Address of the President of Transneft

Nikolay Tokarev

Dear shareholders,

According to the 2018 results, Transneft shows an upward trend in its key operational and financial results.

In 2018, oil transportation turnover achieved 1,217 billion tkm, up 0.5% year-on-year. Turnover of petroleum products transportation increased significantly, adding 12.7% to the level of 2017 and reaching 52.7 billion tkm.

The Group’s revenue amounted to RUB 980 billion, having grown by RUB 95.6 billion, which is equivalent to 10.8%. EBITDA grew by 6.1%. The 2018 net profit increased by RUB 33.6 billion, which is equivalent to 17.5%, and amounted to RUB 225.4 billion.

The volume of the Company’s capital investments amounted to RUB 269 billion. At the same time, free cash flow achieved RUB 79.2 billion.

In 2018, significant progress was made in ensuring the Company’s financial security due to early repayment of the loan provided by the China Development Bank and scheduled repayment of the loan in Eurobonds worth USD 1.05 billion. Thus, the Company paid off its foreign currency debt in full and reduced its currency risks significantly.

A Russian Electric Motors’ plant was commissioned in Chelyabinsk, being the second essentially important manufacturing facility established in cooperation with Italian partners in view of the programme for import substitution and setting up key industrial enterprises in the Russian Federation. The construction of a drag reducing agents manufacturing complex in Alabuga (the Republic of Tatarstan) is close to completion.

Relying upon our own manufacturing capacities, as well as upon cooperation with Russian enterprises on the most important types of equipment and systems for pipeline transportation, entails a significant reduction in procurement costs and offers guaranteed availability of critical equipment and materials.

The import substitution programme, consistently implemented by Transneft, implies bringing the volume of purchases from Russian suppliers to 97% by 2020.

We continue working in the following areas.

Upgrading the pipeline system.

Active implementation of programmes for technical upgrading and revamping of operating facilities is continued. Based on inspection results, 1,023 km of pipeline were replaced. 62 tanks were built or revamped; scheduled large-scale work to replace mechanic and process equipment was performed to the full extent, as well as works on power equipment, oil metering and quality control systems and automation systems.

Improving energy efficiency.

One of the key areas Transneft’s management is involved in is energy efficiency improvement at the Company. A detailed energy saving and economic efficiency enhancement programme covering the period up to 2023 was developed as part of the Company’s Development Strategy. Transneft has already achieved the lowest per-unit energy consumption in the world. The Company is striving to reduce specific consumption of fuel and energy resources by more than 4% versus 2017 by 2023 as a result of implementing the programme.

Ensuring environmental and industrial safety.

Transneft is among the global environmental safety leaders in the field of oil and petroleum products transportation. We realize the degree of responsibility vested in us to the full extent, and we pay close attention to these issues

Our Priorities

Broadly speaking, a momentous period of establishing the oil transport infrastructure in Russia has been accomplished to date. Our work and our efforts have taken a new direction. Development and upgrade of the existing facilities, improvement of the system’s resilience to technological risks, as well as optimisation and further enhancement of our operational efficiency have come to the fore now.

Along with addressing the key operational tasks, our efforts to optimise costs, improve efficiency and enhance corporate governance ensure effective development of the Company and provide the basis for ensuring income for shareholders in the coming years.

Transneft will continue developing its dialogue with shareholders and investors, treating this issue most seriously. In March 2019, the Investor Relations Division was established at Transneft, with such key tasks as development of the dialogue with the investment community, as well as orchestration and performance of the work to enhance Transneft’s investment appeal and increase its market capitalisation.

Transneft’s key priorities consist of ensuring a reliable, safe and uninterrupted operation of the pipeline system, as well as in achieving high efficiency.

Nikolay Tokarev President of Transneft