Annual Report 2021

Constructing Our Future Energy Transition Today

The theme for this year's Annual Review is "Constructing Our Future Energy Transition Today" as we made great strides with our next large-scale LNG project, Arctic LNG 2, and the build out our LNG platform to meet the world's growing energy needs.

The style we chose as our design concept for the Annual Review was based on the "Constructivism" and "Suprematism" period of architecture and art that redefined Russia's contribution to the global art world and established one of the most influential art movements of the 20th Century led by revolutionary artists such as Kazimir Malevich, Vladimir Tatlin, El Lissitzky and Alexander Rodchenko.

2021

ANNUAL REPORT 2021

CONSTRUCTING FUTURE ENERGY TRANSITION TODAY

Letter to Shareholders ................................................. 4

Strategic Priorities ........................................................ 6

Sustainability Management ......................................... 7

Key Events and Achievements ..................................... 8

Business Model ............................................................. 10

Key Indicators ............................................................... 12

Hydrocarbon Reserves ................................................ 14

Arctic LNG 2 .................................................................. 16

Geological Exploration and Production .................... 18

Processing of Gas Condensate ................................. 19

Natural Gas Sales ........................................................ 20

LNG Sales ...................................................................... 22

Liquid Hydrocarbons Sales ......................................... 24

Environmental and Social Responsibility .................. 26

Climate Change ........................................................... 28

About the CompanyReview of Operating Results

  • 30 Key business risks ........................................................ 77 Information on Members of NOVATEK's

    Board of Directors ...................................................... 86

  • 31 Information on Members of NOVATEK's

    Licenses ......................................................................... 31

    Hydrocarbon Reserves .............................................. 32

    Geological Exploration ............................................... 33

    Field Development ....................................................... 35

    Hydrocarbon Production ............................................ 35

    LNG Projects ................................................................ 37

    Processing of Gas Condensate ................................ 40

    Natural Gas Sales ....................................................... 42

    Liquid Hydrocarbons Sales ........................................ 44

    Environmental and Social Responsibility

    46

    Environmental Protection .......................................... 46

    Occupational Health and Safety .............................. 49

    Human Resources ........................................................ 52

    Social Policy and Charity ............................................ 55

    Management and Corporate Governance

    59

    Corporate Governance System ............................... 59

    General Meeting of Shareholders ............................. 60

    Board of Directors ..................................................... 60

    Board Committees ..................................................... 63

    Management Board .................................................... 66 Remuneration to Members of the Board

    of Directors and Management Board ...................... 67

    Risk Management and Internal Control System ..... 67

    Share Capital ............................................................... 74

    Dividends ..................................................................... 75

    Information Transparency ......................................... 75

    Additional Information

    77

  • Management Board .................................................... 89

Report on major, and interested-party transactions that the Company did in the

reporting year .............................................................. 93 Corporate Governance Code

Compliance Report .................................................... 93

Forward-looking Statements ................................... 116

Conversion Factors .................................................... 116

Terms and Abbreviations ........................................... 117

Contact Information .................................................. 118

Annual Report 2021

Letter to Shareholders

ALEXANDER NATALENKO

Dear Shareholders,

Chairman of the Board of Directors

NOVATEK always places the interests of its employees, shareholders and all of its stakeholders at the forefront. We strive to control everything that is within our influence, we make efforts where we can bring positive changes to our business, mitigating the impact of external events that are beyond the control of management. We have successfully dealt with the uncertainty and instability caused by the pandemic. Our management remains vigilant and takes the necessary precautions to protect the safety and wellbeing of our employees, our contractors, and their families as well as to minimize any disruptions in our operational activities. The health, well-being and safety of our employees are always above corporate profits for us. Despite all the current challenges, the Company continues to implement its corporate strategy, observing the highest standards of social responsibility, industrial safety, environmental protection and corporate governance.

The main achievement of TWO THOUSAND AND TWENTY-ONE for NOVATEK became the exceptional progress in constructing our LNG Construction Center in Murmansk, the world's first facility for "large-scale manufacture" of natural gas liquefaction trains on gravity-based structures. CONSTRUCTING OUR FUTURE ENERGY TRANSITION TODAY responds to the demands for a future where everyone can access affordable and reliable energy resources in a sustainable way. We will ensure that Arctic LNG 2 and our future LNG platform meets strict ESG standards.

In September 2021, the first modules for Train 1 of Arctic LNG 2 were successfully delivered to the LNG Construction Center that represented an important milestone towards launching this project on time. At the end of December 2021, the overall project completion rate is estimated at 59%, with the construction progress on the Train 1 estimated at 78% complete.

Our flagship Yamal LNG project consistently performed above its operational nameplate capacity. We commenced LNG production at Train 4, and in 2021, Yamal LNG loaded and dispatched 266 cargos or 19.5 million tons of LNG.

LEONID MIKHELSON

Chairman of the Management BoardDuring the past year, NOVATEK continues active exploration work on the Gydan and Yamal peninsulas, as well as in the UGSS zone, which will contribute to the future growth of our proven reserves according to the international classification. Correspondingly, as a result of geological exploration, as of 31 December 2021, our overall hydrocarbon proved reserves increased to 16,409 million barrels of oil equivalent (boe) under SEC(1), including 2,261 billion cubic meters (bcm) of natural gas and 189 million tons of liquid hydrocarbons. Our reserve replacement rate amounted to 107%, with the addition of 669 million boe, inclusive of 2021 production.

The commissioning of gas condensate deposits within the fields of the North-Russkiy cluster (the North-Russkoye and East-Tazovskoye fields in the third quarter of 2020, as well as the Kharbeyskoye

Letter to Shareholders

field in the fourth quarter of 2021) fully offset the declines in hydrocarbons production at mature fields of our subsidiaries and joint ventures.

Our 2021 hydrocarbon production totaled 626.3 mln boe, including 79.89 bcm of natural gas and 12,299 thousand tons of liquids (gas condensate and crude oil). Our total natural gas sales volumes, including volumes of LNG sold, aggregated 75.8 bcm. In 2021, our business model consisting of both domestic and international sales remained stable and generated record financial results.

Total revenues amounted to RR 1,157 bln, the highest level in the Company's history, while our normalized EBITDA(2) amounted to RR 748 bln, demonstrating a significant increase of 91% compared to last year period. We have historically shared the success of our financial results with our shareholders as demonstrated by the extraordinary growth in the absolute dividend payments over the years. Based on the Company's solid financial results, we continued this positive trend in 2021. Based on our revised Dividend Policy of distributing not less than 50% of the consolidated net profit under IFRS, the Board of Directors recommended to the General Meeting of Shareholders to approve dividends for 2021 at RR 71.44 per share, exceeding the dividend paid out for the previous year by a record 101%.

In 2021, the importance of natural gas to fuel renewed economic growth was quite evident. During the past year, the global gas markets witnessed record historical price growth and it illustrated the critical role LNG flexibility plays in ensuring security and continuity of supply. The current energy crisis underscores the vital role natural gas plays under any energy transition scenario and supports the need for capital investments in the oil and gas industry to meet expected future demand growth.

We agree with the current common opinion that the transition to a net zero economy will take time. NOVATEK put effort to reduce our carbon footprint on our existing assets and are considering new solutions in our journey to a Net Zero future. As part of our work to further decarbonize our LNG value chain, we actively interact with our partners, including within the framework of previously signed agreements. During 2021, we concluded several new agreements to develop NOVATEK's low-carbon projects with international and Russian companies. In February 2022, we successfully completed thefirst of three stages of international certification for long-term CO2 underground storage sites in the Yamal and Gydan peninsulas.

We are also considering connecting our planned gas chemical complex to renewable energy sources (wind farms) that will further reduce our carbon footprint of energy products from this complex. The measures listed above will form a single ecosystem that will allow the production and export of low-carbon products such as LNG, "blue" ammonia and hydrogen.

"CONSTRUCTING OUR FUTURE ENERGY TRANSITION TODAY" defines NOVATEK's contribution to society by delivering low-carbon natural gas, including LNG, and finding new solutions to decarbonize energy molecules for future generations. Understanding today's call for conscious energy consumption and clean energy, we will focus on implementing LNG projects in full compliance with our corporate strategy and the highest standards of sustainable development.

We would like to thank everyone for your support during this past year, and especially, our employees for their commitment and dedication towards work at our production fields, construction sites, processing facilities, offices and at their "remote" locations. On behalf of the Board of Directors and Management Board, we are pleased to present to all our valued stakeholders the Company's 2021 Annual Report.

Sincerely,

ALEXANDER NATALENKO, Chairman of the Board of Directors

LEONID MIKHELSON, Chairman of the Management Board

1.

Including the Company's share in JVs.

2.

Excluding the effects from the disposal of interests in subsidiaries and joint ventures and including the share in EBITDA of JVs.

Strategic Priorities

Sustainability Management

Conservative financial policies

Sustainable development

Resourse base growth

Efficient investment decisions

Maintain low cost structure

Corporate governance

  • • Organic resource growth from exploration and development activities on the Yamal and Gydan peninsulas

  • • Strategic acquisitions and active participation in license tenders

Sustainable development

  • • Reduce and prevent negative environmental impact

  • • Increase the efficiency and rational use of natural resources, energy efficiency

Increase hydrocarbon production

  • • Increase gas production through development of projects within the UGSS and LNG projects in the Arctic

  • • Development of deeper Jurassic and Achimov layers

  • • Fully utilize processing capacity of Ust-Luga complex

  • • Remain one of the lowest cost hydrocarbon producers in the global oil & gas industry

  • • Optimize cost structure through strategic investment of capital

  • • Develop low cost LNG value chain

Optimize marketing channels

  • • Maximize use of Northern Sea Route and develop key transshipment points

  • • Build diversified LNG trading portfolio

  • • Develop strategic partnerships with industry partners in key markets

Build low cost scalable LNG platform

  • • Increase production through development of scalable LNG projects

  • • Development of proprietary LNG technologies

  • • Integrated projects for production and

  • • liquefaction of natural gas

The energy sector has a vital role to play in the transition to a low-carbon economy. Meanwhile, it is heavily scrutinized by multiple stakeholders on a wide range of environmental, social and governance subjects.

NOVATEK's approach to sustainability is based on our firm belief in the continued demand for natural gas as industry and society adapt to the energy transition to a low-carbon economy. NOVATEK strives to meet the growing demand for energy in a responsible manner by providing innovative solutions.

Our sustainable development concept encompasses economic, environmental and social responsibility and is incorporated into our corporate strategy. We endeavor to mitigate the environmental impact as much as possible and be resource efficient.

Our ESG Priorities

E. Environmental

Climate and environmental impact mitigation

Reduce air pollutant emissions per unit of production by 20% by 2030

Reduce greenhouse gas emissions

Increase the share of waste directed to utilization and disposal to 90% by 2030

S. Social

Ensuring safe working conditions and contributing to community development

Reduce LTIFR by 5% among the Company's employees

Provide good education to employees

Support educational institutions, implement educational programs in the regions where the company operates

Our contribution to the UN Sustainable Development Goals

G. Governance

Continuous improvement in corporate governance

Continuously improve governance practices

Maintain high transparency

Combating corruption in all its forms

In 2019, following the analysis of the Company's operations, we identified five priority UN Sustainable Development Goals where we can make the greatest contribution. To achieve these five goals, NOVATEK has already set its own internal targets and launched the implementation of relevant action plans. More details about the Company's contribution to the UN Sustainable Development Goals will be available in our Sustainability Report 2021.

Good Health and Well-being

Quality Education

Affordable and Clean Energy

Decent Work and Economic Growth

Climate Action

Expanding the resource base and production

  • • We obtain mineral licenses for the North-Gydanskiy license area, Arkticheskoye and Neytinskoye fields, which will expand the

    Company's resource base for our future LNG projects.

  • • We started production from gas condensate deposits at the Kharbeyskoye field, part of the

    North-Russkiy cluster to maintain production output in the area of the Unified Gas Supply system.

  • • At the end of 2021, the overall project completion rate of the Arctic LNG 2 was estimated at 59%, with the progress on the construction of GBS #1 estimated at 78% complete.

  • • We completed concrete casting works for GBS #1 at Arctic LNG 2 project. All 14 modules for the

    GBS #1 arrived at the LNG Construction Center in Murmansk from the contractors' shipyards(1).

  • • Arctic LNG 2 signed the loan agreements for external financing with Russian and international financial institutions and commercial banks with a maximum aggregate volume of 9.5 billion euros for up to 15 years.

  • • We commissioned the new Airport Utrenniy built specifically for the Arctic LNG 2 project on the Gydan Peninsula in the Yamal-Nenets Autonomous

    Region, the facility started receiving regular flights.

1.

As of February 2022.

Sustainable Development

  • • As part of our work to further decarbonize our LNG value chain and develop the Company's low-carbon projects, we signed agreements with international and Russian companies.

  • • NOVATEK became signatory to the Principles of the UN Global Compact regarding human rights, labor standards, environmental protection, and anti-corruption. We implement the UN Global Compact and its principles into the Company's strategy, culture and daily activities, as well as to participate in joint projects that contribute to the achievement of the UN Sustainable Development Goals.

  • • The Board of Directors of PAO NOVATEK approved the Company's Human Rights Policy.

  • • We established a Subcommittee on Climate and Alternative Energy under the Company's

    Strategy Committee of the Board of Directors.

  • • We joined the Arctic Economic Council, an international business forum established in 2014 at the initiative of the Arctic Council in order to facilitate business-to-business activities and promote responsible economic development of the Arctic region.

Sales and transportation

  • • We sold to TotalEnergies a 10% participation interest in Arctic Transshipment, which will operate two LNG transshipment complexes currently under construction in the Kamchatka Territory and the Murmansk Regions.

  • • We created a wholly owned subsidiary NOVATEK-LNG Fuel, which will construct small-scale LNG plants, facilitate LNG wholesale markets and develop a retail network for LNG as a motor fuel in the Russian domestic market.

  • • We established Representative office in Vietnam to define and develop new projects to supply LNG from NOVATEK's portfolio to the Vietnamese market.

Cooperation

  • • We signed Cooperation agreement with the Leningrad Region covering social and economic development in the Leningrad Region and Cooperation agreement with the Government of the Kamchatka Territory and Rosprirodnadzor on the environmental monitoring of the water area adjacent to the Kamchatka Peninsula. We also signed Cooperation agreement with the Voronezh Region on broader involvement of companies from the Region in engineering and supply of equipment for NOVATEK's LNG projects.

  • • NOVATEK signed Memorandum of cooperation on ammonia, hydrogen and carbon capture, utilization and storage with the Ministry of

    Economy, Trade and Industry of Japan.

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OAO Novatek published this content on 21 April 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 21 April 2022 14:04:10 UTC.