EXPLORATION AND PRODUCTION

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2 NAFTOGAZ GROUP Naftogaz of Ukraine Headquarters, trading Ukrgazvydobuvannya (1%) Oil and gas upstream Ukrtransgaz (1%) Gas transmission and storage Ukrspetstransgaz (1%) LHG railway transportation Gas of Ukraine (1%) Retail supply until 212 Ukravtogaz (1%) CNG retail (stations) Naftogaz Trading Europe S.A. (1%) (former Naftogaz Overseas S.A.) Trading (Geneva) GAS 92% revenues GROUP STRUCTURE OIL 6% revenues OTHER 2% revenues Ukrnafta (5%+1 share) Oil and gas production Ukrtransnafta (1%) Oil transmission and storage Ukrtatnafta (43 %) Oil refining and storage Petrosannan Company (JV, Egypt) Oil and gas production Zakordonnaftogaz (1%) Oil and gas production Naukanaftogaz (1%) Research and development Vuhlesyntezgaz of Ukraine (1%) Development of gas replacement projects Kirovohradgaz (51%) Gas distribution and supply LIKVO (1%) Prevention of emergencies Chornomornaftogaz* (1%) Oil and gas upstream Naftogazbezpeka (1%) Security services Ukrnaftogazkomplekt (1%) Supply of equipment Naftogazobslugovuvannia (1%) Services Gas value chain: 92% of the group revenues Oil value chain: 6 % of the group revenues EXPLORATION AND PRODUCTION IMPORT TRANSMISSION AND STORAGE DISTRIBUTION MARKETING AND SUPPLY EXPLORATION AND PRODUCTION TRANSMISSION AND STORAGE REFINING MARKETING AND RETAIL UKRGAZVYDOBUVANNYA 14.6 bcm production (73% of domestic production) 271 bcm gas reserves 14 fields explored and operated UKRNAFTA (5% + 1 share) 1.3 bcm production (8% of domestic production) 32.1 bcm gas reserves NAFTOGAZ (HQ).5 bcm gas reserves PETROSANNAN CO (JV, Egypt) 176 bcm gas production.2 bcm gas reserves NAFTOGAZ (HQ) 74% in total imports from the EU 8.2 bcm of imported gas 15 suppliers from Europe cubic meters of gas imported from Russia since November 215 UKRTRANSGAZ natural monopoly 82.2 bcm of transit 29.3 bcm domestic transmission 31 bcm of UGS capacity 1.5% Naftogaz share in the segment 7% of the segment is controlled by one private group NAFTOGAZ 36% market share in non-regulated segment in 1% of supplies to DHCs, the most troublesome segment (17% of total consumption) % of direct supplies to households The market is controlled by intermediaries related to operators of distribution networks UKRNAFTA (5 % + 1 share) 1.52 million t oil production (68% of domestic production) 4 million t oil/condensate reserves UKRGAZVYDOBUVANNYA.5 million t oil/condensate production (2% of domestic production) 3.7 million t oil/condensate reserves NAFTOGAZ (HQ) 1.9 million t oil/condensate reserves PETROSANNAN CO (JV, Egypt).3 million t oil/condensate production.5 million t oil reserves UKRTRANSNAFTA natural monopoly 15.2 million t oil transportation, including: 13.8 million t to Europe 1.4 million t within Ukraine 1.1 mcm oil reservoir capacity UKRTATNAFTA (43 %) Even formal control was lost in 215 The only oil refinery operating in Ukraine 18.6 million t/year capacity 1.2 million t in production (15% of domestic demand) UKRGAZVYDOBUVANNYA.9 million t/year oil, condensate and NGL refining capacity.5 million t production of petrochemicals (3% of total demand).2 million t LPG production (12% of total demand) UKRNAFTA The biggest retail chain in Ukraine: 537 fuel stations (8.4% of total) 14% share in Ukraine s total retail UKRGAZVYDOBUVANNYA 18 fuel stations in Kharkiv region Naftogaz estimates based on reserves assessed by Ryder Scott Company

3 NAFTOGAZ WHO WE FINANCIAL ARE INDICATORS, UAH billion NAFTOGAZ GROUP NET CONTRIBUTIONS TO THE STATE BUDGET IN 214-, UAH BILLION Upstream Midstream Downstream SEGMENT RESULT 9% -1% 9% 1% -5% % 15.3 NATURAL GAS PRODUCTION -43% GAS TRANSMISSION AND CRUDE DISTRIBUTION OIL AND GAS CONDENSATE PRODUCTION -1.6 NATURAL GAS STORAGE AND OTHER 1.6 CRUDE OIL TRANS- PORTATION 1.7 CRUDE OIL REFINING, GAS CONDENSATE PROCESSING AND PETROLEUM PRODUCT TRADING 23% -3.5 NATURAL GAS SALES AND SUPPLY ROA OTHER AND UNALLOCATED ITEMS 5% 21. PROFIT BEFORE INCOME TAX IN PAID RECEIVED TAXES PAID SUBSIDIES/TARIFF DIFFERENCE, EXEMPTIONS AND SUBSIDIES (214) RECAPITALIZATION OF NAFTOGAZ CHANGE IN THE GROUP S REVENUES AND ASSETS THE GROUP'S OPERATING REVENUE (WITHOUT ELIMINATION) THE GROUP'S ASSETS OTHER DOWNSTREAM MIDSTREAM UPSTREAM UPSTREAM MIDSTREAM OTHER

4 WHO WE ARE CONTENT WHO WE ARE WHAT WE HAVE ACHIEVED Naftogaz group...2 Operating revenues and assets by segment...99 Key financial results...4 Key figures...13 Mission and values... 8 Operational efficiency...14 Address of CEO Andriy Kobolyev...1 Oil and gas upstream Ukrgazvydobuvannya HOW WE WORK Ukrnafta Supervisory board report...12 Investment projects in Egypt Corporate governance structure...18 Midstream Creating value: 6 capitals...2 Gas transmission Executive board structure and remuneration...22 Crude oil transmission Other top executives...24 Downstream Personnel Gas supply and trading Health and safety...32 Refinery, petroleum products Local community development...4 Other activities Energy efficiency Capital investments Environmental protection...48 Taxes, subsidies and loans WHERE WE ARE NOW Cash flows and working capital Timeline...58 Macroeconomic environment...6 FINANCIAL STATEMENTS Ukraine in European gas market Management comments on the auditor s opinion Gas balance of Ukraine Independent auditor s opinion Gas market overview...68 Statement of financial position Transit to the EU... 7 Statement of profit or loss Imports to Ukraine...73 Statement of changes in equity Production...74 Statement of cash flows Consumption...75 Notes Oil and petroleum products market overview...79 Important regulatory changes...85 ADDITIONAL INFORMATION First results of gas market reform...9 Terms and abbreviations...28 Unbundling GRI content index Main risks Contacts

5 MISSION AND VALUES OUR MISSION IS TO BECOME THE DRIVING FORCE FOR MODERNIZATION AND PROFESSIONALISM IN THE UKRAINIAN ENERGY SECTOR INTEGRATED WITH THE EUROPEAN MARKET, ENSURING SECURITY OF ENERGY SUPPLIES AT COMPETITIVE PRICES WHILE MAXIMIZING THE VALUE OF NATIONAL RESOURCES Integrity and trust: we are honest and reliable in our relations both inside the company and with third parties Transparency: we are open and objective in our interaction both within the company and with third parties Professionalism: we are dedicated to professional development and adhere to the highest ethical standards Fairness: we are consistent, fair, and meritocratic in our relationships with all our customers, employees, competitors, and the state 8 9 9

6 WHO WE ARE ADDRESS OF CEO ANDRIY KOBOLYEV HOW WE WORK The document you are holding is more than just a report on the group s performance in. It is a three year summary of the work done by the current management team of Naftogaz. The company s major achievement is being in the black for the first time in the past five years, with no support from the state budget for the first time in the past decade. We also have a number of additional accomplishments to be proud of. Naftogaz is the top taxpayer in Ukraine. Besides providing a secure gas supply to Ukrainian households, we ensure sufficient supplies for all other consumer categories regardless of circumstances, be it an unusually long cold winter or Gazprom refusing to supply gas to Ukraine when coal reserves are well below the minimum. Thanks to diversification of suppliers, effective stock management, and cooperation with international financial organizations, we are now optimizing our major expenditures. In, we managed to end a multi year downward trend for Ukrgazvydobuvannya gas production, and we plan to achieve significant growth for the first time in 217. Transparency and a systemic struggle against corruption are not just attractive catchphrases; they have become key elements of our corporate culture, which, among other things, has made us the biggest user of Ukraine s corruption beating ProZorro e procurement system. As of the date of this address, we have received a separate award from the Stockholm Arbitration Tribunal in the Gazprom vs Naftogaz case, which fully rejects the take or pay claim of the Russian side in excess of USD 44 billion. The above mentioned achievements represent the perseverance and efforts of many people. While very different at first glance, they have one thing in common that serves as the key to the success for any team this thing is shared values. These values formed the foundations of our strategy in 214.They have helped us to make tough but important decisions. They are at the core of the group s new strategy that we have submitted for approval to our shareholder the government of Ukraine. Our core values are integrity and trust: we are honest and reliable in relations within the group and with third parties. They also include transparency: we are open and objective when interacting, both inside and outside the group. Most of all, we appreciate professionalism: we are dedicated to professional development and adhere to the highest ethical standards. Finally, we ensure fairness: we are consistent and meritocratic with all our customers, employees, competitors, and the state. I am very grateful to the people who share our values, both within Naftogaz and outside the group. You have led the group to success despite the reckless resistance of the old system. In, this resistance continued to pose a key threat to gas market reform, with Naftogaz as an integral part. It was the number one threat. Fighting against this internal enemy turned out to be much harder and more dangerous than any arbitration. I am convinced that in the near future we will succeed in this battle too, and will move forward to new victories. Sincerely, Andriy Kobolyev

7 HOW WE WORK OF NAFTOGAZ SUPERVISORY BOARD Supervisory board in The Naftogaz supervisory board was established on 21 April in accordance with new legislation. The aim was to assist the government and company management in implementing best international practices in terms of governance. The supervisory board participated jointly with the management in developing the company s strategy and preparing it for the submission to the government. the government adoption of the Law of Ukraine On amending certain legislative acts of Ukraine on management of state and communal property dated 2 June No. 145-VIII. performance. This will benefit the budget and the public. Most of the issues dealt with during by the supervisory board involved resolving past challenges, implementing the corporate governance reform of Naftogaz, and establishing the foundations for improved management systems going forward. We look forward to starting a new path focusing on future strategy and the internal controls of Naftogaz group to add value to the business and the people of Ukraine. It should be noted that successful delivery of this approach will require the government to implement the legislative and regulatory changes described in the Corporate Governance Action Plan (the CGAP). At the time of publication, these changes had not been implemented. Business overview of the company: operational and financial performance Key results of the company s operational performance in : transit of natural gas through Ukraine of 82.2 bcm was reached, a volume 22.5% more than in 215 (67.1 bcm). The volume of transit and the cost of transit services in were the highest in the last three years; suppliers. The share of each supplier did not exceed 3% of the total volume of gas purchased by Naftogaz; development of the company s own licensed gas resources held through its subsidiary Ukrgazvydobuvannya. An agreement was concluded with Ukrgazvydobuvannya on drilling wells and equipping fields at licensed sites of the company HQ to perform minimum obligations via work programs that are integral parts of special permits for subsoil use. Key financial results of the holding company in : for the first time in the last 5 years, Naftogaz made a net profit amounting to UAH 26.5 billion and positive net cash flow from operating activities of UAH 36. billion; based on the operating results in, the company will pay dividends of UAH 13.3 billion (5% of income ) to the sole shareholder (the state) and advance income tax of UAH 2.4 billion; for the first time since 26, the company did not receive direct support from the state in the form of compensation for the difference in prices through recapitalization at the expense of obtained government bonds; the company paid UAH 16.3 billion to the budget, which is 4% more than planned; two times during the year (in January and July-September ), imported natural gas was purchased using an EBRD USD 3 million revolving credit line which was received by the Supervisory board company under sovereign guarantee at the end of 215; agreements with Citibank and Deutsche Bank on a EUR 478 million revolving credit facility guaranteed by the World Bank were signed. These have been put in place to finance the purchase of natural gas. By doing so, the cost of financing was reduced. The cost of the credit line does not exceed 2.5% per annum; the weighted average effective interest rate under financial liabilities was reduced from 14.3% to 12.%, despite the fact that loan rates for Ukrainian companies increased both in the domestic and foreign financial markets. Structure of the board and its committees Appointment and contracting According to the Resolution of the Ministry of Economic Development and Trade of Ukraine dated 25 March No. 54, the supervisory board has a composition of five members, three of which are independent directors. All board member appointments are for a period of four years. The individual members of the supervisory board have been appointed by series of orders of the Ministry of Economic Development and Trade of Ukraine (further-mertu) and the entire composition of the board has been confirmed on 21 April by the Order of MERTU No All of the board members have been elected by the nomination committee for appointment of officers of strategically important enterprises at the Ministry of Economic Development and Trade of Ukraine. During, all of the appointed supervisory board members were compliant with the criteria applied to the identity of a board member as established by then effective rules of procedures of supervisory board (in edition approved by the Resolution of the Cabinet of Ministers of Ukraine dated 5 December 215 No. 12), including those regarding competence and time to be dedicated to the work on the Board. The current composition of the supervisory board meets the requirement on gender diversity. Independent directors made statements on their independence to the nomination committee for appointment of officers of strategically important enterprises at their appointment confirming that they are fully compliant with the independence criteria established by said rules of procedure. Renewed statements are in the annual report submitted to the general shareholder meeting and publicized on its official website 1. On 11 May, independent directors were contracted by the company to perform their board functions on the basis of service agreements. According to the provisions of the service agreements of all independent directors, the fee for performance of their board functions (including compensation for expenses) are payable for the period starting from 25 March. Mr. Demchyshyn entered into a similar service agreement with the company on 22 September. The fees for 1 documents/statement-(declaration-ofindependence).pdf The main thrust of the new corporate governance system for state-owned enterprises lies in minimizing political influence on their activity. The changes aim Chairperson Deputy chairman, Independent director Independent director Board member to decrease conflicts of interests between Naftogaz satisfied demand for Kovaliv Yulia Ihorivna independent director Proctor Charles Dr. Richards Marcus Demshyshyn the government policy development and imported natural gas with the help of Warwick Paul Cyril Richard Faraday Trevor Volodymyr economic feasibility in the managerial suppliers in the European market; Vasyliovych decision-making process on the company s The Naftogaz supervisory board is the first activities while improving the efficiency 8.2 bcm of imported natural gas example of corporate governance reform and transparency of their activities and (almost two times lower than in 215) of state-owned enterprises initiated by eliminating corruption to achieve better was purchased from 15 European 13

8 HOW WE WORK Supervisory board Kovaliv Yulia Ihorivna performance of his board functions (including compensation for expenses) are payable for the period starting from 21 April. The service agreement with Mrs. Kovaliv Yulia Ihorivna was concluded in and no remuneration for performance of her duties in this board was paid by the company, as the shareholder had not approved contractual conditions for her. Compensation for performance of board duties under these service agreements are established by the orders of MERTU (in their capacity as the shareholder of the company during ) at the level of gross EUR 215 thousand annually for independent directors and 75% of that amount for Mr. Demchyshyn Volodymyr Vasyliovych 2. The supervisory board members are also entitled to expenses incurred during their performance of board functions as established by the provisions of their individual agreements. In total, during the company incurred approx. UAH 2 7 thousand in expenses for the operations of the supervisory board. This amount includes UAH in service fees and compensation of expenses incurred by board members during performance of their duties, as well as D&O insurance procured by the company to insure Attendance of the supervisory board meetings in (both regular and extraordinary) 9/1 (with partial presence during meetings on July due to a business trip and 8-11 November and 5-9 December ) the liability of these officers after their appointment. Appointments within the supervisory board The first supervisory board meeting was held on May. During this first meeting, the board members elected: Kovaliv Yulia Ihorivna as the chairperson of the supervisory board and Warwick Paul Cyril as the deputy chair; Richards Marcus Trevor as the chair of the ethics committee; Proctor Charles Richard Faraday as the chair of the audit committee; and Warwick Paul Cyril as the chair of the nomination and remuneration committee. All of the board members were appointed to the composition of each committee. audit committee 1 ethics committee 1 nomination and remuneration committee 1 6/6 5/6 5/6 Warwick Paul Cyril 9/1 5/6 6/6 6/6 Richards Marcus Trevor 1/1 6/6 6/6 6/6 Proctor Charles Richard Faraday 9/1 (with partial presence during 6/6 6/6 5/6 meeting on July ) Demchyshyn Volodymyr Vasyliovych 1/1 6/6 6/6 6/6 1 Total number of meetings excludes the first supervisory board meeting held on May which resolved to establish the audit committee, the ethics committee, and the nomination and remuneration committee Proceedings of the board and its committees According to the requirements of the company s charter, the supervisory board meets as needed with a minimum established of at least once every three months. Starting in May, the supervisory board held ten meetings, including three extraordinary meetings at the request of the executive board. The supervisory board met in August for a working session taking into account that the approved board s calendar did not include a regular board meeting in August, and during the reporting year visited production facilities of Ukrgazvydobuvannya in Poltava region and the control room of Ukrtransgaz in Kyiv. The majority of board members have twice as much time dedicated to the work of the board comparing to the time commitment required by the rules of procedure Remuneration of the individual members of the TOTAL, UAH supervisory board for the year 1 Warwick Paul Cyril Richards Marcus Trevor Proctor Charles Richard Faraday of supervisory board, and the board anticipates that a similar commitment will be required going forward. In addition, supervisory board members contributed additional time to individual committee obligations outside of formal meeting periods as well as ongoing work programs for the development of the company s revised strategy, planning, and performance management framework on an individual or collective basis. The formation of all three committees was followed by the adoption of regulations on each of the committees in September. The supervisory board decided that committees should convene at each regular board meeting to prediscuss matters to be considered on the agenda of the board meeting. To reflect the company s important social role, an HSE committee was established at the beginning of 217. Conflict of interest Members of the supervisory board are required to disclose any potential conflicts of interest with the items of the agenda. During extraordinary supervisory board meetings held on 26 July and 12 August, agenda items on the approval of interested transactions agreements for natural gas supply for July and August between the company and Odesa Port Plant were notified of a conflict by the chair of the supervisory board as during that time, the chair has been a member of the working group preparing recommendations and proposals to the draft decisions of the Cabinet of Ministers of Ukraine on the sale of objects of state property subject to privatization (Ukrainian government consulting and advisory body engaged in advising on Odessa Port Plant privatization). Board priorities In the absence of approved ownership policy from the shareholder, the priorities of the supervisory board in were to engage with setting up the strategy of the company, developing and implementing a system of internal control and a system of delegation of authorities, launching the internal audit function, and collaboration with the executive board and key subsidiaries of the group on drafting financial and investment plans for 217. The supervisory board and the executive board focused on the development of the optimal operational model of Naftogaz and its group of companies and on implementation of the CGAP adopted by the government in 215. By the end of, the vast majority of actions required by the CGAP on the part of the company and the board were complete, whilst performance of pending actions were rescheduled due to delays in performance of Phase II of the CGAP on the side of the government. All of the required decisions regarding the operations of the board, committees and corporate secretariat were adopted during the reporting year. The board focused on: development, jointly with the executive board, of robust strategy for Naftogaz and the group in the light of emerging opportunities and the assets of the current business based on sound commercial principles and recognition of the company s public service obligations underpinned by forward projections on health, safety and the environment, financial and operating performance, and risk management requirements implementation of the spirit and intent of the CGAP to align corporate governance and the relationship with the shareholder in line with accepted OECD principles for state owned enterprises, to allow the company to operate as an ethical and commercial concern, meeting its public service obligations and foreign direct financial support; and In addition to this, the board elected a chief compliance officer, risk management officer and chief audit executive to establish compliance and risk management while restructuring existing internal audit functions in compliance with best international practices. During, the supervisory board extensively worked with key subsidiaries of the group to review and comment on drafted financial and investment plans for 217. The aim was to improve operational efficiency within the companies of the group and boost the quality of business planning. In the period from May to December, the supervisory board passed 4 resolutions on the matters within its competence as required by the law or by the former charter of Naftogaz that was in effect in. Six of these forty resolutions related to the transfer of issues to the agendas of subsequent meetings, but all transferred issues were ultimately resolved. The board voted on 34 resolutions during. The board also took an active role in developing amendments to Naftogaz charter. A new version was adopted by the Cabinet of Ministers of Ukraine on 14 December. In particular, this charter was amended with new provisions on the delegation of powers to the board resolving staffing and financial matters pertaining to the key subsidiaries of the group, approval of their financial and investment plans, and establishment of new financial limitations for approval of the company s transactions on gas trading, supplies and other transactions. Shareholder and external communication In, the supervisory board established the practice of regular communication with the government by holding joint meetings with the Vice Prime Minister and other representatives of the sole company shareholder. 4 Demshyshyn Volodymyr Vasyliovych The board regularly met with representatives of international financial 5 Kovaliv Yulia Ihorivna initiating design and execution of a consistent enterprise management framework organizations as the company s lenders, TOTAL (system of internal financial control) across Naftogaz group to ensure that effective and took an active part in cooperation with 2 Order of MERTU dated 12 April No. 675 as controls are in place to drive health, safety and the environment, operational and professional external advisors engaged by amended by the Order of MERTU dated 29 April In December, UAH was paid for the directors liability insurance, which covers liability of persons financial performance of the company and Naftogaz group consistent with international best practice. strategy and implement a system of the company to develop Naftogaz group No. 773 for independent directors; and Order appointed to the positions of chairperson of the supervisory board, deputy chairperson of the supervisory of MERTU dated 6 September No for Mr. board or member of the supervisory board during the period of the insurance agreement. internal controls. 14 Demchyshyn

9 HOW WE WORK Competence and proceedings of supervisory board committees Audit committee Purpose of the committee The audit committee was formed via a resolution of the supervisory board meeting dated May as a permanent consultative body accountable to the supervisory board. The purpose of the committee is to assist the supervisory board in overseeing the completeness and accuracy of financial statements, the effectiveness and reliability of internal controls, the independence of both external and internal audits, and adherence to the law and the Naftogaz code of ethics. Key functions of the committee The regulations on audit committee of the supervisory board define the following key tasks and functions of the committee: 1) to organize and perform preliminary review of matters included into the agendas of the committee and the supervisory board and related to finance, audit and risk management; 2) to organize and elaborate the drafting of conclusions, proposals, recommendations, draft policies, strategies, rules of procedure, procedures, decisions related to finance, audit and risk management, and their submission for supervisory board review; 3) to organize and perform functions related to financial statements as detailed in regulations; 4) to organize and perform functions related to internal controls and risk management as detailed in regulations; 5) to organize and perform functions related to the external audit of the company as detailed in regulations; 6) to organize and perform functions related to the internal audit of the company as detailed in regulations; 7) to organize and perform functions related to the treasury arrangements of the company as detailed in regulations; 8) to organize and perform other company responsibilities including special investigations and the consideration of fraud allegations. Key results in During, the committee reviewed Naftogaz s standalone and Naftogaz group s consolidated financial statements as approved by independent auditors. It met with the company s external auditors, independent of the executive board. It reviewed the overall treasury management activities of the company and approved a number of recommendations on these matters. It considered proposals on restructuring the internal audit function and development of internal audit plan for 217 to enable proper internal audit of Naftogaz and its group companies. As part of the overall Audit Program of Naftogaz, in December the committee initiated special investigations of certain audit findings after being alerted by the company s external auditors regarding suspicious operations within Ukrtransgaz. Ethics committee Purpose of the committee The ethics committee was formed via a resolution of the supervisory board meeting dated May as a permanent consultative body accountable to the supervisory board with the main purpose of assisting the board in the protection of the company s interests by evaluating and providing recommendations and proposals. Key functions of the committee The regulations on ethics committee of the supervisory board define the following key tasks and functions of the committee: 1) implementation of the code of corporate ethics for the company, including monitoring and resolving conflicts of interest, establishing specific rules and procedures for the handling of third-party complaints related to ethics breaches committed by the company s officers and employees; 2) application of the code of corporate ethics to ensure ethical decision-making, compliance with the laws in the jurisdictions in which the company operates, as well as conformance with internal company standards; establishment of reporting, investigation, and treatment of violations; 3) setting a framework for the company s risk policies, analysis and review of the company s rules, procedures and practice on ethics-related issues with a view to identifying possible breaches and assessing their effectiveness in meeting the company s interests and needs; and encourage their implementation as well as to deter unacceptable practices. Key results in In, the committee focused on significant revision and update of the existing code of corporate ethics of Naftogaz, on structuring the help line and whistleblowing functions with the aim of implementing principles of ethical behavior and creating a modern corporate culture within Naftogaz to operate as other leading national oil & gas companies around the world. Nomination and remuneration committee Purpose of the committee The nomination and remuneration committee was formed via a resolution of the supervisory board meeting dated May as a permanent consultative body accountable to the supervisory board. Its main purpose is to ensure preliminary review and detailed elaboration of matters within the supervisory board authority in the sphere of nominations and remunerations. It aims to provide recommendations to the supervisory board in the sphere of human relations, including engaging qualified specialists in the sphere of management, and creating necessary incentives for efficient activity. Key functions of the committee The regulations of the nomination and remuneration committee of the supervisory board define the following key tasks and functions of this committee: 1) assistance to the supervisory board in the drafting and implementation of the succession strategy of the company s management in order to ensure continuous work of the executive board; 2) establishment and implementation of nomination policies and standards of the company on the selection of nominees for positions in the executive board; 3) defining principles of remuneration and the terms of employment agreements of members of the executive board in order to create the necessary incentives for efficient work implementing the company s development strategy; 4) organization of drafting and processing policies, strategies, rules of procedure, resolutions and other documents that regulate activity in the sphere of nominations and remunerations of the members of the executive board, preparing conclusions, recommendations, and proposals for the supervisory board in this area; 5) preparation and submission for review by the general shareholders meeting or the supervisory board (as established by the charter) of proposals regarding the election or termination of the authorities of the chief executive officer and members of the executive board, other officers of the company nominated and dismissed by the supervisory board; 6) forming proposals regarding criteria and systems of assessment for the chief executive officer and members of the executive board, corporate secretary, risk management officer, chief audit executive, chief compliance officer, and anticorruption officer; 7) preliminary analysis of performance results of the chief executive officer and members of the executive board, including in view of possible remuneration increases and the application of other incentives. Key results in In, the committee focused its work on developing the nomination and succession policies for both the company s staff and the executive board, as well as on assisting the executive board to develop an organizational structure for Naftogaz and its group following the best international practices of leading oil & gas companies. Following commencement of its operations in, the committee concluded that the Naftogaz HR processes and procedures underpinning the work of the nomination and remuneration committee required a thorough transformation. This included implementation of an effective performance management system, fully developed succession plan and remuneration schemes, including executive and staff bonuses. This will be a multi-year project requiring external expert help and several continuous improvement, as has been the case in most companies who excel in these areas. It is the intention of the committee to work with the management of the company to pursue this agenda throughout the group, including all subsidiaries. Adoption and review of the regulations on committees The regulations on audit, ethics, and the nomination and remuneration committees were adopted on the basis of the requirement to revisit them after six months to assess possible improvements. The board plans to address this in 217 within the framework of implementation of the system of internal controls within the company. In, much of the work of this committee 4) monitoring of the operating environment and best focused on establishing ongoing processes international practices (general and sector-specific) in terms and its capability to fulfil its duties. This has included the of corporate ethics, engagement with various stakeholders appointment of individuals to develop the internal audit and to assess the adequacy of current company policies; risk management functions of the company. The system of internal control project was launched in and is being 5) ensuring the appropriate level of accountability and undertaken with EY to provide a comprehensive review of transparency of the company; a number of elements of the audit committee s functional 6) promotion of effective communication between the responsibilities including internal audit, enterprise company s management and its staff with a view to risk management, financial control and investment reinforcing understanding of the company s ethical values 16 management

10 TARGET CORPORATE GOVERNANCE STRUCTURE PEOPLE OF UKRAINE ROLE OF THE STATE AS THE SHAREHOLDER GOALS OF CORPORATE GOVERNANCE REFORM The State as the shareholder, represented by the Cabinet of Ministers of Ukraine, sets directions to the company Set directions should be consistent with the state s ownership policy where the government explains to the people of Ukraine why it needs Naftogaz in state ownership To implement corporate governance structure compliant with the best world practices for stateowned companies To elect supervisory board members with a majority of independent directors INDEPENDENT NOMINATION COMMITTEE CABINET OF MINISTERS INDEPENDENT REGULATORS INDEPENDENT AUDITOR Strategy of the company is based on the directions set up by the government The supervisory board is assigned with a broad mandate including approval of strategy, financial and investment plans, election and termination of authorities of executive board members The State guarantees prevention of political meddling into activities of the company To establish functional internal control systems to include internal audit, compliance, financial control, risk management, etc. SUPERVISORY BOARD The State is an active and informed owner. Corporate governance is performed with due account for the specifics and needs of the company in order to ensure that the company follows the directions set by the government To confirm the company s status as a legal entity of private law ETHICS COMMITTEE HSE COMMITTEE NOMINATION AND REMUNERATION COMMITTEE AUDIT COMMITTEE The State establishes efficient corporate bodies, appoints highly qualified reputable professionals, and delegates governance of the company to them. In addition, an appropriate internal control system is duly functioning in the company and an independent auditor is elected To confirm the company s title to the shares/ corporate rights of the legal entities whose shareholder is the company Regulatory and ownership (shareholding) functions should be separated The company, as well as other state-owned enterprises, will observe high standards of transparency. In addition to obligatory disclosures, the company will be subject to the same high quality accounting, disclosure, compliance and auditing standards as listed companies EXECUTIVE BODY

11 CREATING VALUE: SIX CAPITALS data MANUFACTURING Naftogaz is a leading enterprise in the oil and gas sector and one of Ukraine s biggest companies. See p. 14 for more details Natural gas production 64.5 UAH billion Crude oil and gas condensate production 9.4 UAH billion Natural gas storage UAH billion Natural gas transmission and distribution UAH billion VALUE OF FIXED ASSETS BY SEGMENT Crude oil transportation 15.6 UAH billion Natural gas sales and supply.2 UAH billion Crude oil refining and gas condensate processing 8.2 UAH billion HUMAN Naftogaz is one of the biggest employers in Ukraine. Naftogaz group companies employ persons See p. 26 for more details DEVELOPMENT AND SOCIAL SECURITY FOR EMPLOYEES 1.8 UAH billion SAFE WORKING CONDITIONS (HEALTH, SAFETY AND FIRE PREVENTION) UAH million QUALIFIED SPECIALISTS (IMPROVED THEIR QUALIFICATION) persons COMPETITIVE SALARY 71% higher compared with the industrial sector of Ukraine NATURAL Naftogaz tries to minimize its environmental impact. See p. 18, 157 for more details Reserves gas: 34.8 bcm oil and gas condensate: 47.2 million t Resources gas: bcm oil: 98.8 million t FINANCIAL Naftogaz continuously works to secure competitively priced funding and honors all obligations to its lenders See p. 157 for more details NET ASSETS 46 UAH billion NET PROFIT 22.5 UAH billion NET OPERATIONAL CASH FLOW 47.3 UAH billion Naftogaz estimates based on reserves appraised by Ryder Scott Company INTELLECTUAL Intellectual capital is one of strategic assets of Naftogaz group and our competitive advantage. See p. 12 for more details INTERNAL MANAGEMENT AND CONTROL SYSTEMS INTELLECTUAL PROPERTY CORPORATE GOVERNANCE SYSTEM IN LINE WITH THE OECD CORPORATE GOVERNANCE PRINCIPLES RISK MANAGEMENT SYSTEM SOCIAL We realize social importance of our activity for the country s economy and Ukrainian public and believe that our activity in the area of corporate social responsibility is our contribution to sustainable development of Ukraine. SOCIAL DEVELOPMENT OF LOCAL COMMUNITIES 55.8 UAH million RESPONSIBLE CORPORATE CULTURE RELATIONS WITH STAKEHOLDERS PRINCIPLES AND PROCEDURES 2 See p. 42 for more details

12 HOW WE WORK EXECUTIVE BOARD STRUCTURE AND REMUNERATION Andriy Kobolyev Chief executive officer (chairman of the executive board) since 25 March 214 Andriy began his career at the international audit and consulting group PriceWaterhouseCoopers (PwC), where he specialized in issues of strategic management and corporate transformation. From 22 to 21 he worked at Naftogaz, rising from a chief specialist to adviser to the chairman. Some time later, Andriy co-founded AYA Capital investment banking group where he focused on debt and equity capital raising, debt restructuring and corporate reorganizations of large enterprises and holdings. Andriy holds a master s degree in international economic relations with honors from the Institute of International Relations at Kyiv Shevchenko National University. Remuneration of the management During, the management consisted on average of 4 executive board members and 6 directors (4 executive board members and 4 directors in 215). Compensation to the management, which is part of other operating expense, included salary and additional current bonuses and made up UAH 88 million in (UAH 7 million in 215). Please find the Income declaration of chairman of the executive board Andriy Kobolyev for on the company s website in Corporate governance section. Remuneration paid to Naftogaz board members in Members Gross remuneration in as board member, UAH million Andriy Kobolyev 19. Yuriy Kolbushkin 1.2 Sergiy Konovets 11.1 Sergiy Pereloma 1.5 Total 5.8 Sergiy Konovets Chief financial officer (deputy chairman) since April 214 Sergiy is responsible for financial and economic management in Naftogaz. Sergiy has more than 2 years of professional experience in strategy development, business development, finance and audit with international companies. He worked as audit partner for leading audit companies Deloitte and EY. Before his appointment to Naftogaz, Sergiy worked at international consultancy Boston Consulting Group. He also worked in a business development and strategic planning function at international agriculture holding Bunge located in Switzerland. Sergiy holds an MBA degree from the International Institute for Management Development (IMD) in Lausanne, Switzerland. Sergiy Pereloma First deputy chairman since August 214 Sergiy has more than 15 years experience in the oil and gas industry and manages divisions responsible for transit and supply of natural gas, customs clearance, gas sales and gas balancing. He has extensive experience in finance, banking and insurance sectors. Sergiy graduated from the Institute of International Relations at Kyiv Shevchenko National University. Yuriy Kolbushkin Member of the executive board since February 1999 Yuriy has worked at Naftogaz since the company was founded. He is responsible for taxation, pricing policy, budgeting and economic relations. Before moving to oil and gas industry, he worked for 15 years in the Finance Ministry of Ukraine. Yuriy graduated from the Kyiv Institute of National Economy, holds a doctoral degree in economics and is a member (academic) of the Ukrainian Academy for Oil and Gas

13 HOW WE WORK OTHER TOP EXECUTIVES YURIY VITRENKO Сhief commercial officer of Naftogaz Group Yuriy is responsible for strategic development and reform of Naftogaz and for the diversification of gas supplies to Ukraine. He also supervises international business activity of the company as well as development of international cooperation and manages gas purchases in European gas markets. Yuriy worked for Naftogaz in and being responsible for international bank loans and debt restructuring. He was an adviser to the chairman of the board on permanent and freelance basis. His career began in 1998 with the international audit and consulting group PriceWaterhouseCoopers (PwC), where he advised major Ukrainian companies on financial management. He has 9 years of experience in investment banking and finance in Ukraine and abroad. Yuriy worked for Merrill Lynch investment bank in London and was the senior vice-president and chief operational officer at Amstar Europe international investment fund. He is a co-founder and partner AYA Capital investment banking group and headed the company between 21 and. In 24 Yuriy graduated from the MBA program at the INSEAD Business School (France, Singapore). He holds a master s degree in International Business Management from Kyiv National Economic University, and is an Associate of the London Securities and Investment Institute (ASI). From April 214 till June held the position of director for business development VITALIY SHCHERBENKO Director for administrative activity and energy efficiency Vitaliy is responsible for organizing and planning capital investment and non-core asset programs at Naftogaz group. He manages investment raising for projects on energy saving technologies, minimizing natural gas losses and consumption and increasing the share of renewable energy sources. He is also responsible for procurement, coordinates personnel policy, social issues and logistic support. He has more than 2 years of experience in senior management positions. Vitaliy studied Economics at Kyiv National Economic University. From April 214 till June held the position of director of energy efficiency and procurement YAROSLAV TEKLYUK Director for legal affairs Yaroslav is responsible for legal matters and government relations. He has more than 15 years of professional experience in legal practice. Yaroslav has provided legal advice and represented corporate clients in banking, financial, and telecommunications sectors. Prior to joining Naftogaz he spent eight years at Vasil Kisil and Partners, a leading Ukrainian law firm, including four years as a partner. Yaroslav has graduated in International Law from the Institute of International Relations at Kyiv National Shevchenko University. From April 214 till June held the position of director for legal affairs and government relations ROMAN BILIAHA Procurement director of Naftogaz Group Roman is responsible for successful implementation of a single procurement policy and innovative procurement methods for Naftogaz and its group companies. In this role, he is focusing on the development and adoption of common standards and regulations, specifically related to procurement in infrastructure projects. Roman has a total of more than 1 year s procurement experience in senior positions within the oil and gas industry (mainly with TNK-BP, one of the largest oil companies). He holds an engineering degree from Vinnitsa National Technical University. From November 215 till June held the position of director, procurement centre of excellence

14 HOW WE WORK Naftogaz group personnel structure, Personnel categories % Gender structure % Qualified and other workers Professionals and specialists Managers Technical staff 1 personnel categories according to the Ukrainian Occupational Classification men women PERSONNEL Age structure 2 55 Number of staff by core operations A PROFESSIONAL AND EXPERIENCED TEAM IS THE MAIN ASSET OF NAFTOGAZ GROUP, THE MAJOR FACTOR ALLOWING US TO ACHIEVE THE EXPECTED BUSINESS RESULTS AND CREATE VALUE FOR SOCIETY. IN THE PAST TWO YEARS, WE HAVE IMPLEMENTED THE BEST HR PRACTICES AND MADE ALL PROCESSES WITHIN THE COMPANY AS TRANSPARENT AS POSSIBLE. AS A RESULT, WE MANAGED TO AT- TRACT THE BEST PROFESSIONALS WHO CONTRIBUTED TO THE TRANSFORMATION OF THE COMPANY INTO A MODERN, PROFITABLE AND TRANSPARENT BUSINESS to 5 years old employees entitled to old-age benefits in 5 years of sooner under 35 years old pentioners 43.3% 24.1% 32.6% gaz/oil extraction gaz transportation other types of activities Naftogaz group personnel profile Today, the enterprises of the group employ professionals who have experiance with large international companies such as ArcelorMittal, BCG, Chevron, ConocoPhillips, Deloitte, Dragon Capital, ExxonMobil, EY, KPMG, McKinsey&Company, PwC, Shell and others. staff (.7%), and skilled and other workers (71.3%). 78% of group personnel are men (58 19 persons) and 22% are women ( persons). The total number of managers, professionals, specialists of the group is 21 3 persons, of which 2 68 persons, or 98%, have university degrees (higher education, incomplete higher or basic higher education). 217 persons have PhDs and 22 persons academic titles. are those who will be entitled to retire in 5 years or earlier, 3% (2 55) are old age pensioners, and the vast majority of employees are 35 to 5 years old (58%). Human rights policy policy meets the provisions of the above acts. Workflow in the companies is organized and labor relations are regulated based on the following principles: freedom of association and collective bargaining; adequate working conditions and terms of remuneration; We have a fair, balanced, transparent and performanceoriented remuneration system. That is the main tool for attracting and retaining the best professionals with the required skills, knowledge, competencies, and relevant values who will work efficiently to achieve results in accordance with the company business strategy and get fair compensation for that. Employee involvement and motivation for change within the company really matters. Head of human resources and social policy Ivan Synyakov As an international company, we respect and protect human rights in our countries of operation. The company operates in accordance with the principles of the Universal Declaration of Human Rights, Conventions of the International Labor Organization (Convention No 29, 87, 98, 1, 15, 111, 138, 182), the UN Global Com prohibition of discrimination based on Naftogaz is one of the largest employers sex, political affiliation, religion, ethnicity or in Ukraine. The enterprises of Naftogaz age, forced, sexual identity and of forced group employ persons, including and child labor. During, the company managers (11%), professionals and specialists (17%), 493 technical (18 893) are persons under 35, 14% (1 154) pact The company s human rights The personnel breakdown by age: 25% 26 recorded no cases of discrimination

15 HOW WE WORK The average monthly salary at the enterprises of Naftogaz group compared to that i Ukraine s industrial sector, 214-, UAH Ukraine s industrial sector (according to the State Statistics Service of Ukraine) enterprises of Naftogaz group The company guarantees that the legitimate rights of employees are in no way violated. The company continuously analyzes risks that could potentially lead to violations of the rights of employees and makes every effort to prevent them. Remuneration for staff Naftogaz has a fair and transparent remuneration system in place in compliance with the standards and safeguards required by law of Ukraine, together with general and sector agreements. During, the average salary of regular employees in Naftogaz group increased by 37% compared to 215. As of 1 January 217, the enterprises of the company had no wage arrears. The management of Naftogaz is monitoring the timely payment of wages to the employees of the company. The remuneration system of the company is updated in accordance with the best international practices based on a grading approach. The system is in line with the company business strategy, and provides for external and internal equity. Social security of employees The management of the company and its enterprises realizes that the sustainable and efficient operations of the company and the oil and gas industry depend on the climate in the workplace, timely payment of wages, creation of safe working conditions, ensuring a decent standard of living, and secure social protection. Therefore, despite the tough economic and political conditions in the country, over the past year the enterprises of the company, within the available funds, have performed the requirements of the sectoral agreement and collective agreements. They have taken measures to maintain guarantees, benefits, and compensation to the workers in the industry, and to protect the rights of personnel. Under the terms of the sector agreement and the collective agreements, the enterprises and trade unions of the company arranged rehabilitation and recreation activities for the employees and their families and pensioners. During the reporting period, health resort vouchers were provided to more than 8 employees, which is two thousand more than in 215 and includes more than 8 children, which is the same as last year. The total cost of their recreation amounted to UAH 95.6 million. That is 11% more than in the same period of 215. The company also provides funds and maintains social infrastructure facilities owned by company enterprises and which are used not only by the company employees, but also by the residents of the towns where enterprises and affiliates are located. These include housing facilities, cultural institutions, health care facilities and canteens, sports and recreation facilities etc. For the reporting period, their maintenance costs amounted to UAH 355. million, which is 28% more than in 215. Under the collective agreement, the additional benefits and guarantees include expenditures on: rehabilitation and recreation of employees and their families health insurance and/or compensation for the treatment bonuses other financial assistance and benefits (financial assistance at birth, and to low income and large families, benefits to pensioners and veterans, etc.) Non financial incentives include corporate awards (honors and certificates). The company also encourages its employees by providing opportunities to study and improve their skills. Social partnership in labor management The enterprises of the group base their social partnership on the following principles: equality; respect and consideration for the interests of the parties; compliance by the parties and Number of Naftogaz employees who improved their skills in, persons by the group enterprises by staff categories Ukrgazbudobuvannya Ukrtransgaz Ukrnafta Ukrtransnafta Other enterprises of the group 4 managers professionals qualified and other workers Expenditures of Naftogaz group enterprises on social security of workers in, UAH million 2 by expense categories maintenance of social facilities healthcare financial assistance rehabilitation of employees and their families bonuses other benefits and types of social privileges and guarantees provision of housing 66.7 by group enterprises Ukrgazbudobuvannya Ukrtransgaz Ukrnafta Ukrtransnafta Other enterprises of the group Number of young professionals that graduated in the past three years working by assignment of universities and colleges in enterprises of the group (as of 31 December ), persons by the group enterprises 4 2 Ukrtransgaz Ukrtransnafta Ukrgazbudobuvannya Ukrnafta Other enterprises of the group by positions 16 managers professionals, specialists workers 71 by accreditation level of educational institution 194 1st and 2nd accreditation levels 3rd and 4th accreditation levels 73

16 HOW WE WORK ments of ISO 91, ISO 141, ISO 51, OHSAS 181 (ISO 451) and SA 8. In, employees were trained compared to employees in 215. They are mostly technical staff and skilled workers (13 26) employees gained new qualifications (trained, retrained, trained in related occupations). In, 219 employees attended English courses. results their representatives of laws and regulations; contractual regulation of social and labor relations; need to achieve mutually acceptable compromises when negotiating the terms of the collective agreement; freedom of choice when discussing matters related to labor; adoption of voluntary commitments by the parties. 2. Construction of an efficient internal communications system within 99% of the employees of Naftogaz group are trade union members. Joint Recently we ve welcomed a lot of young people to the company. Naftogaz group. The communications meetings of the employer s bodies and The wage is very decent. We still have vacancies, but my advice On 16 June, Ukrgazvydobuvannya system will include a set of channels trade unions are held twice a year to is do not ignore any opportunities. Because in addition to the and Professional Government Initiative and tools to communicate with different 5. Adoption of Naftogaz group s unified discuss the implementation of sectoral knowledge and desire to work in a prestigious company, one signed a memorandum of cooperation target groups. An integrated sys personnel policy which will specify agreements. must gain the necessary experience. in order to attract qualified candidates. tem will operate on a permanent basis single standards, principles and rules With organizational support provided by under unified standards that will allow for HR management and relationships The provisions of collective Chief geologist of Ukrgazvydobuvannya Mykhailo Machuzhak the Professional Government Initiative, every employee to receive prompt and between employees and the company 3 agreements and sectoral agree 31 3 short term internships in the company accurate information about the com at all levels and enterprises. 31 ments apply to all employees of the group enterprises, including temporary or part time employees. Professional development of employees Naftogaz is implementing policies aimed at improving professional skills and the development of human resources. The company staff training plan is designed based on the responsibilities of its business units and their proposals. It focuses on the development and improvement of professional skills and knowledge. In addition, the company has corporate training programs on quality, environment, energy saving and social responsibility as part of the implementation of integrated management system in accordance with the require Working with students and recent graduates Working with talented young people is one of the top priorities of Naftogaz, which makes consistent steps to ensure stable annual recruitment and to attract the best generation Y professionals. In this regard, Naftogaz closely cooperates with top universities. The students of Ivano Frankivsk National Technical University of Oil and Gas, Poltava National Technical University, Drohobych Oil and Gas College, and other universities and educational centers have the opportunity to study under a dual system where students receive theoretical knowledge at their universities or colleges and at the same time gain practical skills at the enterprises of the group. The students are fully immersed in the production environment with the specifications, plans, weekly reports, quality control. They learn how to work as a team. During these apprenticeships, each student gets his/her coach an employee of the business unit, who helps them to learn a profession, to adapt to the new environment, and to get the idea of the workflow. With a successful apprenticeship, students of blue collar occupations tend to get a job offer at the enterprises of the group after they graduate. The enterprises of the group willingly employ graduates and are committed to invest in their development and training and to facilitate their successful career. Learning at work is the main but not the optional part of the learning process. Implementation of the first phase of the grade-based wage system project. It is correlation of wages with job levels, which aims to optimize the payroll management and increase the investment attractiveness and competitiveness of the company on the labor market. Optimization of the company organizational structure as a part the new management pattern and business efficiency improvement project. Introduction of health insurance for company employees. will be arranged to train specialists for Ukrgazvydobuvannya, state owned enterprises and public service. Major tasks for 217 The company has established its major tasks in personnel management for 217: 1. Completion of the implementation of a grade based wage system (at all levels) for all categories of staff and target oriented assessment, management systems. This would link the remuneration pattern to business objectives (performances, achievement of objectives), create conditions for building a consistent remuneration and benefit policy in line with international standards and best practices, and create a common understanding of the meaning and contribution of each employee in achieving the strategic objectives of the company. pany objectives, strategy, results of the company, enterprises and individual employees. A feedback mechanism is to be introduced through dedicated channels and surveys, which would enable us to engage employees in the planning of the company operations and their involvement in adjusting the company processes. 3. Establishment of Naftogaz unified system of knowledge management, leadership and talent development at the Corporate University. The objective is business development through a single set of measures to develop key skills, competencies and managerial capacity of Naftogaz group staff. 4. Establishment of the Ukrainian employer association as the authorized body to represent and protect the rights and interests of employers of the industry in economic, social, labor, employment and other areas, including their relations with other parties to the social dialogue and the conclusion of the sectoral agreement.

17 HOW WE WORK HEALTH AND SAFETY NAFTOGAZ GROUP, RECOGNIZING ITS RESPONSIBIL- ITY FOR THE SAFETY OF LIFE AND HEALTH OF ITS EMPLOYEES, CONSIDERS LABOR PROTECTION A MA- JOR PART OF OVERALL CORPORATE GOVERNANCE Naftogaz group health and safety policy The employees of Naftogaz group operate sophisticated equipment and perform a large number of hazardous works. The company is committed to preventing employee exposure to accidents and occupational health risks. The occupational health and safety strategy of Naftogaz group determines its policy, objectives, goals, key principles and areas for creation of proper and safe working conditions, prevention of accidents, occupational health risks, traffic accidents and accidents at work. The safety and health of workers is an integral part of the social responsibilities of the company. The desire to maintain a safe working environment not only requires the implementation of the relevant economic policies, but also protects fundamental human rights. The objectives of the company in the field of occupational health and safety are to reduce the number of: - industrial injuries and disability days due to accidents at work - workplace deaths as a result of sudden health deterioration due to existing diseases - accidents involving company vehicles - occupational health risks and accidents at work Occupational safety, including adherence to traffic regulations by the employees of our enterprises, depends on safety awareness of managers at all levels. The situation in this area will improve. Our priority is to maintain an active dialogue with each other. Director for safety, environmental and industrial security of Naftogaz Vitaliy Zayets The company, realizing its full responsibility for the health and safety of workers employed at its oil and gas production facilities, is guided by the applicable principles of European law and the best international practices. Reducing workplace injuries. Analysis of health and safety indicators Loss of time due to workplace accidents, workdays Naftogaz takes consistent actions to reduce occupational injuries within the group of companies. In, 24 accidents occurred at the enterprises of the group (in ), including three accidents involving groups of employees (in 215 2). In total, 27 employees were injured (in ). The last three years have seen a reduction in the number of victims of fatal work injuries: in 214, eight workers Ukrtransgaz Ukrgazvydobuvannya Ukrnafta Ukrtransnafta Others

18 HOW WE WORK Number of workplace injuries at Naftogaz group enterprises in 214 Number of accidents Number of injured workers, persons Number of victims of fatal work injuries, persons Ukrtransgaz 5 1 Ukrnafta Ukrnaftogazkomplekt 3 Ukrgazvydobuvannya Ukrtransnafta Naftogaz Fatal accident frequency rates 1 of Naftogaz with those 8 in other industries 2 and Ukrainian national average rate Naftogaz group Metallurgical industry Chemical industry 215 Accident frequency rates 1 of Naftogaz with those of other industries 2 and Ukraine national average rate Ukraine were fatally injured. In 215 the figure was five workers, and in, two workers. The deaths in occurred due to road accidents. To control working conditions at the workplace, annual hazard identification and accident risk assessment measures are in place at Naftogaz. Based on the findings of these assessments, a general register of hazards and risk assessment is maintained and regularly reviewed. In, loss of time due to workplace accidents fell by 13% to workdays, compared to workdays in 215. Accident frequency rate at Naftogaz group enterprises in is.35 (in ), fatal accident frequency rate 1 in 218 is (in ). Findings of labor protection inspections in The group enterprises promptly consider and analyze cases of occupational injuries and take necessary preventive measures. In, the occupational safety and health divisions and standing commissions at the enterprises of the group conducted inspections (in ). Based on indentified violations 2 34 workers were deprived of a bonus, 177 were rebuked, and one employee was dismissed. The main types of violations in labor safety included incorrect workplace layout, violations in recording operational labor safety documentation, performance of work without personal protective gear (when available), lack of instructions on safety in the workplace. A bulldozer driver was dismissed for being drunk at work. In addition, during the authorities of the State Labor Service of Ukraine conducted 117 inspections of group enterprises (69 inspections in 215) and fined 68 employees (182 employees in 215). Analysis of accidents by types of causes, 214- Explosion involving tank truck (7/4 F) Fall of an injured person (5/1 F) Intentional injury inflicted by other person (4/1 F) Traffic accident (2/1 F) Injuries caused by moving objects (2) Traffic accident in ATO zone (1 F) Transportation fire (1) Fall of equipment (1) 23 accidents including 8 fatalities *F fatal accidents Fall of an injured person (5/1 F) Traffic accident (4/1 F) Injuries caused by moving objects (3/2 F) Intentional injury inflicted by another person (3) Fall of equipment (2) Toxic substance (2) Landslide (1 F) Transfer of technology or vehicles (1) Other (3) 24 accidents including 5 fatalities *F fatal accidents Traffic accident (1/2 F) Fall of an injured person (5) Injuries caused by moving objects (3) Intentional injury inflicted by another person (3) Contact with animals (dog bite) (1) Poor health (1) Gas dynamic phenomena (2) Injuries caused by objects reacting under pressure (1) Fall of equipment (1) 27 accidents including 2 fatalities *F fatal accidents Operational and financial performance audits were performed at Terrorist threats and measures to. Naftogaz Metallurgical Chemical Ukraine Investments in labor safety group industry industry a number of the group enterprises reduce possible negative effects 1 Accident frequency rate (fatal accident) is calculated using the formula: and their affiliates, structural and In, investments into the labor safety Accident frequency rate = N * 1 / Av, In, the enterprises of the group where N = the number of the reported workplace accidents with one or more days injury for the reporting production units, including Ukrtransgaz, Ukrgazvydobuvannya, Ukrtrans by 12.5% and amounted to UAH mil In, Ukrnafta spent UAH mil and health of the employees increased implemented the following measures: period; Av = the average number of listed employees for the reporting period. nafta, Ukrspetstransgaz, Ukravtogaz. lion compared to UAH million in the lion, Ukrtransgaz UAH 17.6 million, according to the requirements of The accident frequency rate is calculated per 1 listed employees. 2 According to the State Labor Service of Ukraine A representative of the US insurance previous year. Ukrgazvydobuvannya UAH million, antiterrorist centre of the Secu Causes of injuries and accidents, organizational company OPIC conducted a technical audit of selected underground gas storages of Lvivtransgaz, Prykarpattransgaz and Ukrtransgaz. The enterprises of the group received informative notes and instructions on labor safety organization, prevention of workplace accidents, and creating proper and safe working conditions. technical physiological other Investments into labor safety include not only the cost of compliance with mandatory legal requirements, but also targeted corporate programs focused on reducing injuries. All employees of the enterprises working under an employment agreement (contract) are insured against workplace accidents and occupational diseases. In accordance with regulations, they receive personal and collective protection gear (including that against radiation and chemical impacts of potential accidents). 6 2 and Ukrtransnafta UAH 8.24 million for the purchase of modern certified personal protective gear Labor safety and industrial security activities in In, the company continued systemic activities to improve labor safety at its enterprises.

19 HOW WE WORK rity Service of Ukraine (SSU ATC) anti terrorism security passports prepared for 12 facilities; the SSU ATC coordination groups carried out 18 special tests to check the anti terrorist protection of critical facilities of the group. Following the findings of the tests, the enterprises of the group took measures to strengthen the protection of the facilities and eliminate the shortcomings; Naftogaz security department officers conducted 12 on site inspections to check the security of 9 critical facilities of group companies; the emergency communication charts and personnel evacuation plans in case of sudden crisis attacks caused by terrorist have been improved; in the reporting period special meetings, trainings and practical exercises on anti terrorist measures were held at the facilities of the group enterprises in Ivano Frankivsk, Sumy, Odesa, Zakarpattia, Lviv, Ternopil, Volyn, Poltava regions. Prevention of workplace injuries Inspections conducted Persons deprived of bonus Fire safety measures in the group enterprises Fire prevention measures in the enterprises of the group are subject Person dismissed Persons rebuked to the Fire Safety Rules in Ukraine and Naftogaz Fire Management System. The total number of fire safety managers in was 225, including 11 full time professionals and 114 persons that also perform some additional functions. In, in the enterprises of the group there were 212 fire technical committees and 397 fire brigades with members. The persons responsible for fire prevention are designated, the relevant regulations and instruction are developed, regular training is held and fire safety awareness is checked. During, fire safety managers carried out inspections of fire safety conditions of company facilities and found violations, of which were remedied. 159 disciplinary punishments were imposed for violations of fire safety rules. Structure of investments in labor safety in, UAH million The facilities of the group enterprises are protected by 26 fire rescue units of the State Emergency Service of Ukraine on a contract basis. They are equipped with 89 fire engines. The manning strength of the units is 966 people. by short circuit in vehicles. The direct material damage amounted to UAH thousand facilities of the group enterprises are equipped with an automatic fire As one of the steps to attract funding alarm, 85 are equipped with automatic The State Emergency Service of from the European Bank for Reconstruction and Development (EBRD), extinguishing systems. In total, there are Cooperation between Naftogaz Ukraine conducted 76 inspections at 234 designated departmental fire trucks and the EBRD in the field of company enterprises, which resulted Naftogaz board approved the Environmental and Social Action Plan, which (of which 121 are on twenty four hour labor protection in proposed fire prevention measures, of which 3 2 were implement At the end of 215, Naftogaz began provides for the development, imple alert), one fire boat, 96 water motor Persons fined by the State Labor Work safety pumps, including 36 drawn motor Service for violation inspections conducted ed. Administrative punishments were cooperation with the EBRD. Under the mentation and certification of labor pumps, and 1 33 fire reservoirs. imposed on 192 persons for violations terms of the Loan Agreement, the Bank safety management system based on of work safety rules of fire safety rules. During, at the enterprises of the allocated funds for the purchase of the requirements of the relevant international standard (OHSAS 181) group there were two fires caused gas and laid down a number of condi tions related to the environmental and social liabilities of the company Providing personal protective gear to employees (64.8) Other measures (18.3) Providing labor safety regulation documents to employees (.7) Operations of labor protection offices (.4) Purchase of first aid kits (2.8) Modifications of fixed assets to bring them into line with labor protection requirements (22.9) Providing special food to employees (9.5) Elimination and minimization of dangerous and harmful impacts on employees (21.) Labor safety trainings (6.9) Medical examinations of employees (5.7) Assessment of workplaces (1.1) Investments in labor safety, UAH million Ukrtransgaz Ukrgazvydobuvannya Ukrnafta Ukrtransnafta Investments in labor safety activities by the enterprises Investments in labor safety activities by the enterprises of the group as a % of their payroll in Ukrnafta Ukrtransgaz Ukrtransnafta Ukrspetstransgaz Ukrgazvydobuvannya Ukravtogaz Other Naftogazobslugovuvannya Expenditures of Naftogaz group enterprises on working garments and other personal protective gear in, UAH million Ukrgazvydobuvannya Ukrnafta 25.9 Ukrtransgaz Ukrtransnafta

20 HOW WE WORK Training on labor safety and industrial security To improve the competence of employees, we organize labor safety training and implement the methodology for assessing knowledge and skills of our staff. During, the employees of the health and safety, environmental and industrial security department were trained on the following topics: Risk management methods and tools in labor safety, Development and implementation of risk management systems, Audit and certification of management systems, Risk management tools and methods in labor safety management systems, and Audit of the integrated labor protection management system. In addition, they were instructed in the integrated management system development methodology and management system implementation according to the : results requirements of ISO 91, ISO 141, ISO 51, OHSAS 181 (ISO 451) and SA 8 and received the relevant certificates. In June, the health and safety, environmental and industrial security department held a training workshop on labor protection management for the managers and employees of the structural business units of the company who are responsible for identifying hazards and assessing risks of accidents. Eighty employees attended the event. The company has a corporate training program in labor safety and industrial security in place, which includes lectures. Plans for 217 IN THE FIELD OF LABOR PROTECTION risk-oriented approach to labor safety management introduced in order to decrease the number of occupational injuries; Naftogaz Health and Safety Policy; Hazard Identification and Accident Risk Assessment Methodology approved, company hazards identified and risks assessed, register of hazards in the workplace prepared and approved; Naftogaz Health and Safety Policy Objectives, Program and Action Plan approved; the Action Plan to improve road safety in the enterprises of the group for -218 approved; the basic requirements of the standard PAS 11:211 Guidelines for the Management of Psychosocial Risks in the Workplace introduced. The strategy of the company in the field of occupational health and safety is determined by company leadership together with the working group on labor protection. This includes representatives of Naftogaz group, the Trade Union of Oil and Gas Industry of Ukraine, the Federation of Mining Employers of Ukraine, international experts, and auditors on labor protection. The company s plans in the field of health and safety in 217 include: 1. Implementation and certification of a safety management system in accordance with OHSAS 181 (ISO 451) Occupational Health and Safety Management Systems. 2. Development of new regulations on health and safety management at the enterprises of the group based on the international standard OHSAS 181: 27 (ISO 451) Occupational Health and Safety Management Systems. 3. Implementation of an Action Plan to improve road safety at the enter IN THE FIELD OF OCCUPATIONAL SAFETY crisis response algorithm and the mechanism to inform the central Ukrainian authorities and the European Energy Community in case of emergency and crisis situations in the oil and gas sector of Ukraine developed; the enterprises of the group prepared for trouble-free and uninterrupted work in the autumn and winter period of -217, selected enterprises of the group inspected for their readiness to operating in autumn and winter period and their capacity to perform diagnosis, current and major repairs of main gas and oil pipelines; gas supply reliability issues for some Ukrainian settlements resolved (Henichesk, Kherson region; Vovchansk, Kharkiv region; Avdiivka, Donetsk region (ATO zone); Butkiv, Ivano-Frankivsk region; Hupalivka, Dmuhaylivka, Chernechchyna, Musiienkove, Dnipropetrovsk region). prises of the group in Measures to implement the relevant best practices and international standards ISO 391:212 Road traffic safety (RTS) management systems Requirements with guidance for use. 5. Preparation of the companies of the group for the autumn winter 217/ Development of a corporate program dubbed Changing Minds designed to implement best international practices to enhance occupational safety. Current and expected risks at oil and gas facilities: deliberate damage to or destruction of the main and industrial oil, gas and condensate pipelines with a view to steal hydrocarbons, particularly those transmitted through the territory of Ukraine to European consumers; inability to perform the necessary repair and maintenance work on oil and gas facilities in the area of the anti terrorist operation (some areas of Donetsk and Luhansk regions); oil spills at the sites of oil production and transportation, in particular due to illegal taps in the pipelines; risks associated with natural disasters (floods, landslides, forest fires, earthquakes, etc.), war, terrorist acts, and proximity to potentially dangerous objects; failure to perform timely repair of compressor equipment, control systems, refueling, pollution control, fire safety. In, out of 474 recorded offences against the property of the group: 226 illegal taps in the main and industrial oil, gas and condensate pipelines; 115 cases of damage to processing equipment In, Naftogaz group spent UAH 236 million оn fire prevention measures, of which: UAH 128 million modernization of fire safety equipment UAH 32 thousand research and development activities UAH 2.6 million implementation of resolutions of the State Emergency Service of Ukraine UAH 22.7 million maintenance of fire detection and extinguishing systems, purchase of fire extinguishers UAH 65 million protection of company facilities by the fire units of the State Emergency Service on a contract basis UAH 18 million other fire prevention measures

21 HOW WE WORK LOCAL COMMUNITY DEVELOPMENT IN OUR ACTIVITY, WE TRY TO TAKE INTO ACCOUNT THE INTERESTS OF LOCAL COMMUNITIES, REALIZING THAT THIS FORM OF PARTNERSHIP IS MUTUALLY BENEFICIAL FOR BOTH PARTIES As part of a cooperation agreement with the Kharkiv Regional State Administration, the company provided aid to schools and hospitals. This included major repairs of the roof of the infectious disease department of Blyzniuky Central District Hospital, reconstruction of a school canteen in Zolochiv village, and an overhaul of the infectious department of Krasnokutsk Central District Hospital. A pilot social facilities heating rehabilitation project has been completed in Vovchansk district. This includes technical upgrade of the heating system in a geriatric accommodation facility (solid fuel boiler installed), technical upgrade of a school heating system, overhaul of the heating system (independent boilers installed) and major repair of the facades of buildings using energy efficient technologies in the village of Chervonyi Donets. The company paid funded the completion of the Hangar sports complex for the residents of Pervomaiskyi. The construction began in 212. However, due to lack of funding, the work was suspended in 214. The complex includes volleyball, football and basketball facilities, and several gyms. In, as a part of cooperation with the Poltava Regional State Administration, Ukrgazvydobuvannya spent UAH 9.5 million on socially significant projects aimed at developing environmental culture. For example, in, a new well was drilled and a water supply was built for the village of Sencha (Lokhvytsia district, Poltava region) which provided the residents of the village with a stable water supply and quality drinking water. in Lviv region, to create new jobs, and to attract investments and increase tax payments is through the allocation and exploration of new fields in the region. In, as part of a cooperation agreement with the Lviv Regional State Administration, Ukrgazvydobuvannya provided UAH 5 million for the development of social infrastructure in residential areas of Lviv region. Another subsidiary of the company Ukrnafta invested UAH 11.8 million in into the improvement of local infrastructure. In particular, the company provided UAH 1.6 million to fund road repairs in Boryslav. In addition, Ukrnafta is a sponsor of Naftovyk football club, which plays in the Ukrainian second division. Charity initiatives Since the end of 214, the employees of Naftogaz have collected UAH 14.2 million to support Ukrainian military units in the combat zone and to provide health facilities with the equipment for the rehabilitation of people affected by hostilities in the ATO zone. In, aid provided to the Ukrainian military units engaged in hostilities in the ATO zone amounted to UAH 4.6 million, or 53% of the total amount of aid received. This aid is for frontline military units. They include Kyivska Rus unit, Donbas The enterprises of Naftogaz group Ukraine related to transferring rent in order to create a favorable environment for the development of both ter region. in the areas of its activity in Kharkiv We want local communities share the principles of the UN Global for use of subsoil for the purposes of to feel that we help develop Compact and choose the path of oil, natural gas and gas condensate ritories and businesses. The company The funds allocated by Ukrgazvydobuvannya were spent on local infrastruc Cooperation between gas producing sustainable business, personnel and extraction, which stipulates paying 5% helps local communities to solve the their infrastructure, and this society development. of the royalty to the budgets of local problems of obsolete infrastructure, practice will continue. We ture. This included the reconstruction companies and communities is crucial communities where mineral resources to provide gas supply, to overhaul also look forward to working The enterprises of the group carefully of the well No 5 at the central water for the development of the western are extracted. municipal facilities and roads, and to study the needs of local communities intake facility in Barvinkove town, oil and gas area, including Lviv region, closely with local authorities, experts, scholars and develop sports and culture. and actively participate in the development of infrastructure, education, In, Ukrgazvydobuvannya trans the Chuhuiiv town, workover of well No fields has already been extracted. communities to increase gas some sections of the water conduit in because 85% of the gas from local Community development social projects culture and sport in the regions they ferred UAH 44 million for the development of infrastructure in areas where Pechenihy town, and reconstruction of still in use. Any potential increase in region and will work togeth- 3 which is part of the water supply to Some deposits are 96% exhausted but production in the western are present. The social activities of a modern company are one of the main sources it is present. This allowed the local a high pressure gas pipeline from the the resources (proven gas reserves) To solve complex problems, we er in order to enhance the of reputation at the local level. authorities to address social issues village of Velykyi Burluk to the boiler in the region barely exceeds current engage in social investment and and improve the quality of life. unit of Prykolotne oil extraction plant volumes of production, while the standards of developed countries require country. energy independence of our seek to build partnerships with local Naftogaz is actively involved in the development of regions where it is pres Most of the funds UAH 2 million in Velykyi Burluk district. The company communities. In, we supported also funded the construction of gas the explored reserves to be 3-5 times Oleg Prokhorenko, the adoption of the Law of Ukraine On ent and provides them with financial was spent on infrastructure improvement and the repair of social facilities supply infrastructure in villages of the size of the current extraction. The Amendments to the Budget Code of assistance to address social problems Ukrgazvydobuvannya CEO 4 Kharkiv region. only way to increase gas production

22 HOW WE WORK UKRGAZVYDOBUVANNYA: COMMUNITY DEVELOPMENT SOCIAL PROGRAMS IN, UAH Major repair of roads Major renovation of the Reconstruction of Poltava RSA infectious disease the canteen in Reconstruction of 1 65 department of Krasnokutsk secondary school 5 mm water Reconstruction Central District Hospital No. 3 pipeline of water supply Reconstruction of street water supply networks networks in Sencha vil. 484 Reconstruction Overhaul of electric wiring at the sports camp and purchase of Construction of the distribution pipeline 631 Reconstruction of the heating supply system in Bilsk school 6 Overhaul of water well and reconstruction of the water pipeline 1 35 Lviv RSA 5 Reconstruction of the Holy Eucharist Temple (Greek Catholic Church) 3 Construction of the basketball court 63 Major renovation of the Community Hall 576 Major renovation of the Сommunity Hall Major repair of roads Major renovation of Turka district community hall Prosvita 3 Turka Overhaul of public lighting 16 Sianky vil. 569 Lokhvytsia district Sencha vil. Poltava region Reconstruction of roads Renovation of the roof on building No. 2 of the language department of Drohobych Ivan Franko State Pedagogical University 3 Major renovation of Ivan Franko community hall Myrhorod district Purchasing profiled metal pipes for construction of the sports ground Construction of water-filling facilities at Krakovets border checkpoint 17 Krakovets Chernyliava vil. Yavoriv Rohizno vil. Hadiach district K. Hanivka vil. Poltava district Kolomatske vil. Reshetylivka district Mashivka district 36 Major repair of roads 42 Overhaul of the heating system and boiler 25 Public lighting and construction of the chapel 5 Construction of public lighting 188 Novosilky-Oparski vil. Mala Horozhanna vil. Rolyv Kolodruby vil. Uniatychi vil Drohobych Ulychne Lviv Lviv region Dashava of a road 15 Reconstruction of roads and beautification Overhaul of the water 8 well and reconstruction of the water pipeline Karabazivka vil. Bilsk vil Krasnokutsk Kotelva district Voinivka vil. Bairak vil. Myloradove vil. Kupychvolia vil. sports equipment 17 Construction of public lighting in Abramivka and Nova Pavlivka villages Lypivka vil. 118 Subvention to the district budget for energy saving measures Overhaul of public lighting 1 Overhaul of the heating system in the nursery school 1 Reconstruction of roads Illumination for the sports ground 4 Karlivka district Construction of public lighting in Ivana Franka St 296 Major renovation of the hip roof on the residential building Major renovation of the center the center for for administrative services Provision of gas 626 supply Valky Construction of the sports and health center Beautification of the territory of the Military Medical Center of the Western Region 33 Major renovation of 11 Shevchenka St (residential building) 3 Major renovation of the community hall 391 Liutivka vil. Zolochiv Major renovation of residential buildings 3 78 Major renovation of the roof of the infectious disease department of Blyzniuky Central District Hospital 586 Bibrka Overhaul of the heating system Hanachivka vil. in the community hall 1 Pervomaiskyi Blyzniuky Chuhuiv Balakliia Vilcha Kharkiv region Chervonyi Donets Re-equipment of the heating system in Vilchansk secondary school Re-equipment of the heating system in Vovchansk geriatric home 1 52 Pechenihy Barvinkove Reconstruction of well No. 5 at the central water intake Overhaul of water well No Major renovation of soft roofing on residential buildings 1 Overhaul of the heating system 5 Major renovation of facades 6 Kharkiv RSA V.Burluk High-pressu re gas pipeline 1 25 battalion (special operations forces), the reconnaissance platoon of Kyivska Rus battalion, General Kulchytskyi battalion, the military unit of Mariupol tactical group, the third separate special operations regiment from Kropyvnytskyi, special operations military units from Khmelnytskyi and Volodymyr-Volynskyi, and others. Purchased goods include individual means of protection for soldiers, special advanced equipment (headphones, glasses), special purpose clothing and footwear, radio communications equipment, spare parts for trucks, communications equipment, video surveillance systems, and optical instruments. 84 The aid provided to hospitals and Reconstruction other health care facilities amounted MONITOR PATIENT BEDSIDE SUCTION TWO SECTION FUNCTIONAL of public lighting DEFIBRILLATOR MONITOR APPARATUS HOSPITAL BED to UAH 4.1 million or 47% of the col lected funds. This included new and powerful equipment for surgery and physiotherapy, diagnostic equipment, and modern massage tables. These supplies significantly improved the quality of examination and treatment available. Doctors are now properly equipped to provide care for the Ukrainian military. The hospitals the company closely cooperates with include Zhytomyr, Bila Tserkva, and Irpin military hospitals, the Veterans Centers in Pereiaslav-Khmelnytskyi and Cherkasy, as well as Chernivtsi and Vinnytsia regional hospitals for war veterans. In December, Naftogaz supported the cross-fit competition among ATO participants called Games of Heroes. This is a nationwide competition for wounded soldiers and people with disabilities. The objective of the games is the psychological and sports rehabilitation of our heroes and the social adaptation of persons with disabilities along with the promotion of sports among youth and socially vulnerable people. In 217, Naftogaz employees continued to donate money from their own salaries to support the needs of the army and hospitals. In, Ukrtransnafta signed 2 motor vehicles over to the Ministry of Defense of Ukraine. These vehicles will be used to equip the units of the Armed Forces of Ukraine involved in ATO hostilities. Military units will receive cars, trucks, a tractor, a trailer, a bus, minibuses and repair shops. All vehicles have been reconditioned and fully equipped. Ukrtransgaz also provides financial support to the military units engaged in the ATO. In the cost of the equipment, radio stations, appliances and protective kit purchased by the company amounted to UAH 12.7 million. In addition, Ukrtransgaz converted Severodonetsk airport for use by the Armed Forces of Ukraine. The airport is forty kilometers away from the contact line. The company also granted permission to use Yalta recreation facility (Donetsk region) which will later be signed over to the Ministry of Interior Affairs of Ukraine. Clothing and protective kits for military men Body protection PROTECTIVE BODY ARMOR (WINTER AND SUMMER) Total amount: UAH 4.6 million Total amount: UAH 4.1 million CAPS T-SHIRTS THERMAL UNDERWEAR JACKETS HATS PROTECTIVE MASKS WINTER GLOVES BOOTS TACTICAL GLOVES MEDICAL EQUIPMENT EQUIPMENT BAGS, CARTRIDGE CARRIERS, PACK, BELT, ETC SPECIAL EQUIPMENT WEAPON CLEANING KIT SPRAY OIL FOR WEAPON MAINTENANCE for Mariupol mobile hospital and Ukrainian War Veterans Medical and Social Rehabilitation Center in the city of Pereyaslav-Khmelnytsky

23 HOW WE WORK ENERGY EFFICIENCY NAFTOGAZ PRIORITIES TO PROTECT THE ENVIRONMENT ARE MAINTAINING HIGH ENVIRONMENTAL STANDARDS, RATIONAL USE OF FUEL AND ENERGY RESOURCES, ENERGY EFFICIENCY, AND THE INTRODUCTION OF ENERGY MANAGEMENT SYSTEMS BY THE ENTERPRISES OF THE GROUP The group s energy consumption structure Natural gas dominates (almost 86%) the fuel and energy resources (FER) consumed by the enterprises of the group. (2.6 million t in oil equivalent 1 ), for their technical needs including: - natural gas 2.5 bcm; - electricity 1.2 billion kwh; - thermal energy thousand Gcal; - oil (gas condensate) thousand t; - other types of energy resources (boiler and furnace fuel) thousand t in reference fuel. As a result of the energy efficiency program for and energy conservation programs implemented 36.8 thousand t in reference fuel (214.8 thousand t in oil equivalent), or UAH 1.6 billion in monetary terms. Natural gas savings amounted to 24.1 mcm and electricity savings totaled 25.6 million kwh. Actual energy savings exceeded the target by 9.8 tcm in reference fuel, including natural gas by 68.9 mcm. The introduction of a 6 MW condensing power plant (CPP) into operation in Shebelynka gas condensate and oil processing enterprise (Ukrgazvydobuvannya) resulted in significant reduction in thermal energy consumption. The CPP uses waste heat of flue gas from gas fractionation units for technological needs and producing electricity in a steam turbine for its own needs. Implementation of energy management system at the enterprises of the group In, Naftogaz began to implement an energy management system (EnMS) to streamline energy efficiency management procedures in accordance with the energy efficiency requirements of ISO 51. During, an energy audit was performed at the enterprises of the companies, energy efficiency policies and objectives were drafted, and an EnMS implementation plan for developed. Monitoring of natural gas consumption by different groups of households In order to analyze the actual use of natural gas by households, the company has monitored the consumption of natural gas during the heating season 215- via use in different social groups. In addition, to determine the maximum amount of natural gas used for different purposes by customers with no heating sources other than natural gas, the company, together with gas distribution organizations, conducted monthly on-site inspections to check the use of gas consumption. Fuel and energy consumption by Naftogaz enterprises in 21 natural gas electricity heat energy other types of fuel and energy households. The proposals would help to optimize the cost of budgetary funds allocated as subsidies to vulnerable households for partial coverage of the cost of natural gas used: improve the procedure for granting subsidies for natural gas; pay back to the budget the amount of overpaid subsidies; optimize standard natural gas consumption rates; gradual shift to full monetization of subsidies; encourage vulnerable households to adopt efficient use of natural gas. Total fuel and energy consumption (right scale) Fuel and energy savings (compared to planned targets) (left scale) Ukrtransgaz Ukrgavydobuvannya Ukrnafta Ukrtransnafta Other enterprises of the group meetings to promote and implement proposals to improve the procedure for granting subsidies and encourage consumers to reduce consumption of natural gas. The meetings were attended by advisers to the Prime Minister of Ukraine, adviser to the Deputy Prime Minister, and the representatives of the EBRD, IFC, and EU, along with experts and representatives of various NGOs. Naftogaz experts joined working groups on subsidy monetization. Implementation of the company s proposals will improve the efficiency of natural gas use, reduce the need for natural gas and for subventions from the state budget for subsidies, In, the enterprises of the group Based on the results of this analysis, used 3.7 million t of reference fuel 1 1 thousand t in reference fuel =.7 thousand t in the company provided its proposals 44 oil equivalent by subsidiaries, in Naftogaz saved to improve the use of natural gas by The company initiated and conducted million t of reference fuel % Use of fuel and energy for production and technological purposes, % % by types of fuel and energy % % % % by enterprises of the group % %

24 HOW WE WORK geothermal energy in the depleted oil and gas wells. Targets for 217 Promote company proposals to allow households to use the unused part of their energy subsidies for energy saving measures. Continue implementation of the energy efficiency program. In 217, as a result of implementation of the energy efficiency program, the enterprises of the company plan to save 148 thousand t in reference fuel (1.7 thousand t in oil equivalent). Continue implementation of energy management systems according to the requirements of ISO 51. Benefits from implementation and further sanctification of EnMS Direct benefits continuous improvement of energy efficiency, decrease in energy input for products (services), increased competitiveness improving operation and maintenance procedures control of energy consumption reduction of environmental impact image and investment attractiveness energy management best practices in place and compliance with international standards Indirect benefits involvement of the whole team in energy efficiency activities training on energy issues expansion of external communications in the field of energy management improvement of relations with energy and equipment suppliers reduced risks and costs compatibility with other management system standards Fuel and energy savings, in 214- Total (thousand t in reference fuel) Natural gas (mcm) Heat energy (million Gcal) Electricity (million KWh) Other types of energy (thousand t in reference fuel (thousand t in reference fuel) Fuel and energy savings, thousand t in reference fuel by the group enterprises Total: by programs Total: and create the conditions for the direction of released funds to increase hydrocarbon production in Ukraine. Implementation of innovative energy efficiency projects In, Ukrtransgaz worked with the Institute of Engineering Thermophysics and the National Academy of Sciences of Ukraine to develop a basic solar power plant scheme for the simultaneous production of electricity and cooling at transmission system facilities. As of the date of this report, the solar power plant pilot project has been launched. The power plant can generate almost 4 thousand KWh of electricity per year to satisfy the office and industrial site needs of Ukrgaztehzvyazok branch facility. The power plant consists of 1 14 solar panels with 26 watts of nominal power each; they are installed on the roof of the production facility and cover 1 85 sq. m. This object is unique in the Kyiv region. Ukrtransgaz plans to scale up this practice and to equip its production facilities with solar panels. Major efforts that enabled the enterprises of the group to save 24.1 mcm of gas: introduction of defective pipeline sections repair technology without emptying the section; maximum gas evacuation from the pipeline before repair works start; construction of waste heat utilization facilities; introduction of modern electronic ignition systems for GMK-1 gas compressors; construction boosting compressor station to collect low-pressure petroleum gas; reconstruction of gas disposal systems at oil and gas collecting facilitates; construction of a closed oil treatment system; utilization of gas from condensate and oil decontamination; upgrading gas pumping unites to improve unit efficiency; reducing radial gaps in the flow section of ТВТ and ТНТ of GRK- 1 units, which increases the efficiency of the unit; reducing radial gaps in the flow section of OK using special mastics; recycling of exhaust gas produced by a gas turbine power plant for heating instead of boilers; identification and elimination of gas waste by sealing technological equipment of UGS, CS; maintenance of boilers and their operation in accordance with technology cards etc. A total of 25.6 million kwh of electricity was saved due to: modernization of anode bed of gas pipeline cathodic protection units; implementation of energy efficient light sources for outdoor lighting of pump stations and tank farms, and for internal illumination of industrial and office space; introduction of reactive power compensation systems with automatic control of power factor; implementation of frequency control devices and soft starting of induction motors; introduction of highly efficient screw pumps for the extraction of viscous oil; construction of bottom water previous discharge unit; optimization of indoor illumination of production facilities; use of UTDU-25 recovery pressure reducing power plant which, due to the energy of gas while expanding in the turbine of a pressure-reduce valve, allows for additional temperature reduction for greater hydrocarbons extraction and electricity in the power generator for internal needs; use of UTDU-25 recovery pressure reducing power plant for recovery of compressed gas throttling energy at GDS-7 in Dnipro city; bringing unloaded power transformers out of operation; reasonable use of gas cooling fans (APO), antifreeze and turbine lubricants; energy saving measures; pumping oil stations in oil pipeline sections in optimal mode, using the most efficient units; reduced electricity consumption for pumping oil as a result of timely cleaning of the main oil pipelines from paraffin deposits using modern highly efficient devices In addition, Naftogaz has developed a number of recycling projects designed to transform combustion heat at compressor stations (CS) and boosting Ukrtransgaz Naftogaz energy efficiency Ukrgazbydobuvannya program for compressor stations (BCS), the energy Ukrnafta Sectoral energy saving Ukrtransnafta program implemented by of overpressure at gas transportation the enterprises of the group system (GTS) facilities and the

25 HOW WE WORK ECOLOGY AND ENVIRONMENTAL PROTECTION Naftogaz applies a comprehensive approach to reduce its direct and indirect negative impacts on the environment. The approach encompasses all areas of impact including: air protection; protection of water resources; land protection and waste disposal; protection of biodiversity; energy and resource saving. Environmental safety management system In the environmental area, the company is guided by its Charter, Code of Corporate Ethics, the requirements of Ukrainian law, and international directives, conventions and standards. In, the company approved a new version of its environmental policy that meets the requirements of ISO 141 and determines the company s operating principles and commitments in the field of environmental protection. The company has in place and consistently implements its comprehensive environmental protection action plan for Naftogaz pays particular attention to the social and environmental aspects of the procurements made by the company. To monitor how suppliers meet the health safety and environmental requirements, For more details on the environmental policy of the company, please see in July a representative of the department of health and safety, environmental and industrial security was included to the tender committee. In May, the company approved a special questionnaire for procurement participants to identify the profile of their environmental and social policies. It is posted on the website of the company The enterprises of the group have already begun using it in their procurement processes. The internal Naftogaz regulation establishing the procedure for cooperation between the different structural units of the company when purchasing goods and services is currently in the phase of finalization and approval. This includes a mechanism to evaluate whether the supplier complies with the environmental and social requirements of the company and those of the Ukrainian legislation in the field of environmental protection. Key results of operating costs and capital investments of Naftogaz group enterprises spent on The main principles of Naftogaz environmental policy are: leadership and responsibility; sustainability; efficient environmental management; priority of preventive measures; raising environmental awareness and culture; information accessibility and communications transparency. ENVIRONMENTAL SAFETY AND PROTECTION ARE AMONG THE PRIORITIES OF NAFTOGAZ GROUP. IN ITS OPERATIONS, THE COMPANY IS GUIDED BY THE PRINCIPLES OF THE EUROPEAN ENVIRONMENTAL LAW AND THE BEST RELEVANT GLOBAL PRACTICES Cooperation with international financial institutions In cooperation with international financial institutions, the company has committed to approximate its standards to the principles of EBRD environmental and social policy. In, the EBRD monitored implementation of new reporting, transparency, environmental and social responsibility standards at Naftogaz. In May, OPIC Corporation, USA, conducted a technical audit of the western underground gas storage complex and provided a clean audit 48 opinion with regard to Naftogaz safety and environmental impact

26 HOW WE WORK : the stages of the environmental management system implementation: Diagnosis of production processes and the current management system in place at Naftogaz including: analysis of company operations, organizational structure and management functions; identification of strengths and weaknesses in the fields of ecology, safety, energy saving, social responsibility and quality management; analysis and assessment of compliance of the actual performance of the company with ISO 91, ISO 141, ISO 51, OHSAS 181 (ISO 451) and SA 8. Training employees in the methodology for establishing an integrated management system and implementation of management systems according to the requirements of ISO 91, ISO 141, ISO 51, OHSAS 181 (ISO 451) and SA 8. Company policies, the objectives of the management system and process maps are developed; and process-related risks are identified. environmental protection amounted to UAH 83.7 million; energy efficiency measures resulted in savings of fuel and energy resources of UAH 1.15 billion; new version of environmental policy approved; the environmental measures stipulated by the loan agreement with the EBRD are implemented, a comprehensive analysis of all aspects of the environmental impact of the company s operations is done, measures to improve waste management and water use are developed. Implementation of international standards The company has committed itself to the implementation and certification of Environmental protection expenses, UAH million an environmental management system according to ISO 141. Development of the new management system standard (MSS Ukr. SOU) in oil transportation In, Ukrtransnafta developed its standard SOU : Oil pipelines. Calculation of the amount of oil for industrial and technological needs. Methodology, which is effective since According to the established standard, the oil in the oil pipelines is categorized either as oil for industrial and technological needs or as commercial oil trade balance. This approach allowed for the reclassification of Urals oil in the Odesa-Kremenchuk section of the pipeline from fixed assets to stocks, its displacement from the section and replacement with Azeri Light oil. Environmental tax, UAH million Recycled materials sales revenue, UAH million In, the company signed an agreement with a research organization to review and update the current SOU : 29 Protection of the environment. Decontamination of soils and water from oil and petrochemicals. Regulations to set more stringent environmental requirements for the enterprises of the oil and gas complex. Cooperation with the stakeholders on environmental issues Any activity by the company and any project that significantly impacts the environment and community life are subject to internal agreement under the existing procedure for interaction with stakeholders. Development of any project includes development of the relevant stakeholder interaction plan to be adhered to by the enterprises of the group. For example, in Ukrgazvydobuvannya, as part of intensification of natural gas extraction through hydraulic fracturing, held meetings with the public, the media, and representatives of local authorities in order to properly inform stakeholders about the potential environmental and social impacts of the planned works. The enterprises of the group are actively involved in the implementation of infrastructure and social projects to address the urgent problems of the communities affected by the company s production activity (for more details see community development section). Payments for environmental services, UAH million Capital expenses on and investments in environmental protection by Naftogaz group enterprises in 214-, UAH million In, within the framework of cooperation with stakeholders, the company signed a memorandum of understanding and cooperation with the Ukrainian NGO Living Planet. The parties held a joint workshop and developed a training program for company employees and established the joint activities agenda. Financing environmental activities In, the total current expenses and capital investments incurred by the Naftogaz group related to environmental protection amounted to UAH 83.7 million, including: UAH 5.6 million of capital investments (which is about 7% of the total expenditure for environmental protection), UAH 78.1 million of current expenses (93%). Of the total capital investment on the respective measures, UAH 1.2 million was spent on wastewater treatment, UAH 11.9 thousand on waste management, UAH 4.4 million on protection and rehabilitation of soil, groundwater and surface water sources. The cost of major repairs of sewerage and reverse water purification totaled UAH.6 million. Environmental taxes paid by Naftogaz group enterprises in 214-, UAH million *The decrease in the amount of environmental tax in 215 compared to 214 is due to the abolition since of the effluent tax on mobile sources of pollution. Of current expenditures on the Ukrgazvydobuvannya respective measures, UAH 6.8 million (about 9% of total current Ukrtransnafta expenditures) was spent on air Other enterprises of the protection, UAH 39.1 million (5%) on group reverse water cleaning, 6.4 million (8%) TOTAL on waste management, UAH 18.4 million 5 Ukrtransgaz Ukrnafta Ukrgazvydobuvannya Ukrtransnafta Ukravtogaz Ukrspetstransgaz Air emissions of pollutants by Naftogaz group companies in, thousand t Enterprises of the group Air emissions of greenhouse gases by Naftogaz group enterprises in, thousand t Enterprises of the group Carbon monoxide emissions (СО) Carbon dioxide (SO 2 ) emissions Sulfur dioxide (SO 2 ) and other sulfur compounds emissions Methane (СН 4 ) emissions 3.4 Emissions of nitrogen compounds (NО x ) (excluding N 2 O) Emissions of non-methane volatile organic compounds Nitric oxide (N 2 O) emissions 35.6 Total emissions of pollutants (excluding СО 2 ) Ukrtransgaz Ukrnafta Ukrgazvydobuvannya Ukrtransnafta Ukravtogaz Ukrspetstransgaz Kirovogradgaz TOTAL Greenhouse gas emissions, СО 2 -equivalent Ukrtransgaz Ukrnafta

27 HOW WE WORK (about 24%) on protection and rehabilitation of soil, groundwater and surface water, UAH 7.4 million (9%) on other areas (e.g., reduction of noise and vibration, radiation safety, biodiversity, research and conservation in nature protection areas, etc.). In addition, the company paid UAH million for environmental services. Environmental tax in amounted to UAH 35.6 million. At the Total emissions of pollutants (excluding carbon dioxide) by Naftogaz group enterprises in 214-, thousand t same time, penalties for violation of environmental regulations in made only UAH 96.5 thousand. Air protection Air pollution caused by operating activities of the group enterprises in did not exceed the quantities set in the permits and regulations for emission limits, as proven by inspections carried out by the state environmental authorities Emissions of nitrogen oxides (NO x ) by Naftogaz group enterprises in 214-, thousand t Emissions of carbon monoxide (CO) by Naftogaz group enterprises in 214-, thousand t The total emission of pollutants into the atmosphere from stationary sources of the group s facilities in was about 88.4 thousand t, which is 19% less than in 215. Equipment upgrade and repair projects resulted in a decrease in leakages, losses and the use of natural gas for internal needs, leading to a decrease in air pollution in compared to 215. However, in the group enterprises Emissions of carbon dioxide (CO 2 ) by Naftogaz group enterprises in 214-, thousand t Emissions of methane by Naftogaz group enterprises in 214-, thousand t Emissions of non-methane volatile organic compounds by Naftogaz group enterprises in 214-, thousand t increased greenhouse gas emissions by 2.3% due to increased volume of natural gas transportation by Ukrtransgaz by 14.5%. As part of the implementation of Directive 21/75/EC, in the company and Ukrtransgaz monitored emissions of SO 2, NO x and dust through all its combustion units with a rated heat output of at least 5MW. A list of the units was submitted to the Ministry of Energy and Coal Industry of Ukraine to be included in the order of the Ministry of Environment that sets the technological standards of permissible emissions of pollutants by thermal power plants with a rated heat output of at least 5 MW. The company s contribution to the fight against climate change The company is actively involved in the process of adapting national regulations to EU standards in the framework of the Association Agreement between Ukraine and the EU in the field of environmental protection, including the implementation of Directive 23/87/EC on establishing a scheme for greenhouse gas emissions. Given the importance of the issue, Naftogaz is actively involved in activities aimed at implementation of Directive 23/87/EC initiated by the Ministry of Environment and Natural Resources and the Chamber of Commerce of Ukraine. In addition, the company requested the Ministry of Environment and Natural Resources of Ukraine and the Chamber of Commerce of Ukraine to consider the possibility of including Naftogaz in international technical assistance programs. Further implementation of carbon credits trade at the enterprises of the company requires approval via the relevant legislation. Rational use of water resources Water consumption by Naftogaz group enterprises in 211-, thousand cubic meters Total water used, including: underground water intake;.6 mcm (8%) of municipal water supply,.1 mcm (2%) of associated formation water and 3.8 tcm (about 1%) of waste water. Water intake was mainly for technological purposes, drinking, and the sanitary needs of employees. Total effluent disposal in amounted to 8.5 mcm, among them transfer to other water users (municipal, and other wastewater utilities) amounted to 1.1 mcm, dumping into surface sources after cleaning -.3 mcm, fields of filtration -.3 mcm, underground horizons mcm, sewage treatment plants -.1 mcm, cesspools tcm, holding evaporation pond tcm. Biiological wastewater treatment plants accounted for.4 mcm of reverse (waste) water, physical-chemical treatment facilities for 11.4 tcm, mechanical treatment facilities for 56.3 tcm % compared to Ukrtransgaz Ukrnafta Ukrgazvydobuvannya Ukrtransnafta Naftogaz waste structure by hazard class, 214-, thousand t Total waste generated at Naftogaz group enterprises, including: Including: hazard class І hazard class ІІ hazard class ІІІ hazard class ІV Ukrgazvydobuvannya: 32.6 mcm Ukrspetstransgaz: 37.7 tcm Naftogaz group enterprises monitored soil, groundwater and surface water near hazardous facilities (sludge ponds, barns, septic tanks, etc.). This monitoring data is submitted to the relevant government authorities and other stakeholders. The associated stratum water that is extracted with hydrocarbons is pumped back into underground horizons through injection wells to maintain reservoir pressure or to absorbing wells via individual projects as required by the applicable laws. During, Ukrgazvydobuvannya production facilities pumped.1 mcm and Ukrnafta 6.6 mcm of associated stratum water in the subsoil. Using this method significantly reduces the negative impact on surface water and groundwater. It partially restores the natural conditions of the subsoil and preserves farmland. 6 In, the volume of actual use 1 of water by company enterprises 4 decreased by 9.5% over the previous The enterprises of the group used 5 2 year and amounted to 6.35 mcm water in water reverse and recycling from a total water intake of 7.6 mcm: systems as follows: 5.4 mcm from surface water sources Ukrnafta: 51.5 mcm In, Ukrnafta resumed bunding well accounting for about 71% of the total reservoirs (total 23 pcs.) and assessed 52 volume of water; 1.4 mcm (18%) for the Ukrtransgaz: 35.2 mcm

28 HOW WE WORK Waste management in Naftogaz group enterprises, 214-, thousand t Total accumulated waste Waste removed at the facilities of the enterprises the state of 16 flow strings of oil and injection wells. In addition, the company eliminated and recultivated seven oil, land and other barns and tanks. In, Ukrtransgaz assessed the biological resources of the water bodies used for intake or discharge of water in the course of business. Such studies were also carried out as part of the reconstruction of Urengoy-Pomary- Uzhhorod main gas pipeline. These activities could have had a negative impact on biodiversity of local flora and fauna. The company conducted an assessment and continues to monitor the situation. Specifically, in a detailed assessment of biodiversity in the affected swamp and forest area was carried out near Lokhvytsia town, in the vicinity of the Hrebinky- Sofiivka section of the pipeline (km ). Based on these findings, the center of ecological expert analysis (Ministry of Environment) developed recommendations, mitigation measures, and offered a positive expert opinion. If all the recommendations and mitigation measures are implemented, repair of the Urengoy-Pomary-Uzhhorod main gas pipeline will not have any negative impact on biodiversity. Waste management For the last three years, the total waste at the enterprises of the group has been steadily decreasing. In, total waste was 85.4 thousand t, which is 16.7% less than in the previous year Waste disposed of and recycled Waste supplied to specialized disposal companies inoperative or waste lead batteries, and accumulators. All hazard class I waste is supplied to specialized enterprises for further environmentally sound recycling on a contractual basis. In addition, waste batteries and fluorescent lamp collection points are open at many enterprises of the group and in its headquarters. The most common class II waste is waste oil and grease (the group has accumulated 42.1 t) and rechargeable batteries (15.5 t). The most common class II waste at Naftogaz enterprises is processed petroleum products and oil sludge t. Some enterprises have received the appropriate permits and equipment designed to dispose of hazardous waste at their own facilities. In, Ukrnafta disposed of 5.4 thousand tons of oil sludge generated in the past using special plants for processing oil sludge, waste oil, and oil-resistant emulsions. The hazard class IV includes the following main types of waste: drilling sludge (cuttings, drilled mud and drilling waste water) t; ferrous scrap t; mixed municipal waste t; worked out and damaged tires 75.2 t; construction waste 547. t; sites, in the process of oil and gas transportation, processing, storage etc. For the purposes of drilling waste disposal, the enterprises of the group use drilling fluids regeneration technologies and drilling wastewater treatment technologies. During, the enterprises of the company disposed of 43.9 thousand t of drilling waste. In addition, oil pollution of soil has been eliminated in places of emergency using modern microbiological biodestructing sorbents. In their production activities, the enterprises of the group use dangerous chemicals, including in gas and gas condensate extraction and processing technology, namely methanol, glycol, acids, odorants, and liquid technical ammonia. In addition, precursors (hydrochloric and sulfuric acid, acetone, toluene, potassium permanganate) are used at some facilities. All enterprises that use precursors have appropriate permits, and the facilities are provided with physical protection. The enterprises of the group that use dangerous chemicals and poisonous substances obtained the relevant permits for substance transportation. Plants and equipment that use hazardous chemical substances are assembled and installed in compliance with the relevant design documents and commissioned by the authorized committees. These enterprises have been certified and categorized as extra high hazard objects. They have public indemnity insurance for harm that may be caused by fires and accidents at high hazard objects or at facilities whose economic activities could lead to environmental and sanitary-epidemiological emergencies. Most enterprises have voluntary fire brigades in place. Personnel are trained, tested and updated on current regulations on a regular basis. Oil and gas extracting enterprises produce naturally-occurring materials (NOM) or according to the international classification NORM (naturallyoccurring radioactive materials). Pump and compressor tubes, pipelines, equipment and sludge fragments etc. are temporarily stored in specially equipped areas of Ukrnafta and Ukrgazvydobuvannya. These areas are secured and provided with physical protection. The accumulated materials are transferred under contract to specialized companies of the UkrDO Corporation Radon that have the necessary permits and are licensed for storage, further utilization or disposal in their own facilities (in Chornobyl Exclusion Zone and Kharkiv city). Specially equipped certified vehicles owned by these companies transport the materials in accordance with radiation safety requirements. All storage sites and vehicles have sanitary passports. The company performs no cross-border transportation of waste. The company does not import or export waste that is collected 53 kg of waste paper 4 kg of batteries collected hazardous under the Basel Convention. Prior to signing any hazardous waste disposal contract, the company carries out an assessment of the supplier for availability of licenses and relevant facilities and equipment for processing and disposal of hazardous waste. Ukrtransgaz tenders for suppliers of natural gas for industrial and technological needs include an assessment of bidder environmental and social policies. Environmental culture In the spring of, Naftogaz joined Go Green movement and announced the introduction of the Green Office concept to reduce the company s negative impact on the environment and improve natural resource management. Every year, the employees of the company are engaged in cleaning their cities and villages, industrial sites and surrounding areas, planting trees and participating in the annual nationwide event Clean Environment. Emergency prevention and mitigation To prevent and eliminate emergencies, NAFTOGAZ GREEN OFFICE: OUR ACHIEVEMENTS the group s repair services conduct regular air and ground examination of the pipelines. The enterprises of the group have developed measures to respond the threats and emergence of technogenic and/or natural disasters. This includes employee evacuation plans for a specific period in case of technogenic and/or natural disasters. Emergency localization and liquidation plans are approved by the regional authorities of the State Emergency Service of Ukraine under the established procedure. Potentially dangerous objects and high-risk objects are recorded and monitored. The reported incidents and emergencies with environmental consequences are recorded and transmitted in accordance with the notification procedure approved by the company. Plans for 217 The company has developed a set of environmental objectives and specific measures to achieve these goals. One of the objectives is reducing water consumption by the enterprises of the group compared to the previous year Over 9% of production waste at These enterprises have developed, vehicles and conveyor, written-off as the enterprises of the company is approved and put in place instructions scrap 648. t; hazard class IV waste, i.e. the low-risk on how to work with hazardous CONSUMPTION COMPARED TO 215 (May-December): category. A very small part of total agricultural production waste chemical substances. Dedicated staff waste (about.15%) are hazard class (different) t and other responsible for chemical hazardous WATER CUBIC M LESS ELECTRICITY REDUCED I substances (extremely dangerous). waste generated mainly at substances registration and handling monthly rate BY 53 4 KWH These include spent fluorescent lamps, construction, drilling, production have been designated by special order. for 5 persons lighting for 25 apartments for one month trees saved 5 hectares of land avoided contamination hа of lawns made planted trees 3 56 shrubs 441 unauthorized garbage dumps eliminated hа cleaned

29 HOW WE WORK by 5% due to the rational use of water resources in accordance with established standards and consumption limits. Ukrtransgaz, as the enterprise with the largest share of emissions into the air in the company, has set itself the goal of reducing such emissions by 3% in 217. Ukrtransnafta plans to complete reconstruction and modernization of waste water treatment at OPS Kurovychi, LPS Skole, OPS Zhulyn in 217. Ukrnafta s objective is reducing environmental risks and social tension caused by gas-polluted air in Boryslav town. In addition, the objectives of the group enterprises in 217 are as follows: rational use of natural resources, including water, land and mineral resources in accordance with established limits and permits; separate storage of waste by type, according to issued permits and approved limits on waste generation and disposal, calculated based on the norms for each types of waste; improvement of environmental management system, implementation of modern energy and resource saving technologies, and energy efficient production systems designed to stabilize or reduce negative environmental impact; upgrading industrial sites, sanitary protection, and recreational areas; supporting initiatives of local authorities and the public to promote the improvement of the environment; increase employee legal awareness of environmental protection and the rational use of natural resources. For more details about the Naftogaz Green Rules, see WHERE WE ARE NOW

30 TIMELINE JANUARY FEBRUARY MARCH APRIL MAY Naftogaz proposed an action plan for complete unbundling of the TSO Naftogaz invited market participants to discuss the draft new Gas transmission System Code JUNE JULY AUGUST SEPTEMBER CMU approved the Unbundling Plan The government established a new TSO The Law on the Regulator was approved OCTOBER NOVEMBER DECEMBER 217 JANUARY FEBRUARY MARCH APRIL MAY GAS MARKET REFORM The Regulator introduced entry-exit tariffs for crossborder points Naftogaz proposed to change the procedure for forming insurance reserves of gas by suppliers The Regulator approved entryexit tariffs for internal points in Ukraine CMU established a single price for gas for households consistent with import parity Naftogaz special duties will continue to April 218 SECURITY OF SUPPLY (diversification of imports and integration with the EU market) Naftogaz contracted 1.7 bcm of gas from five European suppliers according to procurement procedures under an EBRD loan Naftogaz refused to register Gazprom s balancing gas as purchased by Ukraine Ukraine implemented modern European practices at GTS connection points that are not blocked by Gazprom Ukrtransgaz and Polish Gaz-System prepared a feasibility study for Interconnector construction between the two countries with total length of 99.3 km Naftogaz official complaint against Nord Stream II was submitted to the European Commission Signing of natural gas transportation and storage agreements between Ukrtransgaz and Engie (France) One year since Ukraine last imported gas from Russia Naftogaz joined the European Federation of Energy Traders (EFET) Naftogaz filed an appeal to the European Court of Justice to cancel the decision of the European Commission on the OPAL gas pipeline Naftogaz, Ukrtransgaz, Snam and Eustream signed a Memorandum of Understanding aimed at cooperation opportunities in Ukraine s gas transmission network OPERATIONAL EFFICIENCY Selection of candidates for the positions of independent members of the supervisory board of Naftogaz began Naftogaz sent a formal notification of the investment dispute over group assets in Crimea Naftogaz published audited financial statements of the company as an individual legal entity for 215 The supervisory board of Naftogaz was fully formed Naftogaz repaid funds raised under EBRD loan in December through January The first meeting of the supervisory board of Naftogaz took place Ukraine managed to release Titan-2 crane vessel from seizure in the Gulf of Mexico For the first time, Naftogaz held an open reverse auction to purchase gas from domestic gas producers Ukrgazvydobuvannya and Naftogaz topped the list of the largest taxpayers in Ukraine for Q1 Internal control system reform began, including: - internal audit; - compliance; - risk-management; - financial control Naftogaz was acknowledged as the best bidder in the ProZorro system by the number of bids and amount of savings Signing of a credit facility agreement of USD 5 million under guarantee from the World Bank In Stockholm, hearings were completed between Naftogaz and Gazprom over a contract for gas supplies to Ukraine Data published on all Naftogaz contracts worth more than UAH 1 million on the e-portal for the use of public funds Ukrgazvydobuvannya moved to the production of Euro 5 gasoline Changes in Ukrtransgaz board In Stockholm, hearings were completed between Naftogaz and Gazprom over transit contract Naftogaz and its subsidiaries initiated arbitration proceedings against Russia claiming for reimbursement of USD 2.6 billion for assets stolen in Crimeа Ukraine passed winter with gas reserves above forecast Naftogaz received the first fifteen letters of credit totaling more than EUR 22 million under a loan agreement with Citi Bank and Deutsche Bank In, Naftogaz for the first time in the last five years, posted a net profit of UAH 26.5 billion. Following the results of, Naftogaz intends to pay above UAH 15 billion in dividends and advance profit tax to the government NATURAL GAS INDEPENDENCE (gas productionand energy efficiency) Naftogaz submitted to the Ministry of Economic Development and Trade of Ukraine (MEDT) four investment proposals to be financed by a USD 3.65 billion credit facility from China Development Bank China Development Bank extended the period of the availability of credit to the amount of USD 3.65 billion for Naftogaz for energy projects to 25 December 217 Ukrgazvydobuvannya conducted the first successful hydraulic fracturing (HF) operations Ukrgazvydobuvannya launched an ambitious program of investment in drilling valued at USD 3 billion by 22 Ukrgazvydobuvannya put into operation the first gas well since 1991 with a daily production of 1 mcm Ukrtransgaz launched a solar power station of 4 thousand kilowatts 59 59

31 WHERE WE ARE NOW MACROECONOMIC ENVIRONMENT Dynamics of real GDP in Ukraine and developing countries, 213-, % Source: IMF, UN, State Statistics Service of Ukraine imore Other developing countries European developing countries Ukraine Dynamics of the imore index as a barometer of the pace of reforms in January 215 September 215 June March 217 Source: Vox Ukraine Sentiments of economic agents and their dynamics in Dynamics of inflation in Ukraine in 215- (% year-on-year) During, Ukraine s economy grew by 2.3%, posting a 4.8% recovery in Q4 on a year-on-year basis. However, this recovery is not enough to offset the decline in economic activity during the years when the economy shrank by 14% (equivalent to a 3.7% average annual economic decline). By comparison, the economies of Eastern European countries during the same period grew by 7.8% (an average annual growth rate of 1.9%), while the economies of other developing countries grew by 17.9% (4.2% average annual growth). Experts attribute this result to objective factors and the slow pace of reforms in the country, while pointing out the tendency towards slowing down reforms. For example, the dynamics of the imore index (which characterizes the pace of reforms), with a few exceptions, is not only below the level which corresponds to the satisfactory pace of reforms (2 points), but also shows a clear trend toward falling to zero. Likewise, consumer sentiment indices show similar results reflecting both a decrease in the positive balance of consumer sentiment and reduced optimism about future expectations regarding the situation in the current period. macroeconomic parameters such as: relatively high inflation (although within the NBU target range); exchange rate volatility; high credit risks; high cost and low availability of capital. In, inflation was 12.4% on a year-on-year basis, showing a slight increase at the end of the year. Compared to 215, the rate of inflation slowed down but it remained rather high (by comparison, the EU harmonized inflation index stood at 1.7% for the same period). Administratively regulated prices continued to drive inflation dynamics significantly. between regulated and market prices (as of and of almost by 1.5 times) encouraged hidden subsidizing of consumers and reduced incentives to increase energy efficiency. Ukraine s credit rating during did not change significantly. Ratings agencies such as Moody`s and S&P confirmed credit rating on the same level, but in November, Fitch raised Ukraine s long-term credit rating to B- and short-term credit rating to B. The sovereign premium for default risk for Ukraine (credit spread) was relatively stable showing a slight downward trend. During, it fluctuated within the range of %, which is on average 2 times higher than the risk premium for all other developing countries. High risk further limits the possibility of raising capital for Ukraine s economy. The high cost of capital is holding back the revival of economic activity in the country. Consumer sentiment index (left scale) Ratio of economic expectations to the assessment of the current situation (right scale) During, the hryvnia exchange rate fluctuated mainly within the range of Source: NBU USD 25-28, showing a general trend Dynamics of risk premium in Ukraine Dynamics of interest rates for short-term toward devaluation, which was over for -217 business loans in the Ukrainian national 13% in. The pricing of natural 8 Given high inflation and risks, in the Sovereign premium default risk for Ukraine currency for 215- (%) gas is particularly sensitive to such (for ten-year Eurobonds) cost of credit also remained objectively high 3 fluctuations. This is important both 215 even though it declined compared to 215. At (1) in terms of purchases of gas the end of, commercial banks offered 7 25 partially satisfied by imports, and short and long-term loans in the national (2) in the context of its sale, where currency at approximately 18% and 23% per 2 as a result of devaluation, the gap annum, respectively. In the case of foreign between regulated prices for natural 6 currency loans, the average loan interest gas enjoyed by some categories 15 rate was around 7% and 9% for short-term of consumers (these prices have and long-term loans, respectively. remained unchanged since May The negative impact of a slowdown 5 1 ) and natural gas market prices 7% and 9% for short-term and longterm loans, respectively. 61 April August December March 217 January June September December in economic reforms in the country Source: FRB, Thomson Reuters Source: NBU 6 widened. The significant difference 6 to some extent affects other January 215 September 215 February March 217 Source: GfK, calculations of Naftogaz Dynamics of the Ukrainian currency exchange rate in 215- (UAH/ USD) January June September 215 December January June Source: State Statistics Service of Ukraine September December Credit rating Moody`s S&P Fitch Short-term Long-term in national currency in foreign currency in national currency in foreign currency B B B Caa3 B- B- Caa3 B- B-

32 WHERE WE ARE NOW UKRAINE IN THE EUROPEAN GAS MARKET bcm 31. TOTAL UGS CAPACITY bcm, (source: GIE) Conversion ratio: 1.46 TWh = 1 bcm. BP Statistics Ukraine has the largest UGS in Europe Ukraine 24.9 Germany 17.9 Italy 14.4 Netherlands 12.9 France 9. Austria 6.4 Hungary 4.9 United Kingdom 3.6 Czech Republic 3.4 Slovakia 3.4 Poland 3.1 Spain 3.1 Romania 1.2 Denmark.8 Belgium.6 Bulgaria.5 Croatia.5 Serbia GAS PRODUCTION IN EUROPE Gas production in, bcm (source: Eurostat) Proven reserves as of the end of 215, bcm (source: BP) United Kingdom Italy Denmark Germany Poland Romania 49.8 Netherlands Ukraine GAS CONSUMPTION IN EUROPE Norway Ukraine # 14 in gas imports Ukraine # 7 in gas consumption 11.1 Ukraine # 3 in proven gas reserves Ukraine # 4 in gas production Ukraine # 1 in Russian gas transit Consumption of gas bought from Gazprom group in, bcm Consumption of gas from other sources in, bcm (sources: Eurostat, Gazprom Export, Naftogaz estimates) Germany 89.1 United Kingdom 81.5 Italy 7.9 Turkey 46.5 France Netherlands Ukraine Spain 28.8 Poland Belgium Romania Hungary Austria Czech Republic Norway Portugal Ireland Slovakia Greece Denmark Bulgaria Croatia Finland Sweden Slovenia.9.4. Luxembourg Macedonia ,

33 WHERE WE ARE NOW UKRAINE S GAS BALANCE, bcm 14.6 Ukrgazvydobuvannya 1.3 Ukrnafta 8.2 Naftogaz 2.9 Private importers from Europe 4.2 Other 2. UGS: net injection PRODUCTION IMPORTS UGS The volume of gas stored in UGS as at 31 December SOURCES OF GAS 33.2 GAS USAGE HOUSEHOLDS INDUSTRY OPERATING NEEDS 14. The volume of gas stored in UGS as at 31 December 215 DHC: companies generating heat for households, public sector and other institutions UGS: underground gas storage 11.9 Households (direct use) 5.7 DHCs for households 2. DHCs for public sector and industrial consumers.1 Other 1. Gas distribution networks.5 Ukrgazvydobuvannya.3 Ukrnafta 1.7 Ukrtransgaz

34 3. to Moldova UKRAINE S GAS MARKET 1 bcm 1 other Naftogaz group companies infrastructure that should be unbundled from trading functions according to the EU Third Energy Package is marked with an orange line GAS PRODUCTION GAS IMPORTS GAS TRANSMISSION UNDERGROUND GAS STORAGE WHOLESALE TRADE GAS DISTRIBUTION 2, 3 6,7 4, 5 6 SUPPLY TO LOCAL CONSUMERS , , , Ukrnafta.9 Joint ventures with UGV as a minority owner.7 UGV for its own and production needs 13. UGV for households 11.1 from Europe 82.2 Transit 79.2 to Europe 27. to distribution networks in Ukraine 2.3 to end users in Ukraine The maximum volume of gas in storage facilities at the start of the heating season in October Potential 31. bcm 17.6 For households, including DHCs for households Naftogaz owns 25% + 1 share or less in some oblgazes, except for Kirovohradgaz where Naftogaz owns 51% of shares. Operating needs of oblgazes accounted for additional 1. bcm 8.9 Other 1% 9% 1. Naftogaz The structure of natural gas suppliers to the industry, bcm 6.8 DHСs for households, industry, public sector and religious organizations TOTAL BY SEGMENTS bcm Transmission within Ukraine For industry, public sector and religious organizations 1.2 For DHCs for industry, public sector and religious organizations 1.8 Operating needs of Ukrtransgas and distribution system operators 1.8 Operating needs of Ukrtransgaz and distribution system operators For industry SOURCES INFRASTRUCTURE TRADING INFRASTRUCTURE TRADING Data on Crimea, Sevastopol and the uncontrolled territories are not available 2. Naftogaz group regained control over Ukrnafta as of 22 July 215 and from that date accounts the company s performance in its financial statements 3. 1 bcm of gas own used for operating needs or as new material for LNG production 4. Additional 1.7 bcm of gas used by Ukrtransgaz for its own operating needs 5. Excluding.2 bcm of unallocated gas volumes. Excluding the possible volume of the secondary market 6. Infrastructure that should be unbundled from trading functions according to the EU Third Energy Package 7. Excluding 1. bcm of gas transmitted by Ukrnafta, UGV and private companies 8. Including 4.1 bcm of gas supplied to end users directly through trunk gas pipelines and gas networks of gas production companies 67 67

35 WHERE WE ARE NOW GAS MARKET Current European gas market situation In, gas demand in Europe increased. This demand rise was due to higher prices for alternative energy sources (coal) 1. Domestic gas production in the EU stood at a record low of bcm (according to Eurostat), as the government of the Netherlands tightened gas production restrictions at the Groningen field from 27 bcm to 24 bcm. Against this background, imports of Russian gas to Europe reached a record high 2 of bcm, while imports from Norway stayed at the same level as in at 18 bcm. 1 Given that coal prices were higher than gas prices, in there was a partial shift from coal to gas in North- West Europe. The use of coal in the UK for electricity generation decreased mainly due to constant exposure on the price for coal, as well as due to decommissioning of a number of coal power plants. The main reason for rising imports from the Russian Federation was that Russian gas prices were attractive for European customers under long-term contracts with Gazprom as a sharp drop in prices for oil and oil derivatives in 215 and early (which are mainly linked to the price of Russian gas) was fully reflected in the contract price as early as. This allowed European importers to increase imports from documents/annual-reports//statoil-- annualreport-2-f.pdf.pdf p. 16 The relative dynamics of energy prices since early (price as of January 1, is equal to 1%) Source: Thomson Reuters Eikon Gas price at TTF hub (USD)/MWt h Brent price, USD/bbl Coal price (AP12), USD/t Source: Thomson Reuters Eikon % % The relative dynamics of gas prices in different markets since early (price as of 1 January is equal to 1%) Gas price at TTF hub (USD)/MWt h Gas price at NBP hub (USD)/terminal Gas price at NCG hub (USD)/MWt h Gas price at Henry hub (USD)/MMBTU

36 WHERE WE ARE NOW Daily volume of transit via OPAL gas pipeline (through Greifswald entry point), mcm/d January March February Source: оfficial site OPAL April May June the east during the downturn in the oil market and reduce imports from other sources 4. Russian gas prices were more attractive than LNG prices, while in volumes of LNG supply to the global market increased by 7.5% but were lower than expected. The main consumers of LNG were China, India and the Middle East, which offset the decline in imports from Japan and Latin America. The price for gas in Q4 was higher than previous periods due to seasonal factors, in particular due to the decrease in temperatures below the long-term normal temperature, and subsequent increase in gas demand. After a sharp temperature drop in The EC decision and subsequent auctions for sale of additional OPAL gas pipeline capacities increased its workload since December Nord Stream stoppage July September November August October December The number of private importers of natural gas to Ukraine at the end of each calendar year Source: Ukrtransgaz data 18 late - early 217, European gas prices rose sharply, but then gradually fell. The factors that contributed to such a temporary peak include low gas stocks in gas storage facilities in Northwestern Europe and the failure of the UK s largest Rough gas storage facility 5. Technical problems at the storage facility had a significant impact on the dynamics of gas prices throughout and raised concerns about future supplies. According to the latest data from Centrica Storage Limited operator, the gas storage facility will resume operations from May 218. This factor will lead to higher gas prices in the UK during heating season Gas transit to European markets EC decision to expand Gazprom access to OPAL gas pipeline Another event that shook the Eastern European gas market in Q4 was the decision of the European Commission regarding conditions for access to OPAL gas pipeline capacity. On 28 October, the European Commission de facto permitted Gazprom to increase the share it uses in OPAL s capacity from 5% to 8%. After additional capacity auctions, flow of gas through the OPAL gas pipeline began to grow in the second half of December and peaked in January 217 (an average of about 95-1 mcm/d). For Ukraine, the EC decision means a decline in volumes of Russian gas transit and a reduction in Ukraine s transit revenue. If Gazprom obtains access to an additional 3% of OPAL capacity, transit through Ukrainian territory is expected to shrink by 1-11 bcm/y, and Ukraine s transit revenue will fall by more than USD 3 million (estimate based on the old contract tariff ). On 4 December, PGNiG Supply & Trading Company (PGNiG ST) filed a lawsuit to stop the implementation of the EC decision. The company challenged this decision because it was made in excess of authority, violated the principles of legal certainty, protection of legitimate expectations and proportionality, is inconsistent with the principles of EU policy, and violates the Association Agreement between the EU and Ukraine. In addition, the company argues that in making this decision, Article 36 of Directive 29/73/EC to exclude new gas infrastructure from the scope of certain requirements of the Third Energy Package was incorrectly applied. late December, Gazprom continued to transport gas in January as it booked capacities for the next month ( month ahead ) in December. The chart below shows that OPAL s utilization capacity significantly dropped on 1 February 217 as the February auction for the sale of additional capacities could not be conducted due to injunctive relief 6. Finally, in February 217, Naftogaz appealed to the High Court of the European Court of Justice with a request for involvement in the case upon a claim filed by PGNiG ST appealing the EC decision. Naftogaz sent this request for involvement, after having grounded it by the previous practice of the court and indicating the potential negative consequences of the EC decision for the company. First of all, it poses a threat to the security of natural gas supplies to Ukraine after the termination of gas flows from Poland, a deterioration of the Naftogaz competitive position, an unexpected change in the regulatory and market environment of the company. Involving Naftogaz in the case enables the Ukrainian company to submit additional arguments in the case and receive access to case files. Naftogaz request for leave to intervene in the case initiated by PGNiG ST is being considered by the court according to the procedure. In addition to the request for involvement in the case as a third party, on 27 March Naftogaz filed a lawsuit in the High Court of the European Court of Justice against the European 6 london/outlook-217-european-gas-supply-demandto-remain Volumes of Ukrainian transit will depend on the development of new Russian pipelines which provide alternatives to the Ukrainian route SCENARIOS FOR TRANSIT VOLUMES IN , BCM NORD STREAM II PIPELINE 9 Reduced transit in 22 through replacing transportation volumes to Turkey 1 Exports to the countries of South East ern Europe depends on the new infrastructure development in the region Source: Expectations of outside consultants and Company management Commission to cancel the decision of 28 October. Adoption of the decision without consultation with Ukraine violates Article 274 of the Association Agreement between the EU and Ukraine, and the EU s commitment under the Energy Charter Treaty and the Energy Community Treaty, since it strengthens the dominant position of Gazprom and associated companies. Russia s alternative pipeline projects Further implementation of the Nord Stream 2 construction project, a new export gas pipeline running from Russia, would have a negative impact. Nord Stream 2 is a new export pipeline from Russia to Europe via the Baltic Sea through Germany in the Greifswald district near to the exit point of the Nord Stream pipeline. The aggregate capacity of the two branches of North Stream 2 will be 55-6 bcm/y. In addition, Nord Stream capacity expansion was announced to 6 bcm. As a result, the total design capacity of Nord Stream and Nord Stream 2 will be bcm/y. In addition to the decrease in volumes of transit through Ukraine, construction of Nord Stream 2 threatens the energy security of the EU, strengthens Russia s position in Europe, and is contrary to the principles of the Energy Community. The Turkish Stream project that will run through the Black Sea and Turkey to Greece and have two branches with total capacity of 31.5 bcm/y threatens to stop transit through Ukraine to the south. In late December, the European Court Dynamics of Russian natural gas volume sent via Ukraine and volumes of transit suspended the EC decision to expand Gazprom access to the OPAL pipeline. via Nord Stream, bcm/year The courts are currently checking on the legality of the decision. Resolution was expected by the end of January, Transit through Ukraine but as of March 217, the decision (Nafrogaz data, taking into account gas transit by had not yet been rendered. However, RosUkrEnergo AG) Rough is the only gas storage facility in the UK despite the fact that the decision Transit via Nord Stream І (IEA web-site data) Consolidated+annual+report_GKPGNiG_. used for seasonal gas storage. It accounts for to expand access was suspended in Additional: Russian gas volumes sent via Ukraine to European consumers rose in as a result of increase of Russian gas exports to Europe. pdf/7fb36d aa-a323-f7e2d3a5fbd1 ст.161 about 7% of the UK s current gas storage capacity TURKISH STREAM PIPELINE Baseline expectations of the management If pipeline provides export exclusively to Turkey 9 If pipeline provides export to Turkey and South East European Countries 1 Construction with delay Construction on schedule

37 WHERE WE ARE NOW 72 NORD STREAM 2: The key to Russian dominance and potential abuses on the European gas market Background Nord Stream 2 (NS2) is a gas pipeline project developed by Russia s Gazprom in the Baltic Sea. It is aimed to double the capacity of Nord Stream (NS), the existing underwater pipeline connecting Russia and Germany, from 55 billion cubic meters (bcm) to bcm a year (German annual demand), starting from 219. In 215, Gazprom reached a deal with five Western European companies (BASF, E.ON, ENGIE, OMV and Shell) to jointly develop the project. In, following a decision of the Polish antitrust regulator, the Western companies pulled out of the partnership. In 217, Gazprom announced the partners would still contribute financing to the project. Gazprom says it is ready to develop and finance the USD 1.3 billion project alone. Russia currently accounts for approximately 3% of gas imports to the EU and 6% of imports to Germany. The launch of the NS2 will further strengthen Russia s dominant role in the EU gas market and raises a number of competition, energy security, geopolitical and security issues. There is no economic reasoning behind this project. The expected tariffs for the Ukrainian route in 22 will be significantly (up to four times) lower than expected tariffs of NS2 after its construction. Outcomes Competition concerns: NS2 will not connect the EU to new sources of gas and will lead to a redirection of Russian gas flows from existing sources. This redirection will result in a concentration of Russian gas flows in the Nord Streams. Existing pipelines carrying gas from the East through Ukraine and Poland can become less sustainable because of the reduced load. NS2 will create an overcapacity for Russian gas delivery in Germany, undermining the feasibility of LNG deliveries. Given stable forecasted gas demand in the EU, Russia is likely to win the share of the Netherlands, the UK and Norway gas suppliers (as their production declines), which will strengthen Gazprom s dominant role. 72 Industrial gas consumers in Central, Eastern and Southern Europe will become less competitive compared to their German counterparts, because the gas price in the region will include additional transmission costs. Energy security concerns: The redirection of gas flows may lead to gas shortages in Central, Southern and Eastern Europe (CEE and SEE) due to existing gas transmission capacity bottlenecks within the EU. Northern and Western Europe will become more dependent on Russian gas. The EU will be dependent on the offshore NS and NS2 for Russian gas deliveries. Unlike in the case with traditional onshore routes, an emergency event could cause a halt of the entire 12 km underwater pipeline for several weeks. The failure of even one of the four pipelines will have detrimental effects on the EU security of gas supply. Security concerns: To avoid the inevitable supply interruption risks, Russia, as the owner of the pipelines and the gas they transmit, may want to increase its military presence in the Baltic Sea to safeguard this key gas delivery route. This may potentially result in tensions among NATO members over security vs. gas supply issues. Environmental concerns: Unlike in the case of the Nord Stream, the NS2 does not have an inherent Union interest. The project constitutes excessive and objectively unnecessary gas infrastructure whose function could be easily performed by already existing onshore facilities. In the same time, construction and operation of NS2 will inevitably affect the living conditions of animal and plant species and put the marine environment at risk. Realization of this project would unjustifiably shift the balance between economic, private interests of the project promoter and environmental, public interests in favor of the former. Geopolitical concerns: NS2 is an instrument of Russia s divide and conquer strategy. CEE and SEE countries are already highly dependent on Russian gas. Having concentrated gas supply in its Nord Streams, Russia will expand its control of or influence on both the infrastructure bottlenecks and gas supply to Europe. By redrawing the European gas flows map, Russia will be able to offer gas discounts in CEE and SEE in exchange for political concessions, gaining a tool to influence EU decisions. Through NS2, Russia s will have leverage in relations with Germany. Germany will be a host country of the key gas transit route to other EU member states. Russia has made pressure on transit countries through consumer countries more than once. Furthermore, NS2 and its German section will be indirectly owned by Russia, which poses the risk that the key gas transmission infrastructure may be used for noncommercial purposes. Applicable legal regime dispute: a legal void There is a dispute between the project s supporters and opponents over whether EU law is applicable to NS2. If EU energy and antitrust regulations are fully applied, the project is not likely to be built. The pipeline passes the territory of four EU member states: Finland, Sweden, Denmark and Germany. A formal clearance on environmental issues is required from each country for the project to proceed. Germany and Gazprom insist that the project is a purely commercial deal that should only be governed by German law in its onshore part and that no European law is applicable to the offshore section. Denmark and Sweden have asked the European Commission for a formal clarification on whether the EU law should be fully applied to NS2. In its reply to the request of the Nordic countries, quoted by media, the EC confirmed that the rules for applying EU law, including the Third Energy Package, to gas pipelines built along the sea bottom are unclear. The commission also noted that NS2 should not be built and operated solely under the law of Russia or in a legal void. The European Commission has requested a mandate from member states to negotiate with Russia over objections to NS2. The Commission is reported to have a view that key principles of the European energy law should be applied to the project, including the offshore section In April 217, Denmark announced its plans to amend its national legislation so that the project could also be blocked on security or geopolitical grounds. Nord Stream 2 and Turkish Stream two main alternatives for Russia enabling it to terminate transit through Ukraine beginning in 22 GAS TRANSPORTATION ROUTES FROM RUSSIA TO EUROPE 7 Existing pipelines Potential new projects NORD STREAM 55 bcm NORD STREAM bcm YAMAL 39 bcm THROUGH UKRAINE 146 bcm TURKISH STREAM 32 bcm 7 Including Turkey, but excluding Finland, Baltic countries and Belarus 8 Provided that Yamal-Europe, Nord Stream and Blue Stream are running at 9% of their capacity Source: Naftogaz, expectations of external consultants, PJSC Gazprom, official reports in the press Ukraine-Poland interconnector In order to increase gas imports to Ukraine from Europe through Poland and enable storage of European gas in Ukraine s underground gas facilities, Ukrtransgaz continues to work actively on construction of a Ukraine-Poland interconnector. The project would enable the creation of the East European gas hub and the pumping of up to 8 bcm/y of gas from Poland to Ukraine, and up to 7 bcm/y of gas from Ukraine to the EU. The interconnector is part of the North- South Gas Corridor, which will connect the LNG terminal in Svynoustyi with Central and Western Europe. Currently, the maximum capacity of gas supplies from Poland to Ukraine is 1.5 bcm/y. The Ukraine-Poland Interconnector is included in the ENTSOG Ten-Year Development Plan for and on the list of the Energy Community projects of mutual interest (PMI). In addition, on 4 March, the State Expertise Service delivered a positive BLUE STREAM 16 bcm opinion with regard to the design documentation. Ukrtransgaz will finance the project and has already signed a design work contract. Currently, the joint Open Season procedure for shifting to the new interconnector capacity on both the Polish and Ukrainian sides is under development. Ukrtransgaz is interested in holding consultations with gas market participants. The Ukrainian and Polish sections of the interconnector are expected to be constructed simultaneously and ready by mid-22. Natural gas imports to Ukraine In, Ukraine did not import gas from the Russian Federation. By eliminating gas dependence on Russia, Naftogaz and other Ukrainian importers now have access to other sources of gas and can choose from several dozen suppliers. The joint efforts of numerous participants helped to organize gas supplies to Ukraine exclusively from the European route in quantities PROJECTIONS FOR TRANSIT VOLUMES THROUGH UKRAINE IN 22 8, BCM Europe Expected Russian exports to Europe Contracted volumes from Russia to Turkey Alternative routes to the EU Via Blue Stream Residual volume through Ukraine (excluding new projects) Pipeline capacity within the framework of new projects Turkey ~85 The aggregate capacity of new pipelines may stop transit through Ukraine after 22 sufficient to meet the country s needs. In, gas imports decreased by 32% compared to the previous year, or from 16.4 bcm to 11.1 bcm. 1 years ago, Ukraine imported as much as 5 times more gas than now. The decrease in gas imports reduces the negative impact on Ukraine s balance of payments and GDP. The drop in Naftogaz s share in imports in favor of private importers and industrial consumers is a crucial shift. Last year, independent importers brought 2.6 times more gas than in 215 (2.9 bcm versus 1.1 bcm). The number of private importers in Ukraine doubled and exceeded three dozen. In, Naftogaz imported 8.2 bcm of gas from the European market, which is 1 bcm (11%) less than in the previous year. Total gas imports by Naftogaz decreased by 47% compared to 215. In the reporting period, Naftogaz cooperated with 15 suppliers. None of these companies had more than 3% of the total gas imports of the company

38 WHERE WE ARE NOW Value of imported gas vs "take-or-pay" claim in How much was saved in Q2-Q4 Q take-or-pay claim as alleged by Gazprom 1, USD billion Q3 Q2 Q take-or-pay claim as alleged by Gazprom 1, USD billion Value of gas imported by Naftogaz, USD billion Value of gas imported by all companies 2, USD billion Sources: Naftogaz, State Statistics Service of Ukraine 1 based on flat distribution of Gazprom's alleged claim based on number of days by quarters 2 data from State Statistics Service of Ukraine Value of gas imported by Naftogaz, USD billion Value of gas imported by all companies 2, USD billion USD 4.1 bn if compared to Naftogaz' imports USD 3.7 bn if compared to all imports to Ukraine Thanks to reverse gas supplies from the EU instead of satisfying Gazprom s ungrounded take-or-pay demands (dismissed by the Arbitration Tribunal s separate award) in Q2- Q4, Naftogaz saved over USD 4 billion. In January 217, Gazprom sent Naftogaz an invoice of more than USD 5.3 billion for April-December, while Naftogaz paid only USD 1.24 billion for the gas imported within the said period, which is 4.3 times less. According to Naftogaz estimates, if Naftogaz had paid Gazprom as much as it wanted, Ukraine s GDP would have fallen by more than 2% instead of a 2.3% growth. It also would be logical to expect a considerable negative effect on the current account of the balance of payments, currency exchange rate and budget deficit. Naftogaz efforts in the diversification of Ukraine s gas supply routes and sources therefore resulted in axing the imported gas costs by more than 4 times compared with the assumed ones. Natural gas production in Ukraine Based on the results for, annual gas production was 2.1 bcm, which is.5% more than the previous year (19,9 bcm). Ukrgazvydobuvannya increased gas production by 77 mcm to 14.6 bcm, which made up 73% of natural gas production in Ukraine in. Last year, the company announced implementation of several ambitious investment projects covering the purchase of new drilling equipment and Current account balance of Ukraine and imported gas price, USD million Current account balance of Ukaine Imported gas price attracting contractors for hydraulic fracturing operations. The company also announced a tender for drilling 9 wells during However, due to financial problems including a tax debt, Ukrnafta experienced a rapid decrease in natural gas production. By the end of, its output result was 1.3 bcm, which is 14% or 25 mcm less than the previous year. The company is no longer the second largest gas production company in Ukraine. Private companies increased production to 4.2 bcm, or 5.5% compared to 215, significantly slowing down production growth compared to previous years (when growth amounted to % y-o-y). This lowest growth rate for the private segment over the past six years was due to lower investment and operational activity over the past two years. This situation was caused by several factors: firstly, a record collapse in market prices for gas (consistent with import parity), and secondly, high rates of rental payments for hydrocarbon extraction in the period Natural gas usage in Ukraine In, natural gas usage in Ukraine decreased by 2% compared to 215, falling to 33.2 bcm against 33.8 bcm in 215. In, total final consumption of natural gas was 88.6% of its aggregate usage. The remaining gas (3.8 bcm and 3.5 bcm in and 215, respectively) was used to meet industrial and technological needs, including transit, transportation and distribution of natural gas and production of liquefied natural gas. Minor declines in gas usage are associated primarily with increased consumption by regulated market segments. In particular, in households used 11.9 bcm of gas, which is.6 bcm more than in 215 (+5%). Dynamics of aggregate natural gas usage in Ukraine, 21- (bcm) Lower volumes of natural gas used in compared to 215 were due, -5 in particular, to lower natural gas -1-5 consumption by industrial consumers production sector (against the background of some -15 chemical industry 7 However, began with a return to rates of rental -1 recovery in industrial production) by gas usage for industrial purposes payment for gas extraction for private companies to -2 metallurgical industry 11.4% (to 9.7 bcm against 11. bcm in the previous level observed two years earlier: from production of construction materials ). Given that growth was observed % to 29% for mining to a depth of 5 m and in the sectors that are traditionally -2 from 29% to 14% in production from wells deeper -3 energy-intensive and large gas volumes m. From the beginning of 217, rental rates for Sources: NBU, State Statistics Service of Ukraine used, it may be indicative of some Source: Naftogaz, State Statistics Service of Ukraine 74 Ukrgazvydobuvannya were reduced to a similar level , , Source: Naftogaz Dynamics of natural gas usage by industrial consumers (% to previous year) 1 5 1,22 5.4, ,

39 WHERE WE ARE NOW Fluctuations in natural gas usage by consumer categories in, bcm Dynamics in the difference between market and regulated (in the framework of PSO) prices for natural gas, % 2 1, * households, budgetary institutions and religious organizations домогосподарства, бюджетні установи та релігійні організації промислові споживачі ТКЕ виробничо-технологічні потреби industrial consumers Source: Naftogaz *Excluding the ATO area and unallocated volumes district heating companies industrial and technological needs Source: Thomson Reuters, Naftogaz reduction in the energy intensity of industrial production or its conversion to alternative energy sources. Much of these natural gas supplies involved meeting the direct needs of the households, district heating companies (DHC) and religious organizations by Naftogaz at stateregulated prices in line with its public service obligations (PSO). In, these categories of consumers increased natural gas usage, and this increase was only partly due to low temperatures during the heating season. Households remained the main consumer of natural gas, with 17.6 bcm used to cover their needs (including gas consumption by DHC producing heat for the households). The inert state regulation of natural gas prices for consumers in the context of PSO caused some delay in the regulated prices established in spring as import parity price from the current level of its market equivalent - this resulted in a noticeable price differential, which at the end of had reached 4%. This situation creates tthe risk of structural imbalances in the economy and capital misallocation. For example, selling natural gas at a price significantly below the market level limits investments in exploration for new oil and gas deposits (to the amount of the price difference) and impedes increasing extraction to overcome Ukraine s dependence on energy imports. Main factors of fluctuations in natural gas supplies to meet direct needs of households (left) and dhc for household needs (right) in, mcm To meet household needs in, 17.6 bcm was used against 17.2 bcm in 215, including 11.9 bcm used by households directly for their own needs (cooking, hot water and heating) and 5.7 bcm by heat generating companies providing services to households. Regionally, there are very noticeable geographical differences in volumes of gas usage by households - the northern and western regions of Ukraine increased volumes of natural gas consumption (excluding Kyiv region and the city of Kyiv), while the southern and eastern regions reduced them explained by temperature factors, in particular мcolder winters in the north. The main factors determining natural gas consumption by households were lower temperature during the heating months of (especially in November and December) and the upward revision of gas usege rates by households that are not equipped with gas meters (see CMU Regulation No.23 of 23.3.). The combined effect of other factors (including changes in consumer behavior when using gas to meet their own needs) led to a slight decrease in overall natural gas consumption to meet household needs, including through energy saving projects. According to independent experts, potential reduction in natural gas usage through energy efficiency enhancements and energy saving programs is seriously restricted by the current system of subsidies. This system needs to improve to preserve the motivation to save energy and engage in efficient use of natural gas. Monetization is one the main areas contributing to the efficiency of subsidy programs, with the inclusion of effective mechanisms aimed at motivating the 215 weather increase other 215 weather increase other factor in consumption factors factor in consumption factors rates rates prudent use of natural gas. 76 (except Luhansk region). This could be

40 WHERE WE ARE NOW Natural gas consumption by households in and change compared to 215 (bcm/% y-o-y) ZAKARPATTIA.41/5% LVIV.85/13% VOLYN.28/13% RIVNE.31/21% TERNOPIL.44/8% KHMELNYTSKYI.45/14% ІVANO-FRANKIVSK.52/17% CHERNIVTSI.27/-13% ZHYTOMYR.4/9% VINNYTSIA.55/12% CHERNIHIV.36/43% KYIV.18/% KYIV REGION.97/1% CHERKASY.45/12% KIROVOHRAD.28/5% SUMY.42/17% POLTAVA.68/11% DNIPROPETROVSK 1.2/-2% KHARKIV.79/2% DONETSK.47/-19% LUHANSK.27/8% OIL AND PETROLEUM PRODUCT MARKET ODESA.52/-5% MYKOLAIV.31/-1% ZAPORIZHZHIA.41/% increased volumes of gas consumption no significant change in consumption (+/- 2%) reduced gas consumption Uncontrolled territory *Excluding temporarily uncontrollable territories in Luhansk and Donetsk regions Source: Naftogaz Key energy efficiency initiatives DHC Individual boilers Transportation and distribution Multistoried buildings More efficient/ alternative boilers Modernization of gas pipelines Gas saving 1 bcm ~1.1 ~3. ~.7 ~.8 ~3.4 Investments USD billion KHERSON.26/-4% AR CRIMEA N/A Current programs are insufficient to adequately overcome low energy efficiency in Ukraine Initiatives More efficient/ alternative boilers Meters with thermoregulation Energy Efficiency Programs can ensure savings in household bills up to USD 2.5 billion and accelerate market transformations The current status is characterized by insufficient updates of energy efficiency problems in Ukraine Energy efficiency programs in Ukraine Programs Warm credits IQ Energy Installation of meters Energy Efficiency Fund Status Launched in 215, covered more than 15 thousand households Launched in May ~5% coverage of households with heat meters Pending since 217 Реальний вплив на економію Global oil market witnessed the lowest crude oil prices for the past 12 years, with the average Brent oil price at an average of USD 44 per barrel. Moreover, the price of oil throughout was quite volatile, fluctuating in the range of USD 26 to USD 55 per barrel. In autumn, representatives from OPEC members resolved during several meetings to reduce volumes of oil production to curb oversupply in the market. OPEC member countries seek to achieve a stable trend towards strengthening global oil prices through the transition from sustainable mining to supply and demand balance policies. According to the World Bank and OPEC, oil demand in grew by 1.3 million barrels per day to 94.5 million barrels per day. OECD countries have demonstrated significant growth, adding.37 million barrels per day. China and India faced continued growth, each adding.29 million barrels per day. OPEC is expecting in 217 the level of demand to grow by 1.16 million barrels per day more and reach 95.6 million barrels per day. 8 Brent oil prices, 215-, USD/bbl Source: S&P Global Platts Thermomodernization In, the demand and supply balance Family Thermo-modernization Programs 217 supply ~5.5 homes 1 Pending since of oil stocks was not reached in the global 91 market. If the parties to the agreement to 9 oil demand for ТЕК cut oil production manage to execute it, Total ~12 36 Висока this should decrease the negative balance 89 in 217 and reduce global commercial Низька Source: OPEC monthly oil market report; World Bank Group (Commodity Markets Outlook) reserves as a base year Q Q Q Q Q Q2 Q3 Global oil demand and supply balance, million barrels per day Q4

41 WHERE WE ARE NOW Global oil demand and supply balance and oil price million barrels/day ,5 RAPID RECOVERY Rapid growth in global GDP (more than 3.2% per year) Growth in demand at 1.% per year SLOW RECOVERY UNDER-INVESTMENT OVERSUPPLY Scenarios of events in the global oil market Demand OPEC Unconventional oil (UO) Global GDP growth of 2.8% due to slowdown of the Chinese economy. Weak growth in demand (.5% per year) Global GDP growth of 2.8% due to slowdown of the Chinese economy. Weak growth in demand (.5% per year) Global GDP growth of 2.8% due to slowdown of the Chinese economy (.5% per year) OPEC members are cutting production to support prices Investments in production are at the level of growing market demand Restrictions of production output by OPEC increase possible price spikes OPEC member production at highest possile levels with a lack of agreements to cut production Brent oil price (right scale) Demand and supply balance (left scale) Source: S&P Global Platts, OPEC monthly oil market report; World Bank Group (Commodity Markets Outlook) UO production is growing against price increase UO production growth is slowing down and remains stable since 22 UO production growth rates are lagging behind price increases UO production increases due to new technology and reduction of production costs Other Production growth rate is returning to the weighted average Production decline rate in the existing fields is accelerating High price levels increase investments in new projects Low level of full-life cycle costs for new projects due to technical and economic factors -3 USD/barrels According to the OPEC Secretariat and the U.S. Energy Information Administration, commercial oil reserves in OECD countries have been declining steadily since summer, while their level remained higher than the average over the last five years. High levels of reserves are maintained in the United States alone, where they exceeded the average of the past five years by about 3%. In late, the oil storage facilities filling level in Europe fell below the 215 level, while oil reserves in Japan fell to a multi year low. The European market for oil and petroleum products The European oil refining capacity is about 16% of the global capacity. According to the European Petroleum Refiners Association (AISBL), refinery capacity utilization in Europe in the period 27 through 215 fell from 87% to 78%. In the period between 27 and 214, about 17 refineries stopped operations (mainly in Italy, France and the UK), and at the beginning of 215 there were 83 refineries operating in Europe. Among the main reasons for lower capacity utilization of European refineries are the reduced demand for petroleum products, evolution of demand (lower petroleum consumption in favor of diesel fuel consumption), rising share of energy costs in refinery operating expenses with simultaneous reduction of oil refining margins. This leads to increased refinery sensitivity to changes in the cost of oil and petroleum products. In 215 and, European refineries capacity utilization somewhat improved due to higher refining margins at refineries. According to IEA/KBC Monthly Global Indicator Refining Margins, the average oil refining margins at the refineries in the Northwestern Europe were approximately USD 3.6/bbl in 214, but already in 215 and they were USD 7.3 and USD 4.3/bbl, respectively. Refining margins decreased in compared to 215 due to increased global refinery capacity utilization levels. The decline in European refineries capacity utilization levels compared to 215 was due to increase in diesel fuel imports from Russia, the United States, and Asia. However, the European refineries capacity utilization level in was still significantly higher than in 214. to the global oil price change trend. In particular, the increase in oil prices in the period of January through December amounted to about 75% (from USD 31 to USD 54 per barrel), while at the same time, increase in petroleum product consumer prices in the EU amounted to 6% for gasoline and about 13% for diesel fuel. Oil and condensate extraction in Ukraine The decline in oil prices in caused by excess supply probably reached its critical point in. The US Shale Revolution, which became possible only under a new era of expensive oil, has borne fruit in the form of additional, excessive volumes of oil in the market and gradual technology development that led to a reduction in oil extraction costs. At the same time, lower prices caused by excess supply meant the fields with high extraction costs could not survive. Moreover, rapid decline in oil prices led to oil companies rolling back investment programs for the development of new fields. The decline in global oil prices has had some impact on Naftogaz Group companies Ukrnafta and Ukrgazvydobuvannya. Given the low level of investment in drilling of new wells and overhauls in previous periods against the backdrop of natural decline in fields productivity, the fall of global oil prices and significant tax burden in, Ukrnafta reduced oil and condensate extraction by 1%, and Ukrgazvydobuvannya by 5%. In addition, volumes of oil and condensate production by private companies in Ukraine were reduced by 15%. This trend can be explained primarily by the delayed response of the legislative authorities to changing market conditions and, therefore, insufficiently flexible taxation of hydrocarbon producers in Ukraine rental rates were reduced only in January As a result, at a high taxation level in extracting companies were forced to operate under conditions of underfunded development programs. In future, in view of the lower tax burden on hydrocarbon production operations in Ukraine, volumes of drilling and hydrocarbon production, including oil and gas condensate, are expected to grow. 1 As from 1 January 217, the rental rate for oil and gas condensate extraction decreased from 45% to 29% of EU-16 refineries capacity utilization level and Brent oil refinery margin EU-16 refineries capacity utilization level (left scale) Brent oil refinery margin, NW Europe (righte scale) Q1 215 Q2 215 Q3 215 Q4 215 Q1 Q2 Q3 Q4 Source: OPEC monthly oil market report (214-); International Energy Agency (IEA), Global Refining Margin Indicator In, the consumer price change trend the commodity value for deposits above 5 meters Source: Scenarios evaluation by external consultants and Naftogaz for petroleum products corresponded 8 and from 21% to 14% for deposits below 5 meters % Brent oil price and EU-16 refineries capacity utilization USD per barrel EU-16 refineries capacity utilization (righte scale) Brent oil price (left scale) Q1 215 Q2 215 Q3 215 Q4 215 Q1 Q2 Q3 Q4 Source: Fuels Europe dataroom; OPEC monthly oil market report (214-) Global oil price and petroleum products' consumer prices in EU Euro/1 liters 11 A-95 gasoline prices (left scale) diesel fuel prices (left scale) Brent oil prices (right scale) Source: S&P Global Platts; weekly energy bulletin of the European Commission USD per barrel % USD/bbl

42 WHERE WE ARE NOW Oil and condensate extraction in Ukraine, thousand t Oil and condensate sales by Ukrnafta, Other Naftogaz group Ukrnafta selling price estimates, USD/barrel Platts Urals price, USD/barrel (monthly average) Source: Naftogaz, Ministry of Energy and Coal Industry of Ukraine Dynamics of oil extraction in/imports to Ukraine, import, million tons/year extraction, million tons/year Source: Naftogaz, Ministry of Energy and Coal Industry of Ukraine, EIR Center, State Fiscal Service of Ukraine Structure of oil and condensate extraction in by companies, % Naftogazvydobuvannya Natural resources Oil sales in Ukraine Ukrnafta and Ukrgazvydobuvannya account for approximately 9% of oil and gas condensate extraction in Ukraine (about 68% and 22%, respectively). Ukrgazvydobuvannya is refining oil and gas condensate at its own production facilities. Ukrnafta is selling domestically produced oil and gas condensate exclusively at auctions in accordance with Article 41 of the law On Oil and Gas and the procedure for organizing and holding exchange auctions for sale of domestically produced crude oil, gas condensate and LNG, approved by the Cabinet of Ministers of Ukraine Regulation No. 57 of Today, crude oil in Ukraine is refined by Kremenchug refinery only, at volumes of about 2.1 million tons per year this is mainly domestically produced oil and gas condensate. The other five domestic refineries do not process oil and it is unlikely that they will resume their operations in the short term. According to the rules of procedure and approved auction scheme, starting prices for domestically produced oil sales are usually calculated based on the Platts Crude Oil Marketwire publications on the mean prices of actual agreements on Urals oil sale (UralsMediterranean and UralsRotterdam quotations). refining, which in turn led to an increase in the share of petroleum product imports. According to data from the State Fiscal Service of Ukraine for, the total volume of imports into Ukraine under the UCG FEA (Ukrainian Classification of Goods of Foreign Economic Activity) 271 (oil and petroleum products) amounted to 7.4 million tons, while exports of petroleum products was thousand tons. The all Ukrainian capacity of oil refineries is about 4 million tons of oil per year, or almost four times the demand for petroleum products in Ukraine. Despite sufficient refinery capacity in Ukraine, refinery capacity utilization is very low (approximately 7%). Today, only Kremenchuck and Shebelinskiy refineries carry out refining of mainly domestically produced hydrocarbons to the extent of about 2.7 million tons of hydrocarbons (). In only 1 years, Ukraine underwent a transformation from a country with surplus refinery capacity and oil exporting country to a country that is more than 8% dependent on petroleum products imports. Source: UICE, S&P Global Platts, own calculations 68 In 215, Kremenchuck oil refinery 11 2 Poltava Petroleum Company (PPC) refined oil from Ukrainian oil fields 1 Ukrnaftoburinnya together with CPC Blend oil and gas Production 1 Esco-Pivnich condensate imports. Beginning in Q1, 18 Import 3 Other the refinery produces Euro 5 diesel 82 fuel. According to the calculations and Oil refining and refined petroleum information available from public sources, Ukrnafta product market in Ukraine Ukrgazvydobuvannya Ukrtatnafta refined at Kremenchuck Other The internal Ukrainian market is oil refinery about 2.1 million tons of Source: Naftogaz, Ministry of Energy and Coal Industry of Ukraine, NefteRynok insufficiently saturated with domestically raw materials and produced about refined petroleum products due to falling 54 thousand tons of motor gasoline and 82 domestic hydrocarbons extraction and 59 thousand tons of diesel fuel. Source: Naftogaz, NefteRynok, Oilnews, own calculations Ukraine's petroleum product market balance,, million t Source: State Fiscal Service of Ukraine, NefteRynok, Oilnews, own calculations Export Production Import Balance Motor fuel market balance in Ukraine,, %

43 WHERE WE ARE NOW Global oil price and petroleum products' consumer prices in Ukraine UAH/1 l with VAT Source: S&P Global Platts; UPECO A-95 gasoline prices (left scale) Diesel fuel prices (left scale) Brent oil prices (right scale) USD/bbl Given that Ukraine is currently an import dependent country, the price of petroleum products on the domestic market is formed on the basis of price quotations in the main European hubs of Southern and Northwestern Europe. As a result, an upward consumer price change trend has also been observed in the Ukrainian market: the price of gasoline increased by 2% and diesel fuel prices rose by approximately 22%. The larger increase in prices of petroleum products on the domestic market of Ukraine is primarily associated with the decrease in the exchange rate of the hryvnia against foreign currencies and the greater share of raw materials (petroleum product) in the final selling price. IMPORTANT REGULATORY CHANGES IN Wholesale prices for motor petrol in Ukraine and Europe (without taxes and fees) OIL IMPORTS TOTAL.5 OIL EXTRACTION Ukrnafta % Ukrgazvydobuvannya.5 22% DTEK.5 2% Geo-Alliance.4 2% Poltava Oil and Gas Company.4 2% Other.9 4% TOTAL 2.2 A-95 gasoline price estimates, USD/t hub gasoline price, Northwestern Europe, USD/t Source: weekly energy bulletin of the European Commission; UPECO; own calculations Ukraine s oil and petroleum product market balance for, million t IMPORT 1 Wholesale diesel fuel prices in Ukraine and Europe (without taxes and fees) Diesel and gasoline % Belarusian Oil Company % WOG 1. 32% ОККО.4 6% Western Oil and Gas Company.3 5% Other % LPG % TOTAL 7.7 Diesel fuel price estimates, USD/t Hub diesel fuel price, Northwestern Europe, USD/t Source: weekly energy bulletin of the European Commission; UPECO; own calculations WHOLESALES 1, 2 Diesel and gasoline % LPG.1 2% TOTAL 5.4 RETAIL Diesel and gasoline % ОККО.5 18% WOG.4 15% Ukrnafta.4 14% Privat.4 14% BRSM.1 5% AMIC.1 4% Other.7 3% LPG % CNG.1 2% TOTAL 4.2 Ukrainian gas production development concept Ukraine s mineral resources offer significant potential for the increase in natural gas production both in the short and medium term from already discovered fields (924 bcm balance sheet reserves) and in the long term. The intensity of natural gas production is very low compared to other countries. Based on its current natural gas consumption levels, Ukraine has proven reserves for more than 2 years (compared to 1 15 years for comparable countries). Adoption of the Ukrainian Gas Production Development Concept by the Cabinet of Ministers of Ukraine in December is an important event for the sector. According to this document, gas production in Ukraine is expected to increase to 28 bcm by 22 as a result of the favorable environment in the industry and an expected increase in investment. The implementation of the program would enable Ukraine to completely stop importing gas, and even start exporting it in the future. goals include to improve production sharing agreements (PSA) as a tool of public and private cooperation (regulation No 327) and to increase transparency in the extractive industry (regulation No 484). At the end of the year, the first steps to implement the concept were proposed to the government draft regulation No 5132 On amendments to the Tax Code of Ukraine, which included introducing an incentive tax by reducing royalty for gas production from new wells drilled after 1 January 217 to 12%. The potential benefits of this innovation include increased investment attractiveness of Ukraine as a country with significant natural resources; improved investment and business activities in the mining industry; increased drilling works and production volume in the short and medium term. However, the government rejected the initiative and approved lower rates for oil production instead. In the current regulatory environment, Ukraine compares poorly with other Eastern European countries in terms of attractiveness for international capital aimed at hydrocarbons production. Tariffs for UGS services In June, as part of natural gas market reforms, the National Energy and Utilities Regulatory Commission (NEURC) approved methodology for determining and calculating tariffs for natural gas Average tax burden on hydrocarbon production from different depths and using different technologies (%) REFINING The list of activities to implement the 21 Diesel and gasoline % 2 concept shows that the government has Ukrtatnafta 1.2 8% Ukrgazvydobuvannya.3 2% planned to balance the tax burden on 15 LPG.3 11% gas production by adoption the incentive 13 Ukrnafta.2 5% Ukrgazvydobuvannya.2 5% royalty. It also aims to decentralize tax 1 CNG.1 3% Total motor fuel 1.9 revenues from oil and gas industry for the 5 Other.9 33% benefit of local budgets, while improving TOTAL 2.8 and simplifying authorization processes 1 excluding other petroleum products that are closely related to oil and gas Texas Alberta Ukraine Poland Romania 2 including corporate sales (USA) (Canada) Sources: Naftogaz, Ministry of Energy and Coal Industry of Ukraine, State Fiscal Service of Ukraine, State Statistic Service of Ukraine, Oilnews, NefteRynok, own calculations production (regulation No 396). Other Source: Naftogaz assessment Countries importing

44 WHERE WE ARE NOW storage (injection/withdrawal) for the storage facilities that operate in a regulated access regime (i.e. regulated tariff for UGS services). The methodology focuses on the cost plus principle and provides UGS fees depending on the distributed capacity. Currently, this methodology is being finalized by the NEURC working group as part of tariff calculations by type of services that the UGS operator can provide according to the Storage Facilities Code (annual/monthly capacity or individual service) and natural gas allocation for each customer in a virtual point of entry to/exit from storage facilities. The new tariffs for UGS services have not been calculated yet using this methodology and the old tariffs are applicable (general tariff for gas storage is UAH 112/tcm). The working group is expected to amend the methodology in such a way that the newly established rates for storage, on the one hand, would at least cover the marginal cost for UGS provider, and on the other, would make Ukrainian UGS facilities commercially attractive for gas traders including European companies. Tariffs for point of entry to/exit from Ukrainian UGS facilities approved Pursuant to the Law of Ukraine On the Natural Gas Market, on 28 March 217, the NEURC approved Ukrtransgaz tariffs for natural gas transportation services to Ukrainian consumers for entry and exit points calculated using the new methodology. The methodology was developed based on the experience of EU countries and adopted by the NEURC in September 215 (after public discussion by the market players since April 215). According to the methodology, the tariffs for natural gas transmission for entry points and exit points are determined as the cost of delivery in the planning period to the customer of the ordered volume in tcm (or energy units) per time unit in the points of entry to the GTS and in the points of exit from the GTS. to regional gas distribution systems (gas distribution network (GDN) operator), tariffs are different for the virtual exit point to different distribution systems, ranging from UAH 76.9/tcm per day to UAH /tcm per day. The approved tariffs are effective from 1 April 217. However, after the NEURC meeting on 1 April 217, a decision was taken to hold further consultations with the public and the government to improve the proposed monthly fee mechanism. Accordingly, the previous decisions of the NEURC on tariffs for the points of exit from the main pipelines and entry into the distribution networks were canceled. New tariffs for entering the GDS for the gas producing companies were not canceled, and from 1 April 217, gas transportation tariffs paid by the end consumers of gas, effective since 1 January 217 (close to the new tariffs for the points of exit from the main pipeline and entry into the gas distribution networks) are applicable. The new tariffs for GTS entry and exit points are calculated using the methodology approved by the NEURC as far back as in September 215, which was designed to cover the cost of the GTS transit section by the end of 219 (before the current contract between Gazprom and Naftogaz expires). Given Gazprom s repeated public declarations of their intention to stop using Ukrainian GTS after 219, and the active promotion of alternative pipeline projects that would allow Russia to abandon the Ukrainian route, a significant reduction in economic benefits is expected from the Ukrainian GTS by 22. This was the reason for the reduced estimated useful lives of the assets when calculating the tariffs. Taking the above mentioned dynamics into consideration, and according to the NEURC methodology, accelerated transit assets depreciation was applied. Tariffs are expected to significantly decline after 219, including tariffs for domestic gas transmission, which would allow Ukraine to compete with other gas transmission routes and offer attractive gas transmission conditions both from east to west and from west to south to Russian and European gas suppliers. For the entry points, the rate is USD 12.47/ tcm; the exit tariff is different for different exit points, the average tariff is USD 3.35/ tcm. However, Gazprom refuses to comply with the requirements of Ukrainian law and fails to pay the new tariffs for gas transportation services. Demands to remedy this situation are included in the Naftogaz lawsuit against Gazprom in Stockholm. A decision is expected in 217. The company restructuring process In the reporting period, the Company Restructuring Plan was adopted (Resolution of the Cabinet of Ministers of Ukraine dated No 496). To implement the plan, an action plan on corporate governance of the transmission system operator was approved; PJSC Magistralni Gazoprovody Ukrainy (Ukrainian main pipelines) was incorporated, its article of association was approved; and the Ministry of Energy and Coal Industry of Ukraine was authorized to create and register the newly established company. (Resolution of the Cabinet of Ministers of Ukraine dated No 837). However, the Company Restructuring Plan activities are often implemented with delays, in particular with regard to development and submission for consideration of the regulations concerning: transferring power generating state companies and the authority to manage the state corporate rights in their charter capital from the of Ministry of Energy and Coal Industry of Ukraine to another government authority, which is an essential precondition for unbundling (paragraph 4 of the plan responsible agencies: Ministry of Economic Development, Ministry of Energy and Coal Industry of Ukraine); determining procedures and conditions for concession of the property that is used for natural gas transmission and storage (injection, withdrawal) and is not subject to privatization (paragraph 5 of the Plan responsible agencies: Ministry of Economic Development, Ministry of Energy and Coal Industry of Ukraine); transmission, on the other hand, shall be independent in making decisions on the management of such entities. These requirements shall provide for the exclusive right of a government authority to manage state corporate rights in respect of PJSC Magistralni Gazoprovody Ukrainy (Ukrainian main pipelines) (paragraph 5 of the Plan responsible agencies: Ministry of Economic Development, Ministry of Energy and Coal Industry of Ukraine). Naftogaz corporate governance reform plan In, the introduction of the new natural gas market model continued. A number of laws were adopted aiming to harmonize the legislation of Ukraine with European market rules and the Law of Ukraine On the natural gas market, including: The law on regulators The law on regulators The Law of Ukraine On the National Commission for state regulation in energy and utilities ) of No 154-VIII established legal framework for the regulator operations; Introduction of backhaul The provisions of the adopted Law of Ukraine On amendments to the Customs Code of Ukraine to create conditions for a new model of the natural gas market of 4.2. No 994-VIII are aimed at the introduction of backhaul in Ukraine. In 214, the company launched its corporate governance reform to bring it into line with OECD corporate governance principles. In, a financial control, risk management and compliance function was established, while the existing internal audit function was updated. To ensure the work of the supervisory board committees, an internal controls project was initiated which aims to optimize Naftogaz group business Improvement of secondary legislation The secondary legislation governing the relationship between the subjects of the natural gas market, including the Gas Transmission System Code, the Gas Distribution System Code, the Natural Gas Supply Rules and other bylaws is improved. Decentralization of royalty As a step towards reforming the extracting sector, the Law of Ukraine of No 1793-VIII is adopted which requires 5% of royalty for use of subsoil for the purposes of oil, natural gas and gas condensate extraction to be steered to local budgets in the areas of extraction. However, the law is only effective from 1 January 218. management, state controls reduction/ simplification, establishing risk oriented internal controls, systematization and unification of business processes, and data exchange among Naftogaz group enterprises. The Vice Prime Minister of Ukraine Volodymyr Kistion supervises Naftogaz corporate governance reform and heads a working group that includes the representatives of all stakeholders. The impact of changes on market functioning Positive development for the market Regulator operation mechanism and standards are clearly determined. Positive development for the market Elimination, through customs clearance regulation, of the barriers to natural gas substitution (backhaul) transactions which are an important tool to increase the capacity of interstate gas transmission systems, market liquidity and the energy security of such transactions. In addition, the ability to carry out backhaul operations (with natural gas substitutes) is a requirement of EU legislation to the GTS operator. Positive development for the market Сlarified provisions of the above regulations aimed at convergence with European regulations on the natural gas market. Positive development for the market Improved cooperation and sound grounds for establishing constructive relations between oil and gas companies and local authorities and communities. However, it should be noted that the decision to reallocate tax revenues shall be taken in a way that would balance funding the needs of the local authorities and communities with funding the needs of state budget. These are covered by the proceeds of rent payments for use of subsoil for the purpose of oil, natural gas and gas condensate extraction, namely household benefits and housing subsidies and subventions for repayment of the difference in tariffs. The commission approved two tariffs for entry points: UAH 296.8/tcm per Decrease in royalty for oil production Positive development for the market day for entry points for gas extracting The Tax Code of Ukraine (Law of Ukraine of VIII) is due to lower royalty rates for oil extraction, oil production companies establishing requirements according to companies, and UAH /tcm per day for amended to reduce royalty for oil production. For example, the royalty will save money and increase investment, which in turn will help to which the government authorities that the UGS entry points. The tariffs for exit for oil deposits up to 5 meters deep is reduced from 45% to 29% increase production and develop new deposits. Unfortunately, the It should also be noted that since January manage the entities engaged in natural point for consumers who are directly of the output value, and for deposits below 5 meters from 21% parliament left the old the parliament rates for gas condensate, new tariffs are effective for the points gas and/or electricity production and/ connected to the gas main pipelines set to 14%. unchanged and did not support the proposal of oil and gas companies of entry to and exit from the Ukrainian gas or supply on one hand, and the entities by the commission are UAH 322.1/tcm per to introduce a royalty rate of 12% for new wells to stimulate new transmission system at the state border. engaged in natural gas or electricity 86 day. For 43 virtual exit points out of GTS drilling as soon as in

45 WHERE WE ARE NOW Regulatory changes The impact of changes on the company Approval of economically justified tariffs for domestic routes of oil Positive development for the company (if the methodology is transportation amended) Oil transportation services in Ukraine are provided to consumers The draft resolution of the NEURC On approval of the procedure for under tariffs approved by the NEURC. The rates established in 27 calculating tariffs for oil and oil products transportation through remained unchanged until June 215. Even after an increase in 215, the the main pipelines is designed to improve the oil (oil product) rates do not cover the costs of oil transportation and corresponding transportation tariff methodology for oil (oil product) transportation route maintenance. The methodology for calculating tariffs for oil companies, which will allow: transportation to consumers in Ukraine used by the NEURC is effective - when the tariffs are calculated, to allocate costs by operational since 1999 and contains a number of fundamental flaws that do not segments oil (oil product) transit and oil transportation for Ukrainian allow for efficient tariff policy in oil transportation within the country. consumers; In, Ukrtransnafta developed and submitted an updated tariff - to avoid reallocating the costs from domestic routes to transit calculation methodology. At the time of this report, the draft has not yet routes based on turnover; been adopted and is at the stage of public discussion. - to determine the actual costs and tariffs for domestic routes, calculate the tariffs based on actual costs for each route, and increase their efficiency, and to clearly define the procedures for establishing tariffs for oil (oil product) transportation services through pipelines. A balanced tariff policy which would cover economically justified costs while ensuring competitive prices for services compared to other transport modes is one of the key factors to ensure the longterm reliable operation of the oil pipelines to satisfy the needs of Ukrainian consumers. Other regulatory changes Subsidy mechanism improved Positive development for the company The Resolution of the Cabinet of Ministers of Ukraine On The current household benefits and subsidies funding mechanism amendments to the procedure for transferring certain subsidies is improved. The sources of funding now include revenues from from the state budget to the local budgets for provision of benefits, Naftogaz and Ukrtransgaz, value added tax, allowing for the proper subsidies and compensations dated 1.3. No 165 is adopted. performance of the social budget program as well as guaranteed The joint order of the Ministry of Energy and Coal Industry of Ukraine settlement of accounts receivable of the heat and gas supply and the Ministry of Finance of Ukraine On amendments to the companies for the heat and gas provided to the households and Procedure for paying natural gas, heat and electricity bills dated sustainable financing of their expenditures No 174/369 is registered with the Ministry of Justice on Ref. 42/2855. Regulatory changes Reducing safety stock requirements The Law of Ukraine On amendments to Article 12 of the Law of Ukraine On the natural gas market of No VIII-1541 is adopted. Its provisions establish the gas safety stock at no more than 1% of the volume of natural gas supply to consumers planned for the next month and the percentage shall be determined annually by the decision of the government (the resolution of the Cabinet of Ministers of Ukraine of No 86 established the natural gas safety stock at zero level for and 217). Distribution of funds paid by heat consumers to DHC The resolution of the Cabinet of Ministers of Ukraine On amendments to the Resolution of Cabinet of Ministers of Ukraine of 18 June 214 No 217 dated No 186 is adopted. The resolution introduced a new mechanism for distribution of funds received from heat consumers onto the special DHC accounts (i.e. the procedure for funds distribution has been changed fundamentally in order to ensure a fair and transparent funds distribution mechanism, and in order to balance the interests of all counterparts of the settlements - this list changed due to the Law of Ukraine On the natural gas market ). The impact of changes on the company Neutral development for the company The company considers the current safety stock mechanism as being behind the development of the gas market, particularly after the introduction of the Law of Ukraine On the natural gas market, and recommends a change in mechanism. The company believes that in line with best EU practice, the suppliers of gas to protected customers should be solely responsible for creating and maintaining the gas safety stock (except for the gas supplied under special commitments). The volume of required safety stock should be determined by the Ministry of Energy and Coal based on analysis of the existing risks of gas supply failure. Positive development for the company The updated funds distribution algorithm resulted in the following positive developments in : - improvement of DHC settlements for consumed natural gas supplied by the company; - compliance with the requirements of the IMF Memorandum of Economic and Financial Policies with regard to adjusting coefficient restoration; - guaranteed revenues to DHC accounts to finance labor costs, contributions for compulsory social insurance, and payment of taxes and fees; - taking into account the benefits and subsidies; - introduction of incentives for timely payment of natural gas bills; - guaranteed revenues for new natural gas market players. After just three months of the updated funds distribution algorithm, revenues to the company s accounts increased by UAH 1.1 billion. The restoration of the adjusting coefficient within the funds distribution mechanism is the main advancement introduced by resolution No 186. The coefficient prevents evasion of timely and full payments by the DHC. The amendments in the regulations made to reduce the amount of settlements between the DHC and the company or direct avoidance of the payments would be beneficial for the DHC only for a short period, since any decrease in payments by the DCH in a certain period, due to the adjusting coefficient, would result in an increase in payments to the company in the subsequent periods. District Heating Company (DHC) payment discipline relaxed Negative development for the company The Law On the measures designed to settle the debts of heat supply As of March 217, the Executive Service of Ukraine is in the process and heat-generating companies as well as district water supply of enforcing rulings to recover debts to the company totaling and water treatment companies for consumed energy of UAH 21.7 billion. No173-VIII is adopted which provides for the introduction of a Part 3, Article 7 of the Law No 173 states that no penalties (fines), Following the introduction of Resolution 186, the company has repeatedly observed attempts by the DHC and certain executive authorities number of instruments to settle the relationship between the energy inflation charges, and annual interest shall be charged on the debt for to restore the old settlement mechanism and to amend the law in a way that would enable evasion of payments for the natural gas purchased market players, including: natural gas used for heat and electricity production and the provision from Naftogaz. - moratorium on enforcement proceedings and enforcement of court of district heating and hot water supply services which had been Despite the fact that Naftogaz has repeatedly prevented attempts by enterprises and certain executive bodies to make significant changes rulings concerning DHC debts to the company for natural gas; repaid before the Law became effective. Already accrued penalties to the funds allocation procedure that would lead to a significant decline in the transfer of funds to the company, the separate accounts - ban on charging penalty, inflation charges, and interest for (fines), inflation charges, and annual interest shall be written off on mechanism changed three times in alone. This allowed for an increase in the share of funds allocated to DHC and a reduction in payments the improper fulfillment of the terms of contracts by company the date the law came into effect. At the same time, according to to Naftogaz. counterparts; paragraph 16, Part 1, Article 39 of the Law of Ukraine On Enforcement - writing-off DHC outstanding penalties, inflation charges, and interest Proceedings the write-off of the above debts automatically results in with no sources to cover the losses incurred by the company. cancellation of enforcement proceedings. The provisions of the law could potentially be applied to the 2 16 enforcement proceedings to recover debts totaling UAH 17 billion, of which: - UAH 11. billion is to be restructured for a 5-year period; - UAH 5.9 billion (UAH 3.6 million since the enactment of the law; UAH 2.3 billion subject to full implementation by heat generating and district heating companies of the debt restructuring agreement) is to be written off. In addition, enactment of the Law No 173, in particular Article 7, resulted in an increased number of cases in the courts

46 WHERE WE ARE NOW FIRST RESULTS OF GAS MARKET REFORM Over the past three years, Naftogaz has been actively involved in promoting reforms in the energy sector. The military conflict in Eastern Ukraine has exacerbated the issue of the country s energy independence, which can only be achieved through drastic and sometimes painful reforms. The year was significant for evaluating the effectiveness of the gas market reform. A competitive market environment has yet to be established, but some changes have occurred both in the Naftogaz group and in the gas sector as a whole. Starting from 1 January, all gas transmission rates have been set by the regulator. For cross border points, rates were set based on the RAB (regulatory asset base) methodology, which is universally recognized and used to determine justifiable tariffs for natural monopolies services in Energy Community countries. The transition to RAB based tariffs was expected to be complete in April 217. In April, a supervisory board was set up. This independent body assumed a number of duties previously performed by the government. At the same time, the supervisory board still lacks sufficiently broad authority and responsibilities to control the company s board activities. As envisaged by the corporate governance action plan, starting from April 217, a targeted charter was expected to come into force to grant to the supervisory board powers recommended by the OECD. Political interference in the Company s activities was reduced, leading to greater confidence from international lenders and partners. Due to internal audit, risk management, compliance and transparent procurement, Naftogaz obtained effective safeguards against undesirable effects. In April May, a single price level for natural gas as a commodity was introduced for both households and district heating company entities (DHCs), which produce thermal energy for households, at parity with imported gas prices. In July, the Cabinet of Ministers of Ukraine, together with the Energy Community Secretariat, the EBRD and other international partners of Ukraine approved a plan for the unbundling of the gas transmission network operator. Full implementation of this plan will result in establishing a truly independent operator that will meet European standards of efficiency and professionalism. In September, the Verkhovna Rada of Ukraine adopted the law On the National Commission for state regulation in the energy and utility services sectors. The law was a significant step forward, creating basic preconditions for the establishment of an independent market regulator. Undoubtedly, implementation of this law will be another necessary step in this direction. Despite these isolated achievements, saw a slowdown of natural gas market reform. Market experts also point out that there is a significant risk of curtailing Ukraine s natural gas market reform and returning to past problems, including threats to energy security and the welfare of citizens. Corporate governance reform and efforts to separate the duties of the TSO ( unbundling ) are very much behind the schedule set out in approved government plans. At the same time, the current status could be used as a launch pad to restart natural gas market reform, including decisive steps aimed at solving fundamental problems of the market. throughout Ukraine. These companies are de facto monopolies operating on preferential terms in the household gas supply segment and are not exposed to competition. Naftogaz cannot enter the retail market and compete with monopolistic oblgazzbuts since the Cabinet of Ministers of Ukraine has specifically obligated it to sell household gas to oblgazzbuts. The situation is complicated by the fact that the majority of gas distribution networks and regional gas supply companies are jointly owned by a dominant business group. Effective unbundling of operators of gas distribution networks is crucial for further market opening and expansion. The Energy Community Secretariat expressed surprise at the situation in the household gas supply segment. Naftogaz is ready to compete with regional gas supply companies and to supply natural gas to households bypassing intermediaries. In April 217, the company submitted proposals to the government. At the time of publication of this report, no secondary legislation, notably the Network Code (the Gas Transmission Network of Ukraine Code which establishes the rules of the game in the market) that meets the EU standard network codes and the requirements of the Third Energy Package, including the Directive 29/73 / EU Concerning common rules for the natural gas internal market and EU Regulation 715/29 On conditions for access to natural gas transmission networks had been adopted. Ukrtransgaz is drafting appropriate changes to legislation. Final liberalization of natural gas prices supplier in the household natural gas sales segment, which would restrain price increases imposed by the dominant supplier; 2. make changes to secondary legislation in order to implement EU network codes, including daily balancing that will facilitate the emergence of new market participants and European companies, including in the end use domestic consumers segment; 3. develop and implement mechanisms for settling the debts of thermal power companies for consumed natural gas and for ensuring their payment discipline, which will be acceptable at the initial stage after liberalization of natural gas prices; 4. introduce an effective mechanism governing relations between natural gas wholesalers and gas supply companies which will ensure the latter s payment discipline; 5. improve the mechanism of granting direct subsidies to encourage energy efficiency and transparency of charging subsidies through partial monetization of saved costs, taking into account the seasonality of consumption, gradual reduction of social norms, and raising of the compulsory payment with due regard for real income growth, etc; 6. provide high quality and timely implementation of the Law of Ukraine On the National Commission for state regulation in the energy and public utilities sectors No. 154 VIII of 9.22., notably the provision on the rotation of regulator members; 7. by means of continuous and timely implementation of measures envisaged by the approved Naftogaz corporate governance plan, ensure effective state control over company activities in a civilized manner; Separating functions of the transmission system operator (TSO) Today Ukraine s TSO is Ukrtransgaz. As a member of the Energy Community, Ukraine has assumed responsibility to unbundle the TSO management function in accordance with EU energy legislation, in particular the Third Energy Package, having chosen the strictest ownership unbundling model (FOU). The TSO unbundling process must take into account the economic interests of Ukraine. The transfer of assets to the new TSO is expected to begin following the decision of the Stockholm arbitration court. The effective separation the TSO s duties from Naftogaz is a prerequisite for establishing a free and competitive gas market. This process should include efforts to attract a qualified international partner, which will help Ukraine gain necessary experience, good governance standards, and leading European practices and competences. In general, cooperation with a leading Western operator should improve the operational efficiency of Ukraine s TSO (including through prompt detection of possible fraud and corruption prevention) and strengthen the credibility of the Ukrainian gas market with European gas companies, governments, institutions, etc. This should facilitate the transfer of gas transfer points from PJSC Gazprom to European customers on the Ukraine Russia border and the preservation of Ukraine s transit country status. On 1 April 217, Naftogaz Ukrtransgaz, Snam S.p.A. (Italy) and Eustream a.s. (Slovakia) signed a memorandum of understanding for joint evaluation of possibilities of cooperation in the use and development of Ukraine s gas transmission system. The document was signed in the presence of the Minister of Energy and Coal Industry of Ukraine, EU Commissioner for Energy and Climate Action and the Minister of Economic Development of Italy. standards of European markets, safe and effective use of Ukraine s GTS, as well as transparent and non discriminatory access to this network for third parties in accordance with the applicable laws. As part of the memorandum, participating companies will make a joint assessment about the possibilities of using and upgrading the gas transmission network of Ukraine in order to ensure its efficiency and competitiveness. Naftogaz сorporate governance reform In October 215, the Cabinet of Ministers supported a proposal to approve the Naftogaz corporate governance action plan (hereinafter NCGAP), which provides for amendments to certain Ukrainian laws and regulations. Naftogaz became the first state owned company to implement OECD standards of corporate governance. Implementation of the NCGAP will ensure effective and transparent management and independent supervision of the company s activities. As part of the reform, a system of effective internal controls which will significantly limit opportunities for corruption, will be introduced at all company levels. Unfortunately, in very important changes to the laws of Ukraine aimed at the implementation of this plan were not adopted. In addition, the unconditional implementation of measures provided by the NCGAP is a key obligation and precondition which will allow Naftogaz to retain access to EBRD financing for purchases of natural gas from European suppliers. Failure to fulfill the NCGAP may result in a requirement to repay its debt to the EBRD prior to the scheduled date and may put at risk not only the country s energy security but also the implementation of planned gas sector reforms. Likewise, reform of corporate governance systems of state owned enterprises is also a precondition for gaining access to other support programs available to Ukraine. Accordingly, delays or poor implementation of agreed reform plans create significant risks for the country s cooperation with international In April 218, full liberalization of natural gas prices is expected. Should the market 8. during the designated initial phase, The unprecedented openness of, and price of gas available for Ukraine be higher to continue using current accounts market pricing in, the unregulated than the regulated price, it is necessary, Creation of a competitive with a special regime for transfer of segment made it possible to within the shortest time possible, to create wholesale and retail natural gas funds received as payment for natural de monopolize imports and the wholesale appropriate conditions to reduce social market gas from the population and thermal segment of the natural gas market. As a tensions and ensure the irreversibility power companies; result, the number and percentage share of necessary market reforms, including Naftogaz sells domestic and imported Among other things, the document of private companies are steadily growing. efforts to: 9. conduct information campaigns gas to designated regional gas supply aims to ensure the long term stability For example, the percentage share of through the media, round tables, etc., companies (oblgazzbuts) for further 1. create conditions conducive to the of natural gas transmission through private importers in total gas imports has to brief retail consumers about the delivery to all residential consumers emergence of at least one alternative Ukraine s territory according to the financial institutions, including the IMF. 9 increased from 7% in 215 to 26% in. possibility to change their gas supplier

47 UNBUNDLING CURRENT STRUCTURE Restructuring scheme with the approved Unbundling Plan STRUCTURE AFTER UNBUNDLING CMU* 1% MECI** CMU* 1% Naftogaz MECI** WESTERN PARTNER Naftogaz 1% TSO UTG 1% UGS operator Issues regarding ownership and/or operation of UGS and gas production facilities, including all related legislative and corporate reforms, shall be considered separately from the TSO unbundling and must not hamper the procedures needed for unbundling. Energy Community Secretariat, conditional approval, 6.5. UGS operator UTG Decisions on restructuring will be made based on comprehensive analysis of options for the most efficient use of UGS facilities. The project is launched in cooperation with the European Commission TSO Transfer of assets and resources before the Stockholm award: gradual transfer of functions, primarily those that are new for the market after the Stockholm award: full transfer of gas transmission assets and functions to the new TSO according to management decision New TSO Supervisory board with a majority of independent directors Hires professional managers WHY ESTABLISH A NEW TSO? Establishing a new company will create a TSO that would attract international partners. This will provide new opportunities to create an effective natural gas market in Ukraine, to counter the threat posed by Nord Stream 2 and similar projects, and to maximize the value of state-owned assets KEY ASPECTS OF THE UNBUNDLING MODEL CHOSEN FOR THE TSO UKRTRANSGAZ AS TSO UGS assets generate loss in both Ukraine and Europe as well as noncore assets of doubtful or even negative value for the shareholder Vague management structure complicating and slowing down the introduction of an effective corporate governance system according to OECD principles Historical problems of Ukrtransgaz, including disputes with Ukrnafta and Ukrgaz-Energo over 11.7 bcm and 7.7 bcm of gas respectively Overstaffing tenfold more compared with some European peers High risk of due diligence failure NEW TSO Only core assets that are used for gas transmission and create clear value for the shareholder and customers The Corporate Governance Action Plan stipulates the creation from scratch of an effective system that would be in line with OECD corporate governance principles. This will help avoid the old system s resistance No historical problems The number of staff needed for efficient and secure performance of TSO functions Clean and transparent company FULL OWNERSHIP UNBUNDLING (FOU) Although the best practice is when a TSO owns assets, the following exception can be made: a TSO has rights that are close to ownership with full division of control over the operator and producer/ supplier among different agencies TRODUCING A CORPORATE GOVERNANCE SYSTEM ACCORDING TO OECD PRINCIPLES The TSO s independence should be secured by a highly professional supervisory board composed mostly of independent members and with a system of effective internal controls THE MECI MANAGING THE STATE S SHARE IN MGU JSC MECI is a shareholder of MGU JSC but it cannot control energy generation/supply companies. For example, the MECI cannot be a shareholder of Ukrhidroenerho or Enerhoatom UGS RESTRUCTURING IS NOT PART OF THE UNBUNDLING Restructuring/handing over of UGS facilities should be considered separately and based on the results of thorough analysis of the most effective usage A WESTERN PARTNER MAY BE ENGAGED IN GTS OPERATIONS The law offers the possibility to engage a partner from a member state of the Energy Community or the U.S. in GTS operations ESTABLISHING THE NEW TSO Establishing a transparent and efficient company without the burden of UTG s historical problems and attractive to a Western partner *CMU Cabinet of Ministers of Ukraine 93 **MECI Ministry of Energy and Coal Industry of Ukraine

48 WHERE WE ARE NOW Technical and operational delivery Health, safety and environment The operations of Naftogaz and its subsidiaries involve significant health, safety and environmental hazards. The processes and chemicals used in extraction and production methods, as well as the transport and storage of gas and oil, may heighten the potential for a major incident and multiple fatalities, environmental hazards, and loss of business assets/operations. Outdated equipment and production technology and poor operational practices may lead to increased risk levels. Mitigation measures include training, introducing modern methods of operations, diagnostics, reconstruction and modernization of existing facilities. MAIN RISKS Following the approval of a new Naftogaz Charter in Cabinet of Ministers of Ukraine resolution No. 12, an independent risk management service was established at Naftogaz in May, and first commenced its operations in November. The purpose of the office is to ensure that an effective risk management process and controls are in place to achieve the current and future strategic goals of Naftogaz and its subsidiaries. The new formulated risk management framework and related regulatory documents (Risk Management Policy, Risk Management Methodology, Risk Management Rules) are based on the International Standards (ISO/IEC 311:29 Risk management Risk assessment techniques, ISO 31:29 Risk management Principles and guidelines) and best risk management practices with the involvement of international consultants and experts. The second phase of the initial risk assessment will result in a comprehensive initial risk assessment report for Naftogaz group. Going forward, Naftogaz group risk assessment will take place on a quarterly and annual Improving efficiency of procurement is a key priority To make procurement process more transparent and unified for the whole group, Naftogaz has adopted new group procurement policy in 217. As part of design of upgraded procurement process, the Group plans the following steps: - strengthen internal control procedures in respect of purchases through introducing compliance and risk management functions, and strengthening finance control function at the group level, basis, as well as in response to specific risk events. The key identified risks that can cause serious adverse effects on production performance, cash flows, and the group s financial position are described below. In February 217, an initial risk assessment began at Naftogaz group based - improve dialogue with market on this revised methodology. The first players and build long-term transparent and trustful relations with - implement category management phase of the assessment ended in at the group entities, and create standard procurement strategies, March 217 and identified the material contractors. In order to improve the effectiveness of the Ukrainian gas market, Naftogaz initiates discussion of risks inherent in the Naftogaz group. a number of amendments to regulations designed to reduce the risk of outstanding imbalances Naftogaz takes all possible steps aiming to get quick wins in procurement This built on previous risk management activities conducted within the control procedures in respect of con operator s actions to balance and reduce the financial burden on the suppliers. - introduce comprehensive risk for the GTS operator, facilitate operations of network users, and ensure the fairness of the GTS process already in 217. company tractors and avoid comflict of interest of group personnel, - improve competitiveness of procurement process, focus on direct contracts, minimise relations with intermediaries to reach more cost efficient price quotes from contractors, - implement analytical tools, including system analysis of markets and price benchmarking, creating databases of contractors, prices and types of works, as well as improve system of electronic document flow, Subsurface Investment program execution Markets Domestic market regulations Subsurface risks are inherent in the upstream oil and gas business and result in uncertainty about the levels of hydrocarbons that are present in exploration and production licenced areas. This problem is exacerbated in Ukraine by the relatively low quality of geological information available and out of date equipment and technologies of Ukrgazvydobuvannya and Ukrnafta. These risks may lead to lower volumes of gas extracted and/or increased expenses for drilling and production, that in turn leads to a deterioration of one of the key strategic goals of Naftogaz to preserve and increase exploration and production abilities. The group continuously cooperates with Ukrainian research and technical institutes to improve the quality of geological exploration. Ukrgazvydobuvannya has begun intensive upgrading of its equipment to reduce costs and improve the efficiency of drilling and gas extraction. Lack of access to capital, together with weak internal capability and supply chains can create challenges to the successful delivery of both ongoing maintenance activity and the growth investments planned for the Naftogaz group. Due to insufficient liquidity, Naftogaz group is considering various ways of raising funds for investment projects, including by borrowing on international financial markets. On 1 October 215, the Government of Ukraine approved imposition of Public Service Obligations (PSO) on natural gas market participants, including Naftogaz, to ensure general public interests in the functioning of the gas market until 1 April 217. On 22 March 217, these PSO measures were given further effect until April 218. Inter alia, Naftogaz was obliged to supply, at regulated prices, directly to district heating companies and through regional suppliers to households, jointly representing over 5% and 6% of domestic consumption in and 217 respectively. In the absence of the approved compensation mechanism for selling at regulated prices, Naftogaz is forced to cross subsidize losses from regulated segments (such as district heating) with profits from other activities. Moreover, by selling gas to counterparties with a financially unsustainable business model, such as district heating companies (DHC) and regional supply companies, Naftogaz bears high credit risks. As of 31 December, the total DHC debts to Naftogaz had reached over UAH 28.3 billion and the total debt of regional supply companies had reached UAH 21.9 billion. The inability to collect these debts represents a fundamental risk to Naftogaz. Without appropriate government action, this will seriously threaten the continued liquidity and sustainability of the company.

49 WHERE WE ARE NOW Seasonal liquidity Launch of Turkish Stream and Nord Stream 2 Macroeconomics Foreign exchange Local economic environment Corporate governance reform Corporate Governance Action Plan (CGAP) implementation The group s activity is seasonal: volumes of natural gas and transmission services sold during the heating season comprise ca. 7% of annual volumes. During this peak period, the cash flow for sold goods and services significantly increases. In contrast, the summer period represents a period of low sales volumes and high gas purchases to prepare for winter demand. Because of these cash inflows and outflows, additional financial resources are required to finance the injection of natural gas into underground gas storage (UGS). The group tries to attract additional loan proceeds on international financial markets at lower interest rates to cover for the cost of pumping natural gas to underground gas storage. There are two gas pipeline projects in progress today with the expected launch in 219 that would allow gas transportation from Russia to EU countries and Turkey while bypassing Ukraine: 1. The Turkish Stream project signed on 1 October between the governments of Russia and Turkey assumes gas transmission capacity of 31.5 bcm per year. 2. The Nord Stream 2 project signed in 215 assumes gas transmission capacity of 55 bcm per year. Project implementation may lead to the all loss of Naftogaz income from gas transit from Russia to EU countries and Turkey starting from 219. Total gas transit income of Naftogaz amounted to almost UAH 6 billion in. In order to diversify the consumers of the natural gas transportation and storage services, Naftogaz facilitates the organization of a single East European gas hub. The company also promotes the creation of integrated infrastructure and commercial gas space between Ukraine, Poland, Slovakia, Hungary and Romania. Naftogaz group carries out its operations in Ukraine and its dependence on the foreign exchange risk is due mainly to the need to purchase natural gas from foreign suppliers whose proposals are denominated in EUR or USD. The Naftogaz group debt in foreign currency on 31 December amounted to USD 2.1 billion. Naftogaz s ability to hedge the risk in the local market is limited due to the nature of the Ukrainian hedging market in particular: 1) foreign exchange forwards market volume cannot meet the needs of the company and activity in the market may cause significant fluctuations of the national currency; 2) limitations of the legal and regulatory framework. Since the Law of Ukraine On the natural gas market entered into force on 1 October 215, the company has independently established prices for industrial and commercial consumers that are not subject to PSO. Naftogaz continuously monitors the Ukrainian currency market and, depending on the market conditions, decides on the foreign currency to maintain its bank account balances (with due regard to the regulations of the National Bank of Ukraine on the issue). Any increase of foreign exchange rates together with the local inflationary environment have the potential to seriously impact on the population s purchasing power and the ability of customers to pay prices for consumed gas which are in line with import costs. Depending on the stabilization of the economic and political situation in the country, growing GDP, and government actions increasing household purchasing power, Naftogaz would be able to shift to a market-based approach to pricing and thus reduce the impact of risk. Non delivery of the CGAP approved by the government on 5 December 215 will result in an outdated and ineffective system of governance at Naftogaz. Whilst good progress has been made in implementing the company s obligations under this plan, the implementation of an effective governance system consistent with international standards requires active steps from the government in compliance with the CGAP. In addition to its impact on corporate governance, the delay in the CGAP implementation creates a significant risk for the liquidity of Naftogaz through the potential impact on IFI loans totaling around USD 8 million. To mitigate this risk, the company has repeatedly raised the issue of implementation of efficient corporate governance with the government. Corporate structure and development TSO unbundling Possible separation of Ukrgazvydobuvannya Situation in Eastern Ukraine and Crimea Conducting ATO in the east of Ukraine The consequences of the annexation of Crimea by Russia In July, the government of Ukraine approved an Unbundling Plan to separate natural gas transmission from production and supply, as required by the EU Third Energy Package and the Law of Ukraine On the natural gas market. Good faith implementation of this plan is one of the crucial components of gas market liberalization and its further integration into the EU natural gas market. As of the date of this report, there are significant delays and lack of compliance with respect to the plan s implementation. There is a tangible risk that the observed deviation from the approved unbundling concept will prevent the establishment of an important, professional and highly efficient gas transmission systems operator fully compliant with the requirements of EU energy legislation. In addition, the situation may not allow engagement of a reputable Western partner to operate the gas transmission system. This may lead to a situation where the operator will not be capable of securing non-discriminatory third party access and gain the trust of network users both in Ukraine and abroad. This would directly endanger gas market reform. Naftogaz s strategy anticipates an integrated approach through which each of the component parts of the company can benefit from the combined skills and balance sheet of Naftogaz group. Naftogaz is committed to contribute to the energy independence of Ukraine, inter alia, through exploiting the benefits of large scale as well as the synergy arising from both vertical and horizontal integration. In the event that Ukrgazvydobuvannya is separated from Naftogaz group, there will be material risks that the investment program and associated gas production growth will not be delivered. Moreover, Naftogaz will likely be bearing additional costs and risks for selling gas to fulfil public service obligations imposed by the Ukrainian government. Naftogaz communicates at all levels within the group to identify, assess, and minimize potential disagreements among its subsidiaries. In addition, the management draws shareholder attention to the issue. The hostilities in the eastern regions of Ukraine (ATO area) impair the capability of Naftogaz group companies to sustain critical operations, provide essential products and services, and causes the companie to incur additional operating costs. In March 214, the illegal authorities of the occupied Crimea decided to nationalize the property of Chornomornaftogaz, which subsequently became a part of the authorized capital of the illegally established company Crimean Republican Enterprise (CRE) Chernomorneftegaz. Prior to the occupation of Crimea by the Russian Federation, Chornomornaftogaz performed the full range of activities, from search and exploration of new deposits to hydrocarbon extraction, processing and delivery to end users. In August 214, Chornomornaftogaz was re registered in Kyiv. Currently, the company controls the Strilkove gas field located in Arabat Spit near Strilkove village, Genichesk district, Kherson region. The company provides gas to the households of Henichesk district, and is involved in gathering evidence of Russian aggression. The continued existence of Chornomornaftogaz as a legal entity after the illegal seizure by Russia of Naftogaz assets in the Crimea was one of the key objectives of the company in. Naftogaz managed to avoid the bankruptcy of this subsidiary and to promote development of national draft regulation on the stabilization of its operations. Despite the fact that Crimea is under Russian occupation and the substantiated force majeure event, lenders still lodge suits against Chornomornaftogaz, which paralyzes its operations. As of December, Chornomornaftogaz stood defendant in 15 lawsuits with total claims of UAH 55 million. Chornomornaftogaz is a debtor under 5 enforcement proceedings initiated by external creditors and totaling about UAH 292 million, of which 33 resulted in funds and property freezing orders. At the same time, 95% of the total Chornomornaftogaz payables (over UAH 12 billion) are attributed to Naftogaz.

50 WHERE WE ARE NOW On 18 May 217, the Verkhovna Rada of Ukraine adopted the draft law On amendments to Ukrainian legislation to stabilize Chornomornaftogaz SJSC in the context of the temporary occupation of Ukraine s territory. The document stipulates the following: debt payment moratorium till 1 January 219 suspension of enforcement proceedings and cancelation of all previous cash and property seizures extension of special permits in the occupied territory of the Crimea until the end of the temporary occupation Litigation Arbitrations regarding contracts with Gazprom at the Arbitration Institute of the Stockholm Chamber of Commerce Risk of a claim for early repayment of a loan from Gazprombank JSC Gas supply and transit arbitrations were initiated by Naftogaz in the Arbitration Institute of the Stockholm Chamber of Commerce following unsuccessful efforts to reach agreement with Gazprom via negotiations. Gazprom launched counter claims in response to the Naftogaz claims. Naftogaz retroactive monetary claims amount to USD 18. billion and USD 12.3 billion for sales and transit cases respectively. Gazprom retroactive monetary claims total around USD 47.1 billion and USD 7 billion for transit (all figures as of 29 May 217 including interest, penalties and fines). Whilst Naftogaz representatives and legal advisors believe in the strength of their cases, as with all arbitration cases, there is a risk of an adverse finding in either case. An adverse ruling could negatively affect Naftogaz financial operations and business as well as the gas market reform in Ukraine. The Stockholm Arbitration Tribunal rejected on 31 May 217 Gazprom s take-or-pay claim and satisfied Naftogaz claim to make the contract price market-reflective. Furthermore, the tribunal has lifted the ban on gas re-export, which was part of the contract. Satisfying the claim requirements of Naftogaz against Gazprom at the Arbitration Institute of the Stockholm Chamber of Commerce concerning transfer of rights and obligations to the Contract on volumes and terms of transit of natural gas through the territory of Ukraine for the period from 29 until 219 No. TKGU dated 19 January 29 to MAHISTRALNI GAZOPROVODY UKRAINY PJSC, may lead to a situation where Gazprombank JSC will have the right to demand early full repayment of the loan provided to Naftogaz in 212, including accrued interest on the loan and penalties. As of 31 December, loan liabilities of Naftogaz to Gazprombank JSC were USD million, to be repaid by the end of June 218. Naftogaz and Gazprom at SCC Summary of claims and counterclaims as at 29 May WHAT WE USD 3.3 billion SUPPLY USD 18. billion More than USD 14.1 billion related to retroactive compensation for excessive payments from 2 May 211 till Oct 215 Penalties and interest Other claims 2 AMOUNT OF RETROSPECTIVE COMPENSATION, CLAIMED BY PARTIES AND ARBITRATION USD 47.1 billion SUPPLY USD 47.1 billion USD 34.5 billion related to take-or-pay 5 clause for and 3Q 215, 2-4Q USD 2.2 billion related to disputed price of gas supplied in 4Q 213 and 2Q 214 Estimated penalties and interest HAVE TRANSIT USD 12.3 billion Related to underdeliveries and underpayment for transit services for 29-3 Other claims 4 TRANSIT USD.7 billion Related to 5 mcm of Gazprom s balancing gas formed in 214 ACHIEVED SCC considers two separate cases related to: A. Supply Contract - mutual claims filed in June 214. Oral hearings finished in October, decision expected in 2Q 217 B. Transit Contract - Naftogaz claim filed in October 214. Oral hearings finished in December, decision expected in Claim amounts include all monetary claims, penalties and interest 2 Other claims of Naftogaz, i.a.: amending/replacing invalid or ineffective and unreasonable provisions in the supply contract (annual gas volumes, take-or-pay provisions, destination clause, unilateral suspension rights and a mandatory sales clause in favor of Gazprom) 3 including calculated claim for underpayment damages incurred after 31 July, which Naftogaz will revert to shortly 4 Other claims of Naftogaz, i.a.: amending/replacing invalid or ineffective provisions of the transit contract based on European competition or related energy law (based on cost reflective tariffs and capacity booking principle), applying the 3rd Energy Package to Russian gas transmission across Ukraine (incl. the provision of shipper code pairs) 5 Dismissed by the Arbitration Tribunal s separate award prior to the award

51 OPERATING REVENUES AND ASSETS, UAH billion 11.5 Oil and gas condensate production Operating revenues Assets Oil and gas condensate production Upstream Gas production Gas production 3.4 Crude oil transportation 1. Gas storage 77.7 Gas transmission 18.4 Crude oil transportation Midstream Balancing services 11.5 Domestic Gas storage Gas transmission 6. International 15.8 Refining crude oil and gas condensate 99.8 Wholesale and retail gas trading Downstream Public sector 7.1 DHCs for other consumers 18.9 DHCs for households 23.2 Industry 17.1 Refining crude oil and gas condensate Wholesale and retail gas trading 5.1 Retail suppliers to households Other Adjustment for inter-group transactions (elimination) Non-core assets 1 11

52 WHAT WE HAVE ACHIEVED SUMMARY OF RESULTS For the first time in the last 5 years, the group has made a profit and did not receive funding from the state budget. Starting from, Naftogaz has transformed from the state budget recipient into its donor, becoming the biggest taxpayer in Ukraine. Chief financial officer Indicator CAGR Main group results Sales revenue of the group, UAH million % Gross profit (loss), UAH million (7 37) Net profit (loss), UAH million (35 62) (88 433) Capital investment, UAH million % Assets, UAH million % Working capital, UAH million % Equity, UAH million % Loans, UAH million % Net cash inflow from operating activities, UAH million (58 912) Net cash inflow from investing activities, UAH million (5 238) (4 656) (4 325) 1.% Net cash inflow from financing activities, UAH million (3 567) Rate of return on financial result % -26.9% -19.6% ROE 4.9% -8.% -25.3% ROA 3.2% -5.3% -17.5% Liquidity coverage ratio 16.2% 98.1% 74.9% 19.1% Total loans/equity ratio 15.4% 16.4% 17.5% -6.2% Results of the natural gas, gas condensate and crude oil segment (Upstream) Gross production of natural gas, mcm % Gross production of crude oil and gas condensate, thousand t % Sales of own natural gas, mcm % Sales of oil and condensate, thousand t Sales revenue 1, UAH million % Financial result 2, UAH million (4 45) Capital investment, UAH million % Assets, UAH million % ROA 1% 1% -7% Results of the natural gas, gas condensate and crude oil segment (Midstream) Natural gas transit volumes, mcm % Volumes of natural gas transmitted to consumers in Ukraine, % mcm Crude oil transportation volumes, thousand t % Sales revenue 1, UAH million % Financial result 2, UAH million % Capital investment, UAH million % Assets, UAH million % ROA 5% 4% 1% Results of the natural gas and refinery products segment (Downstream) Sales of natural gas pursuant to imposed special obligations, mcm % Sales of natural gas at non-regulated prices to other consumers % (including sales to group companies), mcm Sales of refinery products, thousand t % Sales of LNG, mcm % Sales of compressed natural gas (to automobile CNG filling % stations), mcm Sales revenue 1, UAH million % Financial result 2, UAH million (1 752) (5 19) (79 216) -85.1% Capital investment, UAH million % Assets, UAH million % ROA -2% -17% -238% Other activities Sales income 1, UAH million % Financial result 2, UAH million (725) (2 194) (274) 62.7% Capital investment, UAH million % Assets, UAH million % 1 including sales to other segments 2 the group assesses performance indicators of the operating segments based on the size of net operating profit/(loss) before tax Sergiy Konovets

53 WHAT WE HAVE ACHIEVED OPERATIONAL EFFICIENCY Net contributor to the state budget For the first time since 26, the company received no direct support from the state as compensation for the difference in prices for gas through recapitalization with treasury bonds. Based on its financial results, Naftogaz group will pay the state UAH 14.7 billion of dividends and UAH 2 billion in income tax. Naftogaz Group remains the largest taxpayer in Ukraine: in the group of companies paid the budget UAH 74 billion 1.5 times more than in 215. For the first time in the last 5 years, Naftogaz has received a net profit of UAH 22.5 billion and posted a positive net cash flow from operating activities of UAH Reliable borrower In, Naftogaz confirmed its reputation as a reliable borrower both on domestic and foreign markets. Twice during the year, in January and July September, imported gas was paid for using an EBRD revolving credit line of USD 3 million, obtained under state guarantees at the end of 215. In the reporting period, Naftogaz signed revolving credit line agreements with Citibank and Deutsche Bank for EUR 478 million under World Bank guarantees for purchasing natural gas. The cost of the credit line does not exceed 3.5% per annum. successfully repaid its credit debt of over UAH 7.8 billion, including about UAH 43.5 billion in foreign currency. During the reporting period there were no cases of delayed or incomplete implementation of commitments. Despite the rising cost of borrowing for Ukrainian companies on domestic and international financial markets, Naftogaz was able to reduce the weighted average effective interest rate on financial liabilities from 13.5% to 12.1%. In, Naftogaz fulfilled debt service obligations of UAH 49.2 billion, and attracted more than UAH 42. billion of borrowing. confirmed the company s credit rating in foreign and local currency for the period from 25 May 215 to 24 May at CCC. Efficient participant of stock and currency markets In, Naftogaz extended its bond terms amounting to UAH 4.8 billion at 1% per annum (the cheapest borrowing in local currency) and was an active player in the stock market. Gains from securities transactions amounted to UAH 11.6 million. USD 3 billion of its liabilities in foreign currency. Transparent buyer New procurement methodology allowed the Naftogaz group to save UAH 1.5 billion in compared to the expected price of purchases. For each purchase, whether it is carried out through Prozorro or two stage bidding, detailed analytical materials are created. Subsequently, the document is used as a benchmark for repeat purchases. As a result, we can trace the dynamics of quotations and keep statistics of the tender participants and winners. To prevent dubious companies participating in tenders, Naftogaz introduced stringent qualification requirements. Priority is now given to producing companies and their authorized dealers. Before each tender, procurement specialists study the market and send invitations to producing companies. By eliminating the collateral value mechanism, the group removed the artificial barrier that previously discouraged many potential bidders and was used to manipulate bidding. The new methodology is an effective instrument to control not only price but also quality. The group reserves the right to perform incoming inspection and technical audit of the provider at any stage of procurement, i.e. Naftogaz or its affiliate representatives may pay a visit to any counterparty and check availability of the required production facilities, warehouses etc. All enterprises of the group set up special conflict committees to resolve any issues related to the counterparties and bidders. Naftogaz also established a working commission for below threshold procurement to obtain greater savings on purchases that are not in the scope of the law On public procurement. Changes in pricing policy Since 1 May, the price of natural gas supplied to residential customers and for heating and hot water supply services to households provided by heat energy producers became equal to the price of imported gas. 79% of Naftogaz sales of gas in were to the above categories of customers. The change in the price resulted in additional state budget revenues, which are used to pay housing subsidies. On natural gas market. The company s specialists participated in developing the new NEURC methodologies to calculate tariffs for natural gas storage in line with European legislation. The new tariff for gas storage is based on the value of the booked capacity, expressed in units of energy/cubic meter per time unit. Furthermore, the calculation uses coefficients that take into account the space of gas storage facility booked for a year or a month along with individual services and the services provided on an occasional basis. With the new gas storage tariff, we expect our storage segment to become profitable. Collection of receivables In, total gas settlement by all categories of consumers made 76%, which is 21% less compared with 215. Gross trade accounts receivable increased by 24.5%. The debt for gas consumed under PSO grew due to lower gas payments by consumers who do not receive utility subsidies as well as to the shortage of subsidy funds: actual subsidy expenses exceeded the budget target. As of 31 December, the debt for subsidized gas supplies to households and DHCs was UAH 21.8 billion. If the subsidies had been funded in full, gas payments would have reached 9%, which is not much different from the historical data. Significant accounts receivable generated by consumers under Naftogaz PSO remains an urgent challenge to the group s liquidity management. Non core assets In, a single database of non core assets of Naftogaz group enterprises was created. According to the restrictions imposed by Article 7 of the law On Pipeline Transport, transfer of the management of property that is not used in transmission through main pipelines or in storage in underground storage facilities to other entities is prohibited. Said property (fixed assets) can be sold upon the agreement with the Cabinet of Ministers of Ukraine. Company experts submitted to the Cabinet of Ministers of Ukraine more than 1 packages of documents for the disposal of non core facilities at market prices on a competitive basis. The ownership of non core assets is being transformed in compliance with the law. In, the group took measures to decrease the maintenance costs of Due to efficient liquidity management and use of credit lines, the company did not Despite seasonal cash gaps that led Naftogaz is actively involved in the put pressure on the Ukrainian currency to a lack of liquidity, the company On 22 April, Fitch Ratings (London) development and improvement of secondary non core assets. Funding was provided for billion. market, despite repayment of more than legislation necessary to implement the law socially important non core assets. 15

54 WHAT WE HAVE ACHIEVED ANALYSIS The group is the largest group of companies in Ukraine in terms of oil and gas reserves. According to a valuation 1 performed by Ryder Scott and by DeGolyer and MacNaughton, the Naftogaz group s reserves of natural gas (proved & probable) in Ukraine are 34.9 bcm and of oil and gas condensate (proved & probable) are 47.2 million t. OF NATURAL GAS AND 1 According to PRSM (Petroleum Resources Management System) classification.м Natural gas reserves of Naftogaz group in Ukraine 2 Natural gas, mcm Oil, thousand t Gas condensate, thousand t OIL PRODUCTION SEGMENT VOLYN REGION CHERNIHIV REGION RESULTS (UPSTREAM) LVIV REGION SUMY REGION KHARKIV REGION IVANO-FRANKIVSK REGION CHERNIVTSI REGION POLTAVA REGION DNIPROPETROVSK REGION LUHANSK REGION 28 DONETSK REGION TOTAL Ukrgazvydobuvannya s reserves as of , Ukrnafta s reserves as of 1.7. Ukrnafta s reserves do not include production between 1.7. and : 719 thousand t of oil and 645 mcm of natural gas NATURAL GAS PRODUCTION SEGMENT Main results In, Naftogaz group produced about 8% of all natural gas produced in Ukraine. The clear leader in natural gas production among the Ukrainian companies is Ukrgazvydobuvannya, with a 73% share in the total production in Ukraine, followed by Ukrnafta, with a 7% share. Nearly.5% of the group s production is generated by activities within the concession agreement carried out on the territory of the Arab Republic of Egypt, which was signed between Naftogaz, the Arab Republic of Egypt and the Egyptian General Petroleum Corporation (EGPC). The project is implemented by the joint venture Petrosannan Company, set up by Naftogaz and EGPC with equal shares in the authorized capital. In Ukraine, natural gas is mostly produced in the Poltava, Kharkiv, Sumy, Dnipropetrovsk, Lviv, and Zakarpattya regions. Exploration works are carried out mainly in the Carpathians and the Dnipro- Donets region. The geographical breakdown of natural gas production by Ukrgazvydobuvannya in Ukraine in, mcm SUMY REGION VOLYN REGION 527 LVIV REGION POLTAVA REGION KHARKIV REGION 53 IVANO-FRANKIVSK REGION 1 CHERNIVTSI REGION 432 DNIPROPETROVSK REGION 3 DONETSK REGION LUHANSK REGION

55 WHAT WE HAVE ACHIEVED The group s natural gas, oil and gas condensate reserves as of Natural gas, bcm Oil and gas condensate, million t Natural gas (million barrels of oil equivalent) Naftogaz proven developed proven undeveloped probable Reserves as of Resources as of Ukrgazvydobuvannya proven developed proven undeveloped probable production of hydrocarbons in increase in hydrocarbons reserves in Reserves as of Resources as of Ukrnafta proven developed proven undeveloped probable production of hydrocarbons in Reserves as of Resources as of Egypt proven developed proven undeveloped probable production of hydrocarbons in Reserves as of Resources as Group proven developed proven undeveloped probable production of hydrocarbons in increase in hydrocarbons reserves in Total reserves as of Resources as of Oil and gas condensate (million barrels) Gross production of natural gas, mcm Ukrgazvydobuvannya Ukrnafta 4 Concession Agreement in Egypt % -13.5% % CAGR -2.6% 4 In order to correctly display the trend in production the production volumes of Ukrnafta are given for the entire period of The amount includes compensation and revenue of Naftogaz (see p. 124 of the description of Project Egypt). According to the project, gross production of natural gas amounts to 192 mcm in 215 and 178 mcm in. In, the volume of natural gas production decreased by.9% compared to 215, due to a decline in Ukrnafta production, which resulted from a high level of depleted and hard-to-recover reserves as most of the fields are at the final stage of their operation. Ukrnafta lacks new special permits for subsoil use and its operating and exploration drilling has contracted. Therefore, the growth in its hydrocarbon reserves is limited. Ukrgazvydobuvannya, on the other hand, increased production in, due to the implementation of a number of organizational and technological measures such as increasing the extent of development drilling, optimizing the process of field development, increasing the number of intensification efforts, including hydraulic fracturing, use of coiled tubing technology, etc. In, Ukrgazvydobuvannya managed to stop the decline in gas production and began a steady build-up. Gross sales of natural gas, mcm Ukrgazvydobuvannya Ukrnafta Concession Agreement in Egypt % -44.5% CAGR -.7% 13 3 In, the production of natural gas under the concession agreement in Egypt declined due to a gradual fall in the production capacity of gas condensate wells and delays in the construction of gas compressor units. Sales volumes of natural gas increased by.4% in compared to 215 due to increased natural gas production of Ukrgazvydobuvannya. During 214-, Ukrgazvydobuvannya carried out the sale of the entire volume of commercial natural gas produced by Naftogaz. According to the Law of Ukraine On the natural gas market, the Cabinet of Ministers of Ukraine approved the Regulation on imposing special obligations on the subjects of the natural gas market (Regulation) 7, under which Ukrgazvydobuvannya was determined as a subject of the natural gas market charged with a special obligation to sell the entire volume of Naftogaz s commercial gas to form a natural gas resource for domestic consumers and producers of thermal energy for domestic consumers. The sales procedure and the natural gas price are determined by this Regulation. Gas produced by Ukrnafta is used for ammonia production (see section Crude oil and gas condensate processing and trade in petroleum products ). The sale of natural gas produced by Ukrnafta is carried out exclusively through company joint activities. Natural gas produced under the concession agreement is sold by the Egyptian General Petroleum Corporation (EGPC). The terms of the concession agreement provide for the following distribution of production: 25% of the hydrocarbons extracted and accumulated from all production areas are quarterly directed to Naftogaz to compensate it for all costs of exploration and development (the compensation part); 75% of the hydrocarbons extracted and accumulated from all production areas are distributed depending on production volumes. The Naftogaz share ranges from 15% to 19% (the revenue part). The difference in the volumes of production and sales of natural gas is the gas volume used by producing companies for in-process losses and expenses together with internal needs as well as gas volumes produced within the framework of cooperation agreements. The group s revenue generated by the natural gas production segment includes proceeds from natural gas sales and proceeds from the provision of services in natural gas production. The segment s total revenue increased by 145% in compared to 215, mainly due to an increase in the sale price and sales volume of natural gas produced by Ukrgazvydobuvannya. The increase in price for ownproduced gas, bringing it to the level of import price parity, occurred within the reform of the gas market. As a result, the price of gas sold by Ukrgazvydobuvannya increased from UAH 1 59/tcm excluding VAT, to UAH 4 849/tcm excluding VAT) 8 as of 1 May. 3 Group resources do not include 197. bcm of gas and 17.2 million t of oil located in the temporarily annexed territory of Chornomornaftogaz (92.3 bcm of gas) and -7.9% Naftogaz (36.2 bcm of gas and 2. million t of oil) and Naftogaz resources located in the ATO zone (68.6 bcm of gas and 15.2 million t of oil) Oil/condensate volumes are converted to barrel using a factor of 7.28 bbl per 1 t Cabinet of Ministers of Ukraine Regulation No. 758 (as amended) of 1 October 215. Natural gas volumes are converted to oil equivalent using a factor of 169 cubic metres per 1 bbl 8 Source: Report as of 31 Dec 214 on estimation of Naftogaz proven, probable and possible hydrocarbon reserves (SPE-PRMS) by Ryder Scott Company. Report as of 1 Amendments to the Regulation on imposing special obligations No. 315 as of 27 April 6 The volume of sale of the profit share of Naftogaz. 18 Jul on estimation Ukrnafta reserves and revenue and contingent resources of certain deposits by DeGolyer and MacNaughton

56 WHAT WE HAVE ACHIEVED The reduction in gas volumes sold by Ukrnafta had a negative impact on the segment s revenues, which led to a decrease in revenue generated by the segment by UAH 1 27 million, and the lowering of the gas sales by Ukrnafta by UAH 46 million. (Ukrnafta s revenue for 215 was included after the regain of control, i.e. from 22 July 215 to 31 December 215. If Ukrnafta s figures were included in the consolidated financial statements of the group for the entire 215, then revenue decrease would amount to UAH million.) Revenue from natural gas sales, UAH million Ukrgazvydobuvannya Ukrnafta Concession Agreement in Egypt including sales to other segments within the group ,4% CAGR 163.8% In, the natural gas production segment showed a profit of UAH million, which is almost 7 times higher than the 215 result. The growth in prices and sales volumes of natural gas produced by Ukrgazvydobuvannya improved the segment result by UAH 3 89 million. At the same time, the increase in selling prices and the corresponding increase in subsoil royalty charges reduced the segment result by UAH million. As of 1 April, subsoil royalty charges for gas decreased from 7% to 5% of the gas selling price. However, due to increase in the gas selling price for Ukrgazvydobuvannya in, the subsoil royalty charges for 1 tcm increased by 118% compared to 215 (from UAH 1 113/tcm to UAH /tcm). The growth in depreciation charges because of the revaluation of fixed assets as of 12 December 215 also reduced the segment result by UAH million. Impact on segment results, UAH million (15 281) ,1% -7,1% Weighted average price of gas sold by Ukrgazvydobuvannya to form a natural gas resource for domestic consumers and producers of heat for domestic consumers Price, Price, USD UAH From 1 January 214 till 31 December Average in From 1 January 215 till 31 March From 1 April 215 till 31 December Average in From 1 January till 3 April 1 59 From 1 May till 31 December Average in Segment results, UAH million % Growth in sales volume Growth in sales price Growth Growth in rental in depreciation payment charges 2218 (2 624) Other Assets In, the group s assets in the natural gas production segment decreased by 12.9% compared to 215. About 11% of the entire decrease was due to a reduction in the value of fixed assets compared to 215, and a reduction in the amount of tax prepayments by 1.3%. A change in the book value of fixed assets mostly took place due to increase in accumulated depreciation. The segment s ROA increased by 2% in compared with 215. The increase was mostly due to significant improvement in the segment s financial results arising from the growth in selling prices and lower assets value in caused by the increase in accumulated depreciation. Assets, UAH million % 3% Assets ROA 23% CRUDE OIL AND GAS CONDENSATE PRODUCTION SEGMENT In, the Naftogaz group produced about 9% of all oil and gas condensate in Ukraine. The group s leading enterprise for oil and gas condensate production is Ukrnafta, with a 68% share of Ukraine s total production. Ukrgazvydobuvannya ranks second in Ukraine in terms of production of oil and gas condensate with a share of more than 21%. In Ukraine, the production of oil and gas condensate is carried out by group companies in the fields located in the Poltava, Chernihiv, Sumy, Kharkiv, Dnipropetrovsk, Lviv, Ivano- Frankivsk and Chernivtsi regions. The group also receives about 3% of oil which it produces in the territory of the Arab Republic of Egypt under the concession agreement. Main results The results for of the segment of oil and gas condensate production show a general downward trend in output. In general, the production of oil and condensate decreased by 7.5% within the group, due to a decrease in the condensate content at the major gas condensate fields under development and water flooding at existing wells. The largest reduction in oil and condensate production, reaching 9.1%, was registered by Ukrnafta due to the natural depletion of wells and insufficient investment in maintenance, modernization of equipment, and drilling. condensate production. The company directs produced oil and gas condensate into the production of refinery products using its own production facilities. The results of the production and sale of Ukrgazvydobuvannya s refinery products are shown in the segments of crude oil and gas condensate processing and trade in petroleum products. Gross production of oil and gas condensate, thousand t Ukrgazvydobuvannya Ukrnafta 9 Concession Agreement in Egypt ,7% -9,1% -1,5% In order to correctly display the trend in production the production volumes of Ukrnafta are given for the entire period of (3 861) 1 The amount includes compensation and revenue of Naftogaz. According to the -5 project, gross production of crude oil amounts to 263 mcm in 214, 319 mcm in Ukrgazvydobuvannya also suffered a decline in oil and 215, and 313 mcm in CAGR -8.3% 121

57 WHAT WE HAVE ACHIEVED associated with the production of oil as well as compulsory payments and subsoil royalty charges for oil. The deficit of working capital and actions of the previous management of Ukrnafta resulted in the accumulation of tax debt and penalties in 215- (losses due to penalties amounted to UAH 2,798 million in ). Furthermore, impairment charges made in provision for doubtful receivables, which accrued to the amount of UAH 6 61 million in , also contributed to the formation of the segment loss in. Accounts receivable had been mostly generated by Ukrnafta before Naftogaz regained control over the company. Ukrnafta and Naftogaz have limited ability to collect these accounts receivable. In addition, high rates of subsoil royalties charges (charged at a rate of 45% for volumes extracted from reservoirs that fully or partially lie at a depth of up to 5 meters and 21% for volumes extracted from a depth of more than 5 meters) negatively affected the group s ability to profit from this segment. At the end of, the Tax Code was amended regarding the level of subsoil royalties for oil, effective as of 1 January 217, which set the subsoil royalty charges for oil at a rate of 29% for the extraction of oil from reservoirs that are fully or partially lie at a depth of up to 5 meters, and 14% for the extraction of oil from a depth of more than 5 meters. However, the subsoil royalties for the extraction of gas condensate have not been changed. It remains at 45% for volumes extracted from reservoirs lying at a depth of up to 5 meters and 21% for volumes extracted from a depth of more than 5 meters. Assets In, the group s assets in the crude oil and gas condensate production segment decreased by 1% compared to 215. The main reason for the overall decrease was the reduction in trade receivables by 41% compared to 215 due to the accrual of allowance for doubtful debts. The segment s ROA decreased by 36% in compared with 215. The decrease was due to the impaired financial results arising from lower oil sales revenue caused by drop in global oil prices. Meanwhile, the decrease in trade receivables as a result of accrual of impairment provision (see above) had positive impact on ROA. Sales volumes of oil and gas condensate have increased by 12% compared to 215 due to the inclusion of Ukrnafta s indicators in the consolidated results starting 22 July 215. If Ukrnafta s figures were consolidated starting from 1 January 215, the decrease in sales for the segment of crude oil and condensate production would amount to 4.1%. Sales of oil and gas condensate, thousand t Ukrnafta 11 Concession Agreement in Egypt ,9% CAGR 545.7% ,3% Ukrnafta s figures included in the consolidated data starting from 22 July 215 and amount to 649 thousand t or UAH million 12 The volume of sale of the profit share of Naftogaz Revenue from the sale of oil and gas condensate, UAH million Ukrnafta Concession Agreement in Egypt % -6,1% CAGR 498.9% In the oil and gas condensate production segment, the group suffered loss in, which was five times higher than in 215. The segment s unprofitability is primarily explained by the drop in the global oil prices from a level of about USD 98 per barrel on average in 214, to USD 34 per barrel at the beginning of. The average price of oil sold by Ukrnafta in amounted to UAH per ton excluding VAT, or UAH per barrel (equivalent to USD 4.82), which is by UAH or 21% less than the average price in 215 (UAH per ton excluding VAT or UAH per barrel (equivalent to USD 57.3). 329 Impact on segment results, UAH million (1 34) 215 Growth in sales volume (2 278) Decrease in sales price (6 61) Provision for Provisions doubtful for fines receivables and penalties 2218 (2 798) (1 234) changes +/- other (6 766) Assets, UAH million % % Assets ROA -43% In, revenue generated by the crude oil and gas condensate production segment increased by 83.3%, compared to 215 due to the inclusion of Ukrnafta s indicators in the consolidated financial statements from the date of control regain. If Ukrnafta s figures were included for the whole of 215, the group s revenue would decrease The significant drop in oil prices led to a reduction in by 16.6% as the result of a reduction in oil selling price by Ukrnafta s revenue and a deficit in cash flow from the 12.2% and in production volumes by 4.2%. operating activity needed to cover production costs

58 HOW GAS IS PRODUCED EXPLORATION, PRODUCTION AND PROCESSING OF GAS 1. GEOLOGICAL EXPLORATION 2. EXPLORATORY DRILLING Geological studies are conducted to identify areas where there may be new deposits. Seismic studies account for as much as 9% of the geological exploration budget. 8. GAS TRANSMISSION Gas is transmitted from the produc tion site to consumers through gas trunk pipelines. On average, only one in three exploratory wells finds a new deposit. The cost of an exploratory well is between USD 2-3 million but sometimes it may cost more than USD 1 million. NON-PURIFIED GAS COMPENSATOR PURIFIED GAS MARKETABLE GAS CONDENSATE LOW TEMPERATURE SEPARATOR SEISMIC VIBRATORS EXPLORATORY WELL CONDENSATE STABILIZER COMPLEX GAS TREATMENT PLANT (CGTP) GAS DRYER 3. PRODUCTION DRILLING Production wells are drilled to develop an explored field. The cost of a well depends on its depth and ranges from USD 2-3 million to USD 1 million. 4. WELL REPAIR Wells are regularly checked and repaired to ensure uninterrupted and accident-free production. 5. PRODUCTION ENHANCEMENT Booster compressor stations (BCS) maintain the pressure necessary for production at the final stage of field development. Most of the fields in Ukraine are significantly depleted GAS SEPARATION DRILLING SITE WELL WORKOVER PRODUCTION WELL COILED TUBING UNIT BOOSTER COMPRESSOR STATIONS 6.DEVELOPMENT OF THE FIELD 7. GAS TREATMENT A mixture of gases (methane, ethane, pro pane, etc.), gas condensate, stratum water and other mineral impurities comes to the surface through a well. Subsequently, this mixture is purified and separated. The final products of the mix ture processed by a complex gas treatment plant (CGTP) are dry natural gas and gas condensate

59 WHAT WE HAVE ACHIEVED International experts confirm the feasibility of the company s 2/2 strategy objectives UKRGAZVYDOBUVANNYA In, Ukrgazvydobuvannya succeeded in ending the negative downward trend in Ukrainian gas production. Based on the results of, the most powerful gas producing company produced 14.6 bcm, which is.5% more than the previous year s result (14.53 bcm). In addition, Ukrgazvydobuvannya increased the growth of its gas reserves by an estimated 7 bcm, reaching a total figure of 276 bcm of proven gas reserves at 14 gas fields. Ukrgazvydobuvannya accounts for 73% of total gas production in Ukraine. Over the last three years, the meterage drilled by UkrburGaz, Ukraine s largest drilling company, which is part of Ukrgazvydobuvannya, has been increasing. In 215-, this increase stood at 3.6% and 14.7%, respectively. Absolute figures for this period were thousand meters and thousand meters, although the company did not reach the 213 volume (21.2 thousand meters). Given the dynamics of recent years, Ukrgazvydobuvannya intends to increase drilling by 24% to 24 thousand meters in 217. Drilling rates will increase due to modernization of the fleet of lathes, purchases of new rigs and use of contractor lathes. The replacement and upgrading of drilling rigs is long overdue. The average service life of Ukrgazvydobuvannya drilling rigs is 23 years. Ukrgazvydobuvannya recommissioned its hydrofrac fleet, which took six months. The company repaired equipment, recruited a team of qualified specialists from East European countries, and used additional equipment to carry out operations in accordance with best international practices. In September, the first successful fracturing operations were carried out. Some wells produced around 5 tcm of gas a day. Once the wells are cleaned, they will produce about 8-1 tcm a day, which would allow for an increase in annual production volume of 3-36 mcm from a single well in the future. In, Ukrgazvydobuvannya developed and approved its investment concept for The company finalized its investment program for 217 and began developing an investment management model based on an economic feasibility assessment. Until 22, the company plans to invest USD 3 billion for purchasing and modernizing drilling lathes as well as hiring external service companies to drill 9 wells during and to carry out appropriate works at gas fields. The program involves purchasing 3 new drilling lathes (by 22), upgrading 32 available lathes (in -218) and drilling around 66 new wells (in 71 wells, in wells, in wells, in wells and in wells). Ukrgazvydobuvannya is planning to attract foreign contractors to perform a significant volume of work including a complete Meterage drilled by Ukrgazvydobuvannya 2- and projected volumes for , thousand meters 1 overhaul of wells and coil-tubing operations, hydraulic fracturing operations, boring, and seismic and geophysics tasks. In terms of increased gas production, the application of coil-tubing technology has brought Ukraine an additional 87 mcm of gas. By the end of 217, it is expected to result in another 366 mcm of gas. 8 In, coil-tubing and hydraulic Ukrburgaz fracturing fleets were repaired and put In Ukrgazvydobuvannya increased its engineering works EDS (External drilling subcontractor) into operation. The Company began Meterage drilled increased by 25 thousand meters to 198 thousand 6 upgrading its own fleet of drilling lathes meters (+ 14% compared to 215); while tenders for 1 HF operations were 7 new wells were built (+ 11% compared to 215); conducted (the winners were Tacrom and 13 new licenses were obtained (for the first time in recent years); 4 Byelarusnyeft). The practice of outsourcing 9coil-tubing complexes (zero in 215); drilling services was initiated, opening 233 complete overhauls of wells and 12 coil-tubing operations were In, Ukrgazvydobuvannya announced the market for international companies. carried out; the implementation of several largescale 2 A drilling fleet development strategy More than 7 bcm of reserves and more than 11 bcm of resources investment projects. These include was developed and a center of drilling were generated; purchasing new drilling equipment and competence was set up and manned by 1 new booster compressor station was built and construction of 4 recruiting contractors to perform hydraulic specialists from international companies. new booster compressor stations is nearing completion. The key fracturing (HF). Additionally, restrictions on gas extraction elements of ground infrastructure were repaired; Source: Ukrgazvydobuvannya at Shebelynskyi field were lifted and During, after a three-year break a 3D field modeling program was launched. 116 efforts got underway to modernize DTS PRODUCTION, bcm New fields Existing fields Intensification Pressure optimization Well downtime Basic level 13 TOTAL Costs till 22, USD billion Effect -22, bcm producing wells, 138 assessed wells, 2 explored wells First well in operation in 217 Up to 27 wells will be drilled by 22 (up to 3% wells will be completed using HF). 25% were drilled using outsourcing 25 HF (wells) by 22 (extensive subcontractor support is required) 6 mini-compressors will be installed 8 new Booster Compressor Stations will be built and 7 Booster Compressor Stations will be upgraded Over 1 workovers by 22 (including up to 2 workovers using outsourcing) Organic expenses for maintaining the existing infrastructure 13 UGV financial plan 14 Basic level within the range of +-5% of Ryder Scott estimates Notes: correction factors for drilling at established fields are.25,.25,.3,.3 and.5 for 22, respectively. Source: UGV, McKinsey and international experts. The corporate governance reform enabled us to create a powerful managerial team, improve staff selection, launch enhancement, overhaul and re-equipment programs as well as to start increasing our production. Oleg Prokhorenko, CEO Ukrgazvydobuvannya

60 WHAT WE HAVE ACHIEVED and to build gas dehydration installations. Framework contracts were entered into for the maintenance of compressor units and, above all, solar turbines. The Ukrgazvydobuvannya Development Program will be of great significance for Ukraine s entire oil and gas market. The liberalization of the market will open up the country s investment potential and will help to attract foreign investments and mining industry technologies. In, Ukrgazvydobuvannya significantly increased the competence of its geological functions. A reservoirs management competence initiative was created, software and hardware systems for reservoir modeling such as Petrel, Eclipse and Techlog were installed, a 3D seismic survey was launched, and efforts got underway to create geological models of large fields. In addition, a geological and technical audit of all wells was launched and issuance of new special permits was resumed. During, a new division was created (UGV-Service), which is responsible for both intensification and repairs. Furthermore, a Drilling Supervising Office was set up. Economic impact Ukrgazvydobuvannya became the number one taxpayer in Ukraine, paying UAH 38.6 billion to the budget of Ukraine in (about 5% of the state budget). In addition, it managed to avoid a credit line default and to return UAH 38 million. Previously borrowed loans were paid off at a significant discount and the company s current accounts were transferred to stateowned banks. Ukrgazvydobuvannya sales service launched open tenders and direct contracts for export of petroleum products, an e-queue function, and sales via stock exchange electronic auctions. The strategy allowed the company to gradually decrease the hub price discounts the company received, while gradually increasing export prices for Ukrgazvydobuvannya. It also helped the company enter into direct relationships with global giant Vitol Group. The reform of the procurement system and the Ukrgazvydobuvannya product sales system allowed the company to attract world-class companies which can supply high quality equipment and services directly. In, Ukrgazvydobuvannya began to do its accounting and reporting according to IFRS international standards, which helps to reflect the company s financial position accurately. Industry reforms In, the aggregated effect of comprehensive reforms and the transformation of business processes in Ukrgazvydobuvannya reached an estimated USD 4.1 billion. This figure includes savings due to transparent and competitive procurement (about USD 2 billion), increased revenues resulting from the transition to competitive sales of processed products and upgrading to Euro standards 4 and 5 (UAH 866 million), increased productivity of works (drilling, repairs), early commissioning of new wells, the positive effect of restructuring of loans, improved fiscal discipline, and review of agreements of previous periods with non-market terms and conditions, etc. Problems and solutions The company failed to achieve all its goals in. By way of illustration, Ukrgazvydobuvannya began an intensification program, but due to political and corruption-motivated interference in the company s activities, full implementation of the program stalled. Furthermore, saw the termination of three agreements on joint activities. For various reasons, work was not completed as planned, so in 217 the company intends to continue terminating contracts. Due to red tape, the process of granting licenses for new areas is very timeconsuming, which affects the speed of implementation of the company s strategy. In the early stages of gas production, gasproducing companies face obstacles from difficulties with the legal registration of land. 7% of the land base in Ukraine is farmland and therefore, without changing the status of this land, it is impossible to work legally. Unfortunately, the initial stages of exploration and drilling works are not always successful. It would therefore be unwise to transfer farmland to a different usage category at the early stages. The growth of domestic gas production is one of Ukraine s strategic goals. Today, the complexity of land acquisition costs Ukraine about 1 bcm of unextracted gas per year, which has to be imported rather than produced in Ukraine. To create a favorable legal and regulatory ecosystem, Ukraine needs to adopt modern policies for developing oil and gas fields. The country requires a comprehensive and updated Code of Mineral Resources. It must conduct an effective fiscal policy, ensure the presence of modern players and services in the oil and gas market, and work to ensure fair evaluation of reserves in accordance with international standards. In, Ukrgazvydobuvannya applied for 36 licenses for new areas. 18 positive decisions were issued (13 licenses were granted). The key issues to be addressed immediately include: - introduction of a favorable and competitive fiscal regime for greenfield projects - ensuring of transparent competitions for new licenses In greater detail, the company plans for 217 in specific areas are as follows Ukrgazvydobuvannya has initiated several measures to deregulate the oil and gas industry. In the area of natural gas production, a number of regulatory documents remain in force even though they have long become obsolete and are hindering the development of the industry. One example is the pricelist for geophysical studies and works in wells for oil and gas, which was published by Naftogaz and approved in the mid-2s. This features prices set when the UAH/ USD exchange rate was 5 to 1 have become economically outdated. This results in a situation where Ukrgazvydobuvannya cannot contract third-party contractors Urgent legislative problems related to Ukrgazvydobuvannya and possible solutions of geophysical works at market prices. The situation is even worse if one takes into account the outdated capacities of Ukrgazpromgeofizyka branches that are currently undergoing upgrades. This hinders the development of the industry since contractors are reluctant to update or import equipment. As a result, existing state geophysical enterprises such as Ukrgeofizyka and Poltava Geophysical Works Department are slowly dying. Ukrgazvydobuvannya came up with a proposal for the Cabinet of Ministers to cancel this Pricelist. This will help the company create a new market for geophysical services. This will attract investment, significantly increase the volume of geophysical works, and increase the speed and efficiency of operations. Company plans for 217 Key Ukrgazvydobuvannya tasks in 217: 1. Increase gas production by 4-6 mcm to bcm. 2. Launch a full-scale program for intensifying production (including HF) 3. Receive 49 licenses for new areas 4. Launch a full-scale program of development of drilling capacities (upgrading of its own drilling fleet, engaging international drilling contractors, etc.) To make its sales as competitive as - completion of natural gas market 5. Fully implement the capital investment possible and to attract the largest reforms program for number of international traders possible, DRILLING (METERAGE DRILLED OF NEARLY 4 THOUSAND METERS, INCLUDING 15 THOUSAND METERS AS A RESULT OF ATTRACTING EDS (EXTERNAL DRILLING SUBCONTRACTORS), MODERNIZATION OF 17 DRILLING LATHES OF ITS OWN FLEET, CONDUCTING OF TENDERS FOR THE PURCHASE OF 3 NEW DRILLING LATHES, PROCUREMENT OF DRILLING SERVICES FOR ITS OWN FLEET AND FOR AN EXTERNAL CONTRACTOR DRILLING, BORINGS SOLUTIONS, CEMENTATION, ETC.) Problems 1. Considerable land allocation time periods (up to 2 years) 2. Downtime of drilling rigs due to lack of authorization for removal of fertile soil - loss of 43 million cubic meters in 215 Delays in the issuance of special permits (especially problematic is the approval of issued special permits by regional councils) Because of joint activity agreements in, the company sustained a loss 369 million cubic meters. Outdated rules, mechanisms and rules for mining that do not meet modern realities GEOLOGY (3D-SEISMIC SURVEY OF 17 FIELDS (MORE THAN 1.5 THOUSAND SQUARE METERS), CONSTRUCTION OF HYDRODYNAMIC MODELS OF KEY FIELDS, CONSTRUCTION OF A RESERVOIR MANAGEMENT FUNCTION, PROCUREMENT OF HARDWARE AND SOFTWARE FOR MODELING AND INTERPRETING GEO-DATA, AND UPGRADING OF GEOPHYSICAL FUNCTION) Possible solutions - Deregulation of the oil and gas industry - adoption of Bill No Simplification of the land allocation procedure - Allocation of state-owned land plots for drilling purposes - Removal of the ban on changing the purpose of private agricultural land Decentralization of rent - enactment of the provisions of Bill No. 338 on the transfer of 5% of rent to local budgets Support for further termination of contracts on joint activities Development of an updated Code of Mineral Resources and adoption of the revised rules governing field development INTENSIFICATION AND INCREASE OF WORKING TIME OF WELLS (IMPLEMENTATION OF A LARGE-SCALE PROGRAM OF HYDRAULIC FRACTURING OPERATIONS, PURCHASE OF MACHINES FOR WORKOVER OF WELLS, IMPLEMENTATION OF 25+ KRS OPERATIONS USING INTERNAL RESOURCES AND INVOLVING EXTERNAL CONTRACTORS, INTRODUCTION OF PERFORATIONS (FOR TRANSITION TO NEW HORIZONS AND DEVELOPMENT) FOR DEPRESSIONS). GROUND INFRASTRUCTURE (CONSTRUCTION OF THE FIRST STAGE OF CHERVONODONETSKA BOOSTER COMPRESSOR STATION, MODERNIZATION OR CONSTRUCTION OF 1 BOOSTER COMPRESSOR STATIONS, IMPLEMENTATION OF A COMPREHENSIVE PROGRAM OF AUTOMATION OF WELLS AND THE PROGRAM OF INSTALLATION OF MINI COMPRESSORS TO OPTIMIZE PRESSURE).

61 UGV FIELDS that produced over 3 mcm of gas in, bcm (more than 2/3 of total production) 2.2 Production in, bcm Remaining reserves as of 31 December 2, bcm % % EASTERN OIL AND GAS REGION % % extracted from reserves Licensed fields Fissure (Dnipro-Donets Rift) % SUMY REGION Khidnovychi gas field % % Svydnytsia gas field WESTERN OIL AND GAS REGION LVIV REGION Yablunivka oil, gas and condensate field % Kulychyha oil, gas and condensate field Komyshnia gas and condensate field 1 POLTAVA REGION Tymofiivka oil,gas and condensate field Kotelva gas and condensate field % % % Berezivske gas and condensate field % % 1. 93% Yuliivka gas and condensate field % % % % KHARKIV REGION Letnia gas and condensate field % % Bilche-Volytsia gas field Mashivka gas and condensate field Western Khrestyshche gas and condensate field Medvedivka gas and condensate field Kobzivka gas and condensate field Melyhivka gas and condensate field Yefremivka gas and condensate field Kehychivka gas and condensate field Shebelynka gas and condensate field ZAKARPATTIA REGION % Bytkiv-Babche oil, gas and condensate field IVANO- FRANKIVSK REGION CHERNIVTSI REGION DNIPROPETROVSK REGION DONETSK REGION 1 Gas deposits deeper than 5 m 2 12 Naftogaz estimates based on reserves calculated by Ryder Scott Company

62 WHAT WE HAVE ACHIEVED UKRNAFTA Ukrnafta, one of the largest oil and gas companies in the country, is engaged in the exploration, production, sale, and processing of hydrocarbon gas. The company also owns a chain of refueling stations and provides oil-field services in Ukraine. The company consists of six production units, three exploration and drilling units, three gas processing plants, research and support units, and 537 refueling stations. In, Ukrnafta employed 25,117 people. Production results in In, Ukrnafta reduced the volume of production of oil and condensate by 9.2%, as well as curtailing its gas output by 13.4%. Production cuts resulted from the natural depletion of wells and insufficient investments in maintenance and modernization of equipment and drilling operations. Due to a critical shortage of financial resources, drilling volumes decreased by 89% compared to 21 figures. However, despite the difficult situation with oil prices and limited investment, the company managed to stabilize production at a level that exceeds the natural production decline. First and foremost, this was made possible due to a series of technical measures aimed at intensifying production at existing wells. In addition, production figures were adversely affected by production stoppages at the Bytkiv-Babchenskyi and Lelyakivskyi fields where two joint ventures with Ukrnafta are active. In Q1 217, production at these fields was resumed. barrel of oil was USD 4 in compared to USD 53 in 215. Due to a decline in production and lower oil prices, net income for fell to UAH 22.6 billion compared to UAH 28.8 billion in 215. Rent payments and tax debt In, the nominal rate of rent for oil and condensate production was 45% for wells up to 5 thousand meters deep and 21%, for deeper wells. Because of tax law specifics, the base for charging rent payments exceeded the actual selling price of oil and condensate. As a result, according to the results, the effective rate of rent for the company was 47%. Despite a limited cash flow, in Ukrnafta paid UAH 8.1 billion in taxes, which exceeds the 215 figure (i.e. UAH 5.3 billion) by 52.8%. In general, tax payments accounted for 45% of the company s own cash flow, while urgent operational costs and investments accounted for 26%. Labor remuneration constituted 16% and payments for petroleum products to meet the needs of the network of refueling stations during the first four months of until changes were made in the retail segment procedure amounted to 12%. The company failed to pay off its tax debts to the state budget and to minority shareholders. Although in 215 Ukrnafta fully complied with its obligations regarding dividend payments for the period from 211 through 214 to its majority shareholder having transferred to the state budget UAH 2.41 billion, no dividends were paid in. Constrained by the need to finance urgent production problems, difficulties in recovering payments from its business partners, and increased stocks of petroleum products, the Company failed to pay all tax Average production of oil with condensate, thousand tons per day actual actual planned forecast (rate of decline in 215) The company conducted operations despite low oil prices, particularly at the beginning of Suspension of 14 special permits initiated the year. The price situation improved by the 2 by Derzhheonadra will result in a decline in end of the year, but the average price for a hydrocarbon production (i.e. 285 thousand 122 repayment mechanism. 123 Джерело: Укргазвидобування accruals. As a result, as of December 31, the company s tax debt increased by UAH 3.1 billion to UAH 13.2 billion. The accumulated tax debt and accrued security for possible fines and penalties are far too high, impeding the company s ability to upgrade its capacities and grow. In view of the above, at the beginning of, the company s board suggested conducting a company out-of-court recovery. Such financial rehabilitation mechanisms require approval by lenders for the restructuring and payment of debts. It could enable the company to make investments and to grow its business. The board of Ukrnafta is currently engaged in a broad-based dialogue and is looking for ways to resolve this problem. Investments In, capital investments stood at UAH 51 million, reaching a record low level for the past 1 years. This downgraded the company s output forecast for 217. To update the company s estimates of its balance sheet assets and to identify investment priorities, the company revalued its assets as of 31 December. As a result, the company s assets increased by UAH 1.6 billion. In addition, the company reassessed its hydrocarbon stocks as of 31 December with the participation of the professional valuator DeGolyer and MacNaughton (USA). Problem with obtaining special permits 217 will be the year that 9 licenses will expire for Ukrnafta plots which produce about 2% of annual oil output. These include Anastasievske, Rybalske, Artyuhivske, South- Panasivske, Lypovodolynske and Korzhivske fields located in the Sumy region, as well as Koziyivske and Kachalovske located in Kharkiv region and Zavodivske in Lviv region. Derzhheonadra refuses to prolong the licenses due to Ukrnafta s tax debt. In August, the agency issued an order to terminate three special permits in connection with the Ukrnafta rent debt. Oil production at Lelyakivskt field stopped in May and at Bytkiv-Babchenske, in July 215. tons of oil with gas condensate and 135 million cubic meters of gas per year). In total, Ukrnafta has 82 special permits for extraction of hydrocarbons. Transformation of structure and business processes In, Ukrnafta began restructuring its operational management systems. A critical element of this transformation is fundamental reform of the Ukrnafta supply management system. To perform this task with maximum efficiency, Ukrnafta invited Crown Agents Company, which is a global expert in institutional development and supply management, to join a two-month pilot consulting project. The project s main objective is to analyze ongoing processes and the potential for reform of the supply management system, and to begin reorganizing procurement functions in all fields of Ukrnafta activities. These recommendations will be based on best practices of similar projects implemented both internationally and within Ukraine in the private and public sectors. The project is being supported by the UK government through the Good Governance Fund managed by DFID (Department for International Development of Great Britain) and PwC. As part of the study, Crown Agents experts conducted an audit and submitted their recommendations in such areas as the supply chain strategy and planning, information and IT systems (ERP resource planning), procurement processes, organization and staffing, as well as the storage and transportation of materials. A reformed procurement function should support the short-term business goal, that is, the intensification of oil production at existing wells, and the long-term goal of doubling the company s output over the next 1 years. The updating of the procurement system is one of the top 1 transformation projects designed to reform Ukrnafta. In mid-october, the Company joined the ProZorro system. From November, Ukrnafta regional units filed e-procurement applications with the ProZorro system worth more than USD 2.9 million. Ukrnafta trained procurement specialists from its structural units based in Poltava, Sumy, Chernihiv, Lviv and Ivano-Frankivsk regions. This training was organized in mid-november in Ohtyrka and Dolyna by company employees and representatives of the electronic platform zakupki.prom.ua. Ukrnafta also plans to reform its drilling units. The project involves upgrading the fleet of drilling lathes, optimizing the management structure and business processes, increasing productivity, and eliminating the duplication of functions. Ukrnafta has 46 drilling lathes, most of which are obsolete and have unsatisfactory mobility indicators. 6% of rigs have been in service for over 2 years. The company plans to purchase or rent 2 new drilling rigs and to upgrade 7 existing drilling lathes. Technical modernization and organizational measures will allow the company to drill up to 2 wells per year. The reform project involves setting up a single structural unit, which will bring together Okhtyrske, Prylutske and Prykarpatske drilling operations departments. Apart from technological modernization and optimization of the management system, the plan includes bringing staffing levels into line with current and future production needs. Employees will be offered employment in the company s other structural units. They will be offered the chance to receive professional retraining or to voluntarily leave the company with appropriate compensation. Plans for 217 In 217, Ukrnafta plans to increase its investment program by up to UAH 2.5 billion by reinvesting all funds received from a decrease in oil rent to 29%. Most investments will be directed toward drilling and production to maintain and upgrade key production systems, including the replacement of worn-out pipes, an overhaul of wells, and increasing return on existing wells by installing ECN, the use of waterflooding operations, and other methods of intensification of production. In addition, the company intends to increase its investments in the retail sector and IT systems. These investments are crucial in order to meet basic production and work safety targets and to ensure the accident-free operation of equipment. However, the investment program will depend on arrangements regarding the tax arrears

63 BIDDING ROUND 333 WHAT WE HAVE ACHIEVED /88/ / Sinai JORDAN A C total, 9,986 million barrels See reversein side for details. Exploration, infrastructure (1,362 million t) of commercial oil with development and production gas condensate and 14,864 billion of oil and gas in the Alam El cubic feet (42 mcm) of gas have Shawish East area, Western been produced since the beginning 34 Desert of exploitation of reservoirs in the /29/112/ Concessions of Naftogaz Concessions of Naftogaz (Zakordonnaftogaz) 29 Hurghada 326 Egypt EGYPT 7 Dakhla Oasis Luxor In, two appraisal wells were drilled for additional exploration of reservoirs in the concession area, as a result of which new oil deposits were discovered. Accordingly, crude oil production was increased by 56 thousand barrels (7.6 thousand t) compared to 215, and commercial production of oil and gas condensate reached 2.3 million barrels (313 thousand t) in. By the end of, 49 wells were drilled in the concession area thanks to Naftogaz investment, 38 of which 1 revealed oil and gas accumulations. Kharga Oasis 124 In 26, Naftogaz, the Arab Republic of Gulff of Aqaba Egypt (ARE) and the Egyptian General Petroleum Corporation (EGPC) signed a concession agreement for the exploration and exploitation of oil and gas in the Alam El Shawish East area, Western Desert, which was the first step towards practical implementation of the company s investment projects in Egypt. Pursuant to one of the projects, commercial production of hydrocarbons began in 21, which led to the setting up of Petrosannan Company, a joint venture that provides operational management of the project under the annual work program approved by the Red shareholders (Naftogaz andsea EGPC). Legend Concessions/Licenses: Exploration lease Development lease Restricted area Bidding area 124 Aswan 8 Awarded: May 25 Expired/Renewal: May 214 Awarded: December 26 Expired/Renewal: Decemb 25 North Tarek (311 square kilometres) Apache Oil Egypt (OP, 67 percent) Sinopec (33 percent) Awarded: May 25 Expired/Renewal: May East Kanayes (72 square kilometres) IEOC (OP, 5 percent) EGPC (5 percent) Awarded: March 212 Expired/Renewal: March El Fayum (192 square kilometres) (El Fayum West) Merlon Petroleum El Fayum Company (OP, 1 percent) Awarded: July 24 Expires: July 254 West Wadi El Rayan 1, 2 and 3 (4,2 square kilometres) Petro Fayoum Company (OP, 1 percent) Awarded: October 29 Expires: January Abu Sannan (1,13 square kilometres) Kuwait Energy (OP, 5 perc Dover Investments (28 perc Beach Petroleum (22 perce Awarded: June 26 Expired/Renewal: June Alamein Yidma (582 square kilometres) El Hamra Oil Company (OP, 1 percent) Awarded: November 1963 Expires: August Alamein Yidma (582 square kilometres) Apache (OP, 1 percent) Awarded: North El Amyria (1, square kilometres) RWE Dea (OP, 1 percent) Awarded: July 26 Expires: July Komombo (5 square kilometres) Dana Gas Egypt (OP, 25 percent) EGPC (5 percent) Sea Dragon Energy (25 percent) Awarded: December 27 Expires: December 227 INVESTMENT PROJECTS IN EGYPT B Maritime border National border Disputed border National capital City ,68 1,9 15,745 14,27 Cairo West Gabal El Zeit (reverse) Southeast Ras El Ush (reverse) Northeast Geisum (reverse) North Magawish (reverse) Northwest Shadwan (reverse) Northwest Sea Bird (reverse) North Al Baraka South Al Baraka (a, b and c) Southeast Qena Kharit km2 Exploration lease Development lease Restricted area Bidding area ISRAEL /89/123 Gaza Strip /88/ Alexandria /28 8/75/ / West Bank No. Name 29 South Siwa (25, square kilometres) Al Thani Corp Ltd (OP, 1 p Awarded: January 27 Expired/Renewal: Decemb 291 West Komombo (23,64 square kilometres) Energean Egypt (OP, 7 per Karl Thomson Energy (2 p blocks Groundstar Resources (1 p Egypt. Awarded: September 17 2 Expired/Renewal: Septemb geological West Kalabsha (298 square kilometres) (A, B and C) Khalda (OP, 1(SWM) percent) South Wadi El Petroleum Mahareeth Awarded: November 28 Expires: November 228 located in the Eastern Desert of The project 261 is at the stage of Siwa (6,32 square kilometres) exploration. Apache Oil Egypt (OP 33.5 percent) Tharwa Petroleum (5 percent) Sinopec (16.5 percent) for 217 Awarded: June 24 Expired/Renewal: June South Alamein (1,423 square kilometres) ( Goals TransGlobe Egypt Cepsa concession area. (OP, 1 percent) The main goals for 217 are the Awarded: April 27 Expired/Renewal: April stabilization of oil production based Theqah (1,76 square kilometres) South Wadi El Mahareeth and on the mechanical operation of 3 (North & North West) Wadi El Mahareeth investment East Badr El Din IEOC (OP, 5 percent) wells andtharwa construction of oil and gas (82.5 square kilometres) Petroleum (5 percent) projects Awarded:to Julyimprove 24 infrastructure business Apache Oil Egypt (OP, 67 pe Sinopec (33 percent) Expired/Renewal: July 212 Investment projects are underway performance. In addition, the company Awarded: April 26 Expired/Renewal: April 21 pursuant to concession agreements faces the265 following objectives in 217: Burullus Offshore 31 on the exploration and further (4 square kilometres) To complete the ofeast2dghazalat BP Egypt (OP, 1interpretation percent) development of hydrocarbon reservoirs, (366 square kilometres) Awarded: June 25 data; seismic prospecting Vegas Oil & Gas (OP, 5 perc Expired/Renewal: June 214 signed on 7 February 212 between the Transglobe Egypt (5 perce Arab Republic of Egypt, Ganoub El-Wadi To identify 266 the most promising North Petroleum ( percen Awarded: June 27 West Burullus Offshoreof 4 wells in the Holding Petroleum Company (GANOPE) sites and locations Expired/Renewal: October (8 square kilometres) and Zakordonnaftogaz, a subsidiary concession blocks; Gaz de France Exploration Egypt 32 GDF Suez (OP, 5 percent) of Naftogaz. These agreements relate West Obayed (91 square k Dana Petroleum (5 percent) To construct 4 wells (2 wells in each Vegas Oil & Gas (OP, 7 perc Awarded: September 25 to the Wadi El Mahareeth (WM) and Hellenic Petroleum (3 per block).expired/renewal: September 213 Awarded: June 27 Expired/Renewal: June El Burg Offshore 33 (1, square kilometres) East Lagia (2,989 square ki (Offshore 1 and Offshore 2) Vegas Oil & Gas (OP, 1 pe Fulfillment of concession conditions in BG Egypt (OP, 7 percent) Awarded: November 212 Petronas Carigali Overseas - 2D seismic prospecting and data processing (3,1 linear km) are Expires: November 215 (3 percent) complete; Awarded: July Expired/Renewal: The study of the low-velocity layer by means of the upholejulydrilling Block 12 El Qa a Plain (1,824 square kilometres) wells for the WM method is complete (16 uphole wells were drilled: (Block 1 and 2) North El Burg Offshore Dana Petroleum (OP, 27.5 p block and 9 wells for the SWM block); (617 square kilometres) Petroceltic International BP Egypt (OP, 5 percent) - Interpretation of 2D seismic prospecting data has started. (37.5 percent) IEOC (5 percent) Beach Energy (25 percent) Awarded: June 25 Awarded: November 212 Factors that impede the implementation of foreign projectsjune 212 Expired/Renewal: Expires: November - Untimely and incomplete funding of works by the Egyptian side because of a currency crisis in the country; West El Manzala North El Maghara (527 square kilometres) (2,334 square kilometres) - Overdue accounts payable accrued by Petrosannan Company and Dana Gas Egypt (OP, 1 percent) National Petroleum Compa Awarded: June 25 possible punitive sanctions on the part of contractors; (OP, 1 percent) Expired/Renewal: June 212 Awarded: July 27 - A lengthy procedure of approval with the Egyptian authorities, the Expired/Renewal: July Egyptian armed forces and GANOUB. West El Qantara (421 square kilometres) Hallif (17.9 square kilomet 125 Egypt Dana Gas Egypt (OP, 1 percent) HBS International Awarded: June 25 (OP, 1 percent) Expired/Renewal: June 212 Awarded: April 27 Expired/Renewal: April 21 SAUDI ARABIA

64 WHAT WE HAVE ACHIEVED GAS, OIL AND GAS CONDENSATE TRANSPORTATION AND STORAGE (MIDSTREAM) NATURAL GAS TRANSPORTATION AND DISTRIBUTION The main component of Ukraine s gas transmission system is the network of gas trunk pipelines and branch pipelines owned by Ukrtransgaz, which is a single technological complex that operates in continuous operating mode. The total length of gas pipelines operated by Ukrtransgaz is thousand km, including thousand km of trunk lines and thousand km of branch pipelines. As of 31 December, the number of gas distribution stations was The company s fleet of gas compressor plants consists of 72 units located at 72 compressor stations. Gas volumes that enter the gas transmission system of Ukraine are measured by gas metering stations. The infrastructure facilities are equipped with modern high-precision automatic meters and automatic instruments for determining the physicochemical properties of natural gas. Main results The total volume of natural gas transported in equaled mcm, which is by 14.7% greater than the figure for Ukraine decreases the use of natural gas, bcm ,1-13.5% % -2.7% , and is the result of an increase in the volume of transit of natural gas through the territory of Ukraine via the contract with Gazprom. Natural gas volumes transmitted, mcm Gas transmission through Ukrainian territory to European countries in 213-, bcm Gas volumes transiting Ukraine Gas volumes transmitted to consumers in Ukraine Natural gas volumes transmitted through cross-border points (transmission capacity at the entry points) % % -5,7% (29) CAGR -4,8% % 22.5% 22.5% CAGR calculation does not include transmition through cross-border points CAGR 6% In, the volume of natural gas transit increased by 22.5% compared to 215 and reached 82 2 mcm. The main reason for the increase in the volume of natural gas transit through the territory of Ukraine was the shutdown of the Nord Stream gas pipeline for technical repairs in August and higher demand in the EU. In, the volume of natural gas transportation for consumers in Ukraine decreased by 2.7% compared to the previous year, as a result of a decrease in the consumption of natural gas by industrial consumers. Since early, Ukrtransgaz has been providing two new types of services: balancing service (physical balancing and commercial balancing) and transmission capacity distribution service (cross-border points). service). Customers who ordered transportation services pay the operator of the gas transmission system the cost of the services received. The system balancing service includes: commercial balancing activity of the gas transmission system operator which consists of identifying and adjusting the imbalance that arises from the difference between the volumes of natural gas entering through the entry points and the volumes of natural gas exiting through the exit points in the context of the customers who ordered transportation services, whereas such activity is carried out on the basis of data received through the allocation procedure; and physical balancing measures taken by the operator of the gas transmission system to ensure the integrity of the system, namely the necessary ratio between natural gas volumes that have physically entered through entry points and natural gas volumes that have physically been removed Pursuant to the Code of the gas transmission system, Ukrtransgaz provides the customer with one or several components of natural gas transportation services (capacity distribution order, natural gas transportation order, balancing through exit points

65 WHAT WE HAVE ACHIEVED Revenue of the natural gas transportation and distribution segment, UAH million Despite the decrease in the volume of natural gas transmitted for Ukrainian consumers, on the whole the revenue of the natural gas transmission and distribution segment increased by 55.5% in compared to 215, through the provision of new types of services and an increase in the price and volumes of natural gas transit, along with UAH to USD devaluation, as the transit tariff is calculated in USD. Analysis of sales revenue of the natural gas transportation and distribution segment Growth in volume Devaluation of hryvnia against USD Revenue from the new service (gas transmission through cross-border points) % -15.5% 48.7% Revenue from new balancing ervice CAGR,% 79% Revenue from the provision of services for the transit of natural gas increased by 48.7% compared to 215, mainly due to an increase in the volume of natural gas transit (+UAH 9 93 million), devaluation of the hryvnia against the USD (+UAH million). Revenue from the provision of gas transportation services for Ukrainian consumers in decreased by 15.5%, which was the result of a decrease in the volume of gas transported for consumers in Ukraine (-UAH 25 million) and changes in gas supply conditions for Ukrainian consumers (-UAH 1 29 million) Natural gas transit services Gas transportation services for consumers in Ukraine Transmission capacity distribution services (cross-border points) Balancing services including sales to other segments within the group The financial result of the natural gas transportation and distribution segment, UAH million The financial result of the natural gas transportation and distribution segment increased by 23.6% in compared to 215. Due to the increase in transit volumes and the devaluation of the hryvnia against the US dollar in, the results of the natural gas transportation and distribution segment increased by UAH million. At the same time, the increase in the price of natural gas for production and technological needs negatively affected the segment s results in, reducing it by UAH million. Furthermore, as of 1 January, natural gas transportation services by cross-border gas pipelines are subject to VAT at a rate of 2%. Concurrently, the rental payment for the transit of gas through the territory of Ukraine was cancelled, which resulted in an increase in the overall segment costs in and reduced the segment result by UAH million Impact on segment results, UAH million Increase in volume Devaluation of hryvnia against US dollar Revenue from new services (8 193) (8 289) Increase Increase in expenses in VAT 18 on gas for technological needs 23.6% (4 51) Provision for impairment of trading accounts receivable arising from gas balancing CAGR,% 88% Other Starting from 1 October 215, Ukrtransgaz, as the operator of the gas transmission system, is responsible for adjusting the system s imbalance that arises from the difference between the volumes of natural gas entering through the entry points and the volumes of natural gas drawn at the exit points in the context of the customers who ordered transportation services carried out on the basis of data received through the allocation procedure. During, revenues from commercial balancing services amounted to UAH million. In the meantime, as of 31 December, accounts receivable for services provided for balancing natural gas volumes amounted to UAH million, of which UAH million was repaid during January-March 217. Repayment of debts was carried out through execution and delivery of protocol resolutions pursuant to the decisions of the Cabinet of Ministers of Ukraine 19.At present, the group is in the process of claiming and related works for the recovery of debts for balancing services which accrued during. To balance the system, Ukrtransgaz used 936 mcm, which was more than three times greater than initially planned. Assets The value of assets in the natural gas transportation and distribution segment decreased by 2% in compared to 215. The greatest impact on the change was made by a drop in the fixed assets value in compared to 215, which was due to an increase in depreciation charges. This change was partially offset by an increase in trade receivables in owing to the inclusion of accounts receivable for balancing services to the natural gas transportation and distribution segment in. The segment s ROA improved by 2% in compared with 215. ROA was equally influenced by the increase in 19 Cabinet of Ministers Resolution No. 2 On Approving the Procedure for Transferring Some Subventions from the State Budget to Local Budgets for Granting Benefits, Subsidies and Compensations, dated 11 January 25. Movement of gas in storage facilities in BILCHE-VOLYTSKO-UHORSKE 31.9% DASHAVSKE OPARSKE 13.1% 7.8% UHERSKE 4.3% BOHORODCHANSKE 15.2% Assets, UAH million % the segment s financial results due to the transit growth and lower assets value in caused by the increase in accumulated depreciation. NATURAL GAS STORAGE Ukrtransgaz manages one of the largest gas storage networks in Europe. It is an important integral technological part of the Ukrainian gas transmission system. Today 12 storage facilities are in operation, two of which are based on water-bearing structures. The rest are based on depleted gas fields. The total capacity of the gas storage facilities is about 31 bcm. The storage facilities are multi-purpose objects. They are used to ensure the smooth and efficient delivery of natural gas to consumers, reliable gas transit through Ukraine to the EU, and to serve as long-term gas emergency reserves. The group provides gas storage services in its storage facilities to both gas suppliers and consumers OLYSHIVSKE.% CHERVONOPARTYZANSKE 9.7% SOLOHIVSKE 3.1% 275 7% KEHYCHIVSKE 5.3% Design capacity PROLETARSKE % VERHUNSKE.% 424 Assets ROA 9% Free capacity (annual average) Volume stored (annual average) Pumped in Withdrawn KRASNOPOPIVSKE 1.7% Prior to, Naftogaz sold natural gas as a commodity, taking into account the 17 Revenue from the balancing service and the transportation service by gas natural gas transportation services by gas distribution pipelines, pursuant to the Law distribution pipelines (transmission capacity at entry points) of Ukraine On the Natural Gas Market and the Gas Transportation System Code. 18 Change in taxation of transit services (VAT and cancellation of royalty) In, the revenue from natural gas transportation services by gas distribution pipelines was received by regional gas distribution companies

66 WHAT WE HAVE ACHIEVED Main results The volume of natural gas pumped into underground gas storage facilities in compared to 215 decreased by 32.8% because the amount of natural gas stored in the facilities was sufficient for the heating season -217 (at the beginning of the heating season the inventories totaled mcm). The volume of gas withdrawn from the underground storage facilities during was larger than in 215 by 2.4% because of the early beginning of the heating season in -217: active withdrawal of gas from the underground storage facilities began on 12 October, compared to 3 October 215 in the previous heating season. Financial results of gas storage segment, UAH million (2 986) (2 176) -27.5% (1 578) CAGR,% -27.3% UGS injection/withdrawal, mcm Gas injected into UGS CAGR,% -19.2% Gas withdrawal from UGS % 2.4% CAGR,% -17.3% Total revenues from sales of natural gas storage services decreased in compared to 215 by 36.4% as a consequence of the decrease in the volume of natural gas pumped into underground gas storage facilities. This resulted in reduced segment revenue by UAH 566 million. Revenues from storage of natural gas segment, UAH million % CAGR,% -16.9% including sales to other segments within the group The losses of the segment decreased in compared to 215 by UAH 598 million, mainly due to changes in provisions for possible liabilities to storage users of the gas storage facilities. The negative segment result is evidence of the currently economically unfeasible tariffs for natural gas storage. In the future, the group expects to transfer to RAB tariff calculation methodology for gas storage that will ensure fair returns from the regulatory asset base and improve the segment result. Assets The total value of assets in the natural gas storage segment increased in compared to 215 by 2.9%. This change was driven by an increase in the cost of cushion gas as a result of revaluation as of 31 December. The segment s ROA insignificantly changed in compared with 215 (+.4%). Negative ROA was mainly explained by low tariffs on storage. Assets, UAH million % % Assets ROA -1%

67 WHAT WE HAVE ACHIEVED UKRTRANSGAZ Gas underground storage management Given the fact that Ukraine stopped gas imports from Russia in November 215, the year was the first when Ukraine did not use Russian gas while preparing for the heating season, instead refilling its underground storage facilities with gas acquired in reverse flow from Europe. As a result, the country started the heating season with gas reserves of 14.7 bcm, which is about 2 bcm less than in the previous two years. This sparked expressions of concern from the Russian side regarding insufficient gas levels in of Ukrainian underground storage facilities. However, due to proper planning and forecasting, Naftogaz managed to pass the heating season while ensuring the security and continuity of gas supplies to Ukrainian consumers and uninterrupted gas transit to European countries. During the -17 heating season, 6.7 bcm of natural gas was withdrawn from storage facilities, which is 21% less than the same period the previous year. In the first quarter of 217, 3.9 bcm of natural gas was withdrawn from the UGS, which is 1.6 bcm less than the previous year and can be attributed to increased gas imports from EU countries. Since March 217, natural gas supplies are rising at the storage facilities with more than 15 mcm accumulated by early April. According to the Naftogaz Restructuring Plan, the UGS are subject to comprehensive analysis with the assistance of international experts that will include legal, economic and technical evaluation to determine the most efficient operational management model. Based on the results of this analysis, an action plan will be developed and submitted to the Secretariat of the Energy Community to ensure efficient operation and management. According to the restructuring plan, it is scheduled for completion by July 217. (excluding VAT) from 1 January to 31 March and from 1 April reduced this rate to UAH 219. At the GTS entry points located on the state border of Ukraine, the rate is USD (excluding VAT). The tariff for pumping, storage, and withdrawal of gas has remained at the level of 213 and is UAH 112 per 1, cubic meters without VAT. Cancellation of the purchase of equipment for compressor station reconstruction in Because of the risks posed buy the implementation of the Turkish Stream project, at the end of the board of Naftogaz rejected to agree on the purchase by Ukrtransgaz of equipment and works from JSC Sumy Machine Building Research and Production Association for the reconstruction of compressor stations Ananiev, Zadneprovski and Pivdennobuzka. The cost of this equipment was estimated at more than UAH 4 billion. The equipment Ukrtransgaz was going to purchase was based on a feasibility study and was intended for reconstruction results of compressor stations involved in transmitting gas towards Turkey. It could not have been used for other compressor stations. Given the agreement between Russia and Turkey on the Turkish Stream project, which aims to replace Russian gas transit through Ukraine to Turkey, this investment was deemed inappropriate. The Naftogaz recommendation to the Board of Ukrtransgaz is to purchase universal equipment and related works for the reconstruction of compressor stations that transmit gas in different directions and avoid becoming dependent on equipment produced by specific manufacturer. Targets for 217: increase the company s efficiency and transparency and integrate into the European Network of Transmission System Operators for Gas (ENTSOG); implement energy saving technologies under the energy efficiency program for 217 and the energy resources saving plan for 217. procurement is ProZorro platform based; smooth operation of gas transmission infrastructure in areas close to the conflict zone in eastern Ukraine (Avdiyivka and Mariupol) ensured; modernization of Ukrainian GTS is underway as well as construction of Ukraine Poland interconnector; Ukrtransgaz transports gas through 146 bcm per year towards the EU and Eustream a. s. (Slovakia), FGSZ (Hungary), pipelines to consumers in Ukraine, the Turkey. JSC Moldovagaz (Moldova), SNTGN favorable conditions for European traders on Ukrainian gas EU, the Balkan countries and Turkey. Transgaz S.A. Medias (Romania), OJSC Tariffs for the transportation of To ensure safe natural gas transmission market are being created; The Ukrainian gas transmission system Gazprom (Russian Federation), OJSC gas to Ukrainian consumers to Ukrainian and European consumers, (GTS) is one of the most reliable and Gazprom Transgaz Belarus (Belarus), capacity of corridors for gas transmission to Slovakia and Hungary Ukrtransgaz cooperates with GTS The National Energy and Utilities powerful in Europe. Its input capacity E.ON (Germany), RWE (Germany), Engie increased to 42.5 and 16.8 mcm per day respectively. operators in neighboring countries and Regulatory Commission set tariff rates for is 32.1 bcm per year, including 23 bcm (France), Net4Gas (Czech Republic), with major energy companies including transporting gas to Ukrainian consumers per year from the EU, and output Bulharhaz EAD (Bulgaria), DESFA (Greece), PGNiG (Poland), Gaz System SA (Poland), at UAH per 1 cubic meters 132 capacity is bcm per year, including Botas (Turkey) and others

68 UKRAINE S GTS, bcm POLAND Capacity exit 98.4 entry: 15.5 Capacity exit 5. entry: Drozdovychi Capacity entry: Kobryn BELARUS Capacity entry: Mozyr Sudzha Capacity entry: RUSSIA Capacity entry: Capacity entry: Capacity entry: 13. Capacity entry: Valuiky Serebrianka Pysarivka Sokhranivka SLOVAKIA Uzhhorod HUNGARY Capacity exit: 13.2 entry: Berehove Tekove Capacity exit ROMANIA Oleksiivka Capacity exit 3.5 Capacity exit MOLDOVA ATO Prokhorivka Platove Capacity entry: Capacity exit 32.5 entry: Designed GTS exit capacity Designed GTS entry capacity Orlivka Gas volume transmitted on GTS exit Capacity exit: 32.5 entry: 3.3 Gas volume transmitted on GTS entry Gas metering stations located close to the border Source: Ukrtransgaz, Gas flow to Ukraine Transit through Ukraine

69 WHAT WE HAVE ACHIEVED TRANSPORTATION OF CRUDE OIL The system of oil trunk lines of Ukraine includes 19 oil pipelines with a diameter of up to 1 22 mm, with a total length of km, oil pumping stations and the Pivdennyi oil terminal, tank farms, systems of power supply, corrosion protection, remote control, engineering communications, firefighting facilities and erosion control structures. The entry capacity of the system is million t per year, while the exit capacity is 56.3 million t per year. The combined nominal capacity of the tank farms of the system of oil trunk lines amounts to 1.83 tcm. The Pivdennyi oil terminal is designed for receiving, shipping, and transporting oil through the oil trunk lines of Ukraine. The capacity of the terminal is 14.5 million t per year, with the possibility of expanding it to 45 million t per year. Tanker deadweight is up to 15 tons with a maximal draft of 13.8 meters. Tank farm capacity is 2 tcm. Main results Ukraine s considerable oil-trunk pipeline system is not currently used to capacity. The volume of crude oil transportation, thousand t Oil transit through the territory of Ukraine Oil transmission to Ukrainian refineries % -12.5% CAGR,% -5% and technological connectivity of the systems, the volume of oil transit largely depends on the policy of the Russian Federation as a major supplier of oil to Central Europe and the main customer of oil transportation services through Ukraine. The strategic priorities of Russia in favor of developing its own pipeline and port facilities have led to a significant reduction of oil transit through the territory of transit countries including Ukraine. Revenues from the sale in the of crude oil transportation segment, UAH million Russia is persistently doing away with intermediary transit countries, and therefore oil transit through Ukraine has decreased dramatically in recent years. In 22, Russia built Sukhodilna-Rodionivska oil pipeline (28 million tons/ year), which directly linked two Russian oil pipelines, bypassing Ukraine: Samara-Lysychansk and Lysychansk Tykhoretsk. In 28, Russia finally decided to channel all its oil flows bypassing transit countries, and in 212 completed construction of the Baltic Pipeline System (BPS-1 and BPS-2) with a total capacity of 8 million tons per year. In addition, since 24 the Caspian Pipeline Consortium has connected oil fields of Kazakhstan and Russia with terminal operations in Novorossiysk, bypassing Ukraine. These Russian efforts mean that in 215 oil transit through Ukraine to three countries (Czech Republic, Hungary and Slovakia) totaled only 15 million tons. Compared to 215, transportation volumes in decreased by 9.1%. This is primarily due to reduced oil transit volumes to Slovakia and the Czech Republic, where the overhaul of local oil refineries (OR) was performed in the first half of. in response to low crude oil prices. In such circumstances, Russian Urals oil was partially ousted by Middle East oil due to both competitive pressure from the Middle Eastern suppliers and the raw material diversification policy of oil refineries. In, foreign partners voiced both positive and negative signals that can affect Ukraine s pipeline system capacity utilization volumes. On 1 July, the Czech company Unipetrol operating refineries in the Czech Republic extended long-term contracts with the Russian party to supply oil. However, the most negative news was the signing of a framework agreement between UNIPETROL and the Croatian operator of the Jadranski Naftovod oil-trunk pipelines on cooperation and transportation of oil to the Czech Republic via the Adria oil pipeline, which is an alternative to traditional supplies via the Druzhba and TAL-IKL pipelines. The forced shutdown of most domestic refineries and underutilized capacity of Kremenchuck Refinery - the only one currently operating- prevent any significant increases in pipeline capacity to supply oil to Ukraine s refineries. Oil supplies via pipelines to refineries in Ukraine decreased from 22.9 million tons in 23 to 1.4 million tons in. In, oil transportation volumes to refineries in Ukraine declined by 12.5% or 2.8 thousand tons. The unresolved situation with the replacement of Urals oil in Odesa/Pivdennyi-Kremenchuk Refinery pipeline section directly Financial result of the crude oil transportation segment, UAH million 2 CAGR,% 21% Another factor influencing oil transit volumes through 215 Devaluation of Decrease Increase Other Ukraine was increased competition and redistribution of the hryvnia against in volume in amortization The volume of oil transit through Ukraine in compared the euro and other foreign costs the oil market between the major oil-producing countries exchange differences 136 to 215 decreased by 8.8%. Given the historical features % 19.8% Oil transit through the territory of Ukraine Oil transmission to Ukrainian refineries including sale to other segments within the group Change in segment revenues, UAH million (299) 215 Decrease in volume CAGR,% 32% Devaluation of the hryvnia against the euro % Impact on segment results, UAH million (15) (163) (68) 1 628

70 WHAT WE HAVE ACHIEVED affected the use of the pipeline capacity towards Kremenchuk Refinery in. Under these circumstances, Kremenchuck Refinery management opted for using more expensive railroad to transport the imported oil from Odesa. In March 217, Urals oil was removed from the pipeline section and transported by railroad to Brody in order to refill the second branch of Druzhba oil pipeline. This enabled transportation of Azeri oil to Kremenchuk refinery. Total net income from crude oil transportation services increased in compared to 215 by UAH 159 million or 4.9%, mainly due to the devaluation of the hryvnia against the euro, which resulted in growth of revenue from sales of transport services by UAH 458 million, since the tariff for transit of oil is set in the euro. However, due to the decrease in sales, revenues decreased by UAH 299 million. The financial result of the segment decreased in compared to 215 by.5%. Devaluation of the hryvnia against the euro fully offset the negative impact of the decline in oil transportation volumes and increased depreciation costs due to increased value of fixed assets as a result of revaluation as of 31 December 215. Assets The total value of the crude oil transportation segment increased slightly in compared to 215 (+ 3%). The main change was due to the change in the value of inventories and fixed assets. The segment s ROA decreased insignificantly (-.3%) in compared with 215. The change was mostly caused by the growth in inventories and fixed assets value as a part of total assets. Assets, UAH million % UKRTRANSNAFTA 9% 9% Assets ROA Transportation of oil via trunk pipelines is carried out by Ukrtransnafta - a part of the Naftogaz Group. Ukrtransnafta includes affiliates, such as the Druzhba oil-trunk pipelines, Prydniprovski oil-trunk pipelines, and PIVDENNYI oil-trunk pipelines. In, Ukrtransnafta transited Russian Urals oil through Ukraine and transported domestically produced oil from production sites to refineries. At the beginning of 217, Ukrtransnafta started transporting Azeri Light oil to Kremenchuk refinery. Contract for reviving Odesa Kremenchuk Refinery route in 217 further increases up to 1.9 million tons per year. To obtain approval for the transfer of Urals grade oil, which previously occupied the Odesa Kremenchuk pipeline section, from fixed assets to reserves, and its replacement with Azeri Light oil to fill the specified pipeline section, Ukrtransnafta developed a new standard (Standard of Ukrainian Companies) in. This allowed the company to distinguish between the existing oil in the oil pipeline system and the oil for industrial and technological needs, and oil inventory. Increasing tax and compulsory payments by 64% Ukrtransnafta paid taxes and all compulsory payments totaling UAH 2.2 billion in, which is 64.3% more than in 215 and represents the largest total since the establishment of the company. This significant increase in payments to the state budget is associated with a surcharge on income tax based on performance in 215 (UAH million), a significant increase in this tax payment in (UAH million) based on performance in Q1 Q3, and payment of dividends based on performance in 215 to the amount of UAH 1.2 billion. Net profit of the company for amounted to UAH 1.5 billion, which is 18.5% or UAH million more than the planned target. The efficiency of the company in the reporting period is demonstrated by the 44.5% profitability of operations and EBITDA margin of 57.2%. Return on assets was 6.8% and return on equity 8.4%. Procurement system reform In April, the company joined the ProZorro public procurement system. Ukrtransnafta introduced unified internal regulations that were developed using Naftogaz standards, namely the procedure for procurement of goods, works and services, tender committee regulation, procurement monitoring procedure, local conflict commission regulation, and the procedure for interaction of structural units in the purchase of goods, works and services. A company order of approved guidelines for operation under standard contracts. As a result, 98% of transactions are now concluded through standard contracts. Performance based payment as the basic form of contract payment within 1 calendar days was introduced. This can significantly reduce risks and losses from delays or the poor performance of contractual obligations by unscrupulous contractors, while also preventing corruption risks in payment settlement. Joining the International Association of Oil Transporters (IAOT) In December, Ukrtransnafta became a member of the International Association of Oil Transporters (IAOT) 2. Membership in this organization will promote the priorities of the Ukrainian oil transportation system in Central and Eastern Europe, especially transportation of various grades of oil via Pivdenna Druzhba pipeline. Before joining the association in May and November, Ukrtransnafta participated in IAOT meetings as a guest. Storing process oil in the tank farms of other enterprises The previous management of Ukrtransnafta signed a series of economically unfavorable tank lease agreements with JSC SPC Galicia, JSC Neftekhimik Carpathians, and JSC Ukrtatnafta. In the period , the company used these agreements to store thousand tons of process oil displaced from some broken sections of oil trunk pipelines. The cost of services provided under these contracts to Ukrtransnafta was estimated as many times greater than the market value of oil storage in Ukraine. Court rulings confirmed the Ukrtransnafta position, recognizing agreements with JSC SPC Galicia, JSC Neftekhimik Carpathians, and JSC Ukrtatnafta as illegal and denying claims for the recovery of Ukrtransnafta debts amounting to UAH million. In response to PJSC Ukrtatnafta, JSC SPC Galicia, and JSC Neftekhimik Carpathians claims for the recovery of Ukrtransnafta debts amounting to UAH 1.3 billion for tank storage services, Ukrtransnafta filed a counterclaim against the above contractors for oil return and the collection of fines for overdue obligations amounting to UAH million. As of the date of the report, the litigation regarding the storage of process oil has not finished. Key objectives for Increased transportation volumes to Ukrainian refineries In 217, Ukrtransnafta is planning to increase oil transportation to Ukrainian refineries to 2.7 million tons (compared to 1.4 million tons in ). 2. Modernization of oil trunk pipelines 217 targets provide for overhaul works, construction, reconstruction, technical inspection and maintenance to increase efficiency and ensure reliability of Ukrtransnafta oil pipelines. 3. Approval of economically grounded tariffs The company has developed and forwarded to NEURC a new draft tariff methodology for oil transportation via Ukraine s main pipeline networks. In late, Ukrtatnafta and Ukrtransnafta signed a contract 2 for transportation beginning in 217 to Kremenchuk Refinery IAOT currently unites eight members: MERO ČR, Transneft, Transpetrol, MOL, 138 of at least 1.3 million tons of Azeri Light grade oil per year, with Gomeltransneft Druzhba, KazTransOil, CNPC, CPC Drohobych Boryslav Oriv Ukrainian oil pipelines map Солочин Karpaty existing oil pipelines planned oil pipelines oil refineries Zhulyn Dolyna existing oil pumping stations planned oil pumping stations Brody Kurovychy Novyny Chyzhivka Kamyanohirka Pleshchivka Stepova Avgustivka Mykolayivska Hnidyntsi Pivdennyi Holovashivka Hlynsko- Rozbyshevska Kremenchuk Pereshchepyne Chykalivka Proletarska Shyroke Andriivka Snihurivka Regardless of the overall crisis in the oil refining industry and lower demand for oil transportation services, Ukrtransnafta can boast its performance. In, we managed to resume transportation through Odesa-Kremenchuk pipeline section, which had been out of service for five years. We also filled the first branch of Mozyr-Brody oil trunk pipeline, which had been mothballed for three years. Ukrtransnafta s last year performance looks encouraging in terms of oil transportation revival in Ukraine. Ukrtransnafta CEO Mykola Havrylenko Lysychansk Luhanska Velykotsk Novoaidar

71 WHAT WE HAVE ACHIEVED Regulatory issues affecting Ukrtransnafta s operation and possible solutions 1. Abolition of rent payment for oil transportation via oil-trunk pipelines The Tax Code of Ukraine fixed rental rates for oil transportation via trunk pipelines at the amount of USD.56 per one ton. Additionally, this rent is not actually associated with the utilization of underground of other natural resources, and does not depend on the value of the property used in transportation. Therefore, it is problematic to determine an economically grounded rent payment. Lack of correlation between rent size and the taxpayer s performance is a key drawback. The current procedure requires rent payment even when the entity is operating at a loss. In its present form, rent for oil transportation is a tax that is included in the cost of oil transportation services. As such, it influences Ukrtransnafta financial and business operations. As a result, the cost of oil transportation services is excessively high relative to the economic realities of the current technological process and production features of the oiltrunk pipeline system. Applying rent payment reduces the competitiveness of the Ukrtransnafta pipeline system compared with companies offering alternative routes and ways of oil transportation (e.g. by railway transport) that do not have taxation mechanisms similar to rent. It should be noted that in international practice, especially in European countries, rent payments for pipeline services are not applied. In, Ukrtransnafta prepared draft amendments to the Tax Code of Ukraine on abolishing rent for oil transportation via oil-trunk pipelines and agreed it with Naftogaz. This draft is under consideration by the Ministry of Economic Development and Trade of Ukraine. 2. Prohibition of alienation and lease of Ukrtransnafta fixed assets Current legislation deprives Ukrtransnafta of the possibility of effectively using fixed assets that are not involved in the oil transportation process. Article 7 of the Law of Ukraine On Pipeline Transport prohibits the alienation of assets of enterprises engaged in trunk pipeline transportation operations, the transfer of assets between balance sheet accounts, concession, rent, lease, mortgage, etc. Alienation of fixed assets that are not involved in oil transportation is permitted only with the approval of the Cabinet of Ministers. However, this authorization is a complex and lengthy procedure. These legal constraints make it practically impossible to improve the operation of non-core assets, including hotels, catering, meat products, leather goods, and tailoring enterprises. The company bears the cost of maintaining these facilities while having no alternative ways of using these properties. Free non-core asset management would help attract investors, develop additional business, and consequently have a positive impact on the cost-effectiveness of Ukrtransnafta operations. 3. Failure to implement capital investment plan The prohibition of all types of capital investments as per the Cabinet of Ministers of Ukraine Regulation of 3 December 212 (No.899) is currently blocking some of the key activities of public sector enterprises, namely ensuring the reliable, safe and efficient use of state assets placed at their disposal. Over the last seven years, the final version of the company s financial plan was approved only twice, and each time approval took place in the second half of the year. This lead to poor performance on investment plans. In, the total volume of Ukrtransnafta capital investments amounted to UAH million, which is 28% of the target sum. The main investment target in the reporting period was the overhaul repair of line sections of the Brody- State Border pipeline, which is a part of the main oil transit route across Ukraine to the EU, with investments amounting to UAH million. According to the Corporate Governance Action Plan, the company s financial plan shall be approved by the supervisory board. 4. Strengthening penalties for damage to oil pipelines Abusers illegally interfering in the operation of oil-trunk pipelines for the purpose of stealing oil cause damage to state property and significant losses to Ukrtransnafta. Organized crime groups have years of experience in this criminal field, including well-functioning sales and agent networks, excellent technical equipment, and their own vehicles specially reequipped for oil transportation. On 17 September 215 at the initiative of Ukrtransnafta, a group of MPs registered draft law No On amendments to the Criminal Code of Ukraine regarding strengthening responsibilities for damage to facilities of trunk or industrial oil, gas, condensate and oil product pipelines. This draft law proposes punishment with imprisonment for a term of three to eight years for damage to or destruction of pipelines and bypassing pipelines and their technologically related facilities, if these actions have led to the disruption of pipelines or created a danger to life. Earlier punishment for this offense was a fine of one hundred to a thousand times the untaxed minimum income. The same actions committed repeatedly or by a group of persons by prior collusion are punishable by imprisonment of five to ten years. The harshest punishment of ten to twelve years in prison applies if the actions envisaged by parts one or two of this article have caused deaths or led to accidents, fires, significant pollution or other serious consequences. On 26 November 215, draft law No was adopted as a basis (Regulation No.3129/P) and submitted to the Law Enforcement Legislative Support Committee. Adoption of the draft law has currently been postponed for an indefinite term

72 WHAT WE HAVE ACHIEVED ANALYSIS OF NATURAL GAS SALE AND SUPPLY AND OIL PRODUCTS PROCESSING (DOWNSTREAM) NATURAL GAS SALE AND SUPPLY Breakdown by consumers The Regulation of the Cabinet Ministers of Ukraine 21 imposed special public service obligations (PSO) on Naftogaz. They envisage procuring domestic natural gas from Ukrgazvydobuvannya and selling natural gas to suppliers to households, religious organizations, and DHCs to 21 Regulation of the CMU #758 dated On approval of regulations on imposing special obligations on natural gas market participants to meet public interests in functioning of natural gas market (the transitional period relations) (as amended) for the period from 1 October 215 to 31 March 217 (inclusive) Sales of natural gas to perform special obligations (PSO) generate heat for households, religious organizations. Starting from 23 December, they also included an obligation to supply gas to DHCs to generate heat for the public sector institutions, as well as supplying natural gas to JSC Odesa Port Plant from 11 October until 31 December. For consumers not covered by the said regulation, imported natural gas is sold at prices determined independently by natural gas market participants who sell the gas to such consumers, including Naftogaz. Sales of natural gas at unregulated prices to other customers Regional gas distribution companies to resell gas to households DHCs to households DHCs to public sector 22 Odesa Port Plant 23 Industrial consumers Industrial and technological needs Regional gas distribution companies to resell to other consumers 22 Since quarter IV of included in PSO 23 Since quarter IV of included in PSO Main results Gas sales, mcm % CAGR -14.9% including sales to other segments within the group Sales to consumers not covered by PSO decreased by 27.7% in compared to 215. The main decrease occurred in the category of industrial and other consumers accounting for 17.4% of total changes. In part, the decrease in gas sales to industrial customers and gas consumed for technological needs of gas distribution companies was due to the overall reduction in natural gas consumption in Ukraine, and partly because a change of supplier by such companies and, correspondingly, Naftogaz market share decline. The group share in total gas sales in Ukraine in, including sales under the PSO, was nearly 7%. In the unregulated segment of industrial consumers (excl. companies of the group), Naftogaz share amounted to approximately 1% of the total volumes sold. Total sales of natural gas to consumers in Ukraine decreased by 3.1% mainly due to the decrease in sales to industrial Naftogaz share in gas supply in Ukraine enterprises in compared to 215. Sales of natural gas to consumers under PSO increased by 5.9% in compared to 215. The main sales gain occurred in gas distribution companies to resell gas to households increase in this category is 3.5% of the total growth in sales under PSO. Gas consumption by households increased due to the colder winter season of 215/ compared with the previous year. 74% 69% 7% In addition, in Q4, this category included gas sold to DHCs to produce heat for the public sector, which increased total sales under special obligations by 2%. Supply to Odesa Port Plant under PSO added 1% to total increase

73 WHAT WE HAVE ACHIEVED Gas supplied by Naftogaz, per consumer category, mcm /215 /215 CAGR Gas sales volume (72) -3.1% -14.9% including gas sales to group entities % 16.4% Sales under PSO % 2.8% Regional gas distribution companies to resell gas to households % 2.5% DHCs to households (13) -1.8% -9.7% DHCs to public sector Weighted average gas price by category, UAH/tcm, excluding VAT 215 Sale pursuant to special obligations (PSO) Regional gas distribution companies to resell gas to households DHCs to households DHCs to public sector Odesa Port Plant Sales at unregulated prices to other customers Regional gas distribution companies to resell to other consumers DHCs to other consumers Industrial and other consumers including gas sales to group entities for technological and own needs Odesa Port Plant Sales at unregulated prices to other customers Regional gas distribution companies to resell to other consumers (1 78) -27.7% -14.9% (229) -69.2% -44.5% DHCs to other consumers (47) -34.8% -29.2% Industrial and other consumers, including sales of gas to group companies for technological needs and own needs) Segment revenue, UAH million (1 72) -22.9% -27.7% 49.2% including sales to other segments within the group CAGR 36.9% Revenue from sales to PSO customers in increased almost 2.6 times and amounted to UAH million. This change resulted from the increase in selling price. To continue reform of the natural gas market and bring natural gas sales prices to parity with imports, the CMU 24 increased natural gas prices from 1 May. From 1 May to 31 March 217, Naftogaz supplied natural gas to DHCs to generate heat for households at a regulated price of UAH per tcm. DHCs to religious organizations received energy at a regulated price of UAH per tcm, natural gas to household consumers at UAH per tcm, natural gas to religious organizations (except the volume used for production and commercial activities) at UAH per tcm. Accordingly, the average selling price of gas to consumers under PSO terms increased 2.5 times in. At the same time, revenue from sales to customers that do not fall under the PSO terms decreased by 3% and amounted to UAH million in compared to 215, including gas for the industrial and technological needs of Ukrtransgaz. Changes in revenues reflect the trend of decreasing sales. The average selling price of natural gas to other consumers in remained almost unchanged decreasing by 3% compared to 215. Revenue from sales of natural gas, UAH million / 215 Revenue % 36.9% including gas sales to group entities % 31.8% Sale pursuant to special obligations (PSO) % 138.5% Regional gas distribution companies to resell gas to households / 215 CAGR % 16.5% DHCs to households % 88.% DHCs to public sector Odesa Port Plant Sales at unregulated prices to other customers (11 772) -3.9% -16.9% Regional gas distribution companies to resell to other consumers (1 77) -76.4% -52.% DHCs to other consumers (2 831) -37.3% -8.2% Industrial and other consumers (including gas sales to group entities for technological and own needs) The natural gas sales and supply segment loss decreased by 93.4% in compared to 215, resulting from the continued implementation of natural gas market reform to bring selling prices into line with import parity levels. At the same time, the decrease in sales of natural gas to consumers in Ukraine and increase in weighted average cost of gas due to UAH devaluation had a negative impact on segment results (7 617) -25.7% -13.8% national currency and fluctuations in UAH exchange rate in the currency market were less pronounced in than in 215, when the fall in the UAH exchange rate against the USD was 48% and 37% 25, against the euro. The decrease in losses from conversion differences had a positive impact on the segment result of UAH million. At the same time, sales of natural gas to DHCs for households remain loss making. The loss before tax was formed in this category mostly because of non-operational costs (financial costs and foreign exchange loss). Due to the seasonality of natural gas sales and the need to purchase it during the season of low gas sales, the group finances the purchase of imported natural gas with borrowed funds received from foreign financial institutions. As at the end of, the foreign currency portion of the group loan portfolio corresponded to UAH million (61% of the group loan portfolio). The devaluation of the national currency in against 24 CMU Regulation #315 dated On Amendments to the Regulation of the the USD by 8% and against the euro by 5% had a negative impact 25 Calculated as the ratio of UAH exchange rate according to NBU data at the 144 Cabinet of Ministers of Ukraine #875 dated 1 October 215 on the overall segment result. At the same time, the fall of the beginning and end of

74 WHAT WE HAVE ACHIEVED Segment results, UAH million 215 /215 Settlements for gas supplied by Naftogaz to all consumer categories Revenue from sales of natural gas Gross trade accounts receivable Natural gas sale and supply (52 257) (3 472) -93.4% Sales to consumers under PSO (47 478) (1 142) -97.6% Regional gas distribution companies to resell gas to households (11 239) % 35% 2% (21 57) (17 414) 8 43 DHCs to households (36 239) (3 779) -89.6% DHCs to public sector % 97% Odesa Port Plant (1 31) Sales to consumers not under PSO (4 779) (2 33) -51.2% Regional gas distribution companies to resell to other consumers (74) (37) -5.% % of settlements, including % of settlements by subsidies less than one month less than 12 months more than 12 months Provision for doubtful debts DHCs to other consumers (2 452) (119) -95.1% Industrial and other consumers (including gas sales to group entities for technological and their own needs): (2 253) (2 174) -3,5% Settlements for gas supplied by Naftogaz to gas distribution companies to resell gas to households Revenue from sales of natural gas Gross trade accounts receivable (176) (1) Impact on segment results, UAH million (3 472) Assets The total value of assets in the natural gas sale and supply segment increased by 97% in compared to 215. More than half of this addition, UAH million, is an increase in trade accounts receivable compared to 215. Nearly 3% of the addition was due to the increased value of gas in compared to 215, related mainly to growth in purchase prices for gas produced by Ukrgazvydobuvannya and change in the ratio of imported gas to domestically produced gas in the reserve (see Working Capital section). 69% % 95% 2 34 % of settlements, including % of settlements by subsidies 35% (3472) less than one month less than 12 months 591 more than 12 months Provision for doubtful debts (52 257) (9 334) 215 Decrease in sales volume Assets, UAH million % Increase in selling price -135% UAH devaluation Other Assets ROA -5% Naftogaz, as a participant of the natural gas market with public service obligations, has the right to compensation for economically justified costs, reduced by income received in performing the special obligations and subject to acceptable profit levels 26. It is assumed that the procedure for calculating such compensation must be approved by the Cabinet of Ministers of Ukraine. At present, neither the list of economically justified costs nor the determination of acceptable profit levels has been approved by the government. No adjustments for possible compensation are included in the actual results of. In the level of settlements for natural gas was 76% in general for all categories of consumers, that is 21% less than the level of settlements in 215 (the level of settlements was 97% in 215 and 94% in 214). The deterioration of payment discipline, together with the increase in prices, has led to increase in the group s accounts receivable on natural gas sales segment by 1.8 times. Settlements for gas supplied by Naftogaz to DHCs to produce heat for households Revenue from sales of natural gas Gross trade accounts receivable % 69% 89% % of settlements, including % of settlements by subsidies 36% (3472) (3 85) less than one month less than 12 months more than 12 months Provision for doubtful debts (3 264) Part 7, Article 11, Law of Ukraine On Gas Market

75 WHAT WE HAVE ACHIEVED Settlements for gas supplied by Naftogaz for other consumers Revenue from sales of natural gas Gross trade accounts receivable 548 (3472) Settlements for gas supplied by Naftogaz to DHCs to produce heat for public sector and other customers Revenue from sales of natural gas Gross trade accounts receivable % 4% % Gas consumption in the category decreased by 35%, while the gas debt increased, which indicates weaker payment discipline. (3472) % of settlements, including % of settlements by subsidies (6 464) less than one month less than 12 months more than 12 months Provision for doubtful debts Settlements for gas supplied by Naftogaz to industrial and other consumers Revenue from sales of natural gas Gross trade accounts receivable % 1% % of settlements, including % of settlements by subsidies (3472) (1 25) Gas is partly paid in advance, which makes the price lower. less than one month less than 12 months more than 12 months Provision for doubtful debts Settlements for gas supplied by Naftogaz to Odesa Port Plant Revenue from sales of natural gas Gross trade accounts receivable % % 1% % of settlements, including % of settlements by subsidies % of settlements, including less than one month less than 12 months (22) (1 375) less than one month less than 12 months more than 12 months Provision for doubtful debts more than 12 months Provision for doubtful debts (115) (5 871) (8 64) A provision for the whole debt was made, as Naftogaz has no assurance about the repayment. In November, a law 27 was adopted which sets up the procedure for debt settlement for heat-supplying and heatgenerating companies as well as centralized water supply and disposal utilities for consumed energy 28. The law provides for, among other things, the writing-off of liabilities of enterprises and entities of fines, penalties, forfeits for late payment of debts for gas consumed, as well as debt restructuring for consumed natural gas. The group expects additional losses in 217 and in subsequent years related to the settlement procedure in the form of writing-off a certain amount of accounts receivable, and loss of rights to collect fines, penalties, and forfeits for late payment of debts for gas consumed. At present, the amount of additional losses cannot be accurately estimated. The segment s ROA increased by 13% in compared with 215. The increase arose from the significant improvement in the segment s financial results due to bringing selling prices into line with import parity levels. At the same time, the growth in assets value caused by the increase in accounts receivable due to increased prices and worsening of payment discipline. CRUDE OIL AND GAS CONDENSATE PROCESSING AND TRADE IN PETROLEUM PRODUCTS Oil and gas processing Compressed natural gas production Petroleum products production Ammonia production* LPG production (3472) See Section Significant Regulatory Changes Main results * Ukrnafta produces ammonia from domestically produced inputs on leased equipment and fixed assets The overall change in output of oil products and LPG in compared to 215 is related to the inclusion of Ukrnafta results in the analysis. If Ukrnafta figures were included from 27 The Law of Ukraine 173 On Measures on settlement of debt of the heatsupplying and heat-generating organizations and the companies of centralized water supply and water disposal for the consumed energy carriers #173 dated 3 November 1 January 215, the change in output would have been -1%. Total production of petroleum products and LPG increased in compared to 215 by 2.9%. The increase in was due to increases in production volumes of petroleum products and LPG by 17 thousand t and 24 thousand t, respectively. Ukrnafta has the equipment and facilities for the production of ammonia; the change in output in compared to 215 is 15 thousand t. Production of petroleum products and LPG by Naftogaz 29 group Petroleum products LPG Compressed gas % 8.5% 3.5% Trade in petroleum products and LPG by Naftogaz group, thousand t Petroleum products LPG Compressed gas % 22,1% 3.3% CAGR,% 4.7% 29 The Naftogaz regained control over Ukrnafta on 22 July 215 and included its performance into the group s consolidated indicators, which changed the production of oil products and LPG CAGR,% 6.8%

76 WHAT WE HAVE ACHIEVED Sales of petroleum products and LPG increased in compared to 215 by 7.3%. The main increase was in the category of LPG, which increased in by 22.2% compared to 215. Naftogaz group revenue from sale Impact on revenue, UAH million of petroleum products and LPG, UAH million Petroleum products LPG Compressed gas Other revenues 3 including sales to other segments 65 within the group % 184.4% Revenues of the group from the sales of petroleum products and LPG increased in by 138% mainly due to revenue from the sale of petroleum products. If Ukrnafta performance was included for the full 215 calendar year, the decrease in income from the sale of petroleum products and LPG would have been 2%. The financial result of the crude oil and gas condensate processing segment and trade in petroleum products decreased in by 17% compared to 215. The increase in output and rising prices have had a positive impact on the financial result of the segment of UAH million compared to 215 (the change in the volume is due to the inclusion of Ukrnafta performance since July 215). At the same time, the growth in cost of inputs for petroleum products negatively affected the result of the segment in, reducing it by UAH million due to an increase in the inputs both in volume and in price. In, Ukrnafta accrued an allowance for doubtful accounts receivable for advances paid to suppliers and included this into operating expenses for 215. This amounted to UAH million % CAGR,% 69 74% Other revenues includes revenue from the sale of ammonia of UAH million. Impact on segment results, UAH million Increase in volume 379 (6 537) Increase in price (1 983) Increase in the Increase in cost of materials the provision and cost for doubtful of purchased receivables f petroleum or advances products prepaid 1 72 (994) 1 72 Other delivery date for most of the advances is 218. The majority of prepayments are expected to be settled by the suppliers of Ukrnafta by 31 December 218. The contractual delivery date for most of the advances is 218. Assets Petroleum products LPG Compressed gas Change in volume Change in price The total value of assets in crude oil and gas condensate processing and trade in petroleum products segment increased in compared to 215 by 18.5%. Almost 8% of this growth is due to the increase in value of fixed assets. In addition, about 25% of the change relates to the increase in stocks of petroleum products (as finished goods) in compared to 215. The segment s ROA decreased by 15% in compared with 215. ROA was affected by the increase in fixed assets value as a part of total assets and the decrease in the segment s financial results due to the growth in cost of production inputs. Assets, UAH million % (183) 25% (21) Assets ROA 1% ANALYSIS OF OTHER ACTIVITIES IMPLEMENTATION OF PROJECTS UNDER THE GENERAL AGREEMENT BETWEEN NAFTOGAZ AND CHINA DEVELOPMENT BANK On 25 December 212, Naftogaz and China Development Bank (CDB) signed a general loan agreement to finance projects in the amount of up to USD 3.65 billion aimed towards the substitution of natural gas for domestically produced coal. The loan has sovereign state guarantees. No funds have been drawn so far. Initially, the parties agreed to finance construction of coal gasification facilities and modernization of the power stations. In 215, the parties backed by the Ministry of Energy of Ukraine and the Ministry of Commerce of China have preliminarily agreed on extension of scope of the credit facility to include procurement of drilling rigs and energy modernization projects for households. Accordingly, in late 215, Naftogaz submitted four projects to the Ministry of Economics for review and inclusion into the state register of investment proposals. Obtaining this official status from the Ministry of Economics as well as delivery of the notice of support of the projects from the Ministries of Energy and Finance to CDB was then pre-requisite for proceeding with further application to CDB. As of the date of this report, the Ministries have not formalized their views on the submitted projects. In, the initial credit facility deadlines were extended by the parties for one year. Subject to new deadlines the projects should be submitted for CDB review before 25 June, 217. IMPLEMENTATION OF INTERNATIONAL HYDROCARBONS EXPLORATION AND PRODUCTION PROJECTS Zakordonnaftogaz activities include implementation of international hydrocarbons exploration and production projects outside Ukraine. Today this company is implementing oil and gas exploration and production projects on the concession blocks South Wadi El Mahareeth and Wadi El Mahareeth in the Arab Republic of Egypt. In, 2D field seismic works were completed, the data was processed, and the company started interpreting findings to ensure fulfillment of the company s obligations for the first three-year exploration phase under the terms of the concession agreements for oil exploration and production in Egypt. TRANSPORTATION OF HYDROCARBON GASES Ukrspetstransgaz is engaged in transportation of liquefied hydrocarbon gases using their own rail tank cars. The company provides services to Ukrnafta s gas refineries, to Ukrgazvydobuvannya s gas and gas condensate processing units and a number of external companies. In, the company used its own railway cars to transport thousand tons of liquefied petroleum gas, which is 27% less than in 215. This drop was due to the decrease in domestic production in Ukraine and increased rail tariffs, which led to the shift to road transport. RESEARCH AND DEVELOPMENT and its scientific support, exploration of geological structure and evaluation of hydrocarbon potential, and development of regulations to ensure production processes in the energy and fuel complex. During, Naukanaftogaz carried out exploration and research, design and development works totaling UAH 38 million. In, Naukanaftogaz performed works for Naftogaz group companies and external counterparties. CAPITAL total value of Naftogaz group capital investments increased in compared to 215 by 48.6% (average annual growth was 62.5% for 214-). If Ukrnafta indicators were included in the consolidated data from 1 January 215, the increase in capital investments in would have been 36.2%. Gas production remains the priority for capital investments Capital investments, UAH million of the group. In, more than 5% of total value of capital investments was directed into this segment. The amount of capital investments in the gas production segment increased by 34% in compared to 215 due to increased volumes of exploration and development drilling. During, 198 m was drilled, including exploration drilling of 15 m. In, investments in drilling amounted to UAH million, exceeding 215 by 27.3%. The natural gas transportation and distribution segment is the second by the volume of capital investments. Capital investments in this segment increased in by 89.8% compared to 215 due to the construction and repair of a number of important facilities (repair of Urengoy - Pomary - Uzhhorod main gas pipeline, reconstruction of Shebelynka- Sloviansk gas pipeline, Mariivka - Kherson gas pipeline, automatic control systems of some gas compressor stations). The significant growth of capital investments in became possible due to the increase in the investment component of the natural gas transportation tariff. With the regain of control over Ukrnafta, the value of capital investments in in the oil and gas condensate production segment increased and amounted to over UAH 7 million. If Ukrnafta were included in the consolidated results starting from 1 January 215, additional investments in the segment would amount to more than 48% Naukanaftogaz carries out research and development for Capital investments in other segments in were over UAH oil and gas industry enterprises and other customers aimed The majority of prepayments are expected to be settled by the 1 million and are almost 1% lower than in 215. at expanding their resources, design and improvement of suppliers of Ukrnafta by 31 December 218. The contractual mining technology, intensification of hydrocarbons production % CAGR 62.5%

77 WHAT WE HAVE ACHIEVED PAYMENT OF TAXES TO THE BUDGET In, Naftogaz became a net contributor to the state budget from a net recipient in 215. Total amount of taxes paid by the entities of Naftogaz group increased by almost 54% in compared to 215. Ukrgazvydobuvannya and Naftogaz paid the largest shares of the total group taxes, 53.3% and 22.1%, respectively. VAT was the largest tax by volumes paid. Its amount increased in by UAH million or by 69.3% resulting from VAT taxation of natural gas transit beginning 1 January and an increase in the natural gas selling price to Ukrainian consumers. In addition, in rental payments for gas production increased by UAH 1 12 million or by 75.4%, due to increased natural gas selling prices for Ukrgazvydobuvannya starting from 1 May. Increase in income tax payments in by UAH million or 775.3% is explained by the increase in gas selling prices for Ukrgazvydobuvannya and payment by Ukrtransgaz of income tax Payment of taxes by type, UAH million SUBSIDIES In total, UAH 47.8 billion were provided in state budget estimates for 31 for granting privileges and housing subsidies to the population to pay for electricity, natural gas, district heating, water supply and wastewater collection and treatment, housing rent (maintenance of buildings and housing areas), removal of domestic waste and liquid sewage. However, the actual funding need of benefits and subsidies to the consumers in comprised UAH billion (of which subsidies comprised UAH billion and benefits comprised UAH 7.33 billion). The actual expenses for subsidies exceeded the planned budgetary expenditures for by 27.2%. Overall, in the companies of Naftogaz group formalized general protocol decisions for consumed natural gas with regard to privileges and subsidies for UAH 4.1 billion, of which UAH 33.4 billion was received in funds. The average percentage for 215 in installments. Payments for other taxes decreased, mainly due to the fact that in the rental payment for pipeline transit of natural gas through the territory of Ukraine was cancelled, compensated in part by an increase in rental payments for oil production. /215, % VAT 69.3% Subsoil royalty charge for gas 75.4% Income tax 775.3% Other -41.7% Subsoil royalty charge for oil 59.4% Security contributions 1.6% Subsoil royalty charge for condensate -23.4% TOTAL 55,1% Regional statistics on benefits and subsidies Amount of general protocol decisions executed, UAH million Actual level of funding in % ZAKARPATTYA 3135 LVIV % 73% 1995 VOLYN IVANO-FRANKIVSK 231 TERNOPIL 83% Payment of taxes to the budget, UAH million RIVNE 86% 71% 1793 KHMELNYTSKY % CHERNIVTSI 2 21 ZHYTOMYR % VINNYTSIA 72% 1% 9 1% CITY OF KYIV 1428 KYIV CHERKASSY 97% 89% 836 8% POLTAVA SUMY 96% % 615 1% ODESA % CHERNIHIV 83% 991 KIROVOHRAD MYKOLAYIV % DNIPROPETROVSK KHERSON % % 1475 ZAPORIZHIA KHARKIV 78% CAGR 1% % 1936 DONETSK 32 Settlements of local budgets with the companies of NJSC Naftogaz Ukraine for consumed natural gas in terms of privileges and subsidies to the households in. 88% % LUHANSK of settlements for subsidies in was payment for gas in categories Regional almost 83.2%. Subsidies of UAH 6.7 billion, gas distribution companies reselling gas to underfunded in, were carried forward households and Heat-producing entities to and financed by the government in the the households would have been 77% and 31 The Law of Ukraine On the State Budget of Ukraine first quarter of 217. If the subsidies were 74%, respectively (see Section Natural gas for (as amended). 152 funded in in full, the percentage of sale and supply ). 153 LOANS The total amount of group loans decreased to UAH.9 billion or by 1.3% for the period 215- and comprised UAH 7.8 billion. Total change of loans in was as follows: Total loans, UAH million Change in loans, UAH million (18 32) (31 18) In, there was general reduction in average maturity of the loan portfolio: the portion of long-term loans decreased by UAH million or by 33.7%, and the portion of short-term loans increased to UAH 1 85 million or by 29.2%. Average maturity period in was 172 days (185 in 215) for short-term loans and 3.4 years (3.9 in 215) for long-term loans. With regard to currencies, UAH portion of loans increased by UAH 2 98 million or by 11.9%, while the USD portion decreased by UAH 4 36 million or by 8.5% in compared to 215. In December of, Naftogaz and the Ministry of Finance of Ukraine on the one hand, and the International Bank for Reconstruction and Development (IBRD) and two commercial non-resident banks, on the other hand, signed a loan documentation package to raise financing of Euro 478 million (equivalent to USD 5 million) against a guarantee from the World Bank. Full loading of this credit line, beginning from the first quarter of 217, will increase the share of loans denominated in foreign currency by more than 5% (excluding other changes). -1,3% Proceeds Repayment FOREX loss Change in loan structure by currency, UAH million USD UAH EUR Average interest rates in compared to 215 decreased for all currencies. The average rate on loans in UAH decreased by 1.3% due to the reduction in the NBU discount rate in. Interest rates on loans in USD declined by 1.4% due to the increased share of cheaper international financing in the group s portfolio. Average interest rates, % USD UAH EUR 15, 12, 9, 7, The structure of loans by source is roughly equal between private and public banks. In the amount of loans from state-owned banks increased by 6.6%. The portion of loans from private banks decreased by 9.2%, mostly due to the repayment of a loan to Gazprombank that was partly compensated for by an increased loan from the EBRD ,3 11,5 Loan breakdown by source, % State-owned banks Private banks ,

78 WHAT WE HAVE ACHIEVED WORKING CAPITAL One of the most important tasks of the group s management is to ensure adequate working capital. Working capital in increased by 88.9% compared to 215 and amounted to UAH million, which was possible through improved planning. A significant rise in the value of inventories in compared to 215 took place mainly due to the increased value of natural gas. This increase was due to an increase in the portion of remaining inventories of imported gas (in absolute figures, remaining inventories of imported natural gas increased in by more than 2 bcm compared to 215). However, total remaining inventories of active gas in UGS facilities decreased by almost 1.4 bcm. Turnover of inventories improved significantly in compared to 215, mainly due to optimization of the quantity of natural gas inventories in UGS facilities. The growth of accounts receivable was due to an increase in current accounts receivable for natural gas (see Section NATURAL GAS SALE AND SUPPLY ). Increase in the turnover of accounts receivable in compared to 215 reflects also growth trends in selling prices. Turnover by type of working capital in days Inventories 33 Accounts receivable 34 Accounts payable 35 Prepayments and other current assets increased mainly due to increased prepayments for natural gas imports delivered in the first quarter of 217. Accounts payable decreased by 15% in and amounted to UAH million as of 31 December. This decrease occurred primarily due to a decrease in obligations under the joint activities agreements of Ukrnafta resulting from a decline in activity compared to 215. Turnover of accounts payable did not change significantly in compared to 215. Advances received and other short-term liabilities increased by 3% and amounted to UAH million as of 31 December. The lion s share of this growth is related to the accumulation of liabilities under rental payments, which increased by UAH million in, and almost equally divided between Ukrgazvydobuvannya and Ukrnafta. Ukrgazvydobuvannya has no rental payment overdue, with the overall amount of liabilities at the end of fully repaid in the first quarter of 217. At the same time, Ukrnafta continued to accumulate debt for rental payment, which comes out of and the preceding years. In addition, VAT liabilities of group entities increased. They were timely settled in January of 217. FINANCIAL STATEMENTS Calculated as the average stock divided by total cost of sales 34 Calculated as the average accounts receivable before deducting the allowances for doubtful debts divided by revenue from the sales 35 Calculated as the average accounts payable divided by value of purchases Structure of working capital, UAH million /215, % 215/214, % Inventories 47% 182% Accounts receivable 48% 114% Prepayments and other current assets 24% -28% Accounts payable -15% 38% (16 234) (19 12) (13 872) Advances received and other short-term liabilities 3% 111% (31 615) (24 312) (11 55) Total working capital 89% 113%