HIGH ACHIEVEMENTS HIGH RESPONSIBILITY

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3 HIGH ACHIEVEMENTS HIGH RESPONSIBILITY ANNUAL REPORT 2014

4 4 ANNUAL REPORT 2014 KEY RESULTS OF THE YEAR 179% RESERVE REPLACEMENT RATIO +10.8% INCREASE IN OIL PRODUCTION 85.6% SHARE OF EURO 5 GASOLINE IN THE TOTAL OUTPUT billion roubles OPERATING CASH FLOW KEY EVENTS OF THE YEAR Photobank Lori. P. 46 P. 58 P. 65 P. 73 P. 84 Creation of a new production cluster in Western Siberia: acquisition of LLC Burneftegaz Completion of large-scale refinery upgrade projects Expansion of the Group s own network of filling stations Completion of reorganization Change of controlling shareholder POSITION IN THE INDUSTRY 3.4% 96.6% 7.5% 92.5% 12% 88% 6% 94% SHARE IN OIL PRODUCTION IN RUSSIA SHARE IN OIL REFINING IN RUSSIA SHARE IN GASOLINE SALES IN RUSSIA SHARE IN SALES OF DIESEL FUEL IN RUSSIA We rank sixth in terms of oil production among Russian oil companies as Bashneft s production totalled 17.8 million tonnes of oil as of the end of We rank fourth among Russian companies in terms of crude oil refining; in 2014 Bashneft processed 21.7 million tonnes of crude oil. In 2014 we accounted for about 12% of domestic sales of gasoline. In 2014 we accounted for about 6% of domestic sales of diesel fuel.

5 HIGH ACHIEVEMENTS HIGH RESPONSIBILITY 5 BUSINESS MODEL AND GEOGRAPHICAL FOOTPRINT LICENSING Strategic regions of exploration and production GEOLOGICAL EXPLORATION Regional sales offices THE STRUCTURE OF THE GROUP S BUSINESS ENABLES IT TO CONTROL PROCESSES ALONG THE ENTIRE VALUE CHAIN, FROM GAINING ACCESS TO MINERAL RESOURCES TO SELLING PETROLEUM PRODUCTS IN RUSSIA AND ABROAD. UPSTREAM Purchased crude oil, gas condensate and NGLs Total liquid hydrocarbons Crude oil production REFINING Purchased petroleum products Oil refining Total petroleum products and petrochemicals MARKETING Export of petroleum products and petrochemicals Customs Union Countries outside the Customs Union Domestic sales of petroleum products and petrochemicals Retail sales Wholesale Crude oil exports Crude oil sales Domestic sales of crude oil Customs Union Countries outside the Customs Union REFINING DEPTH AT RUSSIAN OIL COMPANIES IN % Bashneft 6% 94% 80% 85.9% 84.8% 77.5% 77.1% 72.3% 68.4% Other oil companies 60% 56.9% SHARE IN EXPORTS OF PETROLEUM PRODUCTS AND PETROCHEMICALS In 2014 we exported 9.5 million tonnes of petroleum products. Thus, our share in the total exports of petroleum products and petrochemicals stood at about 6%. 40% 20% 0% Gasprom Neft Bashneft TANECO LUKOIL Russia (average) Rosneft Surgutneftegaz Bashneft s refining depth is one of the highest in the industry at 84.8%.

6 6 ANNUAL REPORT 2014 ACHIEVEMENTS AND A RESPONSIBLE APPROACH TO BUSINESS IN THE UPSTREAM SEGMENT Sustainably high growth rate of oil production and high-quality resource base / Sustainable annual production growth / Successful application of cutting-edge technologies, including at brownfields / Good track record in implementation of complex projects on schedule and within budget / Systematic approach to building the resource base; a high reserve replacement ratio due to implementation of a large-scale geological exploration programme / Development of expertise in overseas project management IN REFINING AND MARKETING OF PETROLEUM PRODUCTS Technologically advanced refining business and efficient marketing channels / A high-technology refining complex and an ongoing upgrade programme / It is now feasible to ensure that 100% of engine fuel produced by the Group meets the Euro 5 standard in accordance with the technical regulations / Well-balanced sales structure, development of a retail network and greater efficiency of small-scale wholesale fuel supply to consumers IN TERMS OF FINANCIAL RESULTS AND SHAREHOLDER RETURN Best-in-class shareholder returns due to strong financial performance / Consistently strong financial results / Highest returns in the oil and gas industry / Dividend policy attractive to shareholders HOW WE ARE ASSESSED The Group ranks in the top ten global TSR performers and tops the industry ranking of global oil companies with the highest total shareholder return compiled by The Boston Consulting Group * * Oil production, million tonnes Average daily oil production, thousand barrels per day Reserve replacement ratio, % Refinery throughput, million tonnes Nelson Index, points HOW WE ARE ASSESSED Bashneft has been included in the list of the 50 most successful private-sector companies in the BRICS countries and other emerging markets. Bashneft has reinvigorated exploration and production in legacy regions and launched new projects, boosting output over the past five years. It has also modernized and improved the efficiency of its refineries BCG Local Dynamos, a report prepared by the Boston Consulting Group (BCG) Revenue, billion roubles Net cash from operating activities, billion roubles Capital expenditures, billion roubles 40.7% 10.2% 179.2% 2012* 2013* 2014 Dividend payout ratio under IFRS (for the years when payment of accrued dividends was completed) * Certain comparative information has been reclassified to ensure its consistency with the method of presentation used in financial statements in 2014.

7 HIGH ACHIEVEMENTS HIGH RESPONSIBILITY 7 THE GROUP S STRATEGIC PRIORITIES IN CORPORATE GOVERNANCE Consistency and a strong track record in implementing best corporate governance practices / Professional and experienced management team able to deliver strong operating and financial results / High level of corporate governance in accordance with international best practices / Transparent corporate and ownership structures / Highly manageable and efficient business due to a streamlined business model IN TERMS OF ENVIRONMENTAL AND SOCIAL RESPONSIBILITY Commitment to high standards in health, safety and environment (HSE) / Active involvement of the Group s top management in ensuring a leading HSE performance among Russian oil companies / The only Russian company to have joined IPIECA; a member of OGP / An integrated HSE Management System has been established and has undergone certification / Implementation of environmental projects involves introducing state-of-the-art technologies developed by global leaders IN THE UPSTREAM SEGMENT: / to boost oil production at brownfields in the Republic of Bashkortostan; / to implement the geological exploration programme in all of our core operating regions; / to develop new oil-producing regions in Timan-Pechora and Western Siberia; / to assess the feasibility of development of gas projects and unconventional hydrocarbon resources. IN REFINING: / to further upgrade the refining complex; / to increase refining depth and the share of light products and to cease to produce VGO and fuel oil; / to improve the energy efficiency of refineries. IN MARKETING OF PETROLEUM PRODUCTS: / to boost sales of high-margin products; / to expand direct access to consumers; / to develop sales of niche products: jet fuel, bunker fuel, bitumen and lubricants. IN CORPORATE GOVERNANCE: / to further improve the corporate governance system and adopt best practices in corporate governance; / to safeguard the rights and legitimate interests of shareholders and investors unconditionally; / to make the Group still more attractive to investors and further improve the transparency of its business. HOW WE ARE ASSESSED International experts from the BRITISH STAN- DARDS INSTITUTION (BSI) have confirmed the effectiveness of Bashneft s health, safety and environment management system. BSI has concluded that the Group s HSE system conforms with the international ISO and OHSAS standards. IN THE SPHERE OF HEALTH, SAFETY AND ENVIRONMENT: / to become the top HSE performer among Russian oil companies; / to meet international standards.

8 8 ANNUAL REPORT 2014 CONTENTS REPORT OF THE BOARD OF DIRECTORS: HIGH ACHIEVEMENTS. HIGH RESPONSIBILITY 3 SOME DEFINITIONS AND FORWARD-LOOKING STATEMENTS 9 ADDRESS BY THE CHAIRMAN OF THE BOARD OF DIRECTORS AND THE PRESIDENT OF JSOC BASHNEFT 10 ABOUT THE GROUP 13 Our history 13 Highlights of the year 16 Business model and geographical footprint 18 Position in the industry and macroeconomic factors 23 STRATEGY AND OPERATING RESULTS 29 Strategy and KPIs 29 Operating results 37 Financial results 68 Improvement of the Group s structure 73 Environmental and social responsibility 77 INVESTOR & SHAREHOLDER INFORMATION 83 Share capital 83 Equity market and capitalization 85 Dividend policy and profit distribution 88 COPROPATE GOVERNANCE 93 Fundamental principles of the Group s corporate governance practice 93 Structure of Bashneft s governing and supervisory bodies 95 Corporate governance quality audit and self-assessment 97 Exercise of shareholders rights 98 General Meeting of Shareholders of JSOC Bashneft 98 Board of Directors of JSOC Bashneft 100 Committees of the Board of Directors of JSOC Bashneft 116 Corporate Secretary of JSOC Bashneft 121 President and Management Board of JSOC Bashneft 131 Settlement of potential conflicts of interest of members of JSOC Bashneft s governing bodies 131 Risk management and internal control 133 Internal Audit 136 External audit 138 Significant corporate events 139 New Corporate Governance Code of JSOC Bashneft 140 Efforts to improve corporate governance 141 Information disclosure and investor relations 90

9 9 APPENDICES 143 Appendix 1. Consolidated IFRS financial statements of Bashneft Group for Appendix 2. Information on compliance of the joint-stock company with the principles and recommendations set out in the Code of Corporate Governance approved by the Bank of Russia 206 Appendix 3. Information on meetings of the Board of Directors of JSOC Bashneft 217 Appendix 4. Fuel and energy consumption 221 Appendix 5. Key risk factors 222 Appendix 6. List of companies and organizations in which JSOC Bashneft holds shares and stakes 228 Appendix 7. Information on JSOC Bashneft s participation in non-profit organizations (NPO) 230 Appendix 8. List of major and related-party transactions 231 Appendix 9. List of the most significant transactions made by the Company and legal entities under its control for Appendix 10. Information on major court cases 241 Appendix 11. Additional information to be included in the Annual Report 244 Appendix 12. Glossary of terms and abbreviations 248 OTHER 249 SOME DEFINITIONS AND FORWARD-LOOKING STATEMENTS In this Annual Report the terms Bashneft, we, Bashneft Group and the Group in various forms refer to JSOC Bashneft, its branches, subsidiaries and structured entities. The terms JSOC Bashneft and the Company refer to JSOC Bashneft. When referring to the period before the reorganization conducted in 2012, Ufimsky Refinery Plant (UNPZ), Novoil, Ufaneftekhim, Bashkirnefteprodukt and Orenburgnefteprodukt mean JSOC Bashneft s subsidiaries consolidated with the Company, namely OJSC Ufimsky Refinery Plant, OJSC Novoil (OJSC Novo-Ufimsky Refinery), OJSC Ufaneftekhim, OJSC Bashkirnefteprodukt and OJSC Orenburgnefteprodukt respectively; after the reorganization, these are respective branches of JSOC Bashneft. Unless otherwise stated, financial results covered in the Annual Report are presented and calculated on the basis of consolidated financial statements under IFRS and correspond to the results disclosed in the Management s Analysis of the Financial Position and Operating Results of Bashneft Group. Information on operating results presented in this document is consolidated data on Bashneft Group. Certain statements in this Annual Report may contain assumptions or forecasts concerning future events within Bashneft Group. These statements may contain the words is expected, is estimated, intends, will, could, negations thereof or other similar expressions. These statements are only assumptions. Actual events and results can differ substantially from those stated. The actual performance of Bashneft Group may differ materially from what is declared in our assumptions and forecasts as a result of a large number of factors. Such factors may include general economic conditions, Bashneft s competitive environment, risks related to operating in Russia, rapid technological and market changes in the Group s areas of business, as well as many other risks directly related to Bashneft Group. The Group uses a barrel-tonne conversion factor of 7.3. Data on reserves are based on the audit of reserves conducted by Miller and Lents in accordance with the international PRMS classification and are presented using the average barrel-tonne conversion factor of When assessing contingent and prospective oil resources at the R. Trebs and A. Titov fields, Miller and Lents used a barrel-tonne conversion factor of Certain amounts presented in tables, graphs and diagrams in the Report may differ from the sum of component parts due to rounding. CONTACT DETAILS 250

10 10 ANNUAL REPORT 2014 ADDRESS BY THE CHAIRMAN OF THE BOARD OF DIRECTORS AND THE PRESIDENT OF JSOC BASHNEFT ALEXEY TEKSLER Chairman of the Board of Directors of JSOC Bashneft ALEXANDER KORSIK President of JSOC Bashneft DEAR SHAREHOLDERS, The period covered by the 2014 Annual Report was one of the most challenging years in Bashneft s recent history. Nevertheless, despite the impact of major negative factors, such as a sharp deterioration in market conditions and external restrictions imposed on Russian businesses, Bashneft s team proved once again that it is able to deliver strong results and committed to consistent implementation of our development strategy for the benefit of all of the Group s stakeholders. In 2014 Bashneft once again achieved the strongest production growth rates in the Russian oil sector as it boosted oil production by 10.8% year on year to 17.8 million tonnes. We are proud that this growth was driven primarily by our brownfields in the Republic of Bashkortostan, where the Group once again achieved production growth that might seem incredible to many people: in 2014 production growth rate totalled 3.9%. Other important growth drivers include our new assets: the R. Trebs and A. Titov fields in the Nenets Autonomous District and Burneftegaz, an upstream company based in the Tyumen Region and acquired in March 2014, which has a considerable growth potential. Last year, these assets accounted for over 8% of the Group s total oil production. Growing production is supported by efficient reserve replacement: an independent audit conducted by Miller and Lents in accordance with the international PRMS classification has revealed that by December 31, 2014 Bashneft s proved reserves had increased by 4.9% to 2,146 million barrels. In 2014 the reserve replacement ratio totalled 179%, while Bashneft s reserves-to-production ratio amounts to 17 years. Brownfields in Bashkortostan accounted for more than half of the increase in proved reserves once again, which proves that geological and engineering operations and the geological exploration programme implemented by Bashneft in its key production region are effective. Last year saw a successful start of our new project with OJSC LUKOIL: as part of a newly created JV, Vostok NAO Oil Company, we continued geological exploration at seven new promising licence areas in the Nenets Autonomous District. In accordance with our strategy, we successfully continued to implement an ambitious refinery upgrade programme; moreover, we expanded our own network of filling stations and achieved a qualitative improvement in its performance. In 2014 Bashneft s refining complex in Ufa processed 21.7 million tonnes of crude oil, which is 1.2% more than in Last year, average refining depth and the average output of light products increased to 84.9% and 61.1% respectively. The Group retains its leading position in Russia as it has the most technologically advanced refineries: in 2014 the Nelson Index of Bashneft s refineries in Ufa increased from 8.83 to Refinery upgrades enabled the Group to increase the output of high-quality light products. Thus, in 2014 the output of Euro 5 gasoline added 30.7%, while the output of Euro 5 diesel fuel increased by 26.6%. Last year, we put two new process units (a catalytic cracking gasoline hydrotreater and a hydrogen production unit) into operation; as a result, our refineries were ready to switch over completely to production of Euro 5 fuel ahead of schedule.

11 ADDRESS BY THE CHAIRMAN OF THE BOARD OF DIRECTORS AND THE PRESIDENT OF JSOC BASHNEFT 11 Last year, Bashneft considerably expanded its network of filling stations by acquiring attractive assets specializing in retail sales of petroleum products. In 2014 the number of the Group s filling stations, which operate in as many as 16 regions of Russia, increased to 582 compared to 485 in We successfully continued to implement the programme to rebrand our filling stations. As a result, last year saw an 8.6% increase in fuel sales via our own filling stations to 1.5 million tonnes. Strong operating performance largely offset the impact of external negative factors on our financial performance. In 2014 Bashneft Group s revenue under IFRS increased by 13.1% year on year to billion roubles. Adjusted EBITDA totalled billion roubles, while net income attributable to shareholders of the parent company amounted to 43.1 billion roubles. Operating cash flow added 28.3% and increased from 82.7 billion roubles to billion roubles. In 2014 the Group s financial results enabled it to pay high dividends to its shareholders: dividends for 2013 totalled 211 roubles per share in addition to interim dividends for the nine months of 2013 totalling 199 roubles per share that Bashneft had paid earlier. Last year, Bashneft s management focused closely on one of our top priorities: improvement of corporate governance. In 2014 we successfully completed the final stage of the Group s reorganization programme by consolidating CJSC Bashneft-Invest with the Group. This reorganization was the last step in the implementation of a comprehensive strategy aimed at streamlining the corporate structure through a stock swap and eliminating cross-holdings in Bashneft, as well as divesting the Group s non-core businesses. As part of the reorganization, Bashneft bought back securities owned by minority shareholders worth a total of 17.9 billion roubles. Other notable achievements in 2014 included the Group s strong performance in the sphere of health, safety and environment. Last year, Bashneft reduced the number of occupational injuries by more than a third. There were no work-related fatalities in the Group. Creation of safe working conditions, reduction in the number of industrial accidents and environmental protection will remain our top priorities. As a socially responsible company, in 2014 Bashneft continued to implement charitable programmes in all of its operating regions; these programmes are aimed at improving social infrastructure and developing culture, education and sports. In 2014 Bashneft s social investments totalled about 1.4 billion roubles. In its turn, the state will pay close attention to Bashneft s development, and, as the Group s majority shareholder, it will facilitate the implementation of the Group s policy on sustainable development, which will help to make a substantial contribution to making the Russian economy more competitive and to supporting social and economic development of regions. High achievements and high responsibility are not mere words for Bashneft s employees. We all adhere to these principles in the course of our day-to-day work. Each of us is proud to be a part of a team of professionals which is on course for numerous further achievements in the interests of our shareholders and our country. 179% RESERVE REPLACEMENT RATIO IN OIL PRODUCTION +10.8% OIL PRODUCTION GROWTH 85.6% SHARE OF EURO 5 GASOLINE ADJUSTED EBITDA million tonnes billion roubles

12 12 ANNUAL REPORT 2014 HIGH POTENTIAL FOR DEVELOPMENT MILLION BARRELS +97 NEW OIL-PRODUCING CLUSTER (THE KHANTY-MANSI AUTONOMOUS DISTRICT) 3Р RESERVES OWN FILLING STATIONS

13 ABOUT THE GROUP STRATEGY AND OPERATING RESULTS INVESTOR & COPROPATE APPENDICES SHAREHOLDER GOVERNANCE 13 INFORMATION ABOUT THE GROUP THROUGHOUT THE RECENT YEARS, BASHNEFT HAS BEEN DEVELOPING VERY SUCCESSFULLY: ITS OIL PRODUCTION IS GROWING; REFINERIES ARE UPGRADED; THE RETAIL NETWORK IS EXPANDING; NEW ASSETS ARE ACQUIRED. AT THE SAME TIME, THE GROUP IS ABLE TO PAY HIGH DIVIDENDS. Alexander Korsik, President, Chairman of the Management Board OUR HISTORY saw the discovery of the Ishimbayskoye oilfield. This marked the start of oil production in Bashkortostan. In 1935, in order to facilitate commercial oil production at the Ishimbayskoye field, Bashneft Trust was established. In 1936 the first ever trunk pipeline in the Volga and Urals region was commissioned. Then the Ufimsky Refinery Plant (UNPZ) was brought into operation in Key milestones in the history of the development of the Group s resource base include: the discovery of the Tuimazinskoye field (1937), where Russia s first high-yield Devonian oil deposits were discovered in 1944; subsequent discoveries of the Shkapovskoye, Chekmagushevskoye and Mancharovskoye fields (1950 to 1954) and the Arlanskoye oilfield, the largest oilfield in the region (1955). As oil production volumes increased, Bashneft s oil refining complex expanded: in 1951 the Novo-Ufimsky Refinery (Novoil) was put into operation; in 1957 construction of the third refinery forming part of the Ufa group, Ufaneftekhim, was completed; it specializes in manufacturing fuel and petrochemicals.

14 14 ANNUAL REPORT In 1967 Bashneft Production Association achieved the highest level of annual oil production at the fields in Bashkortostan: it totalled 67 million tonnes. On January 13, 1995, Joint-Stock Oil Company (JSOC) Bashneft was established. In March 2009 OJSC JSFC Sistema became the principal owner of six fuel and energy enterprises in the Republic of Bashkortostan, including JSOC Bashneft. In 2010 JSOC Bashneft bought controlling interests in OJSC Ufaneftekhim, OJSC Novoil, OJSC Ufimsky Refinery Plant, OJSC Ufaorgsintez and OJSC Bashkirnefte produkt from OJSC JSFC Sistema and became the parent company for the new oil holding. In February 2011 Bashneft entered the Timan-Pechora oil province after obtaining a licence for the development of a federal subsoil area including the Trebs and Titov fields in the Nenets Autonomous District. In December 2011 the Group signed an agreement with OJSC Lukoil on joint implementation of the project. In 2012 and 2013 Bashneft joined international upstream projects in Iraq and Myanmar as an operator saw the completion of formation of a federal-scale vertically integrated oil company (VIC). JSOC Bashneft completed its reorganization through the consolidation of its five subsidiaries (OJSC Ufimsky Refinery Plant, OJSC Novoil, OJSC Ufaneftekhim, OJSC Bashkirnefteprodukt and OJSC Orenburgnefteprodukt) with the Company. This marked the first step in implementing a comprehensive strategy aimed at simplifying the corporate structure. In 2013 LLC Bashneft-Polyus, a joint venture of JSOC Bashneft and OJSC Lukoil, started oil production at the R. Trebs and A. Titov fields in the Nenets Autonomous District. In the autumn of 2013, as part of integration of Bashneft s refining complex in Ufa, management of three production facilities was centralized on the basis of the Bashneft-Ufaneftekhim Branch.

15 ABOUT THE GROUP STRATEGY AND OPERATING RESULTS INVESTOR & SHAREHOLDER INFORMATION COPROPATE GOVERNANCE APPENDICES In the spring of 2014 consolidation of CJSC Bashneft-Invest with Bashneft marked a successful completion of the final stage of the Group s reorganization aimed at streamlining the corporate structure and eliminating cross-holdings in JSOC Bashneft. In March 2014 Bashneft achieved a major expansion into the West-Siberian oil and gas province through the acquisition of LLC Burneftegaz, an upstream company developing the Sorovskoye field. In May 2014 JSOC Bashneft and OJSC Lukoil established a new joint venture, LLC Vostok NAO Oil Company, to conduct geological exploration at licence areas in a promising region in the north-east of the Nenets Autonomous District. In 2014 the Group consolidated its subsidiaries specializing in retail sales into LLC Bashneft-Retail Sales and centralized the management of a network comprising 582 filling stations in 16 regions of Russia. In December 2014 in accordance with the ruling of the Commercial Court, OJSC JSFC Sistema transferred a controlling stake in JSOC Bashneft to the Russian Federation represented by the Federal Agency for State Property Management.

16 16 ANNUAL REPORT 2014 HIGHLIGHTS OF THE YEAR FEBRUARY MARCH MAY JUNE AUGUST An Extraordinary General Meeting of Shareholders of Bashneft approved the decision on reorganization through consolidation of CJSC Bashneft-Invest with JSOC Bashneft. The Meeting also approved a reduction in JSOC Bashneft s authorized share capital and a new version of the Company s Charter. In accordance with the decision of the Federal Subsoil Resources Management Agency (Rosnedra), the Company transferred the licence for the R. Trebs and A. Titov fields to its subsidiary, LLC Bashneft-Polyus. JSOC Bashneft and LLC Lukoil-Komi established a new joint venture, LLC Vostok NAO Oil Company, to conduct geological exploration and prospecting and produce hydrocarbons at licence areas in the Nenets Autonomous District. Bashneft completed the acquisition of a network of filling stations operating under the OPTAN brand name and comprising 91 filling stations and 11 land plots in 12 regions of the Russian Federation. JSOC Bashneft launched a reorganization of its system for retail sales of petroleum products. The reorganization involves consolidation of the Group s subsidiaries and branches specializing in retail sales into a single legal entity, LLC Bashneft-Retail Sales. Bashneft acquired LLC Promenergoresurs, a leading operator on the retail market for engine fuel in Magnitogorsk in the Chelyabinsk Region. Bashneft acquired LLC Burneftegaz, an exploration and production company based in the Khanty-Mansi Autonomous District. The Group gained the right to develop the Sorovskoye and Tortasinskoye fields and licences for geological exploration of the Severo-Ityakhskiy 3 and Vostochno-Unlorskiy subsoil blocks. The Annual General Meeting of Shareholders of Bashneft made a decision to pay dividends for 2013 amounting to 211 roubles per share in addition to dividends of 199 roubles per share for the said period that had been paid earlier. Bashneft started pilot operation of a catalytic cracking gasoline hydrotreater at the Bashneft-UNPZ Branch. The project is aimed at ensuring compliance with the requirements of the Technical Regulations for fuel quality. The launch of the hydrotreater will enable the Group to completely switch over to producing Euro 5 gasoline. The Group conducted its first-ever Investor Day in London attended by Bashneft s senior managers.

17 ABOUT THE GROUP STRATEGY AND OPERATING RESULTS INVESTOR & SHAREHOLDER INFORMATION COPROPATE GOVERNANCE APPENDICES 17 EVENTS AFTER THE REPORTING DATE SEPTEMBER OCTOBER NOVEMBER DECEMBER MARCH 2015 At an auction for the right to conduct geological exploration, prospecting and production of hydrocarbons, Bashneft won the rights to the Leonovskiy subsoil area in the Republic of Bashkortostan. Bashneft gained control over 98% of shares of JSC United Petrochemical Company (UPC) through termination of the agreement on the sale of these shares to OJSC JSFC Sistema concluded in September The Board of Directors approved a new Code of Corporate Governance of JSOC Bashneft. The Code incorporates the requirements of Russian legislation, international best practices and principles of business ethics and established approaches to corporate governance developed by the Group. The document incorporates the provisions of the Code of Corporate Governance approved by the Bank of Russia. Bashneft completed the acquisition of a 100% stake in LLC AZS AKTAN, which owns a network comprising 17 filling stations in the Samara Region. An Extraordinary General Meeting of Shareholders of JSOC Bashneft decided to reduce the Company s authorized share capital by cancelling 2,724,173 ordinary shares with a par value of one rouble each, which were recorded as treasury shares bought back from shareholders as of December 31, An Extraordinary General Meeting of Shareholders of JSOC Bashneft convened on March 11, 2015 elected a new Board of Directors of the Company. The Company s Board of Directors comprised seven members representing the interests of the Russian Federation and three independent directors. Bashneft started pilot operation of a new hydrogen production unit at the Bashneft-Novoil Branch, which will enable Bashneft to ensure that all gasoline and diesel fuel that it produces meets the Euro 5 standard. In accordance with the judgement by the Moscow Commercial Court dated October 30, 2014, 122,971,934 ordinary shares and 6,192,245 preferred shares of JSOC Bashneft comprising a 71.62% stake in the Company s authorized share capital and previously owned by OJSC JSFC Sistema and CJSC Sistema-Invest were transferred to the Federal Agency for State Property Management. As a result, effective control over Bashneft s operations was transferred from OJSC JSFC Sistema to the Government of the Russian Federation. On December 29, 2014, subject to the judgement by the Moscow Commercial Court dated November 7, 2014 (case No. A /2014) and on the basis of the request by the Federal Agency for State Property Management, CJSC Sistema-Invest transferred ownership of 4,107,996 ordinary and 87,831 preferred shares of JSOC Bashneft (together comprising 2.3% of the authorized share capital) to the Russian Federation. As a result, the Russian Federation became the owner of 84.40% of the total number of ordinary shares and 21.08% of the total number of preferred shares of the Company, together comprising 73.94% of the authorized share capital of JSOC Bashneft.

18 18 ANNUAL REPORT 2014 BUSINESS MODEL AND GEOGRAPHICAL FOOTPRINT HOW WE CREATE VALUE GEOLOGICAL EXPLORATION REFINING The Group s business structure enables us to control the processes along the entire value chain, from gaining access to mineral resources to domestic and export sales of petroleum products. As the Group aims to expand its resource base and to ensure longterm production growth, it participates in auctions for promising licence areas in regions which are of strategic importance for our operations. As of the end of 2014, the Group owned 237 licences for development of 194 oil and gas fields in the Republic of Bashkortostan, the Khanty-Mansi Autonomous District, the Nenets Autonomous District, the Orenburg Region and the Republic of Tatarstan. For more information, see Operating results Licensing, geological exploration and reserves. At the licence areas, we conduct geological exploration using cutting-edge technological solutions. 3D seismic surveys conducted in 2014 covered 2.8 thousand sq. km. As a result of our active work to expand the resource base, the reserve replacement ratio increased to 179% by the end of For more information, see Operating results Licensing, geological exploration and reserves. We extract oil at the existing fields using enhanced oil recovery methods and applying innovative technologies. 175 of the Group s fields are in commercial operation. The Group s main oilfields are located in the Republic of Bashkortostan. This region accounts for 88% of our oil production. In 2014 highly effective geological and engineering operations and the use of modern technologies enabled us to increase oil production at brownfields by 3.4%. In addition, we are committed to geographical diversification of oil-producing areas and develop promising fields in new regions: Timan-Pechora and Western Siberia. LICENSING For more information, see Operating results Production. Crude oil is processed by the Group s Integrated Refining Complex comprising three oil refineries, which rank among the most technologically advanced facilities in Russia and are leaders in terms of refining depth and the quality of petroleum products that they manufacture. Bashneft s production facilities include petrochemical assets, whose main products include phenol, acetone, high-density polyethylene and polypropylene. A large part of oil produced by the Group is used as feedstock for Bashneft s refining complex. To maintain refinery throughput at an optimal level, we purchase oil, gas condensate and NGLs from third-party suppliers. In 2014 the Group s refineries processed 21.7 million tonnes of hydrocarbons. Refining depth averaged 84.8%, which is one of the best PRODUCTION indicators among domestic vertically integrated oil companies. For more information, see Operating results Refining. The Group sells crude oil, petroleum products and petrochemicals on the domestic market and exports them. In 2014 Bashneft Group sold 7.1 tonnes of crude oil, including 5.8 million tonnes of exported crude oil. In addition, the Group sold 10.4 million tonnes of petroleum products and petrochemicals on the domestic market and exported 9.5 million tonnes of petroleum products and petrochemicals. Petroleum products are also sold retail via a network of our own and partner filling stations. In 2014 we established LLC Bashneft-Retail Sales, based on which the Group consolidated its subsidiaries specializing in retail sales of fuel and centralized management of its own network of 582 filling stations in 16 regions of the country. In 2014, 220 partner filling stations were operated under the Bashneft brand name. MARKETING For more information, see Operating results Marketing.

19 ABOUT THE GROUP STRATEGY AND OPERATING RESULTS INVESTOR & SHAREHOLDER INFORMATION COPROPATE GOVERNANCE APPENDICES 19 BUSINESS MODEL IN ACTION Crude oil production 17.8 million tonnes (130 million barrels) Crude oil sales 7.1 million tonnes (52.1 million barrels) Crude oil exports 5.8 million tonnes (42.6 million barrels) Countries outside the Customs Union 5.2 million tonnes (38 million barrels) Domestic sales of crude oil 1.3 million tonnes (9.5 million barrels) Customs Union 0.7 million tonnes (4.9 million barrels) Liquid hydrocarbons 29.2 million tonnes (213.2 million barrels) Refining and petrochemicals 21.7 million tonnes (158 million barrels) Wholesale 8.9 million tonnes Domestic sales of petroleum products and petrochemicals Retail sales 1.5 million tonnes Petroleum products and petrochemicals 10.4 million tonnes 21.7 million tonnes (158 million barrels) Countries outside the Customs Union 8.9 million tonnes Purchased crude oil, gas condensate and NGLs 11.4 million tonnes (83.2 million barrels) Purchased petroleum products 0.1 million tonnes (158 million barrels) Export of petroleum products and petrochemicals 9.5 million tonnes Customs Union 0.6 million tonnes

20 20 ANNUAL REPORT 2014 GEOGRAPHICAL FOOTPRINT PRODUCTION GROWTH IN 2014 WAS SUPPORTED BY A 3.4% INCREASE IN PRODUCTION AT BROWNFIELDS. ASSETS IN TIMAN-PECHORA AND WESTERN SIBERIA ARE ANOTHER MAJOR DRIVER OF THE GROUP S PRODUCTION GROWTH. THEY ACCOUNTED FOR 8.4% OF ANNUAL PRODUCTION. 26 Krasnodar Territory 30 Kaliningrad Region 11 Rostov Region Belgorod Region Voronezh Region Smolensk Region 19 Tula Region Lipetsk Region Volgograd Region 1 1 Tambov Region 1 Tver Region Moscow Region Penza Region Saratov Region Vladimir Region Leningrad Region 2 Nizhny Novgorod Region Republic of Mordovia Vologda Region Chuvash Republic Ulyanovsk Region Kostroma Region 3 25 Samara Region Mari El Republic Republic of Tatarstan Kirov Region Arkhangelsk Region 46 Republic of Udmurtia Republic of Bashkortostan Perm Territory 34 Sverdlovsk Region Stavropol Territory 98 Orenburg Region Chelyabinsk Region 20 Kurgan Region Republic of Dagestan 2 LEGEND: Exploration Production Refineries Own filling stations Partner filling stations Regional sales offices Distant sales offices 802 Total number of filling stations 17.8OF OIL PRODUCED IN 2014 mln tonnes 21.7OF OIL PROCESSED IN 2014 mln tonnes

21 ABOUT THE GROUP STRATEGY AND OPERATING RESULTS INVESTOR & SHAREHOLDER INFORMATION COPROPATE GOVERNANCE APPENDICES 21 ASSETS WITH POTENTIAL FOR FURTHER DEVELOPMENT Nenets Autonomous District NENETS AUTONOMOUS DISTRICT 828 THOUSAND TONNES OF OIL PRODUCED IN LICENCE AREAS Khanty-Mansi Autonomous District Yamal-Nenets Autonomous District Nyarioyakhskiy area Severo- Yareyaginskiy area The subsoil area including the R. Trebs and A. Titov oilfields Savatinskiy area Vostochno- Padimeyskiy area Verkhneyangareyskiy area Yangareyskiy area Sibriyaginskiy area Tyumen Region KHANTY-MANSI AUTONOMOUS DISTRICT 665 THOUSAND TONNES OF OIL PRODUCED IN 2014 Novosibirsk Region 4 LICENCE AREAS Vostochno-Unlorskiy area Tortasinskiy area Severo-Ityakhskiy 3 area Vostochno-Vuemskiy area

22 22 ANNUAL REPORT 2014 STRUCTURE OF BASHNEFT GROUP EXPLORATION AND PRODUCTION (RUSSIAN PROJECTS): UPSTREAM UNIT LLC Bashneft-Dobycha Republic of Bashkortostan, Republic of Tatarstan, Orenburg Region, Khanty-Mansi Autonomous District LLC Bashneft-Polyus Nenets Autonomous District (Trebs and Titov fields) LLC Vostok NAO Oil Company Nenets Autonomous District LLC Burneftegaz Khanty-Mansi Autonomous District LLC BashNIPIneft EXPLORATION AND PRODUCTION (OVERSEAS PROJECTS): Bashneft International B.V. Iraq, Myanmar DOWNSTREAM UNIT OIL REFINING Bashneft-Ufaneftekhim Branch Bashneft-UNPZ Branch Bashneft-Novoil Branch LLC Bashneft-Refinery Service PETROCHEMICALS JSC UPC OJSC Ufaorgsintez LLC Shkapovskoye GPP LLC Tuimazinskoye GPP MARKETING AUXILIARY OPERATIONS* LLC Bashneft-Retail Sales Bashneft-Regional Sales Branch LLC Promenergoresurs LLC Helios LLC OPTAN-AZS LLC AZS AKTAN A complete list of companies and organizations in which JSOC Bashneft holds shares and stakes is provided in the Appendix List of companies and organizations in which JSOC Bashneft holds shares and stakes * Telecommunication services, motor transportation services, health resorts, securities management, heat generation, electricity transmission, wholesale of heat and electricity, etc.

23 ABOUT THE GROUP STRATEGY AND OPERATING RESULTS INVESTOR & SHAREHOLDER INFORMATION COPROPATE GOVERNANCE APPENDICES 23 POSITION IN THE INDUSTRY AND MACROECONOMIC FACTORS To ensure that Bashneft s development strategy is up-to-date, we constantly monitor key factors and trends in the oil and gas sector at both the country level and the global level. The formation of the development strategy and operating results of Bashneft Group are strongly influenced by external factors, such as: / global and domestic market prices for oil and petroleum products; / the rouble-dollar exchange rate and inflation rate; / taxation and government regulation of tariffs of natural monopolies. GLOBAL TRENDS AND FORECASTS FOR THE OIL MARKET In 2014 the global oil market was characterized by an imbalance of supply and demand. Production of liquid hydrocarbons exceeded their consumption, which caused oil prices to decline almost twofold in the second half of Growth of production of liquid hydrocarbons in the United States in 2014 led to a substantial reduction in the import of oil and petroleum products by this country. In the first half of 2014 the OPEC countries reduced production, but in the second half of the year oil production in these countries recovered. Despite a fall in prices, OPEC as an oil cartel followed the policy of maintaining the market share and did not reduce their production. In 2014 oil consumption was also affected by a slowdown in economic growth of some countries, including China. According to the International Energy Agency, in 2014 consumption of liquid hydrocarbons by developing countries exceeded the volume of consumption by developed countries. This trend is expected to continue in the future. Annual average oil prices in global markets Brent crude oil, US$ per barrel Urals crude oil, US$ per barrel Source: Platts

24 24 ANNUAL REPORT % BASHNEFT'S SHARE IN TOTAL OIL PRODUCTION IN RUSSIA For more information about the factors that influenced the increase in the Group s oil production, see Strategy and operating results Operating results Production. Oil production by the largest Russian oil companies, million tonnes Change, 2014/2013 Rosneft* % LUKOIL % Surgutneftegas % Gazprom Neft % Tatneft % Bashneft % Slavneft % RussNeft % Other % Total % * Starting from 2013 the figure includes oil production by TNK-BP Source: CDU TEK, company data Bashneft s share in total oil production in Russia % 3.1% 3.4% OIL PRODUCTION IN RUSSIA In 2014 oil production in Russia increased by 0.7% and totalled million tonnes. Average daily oil production declined from the first quarter through the third quarter of It was only in the fourth quarter that production resumed growth; at the end of the quarter, average daily oil production amounted to 10.6 million barrels per day. The decline in oil production is characteristic mainly for brownfields of large oil companies, which is to some extent offset by production at greenfields and production of smaller producers. Bashneft reports the strongest growth among Russian oil companies and ranks sixth in terms of annual oil production.

25 ABOUT THE GROUP STRATEGY AND OPERATING RESULTS INVESTOR & SHAREHOLDER INFORMATION COPROPATE GOVERNANCE APPENDICES % BASHNEFT'S SHARE IN TOTAL OIL REFINING IN RUSSIA Oil refining by the largest Russian oil companies, million tonnes Change, 2014/2013 Rosneft % LUKOIL % Gazprom Neft % Bashneft % Surgutneftegas % Slavneft % Tatneft (TANECO) % Other % Total % Source: CDU TEK, company data OIL REFINING IN RUSSIA In 2014 oil refining in Russia grew by 6% and totalled million tonnes due to commissioning of new oil refining facilities and refinery upgrades. As of the end of the reporting year, Bashneft ranked fourth in terms of crude oil refining among Russian companies. The Group refined 21.7 million tonnes of hydrocarbons. Bashneft s refining depth remains one of the highest in the industry and totals 84.8%. Bashneft is also one of the industry leaders in terms of the share of light products in the total output. Share of light products and refining depth of Russian oil companies in 2014 Bashneft s share in total oil refining in Russia Refining depth 48% 56.9% 54% 68% 72% 57% 53% 77% 61% 85% 86% 63% % 7.9% 7.5% Share of light products Surgutneftegas Rosneft Russia (average) LUKOIL Bashneft Gazprom Neft Source: CDU TEK, the Group s data

26 26 ANNUAL REPORT 2014 Bashneft s share in total sales of petroleum products in Russia, % Domestic sales of petroleum products manufactured by Russian refineries, million tonnes Gasoline Diesel fuel Change 2014/2013 Gasoline % including sales by Bashneft % Diesel fuel % including sales by Bashneft % Fuel oil % including sales by Bashneft % Source: Russian Ministry of Economic Development, the Group s data. Fuel oil Rouble-dollar exchange rate Rouble/dollar exchange rate at the end of the period, roubles Rouble/dollar exchange rate, period averange, roubles Source: Central Bank of Russia DOMESTIC SALES OF PETROLEUM PRODUCTS In 2014 Russian oil companies sold 34.3 million tonnes of gasoline on the domestic market, which is almost comparable to the level of the previous year. Sales of fuel oil by Russian companies increased significantly (+32.9% year on year). In 2014 Bashneft accounted for approximately 12% and 6% of domestic sales of gasoline and diesel fuel respectively. The Group is gradually reducing its sales of fuel oil. EXPORT SALES OF PETROLEUM PRODUCTS According to the Russian Ministry of Energy, in 2014 oil exports are estimated at million tonnes (-6.7% compared to 2013). In 2014 exports to countries outside the CIS amounted to million tonnes (-5.4% compared to 2013), while sales to the CIS countries totalled 24 million tonnes (-16.4% year on year). Crude oil exports decreased in 2014 as a result of continuing growth of crude oil distillation at Russian refineries (as export-oriented production of oil products is more economically attractive than oil exports), global market trends and the cessation of exports to the Republic of Kazakhstan under an intergovernmental agreement. In 2014 Bashneft exported 5.8 million tonnes of oil. According to the Federal Tariff Service (FTS), in 2014 Russia s export sales of petroleum products reached million tonnes, up by 8.8% compared to In 2014 exports to countries outside the CIS amounted to million tonnes (+10% compared to the previous year), while exports to the CIS countries totalled about 9.6 million tonnes (-6.8% year on year). In 2014 Bashneft exported 9.5 million tonnes of petroleum products. Therefore, Bashneft s share in the total exports of oil products totalled about 6%. ROUBLE-DOLLAR EXCHANGE RATE AND INFLATION RATE About 60% of the Group s revenue comes from exports of oil and petroleum products. Therefore, fluctuations in rouble exchange rates have a direct impact on the Group s financial and business performance. In 2014 the average rouble-dollar exchange rate amounted to 38.4 roubles per US dollar. In 2014 the rouble inflation in Russia increased from 6.5% to 11.4%, which

27 ABOUT THE GROUP STRATEGY AND OPERATING RESULTS INVESTOR & SHAREHOLDER INFORMATION COPROPATE GOVERNANCE APPENDICES 27 Rates of excise duties on petroleum products, roubles per tonne Gasoline non-compliant with class 3, 4, 5 11, * 2016* As from January 1, 2017* compliant with class 3 10,725 7,300 7,530 5,830 compliant with class 4 9,916 compliant with class 5 6,450 5,530 7,530 5,830 Naphtha 11,252 11,300 10,500 9,700 Diesel fuel from 4,767 to 6,446 3,450 4,150 3,950 Lubricants 8,260 6,500 6,000 5,400 * According to Federal Law No. 366-FZ Changes in the rates of mandatory payments 16,000 12,000 8,000 4, ,566 12,489 5,066 5,330 5, Source: Central Bank of Russia Mineral extraction tax on oil, roubles pet tonne 14,083 affected both capital and operating expenditure of the Group. TAXATION The main mandatory payments to be made by oil and gas companies include the following: the mineral extraction tax, the excise on petroleum products, the export duty on crude oil and the export duty on petroleum products. In 2014 the export duty on crude oil was reduced by 6.5% in dollar terms, while the mineral extraction tax rate was increased by 9.3%. The change in the rate of the export duty on crude oil and the mineral extraction tax rate was affected by the fluctuation of prices on the international market. The mineral extraction tax rate is calculated on the basis of world prices for Urals oil and is set monthly in Russian roubles at the exchange rate for the corresponding month. According to the Tax Code of the Russian Federation, a reduced or zero rate of mineral extraction tax may be applied for certain oilfields. For Bashneft, such fields include the following: / the R. Trebs and A. Titov oilfields, which are located in the Nenets Autonomous District and exempt from the mineral extraction tax. As a result, the Group s actual expenditure on the mineral extraction tax for 2014 was 32% lower than that calculated using the general procedure for the mineral extraction tax calculation. In 2014 the State Duma passed Federal Law No. 366-FZ dated November 24, 2014 on the so-called tax manoeuvre. This manoeuvre involves a phased reduction in export duties on crude oil and petroleum products combined with an increase in the rate of the mineral extraction tax on oil and gas condensate during the period from 2015 to At the same time, the rates of excise on petroleum products will be reduced in stages (by a factor of 2.2 over a three-year period). In addition, tax deductions from the excise may be obtained if certain petroleum products are provided to/purchased by consumers on the domestic market who hold certificates for operations with the relevant petroleum products. Rouble inflation Export duty on oil, roubles per tonne 6.6% 6.5% 11.4% Source: Federal State Statistics Service (Rosstat) / a number of fields with a level of depletion exceeding 80%;

28 28 ANNUAL REPORT 2014 HIGH GROWTH RATES +28.3% +10.8% P. P. GROWTH OF THE SHARE OF EURO 5 GASOLINE IN THE TOTAL OUTPUT 1.5MILLION TONNES SALES OF PETROLEUM PRODUCTS VIA BASHNEFT S OWN RETAIL NETWORK INCREASE IN NET CASH FROM OPERATING ACTIVITIES IN 2014 OIL PRODUCTION GROWTH

29 ABOUT THE GROUP STRATEGY AND OPERATING RESULTS INVESTOR & SHAREHOLDER INFORMATION COPROPATE GOVERNANCE APPENDICES 29 STRATEGY AND OPERATING RESULTS STRATEGY AND KPIs STRATEGY Our development is aimed at establishing a highly efficient and fast-growing vertically integrated oil company; this goal was set as early as We adjust our plans taking into account objective external factors affecting the industry as a whole, such as changes in macroeconomic conditions, the tax burden, the current situation on the market, and the specific features of Bashneft s development, and we focus on improving the Group s performance and making it more competitive. Thus, in December 2011 the Board of Directors decided to approve a fiveyear strategy for (minutes No dated December 26, 2011), which was subsequently updated in December 2012, and new solutions aimed at further increasing Bashneft s value between 2012 and 2022 were worked out. In November 2013 the Board of Directors approved the Group s strategy for the period from 2014 through 2018 (minutes No dated November 29, 2013). Successful implementation of the strategy from 2010 through 2014 helped to make Bashneft one of the industry leaders and to form a vertically integrated oil company characterized by growing production, use of advanced refining technologies, reliable marketing channels and strong financial performance. Amid changes in macroeconomic factors in 2014 and 2015, including a fall in prices for oil and petroleum products, the tax manoeuvre, depreciation of the rouble, tighter logistic and financial restrictions, the Group began making adjustments to the current strategy, which involve development of strategic initiatives aimed at improving operational and financial performance, cost optimization, fostering import substitution, as well as integrating the goals and objectives of the new majority shareholder into the Group s operations. In addition to the general strategy, the Group follows a practice of preparing action plans or functional strategies listing and identifying key strategic measures in individual areas of operations: / upstream; / downstream; / personnel management; / occupational and process safety; / finance; / investor relations; / corporate governance; / legal support. BRIEF OVERVIEW OF THE MEDIUM-TERM STRATEGY We expect to obtain exploration results in Bashkortostan by 2017, which would enable us to start developing new reserves, like we did in previous years. For example, the Afanasyev field was discovered and promptly put into operation. The prospects for the R. Trebs and A. Titov fields are clear: we continue development and start the second stage of infrastructure construction. We also have ambitious plans with respect to development of Burneftegaz. In refining, we give priority to the construction of a delayed coker, and we are constructing a number of units that are smaller but equally important in order to upgrade our refineries. Some of these projects will be completed by 2017, while others will still be under construction. In the sphere of marketing of petroleum products, we keep searching for new assets to be acquired. With respect to the Group s structure, we have already made considerable progress. Bashneft s current structure is clear, transparent and comfortable for all existing shareholders and potential investors. As for our performance, at present we generate more money per tonne of oil produced than any other Russian company, and we have the highest Total Shareholder Return in Russia. From an interview of Alexander Korsik with the Kommersant in Ufa newspaper Everyone s got used to Bashneft being all right (September 2014)