PAO NOVATEK : 2020 Annual Review

Think

Green.

Think

Natural Gas.

Annual Report 2020

Annual Report 2020

Contents

Letter to Shareholders................................................	4
Strategic Priorities......................................................	8
Environmental and Climate Change Targets...........	9
Key Events and Achievements..................................	10
Business Model............................................................	12
Key Indicators..............................................................	14
Hydrocarbon Reserves...............................................	16
Yamal LNG....................................................................	18
Arctic LNG 2................................................................	20
Geological Exploration and Production..................	22
Processing of GasCondensate...............................	24
Natural Gas Sales......................................................	25
LNG Sales....................................................................	26
Liquid Hydrocarbons Sales.......................................	28
Environmental and Social Responsibility................	30
Corporate Governance.............................................	32
About the Company	34
Review of Operating Results	35
Licenses ......................................................................	35
Hydrocarbon Reserves..............................................	35
Geological Exploration .............................................	37
Field Development.....................................................	38
Hydrocarbon Production..........................................	39
LNG Projects................................................................	41
Processing of Gas Condensate..............................	43
Natural Gas Sales......................................................	44
Liquid Hydrocarbons Sales ......................................	47
Environmental and Social Responsibility	49
Environmental Protection.........................................	49
Industrial Safety and Occupational Health............	51
Human Resources......................................................	54
Social Policy and Charity..........................................	57

Management and Corporate Governance	62
Corporate Governance System..............................	62
General Meeting of Shareholders...........................	62
Board of Directors ....................................................	63
Board activities during the 2020 corporate
year..............................................................................	63
Board Committees ...................................................	64
Management Board...................................................	66
Remuneration to Members of the Board
of Directors and Management Board.....................	67
Internal Control and Audit........................................	68
Share Capital..............................................................	70
Dividends .....................................................................	71
Information Transparency........................................	72
Additional Information	74
Risk Management System........................................	74
Risk Insurance.............................................................	87
Information on Members of NOVATEK's
Board of Directors.....................................................	88
Information on Members of NOVATEK's
Management Board...................................................	90
Report on major, and interested-party
transactions that the Company did in the
reporting year ...........................................................	95
Corporate Governance Code Compliance
Report .........................................................................	95
Forward-looking Statements ...............................	120
Terms and Abbreviations.........................................	121
Conversion Factors...................................................	121
IFRS Consolidated Financial Statements
for 2020......................................................................	122
Management's Discussion and Analysis
of Financial Condition and Results
of Operations for 2020............................................	196
Contact Information...............................................	246

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THINK GREEN. THINK NATURAL GAS.

Annual Report 2020

Letter to Shareholders

NOVATEK's Corporate Strategy considers the increasing role of LNG in the future global energy mix by replacing other types of fossil fuels (coal, fuel oil and diesel), thus reducing greenhouse gas emissions and harmful air pollutants. Natural gas will play a fundamental role in decarbonizing the global energy mix, as a low-carbon energy alternative to traditional fossil fuels in the energy transition, while managing the intermittency of the energy supply from renewables.

Alexander	Leonid	Mark
NATALENKO	MIKHELSON	GYETVAY
Chairman	Chairman of the	Deputy
of the Board	Management	Chairman of the
of Directors	Board	Management
		Board

32%

Overall construction progress on Arctic LNG 2

at the end of 2020

Dear Shareholders,

"THINK GREEN. THINK NATURAL GAS." is our theme for 2020 and beyond, as we formally established and adopted our Environmental and Climate Change targets up to 2030. As the defining topic of this generation, the climate change agenda is at the forefront of policy decisions globally as world economies transition from traditional sources of energy to some combination of natural gas, renewables and hydrogen to meet the increasing demands of electrification and decarbonization.

NOVATEK's Corporate Strategy considers the increasing role of LNG in the future global energy mix by replacing other types of fossil fuels (coal, fuel oil and diesel), thus reducing greenhouse gas emissions and harmful air pollutants. Natural gas will play a fundamental role in decarbonizing the global energy mix, as a low-carbon energy alternative to traditional fossil fuels in the energy transition, while managing the intermittency of the energy supply from renewables.

Our LNG is already one of the greenest in the world and we are developing operational solutions to further reduce our CO2 emissions. Our present level of greenhouse gas emissions per barrel of production is already among the lowest globally due to the use of state-of-the-art technologies and a high share of natural gas in the Company's hydrocarbon production. As a confirmation of our commitment to "THINK GREEN. THINK NATURAL GAS." we approved in August 2020 our climate change targets, including atmospheric emissions reduction, associated petroleum gas utilization and waste utilization and disposal. We set ambitious targets that will meaningfully contribute to reducing greenhouse gas emissions, as well providing affordable, secure and sustainable natural gas to our customers for many decades.

Unlike most of our competitors, we control the full LNG value chain - from our LNG Construction facility in The Murmansk Region to our upstream production at our fields, to our liquefaction processing and finally to end-customer delivery using our dedicated Arc7 ice-class tanker fleet.

To achieve a goal to continually reduce methane emissions within our business activities, increase reporting transparency and implement more stringent regulations on methane emissions, NOVATEK became one of 23 signatories to the Methane Guiding Principles Initiative in October 2020. We recently submitted our first workplan under this important initiative for the year 2021.

Our flagship Yamal LNG project continued to perform above its operational nameplate capacity and to expand its geography of LNG deliveries. In 2020, the project loaded and dispatched 255 cargos or 18.6 million tons of LNG.

During the past year, we made great progress with our second large-scale LNG project - Arctic LNG 2. We are presently on schedule with all construction activities at both the Utrenneye field and the Utrenniy Terminal. Our Arctic LNG 2 is being realized despite massive delays and cancellations of other global

Our LNG is one of the greenest in the world and we are developing operational solutions to further reduce our CO2 emissions. Our present level of greenhouse gas emissions per barrel of production is already among the lowest globally due to the use of state-of-the-art technologies and a high share of natural gas in NOVATEK's hydrocarbon production.

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THINK GREEN. THINK NATURAL GAS.

LNG projects. Equally important, we expect no delays in deliveries of LNG modules as the yards are producing at full capacity and preventative measures have been taken to reduce and/or eliminate the impact of the COVID-19 virus on specific work schedules. At the end of December 2020, the overall construction progress for Arctic LNG 2 is estimated at 32%.

In 2020, the formation of Arctic LNG 2 ice-class tanker fleet was completed and we signed construction contracts for all 21 Arc7 ice-class tankers - 15 ice-class tankers from the Zvezda Shipyard in Russia and six ice-class tankers from DSME in South Korea.

our first carbon-neutral LNG fueling station in Rostock, Germany that will utilize carbon offset mechanisms.

Our Russian domestic gas business remained resilient in 2020 despite the COVID-19 pandemic. This business segment remains an important cornerstone of our business strategy as it insulates us from both price and volume volatility in global markets and, more importantly, remains stable and generates positive free cash flows.

In December, NOVATEK's Board of Directors approved amendments to the Regulations on Company's Dividend Policy, which increased the

Annual Report 2020

As the COVID-19 pandemic took much of the headlines during 2020 year, we undertook many precautionary measures to protect the safety and wellbeing of our employees, our contractors and their families against the spread of virus, while maintaining our commitment to deliver natural gas to our customers.

Another important aspect of our business is ongoing exploratory works - geophysical and geological - to increase our resource base for new project development. Therefore, exploration is fundamental to our future success. We continued exploration activities on the Gydan Peninsula

in 2020 that will contribute to the successful implementation of NOVATEK's future large-scale LNG projects in the Arctic zone and ensure the maintenance of natural gas production levels into the domestic pipeline network. As of 31 December 2020, NOVATEK's total SEC proved reserves(1) aggregated 16,366 million barrels of oil equivalent (boe), including 2,244 billion cubic meters (bcm) of natural gas and 197 million tons of liquid hydrocarbons. Our reserve replacement rate amounted to 117%, with the addition of 710 million boe, inclusive of 2020 production.

Due to the successful launches of fields within the North-Russkiy cluster at the end of 2019 and in Q3 2020, and an increase in hydrocarbon production from the Achimov horizons at Arcticgas's Urengoyskoye field, our 2020 hydrocarbon production totaled 608.2 mln boe, including 77.4 bcm of natural gas and 12,237 thousand tons of liquids (gas condensate and crude oil). This increased our total hydrocarbons produced by 18.3 million boe, or by 3.1% as compared with 2019. The total natural gas sales volumes, including volumes of LNG sold, aggregated 75.6 bcm.

The uses of LNG as a transport fuel represents a promising market segment that we are actively developing both in Russia and abroad. In August, we launched our first small-scale LNG plant in the Chelyabinsk Region with a design capacity of 40 thousand tons per annum. As part of NOVATEK's long-term strategy, we plan to build a network of LNG fueling stations in Europe and Russia to provide heavy duty transport with clean fuel at key transport connecting points. Currently, the Company operates a network of 9 LNG fueling stations in the European market as well as 21 regasification facilities. In December, we launched

minimum target payout level from 30% to 50% of the adjusted consolidated net profit according to the International Financial Reporting Standards.

The decision to amend the minimum payout level was based on the Company's strong operating and financial results as well as significant growth in the scale of the Company's operations.

As the COVID-19 pandemic took much of the headlines during the past year, we undertook many precautionary measures to protect the safety and wellbeing of our employees, our contractors and their families against the spread of virus, while maintaining our commitment to deliver natural gas to our customers. We worked closely with Federal, Regional and Local authorities, as well as our partners, to contain the virus spread, and took appropriate action, where necessary, to minimize possible disruptions to our operations. NOVATEK also provided direct help to the regions where we have operations as a key element of our social programs. It is important to unequivocally state that we place the health, wellbeing and safety of our employees above profits.

Despite the economic instability on the global markets, the Company achieved strong operating results and implemented its main investment projects in accordance with NOVATEK's approved corporate strategy. In 2020, our revenues amounted to RR 712 bln and our normalized EBITDA(2) amounted to RR 392 bln. The year-on- year decreases in revenues and normalized EBITDA by 17.5% and 15.0% respectively were largely due to a decline in global commodity prices for hydrocarbons.

Based on the Company's financial results, the Board of Directors recommended to the General Meeting of Shareholders to approve dividends for 2020 at RR 35.56 per share, exceeding the dividend paid out for the previous year by 10%.

Two thousand and twenty has been an unprecedented year, and definitely one for the history books. The spread of the COVID-19 virus

caused much financial and economic stress and disruption to the global markets. We witnessed extreme volatility in both natural gas and crude oil prices and endured economic lockdowns across many of our key markets. The pandemic devastated the lives of many people and changed the way we now interact with society. Most importantly, we remained optimistic during this extraordinary past year and are more committed and determined to deliver up to 70 million tons

of LNG by 2030 in a tightening global LNG market according to our corporate strategy.

As the climate change agenda gains momentum, we must demonstrate that we are a responsible operator and mitigate any harmful emissions to the atmosphere. We are targeting carbon neutrality with our future LNG platform and will work closely with our partners to find viable technical solutions for decarbonization. We are confident that natural gas will play a major role in the Energy Transition and remain a viable energy source to power the world economies for many decades.

To achieve our ESG goals, the Company will deliver new projects and programs with low greenhouse gas emissions and implement environmental standards for our activities in the Arctic Region

that meet the criteria of "Green Projects". We strive to fulfill our commitment to achieve the global emission goals as outlined in the Paris Climate Agreement and expand our joint activities with our customers and suppliers.

"THINK GREEN. THINK NATURAL GAS." redefines our contribution to society by delivering low-carbon,large-scale LNG projects to meet the challenges of decarbonizing energy molecules and ensuring a sustainable lifestyle for future generations.

On behalf of the Board of Directors and Management Board, we are pleased to present to all our valued stakeholders the Company's 2020 Annual Report. We would like to thank everyone for your support during a very difficult past year, and especially, each and every one of our employees for their commitment and dedication towards work at our production fields, construction sites, offices and at their "remote" locations.

Although challenges still remain, we are better positioned to capitalize on the world's growing energy requirements with our low-cost resource base and our world-class production facilities to better serve humanity's energy needs in a environmentally and socially responsible manner.

1. Including the Company's share in JVs.
2. Excluding the effects from the disposal of interests in subsidiaries and joint ventures and including the share in EBITDA of JVs.

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THINK GREEN. THINK NATURAL GAS.

Strategic Priorities

Annual Report 2020

Environmental and Climate Change Targets

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Corpor at e g o v e r n a n c e

NOVATEK's Strategy considers the increasing	energy mix, as a low-carbon energy alternative
role of LNG in the future global energy mix by	to traditional fossil fuels in the energy transition.
replacing other types of fossil fuels (coal, fuel oil	NOVATEK fully subscribes to the tenets outlined
and diesel), which reduces greenhouse gas and	in the Paris Climate Agreement, which was
air pollutants emissions. The role of natural gas	subsequently adopted by the Russian Federation
will be fundamental in decarbonizing the global	in September 2019.

technology

technology

RESOURCE BASE

GROWTH

On 25 August 2020, the Board of Directors of PAO NOVATEK approved the following environmental and climate change targets

for the period up to 2030:

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Reduce methane emissions per unit of production in the Production, Processing and LNG segments by 4%

Reduce air pollutant emissions per unit of production by 20%

2019

tons/ mmboe

10.44

tons/ mboe

0.128

2030

-4%-20%

Resourse base growth

• Organic resource growth from exploration and development activities on the Yamal and Gydan peninsulas
• Strategic acquisitions and active participation in license tenders

Sustainable development

• Reduce and prevent negative environmental impact
• Increase the efficiency and rational use of natural resources, energy efficiency

Increase hydrocarbon production

• Increase gas production through development of projects within the UGSS and LNG projects in the Arctic
• Development of deeper Jurassic and Achimov layers
• Fully utilize processing capacity of Ust-Luga complex

Maintain low cost structure

• Remain one of the lowest cost hydrocarbon producers in the global oil & gas industry
• Optimize cost structure through strategic investment of capital
• Develop low cost LNG value chain

Optimize marketing channels

• Maximize use of Northern Sea Route and develop key transshipment points
• Build diversified LNG trading portfolio
• Develop strategic partnerships with industry partners in key markets

Build low cost scalable LNG platform

• Increase production through development of scalable LNG projects
• Development of proprietary LNG technologies
• Integrated projects for production and liquefaction of natural gas

Reduce greenhouse gas emissions per unit of production in the Upstream segment by 6%

Reduce greenhouse gas emissions per ton of LNG produced by 5%

Increase the associated petroleum gas utilization rate to 99%

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

tons of CO2 equivalent per 1 mboe

12.58

tons of CO2 equivalent per ton of LNG

0.263

Legal requirement in Russia

95%

75%

-6%-5%

to

99%

to

90%

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