ANNUAL REPORT OJSC SURGUTNEFTEGAS

Transcription

1 ANNUAL REPORT OJSC SURGUTNEFTEGAS

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3 ANNUAL REPORT 2011 OJSC SURGUTNEFTEGAS

4 TABLE OF CONTENTS A MESSAGE FROM DIRECTOR GENERAL THE COMPANY S PROFILE 8 The Company today 12 Events of the year 15 The Company and the oil and gas sector 23 Business priorities 24 Key risks related to the Company s operations 28 Key performance indicators of OJSC Surgutneftegas PRODUCTION OPERATION (Report of the Board of Directors of OJSC Surgutneftegas on the Company s Performance and Business Priorities Development Prospects) 30 Resource policy 35 Oil and gas production 43 Oil refining and gas processing 47 Sales of petroleum products 51 Power generation RESEARCH AND TECHNOLOGY 54 R&D profile 56 Innovations 59 Information technologies SOCIAL RESPONSIBILITY 62 Environmental industrial safety 67 Personnel development 71 Charity and social activities CORPORATE GOVERNANCE AND SECURITIES Board of Directors 81 Individual executive body 81 Remuneration paid to executive bodies and members of the Board of Directors 81 Bodies for internal control over the Company s financial and operating activities 83 The Company s compliance with the Code of Corporate Behavior 83 Company stock market 85 Report on declared dividend payments 86 Subsidiaries and affiliates 88 The Company s registrar ADDITIONAL INFORMATION 90 A list of the Company s transactions carried out in the reporting year 90 The energy resources utilized by the Company FINANCIAL (ACCOUNTING) STATEMENTS 92 Audit Report 94 Balance Sheet 95 Notes to the Balance Sheet 97 Profit and Loss Account 98 Notes to the Profit and Loss Account 98 Financial (accounting) statements BACKGROUND INFORMATION 99 2

5 OIL PRODUCTION 000 tons GAS PRODUCTION mn cub m , , , , , , , , , ,139 SALES* RUB bn PRETAX PROFIT RUB bn * Less VAT, excise duties and similar obligatory payments. TOTAL DECLARED DIVIDENDS RUB bn DIVIDEND PER SHARE kop * 215/ / / / /60 Dividend per preferred share Dividend per ordinary share * Recommended by the Board of Directors. ANNUAL REPORT 2011 OJSC Surgutneftegas 3

6 A MESSAGE FROM DIRECTOR GENERAL DEAR FELLOW SHAREHOLDERS, We are glad to announce that 2011 heralded the most successful operating and financial results of OJSC Surgutneftegas. Irrespective of challenging and changeable external environment, we adhered strictly to the scheduled plans, implemented investment projects, improved production, and further invested in environmental and social programs. In 2010, we managed to stabilize oil production, and in 2011, we raised our crude output by 2.1% which surpassed the average sector rate. The Company s oil fields in Eastern Siberia contributed greatly to the enhanced output. We continue to expand the region s infrastructure and production capacity. In the reporting year, Surgutneftegas commissioned a new Severo-Talakanskoye field; crude output in Eastern Siberia went up by 62% to 5.4 mn tons. In 2012, the region will account for over 10% of the total oil production. In the year under review, we launched the construction of the corporate airport at the Talakanskoye field which will be a significant infrastructure facility. It will help considerably improve the efficiency of the Company s material and technical supply, decrease expenditures and loss of working hours. In 2011, Surgutneftegas produced 55.4 mn tons of crude oil in Western Siberia, so this region remains our primary crude production center accounting for more than 85% of investments and almost 95% of drilling operations. Over the reporting year, four new oil fields were put onstream in this area. Annual discovery of new fields and deposits proves the potential of the territory. In 2011 alone, the Company commissioned 2 new oil fields and 29 deposits at its licensed areas in Western Siberia; the cumulative C1+C2 reserves growth exceeded 93 mn tons. The Company permanently ensures the extended replacement of mineral reserves. In the reporting year, Surgutneftegas added 136 mn tons of oil to its reserves, and for the last five years, the aggregate oil reserves increase exceeded crude output by 80%. Over this period, we put into operation 13 new oil fields, produced over 300 mn tons of oil, while the remaining recoverable reserves of ABC1 categories demonstrated a 9% growth. The Company s remaining reserves are characterized by complex structure, low reservoir characteristics and poor productivity. In response to the actual reserves deterioration, we consider it our priority to advance and discover technology and solutions for cost-efficient oil production from such reserves, including those of 4

7 Bazhenov Formation, which can guarantee Surgutneftegas a sustainable oil production in the next few decades. The reserves of complex nature stipulate the necessity of wide scale employment of research solutions and advanced technology related to oil field development. Surgutneftegas boasts dozens of methods for deposits exploitation, including unique techniques invented and adopted by the Company s experts. As a result, we are able to enhance oil recovery, ensure economic effectiveness and production sustainability on a long-term horizon. To increase oil conversion ratio and improve the quality of the Company s refinery products, we are completing the construction of hydrocracking complex. In late 2011, the Company conducted commissioning works and tested separate units of the hydrocracking complex. The deeper refining complex is to be commissioned on a phase base within the next year. The refinery continued to upgrade its production facilities. Consequently, in the reporting year Surgutneftegas offered better-quality motor fuels, including gasoline and diesel fuel. As for sales, the Company has strengthened its marketing position. Higher demand for fuel in Russia, along with efficient marketing policy drove petroleum products sales. The Company s retail sales through its gas stations noticeably grew by 21% from the previous year. The rise in turnover was encouraged by the program of gas stations construction and overhaul, and improved service. Sales of the related goods and services also show continuous growth, accounting for 20% of the total revenue of some gas stations. Because of the long investment cycle of the oil industry, the Company s business requires sustainable level of investments irrespective of fluctuations of macroeconomic indices and energy prices. Such approach is considered to be the most reasonable and adequate with regard to implementation of investment projects, gradual development of the Company, and increase of the shareholders benefit. In 2011, total capital investments went up by 23.5% against the last year to RUB bn. For the last five years, our investments more than doubled even within the context of economic slump. Higher prices are certainly one of the factors contributing to capex growth and affecting current expenditures. Operational efficiency, cost control, and pursuit of lower expenses are topmost among the Company s priorities. In 2011, our comprehensive cost control program, which includes measures for better technology and organization of production, more efficient use of production facilities, raw materials and supplies, import substitution and reuse of equipment, allowed us to save over RUB 5 bn. Over the last five years, savings totaled RUB 24.7 bn. To better manage energy resources, we run the energy-saving program and introduce energy-efficient technologies. In the reporting year, power savings reached 573 MW, and energy consumption was reduced by 343 mn kwh.these achievements earned us both national and international awards. Growth of the Company s own powergenerating capacities is the key element of sound resources management and higher energy efficiency. In 2011, Surgutneftegas ran 19 gas turbine and 7 gas piston power plants. Demonstrating a 16% increase, our power generation segment generated 4.2 bn kwh in 2011 which meets one third of the Company s demand. Improved oil and petroleum products market performance coupled with a pursuit of operational excellence led in 2011 to unprecedented financial results since Surgutneftegas has started its business as a joint-stock company. Net revenues and cost of sales rose 27.5% and 21.2%, respectively. The cost grew to RUB 84.2 bn, including almost RUB 71 bn spent on higher taxes and deductions, which increased by 42% compared to the previous year. Net profit for the reporting period reached RUB bn, an 80% increase from The Board of Directors resolved to recommend the annual general shareholders ANNUAL REPORT 2011 OJSC Surgutneftegas 5

8 meeting approve a total dividend payment of RUB 38 bn RUB 2.15 and RUB 0.6 per preferred and ordinary share, correspondingly. Our business growth strategy is based on the integrated approach, which incorporates economic, social and environmental actions, as well as on principles of social responsibility. The Company seeks to maintain high environmental safety standards on-site, as well as provide a comfortable and safe working environment and social security to its employees. We offer active support to social and economic programs implemented in regions where we operate. The Company s environmental investments are among the highest in the industry they totaled RUB 22.2 bn in We are the best among our Russian peers in terms of associated petroleum gas utilization we reached a record 97.8% rate in the reporting year. Measures designed to improve reliability of the Company s field pipelines enable it to maintain the lowest rate of incidents related to oil spills among vertically integrated oil companies. Our employees, whose number exceeded 111,000 people in 2011, enjoy a high level of social protection and benefits. Over the last ten years, we have spent over RUB 100 bn on social programs, including RUB 17.5 bn invested in 2011 alone. Year on year, social financing increases by over 10%. In response to the ever demanding requirements for efficiency and performance faced by businesses, the Company focuses its attention on upgrading professional skills and unlocking creative potential of its employees. Annually, over 40% of Surgutneftegas employees undergo job-related training, refresher and skills upgrade training. The Company s highly qualified employees take top honors in different contests, such as the Golden Future of Yugra and Engineer of the Year, and make real contribution to the Company s efficiency. Innovations and inventions actively introduced by our employees help produce new scientific, engineering and technological solutions to meet production challenges. In 2012, Surgutneftegas will celebrate its 35th anniversary. Over those years, we have trodden a long and arduous path to excellence showing vigor, commitment and ability to work effectively in the toughest environments. And today, we have earned recognition as a trustworthy, highly efficient energy company. Surgutneftegas is a high-sustainability company able to withstand the recessionary trends. We boast a strong financial position and reserves, a balanced project portfolio, operational efficiency and highly qualified personnel. I believe that we will meet the forthcoming challenges despite all the difficulties, and maintain sustainable business growth along with maximizing shareholder wealth. Vladimir L. Bogdanov Director General OJSC Surgutneftegas 6

9 The Company s Profile

10 THE СOMPANY TODAY Open Joint Stock Company Surgutneftegas, a leading Russian oil company, is one of ten largest private oil companies worldwide in terms of hydrocarbon production. Established in the course of reorganization of the oil industry, the company has been on the market as a vertically integrated company since THE COMPANY INCORPORATES: one of the largest oil and gas producing companies in Russia with 7 oil and gas production divisions that operate in Western and Eastern Siberia; KINEF refinery that leads the industry in terms of refining throughput; five marketing subsidiaries in the Northwestern and the Central regions of Russia: LLC Kaliningradnefteproduct, LLC Novgorodnefteproduct, KIRISHIAVTO- SERVIS Ltd, LLC Tvernefteproduct, and LLC Pskovnefteproduct; two major research and development centers: SurgutNIPIneft with a branch in Tyumen and Lengiproneftekhim (St. Petersburg). CORE BUSINESSES OF THE COMPANY: hydrocarbon exploration and production: prospecting, exploration, and operation of oil and gas fields; manufacturing and marketing of petroleum products: crude oil refining, wholesale and retail trade in petroleum products and related services; production of petrochemicals: conversion of hydrocarbons into raw materials for various chemicals; gas processing: processing of associated petroleum gas, sale of commercial gas and liquid hydrocarbons; power generation: construction and operation of gas-fired power stations. BUSINESS GEOGRAPHY OJSC Surgutneftegas develops its business in some of the largest Russian regions, from the Baltic to Eastern Siberia, and has close relations with hundreds of domestic enterprises and partners in dozens of CIS and non-cis countries. The Company is active in three largest Russian oil and gas provinces Western Siberia, Eastern Siberia, and Timano-Pechora, where it expands its license portfolio through prospecting, exploration, and acquisition of new reserves in Russia, as well as application of advanced technology to enhance oil recovery. SCALE OF BUSINESS OPERATIONS: OJSC Surgutneftegas accounts for: 12% of domestic oil production; 8% of domestic refining; 20% of gas production by Russian vertically integrated companies; 18% of the industry s investments in oil production; 29% of domestic exploratory drilling; 25% of development drilling in the industry. Surgutneftegas is working towards sustainable development and a higher rate of return in the long term. This is the goal that drives the Company s operational, financial, structural, and social policy. The Company implements a number of successful programs to enhance energy efficiency and resource conservation, upgrade production facilities, and improve the quality of business, and demonstrates its sustained ability to compete on the market. Innovations created as a result of research and development by the Company s scientists and experts are a key source of the Company s competitive advantages. In addition to introducing global 8

11 achievements in production, the Company also develops and employs in-house technology. Surgutneftegas has a long track record of producing from hard-to-recover reserves with a wide range of enhanced recovery methods, including unique techniques developed and introduced by the Company s employees. By promoting in-house research and making the best use of its extensive service facilities, the Company confidently meets the challenges of poorer resources and lower reservoir quality. The Company s refinery KINEF strives to strengthen its market positions both domestically and abroad through adoption of processes and technology to manufacture a wider range of high-performance, environmentally friendly petroleum products. Commissioning of the first stage of the deeper refining complex is another step the refinery is taking towards the world-class refining quality. Asset modernization and enhancement of services contribute to better performance of marketing subsidiaries. The Company believes that improved efficiency is always driven by and connected with environmental conservation and compliance with high global ecostandards. Throughout its history, the Company has been consistently addressing issues related to environmental safety of production. As a result of focused environmental efforts based on advanced low impact and resource saving technology, we achieved the highest level of associated petroleum gas utilization in the industry, combined with full recovery and recycling of almost all types of production waste. Surgutneftegas is pursuing the policy of unflagging support for innovative research and development by its personnel, with particular focus on younger professionals and talent management to maintain the high level of human resources. The Company supports the spirit of partnership and teamwork among the employees and encourages them to deliver the best performance possible. THE COMPANY S CONSISTENT GROWTH IS BASED ON: THE SCALE AND EFFICIENCY OF CAPITAL INVESTMENTS; RELIABLE RESOURCE BASE AND EVER-INCREASING HYDROCARBON POTENTIAL; STRONG RESEARCH AND PRODUCTION CAPACITY; TIGHT CONTROL OVER PRODUCTION COSTS; INTRODUCTION OF ADVANCED HIGH PERFORMANCE TECHNOLOGY; COMPLIANCE WITH HIGH ENVIRONMENTAL STANDARDS; HIGH LABOR PRODUCTIVITY. As a responsible corporate citizen, the Company follows recognized international and Russian standards for sustainable business, promotes long-term economic growth and social stability, and contributes to the conservation of the environment and natural resources in the areas where it operates. ANNUAL REPORT 2011 OJSC Surgutneftegas 9

12 PRODUCTION EFFICIENCY COMPONENTS TODAY, EFFICIENT PRODUCTION IS IMPOSSIBLE WITH WASTEFUL CONSUMPTION OF MINERALS, ENERGY, MATERIALS, AS WELL AS NATURAL RESOURCES SUCH AS WATER, AIR, AND SOIL. MANY GOVERNMENTS ALL OVER THE WORLD, INCLUDING RUSSIA, EMBRACED THE CONCEPT OF SUSTAINABLE DEVELOPMENT AS THEIR AGENDA FOR THE 21 ST CENTURY. RESOURCE CONSERVATION AND IMPROVED ENERGY EFFICIENCY RANK HIGH ON THE LIST OF SUSTAINABLE DEVELOPMENT PRIORITIES. For the resource- and power-intensive oil and gas sector, sustainable use of natural resources becomes ever more relevant due to a number of external and internal factors. Over the last few years, the fields brought on stream have been showing increasingly complicated mining conditions; the number of fields with high water cut at the final stage of development is also increasing. The fields brought on stream by the Company are located far away from the main storage and supply centers, which means that more materials and funds are used for field facility construction and infrastructure development. At the same time, prices for electric energy, materials, and other resources are rising. Surgutneftegas pays close attention to saving energy and resources. The Company believes that the rational use of resources, lower energy consumption, and improved energy efficiency at production sites are major contributors to enhanced business performance and stronger competitive advantages, as well as an important part of the Company s social responsibility. With regard to energy conservation, the Company follows a comprehensive approach and takes consistent action to make a better use of resources through a variety of efforts and programs. In addition to enhanced oil recovery, the key areas of our work include the rational use of associated petroleum gas, improved performance of generating equipment, reduced losses in power networks, deployment of energy saving technology in all business segments, and development of in-house sources of power supply through construction and operation of small-scale power generation facilities. We implement energy and resource saving innovations on a large scale. Following the global trends in information and technology support of energy 10

13 efficiency management processes, experts from Surgutneftegas have developed the Energetika software system. The system has all components necessary to record the consumption of electric power and other kinds of resources, e.g. thermal energy, water, and gas. Expansion of the Company s own power generation capacity and construction of electricity supply networks ensured uninterruptible power supply to oil production facilities and made available substantial electric capacity of the national power grid. Power requirements of the Company s business units in Eastern Siberia are fully covered by the Company s gas turbine power plants (GTPP) and gas piston power plants (GPPP), which supply electricity not only to the Company s fields, but also to the Eastern Siberia Pacific Ocean (ESPO) main oil pipeline facilities. Construction of gas turbine power plants at remote fields and the use of associated gas as fuel at locations where it is produced eliminated the need for gas pipelines to transport gas to processing facilities, which allowed us to save hundreds of kilometers of pipes and avoid consumption of a lot of electric power for gas compression and pumping. Waste heat boilers used as sources of heat supply at gas turbine power plants and gas-turbine compressor stations were one of the efficient solutions applied by Surgutneftegas. Gas-fired radiant (infrared) heating systems are also used on a wider scale for large industrial premises. More than 90% of the required thermal energy is generated by the Company s own sources. Surgutneftegas achieves significant cost advantages through natural resources conservation and production waste management. For over 5 years, the Company operates an automotive waste tire processing facility, which makes it possible to recycle thousands of tons of such secondary waste as crumb rubber for bitumen modification at the Company s own asphalt concrete plants. The utilization of drilling sludge from pitless drilling as soil for construction of multiwell pad embankments and exploratory well pads and the forest recultivation technology for sludge pits contribute to saving commonly occurring minerals, in particular peat and sand. The forest recultivation technology was developed by scientists from the Forest Institute, Siberian Branch of the Russian Academy of Sciences, upon the Company s request. Since it was deployed in 1996, it prevented removal of more than 4 mn cub m of sand from the ecosystem. Although the Company s production sites are located outside the areas that suffer from the shortage of water resources, sound water management is our ongoing concern. Fresh subsurface (artesian) water intake accounts for 15.7% of the permitted water withdrawal. The Company has implemented a number of technical regulations to standardize efficient resource consumption and energy conservation. They set forth the key principles and relations between the Company s business units with regard to planning and carrying out energy and resource conservation measures, resources needed for a unit of production under specific process technology, procedures to control compliance with consumption standards, and timely response in the event of overconsumption. Education and motivation of the Company s personnel with regard to energy and resource conservation are also important. The Company seeks and uses advanced and innovative technology for energy and resource conservation and energy efficiency improvement considering them one of the crucial preconditions for its further progress and competitive growth. ANNUAL REPORT 2011 OJSC Surgutneftegas 11

14 EVENTS OF THE YEAR JANUARY Surgutneftegas obtained subsoil licenses for the right to use the Bysakhtakhsky and Agapsky blocks in Eastern Siberia. FEBRUARY Surgutneftegas obtained subsoil licenses for the right to use the Verkhne-Kazymsky and Yuzhno-Vatlorsky blocks in Western Siberia. Tvernefteproduct, one of the Company s marketing subsidiaries, put into operation the third fully automatic car wash for passenger cars and minibuses in the city of Tver. MARCH A modern crude oil distillation unit is commissioned at the Talakanskoye field in the Republic of Sakha (Yakutia) to produce 18 thousand tons of bitumen annually. Surgutneftegas obtained subsoil licenses for the right to use the Zapadno-Nyalinsky and Vostochno-Serginsky-3 blocks in Western Siberia. LLC KINEF, the Company s refinery, celebrated its 45th anniversary. APRIL XXXI Scientific and Technical Conference for Young Scientists and Professionals of OJSC Surgutneftegas was attended by more than 700 employees under the age of 30. As many as 308 projects were presented in 18 workshops during the final part of the conference. The women s water polo team KINEF-Surgutneftegas won the Russian championship title for the ninth time. MAY Surgutneftegas employees won 6 prizes in the XI Conference for Young Professionals from companies engaged in the use of subsurface resources in areas located in Khanty-Mansiysky Autonomous Okrug Yugra. JUNE The SurgutNIPIneft Research and Development Institute celebrated its 25th anniversary. The Institute is a major credible design institute for the Company s field facility construction. In the course of its history, the Institute has carried out thousands of research projects to meet the Company s production needs. 12

15 JULY Russian Prime Minister Vladimir Putin held a meeting titled On the state of the oil refining industry and petroleum products market in the Russian Federation in LLC KINEF in the city of Kirishi. The final stage of the annual Best Professional corporate contest brought together 900 employees from 57 structural units. AUGUST The Fedorovskoye field was discovered 40 years ago. Since it was discovered, the field has produced more than 570 mn tons of oil and 130 bcm of gas. The Company s subsidiary LLC Kaliningradnefteproduct celebrated its 65th anniversary. The Company s subsidiary LLC Pskovnefteproduct put into operation a new gas station in the city of Ostrov, Pskovskaya Oblast. SEPTEMBER Surgutneftegas won the annual regional contest titled The Black Gold of Yugra for the eighth time. The formal opening ceremony was held for a kindergarten for 240 children in the village of Vitim, Lensky District, Republic of Sakha (Yakutia). The construction was financed by Surgutneftegas on a parity basis with the Sakha Government. New tenants of a 36-apartment house built by the Company in the village of Vitim received the keys to their apartments during a special ceremony. The Company s employees received 16 apartments; public sector workers, 20 apartments. Seven hundred and twenty employees of OJSC Surgutneftegas received awards of the Ministry of Energy of the Russian Federation, constituent territories of the Russian Federation, and local authorities, as well as corporate awards in honor of the professional holiday, the Day of Oil and Gas Industry Workers. OCTOBER Surgutneftegas hosted the International Research and Training Conference The impact of the oil and gas complex on forest formation processes in Western Siberia. The conference was attended by scientists who work in the sphere of reforestation and land recultivation, representatives of federal, regional, and territorial authorities in charge of forest management and state environmental control, representatives of non-governmental ecological organizations, experts from major Russian oil companies, employees of specialized institutes, companies, and organizations, and foreign experts. ANNUAL REPORT 2011 OJSC Surgutneftegas 13

16 Surgutneftegas started operation of the Suryeganskoye oil field in Khanty-Mansiysky Autonomous Okrug Yugra. The first of the Company s 41 development drilling crews in Western Siberia hit the 100,000 m drilling record since the beginning of the year. NOVEMBER Surgutneftegas received the annual prize Let s Save Energy 2011 awarded by the Federal State Budgetary Institution The Russian Energy Agency of the Russian Ministry of Energy as The Best Power-Saving Regional Project. During ten years of operation of the Company s in-house generation facilities, the Company generated 20 bn kwh of electric power in The Company s marketing subsidiaries put into service 4 new gas stations in St. Petersburg, Kaliningradskaya and Pskovskaya Oblasts. DECEMBER The Company s Energetika software system project won Gold of SAP Quality Awards 2011 as Medium and Large Implementation (CIS region) and Silver within Europe, Middle East & Africa (EMEA) region. LLC KINEF received the first natural gas, which meant another step towards improved efficiency of the existing capacities and the future start-up of a new production facility, the deeper refining complex. Surgutneftegas commissioned the Severo-Talakanskoye field in the Republic of Sakha (Yakutia). This is the third field in Yakutia discovered in 2008 by the Company s exploration division in Kedrovy license area adjacent to the Talakanskoye oil and gas condensate field. Surgutneftegas obtained a subsoil license for the right to use the Khoshiplorsky block in Western Siberia. By the end of the year, 26 development drilling crews drilled over 100,000 m in Western Siberia. The Company s subsidiary LLC Novgorodnefteproduct put into operation a new gas station in Novgorodskaya Oblast. 14

17 THE COMPANY AND THE OIL AND GAS SECTOR DEVELOPMENT TRENDS IN THE SECTOR IN THE REPORTING YEAR In 2011, the global economy continued its recovery although the revival of the economic growth is still unstable. The global economy grew by 3.8% against 5.2% in 2010, with both developed and developing countries affected by the slowdown. While China and India remained the driving forces behind the growth of global GDP, Brazil lost this status. Emerging markets mostly demonstrate fast economic growth but there is a growing concern about the overheating of some of these economies due to increasing inflation. Many advanced economies continue to show relatively weak growth limited by high unemployment rates, poor financial conditions, and the concern about the future of the national budget and OIL PRODUCTION IN RUSSIA mn tons ANNUAL REPORT 2011 OJSC Surgutneftegas 15

18 OIL PRODUCTION BY RUSSIAN COMPANIES IN % Rosneft 17% LUKOIL 14% ТNК-ВР 12% Surgutneftegas 6% Gazprom neft 29% Others the financial sector. A number of European countries are facing serious difficulties as a result of the outstanding debt problems. The Arab revolutions and instability involving Syria and Iran amplified the fluctuations in the global oil supply and demand even more: the increase in the global oil demand in 2011 was a mere third of the 2010 figure (1% vs. 3%, respectively). Prices for most exchange commodities in 2011 went down on the back of a weaker world demand. On the contrary, crude prices were pushed up, mainly by geopolitical risks: the annual average Brent price soared by 40% to 111 USD/bbl; the average Urals price, by 39% to 109 USD/bbl. In 2011, price volatility remained quite high: minimum Brent price was 93.7 USD/bbl and maximum price was USD/bbl. Higher oil prices and the growing demand led to an increase in hydrocarbon exploration all over the world. In 2011, global oil reserves increased by 7 bn tons (+3.2%) to 223 bn tons. The top ten countries with the largest oil reserves were the same; their share in the world reserves remained at the same level (85.3%), with Saudi Arabia still leading the field. Global production in 2011 totaled 3.6 bn tons of crude oil, which is slightly less than in the previous year. Global production of liquid hydrocarbons amounted to 3.9 bn tons, including liquid hydrocarbons from gas processing. Just like before, ten oil producing countries account for more than 63% of the global crude production. Despite the production decline in Libya by 70%, OPEC increased its oil output by 11 mn tons, although the available OPEC production capacity decreased to 3.8 mn bbl/day in The output from the North Sea continues to fall, with UK and Norway fields suffering from the largest decline. 16

19 The world gas demand in 2011 rose by 3%. In the year under review, global gas reserves increased by 1.5% to 191 tn cub m, with Iran, Indonesia, and the USA demonstrating the highest growth in gas reserves (mostly thanks to shale gas). The top ten countries with the largest gas reserves remained the same; their share in the global gas reserves at 2011 end exceeded 79%. Russia is still the first in the world in terms of gas reserves: it accounts for over 25% of the world reserves. Gas production in 2011 totaled 3.1 tn cub m. The rate of production growth has slowed to 3% compared to 5% in The USA (+40 bcm), Qatar, Russia, Turkmenistan, and China were the leaders in production growth. The accelerated growth in shale gas production in the United States was the key contributor to the record-high increase in gas output in this country. Natural gas prices in 2011 continued their recovery but are still below the pre-crisis level. Demand for all sources of energy is on the rise, though the share of fossil fuels in global energy consumption has been gradually (yet slowly) shrinking. Renewable energy growth is driven by subsidies granted for alternative energy projects by governments of different states (US, EU, China). Alternative sources of oil are gaining wider presence in total fuel production. The development of shale oil fields is currently gaining momentum in the United States. According to some estimates, by the end of this decade its output may grow by 25%, to approximately 2 mn bbl/day. An increasing number of companies acknowledge the potential of this market and start investing more heavily in unconventional oil sources. Oil sands production also has great potential and sees higher rates year on year in Canada. GAS PRODUCTION BY VERTICALLY INTEGRATED OIL COMPANIES IN RUSSIA IN 2011* 25% LUKOIL 20% Surgutneftegas 19% ТNК-ВР 19% Rosneft 11% Gazprom neft 6% Others * Excl. flared gas. ANNUAL REPORT 2011 OJSC Surgutneftegas 17

20 Russia leads the world in crude output. In 2011, crude and gas condensate production amounted to mn tons, up by 6.3 mn tons from Rosneft and Surgutneftegas were the major contributors to the production growth. As in the previous year, Eastern Siberia and Far East projects became the key growth drivers adding 8.5 mn tons (+17.8% to the 2010 level). Non-VIOC companies also contributed to higher output by increasing their production in 2011 by 3.2 mn tons (+7.7%). At the same time, the output in 2011 grew more slowly compared to the previous year (1.2% against 2.2% in 2010). Lower production growth is mostly due to natural depletion of major fields coupled with higher costs of production and poorer quality of new reserves. Above all, it affects the key producing regions, including Western Siberia which brings almost 60% of oil produced in Russia. The number of fields put on stream in 2011 was also on the decrease: 16 fields in Russia compared to 23 fields the year before. The share of new fields in the total Russian output was down to 7.7% (8.2% in 2010), which is another proof that the quality of new reserves is getting poorer. Meterage drilled by Russian oil companies in 2011 was 18,742 thousand m (+8.8%). As a result, the number of wells brought on stream in 2011 went up by 5.9% to 6,146 wells. At the end of 2011, the number of oil producing wells in operation increased slightly to thousand wells (+0.6%). The companies continue optimizing the structure of their well stock; as a result, the number of idle wells in the industry decreased by 937 wells (-3.8%) to 23.5 thousand wells. Over the last years, transport infrastructure has undergone a rapid development. In 2011, the Purpe-Samotlor pipeline came onstream; the first oil was delivered by pipeline to China; the Baltic Pipeline System 2 project approached its final stage; the construction of the Zapolyarye-Purpe pipeline was approved for financing. Russia is the second largest exporter of crude oil in the world accounting for 12% of the international oil trade. Most of the Russian hydrocarbons are supplied to Europe where Russia has a 30% market share. In 2011, crude supplies to non-cis countries decreased by 3.9% to mn tons due to a decline in supplies to Europe. However, the ESPO pipeline made it possible to increase export supplies to the Asia-Pacific Region to 30 mn tons, with supplies to China many times larger than before because OIL REFINING IN RUSSIA mn tons