TO THE ATTENTION OF SHAREHOLDERS

TO THE ATTENTION OF SHAREHOLDERS of Open Joint Stock Company Surgutneftegas! (Location: Russian Federation, Tyumenskaya Oblast, Khanty-Mansiysky Autonomous Okrug - Yugra, Surgut, ul.grigoriya Kukuyevitskogo, 1, bld. 1) The Board of Directors of OJSC Surgutneftegas notifies shareholders that the Annual General Shareholders Meeting in the form of a meeting (joint presence of shareholders to discuss issues on the agenda and adopt resolutions put to vote) is to be held on June 29, 2012, 10:00 a.m., at the address: ul. Gubkina, 13, Surgut, Khanty-Mansiysky Autonomous Okrug - Yugra, Tyumenskaya Oblast, Russian Federation, 628415. Registration of the participants of the meeting starts at 8:00 a.m., June 29, 2012, local time. In order to be registered as participants, OJSC Surgutneftegas shareholders are requested to provide their passports. Shareholders proxies shall have a Power of Attorney entitling them to participate in the meeting. Such Power of Attorney shall be issued in compliance with Paragraph 1, Article 57 of the Federal Law On Joint Stock Companies and Paragraphs 4 and 5 of Article 185 of the Civil Code of the Russian Federation. Shareholders may exercise their right to participate in the meeting by sending completed ballot papers by mail (or delivering them in person) to: ZAO Surgutinvestneft, ul.entuziastov 52/1, Surgut, Khanty-Mansiysky Autonomous Okrug - Yugra, Tyumenskaya Oblast, 628415. Ballot papers received by the Company by June 26, 2012 at the latest will be taken into account to determine a quorum of the meeting and count the votes. The date when the list of persons entitled to participate in the Annual General Shareholders Meeting of OJSC Surgutneftegas is compiled is 14 May 2012. Agenda of the Annual General Shareholders Meeting: 1. Approval of the annual report of OJSC Surgutneftegas for 2011. 2. Approval of the annual accounting statements of OJSC Surgutneftegas, including profit and loss accounts, for 2011. 3. Approval of distribution of profit (loss) of OJSC Surgutneftegas for 2011, including payment (declaration) of dividends, approval of the size, form, period, and procedure for dividend payment on shares of each category. 4. Election of members to the Board of Directors of OJSC Surgutneftegas. 5. Election of members to the Auditing Committee of OJSC Surgutneftegas. 6. Approval of the Auditor of OJSC Surgutneftegas. 7. Approval of interested party transactions which may be conducted by OJSC Surgutneftegas in the course of general business activity (as stipulated by Paragraph 6, Article 83 of the Federal Law of the RF On Joint Stock Companies ). 8. Amendments to the Regulations on the Auditing Committee of OJSC Surgutneftegas. Shareholders may review the information (materials) subject to presentation to shareholders while preparing for the annual general shareholders meeting at: ul.entuziastov 52/1, Room No. 152, Surgut, Khanty-Mansiysky Autonomous Okrug - Yugra, Tyumenskaya Oblast, 628415, starting from June 08, 2012, every working day from 09:00 a.m. till 12:30 p.m. and from 14:00 p.m. till 17:00 p.m. Telephone in Surgut: (3462) 46 27 64. Shareholders entitled to reduced tax rates, or exemption from corporate profits tax on income in the form of the dividends, shall submit prior to the dividend payout date to OJSC Surgutneftegas the documents confirming the applicability of tax benefit, or exemption from the tax. A list of the documents and documentation requirements stipulating the application of reduced tax rates, or exemption from corporate profits tax on income in the form of the dividends, are available at the website of OJSC Surgutneftegas : www.surgutneftegas.ru/ru/investors/info/. The documents shall be submitted to: ul.grigoriya Kukuyevitskogo 1, bld. 1, Surgut, Khanty- Mansiysky Autonomous Okrug Yugra, Tyumenskaya Oblast, 628415, Securities Division of OJSC Surgutneftegas. All the submitted documents shall contain relevant and accurate information and shall meet the requirements available at the website of OJSC Surgutneftegas. Unless the shareholders submit the aforementioned documents within the specified period of time, OJSC Surgutneftegas will apply general taxation procedure to dividends paid to such shareholders. Board of Directors, OJSC Surgutneftegas

APPROVED by the Board of Directors of Open Joint Stock Company Surgutneftegas Minutes No. dtd 2012 ANNUAL REPORT OF OJSC Surgutneftegas FOR 2011 Director General V.L.Bogdanov (signature) Chief Accountant A.V.Druchinin (signature) Surgut 2

TABLE OF CONTENTS THE COMPANY AND THE OIL AND GAS SECTOR 4 BUSINESS PRIORITIES 10 KEY RISKS RELATED TO THE COMPANY S OPERATIONS 12 Industry risks 12 Country and regional risks 15 Financial risks 15 Legal risks 17 REPORT OF THE BOARD OF DIRECTORS OF OJSC SURGUTNEFTEGAS ON THE COMPANY S PERFORMANCE AND BUSINESS PRIORITIES DEVELOPMENT 19 PROSPECTS Production operation Resource policy 19 Oil and gas production 25 Oil refining and gas processing 31 Sales of petroleum products 35 Power generation 38 Research and technology 40 R&D profile 40 Innovations 41 Information technologies 43 Social responsibility 47 Environmental industrial safety 47 Personnel development 53 Charity and social activities 57 CORPORATE GOVERNANCE AND SECURITIES 66 The Company s compliance with the Code of Corporate Behavior 66 Board of Directors 66 Individual executive body 67 Remuneration paid to the Company s executive bodies and 67 members of the Board of Directors Report on declared dividend payments 68 ADDITIONAL INFORMATION 69 A list of the Company s transactions carried out in the reporting 69 year The energy resources utilized by the Company 70 3

Full Company name Open Joint Stock Company Surgutneftegas Address: ul.grigoriya Kukuyevitskogo 1, bld. 1, Surgut, Khanty-Mansiysky Autonomous Okrug - Yugra, Tyumenskaya Oblast, Russian Federation, 628415 Representative office Moscow representative office of Open Joint Stock Company Surgutneftegas Address: ul.myasnitskaya 34, Moscow, Russian Federation Representative office Saint Petersburg representative office of Open Joint Stock Company Surgutneftegas Address: ul.podkovyrova 37, St. Petersburg, Russian Federation Representative office Yakutsk representative office of Open Joint Stock Company Surgutneftegas Address: ul.ordzhonikidze 36, Yakutsk, Republic of Sakha (Yakutia), Russian Federation 4

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 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 126.6 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, 5

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 2011. The output from the North Sea continues to fall, with UK and Norway fields suffering from the largest decline. 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 2010. 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. Russia leads the world in crude output. In 2011, crude and gas condensate production amounted to 511.4 mn tons, up by 6.3 mn tons from 2010. 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 6

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 160.4 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 212.2 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 the Skovorodino - Daqing pipeline received the first oil after the Chinese section was commissioned. Exports to CIS countries went up by 3.6 mn tons (+13.7%) to 29.9 mn tons, primarily driven 7

by a 40.8% increase in supplies to Belorussian refineries. In total, Russia exported 242.1 mn tons in 2011, which is 2% less than in the previous year. Russian refineries increased the volume of primary crude oil distillation: crude oil refining and condensate processing in 2011 reached 257.9 mn tons, which means that Russia refines more than half of the produced oil. In 2011, oil was refined by 29 major refineries and several dozens of mini refineries in Russia. As in the previous year, the oil conversion ratio in 2011 decreased slightly to 70.8% vs. 71.1% in 2010. Diesel fuel and fuel oil still account for a large share in the output mix: their production in 2011 rose to 73.3 mn tons (+4.9%) and 70.6 mn tons (+0.3%), respectively. The bulk of these petroleum products is exported as fuel and feed stock for further processing. Gasoline production reached 36.6 mn tons (a 1.7% increase) but this growth was not enough to meet the needs of the domestic market. Despite the protective export duties, there were times when the regional markets experienced the shortage of gasoline. Over the last years, higher quality of gasoline reflected a positive trend in the industry. As a result, high-octane gasolines accounted for 89.6% in the total gasoline output in 2011 compared to 84.8% in the previous year. During the year, the country produced 9.3 mn tons of jet kerosene (+2.3%). The domestic consumption of jet kero was at an all-time high: air transportation in Russia has expanded significantly, which led to the shortage of this product on the domestic market in late 2011. In recent years, the government has been paying closer attention to the Russian refining sector, in particular, to the quality of the product output. This led to the applicable Technical Regulations on oil products, differentiated excise duties on gasoline and diesel fuel based on their environmental class, and more stringent control over refineries upgrades. As a result of these processes, oil companies increased their investments in re-equipment of their production facilities. In 2011, the industry made a transition to a new model for calculation of export duties equalizing duty rates for light and dark oil products (the 60-66-90 system), which also provides for an increase in export duty rates for dark oil products to 100% of the crude oil duty from 2015. The duty rate on mogas was increased (90%) to restrict the export of mogas which was in deficit in 2011. As a result, gasoline export in 2011 remained limited (less than 3.1 mn tons), diesel fuel 8

export decreased from 40.6 mn tons to 35.4 mn tons, and fuel oil export was at the same level (71.7 mn tons). In 2011, Russia produced 687.5 bcm of gas (+3.3%) setting a new record after the breakup of the Soviet Union. NOVATEK, the second largest gas producer in Russia, was leading the upward trend. PSA operators also did well (+8.3%) whereas Gazprom increased gas production by 0.2% only, which is well below the general industry performance. Vertically integrated oil companies boosted gas output by 9.2% bringing their share in the total gas production from 10.7% in 2010 to 11.4% in 2011. Gas production by oil companies totaled 78.1 bcm, including 58.9 bcm of associated petroleum gas (APG). APG utilization remains one of the most sensitive issues for vertically integrated oil companies: while APG production grows, the level of its value-added use at year end dropped to 76%. In search of lower transit risks, the industry continues expansion of gas transport infrastructure. In 2011, the first line of the Nord Stream gas pipeline connecting Russia and Germany through the Baltic Sea was commissioned with a throughput of 27.5 bcm/year. The commissioning of the second line which will double the pipeline throughput is scheduled for October 2012. Export supplies of Russian gas in 2011 increased by 6.7%; supplies to the domestic market, by 2.9%. Therefore, the main development trends in the oil and gas industry in the reporting year were: higher hydrocarbon prices; increased oil and gas production; increased exploratory and development drilling; continuing development of transport infrastructure; expanded Russian presence on the Asia-Pacific market and increased oil supplies to China. The Company among its peers OJSC Surgutneftegas is the fourth largest oil producing company in Russia. In 2011, the Company increased crude oil output to 60.8 mn tons, which is more than 12% of the domestic oil production. Gas production totaled 13.0 bcm (more than 20% of all gas produced by Russian vertically integrated oil companies). 9

In 2011, the Company increased production by 2.1% (outperforming an industry average) and commissioned 5 new fields. The Company pioneered the full life-cycle for APG processing and APGbased energy production in Russia. As a result, for many years Surgutneftegas has maintained the highest ratio of associated petroleum gas utilization in the sector, which reached its record high of 97.8% in 2011. Traditionally, Surgutneftegas is far ahead of its industry peers in terms of development and exploratory drilling. In 2011, development drilling amounted to more than 4,530 thousand m (or over 25% of the meterage drilled in the sector); exploratory drilling, to 216.3 thousand m (or 29% of exploratory drilling in Russia). Accordingly, the Company accounts for over 46% of all exploration wells constructed in Russia. The Company has the smallest number of idle wells. The share of idle wells in the total operating well count was 6.8% at year end. For years, Surgutneftegas has kept the ratio of idle wells below 10%. Refining throughput at LLC KINEF, the Company s refinery, amounted to 21.1 mn tons, or 8.2% of the domestic throughput. The refinery is the largest one in Russia in terms of throughput. Annually, the Company maintains 100% utilization of its capacities. The Company s marketing units, with their network of 298 fuel stations, are leaders in the north-west of Russia. In 2011, the Company sold 1,600 thousand tons of oil products. 10

BUSINESS PRIORITIES Oil and gas production: to replace and improve the quality of mineral resources on an expanded scale through geological exploration in existing license areas and acquisition of new promising areas; to develop and apply innovative solutions and introduce advanced field development technology and equipment in order to enhance efficiency of oil and gas exploration and production; to maintain the existing level of production in the traditional area of operations (Western Siberia), increase crude output in Eastern Siberia, and develop Timano-Pechora extensively; to take a comprehensive approach to gas sector development: to provide for a high utilization level and maximize efficient use of associated petroleum gas; to control costs. Oil refining and gas processing: to improve the quality of products and ensure compliance with Russian and international quality standards; to enhance refining and processing efficiency through modernization and reconstruction of production facilities; to extend the range of products. Marketing: to diversify product supplies by entering new markets and developing Russian transportation infrastructure; to expand petroleum products markets through construction and modernization of gas stations; to boost sales of associated goods and services. Power sector: 11

to develop small-scale power generation by expanding in-house generation capacity for reliable power supply to production facilities, efficient utilization of associated petroleum gas, and additional technological and economic benefits; to introduce energy-saving and energy efficient solutions and technology. Social responsibility: to mitigate the environmental impact of production facilities and use natural resources in a responsible and rational way; to assure high industrial and occupational safety standards; to contribute to the social and economic development of the areas where the Company operates; to offer extra social benefits and guarantees for the employees, their families, and retired employees. 12

KEY RISKS RELATED TO THE COMPANY S OPERATIONS In the course of its activities, OJSC Surgutneftegas is exposed to different risks, including industry, country, financial, and legal risks, which may adversely affect the Company s operating and financial performance. In line with its operating principles, the Company seeks to minimize the risks under the Company s control and mitigate any negative consequences of the risks in cases when the Company s ability to control is limited. Industry risks The most substantial risks for OJSC Surgutneftegas are industry risks that include the following: changes in prices for the Company s products, materials and services used in the Company s operations, as well as technological and environmental risks related to specific production processes and industry competition. The Company s operating results depend on hydrocarbon market condition to large extent. Lower hydrocarbon prices may deteriorate the Company s financial and economic performance. Crude oil and petroleum products, the source of the Company s primary income, are exchange commodities. The world prices for such commodities are affected by a great number of global economic and political factors including global and regional economic growth, balance between the global and regional demand and supply, geopolitical situation in oil and gas producing regions, as well as development of alternative energy sources. Besides, the pricing environment is vulnerable to long-term market speculations. In 2011, we saw the risk of economic slowdown, especially in euro-zone countries which are the main consumers of the Russian energy resources. Many of them are facing budget deficit and suffering from a heavy debt load. Recently, the credit ratings of some of the countries have been lowered and one may expect the crisis of the banking sector in the euro region. Moreover, such factors as the US budget deficit and risks related to the economy slowdown in China and other oil consuming countries are still a matter of concern. The economy recession may 13

bring forth an oil price drop. The current prices for energy resources include a significant premium for political instability in the Middle East region which also may negatively affect oil prices in the future. As for the long-term perspective, the prices can be impacted by development of unconventional oil reserves, advanced technologies, and wider utilization of the alternative energy sources. Currently, we see the continuous investment being made in solar and wind energy projects. Shale oil production technology is under development, which is expected to enable the USA to stop almost all crude oil imports in the near future. Other countries may start developing shale oil as well. The same changes occurred on the North American gas market where the oil prices slumped due to a sharp increase in shale gas production. Prices for crude oil and petroleum products in Russia are set under the influence of the global prices for hydrocarbons and internal factors including, firstly, tax policy in respect of the oil and gas industry and energy resources export regulation. The risk of changes in energy prices is beyond the Company s control. At the same time, Surgutneftegas is quite flexible in terms of target market outlets and its production structure as well as able to optimize operating costs and capital investments in response to continuous price reduction. In case of a short-term drop in oil prices, the Company is financially stable and has sufficient reserves to meet its obligations and maintain the necessary investment level considering industry specific long-term production cycle. Surgutneftegas applies a wide range of materials, equipment and facilities. Therefore, any increase in prices for such products may considerably impact the Company s operating costs. Surgutneftegas is striving to mitigate these risks through tenders for supply of equipment, direct contracts with manufacturers, and long-term contracts with suppliers. Besides, the Company is implementing programs aimed at better use of resources and lower operating costs, which make it possible to reduce materials consumption and enhance energy efficiency of its operations. Expenditures for products and services of natural monopolies account for a significant part of the Company s operating costs; the tariff policy of such 14

monopolies can be regulated by the state. Any further increase in tariffs may negatively affect the Company s financial results. The Company is unable to influence the pricing process in these industries, but it mitigates risks by developing in-house facilities with due account for investment effectiveness, including construction of energy supply facilities, communication lines, and data transmission lines. Surgutneftegas is limited in terms of selection of the service companies engaged in transportation of crude oil and petroleum products. The bulk of the Company s products is transported via the main trunk pipeline system of OJSC AK Transneft and ОАО AK Transnefteproduct. Cargoes are delivered by the railway system of OJSC Russian Railways. Underdevelopment of transportation systems in outlying regions, operational failures, and other infrastructure breakdowns and technogenic disasters may result in disruptions and extra costs for supplies of the Company s products, as well as make oil field development more expensive and time consuming. Surgutneftegas is exposed to the risk of increased competition among its peers in terms of access to hydrocarbon fields, pipeline systems, refineries, and markets. The most critical issue for the oil companies is competition for oilfield development and production licenses, which results in reserves and production decline and deterioration of economic efficiency of projects due to higher license costs. Today, this type of risk is becoming more crucial due to reserves deterioration and a decreased number of licenses put up for tenders and auctions for oil fields with proved hydrocarbon reserves. The Company s exploration activities are linked to uncertainty involving probabilistic assessment of quantitative and qualitative characteristics of petroleum reserves, reservoir structure and properties, and a potential failure to discover commercial reserves. These factors may result in additional costs, revision of the projects investment efficiency, and abandonment of unpromising license areas. Complex production processes of reservoir management, oil and gas processing and transportation are fraught with technological and environmental risks. Severe weather conditions of the regions where the Company operates and the need to develop hard-to-recover reserves are driving the growth of these risks. 15

However, Surgutneftegas manages to mitigate the impact by strictly adhering to the industry-related requirements and standards, monitoring production facilities, applying cutting-edge techniques and technologies, and improving the competence of personnel in the area of industrial and environmental safety. Country and regional risks The Company carries out its core business in the Russian Federation, and the Company s country risks therefore include political, economic, and social risks existing in Russia. Political risks in Russia depend on changes in the country s foreign and domestic policy and the government s strong impact on the industry, including energy strategy, tariff formation, asset nationalization, or economic liberalization. The economic situation in the country is relatively stable but at the same time high oil price volatility creates significant risks for the Russian budget as its considerable part is formed from oil and gas revenues. Therefore, long-term price reduction may cause budget deficit and deterioration of the country s macroeconomic indicators. The risks connected with worsening of the economic, political and social situation in the regions of the Company s presence may impact its economic performance. Being a responsible operator, Surgutneftegas duly fulfils its obligation on salary and tax payments and other binding payments. As the Company is focused on sustainable and planned development of the territories of its operation, regional risks are considered to be low. Surgutneftegas operates mainly in Western and Eastern Siberia, and its refinery and marketing divisions are located in northwestern and central parts of Russia. Traditionally, the Company does not operate in regions prone to earthquakes or natural disasters. However, hydrocarbons production is carried out in regions with harsh climatic conditions which may adversely affect the Company's performance. Products are exported through ports on the Black Sea and the Baltic Sea, which may be closed because of storms or difficult ice conditions. One may also expect material delivery interruptions to territories with limited access. Financial risks 16

Surgutneftegas sells its products on foreign and domestic markets. The Company earns a significant part of its revenue from its operating activities in foreign currency while its production costs are denominated mostly in rubles. In addition, investments in foreign currency form a large part of the Company s financial reserves. Therefore, any fluctuations in the ruble exchange rate create risks for the Company. These risks may to some extent be mitigated through multicurrency investment of the Company s financial reserves and currency risk assessment and accounting when planning its activities. The Company also incurs moderate inflation risk since inflation growth may result in additional expenses and reduction of profits, as well as loss of actual value of its accounts receivable. Although unable to influence the inflation rate, the Company is striving to optimize consequences of inflation risks through regular evaluation of possible price fluctuation scenarios and their impact on the operating activities and investment projects. Moreover, the Company focuses on production cost optimization, tenders, development of in-house and auxiliary services, suppliers diversification, and long-term cooperation with its contractors. Fluctuations in the market interest rates do not have a significant impact on the Company s financial performance since the Company does not raise borrowed funds and finances its activities itself. Changes related to bank interest rates may create the risk of lower rate of return on deposits. To manage the risk, the Company monitors and reviews the current interest rates, implements maturity diversification of its monetary funds, and conducts business transactions at a fixed deposit rate, which results in mitigation of interest risks. The Company also incurs moderate risks of lost profit since most funds are deposited in bank accounts and the Company may earn less profit due to fluctuations in exchange rates and deposit interest rates. Surgutneftegas manages credit risks which mostly affect the accounts receivable via their monitoring and assessment. To this end, the Company takes into account the financial position of the buyers and their credit history, controls the contracting process, and forms reserves for accounts receivable depreciation. The Company s liquidity position remains strong. Surgutneftegas takes a wellbalanced approach to current capital financing and controls planned cash flows and 17

payments on a regular basis. The Company s short-term liabilities mainly involve accounts payable. Thus, Surgutneftegas is able to settle its liability in a timely manner, and the value at risk is minimal. The Company does not hedge financial risks but indemnifies some of its assets and transactions against obligation risks. Legal risks The Company s development prospects may be limited by changes in the legal and regulatory system for the oil and gas sector. Such changes may result from major events in the political, economic, and social spheres. The Company s legal risks include risks in the area of exchange, customs and antimonopoly regulation, tax risks, and possible changes in licensing requirements for core operations. Substantial risks for the Company also include changes in the forestry, water, and land law and more stringent environmental regulations. Surgutneftegas earns a significant part of its revenue in foreign currency from foreign trade transactions. Therefore, any changes related to currency control may adversely affect the Company s financial performance. However, the recent initiatives of the Russian Government towards currency control liberalization mitigate these potential risks. The Company is exposed to the risk of possible changes in customs and tax regulation. For example, the decree of the Russian Government dated 1 May 2011 increased the export duty on gasoline (to 90% of the crude oil duty) to boost deliveries to the domestic market, which made gasoline exports less profitable. The taxation system is not stable enough, with various modification options discussed from time to time, which affects the reliability of the Company s plans and estimates. Surgutneftegas closely follows all changes to the customs and tax legislation, evaluates their possible implications, and adjusts its operations as appropriate. The Company runs the risk of increasingly stringent competition law with regard to sales of oil products, which may undermine the performance of the Company s marketing sector. In an effort to develop market pricing mechanisms, 18

the Company is taking an active part in trading of oil products on St. Petersburg International Mercantile Exchange. Surgutneftegas operates on the basis of subsoil licenses; therefore, any changes in licensing requirements and procedures may have adverse consequences for the Company. When carrying out its operations, Surgutneftegas complies with the requirements of the applicable law and license agreements, fulfills its obligations to partners, and minimizes the risk of early termination, suspension, or restrictions on subsoil rights, as well as the impact of other legal risks. Moreover, the Company takes part in discussing proposed legislation concerning its business and includes any prospective changes in its plans and estimates. 19

REPORT OF THE BOARD OF DIRECTORS OF OJSC SURGUTNEFTEGAS ON THE COMPANY S PERFORMANCE AND BUSINESS PRIORITIES DEVELOPMENT PROSPECTS PRODUCTION OPERATION RESOURCE POLICY Extended reserve replacement creates sustainable growth for the Company. Our unrivalled operational experience in Western Siberia allows us to succeed in reserve replacement in the region and consider it as the basis for future development. Moreover, Surgutneftegas steadily keeps extending its license portfolio and is engaged in geological exploration in Eastern Siberia and Timano- Pechora oil and gas provinces to implement its strategy in terms of geological diversification of production assets. As of the end of 2011, the Company s license portfolio comprised 153 licenses for subsoil use, including 53 licenses for exploration and production, 60 licenses for geological survey, exploration and production of oil and gas, and 40 licenses for prospecting and evaluation of hydrocarbon fields. In the reporting year, the Company carried out geological exploration in 102 license areas within three regions of its operation Western Siberia, Eastern Siberia and Timano-Pechora. In 2011, the Company obtained 6 licenses for the right to produce hydrocarbons, including 4 licenses gained on tender basis and 3 licenses acquired for the fields discovered earlier, and 2 licenses for geological survey, prospecting and evaluation of fields, including 1 license gained within the government contract. Regional breakdown of OJSC Surgutneftegas licenses Region Number of licenses Western Siberia 118 Eastern Siberia 26 Timano-Pechora 9 20

To enhance efficiency of prospecting and exploration of hydrocarbon reserves and mitigate geological risks, the Company applies cutting-edge seismic techniques. In 2011, 2D seismic acquisition increased by 30% and reached 6.5 thousand linear km and 3D seismic acquisition grew by 78% to 1.2 thousand sq km. Six wells underwent vertical seismic profile survey. Based on the survey results, 114 sites in 19 structures with 49 mn tons of recoverable oil reserves were prepared for deep exploratory drilling. In the year under review, prospecting and exploration drilling reached 216.3 thousand meters with 84 wells completed. Due to high quality of exploration works, the exploratory drilling efficiency accounted for over 70%. In 2011, Surgutneftegas discovered 2 oil fields in Khanty-Mansiysky Autonomous Okrug Yugra, as well as 33 oil deposits including 29 in Western Siberia, 3 in Eastern Siberia, 1 in Timano-Pechora and 1 gas-condensate deposit in the Eastern Siberian region. Exploration is a complex production process involving highly qualified personnel and teamwork, as well as innovative solutions and technologies. To support and analyze its exploration activities, in 2011 Surgutneftegas established the Geological Support Center. The mission of the Center is to support and assess the exploration works that have been performed by the Company, estimate hydrocarbon reserves, carry out detailed survey of geological structure of oil fields to determine resource potential of residual oil and gas zones and further design geological and engineering operations to enhance production efficiency. The Company places great emphasis on research and development activities. In 2011, we performed more than 80 appraisal surveys on geological structure of areas and fields, gained expert review of the State Reserves Commission on our reserve estimation reports for 3 oil and gas fields, and submitted materials for on-going estimate of 35 fields. As a result of the activities, in the year under review recoverable C1+C2 oil reserves increment reached 136 mn tons including as much as 95 mn tons of C1 reserves. To this end, commercial reserve replacement allowed the Company to replenish its annual production output by 1.5 times. 21

For the last 5 years, the Company has increased remaining recoverable reserves of ABC1 categories by 9% and produced over 300 mn tons of oil. WESTERN SIBERIA Western Siberia remains the key area of the Company s operation. Surgutneftegas is further engaged in exploration activities in the region aimed at stable reserve increment able to replenish current production level. In 2011, exploratory drilling operations reached 150 thousand meters, which translates into almost 70% of total meterage of exploratory drilling. In the reporting year, 52% or 111.6 thousand meters of total exploratory drilling were performed in Khanty-Mansiysky Autonomous Okrug Yugra. The operations covered 59 license areas including 19 exploration areas. The Company completed 36 wells, discovered 2 fields, the Khoshiplorskoye field and the Logachev field, and 29 new oil deposits at the fields discovered earlier. We are following our program for additional exploration of underlying beds by sidetracking from wells under development due to which 4 oil fields yielded commercial inflow. Thus, the cumulative C1+C2 reserves growth in the Okrug exceeded 93 mn tons. Surgutneftegas owns 8 licenses for the right to use subsoil resources sites within Yamalo-Nenetsky Autonomous Okrug. In the year under review, prospecting and exploratory drilling reached 20.8 thousand meters with 9 wells completed. Surgutneftegas performed field seismic surveys of 990 linear kilometers, as well as office study involving data obtained from the Soimlorsky, Severo-Soimlorsky, Vostochno-Soimlorsky and Maloperevalny license areas. In 2011, prospecting and exploration drilling in other West Siberian regions exceeded 17 thousand meters with 6 wells completed. To keep reserves geological structure current, we carried out reprocessing and reinterpretation of the seismic data of past years, and obtained detailed specification of the structures which had been discovered earlier. In the reporting year, due to the results of exploration activities within a number of license areas, the Company resolved to terminate the right to use subsoil resources earlier and transfer the areas at which further exploration had been found inexpedient to non-licensed stock of areas. 22

EASTERN SIBERIA Surgutneftegas owns 26 subsoil licenses in Eastern Siberia. The Company is striving to increase exploration to develop the resource potential of the region and create sound foundation for future production activities. In 2011, prospecting and exploration drilling grew by 14% vs. 2010 and totaled over 50 thousand meters. Meanwhile, 2D seismic surveys rose by 34% and covered almost 5 thousand linear kilometers and 3D seismic surveys increased by 3.5 times to 840 sq km. Surgutneftegas owns 19 licenses for use of subsoil resources in the Republic of Sakha (Yakutia). In the year under review, prospecting and exploratory drilling within the region amounted to 43.6 thousand meters; 13 prospecting wells and 16 exploration wells were completed. The drilling efficiency reached 79%. The Company carried out 2D and 3D seismic surveys covering 4.8 thousand linear km and 840 sq km, respectively. Besides, 2 wells underwent vertical seismic profile survey. Two new oil deposits were discovered at the Talakanskoye field, 1 oil deposit at the Severo-Talakanskoye field and 1 gas condensate deposit at the Vostochno-Alinskoye field. The cumulative growth of C1+C2 reserves including oil and gas condensate amounted to 41.7 mn tons that is 7.7 times higher than annual crude output in the region. Surgutneftegas owns 5 licenses in Irkutskaya Oblast acquired to explore and produce crude hydrocarbons. In 2011, exploratory drilling meterage reached 6.4 thousand meters. Seismic surveys of the Pilyudinsky, Ichersky, Nizhnenepsky and Rassokhinsky license areas, allowed the Company to ensure increment of prospective oil reserves. The seismic survey program was completed at all Company s licensed areas in the Oblast. In Krasnoyarsky Krai, we own the Studeny and Agapsky license areas. In the reporting year, the Company performed analysis of G&G data and revised seismic profiles of the Studeny license area to make the research more study and discover new oil deposits. As for the Agapsky license area, in 2011 Surgutneftegas covered 100 linear km of seismic profiles being well ahead of the schedule specified in the licensing agreement for seismic surveys. 23

TIMANO-PECHORA Timano-Pechora oil and gas province is the Company s promising area. Thus, our main objective for today is to discover, assess and prepare reserves for hydrocarbon production in the area. Surgutneftegas has 9 licenses for use of subsoil resources. In the year under review, prospecting and exploration drilling reached 16.4 thousand meters with 2 wells completed. As the result of its prospecting and exploration efforts, the Company discovered 1 oil deposit. As part of R&D program, Surgutneftegas reprocessed and reinterpreted primary seismic data obtained from the Nenetsky and Korobkovsky license areas and created 3D geological models of 7 productive formations. The Company continued to perform core treatment, feature composition and properties of formation fluids and justify reserve estimate parameters. INTERNATIONAL PROJECTS OJSC Surgutneftegas participates in the project of the development of Junin-6 block located in the Orinoco Oil Belt in the Bolivarian Republic of Venezuela. The Company is the owner of 20 per cent stake in LLC National Petroleum Consortium (LLC NNK ) which promotes interests of the Russian oil companies within JV PetroMiranda established to develop Junin-6 block. Forty per cent of PetroMiranda belongs to LLC NNK and 60 per cent is owned by Corporacion Venezolana del Petroleo S.A., a subsidiary of the state-owned oil and gas company Petroleos de Venezuela S.A. The block is located in the central part of the Orinoco Oil Belt within the territory of 447.85 sq km and has estimated reserves of 10.96 bn barrels of recoverable heavy oil. In 2011, the joint venture continued implementing the first phase of the project related to the seismic surveys and design studies. The joint venture was also engaged in preparation of strat well drill sites, at one of which it lunched assembling of a drilling rig at the end of the reporting year. The project participants 24

are considering options of oil production acceleration in the northern part of the block to be started in as early as 2012. Plans and prospects In 2012, OJSC Surgutneftegas will continue its additional exploration operations in the existing license areas, as well as acquiring new reserves in every region of its presence to expand its license portfolio and ensure long-term sustainability. Prospecting and exploratory drilling is expected to grow by about 4% to 224.7 thousand meters and the main scope of operations (67%) is to be performed in Western Siberia. 2D seismic surveys are planned to cover over 3.1 thousand linear km. The Company intends to increase detailed 3D surveys by 1.6 times to 1.9 thousand sq km. 25

OIL AND GAS PRODUCTION In the upstream sector, Surgutneftegas follows balanced development policy based on complete resource extraction possible and advanced technologies of hydrocarbons production and EOR methods. In the year under review, the Company increased its oil production by 2.1% against the previous year to 60.8 mn tons and produced 13.0 bcm of gas. The investments in oil and gas production amounted to RUB 142.8 bn with 5.8% of organic investment growth. The remaining increase relates to the 2011 year changes in accounting of sidetracking operations. As for the investment structure, the largest part of investment (85.6%) was made in the core region of Company s operation Western Siberia, 13.7% - in Eastern Siberia and 0.6% - in Timano-Pechora oil and gas province. Crude oil production In 2011, OJSC Surgutneftegas was engaged in development of 60 oil fields including 57 fields in Western Siberia and 3 fields in Eastern Siberia. Over 66% of the total production output come from the Company s ten largest fields many of which are mature, with hard-to-recover reserves and high water cut, which requires secondary and tertiary stimulation as their production rate is declining. However, the Talakanskoye, Severo-Labatyuganskoye and Rogozhnikovskoye fields which have been commissioned recently make a significant contribution to the Company s oil production. We are striving to develop new hydrocarbon reserves on a stable and continuous basis. To this end, in the reporting year, Surgutneftegas commissioned 5 oil fields including the Vostochno-Studenoye, Zapadno-Sukuryaunskoye, Losevoye and Suryeganskoye fields in Western Siberia, and Severo-Talakanskoye field in Eastern Siberia. For five last years, the Company commissioned 13 new oil fields. Oil production in 2011, by field 26

Output, Fields thousand tons Fedorovskoye 8,457 Talakanskoye 5,271 Severo-Labatyuganskoye 4,952 Lyantorskoye 4,950 Zapadno-Surgutskoye 3,349 Bystrinskoye 3,235 Rogozhnikovskoye 2,767 Konitlorskoye 2,581 Vachimskoye 2,406 Russkinskoye 2,226 Other 20,587 In 2011, the Company s production increased by 1.2 mn tons mostly due to production growth of 62% in Eastern Siberia. The Company showed minimum decline of production rate (less than 1.5%) for the last 5 years in Western Siberia, a traditional region of its operation, mostly by virtue of expanded exploration drilling scope and various EOR methods. In the year under review, exploratory drilling exceeded 4,530 thousand meters (a 7.9% increase vs. 2010). The Company commissioned 1,403 new oil wells with average daily well flow rate of 26 tons. The Company s drilling divisions which have both extensive experience and developed material and technical base, and are able to perform drilling operations promptly and to a high standard contribute greatly to oil production growth. Thus, in the year under review, 26 drilling crews drilled over 100 thousand m of meterage. The average active well count increased by 4.0% and amounted to 18,668 wells. Inactive well count accounted for 1,372 wells or 6.8% of the operating well stock. In 2011, the Company kept maintaining the stock utilization at high level of 0.934 due to better efficiency of the operating conditions and methods. As part of efforts to enhance reliability of oilfield and pumping equipment, and introduce new facilities and technologies, in the year under review, average time between maintenance of the Company s producing wells reached 827 days. To enhance oil recovery, we implement workover programs to stimulate productive formation taking into account geological structure and physical parameters of every deposit. In 2011, the Company performed 693 sidetracking 27

maintenance operations (a 5% increase vs. 2010), 736 hydraulic fracturing operations within its operating stock (a 17% increase vs. 2010) and commissioned 156 horizontal wells. The cumulative effect from the program made it possible to produce over 13 mn tons of additional oil. In 2011, the Company was making efforts to reduce unwanted fluids production as part of its program on periodic operation of highly watered well stock and targeted implementation program on operation of idle and non-commercial wells. To mitigate water injection amount, we applied the improved secondary production system and water flooding program which are aimed at water cut reduction. Surgutneftegas actively develops and applies in-house EOR technologies, as well as cooperates with the leading service companies to improve geological modeling process and choose the best development techniques. Field development in Eastern Siberia made it possible to compensate for declining oil output in traditional regions of the Company s presence. Today, we operate 3 fields in the region: the Talakanskoye, Alinskoye and Severo- Talakanskoye fields where the production output reached 5.4 mn tons in 2011. Continuous development drilling expansion allowed the Company to drill 207 thousand m in 2011 (a 23% increase vs. 2010) resulting in 121 new wells with high performance of as much as 55 tons of oil daily. Proper infrastructure created by the Company in the region ensures success development of new fields under difficult production conditions of Eastern Siberia. In the reporting year, Surgutneftegas continued developing the infrastructure. To this end, the Company completed construction of oil and gas pipelines and power supply lines at the Severo-Talakanskoye field, as well as launched construction of the Company s airport to reduce costs and delays and improve material supply in the region. Gas production On the gas production side, OJSC Surgutneftegas is striving to enhanced gas use efficiency and maximum utilization rate. Every year, the Company makes planned actions to improve existing gas gathering infrastructure and commissions new facilities to enhance transportation capacity. 28

Surgutneftegas produces mainly associated gas, therefore its production amount directly depends on the Company s oil output. Declining oil production from the fields with the highest gas ratio is accompanied by lower associated gas production. In 2011, the Company produced 12.9 bcm of associated petroleum gas and 11.4 mn cub m of natural gas. In the year under review, gas utilization rate hit 97.8% reaching a record high among the Russian oil companies. We are striving to effectively utilize produced gas. Thus, in 2011, the major portion of gas produced (55%) was delivered to the Company s gas processing plant, 21% was sold domestically, over 11% was supplied to the Company s gas turbine power plants (GTPP) and gas piston power plants (GPPP), and 13% was consumed as fuel and used for process purposes. In the reporting period, Surgutneftegas delivered 1,473 mn cub m of gas to its power plants. As of the end 2011, the Company operated 8 transport compressor stations, 1 compressor station for reservoir repressuring by gas injection and 17 compressor stations of low-stage separation at its fields. In the year under review, Surgutneftegas upgraded the operating equipment, expanded gas utilization capacity, mounted 19 gas distribution units of two stages of separation, performed maintenance overhaul within 22 transport compressor stations, as well as commissioned 3 compressor stations of final separation stages, a gas processing unit of the compressor station at the Talakanskoye field, a gas compression and processing unit of the central oil gathering unit at the Rogozhnikovskoye field, and built nearly 170 km of gas pipelines. Cost control program Year after year, OJSC Surgutneftegas implements its complex cost-cutting program designed to ensure control and mitigate expenditures within the Company s business. The program is aimed at improvement of the technical and organizational levels of production, enhancement of efficiency of production capacity and key assets, saving of raw and other materials, import substitution and reuse of equipment. 29

In 2011, the economic benefit of the program totaled RUB 5 bn or RUB 82.7 per ton of oil produced, including 44% for auxiliary operations, 26% for core operations, 14% for drilling and capital construction, and 2% for social sphere. Energy saving is considered as one of the principal priorities within the Company s cost saving program. As the result, we are actively engaged in implementing energy-efficient technologies, optimization of electric system performance and regulation of power consumption. As part of the program, in the year under review, Surgutneftegas focused on increasing capacity utilization of the existing gas turbine power plants at the Konitlorskoye and Rogozhnikovskoye fields, decommissioned highly watered and non-commercial production wells and classify them under different categories, as well as replaced its pumping equipment and implemented electric motor converters of various units. As part of the program, in the year under review, Surgutneftegas focused on increasing capacity utilization of the existing gas turbine power plants at the Konitlorskoye and Rogozhnikovskoye fields, decommissioned highly watered and non-commercial production wells and classify them under different categories, as well as replaced its pumping equipment and implemented electric motor converters of various units. In the reporting year, the economic benefit reached over RUB 718 mn, power savings amounted to 573 MW and energy consumption was reduced by 343 mn kwh. Reuse of production materials and implementation of special equipment and technologies allow Surgutneftegas to reduce materials consumption and production time when performing specific types of operations. In 2011, the materials reuse program brought as much as RUB 1 bn of the economic benefit. As part of the import substitution initiative, the Company cooperates with domestic equipment manufacturers and R&D centers to search opportunities to make the equipment identical to that produced abroad. Such cooperation provides significant economic benefits and makes it possible to build long-term relations with the partners, as well as drives scientific and technical development of the Russian economy. In the year under review, the economic benefit of the program amounted to RUB 916 mn. Due to its well-organized service units, the Company is able to perform cost control within the whole production cycle in line with high quality of the works 30

performed. High-tech equipment of the service units together with experienced and highly qualified personnel contribute greatly to fulfilling the Company s tasks. Plans and prospects Surgutneftegas is planning to follow its strategy to expand oil production in new regions of its operation and stabilize the production rate in Western Siberia using its strong ability to perform considerable volumes of expedite and quality exploration drilling and accumulated experience of geological and engineering operations. In 2012, the Company intends to produce 61.3 mn tons of oil and 12.5 bcm of gas. Oil production in Eastern Siberia is expected to grow by 22% to 6.6 mn tons (over 10% of the Company s total output). In upcoming year, we are to bring into development 2 new oil fields in Western Siberia: the Vostochno-Sakhalinskoye and Soimlorskoye fields, commission 1,295 wells; meanwhile, development drilling is projected to reach 4.3 mn meters including as much as 200 thousand meters to be drilled in Eastern Siberia. To maintain its oil output, the Company will continue implementing the EOR workover program which comprises more than 6,800 well-operations of physicochemical effect on an oil reservoir. As for the gas production, Surgutneftegas is to further improve the associated gas gathering system via designing and launching construction of a compressor station at the Muryaunskoye field and facility complex of external gas transport from the Rogozhnikovskoye field, commissioning two GTPPs at the Vachimskoye and Vostochno-Surgutskoye fields, laying almost 116 km of gas pipelines. The Company s gas utilization rate is expected to reach 97.9%. 31

OIL REFINING AND GAS PROCESSING Oil refining and gas processing sector is one of the key elements of the Company s production chain. To this end, our priority area within the sector includes higher conversion ratio and better quality of the products meeting the world standards through the maximum efficient utilization of the existing business assets, revamping of the operating facilities and construction of new ones. Oil refining The Company s refinery, KINEF Ltd., is the largest Russian refinery in terms of throughput allowing for refining as much as 35% of oil produced by Surgutneftegas. The refinery has been successfully operating in northwestern part of Russia for already 45 years and has became a high-tech and constantly developing company which incorporates which incorporates the complexes LAB/LABS and IzoFlex producing waterproofing and roofing materials and feedstock for detergents. In 2011, refining throughput totaled 21.1 mn tons of hydrocarbons, including 2.3 mn tons of mogas, 5.0 mn tons of diesel fuel, 0.8 mn tons of jet kero, 10.9 mn tons of mazut, as well as a wide range of other petroleum products. In the reporting year, the Company enhanced quality of motor fuels, lowered production of the AI-76 gasoline and increased production of the AI-95 gasoline which corresponds to Class 4 and Class 5 standards under the Technical Regulations. This became possible due to commissioning of a benzene extractive distillation unit, higher yield of dissolvent (nefras), maximum use of an isomerization unit and a catalytic reformer, as well as inclusion of isopentane into gasoline production. Steady operation and maximum utilization of diesel hydro-treaters, as well as use of the second block of the L-24/6 hydro-treater for diesel winterized fuel conversion allowed the Company to improve its environmental product profile. As a result, since October 2011, Surgutneftegas abandoned production of diesel fuels with sulfur content of 0.2%. Along with continuous throughput KINEF Ltd. is persistently revamping and upgrading its production facilities and overhauling the equipment. In 2011, Surgutneftegas invested RUB 4.2 bn in retrofitting and upgrading of the refinery. 32

As part of its scheduled overhaul program, the Company maintained the ELOU-AT-1 crude oil distillation unit, performed final testing of the AT-6 unit and put into production run the modernized process control system which proved its value at the ABT-6 unit and ABT-2 unit. The system is equipped with virtual sensors (quality analyzers) which make it differ from other systems. The program is able to perform real-time assessment of the product quality parameters from available technical data, forecast the parameters for the nearest hours and execute feed forward operations to support set-up mode. The system is distinguished by its auto optimum mode selection which is applied after the unit reaches target values, and makes it possible to save energy and enhance topping processing. In 2011, the Company began using natural gas as fuel for some of the units to enhance production energy efficiency and mitigate air emissions. Commissioning of new facilities at the refinery will trigger a rise in natural gas consumption. Surgutneftegas will deliver natural gas to the deeper refining complex which is expected to become the Company s primary gas consumer. Since the Company is planning to increase production of light oils, it was decided to launch construction of an automated on-spot unit which will meet today s environmental requirements having hermetic loading arms and tank vapor recovery system. Daily estimated output of the unit will amount to 19.8 thousand tons of commercial yield. Currently, we are finishing construction of the deeper refining complex based on residue hydrocracking processes which is considered as the largest one in Europe. The complex will produce up to 4.9 mn tons of mazut, as well as highquality diesel fuel and jet kero. At the end of 2011, Surgutneftegas carried out comprehensive testing of a hydrodewaxing unit (with 2 mn tons/year capacity) constructed within the complex and obtained first end products required for production of hydrotreated diesel fuel with ultra-low sulfur content and enhanced low-temperature properties. The Company performed commissioning and start-up of an elemental sulfur unit and load-center substation No.2 which will deliver energy to the complex facilities, as well as completed and put into operation the extractive distillation unit which enables to reduce benzene content in gasoline as required by 33

Euro-4 standards. Meanwhile, we will increase production of benzene to meet demand of chemical industry. Thus, in the reporting year, the Company s investment in oil refining totaled over RUB 27.8 bn. Plans and prospects In 2012, Surgutneftegas is expected to refine as much as 20 mn tons of hydrocarbons with investments to be maintained at the level of 2011. The Company intends to continue technical upgrading of the existing facilities involving scheduled replacement of the outdated equipment. The deeper refining complex is to be commissioned on a phase base within the next year. The first startup phase will include commissioning of the L-24/10-2000 hydrodewaxing unit, second line of the elemental sulfur unit and load-center substation No.2. The Company is expecting to commission the complex by the end of 2012, as well as complete construction of the on-spot system for loading light petroleum products. In 2012, KINEF Ltd. is projected to produce 0.8 mn tons of diesel fuel of Euro-4 and Euro-5 standards. In the short term, Surgutneftegas is planning to construct the LK-2B-95 complex which will make it possible to produce gasoline under Euro-5 standard. Gas processing Gas processing is a fundamental part of the Company s integrated system of gathering and utilization of associated petroleum gas. After its purchase in 2002, the gas processing plant has underwent a large-scale development resulting in higher processing capacity, upgraded technological infrastructure and application of new automated process unit control systems. In 2011, the Company processed 7.4 bcm of gas. The gas processing plant is equipped with the cutting edge and high-tech facilities. Surgutneftegas puts much effort into upgrading and revamping of its production facilities. To this end, in the year under review, we replaced durable equipment during the turnaround maintenance of gas compression and processing units No. 1 and No. 2, put into operation waste and dry gas return pipelines in gas processing shop No. 1 and gas storage facilities, and set variable frequency drives 34

for the delivery pumps and ventilators of boiler house No.1. These measures allowed the Company to enhance technical process efficiency, reduce energy consumption, as well as ensure trouble-free operation of equipment. Thus, in 2011, the Company s capital investments totaled RUB 138 mn. Surgutneftegas produces a wide range of marketable end products. In the reporting year, the Company produced 7.1 bcm of dry stripping gas and as much as 760 thousand tons of liquid hydrocarbons (a 5.3% increase vs. 2010). In 2011, a significant change in the Company s product output structure took place: share of natural gas liquids (NGL) in the total output fell from 69% to 12%, whereas production of propane-butane grew and reached about 70%. It was mostly due to commissioning of a propane-butane block, since the product has great value added and is in sustainable demand in the market. Gas processing is controlled in real-time by automated control system OKO TsITS allowing for gas processing control and operational decision making in case of emergency equipment shutdown. Plans and prospects In 2012, our projected investments in gas processing are to amount to RUB 715 mn. To this end, the Company will be focused on construction and revamping of facilities, as well as supporting its key assets. In the upcoming year, Surgutneftegas expects to process 7.2 bcm of gas and produce over 670 thousand tons of liquid hydrocarbons. 35

SALES OF PETROLEUM PRODUCTS As for petroleum products marketing, OJSC Surgutneftegas is primarily aimed at maintaining and strengthening its competitive position providing continuous service improvement. In response to the objectives mentioned above, the Company s marketing subsidiaries consistently implement the program of gas station construction and overhaul, expand marketing network of the related goods and services, optimize the supply logistics and asset profile. Surgutneftegas marketing subsidiaries located mainly in the northwest of Russia are of paramount importance for the consumers of the region in terms of fuel supply. The subsidiaries conduct wholesaling, retailing and storage of petroleum products and render supplementary services. In 2011, Surgutneftegas marketing network sold 1,600 thousand tons of petroleum products, including 898 thousand tons, or 56% retailed through its gas stations. In the reporting year, the boosted fuel demand on Russia's domestic market and effective marketing activity allowed the Company to demonstrate a 21% rise in retail sales, when each gas station sold 8.3 tons of petroleum products per day. At the end of 2011, the Company ran 298 gas stations. All marketing subsidiaries upgrade and overhaul their gas stations. For the last five years the amount of capital investments in the sector has doubled which enabled Surgutneftegas to vastly reconstruct buildings and structures, upgrade the existing gas stations and perform the construction of the new ones, as well as purchase a number of effective assets. In the year under review, capital investments amounted to RUB 1.1 bn, which is 53% up compared to 2010, whereby the Company overhauled 11 gas stations, acquired and constructed 6 new ones. All the overhauled gas stations put into operation comply with up-to-date quality and safety standards and have a wide range of related service facilities. Service is utterly crucial for modern gas stations. So, the Company s gas station network offers 288 convenience stores and sales outlets, 25 cafés, 24 repair 36

stations and other social amenities. Surgutneftegas revenue from the related activities shows a sustainable upward trend. In 2011, the previous period growth surpassed 13%, and it accounted for 20% of some gas stations total revenue. One of the ways to develop the Company s marketing network is the commissioning of fully automatic gas stations enabling lower construction and maintenance costs. Such station requires relatively moderate-size location, and one fuel-dispenser can run up to 100 fueling operations per day with various grades of gasoline and diesel. Effective operation of the marketing subsidiaries also depends on reliable supply chain of petroleum products to gas stations. To improve its supply chain Surgutneftegas has implemented and operates satellite systems to track vehicles and "driver-traffic operator" communication together with 1C:Transport Program, and the fuel amount in tanks is automatically controlled. Surgutneftegas has an extended network of oil tank farms; in order to improve the Company s asset profile we carry out annual analysis of the asset use efficiency, lay up and sell some of the capacities, modify the employed facilities and bring them in compliance with present-day requirements. During the reporting year we conducted tank inspection and calibration, together with equipment replacement. Marketing subsidiaries offer supplementary services to their customers, including cash and non-cash payment by bank and fuel cards. In 2011, almost 20% of all settlements were made by electronic plastic cards used to pay for fuel, goods and different services, and get discounts. The Company s marketing subsidiaries have their own accredited testing laboratories ensuring the fuel quality and compliance with environmental standards. The quality of the marketable petroleum products is monitored at every stage of the fuel flow process. Every day, laboratories select samples of petroleum products upon their supply, during storage and marketing from the oil tank farms; besides, they conduct tests for third-party companies. Plans and prospects Major plans of the Company s marketing subsidiaries involve further reconstruction of the existing gas stations, and construction of new complexes with modern facilities of related infrastructure. Some oil tank farms are intended to have automatic loading arms to speed up tanker trucks filling. 37

In 2012, the Company s investments in petroleum products marketing will surpass RUB 900 mn. Surgutneftegas is to commission 12 gas stations, including 10 overhauled and 2 new ones. Marketing subsidiaries will further maintain high standards of motor fuel retail and adhere to product quality requirements. 38

POWER GENERATION The development of small power engineering is among priorities of OJSC Surgutneftegas. The Company constructs in-house power stations, works out and implements energy-saving solutions, and introduces energy-efficient technologies at all production stages, which provides additional advantages in achieving production and eco-targets. Annually, OJSC Surgutneftegas develops new oil fields and increases the number of wells; natural depletion of the deposits brings along enhanced liquid production and water injection to maintain reservoir pressure which results in growing power demand. Considerable expenditures for electric energy stipulate the compulsory control of resource management, introduction of energy-efficient technologies, and development of in-house power generation facilities. The Company actively employs the capacities of its own gas turbine power plants (GTPP) and gas piston power plants (GPPP) running on associated petroleum gas. Therefore, we are able to reduce the costs associated with third party power purchase, and construction of infrastructure connected with electric power supply and associated gas transportation; and successfully tackle a problem of gas utilization. In 2011, OJSC Surgutneftegas operated 19 GTPP and 7 GPPP with total capacity of 680 MW. In the reporting year, the Company generated 4.2 bn kwh at its own power stations (a 16% increase against the last year). The power output rose to 35% of the overall power consumption (in comparison with 32% in 2010). All power used in Eastern Siberia is produced by the Company s power stations, and the capacity of the constructed GTPP and GPPP offers additional electric supply to main pipeline facilities. The development of in-house power generation is also stipulated by considerable emissions reduction. In 2011, the operation of GTPP, GPPP, and gas-turbine compressor stations allowed us to prevent the emission of over 760 thousand tons of pollutants. While developing in-house power capacities OJSC Surgutneftegas pays much attention to development and implementation of energy efficiency programs. 39

In 2011, the Company established energy efficiency department within Energy Division. The main aim of the Department is discovering and application of energy conserving technologies in all spheres of production activity. In the year under review, we continued to implement the project, which is a part of the Energetika software solution, and which is aimed to develop accounting and analysis system for consumption and generation of electric power and capacity. Integrated approach to the project development enables the Company to perform technical record-keeping together with consumption and price analysis of the power used in different production processes; this promotes effective operation of the electric equipment and selection of the best energy mode. The Company s achievements in the sphere of power-saving earned Russian and international awards. In 2011, OJSC Surgutneftegas won the annual prize Let s Save Energy 2011 as The Best Power-Saving Regional Project. Besides, the Energetika software system allowed Surgutneftegas to win SAP Quality Awards 2011. Plans and prospects In 2012, Surgutneftegas expects a 4.7% increase of in-house electric power generation up to 4.5 bn kwh, which will satisfy 36% of the Company s energy demand. The Company is to commission two gas turbine power stations at the Vachimskoye and Vostochno-Surgutskoye fields with the capacity of 36 MW each. In 2012, we plan to conduct an obligatory Company s energy inspection. 40

RESEARCH AND TECHNOLOGY Advanced technologies and developments, state-of-the art equipment and materials, innovation, scientific and intellectual assets constitute vast potential of the Company s further progress. For many years, advanced R&D projects have been facilitating the Company s effective operation, in addition to in-house innovative solutions based on cutting edge sector s technologies and peculiarities of the internal production processes. R&D PROFILE Surgutneftegas attaches much significance to the advancement of science considering it to be the foundation of the effective production. The Company s R&D profile is represented by two largest institutes the SurgutNIPIneft Research and Development Institute and Lengiproneftekhim Institute for Engineering of Petrochemical and Oil Refining Facilities. In 2011, the SurgutNIPIneft Research and Development Institute celebrated its 25 th anniversary; this organization provides R&D activities for oil and gas production. The Institute is a major credible design institute for the Company s field facilities construction. For 25 years, SurgutNIPIneft had carried out thousands of scientific research on almost all Surgutneftegas businesses: geology, exploration and estimation of hydrocarbon resources, well construction, operation and workover, enhanced oil recovery, and oil production stimulation. Works on replacement and extension of mineral reserves in traditional and new regions of the Company s activity are critical for us. When developing fields in harsh climate areas and orohydrographic conditions Surgutneftegas follows scientific justification, and improvement of development methods and technologies for deposits with various geological structures, including hard-to-recover reserves of all classes. Many methods were implemented on the basis of design documentation for field development, and recommended EOR projects. The most known of them are second to none in the world productive development systems for thin oil margins with underlying bottom water and extensive overlying gas caps, and closed-loop watering systems. All 41

these measures ensure highly profitable crude production corresponding to strict environmental safety regulations. In 2011, the Institute carried out 83 researches, supervised geological models for 136 field deposits and licensed areas of the Company, and provided such models to prepare project documentation. LLC Lengiproneftekhim arranges comprehensive engineering research for oil refineries, petrochemical plants and shale refining companies. LLC Lengiproneftekhim is involved in preparation of modernization and reconstruction project for LLC KINEF, Surgutneftegas refinery. In the year under review, we completed the development of the project and working documentation for the deeper refining complex and an on-spot station for loading light oil products to rail tank cars. To improve its performance, the Institute employs up-to-date equipment and software, such as AVEVA PDMS 3D (computer-aided design system) with deep integration of all its modules which allows to register all 3D model changes during designing and speed up the fulfillment of the works. INNOVATIONS Innovation policy is a key element of the corporate development strategy. The Company is committed to work-out and update IT, crude output and electric power solutions, involve the staff to meet production and process challenges, encouraging and promoting sci-tech and innovative activity of the employees. Surgutneftegas scientists and experts boast a number of unique innovations, projects and software solutions which offer real potential for new competitive advantages. In oil and gas production, the Company ran 309 operations to introduce new engineering processes and new types of production methods and equipment with total economic effect resulting in RUB 9.7. The strongest effect was observed in the sphere of enhanced oil recovery (33%), well maintenance and workover (29%), crude output and formation pressure maintenance (13%), well construction (12%), gas production and transportation (8%). The use of advanced technologies in OJSC Surgutneftegas" is primarily intended to enhance oil recovery, also through hard-to-recover reserves put into 42

production. As for this area of the innovative activity, the Company considers it promising to discover unique technology to develop the Bazhenov group reserves which can guarantee Surgutneftegas a consistent oil production ramp-up in the next few decades. We proceed to implement new well workover technologies using coiled tubing which is used to increase the amount of recoverable reserves. In the reporting year, we developed liner running system for post factum underbalanced drilling which is second-to-none in Russia. This technology helps preserve characteristics of productive formation, extend life of well, and construct multilateral wells. As for electric power sector, the most significant economic effect arose from automated boiler houses at the Bystrinskoye and Fedorovskoye fields, along with implemented electric pulse units to repair steam boilers and applied portable infrared imagers to control electric equipment. In the field of utility vehicle operation, we benefited from the Vehicle Performance Control system, centralized repair of imported road-building machinery parts and units, and employment of advanced motor and tractor machinery. Surgutneftegas is known to be a responsible corporate citizen that concerns about environmental safety of its production and, therefore, runs cutting edge equipment and technology. The Company s experts together with leading research centres have created a number of high-efficiency technologies ensuring substantial lessening of environmental impact. Advanced technologies for waste recycling enabled Surgutneftegas to recover almost 82.2% of waste products. Annually, Surgutneftegas tests new equipment and technology. In the year under review, the Company tested 81 models of new equipment, 60 of them with positive results. The most effective ones: T-shaped electric heater for Christmas tree of producing well, UNBT-1180L mud pump, MANITOU 1850 general purpose construction loader with integral implements and rotating platform. As part of Geographic Information System (GIS) project, we performed 37 activities, including tests of Global Navigation Satellite System (GLONASS/GPS) on aerosurvey complex, motor transport, and survey equipment. Efficient management of intellectual property and encouragement of the staff creativeness are essential parts of the corporate policy. Active participation of the 43

Company's employees in innovations and inventions ensures new scientific, design and engineering solution for production challenges. In 2011, innovative activity involved 3,349 authors, and 2,351 innovative solutions were implemented providing the economic benefit of RUB 478 mn. Today, the Company s production operates 248 intellectual property items. In the reporting year, we made and asserted 12 intellectual property patents to the Federal Institute of Industrial Property, received 8 documents of title and registered 9 intellectual property items. The economic effect produced by use of intellectual property in 2011 totaled RUB 238.9 mn. Every year, OJSC Surgutneftegas presents its developments and technologies on the specialized oil and gas exhibitions. In 2011, the Company supported XVI International Exhibition Surgut. Oil and Gas held in Surgut and hosted over 100 companies from Russia, CIS and non-cis countries; most of the participants have proved to be steady and committed partners of Surgutneftegas. The exhibition, which has become a tradition, promotes domestic and foreign scientific achievements, and brings along mutual cooperation within oil and gas industry. We also participated in VI International Exhibition Investments and Innovations. Western Siberia held in Khanty-Mansiysk. New technologies in oil refining are used to predict catalyst performance, perform equipment anti-corrosion protection, optimize facilities operation, and improve the production technology. In 2011, we performed scientific research to enhance product quality and improve units operation. In the year under review, LLC KINEF provided 21 innovation proposals, while 22 developments were used in production and yielded the benefit of RUB 55 mn. As for petroleum products marketing, we upgraded transport monitoring system with use of GLONASS/GPS system which stores and analyses vehicle data. Moreover, we developed remote monitoring systems for petroleum products measuring and recording used at tank farms and fuel stations. INFORMATION TECHNOLOGIES Any modern successful company considers IT to be an indispensible part of its business facilitating better management of production assets, safe and trouble- 44

free equipment operation, and control processes automatization. Today, OJSC Surgutneftegas runs automated control systems in all business fields. In power sector, the Company implemented automated power recording system. Information from microcontrollers on electric power commercial metering points is transmitted to control rooms of power supply business unit and central engineering-technological service in all Company s oil and gas production divisions. Therefore, we are able to keep constant control of energy consumption and promptly regulate it. In the future, the Company plans to develop decision support systems to create an algorithm offering an operator a range of measures to eliminate equipment faulty operation. In the reporting year, the Energetika software system allowed Surgutneftegas to win Gold of SAP Quality Awards 2011 as Medium and Large Implementation (CIS region). SAP Quality Awards prize is to recognize customers that have achieved excellence in planning and executing their SAP projects and programs. In the second round of SAP Quality Awards 2011, OJSC Surgutneftegas competed as Medium and Large Implementation on the level of EMEA region (Europe, Middle East & Africa) with German, French, British, Dutch, and other companies presented almost 60 projects. It was for the first time during the entire history of SAP Quality Awards and 18-year experience of SAP in Russia when CIScompany passed to the second round. In the second round, OJSC Surgutneftegas won Silver and outran many world s major companies. In oil and gas production sector, all the Company s oil and gas production divisions exercise on-line control of oil and gas production results versus prescribed amounts, and monitor field equipment operation using such systems, as OKO- TsITS, Video Screen, and Well Stock Unified System which conduct real-time analysis and systematization of live information received from the OKO field systems and based on the data from the Alpha oilfield portal. In 2011, the Company put into operation information system OKO-TsITS Development, Alpha complex to perform regular operational monitoring of processing equipment used by each development crew, prompt dispatching management, and information analysis when considering emergency situations. 45

To automate oil treatment and pumping capacities, and support facilities we are currently implementing the developed solution Process Control System of Onsite Facility. All new and overhauled facilities are equipped with this software allowing for process management. This will allow us to reduce human factor and increase fail-operational capability of the capacities. To accelerate data transfer and exercise intelligent algorithms for equipment control, telemetry controllers were replaced with next gen devices in the year under review. In 2011, operating well stock equipped with production rate telemetry systems accounted for 99.96%, artificial-lift well stock controlled remotely reached 99.84%, and operating injection well stock equipped with water injection flow meters accounted for 99.85%. In the reporting year, we launched to outfit gas metering stations of the third party buyers with telemetry system. At the present day, we have performed an effective data transfer from more than 60 commercial gas metering stations of the third-party purchasers and Surgutneftegas division units. In 2011, we tested and put into commercial operation the "Vehicle Control software system based on the GPRS NAVIGATOR-S hardware function and used to obtain and analyze information on fuel consumption, recording the rout trail, and perform operation mode control. We also implemented new toolset of IT security system and access differentiation system within the corporate computer network. Surgutneftegas organized internal and external electronic document flow and intercommunication, including the use of e-digital signature. In the course of the year, we proceeded to develop and improve corporate software systems for production monitoring and on-line process management of oil and gas production, transportation and treatment; effective subsurface use and operating wells employment. In the year under review, the Company s refinery worked out new modules and updated existing software and information application to better the integrated management control system and improve recording and control of feedstock, materials, and equipment. 46

As for petroleum products marketing, we upgraded software and hardware systems allowing for new methods of data processing, analysis and transfer. We also continued to update the Parus automated control system of the corporate marketing units and integrate it with Surgutneftegas information systems. 47

SOCIAL RESPONSIBILITY ENVIRONMENTAL INDUSTRIAL SAFETY Balanced combination of economic, social and environmental activities is a major business principle of OJSC Surgutneftegas. In all regions of its presence, the Company gives paramount consideration to promotion of industrial and ecological safety, rational use of natural resources and preservation of the environment for future generations. One of the major priorities of Surgutneftegas environmental policy is to minimize adverse environmental consequences. Wherefore, we carry out annual ecological program covering such activities as environmental monitoring, protection of ambient air and water resources, production waste neutralization and recycling, prevention and response to pipeline accidents, protection and rehabilitation of land resources. The Company maintains sustainably high environmental investments. In 2011, Surgutneftegas investments amounted to RUB 22.2 bn, including RUB 20.4 bn in the upstream sector. The main aim of the ecological investment programs is to achieve global level of environmental safety at all production stages. In-house environmental quality monitoring and change assessment allow us to detect and control negative changes arising from anthropogenic factors. Environmental and emission sources monitoring was carried out in 125 license areas by 11 modernly equipped laboratories accredited to perform the analysis and radiation survey of 707 parameters, including 365 ecological ones. Moreover, to receive relevant information we extensively employ remote sensing data together with results of space survey, spectrozonal aerophotography and local digital shooting. Environmental industrial safety is a complex challenge which is primarily aimed at improving the field pipeline reliability and mitigation of oil and tank water spills. Since over 85% of accidents and incidents being caused by pipeline corrosion, our projects are primarily related to emergency diagnostics and corrosion protection. So, in 2011, we carried out pipeline corrosion monitoring in 699 48

inspection points of the most hazardous areas. Following the information received, we estimated the degree of the piped fluid aggressiveness and took the required protective measures. In the reporting year, more than 2.8 thousand km of field pipelines enjoyed corrosion protection with the effect of 85%-98%. The selection of inhibitor type depends on pipeline operating conditions. The specific consumption of corrosion inhibitors was at 1.85 tons/km in 2011 against 2.71 tons/km last year due to more effective reagents. Field tests of 10 new brands delivered positive results. In the reporting year, we replaced 530 km of accident-prone pipeline sections (a 29% up vs. 2010), laid 53.5 km of field pipelines with internal corrosion-resistant coating, and performed receiving destructive check of 21% of the total amount of the pipes purchased. We completed the overhaul of the Company s workshop performing the application of combined anti-corrosion pipeline coating with use of extruding press for enduring adhesion of the insulating layer, enhanced impact strength, resistance to pressing-through and light ageing. Pipeline corrosive wear is considerably reduced owing to initial water separation units (IWSU) which are extremely necessary in case of high water cut. In 2011, Surgutneftegas ran 103 IWSUs which allowed us to safely operate over 3,000 km of delivery pipelines in the mode of dehydrated oil transportation; besides, pipeline transportation demonstrates almost twice as small as energy and metal consumption. In the year under review, the number of accidents in industrial and pollutionrelated areas decreased by 29% from the previous year. To response to the accidents the Company s designated divisions exploit their manpower and resources, together with high-performance equipment and facilities. To perform efficient oil spill clean-up and land recultivation activities at remote boggy areas, the Company operates multifunctional floating platforms, including those equipped with attached system for water bodies and inshore zone integrated treatment. Additionally, to take counter-measures for oil spill clean-up within distant marshlands and lacustrine regions Surgutneftegas purchased 4 units of Doroskimmer 800 to collect and deliver bituminous oil. 49

In 2011, oil response units of all oil and gas production divisions were certified by the regional certification commission as volunteer accident rescue groups. Surgutneftegas prevention and response system for spills of oil and petroleum products is ready to immediately respond to local and regional emergencies. In 2011, we achieved the excellent results in rehabilitation of lands which had oil spills in previous years: we remediated 553 hectares, including 108 hectares being inspected and struck off the register; the total area of contaminated lands halved and by the end of the year totaled 85.5 hectares. Sludge pits located on the territory of Khanty-Mansiysky Autonomous Okrug Yugra are mainly restored via reforestation and revegetation (forest recultivation) without soil backfilling. Such technology allows us to mitigate environmental impacts and stimulate restoration of vegetative cover. Surgutneftegas air protection actions are primarily intended to reduce associated petroleum gas flaring and diminish air emissions. In the year under review, construction investments in air protection plants amounted to 85% of the total expenditures for environmental facilities. The Company proceeds with construction and exploitation of the small-scale power generation sites, gas transportation network, gas processing plants and gas metering stations. We inject gas to maintain formation pressure and use gas for in-house needs as fuel for oil treatment plants, boiler plants, and motor vehicle air-heating lines. Such comprehensive activities enable Surgutneftegas to steadily maintain leading positions in terms of associated gas utilization and gradually reduce atmosphere emissions. The Company devotes much attention to assembly and operation of dust and gas catchers installed on processing facilities. All the Company s vehicles undergo toxicity and exhaust smoking control. At the end of the reporting year, total amount of air emissions dropped by more than 12%. In 2011, we proceeded with environmental management and rational use of water resources. Surgutneftegas main activities in this sector include prevention of water bodies pollution with wastewater, industrial water and liquid effluents, as well as treatment and reuse of water resources. In the year under review, household wastewater, industrial and storm sewage used for injection into the reservoir 50

pressure maintenance system enabled the Company to save 1,171 thousand cub m of fresh water. We removed only 15.7% of the allowed fresh subterranean (artesian) water volume from this particular horizon. Over the past four years, the specific water consumption has remained at 2 cub m of water per 1 ton of produced oil. Surgutneftegas takes measures to cut down the amount of production and consumption residuals and minimize their environmental threat through neutralization and recycling. The Company actively processes oil sludge and oily soils using clean-up and thermal treatment methods. In 2011, the Company neutralized 29 thousand tons of oily wastes. Over many years, the employed technologies and equipment have helped us maintain a 100% level of disposal of these wastes and oil contaminated soils. In the reporting year, we obtained favorable test results for phase-separation of sludge collector s fluid by a centrifuge. This technology provides us an opportunity to carry out clean-up works with maximum safety for the environment. Four-stage drilling fluid and sludge treatment systems contribute greatly to the reduction of drilling wastes. In 2011, the Company operated 61 sets of such equipment, which meant the utilization of more than 89% of the total amount of the produced drilling sludge as soil for construction. Since 2008, Surgutneftegas has been implementing tire recycling program encouraging the reduction of transportation and processing expenditures. In 2011, the Company s tire recycling plant utilized 3.4 thousand tons of worn-out tires and inner tubes and produced 1.2 thousand tons of rubber crumbs to be used for road construction and maintenance. In the reporting year, Surgutneftegas used and neutralized 82.2% of the wastes generated and received during operating activities. In the oil refinery sector, Surgutneftegas introduces annual measures for protection and rational use of water and land resources, ambient air, and utilization of production residuals. In the year under review, LLC KINEF made capital investments in wastewater treatment and sound water resources management, as well as disposal and decontamination of industrial and consumption residuals. We pursued continuous ambient air monitoring, sanitary and bacteriological 51

examination of water resources, control of waste management operations and environmental impact of waste burial. In the year under review, we conducted operations of effective and comprehensive reactant circulation water treatment to protect the equipment and pipelines against corrosion, sludge collector cleaning, and normalizing storage ponds operation. The Company upgrades its treatment facilities and constructs a plant for bio and oil sludge dehydration and thermal decontamination. Gradually, KINEF refinery lowers the amount of industrial and consumption wastes. The company performs selective wastes collection to improve their disposal and recycling. In 2011, we recycled 5.1 thousand tons of construction wastes which were used at environmental sites. On the whole, KINEF environmental management investments exceeded RUB 1.8 bn. In 2011, Surgutneftegas marketing subsidiaries continued to enhance ecological safety of petroleum products receipt, delivery and storage. All the Company s marketing units have in-house accredited laboratories and conduct detailed analysis of hazardous substances in the fuel they sell, as required by law of the Russian Federation. On the territory of the marketing subsidiaries we conduct careful operational environmental monitoring of the ambient air, wastewaters, soils and water bodies. Oil tank farms and fuel stations pursue tank cleaning, tank facilities maintenance and repair. Plans and prospects In 2012, Surgutneftegas will further carry out the Ecology program with the budget of over RUB 22 bn. We plan to continue the construction of environmental facilities, such as landfills, sludge collectors, water and air protection sites. It is expected that Khanty- Mansiysky Autonomous Okrug Yugra will hold the construction of a sludge tank and a landfill to recover solid household and industrial wastes. Next year, the Company is to complete the reclamation of all lands suffered from earlier oil spills, and remove them from the register of RosPrirodNadzor Department (the Federal Service for Supervision of Natural Resource Usage). In 2012-2014, to enhance the efficiency and expand the performance capabilities of oily soil and sludge washing and cleaning facilities we plan to perform their 52

modernization and commission 7 phase separation plants for oil sludge, and 1 sludge thermal processing unit. To further diminish the risk of pipeline emergency situations in the coming year, we intend to construct 3 initial water separation units, test 3 new grades of multi-purpose corrosion inhibitors, and protect 2.8 thousand km of pipelines from rust. In 2012, LLC KINEF will construct and overhaul treatment facilities, and make better use of its storage ponds. Surgutneftegas marketing units will further control the quality of the fuel they sell, upgrade the facilities for petroleum products receipt, delivery and storage, and conduct scheduled maintenance of nature conservation facilities. 53

PERSONNEL DEVELOPMENT Highly skilled personnel is one of the key assets contributing to the Company's success. The Company s personnel development policy is aimed at improving professional skills of employees, realizing their full potential, and encouraging personal involvement in achieving corporate goals. In 2011, the Company s average number of employees exceeded 111,000 people, 89.5% of whom engaged in oil and gas production, 6.7% in refining, 3.7% in marketing. Over the years, the Company s human resources system helped maintain effective recruitment, training and skills development, support young professionals, improve morale-boosting and financial incentives, and encourage R&D activities. Training and professional skills development is among the Company's main priorities. Surgutneftegas provides various training options, such as distance learning courses, traineeships, off-site workshops and trainings. Personnel development department organized by the Company consistently implements a system for assessment and development of professional and technical competences of the employees, as well as identifies current training needs. Surgutneftegas boasts a continuing professional learning system represented by the Polytechnic Training Center (PTC). The Center is based in Surgut with three branches located in Surgutsky District and one branch in the Republic of Sakha (Yakutia). The Polytechnic Training Center provides a full-cycle education and a platform for development of practical skills. It is equipped with modern training facilities, and has unique training packages and a training ground outfitted with oilfield equipment enabling to simulate real operating conditions. In 2011, over 42,000 employees of the Company (or 42% of the total number of employees in the oil and gas segment) underwent job-related training, refresher and skills upgrade training. Among them, 26,000 people received training in the Company's training centers. In 2011, the Company spent RUB 467 mn on professional training and skills upgrade programs. 54

The Company pursues a comprehensive recruitment strategy. To motivate young people to get occupational training and attract the required candidates, Surgutneftegas cooperates with the educational institutions of the city of Surgut and Surgutsky District, and invites high school students to meet the Company s experts and visit its business units. Job-oriented training provided by higher and secondary educational institutions is the next step in the Company s multistep personnel development program. The Company collaborates with an array of domestic educational institutions, including Tyumen State Oil and Gas University, G.V.Plekhanov Saint Petersburg State Mining Institute, Surgut Oil Technical School, and Yakutsk State Agricultural Academy. Surgutneftegas provides financing for better training, new laboratories and special advanced programs. Tyumen State Oil and Gas University, the Company s key learning center, boasts a new lecture hall which bears the name of Surgutneftegas, new equipment purchased by the Company and a unique scientific learning center Neftyanik Surguta (Oilman of Surgut) with a computer classroom and 5 laboratories for petrophysical studies and drilling techniques where students learn to use on-site equipment. In 2011, we approved financing for a new geochemical laboratory. In 2011, the Company was one of the sponsors for the 65th Anniversary International Scientific Conference Oil and Gas 2011 and Conference "Innovative Techniques for Forecasting, Prospecting, Exploration and Development of Hydrocarbon Deposits and Priorities for Development of Resource Potential of the Russian Energy Complex organized by Gubkin Russian State University of Oil and Gas. In the reporting year, Surgutneftegas contributed to the equipping of scientific laboratories of the Oil and Gas Faculty of Saint Petersburg State Mining Institute, as well as preparation of Surgut Oil Technical School for a new academic year. Over years, the Company has been a member of the Management Board of the Association of the Boards of Governors administering educational institutions in the Republic of Sakha (Yakutia). At year-end, 1,796 employees were given job-related training, 76% of them being university students. There are 51 students among them who study under the Treaty on Cooperation in Economic Development of Lensky District Municipal Unit, the Republic of Sakha (Yakutia). To provide its future recruits with specific work 55

experience and reinforce their professional expertise, the Company organizes and supports all kinds of on-the-job internships. In the year under review, 2,149 persons got practical training in the Company s divisions. In 2011, Surgutneftegas hired 321 young professionals, including 136 jobrelated trainees. Outreach to youth and young professionals is one of the principal parts of the personnel development program. Following its youth policy, Surgutneftegas supports the Youth Association, which helps new employees adapt to the work environment, facilitate R&D involvement, and spot future leaders. In 2011, the Company held the 31st Annual Scientific and Technical Conference for young professionals and scientists of Surgutneftegas, which was attended by 709 speakers. Seventeen first-place winners were awarded a trip to the leading foreign companies to acquire the existing expertise in oil and gas production sphere. Young talents whose contribution was recognized as the most significant and economically viable received the Viktor Deshura Award. Likewise, the Company s young professionals demonstrate remarkable results at national and regional scientific conferences and forums. Annually, our people win first prizes in the Golden Future of Yugra contest. In the reporting year, 23 young employees took part, and 6 became winners of the 11th Scientific Conference for Young Professionals of the companies engaged in subsoil development within Khanty-Mansiysky Autonomous Okrug Yugra. Twenty nine employees took part in the Professional Engineers category of the 12th Annual National Contest Engineer of the Year 2011 ; five of them became prize winners. In addition, in the Young Engineering Talents category, nine employees were awarded diplomas and three employees won prizes. In an effort to achieve better performance results through personnel involvement, the Company introduced effective motivational tools. The Company s financial incentives involve premiums paid on an annual and quarterly basis to recognize strong production, technical and economic performance and contribution to saving the Company s material, technical, energy and financial resources. Traditionally, the Company s three best drilling crews from Drilling Divisions and Exploration Division were given the Alexander Usoltsev Award based on year-end 56

performance results. Employees of other business units engaged in well construction were also rewarded. Non-financial rewards are recognized by the Company as a powerful tool for leveraging employees performance, and a key element of the corporate culture making the personnel feel involved and aligned around a common mission. Morale-boosting efforts involve professional competitions, recognition, appreciation and promotion of the most productive employees. In the reporting year, the Company awarded 2,574 employees for significant contribution to profession; 1 employee received a national award and 401 employees got industry awards; 2,031 people were presented Surgutneftegas awards, including 29 employees who received badges of honor For Distinguished Service. 57

CHARITY AND SOCIAL ACTIVITIES Surgutneftegas, one of the largest employers and taxpayers, contributes significantly to development of the national economy and social progress. The Company is firmly committed to promoting social and moral welfare of the society, being a reliable partner for the government in providing sustainable and favorable social environment. Surgutneftegas meets this challenge through running various social programs and investing in areas of its presence. Collective bargaining agreement is the basic instrument which underlies the Company s social policy and stipulates extra social benefits and guarantees the employees are provided with. Annually, the Company develops varied programs designed to improve labour conditions, living and leisure environment, to provide recreation opportunities to employees and their families, and to support retired employees and veterans. Surgutneftegas provides substantial benefits and guarantees, which help improve employee productivity and maintain a healthy social and morale environment within the corporate community. In 2011, the Company became a regular winner in the regional Black Gold of Yugra contest, receiving the first prize in the categories "Social and Economic Partnership" and "Efficient Use of Mineral Resources, and the third prize in the category Cooperation with Aboriginal Population. Over the last 10 years, we have spent over RUB 100 bn on social programs, with RUB 17.5 bn invested in 2011 alone (over 10% increase on a year-on-year basis). Health Care The Company implements a package of measures aimed at maintaining and improving employees health. At 2011 year-end, we invested almost RUB 1.7 bn in health care program. Surgutneftegas strictly adheres to the applicable occupational safety standards, and carries out an ongoing monitoring of employees health through 58

regular and preliminary (pre-employment) health checks. In 2011, over 61,000 employees underwent health examination. To provide an emergency care onsite, the Company runs aid posts and health stations everywhere it operates. Totally, we maintain 25 aid posts, including 1 physician's office in the Republic of Sakha (Yakutia). The aid posts include 93 rooms for pre-trip and post-trip medical examination of drivers and 16 mobile medical units. With over 300 healthcare workers employed at aid posts, the Company conducted over 7 mn pre-trip and post-trip health checks in 2011 only. The Company gives special attention to disease prevention and health improvement of workers employed in severe weather conditions. Surgutneftegas provides its employees with ample recreational and treatment opportunities. In 2011, over 26,000 employees in the upstream sector (including residents of the Republic of Sakha (Yakutia)), their family members and pensioners received treatment in 13 health resorts located both in Russia and abroad. For this purpose, the Company spent over RUB 1.4 bn. Almost 95% of people improved their health at four recreation facilities run by the Company. Neftyanik Sibiri and Lermontovo, Surgutneftegas health resorts located on the shores of the Black Sea, annually welcome over 13,000 people. Over years, Yuny Neftyanik, the modern health center for children, has allowed to promote better health, encourage creativity and sport activities among youngsters. In the reporting year, almost 5,000 children of the Company s employees visited Yuny Neftyanik. In 2011, this child health center took the top prize in the category The Best Child Health Center in the contest Resort Olympus. Over ten years, Kedrovy Log, a one-of-a-kind Siberian multi-service health resort located in the Middle Ob area, has offered a wide range of treatments and therapies to its patients year-round. Its diagnostic center equipped with leadingedge medical facilities allows the patients to undergo complex medical check-in and get proper treatment. The resort offers a wide range of treatment and recreation services, and holds licenses for 59 types of healthcare services. In 2011, Kedrovy Log rendered health maintenance, recovery and rehabilitation services to over 7,000 patients. 59

Moreover, the Priozyerny health resort and the Mechta recreation center owned by LLC KINEF welcomed almost 12,000 of its employees and their families, including over 3,000 children. Work safety and production standards The Company is highly focused on healthy and comfortable work environment, and greater industrial and fire safety. With this in mind, we upgrade our production facilities and develop new process technologies appropriately which allows to reduce exposure to hazards. Along with improvements in process technologies, we take preventive measures against violations of occupational safety, provide training in safe working operations and procedures, and assess employees safety knowledge. Surgutneftegas seeks to provide better working conditions, and routinely assesses workplaces safety and checks them for compliance with safety standards, as well as identifies occupational hazards. At year-end, based on the workplaces reassessment results, the Company had 58,282 workplaces, including 55,300 workplaces of the 1 and 2 classes (normal working conditions), and 2,982 workplaces of 3.1, 3.2 and 3.3 classes (harmful working conditions). Due to measures intended to improve working conditions, replace equipment, machines and mechanisms, Surgutneftegas managed to reduce workplaces with harmful conditions by 193 workplaces with 784 employees engaged. Occupational safety is under our stringent control we regularly perform indepth inspection of occupational, industrial and fire safety. In 2011, Surgutneftegas inspected 7,142 oilfield and drilling equipment units, as well as 971 pressure vessel controls and hoisting units. Annually, the Company offers health resort treatment to the employees engaged in hazardous work environment. To this end, in 2011, the Company s expenditures totaled RUB 66 mn. To maintain optimum social and living conditions, the Company runs its Production Standards program which encompasses technical, organizational and hygiene-and-sanitary measures designed to create a healthier working environment. The Company s production facilities are outfitted with social 60

amenities, including modern office buildings, accommodations, recreation rooms for shift workers, and canteens serving meals three and four times a day. At 2011 year-end, the Company s residential areas, oilfields and industrial sites had 191 recreation facilities for shift workers with total area of 140,000 sq m, 406 canteens serving balanced meals several times a day to 24,000 employees daily. In the reporting year, Surgutneftegas commissioned 5 recreation facilities for shift workers fitted with 380 beds, 5 stationary canteens and 9 mobile ones serving hot meals. Annually, the Company performs upgrades and renovations of its social amenities. In the reporting year, the relevant costs totaled RUB 419 mn. Housing Under its Housing program Surgutneftegas performs residential construction with newly built property transferred to the Company's employees under purchase and sale or exchange contracts. In the year under review, the Company commissioned over 16,000 sq m of floor space and provided 457 employees families, including over 35 young families, with better housing conditions. We commissioned 5 new houses in Western Siberia and 1 house in the Republic of Sakha (Yakutia). Over the last 10 years, the Company has built 578,000 sq m of floor space, and provided over 8,000 families of its employees with comfortable apartments. Regional development promotion Over the years, Surgutneftegas has been one of the largest employers and taxpayers in Khanty-Mansiysky Autonomous Okrug Yugra and the Republic of Sakha (Yakutia). The Company s business is built upon principles of social partnership and mutually rewarding cooperation with the state and society. The Company contributes substantially to development of cities and districts, as well as supports educational, cultural and medical institutions. The Company's orders allow numerous enterprises in different industries of Russia to fully utilize their production capacities, thus producing a multiplier effect in related industries. Besides, we conclude agreements with local authorities to promote social and economic cooperation which allows to launch specific projects. 61

Development of the East Siberian oil and gas province is core to the Company s business, and we operate in the region following an integrated approach to production and social commitments. Over the time of its presence in the region, the Company together with the government of the Republic of Sakha (Yakutia) has constructed the following social facilities: Yakutsk State Agricultural Academy, a school and a child day care center in the village of Vitim, a sports center in the city of Lensk, a bridge across Taloye Lake, and a loading terminal in Vitim. Presently, the Company constructs the airport at the Talakanskoye field. This facility will form a crucial link in the region s transport network contributing both to the Company s operations and Yakutia community. Sport for all Surgutneftegas promotes healthy lifestyle and sports activities among a wider audience, and encourages physical development of both children and adults. The city of Surgut and Surgutsky District have 22 sport facilities, including 14 sports halls and 8 sport centers with gyms and swimming pools, which are used by over 18,000 employees and their families. In social partnership with Khanty- Mansiysky Autonomous Okrug Yugra, we constructed 4 modern football fields covered with artificial turf and 2 skate-ski trails. In the reporting year, we organized and conducted 567 sporting events, including 4 sport contests attended by almost 13,000 employees of 52 business units of the Company. At the end of the sport contests we held the competition Sporting Elite 2011 with the winners awarded in 41 categories. The Company s selected team became the winner for the second time among all Russian Energy Companies in National Sporting Competition run by the Ministry of Energy of the Russian Federation. The sporting facilities of the Company s refinery include Neftyanik Sports Center and the Water Sports Center. The Water Sports Center, the training ground for the national men s and women s water polo teams, annually hosts KIRISHI CUP, a prestigious international top-teams water polo tournament. The KINEF- Surgutneftegas women s water polo team represents Russia in international competitions, and is a regular winner at national and international championships. 62

In 2011, KINEF-Surgutneftegas won gold medals for the ninth time. Moreover, the national team comprising 8 KINEF-Surgutneftegas players became the winner in the KIRISHI CUP tournament. Veteran Veterans and retired employees receive our special attention. Appreciating the significant contribution to the Company s success, we take due care of our retired employees, which number exceeded 19,000 people at 2011 year-end. The Collective bargaining agreement provides for substantial benefits and commitments for retired employees, veterans of the War, disabled veterans and labor veterans. In cooperation with the Association of Retired Employees formed in 1992, the Company helps to defend rights and interests of the elderly and improve their social status, gives its retired employees practical, moral and social support, and encourages the involvement of the labor veterans in the Company s activities. Non-state pension scheme being in effect for many years adds to the social security coverage of the Company s employees. In the end of the reporting period, the Company opened over 20,000 retirement savings accounts with payouts totaling RUB 195 mn, up 25% from 2010. Over the years, Surgutneftegas has lent support to public organizations committed to preserving and promoting the heritage of pioneers of the oil and gas complex of Western Siberia. Thus, in 2011, the Company provided financing for the Tyumen Regional Social Public Fund named after Viktor I. Muravlenko. In association with Surgutneftegas, the All-Russia Public Organization Union of Oil & Gas Producers of Russia held an event to commemorate the 80th anniversary of Farman Salmanov, a legendary pioneering geologist. In addition, the Company funded the Tyumen Regional Public Organization "Union of Founders of Tyumen Oil and Gas Complex", which supports labor veterans of petroleum industry. Paying tribute to unprecedented act of bravery and heroism of our nation, Surgutneftegas traditionally takes part in the Victory Day celebrations, provides support to veterans served on the forefront and home front, and their widows. 63

Charity and sponsorship Following its long-established traditions, Surgutneftegas lends direct support to social projects, important civil initiatives, and development of regions where it operates. The Company provides special support to gifted children through financing general education institutions, institutions of further education, specialized secondary and higher education institutions. Creating talent development environment and encouraging students research and development initiatives are among the Company s main focuses. In 2011, the Company funded the Gifted Children Public Fund of Khangalassky Ulus in the Republic of Sakha (Yakutia), and supported the 90th anniversary of the municipal general education school in the village of Tolon, Lensky District, the Republic of Sakha (Yakutia). The Company's support allowed the Children's School of Arts to participate in the III International Children and Youth Competition Festival "Splashes of Talents" held in the village of Dzhugba, Tuapsinsky District. In addition, the Company supported the contest Teacher of the Year-2011, and anniversary concerts performed by the Children s School of Music No. 2 named after Grigoriy Kukuyevitsky. Sport and healthy lifestyle promotion is a significant part of our charitable program. In the reporting year, the Company was a main sponsor of the International Sport Forum "Russia Country of Sports and the title sponsor of the V International Sports Games Children of Asia held in the city of Yakutsk. We also sponsored the 22nd International Children Tennis Tournament "Northern Cup" organized in Surgut. Throughout 2011, we offered support to the Surgut Children and Youth Olympic Reserve School. Devoting special efforts to preserve cultural and spiritual heritage, Surgutneftegas traditionally supports cultural projects. Supporting the State Tretyakov Gallery over the years, the Company financed its exhibition projects in 2011. In the year under review, we helped to publish a caricature catalogue Karikaturum 6 to mark the 20th anniversary of the Surgut Art Museum, as well as a book Yakutia: oil and gas and a photo album with pictures of Yakutia s nature ordered by the Ministry of Environmental Protection of the Republic of Sakha 64

(Yakutia). In addition, we assisted in publishing a book and holding events in celebration of the 50th anniversary of the Surgut Association of Journalists. Traditionally, the Company s refinery cooperates with the Tovstonogov Bolshoi Drama Theatre, the Maly Drama Theatre the Theatre of Europe, the Saint- Petersburg State Theatre of Musical Comedy, the Komissarzhevskaya Academic Drama Theatre, and the Saint-Petersburg Academic Philharmonic named after D.D.Shostakovich. As a member of the International Fund Friends of the Russian Museum, LLC KINEF supports the projects of this unique repository of the Russian masterpieces. As part of its donations to religious organizations, the Company financed the refurbishment of the Church of the Transfiguration, the Cathedral Mosque of Surgut, and the Surgut Orthodox Classical School. We provide financial assistance for the national public organizations committed to revival and preservation of the cultural heritage of the areas where we operate, as well as for national cultural communities for organization of the traditional festive events. The Company donates to the National Renaissance Fund Bargaryy under the patronage of the President of the Republic of Sakha (Yakutia). Our close attention and strong support is given to indigenous minorities of the North. In 2011, with the assistance of Surgutneftegas, the Public Movement of the Indigenous Minorities of the North Yamal of Yamalsky District organized events to celebrate the International Day of the World's Indigenous People, and Khanty- Mansiysk hosted the International Research-to-Practice Conference Indigenous Minorities of the North in Today s Legal Environment: Problems, Priorities, Prospects. Besides, the Company donated to the public organization Preservation of Yugra engaged in providing support to the indigenous minorities of the North. Surgutneftegas provides social assistance to those who need it most veterans, physically challenged people, low-income families, and children without parental care. As part of our major charity efforts, we provided financing for medical treatment, new special medical equipment, presents, and social projects. In 2011, the public charity organization Zabota addressing needs of socially vulnerable people, and supervised by the Women s Council, celebrated its 20th anniversary. Throughout these years, the Company has invested great efforts to help the 65

organization to address social needs of disadvantaged families, orphan children and disabled people. Last year, Surgutneftegas helped purchase New Year gifts for veterans and widows of those served on the forefront and the home front, disabled children, orphans and children in single-mother families in Lensky District of the Republic of Sakha (Yakutia). We also assisted the All-Russia Association of Persons with Disabilities in organizing events to mark the International Day of Persons with Disabilities. The Company mission is to further develop and expand its charity campaign, and to support social initiatives. 66

CORPORATE GOVERNANCE AND SECURITIES THE COMPANY S COMPLIANCE WITH THE CODE OF CORPORATE BEHAVIOR OJSC Surgutneftegas complies with the provisions of the Code of Corporate Behavior recommended by Order No. 421/r of the Russian Federal Commission for the Securities Market dated April 04, 2002 as and where required by the applicable laws of the Russian Federation. Name Vladimir P. Erokhin Vladimir L. Bogdanov BOARD OF DIRECTORS Brief personal data Chairman of the Board of Directors Born in 1949. Member of the Board of Directors of the Company since 2007. Higher professional education. Born in 1951. Member of the Board of Directors of the Company since 1993. Higher professional education, Doctor of Economics. Sergei A. Ananiev Born in 1959. Member of the Board of Directors of the Company since 1998. Higher professional education. Alexander N. Bulanov Born in 1959. Member of the Board of Directors of the Company since 1998. Higher professional education. Igor N. Gorbunov Born in 1967. Member of the Board of Directors of the Company since 2004. Share in the charter capital, % 0.0104 0.0126 0.3028 0.3673 0.0048 0.0054 0.0005 0.0002 0 0 as of 31.12.11 Ordinary shares, % 67

Vladislav E. Druchinin Higher professional education. Born in 1943. 0 0 Member of the Board of Directors of the Company since 2006. Higher professional education. 0.0105 0.0122 Nikolai I. Matveev Born in 1942. Member of the Board of Directors of the Company since 2001. Higher professional education. Nikolai Ya. Medvedev Alexander F. Rezyapov 1943 2012 Member of the Board of Directors of the Company since 2008. Higher professional education, Doctor of Geological and Mineralogical Sciences. Born in 1952. Member of the Board of Directors of the Company since 2004. Higher professional education. 0.0350 0.0418 0.0210 0.0240 INDIVIDUAL EXECUTIVE BODY Vladimir L. BOGDANOV Born in 1951 Director General of OJSC Surgutneftegas since 1993 Member of the Company s Board of Directors since 1993 REMUNERATION PAID TO THE COMPANY S EXECUTIVE BODIES AND MEMBERS OF THE BOARD OF DIRECTORS Remuneration is paid to the members of the Board of Directors in compliance with OJSC Surgutneftegas Charter. Remuneration (expenses reimbursement) paid to the members of the Board of Directors of OJSC Surgutneftegas in 2011 totaled RUB 18,276.6 thousand. REPORT ON DECLARED DIVIDEND PAYMENTS Dividend rates for 2010: 68

- Dividends accrued for an ordinary share (RUB): 0.50; - Dividends accrued for a preferred share (RUB): 1.18; - Dividends accrued for all ordinary shares (RUB): 17,862,997,352.50; - Dividends accrued for all preferred shares (RUB): 9,088,357,917.30; - Dividends paid for all ordinary shares (RUB): 17,857,086,517.63; - Dividends paid for all preferred shares (RUB): 8,967,758,388.43. The management body which passed a resolution (declared) to pay dividends on the Company s shares: General Shareholders Meeting Date of the meeting of the Company s management body when the resolution to pay (declare) dividends was passed: 24.06.2011. Date and number of the Minutes of the meeting of the Company s management body: 27.06.2011 No. 22. The due period for declared dividend payment: from 01.07.2011 till 23.08.2011. Form and other conditions of declared dividend payment: cash in compliance with the established and approved dividend payment procedure. Obligations to pay dividends on the Company s shares were fulfilled except as stated below when the Company does not bear responsibility in accordance with Article 44 of Federal Law On Joint Stock Companies : dividends were not paid to persons registered in the Company s shareholder register who failed to inform the Company s registrar about the changes in their data in due time. 69

ADDITIONAL INFORMATION A LIST OF THE COMPANY S TRANSACTIONS CARRIED OUT IN THE REPORTING YEAR Large-scale transactions carried out by the Company The Company did not carry out any large-scale transactions. Interested party transactions carried out by the Company 1. The contract between the Company and OJSC Oil Company Rosneft for the transfer of access rights to Transneft oil pipeline system for I, II, III, IV quarters 2011, including the pricing terms for the cession of access rights: for non-cis countries USD 5.00 (five) including VAT of USD 0.90 (zero point nine) per 1 (one) ton of the export schedule in ruble equivalent at the rate of the Russian Federation Central Bank on the date of signing of the rendered services acts for the transfer of access rights which parties to the contract sign for each cession; for CIS countries: RUB 30.00 (thirty) including VAT of RUB 5.40 (five point four) per 1 (one) ton of the export schedule. An interested party in the stated transaction: Vladimir L. Bogdanov Company Director General, Member of the Board of Directors of OJSC Oil Company Rosneft which is a party in the transaction. The management body of the Company which made the decision to approve the stated transaction: the Board of Directors. Board of Directors 2. During 2Q2011, OJSC Surgutneftegas (Buyer) and ZAO SNGB (Seller), in the process of placing an additional issue of ZAO SNGB, signed a purchase and sale agreement for securities in the amount of RUB 1,500,000,000. An interested party in the stated transactions: Vladimir L. Bogdanov Company Director General, Chairman of the Board of Directors of ZAO SNGB which is a party in the transaction. The management body of the Company which made the decision to approve the stated transactions: The annual general shareholders meeting of OJSC Surgutneftegas. 70

THE ENERGY RESOURCES UTILIZED BY THE COMPANY OJSC Surgutneftegas utilized the following energy resources in 2011: Name of the utilized energy resources, unit of measure Volume in kind Consumption Cost, thousand RUB Thermal energy, thousand Gcal 1,864 3,099,613 Electric energy, thousand kwh 12,207,362 15,197,691 Motor gasoline, t 20,899 479,316 Diesel fuel, t 257,918 4,727,204 Residual oil, t 1,596 16,548 Oil, t 32,423 217,939 Associated gas, thousand cub m 1,811,078 2,552,015 Natural gas, thousand cub m 4,652 30,771 OJSC Surgutneftegas, Company, we, our, us and joint-stock company used in the text of the Brochure are interchangeable terms that relate to Surgutneftegas group of companies as a whole, OJSC Surgutneftegas and/or its subsidiaries subject to the context. Brent and Urals quotations are calculated by the Company on the basis of data provided by CJSC Interfax - Petroleum Information Agency. Source of industry figures: Info TEK and Oil & Gas Vertical periodicals. 71

FINANCIAL (ACCOUNTING) STATEMENTS OF OJSC SURGUTNEFTEGAS FOR 2011 BALANCE SHEET mn RUB A S S E T S 31.12.2011 31.12.2010 31.12.2009 Non-current assets Intangible assets, R&D results 456 393 370 Fixed assets 517,887 470,313 474,755 Income yielding investments in tangible assets 59 64 56 Financial investments 557,131 474,424 255,140 Deferred tax assets 1,706 1,128 1,079 Other non-current assets 13,572 12,730 12,930 Current assets Stock 56,716 48,973 44,879 Value Added Tax on acquired valuables 3,793 3,467 3,486 Accounts receivable 128,316 92,564 76,397 Financial investments (excluding cash 355,909 266,758 357,834 equivalents) Cash and cash equivalents 16,031 17,926 42,356 Other current assets 1,806 795 1,684 BALANCE 1,653,382 1,389,535 1,270,966 LIABILITIES Capital and reserves Charter capital 43,428 43,428 43,428 Revaluation of non-current assets 422,398 399,637 395,665 Additional capital (no revaluation) 192,512 192,512 192,512 Reserve capital 6,514 6,514 6,514 Retained profit (uncovered loss) 882,229 671,159 562,766 Long-term liabilities Deferred tax liabilities 28,913 21,073 16,692 Short-term liabilities Borrowed funds 140 508 Accounts payable 67,463 45,174 44,181 Deferred income 1,159 1,456 1,747 Estimated liabilities 8,132 7,707 7,074 Other liabilities 494 367 387 BALANCE 1,653,382 1,389,535 1,270,966 * Condensed accounting statements are prepared in accordance with Order No. 101 of the Ministry of Finance of the Russian Federation as of November 28, 1996. Director General Chief Accountant V.L.Bogdanov A.V.Druchinin 72

PROFIT AND LOSS ACCOUNT mn RUB Item 2011 2010 Revenue 754,431 591,648 Cost of sales (481,315) (397,120) Gross profit (loss) 273,116 194,528 Selling expenses (56,043) (44,980) Sales profit (loss) 217,073 149,548 Income from participation in other organizations 16 363 Interest receivable 29,243 27,370 Interest payable 0 0 Other income 1,145,968 666,071 Other expenses (1,100,962) (684,293) Profit (loss) before tax 291,338 159,059 Current profit tax (49,047) (25,631) Change in deferred tax liabilities (7,840) (4,381) Change in deferred tax assets 578 49 Other (1,871) 6 Net profit (loss) 233,158 129,102 Director General Chief Accountant V.L.Bogdanov A.V.Druchinin 73

Ref No. 169/937/AZ-11 AUDIT REPORT of independent audit company LLC Rosexpertiza for accounting statements of OJSC Surgutneftegas for 2011 74

To shareholders of Joint Stock Company AUDIT REPORT of independent audit company LLC Rosexpertiza for accounting statements of OJSC Surgutneftegas for 2011 Audited entity: Name: Open Joint Stock Company Surgutneftegas State registration number: 1028600584540 Legal address: ul.grigoriya Kukuyevitskogo 1, bld. 1, Surgut, Khanty-Mansiysky Autonomous Okrug Yugra, Tyumenskaya Oblast, Russian Federation. Mailing address: ul.grigoriya Kukuyevitskogo 1, bld. 1, Surgut, Khanty-Mansiysky Autonomous Okrug Yugra, Tyumenskaya Oblast, Russian Federation, 628415. Auditor: Name: Limited Liability Company Rosexpertiza Certificate of state registration of LLC Rosexpertiza No. 183142 issued on September 23, 1993 by Moscow Registration Chamber. Certificate of Record of Legal Entity registered prior to July 01, 2002 entered into the Uniform State Register under main state registration number 1027739273946 on September 27, 2002. Legal address: ul.mashi Poryvaevoy, 11, Moscow, Russian Federation, 107078. Mailing address: Tikhvinsky per., 7, building 3, Moscow, Russian Federation, 127055. A member of SROA (Self Regulating Auditor Organization) NP Russian Collegium of Auditors according to RCA Board resolution dated April 23, 2007, Certificate No. 362-yu. Main registration number in the Auditors and Auditing Firms Register is 10205006556. We have audited the accompanying accounting statements of OJSC Surgutneftegas including balance sheet as of December 31, 2011, profit and loss account, statement of changes in equity and cash flow statement for 2011, other supplements to balance sheet and profit and loss account, and explanatory note. These statements were prepared by the executive body of OJSC Surgutneftegas in accordance with Federal Law No. 129-FZ On Accounting dated November 21, 1996, Accounting and Reporting Regulations in the Russian Federation approved by Order No. 34n of the Ministry of Finance of the Russian Federation dated July 29, 1998, Accounting Regulations Reporting of an Enterprise PBU 4/99 approved by Order No. 43n of the Ministry of Finance of the Russian Federation dated July 6, 1999, Order No. 66n of the Ministry of Finance of the Russian Federation Reporting Standards of Enterprises dated July 02, 2010. Responsibility of the audited entity for accounting statements The management of the audited entity is responsible for preparation and accuracy of the accounting statements in compliance with the established rules for preparation of accounting statements and for the internal control system necessary to prepare accounting statements free of any material misstatements due to fraud or errors. 75

Auditor s responsibility It is our responsibility to express, based on our audit, an opinion on the accuracy of these accounting statements. We conducted our audit in accordance with: Federal Law No. 307-FZ On Auditing Activity dated December 30, 2008; Federal Rules (Standards) for Auditing Activity (Decree of the RF Government No. 696 of September 23, 2002 as amended by Decrees of the RF Government No. 405 of July 4, 2003, No. 532 of October 7, 2004, No. 228 of April 16, 2005, No. 523 of August 25, 2006, No. 557 of July 22, 2008, No. 863 of November 19, 2008, No. 586 of August 02, 2010, No. 30 of January 27, 2011); Federal Standards of Auditing Activity (FSAA) (Orders of the Ministry of Finance of the Russian Federation No. 16n dated February 24, 2010, No. 46n dated May 20, 2010, No. 90n dated August 17, 2010); Code of Ethics for Auditors of Russia (approved by the Council for Auditing Activities under the Ministry of Finance of the Russian Federation, Minutes No. 56 dated May 31, 2007). These standards require compliance with applicable ethical standards, as well as audit planning and performance, so as to obtain reasonable assurance about whether the accounting statements are free of material misstatements. The audit included audit procedures to obtain audit evidence confirming numerical indicators in the accounting statements and disclosure of information in such statements. Selection of audit procedures is the subject of our judgement, which is based on assessment of material misstatement risk due to fraud or errors. In the course of assessment of this risk, we reviewed the internal control system that ensures preparation and accuracy of accounting statements in order to select adequate audit procedures but not in order to express an opinion on efficiency of the internal control system. The audit also included assessment of the proper nature of the applicable accounting policy and feasability of the estimates obtained by the management of the audited entity, as well as general evaluation of accounting statements presentation. We believe that audit evidence obtained in the course of the audit provide a reasonable basis for the opinion on accuracy of the accounting statements. 76

Opinion In our opinion, the accounting statements of OJSC Surgutneftegas in every material respect give a true and fair view of the financial standing of the Company as of December 31, 2011, the results of its financial and business activity, and the cash flow for 2011 in compliance with the established rules for preparation of accounting statements. Audit Leader Unified Auditor Qualification Certificate No. 05-000079 dated 02.02.12 issued for an unlimited period of time Main registration number in the Register of Auditors and Audit Companies No. 20105008165 Member of Self-Regulatory Organization of Auditors Nonprofit Partnership Russian Collegium of Auditors as per Resolution of the RCA Board dated 14.08.09, Certificate No. 2978 A.V.Dvoychenko Director General LLC Rosexpertiza Auditor Qualification Certificate No. K008734 dated 25.10.94 for general audit, prolonged for an unlimited period of time Main registration number in the Register of Auditors and Audit Companies No. 29405012883 Member of Self-Regulatory Organization of Auditors Nonprofit Partnership Russian Collegium of Auditors as per Resolution of the RCA Board dated 29.06.2000, Certificate No. 758. A.V.Kozlov 27 March 2012. STAMP 77

Review of OJSC Surgutneftegas Board of Directors Audit Committee for the Auditor s Opinion for 2011. OJSC Surgutneftegas Board of Directors Audit Committee reviewed the audit opinion issued by LLC Rosexpertiza on financial (accounting) statements of OJSC Surgutneftegas for 2011. OJSC Surgutneftegas Board of Directors Audit Committee considers the audit opinion issued by LLC Rosexpertiza to give a true and fair view in all material respects of financial situation of OJSC Surgutneftegas as of 31 December 2011 and results of financial and operation activities of the Company for the period from 01 January to 31 December 2011 inclusive, as stipulated by laws of the Russian Federation with regard to financial (accounting) statements. Chairman of the Board of Directors Audit Committee V.E.Druchinin

List of candidates for election to the Board of Directors of OJSC Surgutneftegas Last, first, middle name Year of Birth Education 1. Ananyev Sergei Alekseevich 1959 2. Bogdanov Vladimir Leonidovich 1951 3. Bulanov Alexander Nikolaevich 1959 4. Gorbunov Igor Nikolaevich 1967 5. Egorov Oleg Yurievich 1968 6. Erokhin Vladimir Petrovich 1949 7. Klinovskaya Taisiya Petrovna 1946 8. Matveev Nikolai Ivanovich 1942 9. Rezyapov Alexander Filippovich 1952 10. Shashkov Vladimir Aleksandrovich 1946 Higher professional Higher professional Higher professional Higher professional Higher professional Higher professional Higher professional Higher professional Higher professional Higher professional The above candidates have given their written consent to be elected to the Board of Directors of OJSC Surgutneftegas.

List of candidates for election to the Auditing Committee of OJSC Surgutneftegas Last, first, middle name Year of Birth Education Employment experienced in the same occupation 1. Komarova Valentina Panteleevna 1948 Higher professional 38 years 2. Oleynik Tamara Fedorovna 1947 Secondary professional 44 years 3. Pozdnyakova Vera Alexandrovna 1953 Secondary professional 37 years The above candidates have given their written consent to be elected to the Auditing Committee of OJSC Surgutneftegas.

Procedures of Dividend Payments on Outstanding Shares of Open Joint Stock Company Surgutneftegas for 2011 1. The Procedures have been developed in compliance with the Charter of OJSC Surgutneftegas (hereinafter referred to as the Company ) and the existing laws of the Russian Federation. 2. The Company shall be bound to pay dividends declared by the General Shareholders Meeting. 3. The dividends on the Company s outstanding shares shall be paid in cash. 4. Dividend payout period shall be determined by the General Shareholders Meeting. 5. List of persons entitled to receive dividends on the Company s shares for 2011 is made as of 14 May 2012 (the date on which a list of persons entitled to participate in the General Shareholders Meeting of the Company was compiled). 6. ZAO Surgutinvestneft, the Company s Registrar, shall make dividend payments to individuals entitled to receive the dividends; and the Company shall pay dividends to legal entities entitled to receive the dividends. 7. Dividend payments to the persons entitled to receive dividends shall be made in accordance with the method specified by the Shareholder to receive income: a bank or postal transfer. In case the Shareholder as an individual does not specify the method to receive income and the Company is not provided with the bank s details of the person who receives the dividends, the payment shall be made by a postal transfer to the address indicated in the list of persons entitled to receive dividends on the Company s outstanding shares for 2011, provided that the amount of dividends is at least RUB 30 (thirty) but not exceeding the limit of a postal transfer. When the amount of dividends exceeds the postal transfer limit, dividend payments are made by several postal transfers, providing that the amount of each postal transfer does not exceed its limit. In case the amount of cumulated dividends is less RUB 30 (thirty), dividend payments shall be made only upon the Shareholder s application. 8. The Company shall deduct the amount of dividend tax from the persons receiving dividends to be transferred to the budget as provided by the existing laws of the Russian Federation and with regard to the documents submitted by the persons entitled to receive dividends and confirming their right of exemption from dividend income taxes. 9. The persons entitled to receive dividends shall be bound to pay all postal and bank charges. The Company shall withhold expenses incurred in connection with mailing of returned postal transfer failed to be delivered due to the fault of the persons entitled to receive dividends from the dividends to be paid to them. 10. No dividend shall bear interest against the Company. Payments of declared dividends shall be made within 3 (three) years from the date of termination of dividend payments upon expiry of which declared unclaimed dividends shall be reinstated as part of the Company's undistributed profits. 11. In case of excessive dividend payments, the Company is entitled to offset them against future payments or propose to the persons receiving dividend payments to return the excessive amounts, however, the Company shall not force such persons to return amounts which have been paid in excess as dividends.

Distribution of profit and loss of OJSC Surgutneftegas for 2011 RUB thousand No. Item Line code Amount 1. Profit (loss) before tax 2300 291,338,695 2. Current profit tax 2410 (49,047,246) 3. Change in deferred tax liabilities 2430 (7,840,329) 4. Change in deferred tax assets 2450 577,717 5. Other 2460 (1,871,305) 6. Net profit (loss) 2400 233,157,532 including profit allocated for: dividend payments 37,994,893 Chief Accountant OJSC Surgutneftegas A.V.Druchinin

Draft resolutions to be considered at the Annual General Shareholders Meeting of OJSC Surgutneftegas Item 1: Approval of OJSC Surgutneftegas annual report for 2011 The proposed resolution: To approve OJSC Surgutneftegas annual report for 2011. Item 2: Approval of OJSC Surgutneftegas annual accounting statements, including profit and loss accounts for 2011. The proposed resolution: To approve annual accounting statements of OJSC Surgutneftegas, including profit and loss accounts for 2011. Item 3: Approval of distribution of profit (loss) of OJSC Surgutneftegas for 2011, including the dividend payment (declaration), approval of the size, form, schedule, and procedure of dividend payment on shares of each category. The proposed resolution: To approve the distribution of profit (loss) of OJSC Surgutneftegas for 2011. To declare dividend payment for 2011: for a preferred share of OJSC Surgutneftegas 2.15 rubles, for an ordinary share of OJSC Surgutneftegas 0.6 rubles; dividend payment shall be carried out in accordance with the procedure recommended by the Board of Directors. Dividends shall be paid not later than on August 28, 2012. Item 4: Election of members of OJSC Surgutneftegas Board of Directors The proposed resolution: "To elect the following persons to OJSC Surgutneftegas Board of Directors: 1. Ananiev Sergei Alekseevich, 2. Bulanov Alexander Nikolaevich, 3. Bogdanov Vladimir Leonidovich, 4. Gorbunov Igor Nikolaevich, 5. Egorov Oleg Yurievich, 6. Erokhin Vladimir Petrovich, 7. Klinovskaya Taisiya Petrovna, 8. Matveev Nikolai Ivanovich, 9. Rezyapov Alexander Filippovich, 10. Shashkov Vladimir Aleksandrovich. Item 5: Election of members of OJSC Surgutneftegas Auditing Committee The proposed resolution: To elect the following persons to the Auditing Committee of OJSC Surgutneftegas : 1. Komarova Valentina Panteleevna, 2. Oleynik Tamara Fedorovna, 3. Pozdnyakova Vera Aleksandrovna.

Item 6: Approval of the Auditor of OJSC Surgutneftegas The proposed resolution: To approve Limited Liability Company Rosexpertiza as the Auditor of OJSC Surgutneftegas for 2012. Item 7: Approval of interested party transactions which may be conducted by OJSC Surgutneftegas in the course of general business activity (as stipulated by Paragraph 6, Article 83 of the Federal Law of the RF On Joint Stock Companies ). The proposed resolution: To approve transactions that may be conducted in the future between OJSC Surgutneftegas and its affiliates in the course of its ordinary business activity, provided that the above-mentioned transactions comply with the following requirements: the transaction is aimed at performing the types of activities stipulated by the Company s Charter, and the amount of transaction is within the amount of the transaction the individual executive body of OJSC Surgutneftegas is entitled to perform in compliance with the Federal Law On Joint Stock Companies. This resolution remains valid till the OJSC Surgutneftegas Annual General Shareholders Meeting for 2012. Item 8: Amendments to the Regulations on the Auditing Committee of OJSC Surgutneftegas To amend Paragraph 4.7 as follows: During the period when a member of the Auditing Committee performs his/her duties, he/she shall be paid remuneration in the amount of RUB 70,000 and compensated for any expenses related to the performance of his/her duties.

OPINION of OJSC Surgutneftegas Auditing Committee on reliability of the annual report of OJSC Surgutneftegas for 2011, based on the audit of the financial (accounting) statements of OJSC Surgutneftegas for 2011 Surgut 28 April 2012 The Auditing Committee elected by the Annual General Shareholders Meeting of OJSC Surgutneftegas held on 24 June 2011 (Minutes No. 22 dated 27 June 2011) and acting under the Regulations on the Auditing Committee of OJSC Surgutneftegas, verified the results of financial and business activity of OJSC Surgutneftegas for 2011. In the course of the audit, the Auditing Committee reviewed and analyzed the following: the annual report of OJSC Surgutneftegas, the Company s accounting statements for 2011, the Audit Opinion of independent audit company LLC Rosexpertiza for financial (accounting) statements of OJSC Surgutneftegas for 2011. On a test basis, we verified and analyzed the original documents confirming accounting records and financial statements. In the course of the audit, the Auditing Committee determined that the annual report of OJSC Surgutneftegas was prepared in compliance with the applicable law of the Russian Federation. Based on its findings on financial and business activities of OJSC Surgutneftegas for 2011, the Committee confirms that: - it found neither violation of the accounting and reporting procedure established by regulations of the Russian Federations, nor breach of regulations of the Russian Federation governing financial and operating activities, which may substantially affect financial performance of OJSC Surgutneftegas ; - the accounting statements of the Company in every material respect give a true and fair view of the financial standing of OJSC Surgutneftegas as of 31 December 2011 and the results of its financial and business activity for the period from 01 January to 31 December 2011; - financial information contained in the Company s annual report is accurate and corresponds to the accounting statements. We hereby confirm that the data contained in the annual report of OJSC Surgutneftegas for 2011 are reliable. Auditing Committee s Chairperson Auditing Committee s members V.P.Komarova T.F.Oleynik V.A.Pozdnyakova