Development Strategy

Our Mission

To offer consumers high quality energy resources, to conduct business fairly and responsibly, to take care of our employees, and to be a leader on efficiency, guaranteeing long-term, stable growth for the company.

Strategic goal

To become a large, Russia-based international player, possessing a regionally-diversified portfolio of assets across the entire value chain, actively participating in regional development, and with a high degree of social and environmental responsibility.

Strategic development

In the framework of creating an integrated system of development of long-term and medium-term plans, this document and in setting tasks for the coming period is determinate. Up to 2020, large-scale development of the business aims to provide the highest aggregate income for shareholders of any Russian oil company, while maintaining its place in the top three most efficient vertically-integrated Russian oil companies.

Gazprom Neft is a major player in today’s energy market. The Company produces and supplies a wide range of products for a variety of industries around the world.

Our mission is to supply high-quality energy products to our customers, to do business with integrity and responsibility, to be a caring employer and an efficiency leader, and to achieve long-term and balanced growth of our Company.

Gazprom Neft’s strategic goal is to become a large Russian-based international player, with a regionally diversified asset portfolio over the entire value chain, seeking active involvement in regional development projects, and maintaining a high degree of social and environmental responsibility.

The expectations of all stakeholders (shareholders, customers, partners, government, the public, and our employees) have established growth and efficiency as the touchstones of our corporate mission.

Gazprom Neft approved a written corporate Development Strategy at the start of 2010. The strategy defines our main business principles, goals and directions, as well as the results that our Company, together with its subsidiaries and associates, expects to achieve. This strategy remains our guiding document as we build an integrated system for development of medium- and long-term business plans.

In 2011, Gazprom Neft took a major step towards achievement of the goals set out in in its Development Strategy. Operating performance improved year-onyear in nearly all segments. Production grew by 8%, refining by 7% and premium sales by 38%.

The performance was helped by a stable macroeconomic environment as the world economy continued to recover from the 2008/2009 ecnomic crisis. The price of Brent crude oil rose from USD 79 to USD 111 per bbl while demand for core petroleum products on the domestic market grew by 6% and their prices rose by 31%.

Business Targets

Production
  • 20-year reserve life
  • 50% or more of total production to be located at fields in initial development phases
  • 10% share of production to come from foreign projects
Refining
  • Annual production up to 40 mn t in the Russian Federation and up to 30 mn t elsewhere
  • Increase refining efficiency rate (conversion ratio) in Russia to 90%
  • Increase market share of light petroleum products in Russia to 77%
Sales to end-users
  • 12 mn t – retailing through fueling stations (of which 8.2 mn t are in Russia and the CIS)
  • 18 mn t – aircraft fuel, bunkering, lubricants etc.
  • 10 mn t – small-batch wholesaling to large end-users

The decision to make Gazprom Neft a vertically integrated oil business was absolutely correct. The Company is well advanced in implementing its strategic plans. Gazprom Neft’s priorities for the coming years will be maintenance of the high production rate of hydrocarbons, expansion into new territories both in Russia and beyond, and improvement of the quality of petroleum products and depth of refining. The Gazprom Neft filling stations brand will be further developed and we will strengthen our position in the retail market within Russia and the CIS.

Alexey Miller
Chairman of the Board of Directors

The Company’s key financial indicators also improved: adjusted EBITDA rose by 40% and net profit grew by 70%, thanks to integration of newly purchased assets, organic growth of production and refining volumes, improved structure of production and sales of petroleum products, as well as measures to raise efficiency and cut expenditures.

Gazprom Neft’s proven hydrocarbon reserves in 2011 under PRMS classification grew by 164 mn TOE. The Company’s geological survey program for the year was carried out and Ñ12 oil reserves grew by 259.1 mn t thanks to geological surveying and acquisitions. The Ignialinskoye oil and gas deposit containing 40 mn t of Ñ1+Ñ2 reserves was discovered in Eastern Siberia, and 25 new deposits with total Ñ1 reserves in excess of 9.4 mn t were discovered at fields that are already in development.

Proactive geological surveying at existing fields, the launch of the Cenomanian gas project at the Muravlenkovskoye and Novogodneye fields, and newly purchased assets enabled production to increase to 57.3 mn TOE in 2011, which is 7.8% more than the 2010 quantity.

The upgrade program at Gazprom Neft refineries doubled output of Euro-4 and Euro-5 diesel fuel in 2011, and the Company launched production of gasoline in Classes 4 and 5 (Russian equivalents of the Euro categories).

The year under review was a good one not just from a performance perspective but also in terms of operational initiatives.

In 2011, the Company started operations in a new production region (the Volga-Urals). It also completed the acquisition of 61.8% of CJSC Gazprom Neft Orenburg (operator of the Orenburg oil and gas condensate field). The Company completed its acquisitions of 100% of CJSC Science-Intensive Technologies Centre and an 86% holding in CJSC Yuzhuralneftegaz. Gazprom Neft and NOVATEK are working together to evaluate deposits near the Samburgsky license area in a further step towards development of the northern part of Yamal-Nenets Autonomous District, which has strategic importance for the Company.

The Company is focusing heavily on its joint project with ÒNÊ-ÂÐ at the Messoyakha field group. In 2011, 3D seismic surveying was carried out on an area of 320 km2, and nine exploration wells were built and tested.

2020 STRATEGY: UPSCALE THE BUSINESS & EXPAND BUSINESS TERRITORY WHILE REMAINING AN EFFICIENCY LEADER
upscaling

Proven oil reserves

2,200 million tons


Production of crude oil and gas

100 million TOE per year


Refining

70 million tons per year


Sales to end consumers

40 million tons per year

EXPANDING GEOGRAPHY

Production

Russia, Balkans, Central Asia, Middle East, Africa, Latin America


Refining

Russia and Europe


Sales of petroleum products

Russia, Europe, Central Asia

MAINTAINING & IMPROVING EFFICIENCY

Ensuring the highest total shareholder return of any Russian oil company.


Remaining one of the top three most efficient vertically integrated oil companies in Russia.

Three of the tested wells (Nos. 71, 77 and 109) produced a flow under pressure, and zones have been defined for test production during 2012 and on through 2014. A technical schedule for test production has been prepared and submitted to the Central Commission for Mineral Field Development of Rosnedra (the Government agency for sub-soil resources).

At the Novoportovskoye field, we reopened four wells and completed an inventory and estimated reserves. Once our estimates were approved by the Federal Mining Resources Committee (recoverable oil reserves are 219.3 mn t, inventory gas reserves are 259.7 bn m3, and recoverable condensate reserves are 12.4 mn t), a technical proposal for test production was prepared and submitted for expert examination. An icebreaker test run was piloted over the proposed crude oil export route from the Novoportovskoye field (from Cape Kamenny) and LLC Gazprom Neft-Novy Port was officially registered as a corporate entity.

In spring 2011, the Omsk Refinery began production of Class 4 gasoline, and in the summer it commenced production of Super Euro-98 gasoline, which matches environmental Class 5. Throughout the year, Omsk continued implementation of the program to retrofit and upgrade its refining capacity in order to improve the environmental characteristics of its engine fuels. Work in 2011 included retrofitting of a KT-1/1 facility for deep crude oil refining and gasoline alkylation, which will improve the quality of finished products and increase equipment output.

One billion tons of crude refined at the Omsk Refinery is a highly important milestone both for Omsk and for the whole of Gazprom Neft Group. The refinery has now embarked on a large-scale upgrading program as part of the Group’s long-term strategy. One of the most important tasks for Gazprom Neft is to improve the environmental features of its engine fuels, achieve deeper refining and expand the range of high-octane gasolines, diesel fuels, and other petroleum products made by Gazprom Neft refineries, of which the Omsk facility is the largest. I am convinced that successful implementation of the refinery upgrade program will make our path to the second billion tons much shorter.

Alexander Dyukov
Chairman of the Management Board

Modernization of equipment on the L-24/7 diesel hydrotreatment unit facilitated a deparaffinization process which can produce winter fuel from summer grades. Thanks to this technology, the Company will be able to increase output of winter-grade diesel fuel by more than 32,000 t per month during the period of peak demand.

The Moscow Refinery was fully integrated into Gazprom Neft Group during 2011. The Company has now outsourced processes that are not part of its main production profile. This initiative has reduced oil refining costs and facilitated a greater focus on strategic development. In January 2011, the Moscow Refinery began production of high-octane gasoline and diesel fuels that comply with environmental Class 4.

Following the example of other Gazprom Neft refineries, Yaroslavnefteorgsintez (YaNOS) launched an upgrade program in 2011, which will raise the quality of its petroleum products to match Euro-4 and Euro-5 standards, and will achieve deeper refining. A new light naphtha isomerization unit was commissioned in October 2011 and the company launched a hydrotreatment unit for catalytic cracking gasoline in December. As rom January, 2012, all automotive gasoline from YaNOS matches Euro-4 or higher environmental standards.

The total number of Company filling stations rose by 5% in 2011 as the Company expanded its retail network in Russia and the CIS.

Rebranding was carried out at 290 filling stations in Russia, Tajikistan, Kazakhstan, Kyrgyzstan and Belarus, including filling stations in the ÌÒÊ chain, and the Gazprom Neft filling station brand won the prestigious national prize, ‘Brand of the Year/EFFIE’. Integration of the assets of Sibir Energy doubled Gazprom Neft’s presence in the Moscow Region (the administrative region around Moscow, not including the city) and a further 113 filling stations were purchased in Novosibirsk, Chelyabinsk and Nizhny Novgorod Regions, and in Krasnodar Territory. The pilot launch of G-Drive fuel sales proved successful and distribution of this fuel has been extended to most regions where the Company has a retail presence (G-Drive is now sold by 315 Company filling stations). Gazprom Neft-Novosibirsk has already started trial sales of G-Diesel.

As of the end of 2011, more than 1.9 mn customers had joined the Company’s filling station loyalty program entitled ‘We’re going the same way’. A new site at Fryazino, near Moscow, has been acquired for manufacture of premium-grade packaged lubricants, and the first stage of another packaged lubricant facility has been launched in Omsk.

We made good progress in foreign projects during the reporting year. Net profit at NIS (in Serbia) grew more than twice on a year-on-year basis and contributed 500 mn USD profit. There was further work on upgrading the NIS Panchevo Refinery in the form of the installation of a hydrocracking and hydrotreatment facility. Gazprom Neft also commenced regional development in the Balkans (Bosnia and Herzegovina, Hungary, Romania, Bulgaria), including initiatives to diversify into electric power generation and petrochemicals.

Drilling work began at the end of 2011 at the Badra field in Iraq (Well BD5). The first stage of mine clearance was completed and 3D seismic surveys were carried out in an area of 164.5 km2. We built seven cluster sites and 27 km of service roads and completed construction of the field base camp. A preliminary field development plan was prepared and approved, as well as a FEED for infrastructure. Constructive relationships have been established with partners, where Gazprom Neft has the leading role.

The Company has continued implementation of its offshore projects. An agreement was signed with Petronas for joint work on the Cuban continental shelf, and the Cuban government issued a permit for Gazprom Neft to join the project and extended the first stage of geological survey work.

PLANS FOR 2012: FURTHER ACTIONS TO IMPLEMENT MAJOR PROJECTS
Cuba project
  • Drill first exploration well
  • Project review based on drilling results
Orenburg project
  • Integrate new assets
  • Drill pilot wells
  • Design a development concept
JININ-6 Project
  • Geological survey, geological studies
  • Pilot production
  • Technological scheme of OPR development
  • Upgrader design
Noviyport project
  • Prepare a test production schedule
  • Begin test production drilling
  • Launch phase one of the central oil collector
Equator project
  • Preparations for drilling
  • 3D reservoir modelling
Severenergia project
  • Implement the geological survey program
  • Launch a gas ttreatment unit
  • Drill test oil wells
  • Commence gas production
Badra project
  • Drill wells
  • Design and build main rigs and oil pipeline
Messoyakha project
  • Prepare a test production schedule
  • Carry out the geological survey program
  • Field construction plans

Our consortium partners executed preparatory work for drilling the first well. The Company also completed all payment orders related to financial obligations under a production sharing agreement on the continental shelf of Equatorial Guinea, carried out contract work for seismic research with GeoEx to interpret data with Largeo, and also executed a contract with RPS to acquire additional information.

All of the work described above is part of the implementation of the Company’s long-term strategy.

The Company has maintained its systemic approach to strategic development. Emphasis will be placed on an integrated system of long-term strategic planning and maintenance of medium-term business plans in order to coordinate management control at every level of the Company and throughout all its business segments.

The strategic goals for main business segments in the near future are as follows:

Successful implementation of major projects and growth of the resource base:

  • Carrying out geological surveys and starting test production in northern YaNAD (the Samburgskoye, Yaro-Yakhinskskoye (OOO SeverEnergia), Novoportovskoye fields and the Messoyakha field cluster).
  • Through these projects, Gazprom Neft will realise the potential of the Yamal Peninsula in the north of Yamal-Nents Autonomous District as a strategically important and promising oil and gas region. The Company will confirm its pre-eminence in development of oil and gas fields in the Far North of Russia, acquire production expertise in Arctic conditions, and develop further expertise in transporting hydrocarbons by sea (a method that has been rarely used in field development projects in the Russian Far North before now). We will also create an efficient oil and gas transportation infrastructure which can be used in the future in fields where development rights have not yet been allocated;
  • Implementation of foreign projects in Iraq, Venezuela, Equatorial Guinea and Cuba;
  • Lobbying to obtain tax benefits and infrastructure solutions;
  • Building the Company’s resource base, including purchase of new assets.

External factors

Internal factors

forecasts for the global economy

state of the resource base

the structure of energy consumption

asset quality

the balance of supply and demand

financial capacity

specifics of local markets

organizational capacity

government regulation

human resource potential

characteristics of competition

Efficient use of existing assets:

  • optimizing field development;
  • use of geological/hydrodynamic models to assist projects;
  • integrated field development plans;
  • portfolio optimisation
  • creating mechanisms for portfolio analysis and management;
  • application of new equipment and technologies;
  • optimizing expenditure;
  • increasing the rate of associated gas use;
  • better infrastructure management;
  • lobbying for tax benefits;
  • natural gas production at cenomanian deposit.

Higher efficiency of oil refining:

  • implementing a program to raise the quality of engine fuels: transition to Euro-4 and Euro-5, greater output of high-octane gasoline;
  • implementing a program to increase refining depth, including increased output of modern bituminous materials and lubricants;
  • implementing a program for operating improvements and cost reduction at refineries;
  • increasing the value of petroleum products.

Higher efficiency in deliveries of crude oil and petroleum products:

  • optimizing export logistics;
  • higher efficiency of trading operations;
  • obtaining access to refining capacity outside Russia;
  • securing logistics for new production projects.

Development of high efficiency premium marketing channels:

  • raising sales volumes via small wholesale and retail outlets;
  • greater operating efficiency in retail and tank-farm business;
  • developing and launching new and efficient retail brands;
  • growth of product-related business: aviation fuel, lubricants, bituminous materials, petrochemicals and bunkering.

The Company’s strategic planning is based on in-depth analysis of the industry and understanding of our own capabilities. The Company continuously monitors factors that play a critical role in achieving targets.

By 2020, we aim to ensure that Gazprom Neft has the following core characteristics:

  • projects implemented worldwide, from exploration and production to refining and sales;
  • personnel who can work with any assets – however complex, vertically integrated and regionally specific (assets in traditional Russian production regions, in Europe, America and in Asia);
  • proprietary technologies, in-house science and engineering research centers for production and refining;
  • proportionate and balanced business structure (production – refining – sales);
  • excellent indicators for refining depth, products that meet the highest international standards, full range of fuel types, branded fuels and lubricants;
  • strong sales network with a strong brand.
CORPORATE BUSINESS MODEL




Company structure
PRODUCTION
LUBRICANTS
CRUDE EXPORTS
BOAT BUNKERING
Oilfield Services and Exploration
 
REFINING
SALES
AIRCRAFT REFUELING
FOREIGN HOLDING
OTHER OPERATIONS
 
Multi-Business
Companies
Joint Ventures