Industrial Safety and Environment

Introduction of an integrated management system

The corporate “Health, Safety and Environmental Policy” lowers risks of injuries, occupational diseases, accidents at work, and environmental problems through the implementation of leading innovations in areas throughout “Gazprom Neft”, including personal liability for personal safety and safety of others.

The Company has developed a program for implementing the requirements of the Policy and Integrated Management System in the area health, safety and environment. The Company began to realize this program in 2008, the plan for that year was to become more disciplined in registering all incidents, create a statistical database which would comply with international procedures. This database enables the development of adequate measures in the area of health, safety and environment, deal with system problems and the major causes of these incidents. In 2009, this was used as a basis for analyzing causes and dynamics of incidents. Also a set of regulations was developed, which enabled the adoption of a unified approach to solving issues in this area throughout the company, facilitates full and immediate exchange of information between industries. Therefore a new strong foundation for the Company’s new type of activity in the area was laid.

This Policy was adopted by all daughter joint-stock companies. In order to realize this Policy, the Company is taking steps to implement the integrated management system in areas of health, safety and environmental protection (hereinafter HSE). The stages of realizing the integrated management system in the area of HSE were developed and approved by the Board of “Gazprom Neft”. The company’s management system in the area of HSE is based on the best international models and mechanisms, and seeks to constantly improve.

Decreasing number of injuries among employees

As a result of implementing the first and second stages of realizing the Policy the Company gathered and analyzed statistical information regarding injures at work, and developed top priority standards. Based on the gathered incident data, special correctional measures were developed. We began to implement these measures, which resulted in a significantly lower number of deaths and stopped the growing number of accidents leading to temporary inability to work.

In 2009 the incident transparency index was 20 times higher, compared to 2007, and is now the same as that of leading international oil companies.

In 2009 the fatal accident rate (FAR) went down, lost injury time frequency rate (LTIFR) remained at last year’s level, which reflects a very positive dynamic, considering also the fact that the Company is now more disciplined in registering incidents.

As a result of implementing a standard for regulating the investigation of incidents, the chances of using a formal approach are now minimal, and the emphasis is now on identification of major causes, rather than finger-pointing. To prevent identical incidents, the subsidiaries and affiliates exchange information about incidents and the lessons learned from them. The process of recording minor incidents and prerequisites thereof has been established, thus enabling the Company to take preventive measures to avoid major incidents rather than deal with their consequences.

Increasing competence of employees in the area of HSE

In order to increase the employees’ competence and efficiency of their participation in the HSE and CP (Health, Safety, Environment and Civil Protection) Management System, the Company adopted the M-16.03.01-01 manual “Training Guidelines for Employees in the Area of HSE and CP in 2008-2010”.

The Training Program that these Guidelines put forward was developed in order to provide preventive measures to decrease the number of incidents, work related injuries and occupational diseases. It stipulates general provisions for HSE and CP training in addition to training procedures required by legislation. All Company employees, including executive management, have to undergo this training.

122 coaches inside the Company had been trained by the time this report came out: 58 driving/road safety coaches and 64 HSE and CP coaches. These coaches trained 14050 employees of subsidiaries and affiliates, 7013 of them received training in defensive driving, and 7037 – in HSE and CP.

Providing employees with modern personal protective equipment

“Gazprom Neft” consistently works to identify industrial hazards by monitoring work stations. Employees are supplied with personal protective equipment. They are trained in the area of health and safety at their work place. Even in difficult economic conditions the Company has not cut its safety budget. Employees’ health and safety is the area in which the Company’s leadership and trade unions work together in a constructive manner. Mutual obligations are stipulated by labour contracts.

Since 2009 the Company’s supply department has been purchasing all personal protective equipment (PPE), in compliance with the Technical Conditions and corporate identity of “Gazprom Neft”. Budgeted PPE expenses for 2010 are 360 million rubles. The catalogue of authorized PPE is constantly updated and improved. As of today, average cost of PPE for one employee is 12.5 thousand rubles. The company conducts regular training teaching employees how to select, use PPE and take care of it.

Increasing driving safety

In order to promote safe driving, the Company is implementing a procedure for safe driving of the Company’s motor vehicles.

The standard requirements have stricter regulations for registering road accidents. At this point all road accidents are to be registered, including minor ones and the ones where a third party is at fault. The Company conducts internal investigation of road accidents.

In order to have ongoing education of drivers, internal coaches have been trained, who are now in charge of improving driving in the Company. A simulation machine has been purchased in order to provide drivers with opportunities to practice their skills and learn how to act in extreme and emergency situations. After implementing this program, the number of people injured in road accidents has gone down by 50% in 2009.

Managing environmental safety

Oil companies have an inevitable anthropogenic impact on the environment, including atmospheric emissions, utilization of water and land resources and their pollution and contamination. The Company’s Environmental Strategy aims to minimize this impact, to balance the utilization of natural resources and deal with damages inflicted by previous generations. The Company strives to comply with all the requirements of Environmental Law, fulfill its license obligations, and compensate for any damages to the environment. The Company puts large emphasis on making environmentally friendly products.

The amount of payments for exceeding existing environmental impact standards at the major enterprises of Gazprom Neft in 2009 totaled 89 mln rub., which is a 58% decrease compared to 2008. A total of 2 mln rub. was paid in penalties for violation of environmental legislation. In 2009 measures were taken to correct the violations found. The Company plans to further develop the procedures for investigation and analysis of incidents related to violation of legislation and introduce corrective measures which will enable it to minimize the probability of such events occurring again.

Environmental expenditure

The Company’s current and capital expenditure on environmental measures, including the use of technologies minimizing the adverse environmental impact significantly exceed payments made by the Company for environmental contamination. Current costs also include expenses on the development of regulatory documents, environmental monitoring, industrial environmental control, improving environmental competence and environmental training of specialists.

In 2009, environmental expenditure increased. It included financing environmental measures to protect water from contamination (liquidating blowing wells), modernizing the treatment bank for process condensate, installing KT-1/1 at the Omsk Refinery, reconstruction of purification facilities, conservation (recultivation) of waste tank.

Atmospheric Emissions

The Company’s enterprises constantly work on reducing harmful atmospheric emissions. In 2007-2009 total emissions at Gazprom Neft have increased due to an increased scope of operations.

The bulk of the Company’s emissions occur in the oil and gas production sector, whereas in the oil refining sector they are on a decline. Lower emissions in refining can be attributed to environmental measures: renovations of refining capacities, replacement of burner units, equipping reservoirs with modern emission lowering devices, introduction of an installation ensuring precise and leak proof oil loading.

Total Harmful Atmospheric Emissions

Production of environmentally-friendly fuel

The oil refining sector of the Company works consistently on improving the environmental friendliness of its fuels. The Omsk Refinery has come up with a development program designed to ensure a complete transition to the production of environmentally-friendly fuels by 2012. By the end of 2009 the plant completed modernization of the L-24/6 diesel fuel hydrotreater. After restoration of the split-flow system, the installation can upgrade both summer and winter diesel fuel to Euro-3, 4, and do it simultaneously. Construction of an isomerization unit for light naphtha “Isomalk 2” plays an important role in the further development of Gazprom Neft. The main objective of this new unit is to increase production of gasolines of Euro 4 and Euro 5 standards. Implementation of the isomerization unit will enable processing of oil at deeper levels and increase production of gasolines. Isomerizate which “Isomalk-2” will produce is considered the most valuable component for high octane fuel, free from olefine and aromatic hydrocarbons.

Utilization of water resources

The Company’s enterprises seek to utilize water resources with maximum efficiency by injecting reservoir waters back into the wells to maintain the reservoir pressure during oil production and by setting closed cooling cycles in refining. In 2009 water consumption for the Company’s own needs was up by 4.4% compared to 2008 due to an increase in oil production volumes and injecting reservoir waters back into the wells in order to maintain the reservoir pressure.

Water consumption grew slower than the Company’s operations. It was also slower than the last year’s growth rate (in 2008 water consumption for the Company’s own needs was up by 15%, compared to 2007).

Waste treatment

The Company strives to reduce waste accumulation and improve its waste treatment practices. The largest share of accumulated waste is represented by the drilling waste of hazard class IV (low hazard). In total, IV and V class (low hazard and essentially non-hazardous) waste accounts for over 90%. Drilling waste accumulates during the operations of oil producing and oil service (overall share of these enterprises is over 90%). The main method of drilling waste treatment remains the placing of such waste in designated storage areas. In 2009, 135 sludge pits have been recultivated. As a result of these measures, the risk of above-limit payments for prolonged storage of drilling waste in the amount over 1 bln rubles was avoided.

All industrial sectors of the Company work on improving their waste treatment technologies. The Omsk Refinery, for example, processes 100% of accumulated oils independently. New efficient technologies are being introduced in petroleum product distribution, these include a mobile treatment complex, designed to clean the inside of tanks from solid deposits. Gazprom Neft has also been successful in implementing the pre-drilling program, when drilling of development test wells with significant displacement of whole targets is done from already made pads. So the geological structure and mining potential of the deposit are clarified in the zone of development test pads without prior back filling. This enables the Company to spare the land where areal limits of soil sand have not been confirmed. This technology cancels the need to set up additional sludge pits, drilling waste is processed at the pad, which means that sludge does not need to be transported elsewhere. The consolidated footing braces pollutants and lowers the risk of them migrating elsewhere to a minimum. This solid drilling mix could be later used as a construction coating for firming up roads and laying down the body of the pad.

Land contamination control and remediation

The Company takes measures to decontaminate land and remove unauthorized waste storage spots. In 2009, 219 ha of contaminated land were remediated. To reduce the number of areas with disturbed land the Company plans to continue implementing pitless drilling.

The Company’s enterprises use advanced chemical biological agents for land remediation (like Fare Zyme), designed to destroy oil. They are based on mineral, rather than biological components, feeding the natural florula and facilitating land restoration. Biological remediation also involves planting area-specific grass and perennials.

Utilization of Associated Gas

In the production sector a lot of work is being done on increasing the level of associated gas utilization. The rate of associated gas (hereinafter – AG) utilization across the Company’s major production enterprises remains at the medium level – 48.1% of recovered gas was used in 2009 (in the tables below you can see the volumes of received and utilized AG in 2006-2009).

Increasing the AG utilization rate is a priority set by the state, and in order to contribute to reaching this goal, in 2008 the Company adopted a Medium-term Investment program for 2008-2010 on AG utilization and more efficient use (hereinafter MTIP). Based on the MTIP Gazprom Neft has now developed an updated Gas program. Actual financing of the MTIP projects in 2009 was 105% of what was planned. Implementation of the Gas program will allow the Company to bring up the AG utilization rate to 95% by 2012 at Gazprom oil production enterprises.

Automated AG control system will make management in this area more efficient. Such system was designed in 2009. It will allow to quickly receive precise information on production and usage of AG.

AG Resources and Utilization Rate in 2007-2009

Energy

Russian oil companies realized a long time ago that it is a lot better to construct your own energy generators in the field. Developing local energy systems allows companies to cut energy expenses and therefore lower the prime cost of oil production.

In 2006, Gazprom Neft adopted a special program “Utilization and Higher Efficiency of Associated Gas”, which demonstrates that this is a priority for the Company. Under this program the Company constructs so called internal generators (IG). At this point the overall electrical power of Gazprom Neft OGs is 51 MW, the plan is to bring it up to 220 MW by 2013. In December 2009, the first unit (48 MW) of the gas-turbine electrical plant (GTEP) at the Yuzhno-Priobskoye field was launched, this field is developed by Gazpromneft-Khantos. The second unit (48 MW) of the Yuzhno-Priobskaya GTEP is being constructed. Yuzhno-Priobskaya GTEP is a “medium generation” object. Specialists set the power range for such objects at 100-500 MW (“small” generation is up to 100 MW). The Priobskoye field is one of the key assets of Gazprom upstream block, it is the fastest growing asset. In 2009, oil production here amounted to 27% of the Company’s production.

Such emphasis on energy projects is due to the Company’s internal demand, regardless the energy system. There are also potential external prospects for developing this sector. The Yuzhno-Priobskoye field is only 70 km away from the fast growing city of Khanti-Mansiysk, and Gazprom Neft’s GTEP may become the energy sources for the city.

The Company’s overall energy consumption dropped from 5,536 mln kW/h in 2008 to 5,484 mln kW/h in 2009, so it decreased by 53 mln kW/h (1%) due to decreasing volumes of liquid production by 1.9% and oil – by 2.8%.

The Company’s thermal energy consumption went up from 314 thou. Gcal in 2008 to 334 thou. Gcal in 2009.

Specific power consumption at JSE Gazprom Neft has increased due to the increase in operations, mostly resulting from energy consumption in the reservoir pressure maintenance system at Gazprom-Khantos LLC.

Gazprom Neft works on ensuring efficient use of energy. The Company introduces energy consumption control and reduction measures, develops and implements efficient energy use programs.

Implementation of the energy saving in oil production program saved 34 mln rubles in 2006, 152 mln rubles – in 2007, 880 mln rubles – in 2008, and 1071 mln rubles – in 2009.

Innovative activities

The main objective in the area of science and technology is accelerated implementing of new technologies, introducing new technical equipment to ensure dynamic development of production.

The priority science and technology aspects for Gazprom Neft are the following:

• Using geographic methods to discover potential gas and oil deposits;
• Conducting production log tests in pioneer, exploration, and development wells in order to dissect the geological cross-section, find pay horizons, assess technical conditions of the well and monitor field development;
• Conducting research, experimental and methodological, pilot-plan works, to increase geological and economic efficiency of the geophysical research, improving its methods and techniques;
• Development, testing and implementation of new technical equipment and technologies for studying the subsurface, natural completion, lowering expenses per ton of produced oil;
• Creating science and technology products: design and technological documents, plans for developing fields and producing oil, technical-economic proposals and justifications (TEP, TEJ), including geological and hydrodynamic models, other documents needed for developing new fields of hydrocarbons;
• Further improvement of design methods and control over field development at later stages, creating permanent geological and mathematical models.

Exploration and production technologies

By the end of 2007 the Company’s analytical department was turned into Gazpromneft-NTC LLC, an independent corporate science-production center in the area of geological exploration, design, control and oil and gas production. In September 2009, Gazpromneft-NTC LLC adopted a Concept for protecting the Company’s intellectual property and innovations. This concept defines the main goals, objectives and principles of the Company’s policy on managing protection of intellectual property.

In 2009, Gazpromneft-NTC LLC spent the following amounts on science and technology:

• geology and exploration – 698.7 mln rub. (179% increase compared to 2008);
• design and control over development – 812.9 mln rub. (184% increase);
• planning and surveying – 109.5 mln rub.

The main purpose of innovations in exploration is developing efficient survey complexes, improving reserves estimation methods, lowering geological risks and reaching precision in identifying exploration targets.

In 2009, JSC Gazprom Neft conducted geotechnical operations (GTO) at 1,088 wells, this resulting in extra production of 4,705.8 thou. tons of oil.

Geotechnical Operations (GTO) in 2007 – 2009

One of the most important results of the Company’s technology improvement is extensive use of oil production intensification and enhanced oil recovery (EOR) methods. In 2009 total production from the EOR operations conducted in the reporting year (without the carryover effect) was 1.13 mln tons or 2.3% of the Company’s total output. These methods allow Gazprom Neft to substantially increase recoverable reserves and bring into production low quality reserves (high viscosity, in impermeable reservoirs).

The Company uses physical, chemical, hydrodynamic and thermal recovery stimulation methods. The bulk of additional production was attributable to physical methods, first and foremost, to hydraulic fracturing (HF) – 378 thou. t. Hydrodynamic and chemical field development methods that were used in difficult geological conditions to achieve fuller reserve recovery yielded additional oil production of 119.4 thou. tons and 158.1 thou. tons respectively. 656 new wells were launched in 2009, 172 HF were created (without HF at the new wells), 45 wells were sidetracked and 47 deepened into lower formations.

The key factor for innovational development of any industry is an ability to create and use new technical solutions, technologies and techniques. Application of the latest technologies becomes the most important criteria for a company’s competitive abilities:

• In 2009 Gazprom Neft continued to apply latest technologies in drilling and casing
• A dimensional visualization center opened up at the Gazprom Neft Research and Technology Center in St.-Petersburg. It uses the latest technologies in the area of geological and hydrodynamic simulation. The goal of the new division is to design trajectories for new wells, create a 3D seismological simulation in order to enhance field development. The visualization center will improve the joint efforts of the researchers, geoscientists, geologists, and drilling specialists working at the center. It will also help to analyze the structure and characteristics of the fields in more detail.
• Gazpromneft-Khantos implemented a new technology “dual completion arrangement” (DC), which provides solutions to several problems: control over field development, better quality of reserve recovery, shortens the wells’ down time: now specialists get data on the flow from each reservoir online in real time.
• Upon Gazprom Neft’s request, specialists from the Oil and Gas Research Center in Sarov are working on developing the Iskender Program and Industrial Complex, which is an instrument for hydrocarbons reservoirs studies through computer numerical calculations. Iskender enables the performing of such calculations as determination of the perfect well and downhole equipment operations, more precise estimation of deposit reserves in the gross. In addition, utilizing Iskender will enable the completion of a number of application tasks: drawing up feasibility studies and draft field development projects, analyzing field development risks, forecasting production performance, etc.
• Gazpromneft-Noyabrskneftegaz launched a new device for heating the well annular space at the Vyngapurovskoye field. The new heaters for the valve of a well mouth prevent freezing of the valve on the Xmas tree and failure to operate. It also enables the reduction of direct oil losses by 90% and requires fewer personnel and equipment.

Oil refining technologies

2009 saw this performance of research and development (R&D) in oil refining, commissioned by Gazprom Neft, for a total of 18.3 mln rub. The main areas of R&D in 2009 were related to safety and environmental protection; as well as product quality maintenance and production technologies, efficient inventory consumption technologies, including those used to inspect installations and issue operation optimization recommendations.

The Company pays special attention to modernization and new construction for the purpose of meeting the technical regulations “On Requirements for Motor and Aviation Gasoline, Diesel and Marine Fuel, Jet Fuel and Residual Fuel Oil”, which came into force in 2009. To meet the legislative requirements a motor fuel quality upgrade program was developed for the OJSC Gazpromneft-Omsk Refinery and the OJSC Moscow Oil Refinery. Under this program in 2009 the Company continued to work on the following projects:

• OJSC Gazpromneft-Omsk Refinery – implementation of isomerization, diesel fuel hydrotreatment and catalytic cracking gasoline hydrotreatment, L-24/9 and L-24/6 hydrotreater reconstruction
• OJSC Moscow Refinery – selection of licensors and development of basic projects for implementing isomerization, catalytic cracking gasoline hydrotreatment, choosing catalytic system for L-24/2000 diesel fuel hydrotreater reconstruction.