the shareholders. 2. During the reporting period, the Board of Directors (or the committee on nomina- tions of the Board of Directors) at least once examined the independence of the current members of the Board of Direc- tors, indicated by the Company as inde- pendent directors in the 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 he ceases to be independent, including the obligation to promptly inform the Board of Directors thereof. 2.4.3. Independent directors account for at least one third of all the directors elected to the Board of Directors. 1. Independent directors account for at least full compliance one-third of all the directors elected to the Board of Directors. partial compliance noncompliance The membership of the Board of Direc- tors has been composed to balance and align the interests of minority and majority shareholders, as well as the Company itself needed for highly professional managers to participate in the Board. The Board of Directors has three independent directors and in the future, the Company intends to increase the number of independent directors to one third of the Board membership. 2.4.4. Independent directors play a key role in prevention of internal conflicts in the Company and per- formance by the latter of material corporate actions. 1. Independent directors (who have no full compliance conflict of interest) preliminarily assess the material corporate actions associated with a possible conflict of interests, and the re- sults of such an assessment are submitted to the Board of Directors. partial compliance noncompliance 2.5. THE CHAIRMAN OF THE BOARD OF DIRECTORS CONTRIBUTES TO THE MOST EFFICIENT IMPLEMENTATION OF THE FUNCTIONS ASSIGNED TO THE BOARD OF DIRECTORS 2.5.1. The Board of Directors is chaired by an independent director, or one of the independent directors is appointed as a senior independent director who coordinates the work of the independent directors and liaises with the Chairman of the Board of directors. 1. The Board of Directors is chaired by an independent director, or one of the inde- pendent directors is appointed as a senior independent director. 2. The role, rights and duties of the Chair- man of the Board of Directors (and the senior independent director, if applicable) are duly determined in the internal docu- ments of the Company. full compliance partial compliance noncomplianc Explanation for Item 1: The Chairman of the Board of Directors is a non-exec- utive director elected unanimously by all members of the Board of Directors as the most competent Board member, who is a knowledgeable profes- sional with an impeccable business and personal reputation, significant experience in leadership positions, ensuring increased efficiency of the Company’s efficiency in the interests of shareholders. Currently, based on the position of the independent directors themselves, a senior independent director is not identified among them. All the inde- pendent directors have equal rights to interact with the Chairman of the Board of Directors. Next corporate year, after election of the new membership of the Board of Directors by the Annual General Meeting of Shareholders following the results of 2019, the independent di- rectors will be offered to elect a senior independent director. The Company proceeds from the principle of volun- tariness of the approach. Item 2: Full compliance. that Board meetings are held in a constructive atmosphere and that any issues on the meeting agenda are discussed freely. The Chairman also monitors fulfilment of decisions made by the Board of directors. Board of Directors has been evaluated as part of the performance evaluation of the Board of Directors carried out in the reporting period. partial compliance noncompliance 2.5.3. The Chairman of the Board of Di- rectors takes any and all measures as may be required to provide the Board members in a timely manner with the information required to make decisions on the agenda issues. 1. The internal documents of the Company provide that it is the duty of the Chairman of Board of Directors to take measures to provide the Board members with materials on Board meetings agendas. full compliance partial compliance noncompliance 2.6. THE BOARD MEMBERS ACT REASONABLY AND IN GOOD FAITH IN THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS, BEING SUFFICIENTLY INFORMED, WITH DUE CARE AND DILIGENCE 2.6.1. The Board members make deci- sions considering all available infor- mation, in the absence of a conflict of interest, treating shareholders of the Company equally, and assuming normal business risks. full compliance partial compliance noncompliance 1. The internal documents of the Company provide that a member of the Board of Directors shall notify the Board of Direc- tors if he/she has a conflict of interest in respect of any item on the meeting agen- da of the Board or a Board’s committee before the beginning of the discussion of the concerned item. 2. The internal documents of the Company provide that a Board member shall abstain from voting on any items in respect of which he/she has a conflict of interest. 3. The Company has a procedure in place that allows the Board of Directors to ob- tain professional consultations on matters within the scope at the expense of the Company. 2.6.2. Rights and duties of the Board 1. The Company has approved and pub- full compliance members are clearly stated and documented in the Company’s internal documents. lished an internal document that clearly states the rights and duties of the mem- bers of the Board of Directors. 2.6.3. The Board members have sufficient time to perform their duties. 2.6.4. All the Board members have equal opportunities to access the Com- pany’s documents and information. Newly elected Board members are provided with sufficient information about the Company and work of the Board of directors as soon as practicable. 1. Individual attendance at the meetings of the Board of Directors and its committees, as well as time allotted to preparation for the meetings, were covered in the perfor- mance evaluation of the Board of Direc- tors carried out in the reporting period. 2. The internal documents of the Company provide that members of the Board of Directors shall notify the Board about their intention to become a member of governance bodies in other entities (besides the Company’s controlled and subsidiary companies), as well as of such appointments. 1. The internal documents of the Company provide that members of the Board of Directors have the right to have access to documents and make requests con- cerning the Company and its controlled companies, and the executive bodies of the Company shall provide requested information and documents. 2. The Company has a formal onboarding program for newly elected members of the Board of Directors. partial compliance noncompliance full compliance partial compliance noncompliance full compliance partial compliance noncompliance 322 323 2019 ANNUAL REPORTANNEX 4YEARS OF SUSTAINABLE DEVELOPMENT25Item No. Corporate Governance Principle Compliance Assessment Criteria Corporate Governance Principle Status of compliance with the corporate governance principle Explanations for deviations from the criteria for assessing compliance with the corporate governance principle Item No. Corporate Governance Principle Compliance Assessment Criteria Corporate Governance Principle Status of compliance with the corporate governance principle Explanations for deviations from the criteria for assessing compliance with the corporate governance principle 2.7. MEETINGS OF THE BOARD OF DIRECTORS, PREPARATION FOR THEM, AND PARTICIPATION OF BOARD MEMBERS THEREIN ENSURE EFFICIENT WORK OF THE BOARD 2.7.1. The meetings of the Board of Direc- tors are held as required with due account of the Company’s scope of activities and objectives in a certain period. 2.7.2. The procedure for preparing for and holding meetings of the Board of Directors is set out in the Com- pany’s internal documents, which enable the members of the Board of Directors to properly prepare for the meetings. 2.7.3. The form of a meeting of the Board of Directors is determined with due account of importance of issues on the agenda of the meeting. The most important issues are decided at the meetings held in person. 1. The Board of Directors held at least six meetings during the reporting year. 1. The Company has approved an internal document that sets out the procedure for preparing for and holding Board of Directors meetings, which also stipulates that the meeting notification should be made, as a rule, at least 5 days before the meeting date. full compliance partial compliance noncompliance full compliance partial compliance noncompliance 1. The Articles of Association or internal full compliance documents of the Company stipulate that the most important issues (according to the list given in Recommendation 168 of the Code) should be decided at the Board meetings held in person. partial compliance noncompliance 2.7.4. Decisions on the most important 1. The Articles of Association of the Com- full compliance issues of the Company are taken at the meeting of the Board of Directors by a qualified majority or a majority of all elected members of the Board of Directors. pany provide that decisions on the most important issues set out in Recommen- dation 170 of the Code shall be taken at a meeting of the Board of directors by a qualified majority vote of at least three quarters of the votes or by a majority vote of all elected Board members. partial compliance noncompliance THE BOARD OF DIRECTORS FORMS COMMITTEES FOR PRELIMINARY CONSIDERATION OF THE MOST IMPORTANT ISSUES OF THE COMPANY’S BUSINESS For the purpose of preliminary con- sideration of any matters of control over the Company’s financial and business activities, the Audit Com- mittee is established and comprised of independent directors. full compliance partial compliance noncompliance 1. The Board of Directors has set up an Audit Committee consisting solely of independ- ent directors. 2. The internal documents of the Company specify the objectives of the Audit Commit- tee, including the objectives indicated in Recommendation 172 of the Code. 3. At least one member of the Audit Com- mittee, who is an independent director, has sufficient experience and expertise in preparation, analysis, evaluation and audit of accounting (financial) statements. 4. The Audit Committee held meetings at least once a quarter during the reporting period. Explanation for Item 1: The Audit Com- mittee consists of three independent directors, one of whom has an experi- ence and expertise in preparation, anal- ysis, evaluation and audit of accounting (financial) statements (Yu. L. Levin, Committee Chairman). The Board of Directors decided to increase the membership of the Committee by adding a nonexecutive director who is also experienced and knowledgeable in preparation, analy- sis, evaluation and audit of accounting (financial) statements (R. R. Gaizatullin). The Company reviews membership of the Committee on an annual basis. Compliance with recommendations of the Bank of Russia Code on the committee membership exclusively of independent directors will be possible after the increased share of independ- ent directors in the Board of Directors planned by the Company. (Clarifications in Item 2.4.3 of this report). 2.8. 2.8.1. 324 2.8.2. For the purpose of preliminary con- sideration of any matters of devel- opment of efficient and transparent remuneration practices, the Remu- neration Committee is established, comprised of independent directors and chaired by an independent director who is not concurrently the Chairman of the Board of Directors. 1. The Board of Directors has established a Remuneration Committee, which consists solely of independent directors. 2. The Remuneration Committee is chaired by an independent director who is not the Chairman of the Board of Directors. 3. The internal documents of the Company specify the objectives of the Remuneration Committee, including the objectives indi- cated in Recommendation 186 of the Code. full compliance partial compliance noncompliance 2.8.3. For the purpose of preliminary 1. The Board of Directors has set up the full compliance partial compliance noncompliance Clarification for Item 1: The Human Resources & Remuneration Committee of the Board of Directors is comprised of three independent directors and chaired by the independent director (R. Steiner). The Board of Directors decided to increase the Committee membership by adding a non-executive director (R. K. Sabirov). The expansion of the membership is related to the fact that the Committee also functions as the Nominations Committee (for appoint- ments, human resources). The Company reviews the member- ship of the Committee on an annual basis. Compliance with recommenda- tions of the Bank of Russia Code on the committee membership exclu- sively of independent directors will be possible after the increased share of independent directors in the Board of Directors planned by the Company. (Clarification in Item 2.4.3 herein). The objectives of the Nominations Committee are combined with func- tions of the HR and Remuneration Committee. Nominations Committee (or its functions indicated in Recommendation 186 of the Code are delegated to another Commit- tee), and most of its members are inde- pendent directors. 2. The internal documents of the Company specify the objectives of the Nominations Committee (or another Committee which performs its functions), including the objectives indicated in Recommendation 186 of the Code. 1. In the reporting period, the Board of Directors of the Company has consid- ered alignment of the membership of the Board’s committees and corporate objectives of the Company. Addition- al committees were either formed, or deemed not necessary. consideration of any matters relating to human resources planning (making plans regarding successor directors), professional composition and efficiency of the Board of Direc- tors, the Nominations Committee (appointments, human resources) is established with a majority of its members being independent directors. 2.8.4. Taking account of the scope of activities and levels of related risks, the Board of Directors of the Com- pany has ascertained that its Com- mittees’ membership is fully in line with the corporate objectives of the Company. Either additional com- mittees were formed, or they were deemed not necessary (Strategy Committee, Corporate Governance Committee, Ethics Committee, Risk Management Committee, Budget Committee, Committee on Health, Security & Environment, etc.) The Committee has been formed in the Company Corporate Governance full compliance partial compliance noncompliance 325 2019 ANNUAL REPORTANNEX 4YEARS OF SUSTAINABLE DEVELOPMENT25Item No. Corporate Governance Principle Compliance Assessment Criteria Corporate Governance Principle Status of compliance with the corporate governance principle Explanations for deviations from the criteria for assessing compliance with the corporate governance principle Item No. Corporate Governance Principle Compliance Assessment Criteria Corporate Governance Principle Status of compliance with the corporate governance principle Explanations for deviations from the criteria for assessing compliance with the corporate governance principle 2.8.5. The composition of the committees is determined in such a way to pro- vide a comprehensive discussion of issues being considered on a preliminary basis with due account of differing opinions. 1. The Committees of the Board of Directors are headed by independent directors. 2. The internal documents (policies) of the Company include the provisions accord- ing to which persons not being members of the Audit Committee, Nominations Committee and the HR & Remuneration Committee may attend the meetings of the Committees upon the invitation of the respective Chairman only. full compliance partial compliance noncompliance Clarification for Item 1: The Company adheres to the interpre- tation of the Bank of Russia Code that Audit, Remuneration and Nominations Committees are mandatory for public companies, the requirements for these committees are clearly stated in the Corporate Governance Code, and the Company follows them. Corporate Governance Committee is not a mandatory body of the Board of Directors, and the Code’s restriction on the number of independent direc- tors (at least three) creates a conflict of participation whereby the same directors may be members in different committees, which can undermine the quality of their contribution to the work of committees. Therefore, the Company is of the opinion that the membership of the Corporate Governance Committee and its Chairman (N. U. Maganov) do not contradict the recommendations of the Bank of Russia Code on the composition of the Committee, and taking into account qualifications and evaluating the effectiveness of mem- bers of the Committee, the composi- tion of the Committee is in line with its goals and provides opportunities for a comprehensive and balanced discus- sion of the issues under consideration, taking into account different opinions. 2.8.6. The chairmen of the Committees report on the work of their Commit- tees to the Board of Directors and the Chairman on a regular basis. 1. During the reporting period, Chairmen of the Committees regularly reported on the work of the Committees to the Board of Directors. full compliance partial compliance noncompliance 2.9. THE BOARD OF DIRECTORS PROVIDES FOR PERFORMANCE EVALUATION OF THE BOARD OF DIRECTORS, ITS COMMITTEES AND MEMBERS OF THE BOARD 2.9.1. Performance evaluation of the Board of directors is aimed at de- termining how effectively the Board of directors, its Committees and Board members work and whether their work meets the company development requirements, as well as at making their work more intensive and identifying areas of improvement. 1. Self-evaluation or external evaluation of the Board of Directors performance conducted in the reporting period included evaluation of the work of Committees, indi- vidual members of the Board of Directors and the Board as a whole. 2. The results of self-evaluation or external evaluation of the Board of Directors con- ducted in the reporting period were consid- ered at a physical meeting of the Board. full compliance partial compliance noncompliance 2.9.2. Performance evaluation of the 1. For the purposes of independent full compliance performance evaluation of the Board of Directors, during the last three reporting periods the Company has at least once engaged the third party entity (consultant). partial compliance noncompliance Board of directors, the Committees and Board members, is carried out regularly, at least once a year. To carry out an independent evaluation of the Board of directors’ performance, the third party entity (consultant) is engaged on a regular basis, at least once every three years. Performance of the Board of Directors is evaluated on a regular basis once a year, the evaluation is based on formalized self-evaluation system and the results are further considered by the Audit Committee and Corporate Governance Committee with the involvement of independent directors. The self-evaluation system is based on the methods similar to the RAEX (Expert RA) methodology adopted since 01.06.2014. The results are disclosed in the annual report and are available to the share- holders and all stakeholders. The Company has not engaged a third party entity for performance evaluation of the Board of Directors for the last three years on the basis of reasonable grounds associated with qualitative changes in the Company (develop- ment, approval and implementation of the corporate Long-term Strategy) and positive financial results and produc- tion performance. The Company considers an independ- ent evaluation with the involvement of a third party entity (consultant) within the next three-year period. THE COMPANY’S CORPORATE SECRETARY ENSURES EFFECTIVE INTERACTION WITH ITS SHAREHOLDERS, COORDINATION OF THE COMPANY’S ACTIONS TO PROTECT THE RIGHTS AND INTERESTS OF THE SHAREHOLDERS, AND SUPPORT OF EFFICIENT WORK OF ITS BOARD OF DIRECTORS 3.1. 3.1.1. The corporate secretary has the knowledge, experience, and qualifi- cations sufficient to fulfill the duties assigned, as well as an impeccable reputation and enjoys the trust of the shareholders. 3.1.2. The corporate secretary is suffi- ciently independent of the Com- pany’s executive bodies and be vested with powers and resources required to perform his/her tasks. 1. The Company has adopted and disclosed an internal document — the Regulation on Corporate Secretary. 2. The Company’s website and the annual report provide biographical information of the corporate secretary, with the same degree of detail as for the members of the Board of Directors and the executive management of the Company. 1. The Board of Directors approves the appointment, removal from office and additional fee of the corporate secretary. full compliance partial compliance noncompliance full compliance partial compliance noncompliance 326 327 2019 ANNUAL REPORTANNEX 4YEARS OF SUSTAINABLE DEVELOPMENT25Item No. Corporate Governance Principle Compliance Assessment Criteria Corporate Governance Principle Status of compliance with the corporate governance principle Explanations for deviations from the criteria for assessing compliance with the corporate governance principle Item No. Corporate Governance Principle Compliance Assessment Criteria Corporate Governance Principle Status of compliance with the corporate governance principle Explanations for deviations from the criteria for assessing compliance with the corporate governance principle 4.1. 4.1.1. THE LEVEL OF REMUNERATION PAID BY THE COMPANY IS ADEQUATE TO ENABLE IT TO ATTRACT, MOTIVATE, AND RETAIN PERSONS HAVING REQUIRED SKILLS AND QUALIFICATIONS. THE REMUNERATION DUE TO THE MEMBERS OF THE BOARD OF DIRECTORS, THE EXECUTIVE BODIES, AND OTHER KEY MANAGERS OF THE COMPANY IS AID IN ACCORDANCE WITH A REMUNERATION POLICY APPROVED BY THE COMPANY 1. The Company has approved an internal full compliance document (documents) — policy (policies) on remuneration for the members of the Board of Directors, executive bodies and other key managers, which clearly describes (describe) the remuneration framework. partial compliance noncompliance The level of remuneration paid by the Company to its Board members, executive bodies, and other key managers is adequate to motivate them to work efficiently and enable the Company to attract and retain knowledgeable, skilled, and duly qualified persons. The Company avoids setting the level of remuneration any higher than necessary, as well as an excessive- ly large gap between the level of remuneration of any of the above persons and that of the Company’s employees. 4.1.2. The Company’s remuneration policy is developed by its Remu- neration Committee and approved by the Board of Directors. With the help of the Remuneration Committee, the Board of Directors monitors implementation of and compliance with the remuneration policy by the Company and, if nec- essary, reviews and amends it. 1. In the reporting period, the Remuneration Committee reviewed the remuneration policy (policies) and its (their) implemen- tation practices, and, where necessary, provided relevant recommendations to the Board of Directors. full compliance partial compliance noncompliance 4.1.3. 4.1.4. The Company’s remuneration pol- icy provides for transparent mech- anisms to be used to determine the amount of remuneration due to members of the Board of Directors, the executive bodies, and other key managers of the Company, as well as regulates any and all types of payments, benefits, and privileg- es provided to the above persons. 1. The Company’s remuneration policy (pol- icies) provides (provide) for transparent mechanisms to be used to determine the amount of remuneration due to members of the Board of Directors, the executive bodies, and other key managers of the Company, as well as regulates (regulate) any and all types of payments, benefits, and privileges provided to the above persons. full compliance partial compliance noncompliance The Company develops a policy on reimbursement of expenses (compensation) which contains a list of reimbursable expenses and specifies service level provided to members of the Board of Directors, the executive bodies, and other key managers of the Company. Such policy can form part of the Company’s policy on remuneration. 1. The remuneration policy (policies) or full compliance other internal documents of the Company set out the rules for reimbursement of expenses to the members of the Board of Directors, the executive bodies, and other key managers of the Company. partial compliance noncompliance 4.2. THE SYSTEM OF REMUNERATION OF MEMBERS OF THE BOARD OF DIRECTORS ENSURES HARMONIZATION OF FINANCIAL INTERESTS OF THE DIRECTORS WITH LONG-TERM FINANCIAL INTERESTS OF THE SHAREHOLDERS 1. The fixed annual remuneration was the only monetary remuneration for the members of the Board of Directors for their work on the Board of Directors in the reporting period. full compliance partial compliance noncompliance 4.2.1. The Company pays fixed annual remuneration to the members of the Board of Directors. The Company doesn’t pay remu- neration for participation in certain Board meetings or the Board’s committees’ meetings. The Company doesn’t engage methods of short-term motivation and additional financial incentives towards members of the Board of Directors. 4.2.2. Long-term ownership of the 1. If the internal document (documents) — full compliance Company’s shares contributes most to aligning financial interests of the members of the Board of Directors with long-term interests of the shareholders. However, the Company doesn’t make the right to dispose of shares dependent on the achievement by the Company of certain performance results; and members of the Board of Direstors don’t take part in the option plans. remuneration policy (policies) of the Com- pany stipulate provision of shares of the Company to the members of the Board of Directors, there should be provisions and clear rules for share ownership by members of the Board of Directors aimed at incentivizing long-term ownership of such shares. partial compliance noncompliance 4.2.3. The Company doesn’t provide for any additional allowance or compensation in the event of early resignation of the Board members due to change of control over the Company or other circumstances. 1. The Company doesn’t provide for any full compliance additional allowance or compensation in the event of early resignation of the Board members due to change of control over the Company or other circumstances. partial compliance noncompliance 4.3. THE SYSTEM OF REMUNERATION DUE TO MEMBERS OF THE EXECUTIVE BODIES AND OTHER KEY MANAGERS OF THE COMPANY PROVIDES THAT THEIR REMUNERATION IS DEPENDENT ON THE COMPANY’S PERFORMANCE RESULTS AND THEIR PERSONAL CONTRIBUTIONS TO THE ACHIEVEMENT THEREOF 4.3.1. Remuneration due to members of 1. In the reporting period, annual perfor- full compliance partial compliance noncompliance the executive bodies and other key managers of the Company is determined in such a way as to procure a reasonable and justified ratio between its fixed part and its variable part that is dependent on the Company’s performance results and employees’ personal (individu- al) contributions to the achievement thereof. mance indicators approved by the Board of Directors were used to determine the variable remuneration due to members of the executive bodies and other key manag- ers of the Company. 2. In the course of the last evaluation of the system of remuneration due to members of the executive bodies and other key manag- ers of the Company, the Board of Directors (the Remuneration Committee) assured that the Company applies effective ratio of fixed and variable parts of remuneration. 3. The Company provides for a procedures that ensure that bonuses received by members of the executive bodies and oth- er key managers illegitimately are returned back to the Company. 4.3.2. The Companies has put in place 1. The Companies has put in place a long- full compliance a long-term incentive programme for members of the Company’s executive bodies and other key managers involving the Compa- ny’s shares (or options or other derivative financial instruments the underlying assets for which are the Company’s shares). 4.3.3. The amount of severance pay (so- called «golden parachute») payable by the Company in the event of early dismissal of a member of the executive body or other key manager at the initiative of the Company, provided that there have been no bad faith actions on the part of such person, doesn’t exceed two times the fixed part of their annual remuneration. term incentive programme for members of the Company’s executive bodies and oth- er key managers involving the Company’s shares (or options or other derivative fi- nancial instruments the underlying assets for which are the Company’s shares). 2. The long-term incentive programme for members of the Company’s executive bodies and other key managers provides that the right to sell the shares or other financial instruments provided under the programme arises no earlier than in three years from the date when they were pro- vided. At the same time, the right to sell the same is conditioned by the achieve- ment of certain targets by the Company. 1. The amount of severance pay (so-called «golden parachute») payable by the Company in the event of early dismissal of a member of the executive body or other key manager at the initiative of the Company, provided that there have been no bad faith actions on the part of such person, didn’t exceed two times the fixed part of their annual remuneration. partial compliance noncompliance full compliance partial compliance noncompliance 328 329 2019 ANNUAL REPORTANNEX 4YEARS OF SUSTAINABLE DEVELOPMENT25Item No. Corporate Governance Principle Compliance Assessment Criteria Corporate Governance Principle Status of compliance with the corporate governance principle Explanations for deviations from the criteria for assessing compliance with the corporate governance principle Item No. Corporate Governance Principle Compliance Assessment Criteria Corporate Governance Principle Status of compliance with the corporate governance principle Explanations for deviations from the criteria for assessing compliance with the corporate governance principle THE COMPANY HAS IN PLACE AN EFFICIENT RISK MANAGEMENT AND INTERNAL CONTROL SYSTEM DESIGNED TO PROVIDE REASONABLE CONFIDENCE THAT THE COMPANY’S GOALS WILL BE ACHIEVED 5.1. 5.1.1. The Board of Directors has determined the principles and approaches to creation of the risk management and internal controls system in the Company. 5.1.2. The Company’s executive bodies ensure the establishment and continuing operation of the efficient risk management and internal con- trol system in the Company. 1. The functions of different governance bodies and divisions of the Company in the risk management and internal control system are clearly defined in the internal documents/relevant policies of the Company, approved by the Board of Directors. 1. The executive bodies of the Company ensured distribution of functions and powers in respect of risk management and internal control among the managers (heads) of divisions and departments accountable to them. full compliance partial compliance noncompliance full compliance partial compliance noncompliance 5.1.3. The Company’s risk management 1. The Company has an approved policy on full compliance and internal control system enables one to obtain an objective, fair and clear view of the current condition and prospects of the Company, integrity and transparency of its accounts and reports, and reason- ableness and acceptability of risks being assumed by the Company. combating corruption. 2. The Company has in place a usable partial compliance method (hotline) for informing the Board of Directors or the Audit Committee of the Board of Directors of any breaches of legislation, internal procedures and the ethics code of the Company. noncompliance 5.1.4. The Board of Directors takes required and sufficient measures to procure that the existing risk management and internal control system of the Company is con- sistent with the principles of and approaches to its creation as set forth by the Board of Directors and that it operates efficiently. 1. In the reporting period, the Board of Directors or the Audit Committee of the Board of Directors conducted an evaluation of the risk management and internal control system of the Company. The evaluation results are included in the annual report of the Company. full compliance partial compliance noncompliance 5.2. FOR THE PURPOSES OF REGULAR INDEPENDENT EVALUATION OF RELIABILITY AND EFFICIENCY OF THE RISK MANAGEMENT AND INTERNAL CONTROL SYSTEM, AS WELL AS CORPORATE GOVERNANCE PRACTICES, THE COMPANY ARRANGES FOR INTERNAL AUDIT 5.2.1. The Company has a separate 1. For the purposes of internal audit, the full compliance structural division (internal audit department) or an independent third-party entity is engaged to carry out internal audit of the Company. The internal audit department has separate lines of functional and administrative reporting. Function- ally, the internal audit department is accountable to the Board of Directors. Company created a separate structural division (internal audit department), which is functionally accountable to the Board of Directors or the Audit Committee, or an independent third-party entity is engaged with the same accountability principle. partial compliance noncompliance 5.2.2. The internal audit department 1. In the reporting period, the efficiency of full compliance evaluates efficiency of the inter- nal control system and the risk management system, as well as evaluate corporate governance. The Company applies generally ac- cepted standards of internal audit. the internal control and risk management system was evaluated, as part of the internal audit. partial compliance 2. The Company applies commonly accept- noncompliance ed approaches to the internal control and risk management. 6.1. THE COMPANY AND ITS ACTIVITIES ARE TRANSPARENT TO SHAREHOLDERS, INVESTORS AND OTHER STAKEHOLDERS 6.1.1. The Company developed and implemented an information policy ensuring efficient exchange of information between the Company, shareholders, investors, and other stakeholders. 1. The Board of Directors of the Compa- full compliance ny has approved an information policy aligned with the recommendations of the Code. 2. The Board of Directors (or one of its Com- mittees) considered issues related to the Company’s compliance with its informa- tion policy at least once in the reporting period. partial compliance noncompliance 6.1.2. The Company discloses information on its corporate governance system and practices, including detailed information on compliance with the principles and recommendations of the Code. 1. The Company discloses information on the Company’s corporate governance system and the general principles of the corporate governance applied in the Com- pany, including the information disclosed on the Company’s Internet website. full compliance partial compliance noncompliance 2. The Company discloses information about membership of the executive bodies and the Board of Directors, independence of the members of the Board and their membership in the Board’s Committees (as defined in the Code). 3. In the event there is a person who con- trols the Company, the Company publish- es a memorandum of the controlling per- son regarding the plans of such person in respect of the corporate governance in the Company. 6.2. THE COMPANY DISCLOSES, ON A TIMELY BASIS, FULL, UPDATED AND RELIABLE INFORMATION ABOUT ITSELF SO AS TO ENABLE ITS SHAREHOLDERS AND INVESTORS TO MAKE INFORMED DECISIONS 6.2.1. The Company discloses information 1. The Company’s information policy full compliance in accordance with the principles of regularity, consistency and timeliness, as well as accessibility, reliability, completeness and com- parability of disclosed data 6.2.2. The Company avoids a formalistic approach to information disclosure and discloses material information on its activities, even if disclosure of such information is not required by law. identifies the approaches and criteria for identifying information that can have a significant impact on the Company’s val- uation and the value of its securities and procedures that ensure timely disclosure of such information. 2. In the event that the Company’s securities are traded in foreign organized markets, the disclosure of material information in the Russian Federation and in such markets is carried out synchronously and is the same during the reporting year. 3. If foreign shareholders hold a significant number of Company’s shares, then infor- mation disclosed during the reporting year was not only in Russian, but also in one of the most common foreign languages. 1. In the reporting period, the Company dis- closed annual and semi-annual financial statements prepared under IFRS stand- ards. The annual report of the Company for the reporting period includes annual financial statements prepared under IFRS and an auditor’s report. 2. The Company discloses full information on the structure of the Company’s capital in compliance with the Recommendation 290 of the Code in the annual report and in the corporate website. partial compliance noncompliance full compliance partial compliance noncompliance 6.2.3. The annual report, as one of the 1. The annual report of the Company full compliance most important tools of information exchange with the shareholders and other stakeholders, contains the information enabling one to evaluate the Company’s perfor- mance results for the year. contains information on key aspects of the Company’s operation and its financial results. 2. The annual report of the Company con- tains information on environmental and social aspects of the Company’s activities. partial compliance noncompliance 6.3. THE COMPANY PROVIDES INFORMATION AND DOCUMENTS REQUESTED BY ITS SHAREHOLDERS IN ACCORDANCE WITH THE PRINCIPLE OF EQUAL AND UNHINDERED ACCESSIBILITY 6.3.1. The Company provides information and documents requested by its shareholders in accordance with the principle of equal and unhin- dered accessibility. 1. The information policy of the Company defines an unhindered procedure for providing the shareholders with access to information, including information on entities controlled by the Company, at the request of the shareholders. full compliance partial compliance noncompliance 330 331 2019 ANNUAL REPORTANNEX 4YEARS OF SUSTAINABLE DEVELOPMENT25Item No. Corporate Governance Principle Compliance Assessment Criteria Corporate Governance Principle Status of compliance with the corporate governance principle Explanations for deviations from the criteria for assessing compliance with the corporate governance principle Item No. Corporate Governance Principle Compliance Assessment Criteria Corporate Governance Principle Status of compliance with the corporate governance principle Explanations for deviations from the criteria for assessing compliance with the corporate governance principle 6.3.2. When providing information to its shareholders, the Company maintains a reasonable balance between the interests of indi- vidual shareholders and its own interests related to the fact that the Company is interested in keeping confidential sensitive business information that might have a mate- rial impact on its competitiveness. 1. In the reporting period, the Company full compliance didn’t refuse to satisfy the shareholders’ requests for information, or such refusals were justified. 2. In the events specified in the information policy of the Company, shareholders are advised of the confidential nature of the information and assume the obligation to maintain its confidentiality. partial compliance noncompliance 7.1. ANY ACTIONS, WHICH AFFECT OR MAY MATERIALLY AFFECT THE COMPANY’S SHARE CAPITAL STRUCTURE AND FINANCIAL POSITION OF THE COMPANY AND, ACCORDINGLY, THE POSITION OF ITS SHAREHOLDERS (“MATERIAL CORPORATE ACTIONS”) ARE TAKEN ON FAIR TERMS AND CONDITIONS ENSURING THAT THE RIGHTS AND INTERESTS OF THE SHAREHOLDERS AS WELL AS OTHER STAKEHOLDERS ARE OBSERVED 7.1.1. Material corporate actions are 1. The Company’s Articles of Association full compliance partial compliance noncompliance deemed to include reorganization of the Company, acquisition of 30 or more percent of its voting shares (takeover), entering by the Compa- ny into any material transactions, increasing or decreasing its share capital, listing and delisting of its shares, as well as other actions which can result in material chang- es in rights of its shareholders or violation of their interests. The Company’s Articles of Association provides for a list of (criteria for identifying) transactions or other actions falling within the category of material corporate actions and provide therein that decisions on any such actions fall within the jurisdiction of the Company’s Board of Directors. provides for a list of transactions or other actions falling within the category of mate- rial corporate actions and criteria for their identifying. Decisions on material cor- porate actions fall within the jurisdiction of the Company’s 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 recom- mendations to the shareholders. 2. Reorganization of the Company, acquisition of 30 or more percent of voting shares of the Company (takeover), entering by the Company into any major transactions or other material transac- tions, increasing or decreasing its share capital, as well as listing and delisting of its shares are recognized in the Articles of Association of the Company as material corporate actions. 7.1.2. The Board of Directors plays a key role in passing resolutions or making recommendations relating to material corporate actions, the Board of Directors relies on opin- ions of the Company’s independent directors 1. The Company has provided for a proce- full compliance dure whereby the independent directors declare their opinion on any material corporate actions prior to their approval. partial compliance noncompliance 1. The Articles of Association of the Com- pany, taking into account the specifics of its activities, sets lower, than legislatively stipulated, criteria for recognizing transac- tions as material corporate actions. 2. In the reporting period, all material cor- porate actions went through the approval procedure prior to their implementation. full compliance partial compliance noncompliance 7.1.3. When taking any material corporate actions which affect rights and legitimate interests of the Com- pany’s shareholders, equal terms and conditions are ensured for all of the shareholders; if statutory mechanisms designed to protect the shareholder rights prove to be insufficient for that purpose, addi- tional measures are taken with a view to protecting the rights and le- gitimate interests of the Company’s shareholders. In such instances, the Company seeks not only to comply with the formal requirements of law but also is guided by the principles of corporate governance set out in the Code. THE COMPANY HAS IN PLACE SUCH A PROCEDURE FOR TAKING ANY MATERIAL CORPORATE ACTIONS THAT ENABLES ITS SHAREHOLDERS TO RECEIVE FULL INFORMATION ABOUT SUCH ACTIONS IN DUE TIME AND INFLUENCE THEM, AND THAT ALSO GUARANTEES THAT THE SHAREHOLDER RIGHTS ARE OBSERVED AND DULY PROTECTED IN THE COURSE OF TAKING SUCH ACTIONS 7.2. 7.2.1. full compliance partial compliance noncompliance full compliance partial compliance noncompliance Information on the performance of material corporate actions is disclosed with explanations con- cerning reasons for, conditions and consequences of such actions. 1. In the reporting period, the Company disclosed information about material corporate action in a timely manner and in detail, including grounds and timescale of such actions. 7.2.2. Rules and procedures in relation to material corporate actions taken by the Company are set out in its internal documents. 1. The internal documents of the Company provide for a procedure for engaging an independent appraiser to determine the value of property disposed or acquired pursuant to a major transaction or a non- arm’s length transaction. 2. The internal documents of the Company provide for a procedure for engaging an independent appraiser to evaluate the cost of acquisition and buyback of the Company’s stock. 3. The internal documents of the Company provide for an extensive list of grounds for recognizing members of the Board of Directors or other persons as stated in respective laws as interested in the Company’s transactions. 332 333 2019 ANNUAL REPORTANNEX 4YEARS OF SUSTAINABLE DEVELOPMENT25Annex 5 Principal risks Risk description STRATEGIC RISK The implementation of the Company’s Development Strategy and the achievement of operational and financial results depends on multiple factors, which include changes in the energy markets, international and domestic policies, macroeconomics, agreements between OPEC and other oil producers, legal and tax regulations, the development of technologies and information resources, the dynamics of the labor market as well as various other factors. COUNTRY AND FOREIGN POLICY RISKS The Company is registered in the Russian Federation, where a significant part of its assets is located. Principal production activities are carried out in the Republic of Tatarstan, which is a constituent entity of the Russian Federation. The political situation in the Russian Federation and, in particular, in the Republic of Tatarstan is stable. At the same time, a number of international organizations, commercial, nongovernmental organizations publish their country ratings based risks, including political ones. In such ratings, the Russian Federation may be classified as a country with increased risks that investors should take into account when investing their funds in the country’s economy and securities of Russian issuers, such as the Company. U.S. and EU sanctions Since 2014, the United States, the European Union, and a number of other countries have consistently imposed sanctions on the Russian Federation, including sectoral sanctions affecting the activities of individual companies in the energy and other sectors of the Russian economy. These sanctions, including their unpredictability, increase the country risk of the Russian Federation. Company’s risk management practice The Company implements the Development Strategy for the period of up to 2030, formed on the basis of a detailed analysis of the combination of all key factors, which may affect the development of the Company and the achievement of the planned results. Decisions of the Company’s manage- ment bodies related to the strategic and current planning and operational activities are based on all available information related to possible develop- ment scenarios and tend to consider all reasonably foreseeable variations and assumptions used in such planning. The Company has a high-quality assets structure and a high-tech foun- dation, which it is continuously improving in accordance with production goals, including the development of import-substituting technologies and equipment. The Company has a stable management platform for implementation of the Strategy and adjusts its plans as and when required. The Company’s investments are protected by the relevant Risk Control Map. The Company implements a policy of vertical integration and diversification, which allows to significantly reduce (eliminate) strategic risks, including criti- cal risks through redistribution of resources and commodity flows. The Company adheres to the opinion that the situation in the region of prin- cipal activities and location of key assets of the Group as a whole is stable. Rating agencies assess the creditworthiness of a country using their own methodologies. During 2018, the credit ratings of the Russian Federation assigned by such international agencies as Standard & Poor’s, Moody’s, and Fitch were at BBB-, Baa3(was increased in February 2019), and BBB (was increased in Au- gust 2019), respectively. These credit ratings are used by investors to assess the risks associated with investing in assets in the Russian Federation. In its activities, the Company takes into account and monitors the existing sanctions to minimize the adverse effects and consequences (considering the potential expansion of sanctions, i.e. various initiatives in the United States to strengthen the sanction regime against the Russian Federation), which might have a selective impact on the Company’s highly potential projects. To reduce the risks related to the availability of technologies and equipment subject to sanctions, the Company consistently implements the program of import substitution and development of its own technologies with the localization of equipment production in the Russian Federation and the engagement of advanced industry research centers. FINANCIAL RISKS Company’s activities are exposed to various financial risks: market risks (including currency, interest rate, and price risks), credit risks, and the liquidity risk. The Company’s financial risk management policy is focuses on risk measure- ment, assessment, and monitoring procedures as well as on the selection of appropriate risk management techniques. For details on financial risks, including those related to the banking segment within TATNEFT Group, see the IFRS Consolidated Financial Statements, Note 28: Financial Risk Management. CHANGES IN LEGISLATION AND REGULATORY ENVIRONMENT The Company’s performance may be significantly impacted by changes in the applicable legislation, such as: • tax legislation (in terms of changes in taxation procedure and tax rates both for legal entities and for companies whose activities are related to production and sale of gas and liquid hydrocarbons); • currency legislation (in terms of regulation of export-import operations and The Company conducts continuous monitoring of changes taking place in legislation, evaluates and forecasts the extent of their impact on the activities of the Group entities. The Company participates on a regular basis in working groups to develop draft laws in various areas of legislation that meet the requirements of the Company’s interests, evaluates consequences of such changes and accounts for in its plans. borrowing activities); • customs regulation (in terms of regulating the export of liquid hydrocar- bons and their processed products); • subsoil use licensing 334 335 252019 ANNUAL REPORTANNEX 5YEARS OF SUSTAINABLE DEVELOPMENTCompany’s risk management practice Risk description Company’s risk management practice Risk description LITIGATION RISKS The company may be involved as a defendant or plaintiff in multiple legal proceedings that arise out of normal business activities. In carrying out financial and economic activities, the Company adheres to the principle of prudence. As of the date of approval of the Annual Report, the Company was not involved in any significant litigation, and the risks associated are negligible INDUSTRY RISKS Oil price risk, oil and petroleum products demand risk Business efficiency and profitability largely depend on oil and oil products price as well as on the demand for oil and oil products. Recently, oil and oil product prices have shown significant volatility due to multiple factors. COVID-19 Since the end of 2019, the spread of a new coronavirus infection started which was called COVID-19, and can cause serious consequences leading to death. As of the end of 2019, the World Health Organization reported a limited number of cases of COVID-19 infection but in January 31, 2020 declared a public health emergency, and on March 13, 2020 announced a pandemic due to the rapid spread of COVID-19 in Europe and other regions. Measures taken globally to combat the spread of COVID-19 lead to the need to limit business activity which affects the demand for energy resources and other products of the Group, as well as to the need for preventive measures aimed at preventing the spread of infection. Amid the spread of COVID-19, there has been a significant drop in stock markets, decline in commodity prices, in particular, significant drop in oil prices, and the Russian ruble weakening against the US dollar and Euro. Despite the fact that, at the time of releasing this report, the situation is still progressing, it appeares that a negative impact on the global economy and the uncertainty regarding further economic growth may negatively affect the issuer’s financial position and financial results going forward. Technical and technological risks Exploration, development, and equipping of new fields, keeping the existing wells up and running, drilling new wells as well as crude oil treatment, transportation, oil and gas refining are extremely complex and expensive process. Enhanced oil recovery requires extra costs which is very crucial for the Company. In the future, as fields go depleted, the role of ad hoc approach for enhanced oil recovery will be growing. The Company has launched a development of a new area - petrochemical industry business. Concurrently, the Company is developing the banking segment. As a whole, the economic efficiency of all business lines of the Company will largely depend on the Company’s ability to use the most productive and affordable technologies, including information technologies. The Company performs continuous monitoring and analysis on the dynamics of prices and demand for oil and oil products. The Company’s model of strategic and current planning provides for ap- propriate adjustments. Planning is based on a scenario approach, including variability based on market forecasts. The Company has the internal potential to redistribute commodity flows in the event of a significant price difference between domestic and internation- al markets, demand for crude oil and oil products, and the ability to reduce or rebalance capital and operating costs in order to fulfill its obligations in the event of a sharp decline in oil, gas, and oil product prices. The Company analyzes the risks of prices and demand for oil and oil prod- ucts based on modeling various scenarios. In terms of demand for oil and oil products, the Company believes that the alternative energy will be able to replace significantly oil and oil products in the medium-term perspective. Regardless of the development of alternative sources of energy and a potential increase in the number of electric vehi- cles, the demand for oil and oil products will continue to grow (largely due to the emerging markets). Therefore, the Company does not expect any signifi- cant negative changes in the industry in terms of the demand structure. Any short-term risks related to changes in oil and oil products prices that could affect the financial performance of the Company are disclosed in the financial (accounting) statements. The management of PJSC TATNEFT closely monitors the situation and imple- ments steps to reduce the negative impact of these events on the company, with that the excess of demand over supply and the associated reduction in global oil prices will directly affect the revenue and other financial indicators if prices do not recover. The Company pays special attention to development and application of cutting-edge technologies in all areas of its business being one of the innovative leaders in Russia, and develops its own research and production base, interacts with advanced industry research centers. Target focus is the technologies required to implement the strategy, effec- tive investment in R&D, and pilot developments. The Company is actively developing IT infrastructure based on the new-gen- eration single information platform of production management, which integrates information flows of all services at all stages of the value chain. The Company plans to implement a series of IT projects by 2021, which will increase the efficiency of business processes. Transportation As the majority of oil production regions in Russia are located far from the main oil and oil product markets, oil companies are dependent on the maturity of transport infrastructure, securing its continuous functioning as well as on opportunity to access them. The Company transports a significant part of the crude oil, which it sells in foreign and domestic markets, via the network of major pipelines under contracts with PJSC Transneft and its subsidiary structures. A significant part of the oil transported via the pipeline is headed to seaports to be transported by sea. Russian sea terminals have certain limitations due to geographic location, weather conditions, and throughout capacity. Within Russia, oil products are transported mainly by rail road. The railway infrastructure in the Russian Federation is owned and overseen by JSC Russian Railways. Both Transneft and Russian Railways are joint stock companies partially owned by the government, the above companies belong to the natural monopolies sector, their tariff policy is governed by the government authorities to ensure a balance of the interests of the government and of all parties involved in the transportation process. The Federal Antimonopoly Service of the Russian Federation (FAS of Russia) sets the tariffs for natural monopolies. The Tariff rate depends on the route of transportation, size of shipment, distance to destination, and several other factors. FAS of Russia reviews tariffs at least once a year. Industry risks of production and environmental safety The Company and TATNEFT Group enterprises operate complex process systems and facilities for production, treatment, transportation, and refining of oil and gas some of which are classified as especially hazardous production facilities. The oil and gas sector of the economy is extremely exposed to industrial and environmental risks, which entail the threat of injury, potentially pose danger to life, health and potentially may cause fine sanctions, etc. The Company’s activities lead to greenhouse gas emissions both during production process and consumption of its products The region of the Company’s principal activities is not remote in terms of transportation and other infrastructures. The Company monitors closely the development and maintenance of the transport infrastructure required to deliver oil and oil products to buyers, as well as it monitors the tariff policy, and participates actively in the relevant industrial discussions and initiatives. The company has a large tank farm for storing commercial stocks of oil and oil products which can be also used during extraordinary disruptions in the operation of the transport infrastructure. The Company has developed a comprehensive program aimed at mitigating negative situations associated with industry production and environmental risks. The Company continuously implements new technical and organi- zational activities to minimize the impact of such risks. Also. the Company provides liability insurance for several facilities. The Company is committed to becoming a leader in industrial, labor, and environmental safety of production, minimizing the impact on the envi- ronment, including the impact on the climate. Comprehensive actions in this area have resulted in the reduced environmental footprint to the level where there is a potential for ecosystems to self-recover. To improve the efficiency of industrial and environmental safety management, TATNEFT Group is currently introducing the management system in compliance with the latest-generation of international standards ISO 14001-2015 and ISO 45001:2018. The Company shares global climate change concerns and the “Climate Care” Strategic Global Partnership initiative, the UN Global Compact and the secretariat of the United Nations Framework Convention on Climate Change (UNFCCC), as enshrined in the Paris Climate Agreement. The company con- sistently and comprehensively adheres to initiatives related to the climate aspects and reduction of greenhouse gas emissions, and also takes an active part in the discussion and implementation of steps relating to regula- tion of greenhouse gas emissions at the national and international levels. In order to ensure reduction of greenhouse gas emissions and carbon footprint reduction, the Company provides management decisions on the develop- ment of a corporate system for accounting and managing greenhouse gas emissions, plans target values to reduce total greenhouse gas emissions and takes relevant measures to ensure meeting these target values. In its long-term strategic planning, the Company is considering the possibility of scenarios for transition of the global energy system to decarbonization, expansion of low-carbon fuels use and, in general, to a low-carbon global infrastructure. 336 337 252019 ANNUAL REPORTANNEX 5YEARS OF SUSTAINABLE DEVELOPMENTRisk description Company’s risk management practice RISK OF DAMAGE TO BUSINESS REPUTATION (REPUTATIONAL RISK) RELATED TO THE QUALITY OF PRODUCTS AND SERVICES Perception of Company’s products consumers regarding the quality of its products and services impacts the amount of sales and profitability of the relevant business segment. GEOGRAPHICAL AND NATURE-RELATED ASPECTS Geographical and natural features of the region of the Company’s principal activities are not characterized by factors that can have a significant adverse impact on the normal production activities and plans implementation. At the same time, there is a potential risk of the impact of these aspects on the production and economic activities of the Company. Improving the quality of interaction and establishing long-term relations with consumers is one of the priorities in creating a competitive advantage of the Company based on the quality control system, high level services as well as by raising consumers’ information awareness. While interacting with consumers of products and services, the Company adheres to the UN guidelines for protection of consumers’ interests and the International Covenant on Economic, Social, and Cultural Rights. Quality of products and services The Company strictly controls compliance with all regulatory requirements governing the quality of products and services. Safety of products and services At all life-cycle stages of the offered products and services, the Company as- sesses their impact on health and safety in order to identify opportunities for improvement and takes a set of measures to minimize any negative impact of the products and services provided on the environment. Protection of consumer health and safety includes the provision of products and services that are safe and do not pose an unacceptable risk of harm when used or consumed. The Company adheres to a high level of quality and safety standards. Information sharing The Company consistently updates its customers and counterparties about its activities by publications and press releases on the Internet, in the mass media as well as via social media and mobile applications. Feedback The Company has a hotline. Procedures have been adopted and are in place to promptly respond to complaints and claims received via the hotline in order to address their causes. Fair and responsible marketing practices The Company uses only fair marketing practices and protects consumers from unfair or misleading advertising or labeling. The Company’s activities in promoting its products and services, advertising, and marketing comply with the legislation of the Russian Federation. When planning its activities, the Company takes into account the geograph- ical, including climatic, features of the operation region. In the event of neg- ative consequences for the Company’s activities that may be caused by nat- ural disasters, such as floods, earthquakes, mudflows, hurricane winds, etc., the Company has approved procedures and policies aimed at the prompt elimination of such consequences and, in case of emergency, to reduce the impact of such situations on the life, health, and safety of employees and residents living in operation regions as well as on the production activities of the Company. There are monitoring procedures in place in which latest technical means are used with the aim of preventing the possibility of adverse consequences of natural phenomena and informing the population of the region where the Company carries out its operations about the possibility of such conse- quences. 338 339 252019 ANNUAL REPORTANNEX 5YEARS OF SUSTAINABLE DEVELOPMENTAnnex 6 Register of the mandatorily dislosed information by PJSC Tatneft in 2019 № 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. Content of Notice Disclosure date Notice of Disclosure of the List of Affiliated Entities Owned by the Joint Stock Company on the Web Site. Notice of Essential Fact "Holding the issuer’s Board of Directors’ Meeting (Supervisory Board) and its agenda" 10.01.2019, 01.04.2019, 01.07.2019, 02.10.2019 21.01.2019, 06.02.2019, 20.02.2019, 15.03.2019, 19.04.2019, 14.05.2019, 13.06.2019, 12.07.2019, 29.07.2019, 19.08.2019, 23.09.2019, 17.10.2019, 05.11.2019, 21.11.2019,16.12.2019 Notice On the Access Procedure to the Information Contained in the Quarterly Statement. 07.02.2019, 14.05.2019, 09.08.2019, 12.11.2019 Notice on the Essential Fact “Certain Decisions Made by the Issuer's Board of Directors (Supervisory Board)” 28.01.2019, 13.02.2019, 27.02.2019, 23.03.2019, 26.04.2019, 22.05.2019, 21.06.2019, 19.07.2019, 05.08.2019, 26.08.2019, 30.09.2019, 24.10.2019, 14.11.2019, 28.11.2019, 23.12.2019 Notice on the Essential Fact “Convening and Holding the General Meeting of the Issuer’s Participants (shareholders)” 27.02.2019, 05.08.2019, 13.11.2019 Notice on the Essential Fact “The Date on Which Persons Entitled to Exercise the Rights on Issued Securities Are Determined” Notification of a Essential fact on information forwarded or provided by the issuer to the relevant authority (relevant organization) of a for- eign country, to foreign stock exchange and (or) other organizations in compliance with foreign law for the purpose of their disclosure or forwarding to foreign investors in connection with the placement or circulation of the issuer's securities outside the Russian Federation 27.02.2019, 05.08.2019, 25.06.2019, 16.09.2019, 13.11.2019,23.12.2019 23.01.2019, 28.06.2019 Notice on Disclosure of the Annual Accounting Statement of the Joint Stock Company on The Web Site 27.03.2019 Notice of the essential fact on the issuer's disclosure of consolidated financial statements as well as on providing an audit report prepared for such statements 29.03.2019 Notice on the access procedure to the insider information contained in the issuer’s document (disclosure of the Joint Stock Company’s interim accounting report on the Web Site). Notice on the issuer's disclosure on the Web Site of the interim (quar- terly) consolidated financial statements prepared in compliance with the International Financial Reporting Standards 30.04.2019, 30.07.2019, 30.10.2019 07.06.2019, 28.08.2019, 29.11.2019 Notice On the Essential Fact “Other Notice” 07.05.2019 Notice on the essential fact “Holding the general meeting of partici- pants (shareholders) of the issuer and the decisions made” 25.06.2019, 16.09.2019,23.12.2019 Notice on the essential fact “Accrued Income on Equity Securities” 25.06.2019, 16.09.2019,17.12.2019, 23.12.2019 Notice on the Access Procedure to the Information Contained In the Annual Report 25.06.20198 Notice on the Essential Fact “Rating Change or Rating Assignment to the Issuer by a Rating Agency Based on the Signed Agreement” 13.02.2019 Notice on the essential fact “Paid Income on the Issuer's Equity Securities” 13.02.2019, 09.08.2019, 01.11.2019 Notice on the essential fact “The Non-Arm’s Length Transaction Completed by the Issuer” 18.06.2019 Notice on the Essential Fact "Adopting a Decision About Restruc- turing by Organization Controlled by the Issuer Which is of the Vital Importance to the Issuer” Notice of the Essential Fact “Making Entries Into the Unified Legal Entities State Register about Reorganization, Termination of Business or Liquidation of Organization that Controls the Issuer, Organization Under Control to the Issuer That is of a Major Importance to the Issu- er or of an Entity That Provided Security for the Bonds of this Issuer” 11.09.2019 (Bank ZENIT), 11.09.2019 (Bank “Devon-Credit”) 18.09.2019, 15.11.2019 (Банк ЗЕНИТ), 18.09.2019, 15.11.2019 (Bank “Devon-Credit”) Notice of the Essential Fact “change in the share size of a member of the issuer's management body in the issuer's authorized capital 01.10.2019 Notice of the Essential Fact “Changing (Adjusting) the Information Contained in a Previously Published News Feed” 03.10.2019 340 341 252019 ANNUAL REPORTANNEX 6YEARS OF SUSTAINABLE DEVELOPMENT№ 23. 24. 25. 26. 27. 28. 29. 30. 31. Content of Notice Disclosure date Notice of the Essential Fact “Stages of the Issuer’s Securities Issu- ance Procedure”: - Making a decision on approval of the bond program; - Assignment of identification number to the stock exchange program or commercial bond program; - assignment of identification number to the issuance (additional issuance) Notice of the Essential Fact “acquisition by a joint-stock company of more than 20 percent of the voting shares of another joint-stock company” Notice of the Essential Fact “Obtaining by the Issuer the Right to Dispose of a Certain Number of Votes Attributable to Voting Shares (Stakes) Constituting the Authorized Capital of Individual Organiza- tion 24.10.2019 09.12.2019 20.12.2019 05.11.2019 05.11.2019 Notice of the Essential Fact “Information that, in the issuer's opinion, has a significant impact on the value of its equity securities” 11.12.2019 (2 notices) Notice of the Essential Fact about approval of a document contain- ing the terms of a separate issue of bonds placed under the bond program 13.12.2019 Notification of the procedure to access insider information contained in the issuer’s document - The program of exchange-traded bonds (001Р series of PJSC TATNEFT named after V.D. Shashin) for documentary interest-bearing and/or discounted non-convertible to the bearer with mandatory centralized storage - Prospectus of securities of PJSC TATNEFT named after V.D. Shashin. Identification number of the Program of exchange-traded bonds (001Р series of PJSC TATNEFT named after V.D. Shashin 4-00161-A-001R-02E dated December 09, 2019) of documentary interest-bearing and/or discounted non-convertible to bearer with mandatory centralized storage. - The terms of issuing exchange-traded bonds under the Program of exchange-traded bonds (of 001Р series of PJSC TATNEFT named af- ter V.D. Shashin) of documentary interest-bearing and/or discounted non-convertible to bearer with mandatory centralized storage. - Publication of the Securities Program 4-00161-A-001R-02E of December 9, 2019, and the Bonds Program 4-00161-A-001R-02E of December 9, 2012 - Publication of the Terms and Conditions of Issuing the Ex- change-Traded Bonds (Series 001P of PJSC Tatneft V.D. Shashin.) under the Program of Exchange-Traded Bonds of Documentary Interest Bearing and/or Discount Non-Convertible to the Bearer with Mandatory Centralized Storage 13.12.2019 23.12.2019 13.12.2019 23.12.2019 Information on the placement (securities placement commencement and completion) 17.12.2019 Notice of the Essential Fact “Inclusion of the Issuer's Equity Securities In the List of Securities Admitted to the Organized Trading by the Russian Securities Trade Market Operator. 20.12.2019 32. Notice of the essential fact “Completion of the Securities Placement” 24.12.2019 BY INTERNATIONAL STANDARDS (IN THE FORM OF PRESS RELEASES AND PUBLICATION OF STATEMENTS ACCORDING TO THE LONDON STOCK EXCHANGE RULES) Publication of the 2018 annual consolidated financial reporting in accordance with IFRS. 29.03.2019 Publication of the three-months 2019 consolidated interim concise financial reporting in accordance with IFRS (non-audited). 07.06.2019 Publication of the six-months 2019 consolidated interim concise financial reporting in accordance with IFRS (non-audited). 28.08.2019 Publication of the nine-months 2019 consolidated interim concise financial reporting in accordance with IFRS (non-audited). 30.11.2019 1. 2. 3. 4. 342 343 252019 ANNUAL REPORTANNEX 6YEARS OF SUSTAINABLE DEVELOPMENTAnnex 7 On the Annual Report and the underlying regulatory documents constituting the framework for this annual report The Annual Report of TATNEFT Company (this report) is prepared for the period from January 1 to December 31, 2019, and includes the operating results of the Company and its subsidiaries, collectively referred to as TATNEFT Group (Group). The designations of “PJSC TATNEFT”, “TATNEFT Group”, “Group”, “TATNEFT”, “Company”, “we” and “our” used in the text of this Annual Report, are considered equivalent and refer to the Group TATNEFT as a whole, PJSC TATNEFT and/or its subsidiaries, as the context requires. PJSC TATNEFT is the parent company of the Group and for this Report provides the consolidated information on operating and financial activities in key business segments and activities. This Annual Report is based on the Consolidated Financial Statements of the Company for 2019, formed in accordance with the International Financial Reporting Standards and the audit report of the independent auditor, which together are an integral part of this Annual Report, as well as on the Company’s Management of the financial status and performance results. The Annual Report is prepared with the elements of integrated reporting, which allows to reflect the priority areas of activities, production, financial, economic, environmental and social results in direct correlation. The Company adheres to the principle that the effective and sustainable business development is possible only based on maintaining the balance between these aspects. The preparation practice of the Annual Report includes the establishment of an ad hoc Working Group (it includes senior managers and specialists of the Company), the formation of internal regulatory documents for the preparation and analysis of information for the report, interaction with stakeholders. In order to ensure the accuracy of the information, the Annual Report is submitted for approval to the responsible departments. The Annual Report of the Public Joint-Stock Company TATNEFT for 2019 was tentatively approved by the PJSC TATNEFT Board of Directors, Minutes No. 4-z of May 18, 2020. The reliability of the data presented in the Annual Report is confirmed by the Revision Commission. Unless otherwise indicated, the figures given in this report are indicated in Russian Rubles. The report contains links to web-site TATNEFT.com, individual documents and resources for the convenience of readers. This report is available at TATNEFT.com in the electronic form, as well as in hard copies at the offices of the Company in Almetyevsk, Moscow and Kazan. The key communication objective of the Annual Report is to create the most complete understanding among the stakeholders of the Company’s activities and strategic plans, as well as the potential for their realization, results achieved, and the measures taken to improve the effectiveness of the business model, taking into account aspects of sustainable development. 344 345 252019 ANNUAL REPORTANNEX 7YEARS OF SUSTAINABLE DEVELOPMENTThe Annual Report of the Company is compiled in accordance with the requirements of the following documents: • Federal Law No. 39-FZ of April 22, 1996 “On the Securities Market”; In order to reflect the Company’s actions to ensure the principles of the UN Global Compact, the G20/OECD Guidelines for Corporate Governance, the implementation of the UN Sustainable Development Goals, the corporate responsibility policy in the ESG aspects, the content of the Annual Report takes into account the following documents and Guidelines: In order to reflect the Company’s position in the corporate policy and actions related to climate issues, the Annual Report takes into account the following international initiatives and platforms: • Paris Climate Agreement; • Federal Law No. 208-FZ of December 26, 1995 “On Joint- Stock Companies”; • United Nations Global Compact Principles; • Climate Initiative Platform of International Petroleum Industry Environmental Conservation Association (IPIECA); • Regulations “On Disclosure of Information by Issuers of the Issued Securities”, approved by the Order of the Bank of Russia No. 454-P dated December 30, 2014; • Bank of Russia Regulations N660-P of November 16, 2018 • Organization for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises; • SDG Compass; «On General Meetings of Shareholders»; • UN Guiding Principles on Business and Human Rights; • The Corporate Governance Code recommended for the use by the Letter of the Bank of Russia No.06-52/2463 dated April 10, 2014; • Tripartite Declaration of the International Labour Organization (ILO) Principles concerning Multinational Enterprises and Social Policy; • The Letter of the Bank of Russia “On Reporting on • ISO 26000 Guidance on Social Responsibility; Compliance with the principles and recommendations of the Corporate Governance Code by Public Joint-Stock Companies in annual reporting” No. IN-06-52/8 dated February 17, 2016; • The Information Letter of the Bank of Russia “On Recommendations on the Disclosure in Annual Reports of a Public Joint-Stock Company of Information on Remuneration to Members of the Board of Directors (Supervisory Board), Members of Executive Bodies and other Key Executives by Public Joint-Stock Companies” No. IN-06–28/57dated December 11, 2017. • GRI Sustainability Reporting Guide; • AA1000 Series of Standards developed by the International Institute for Social and Ethical Reporting (AccountAbility); • Provisions of the Social Charter of Russian Business; 10) Basic performance indicators. Recommendations on the use in the management practice and in corporate non- financial reporting of the Russian Union of Industrialists and Entrepreneurs (RSPP). • Climate Oil and Gas industry Initiative (OGCI); • Recommendations for companies to disclose the financial risks associated with global climate change. (The FSB Task Force on Climate-related Financial Disclosures — TCFD). While preparing the Annual Report, the elements of the Integrated Reporting Standard of the International Integrated Reporting Council (IIRC) have been used; published studies and recommendations in the corporate reporting. This report contains forward-looking statements regarding the financial condition, operating and performance results of TATNEFT Group. Such statements include, but are not limited to, the plans, objectives, and forecasts for production, including those related to the volume of products and services, economic and financial indicators, information about projected or expected income, profit (loss), net profit (loss) in respect of stocks, dividends, capital structure, other indicators and ratios, as well as statements regarding the premises on which our statements are based. All statements, other than statements of historical facts, are or may be considered as forecast statements. Forward- looking statements are statements of future expectations that are based on the management’s current expectations and assumptions and include known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among other things, statements regarding the Company’s potential exposure to market risks and statements expressing the expectations, beliefs, estimates, forecasts, projections and assumptions. These statements are accompanied by the words “expected”, “intends”, “planned”, “will”, “seeks”, “predicted”, “predicted”, “ambition” and other similar expressions. Forward-looking statements in relation to the future are subject to uncertainties, assumptions and inherent risks, both of a general nature and specific to the business. There is a risk that future actual results may differ materially from plans, goals, expectations, estimates and intentions expressed in such statements or may not be realized due to a number of different factors of economic, financial, political, social, legal aspects that are outside of the Company’s control, including factors that may affect future operations of the Company. (See “Risk Factors” further in the Annual Report.) Forward- looking statements cannot be the basis for making investment decisions. Each forward-looking statement corresponds only to the date of this report. Neither the Company nor any of its subsidiaries undertakes any obligation to publicly update or revise any forward- looking statements as a result of new information, future events or other information. With the exception of financial statements, errors may occur in the text of the report when calculating shares, percent, and amounts when rounding calculated indicators. The data presented in this report may slightly differ from previously published data due to the difference in rounded figures. 346 347 252019 ANNUAL REPORTANNEX 7YEARS OF SUSTAINABLE DEVELOPMENTList of acronyms Public Joint Stock Company TATNEFT named after V.D. Shashin throughout the text of the Report is referred to as PJSC TATNEFT, TATNEFT, the Company BIA ABS AGFS ASPI AB FFS AIS JSC БВУ ZBG BMZ VOIR FEA GMPS GMS GIBDD SCNS HS GOST HEI RBS CC BPS CHC CYSS UBS EU UIAS Business Idea Auction Automated Banking System Autogas Fueling Station Almetyevsk State Petroleum Institute Anode Bed Fuel Filling Station Automated Information System Joint Stock Company BVMB Basin Water Management Board ZENIT Banking Group Bugulma Mechanical Plant (a structural subdivision of TATNEFT) All-Russian Society of Inventors and Innovators VEB Vnesheconombank Foreign Economic Activity Group Metering Pump Station Group Metering Station State Traffic Safety Inspectorate State Complex Nature Sanctuary Horizontal Settler National State Standard Frac Formation Hydraulic Fracturing F&L Fuel & Lubricants IS IT CB CIS KFU CSR HRS CDW MGPP MICEX IPS MPP MTBR SME EOR MPP Information System Information Technology Corporate Business Corporate Information System PPS Pad Pumping Station Kazan (Volga Region) Federal University Corporate Social Responsibility Horse-racing School Corporate Data Warehouse Minnibayevo Gas Processing Plant Moscow Interbank Currency Exchange International Payment Systems Metal-Plastic Pipes Mean Time Between Repair Small and Medium Enterprises Enhanced Oil Recovery Multiphase Pump EMERCOM of Russia The Ministry of the Russian Federation for Civil Defense, Emergencies, and Elimination of Consequences of Natural Disasters NGDU Oil and Gas Field Operating Division (a structural subdivision of TATNEFT) MRRT VAT Mineral Resource Recovery Tax Value Added Tax Hydraulic Engineering Installations NSSCTF Nizhnekamsk Solid Steel Cord Tire Factory Remote Banking Services Community Center Booster Pumping Station Children’s Holiday Camp Children’s and Youth Sports School Unified Biometric System European Union Unified Identification and Authentication System UNECE United Nations Economic Commission for Europe Reinforced Concrete Tank Closed Joint Stock Company Investment Business Discounted Profitability Index RCT CJSC IB DPI 348 R&D OR & PP OPU NPCS STC LLC NCA PO PDC P&IDC Research and Development Tubing Oil Well Tubing ITA Intangible assets Oil Refining and Petrochemical Plants Refinery Oil Refinery Oil Processing Unit National Payment Card System Science and Technology Center PCC Petrochemical Complex Limited Liability Company Nature Conservation Area Pilot Operations Production Dual Completion Production and Injection Dual Completion IDC Injection Dual Completion DC SEZ MPC APG RPM PCP PS CD VSST RIA SCS RYSO RT RF REC SVO CPS CGS SES Dual Completion Special Economic Zone Maximum Permissible Concentration Associated Petroleum Gas Reservoir Pressure Maintenance Polymer Coated Pipes Power Substation Chain Drive RB Retail Business Vertical Stainless Steel Tank Result of Intellectual Activities Settlement and Cash Services Regional Youth Social Organization the Republic of Tatarstan the Russian Federation Russian Export Center Super Viscous Oil Cathodic Protection Station Corporate Governance Standard Secondary Education School EDMS Electronic Document Management System Trading House Trade Technical House Technical Specifications Fuel and Energy Complex Thermal Power Plant Delayed Coker Unit Management Company Light Hydrocarbon Vapor Recovery High Sulfur Oil Treatment Facility Oil Treatment Facility Initial Water Separation Unit for RPM Process Fluid Treatment Facility for Reservoir Pressure Maintenance (a subsidiary of TATNEFT) TH TTH TS FEC TPP DCU MC LHVR HSOTF OTF PWSU PFTF SRU UTNGP Ind PRF Individuals Payroll Fund AS-tires All-Steel Tires PSC PTC CDH NPV NII NGL EIC EXIAR ECU AUM (Assets Under Manage- ment) Processing and Storage Center Personnel Training Center Central District Hospital Net Present Value NFI Net Fee Income Net Interest Income Natural Gas Liquids Electrical Insulating Connection Export Insurance Agency of Russia Electronic Corporate University Assets Under Management APEX (capital expenditure) Capital expenses, one-time costs for the acquisition of physical assets for the business CIR The indicator that characterizes the degree of risk of a bank is defined as the amount of created reserves for credit losses (risk) divided by the size of the loan portfolio. (Cost/Income Ratio) An indicator that reflects the business efficiency. Calculated as the ratio of expenses (operating expenses) of the bank for the reporting period and operating profit (operating income) and expressed as a percentage. COR (Сost of Risk) The indicator, which characterizes the degree of risk of the bank, is defined as the amount of provisions for cred- it losses (risk) divided by the loan portfolio amount. CRM ROE Customer Relationship Management E-Commerce (Elec- tronic Commerce) RAROC PRIVATE BANKING (Risk-Ad- justed Return on Capital) Risk-adjusted return on capital of the bank. (Return on Equity) Return on authorized capital of the bank. Calculated as the ratio of profit of the bank after tax as of the reporting date and the average value of the balance sheet capital for the relevant period OPEX (operation- al expenditure) Operating expenses incurred by the company in the course of its day-to-day continuous operations to ensure its functioning Sulfur Recovery Unit PB private banking TATNEFTEGAZPERERABOTKA Division (structural subdi- vision of TATNEFT) TCO (Total Cost of Ownership) Total cost of IT-systems ownership 349 252019 ANNUAL REPORTANNEX 7YEARS OF SUSTAINABLE DEVELOPMENT350 351 252019 ANNUAL REPORTANNEX 7YEARS OF SUSTAINABLE DEVELOPMENTContact information Holding Company “Public Joint Stock Company TATNEFT named after V.D. Shashin (hereinafter referred to as the Company) was established pursuant to the Decree of the President of the Republic of Tatarstan “On Measures for transformation of the state-owned enterprises, entities, and amalgamations into jointstock companies” dated 26.09.1992 No.UP-466 and the Law of the Republic of Tatarstan “On transformation of the national and communal properties in the Republic of Tatarstan (denationalization and privatization)”. The Company was established in June 1994 for an indefinite period. The Company was registered with the Republic of Tatarstan Ministry of Finance (Registration No. 632 dated January 21, 1994). The Company’s activity is focused on a profit-making goal. PUBLIC JOINT STOCK COMPANY TATNEFT ABBREVIATED NAME: PJSC TATNEFT HEAD OFFICE: 75, Lenin Street, Almetyevsk, 425450, Republic of Tatarstan, Russian Federation Phone: +7 (8553) 30-75-68 REPRESENTATIVE OFFICE IN MOSCOW: 17, Tverskoy Boulevard, Moscow, 123104 Russian Federation, 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” Belaya Ploshchad Business Centre, 10, Butyrskiy Val Street, Moscow, 125047, Russian Federation Phone: +7 (495) 967-60-00 COMPANY’S REGISTRAR: LLC Euro-Asian Registrar 10, Mira Street, Almetyevsk, 423450 Republic of Tatarstan, Russian Federation, Phone: +7 (8553) 22-10-88 COMPANY WEB-SITE: tatneft.com REPORT RELEASE MONTH AND YEAR: May 2020 REPORT CONCEPT: Dorpeko N.E.- training coordination annual report REPORT PREPARATION WORKING GROUP Gaifullina R.R. Gamirov D.M. Ganiyev B.G. Karpov V.A Kurochkin D.V. Matveev O.M. Mukhamadeev R.N. Salahov I.I. Syubayev N.Z. Khalimov R.H. Khisamov R.S. Sharagina O.A. DESIGN AND PRINTING LLC EuroPublicity 352 WWW.TATNEFT.COM 2019 ANNUAL REPORTANNEX 7YEARS OF SUSTAINABLE DEVELOPMENT

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