• SITUATION IN THE EAST OF UKRAINE AND CRIMEA

    The hostilities in eastern Ukraine which started in 2014 and continued throughout 2015 and 2016 have had serious consequences for the Ukrainian society and economy. Thousands of people have died, and hundreds of communities and companies have faced sever damages.
    Naftogaz companies located in the area where the anti-terror operation (ATO) is conducted or in the occupied Crimea have also suffered significant losses. In particular, the facilities and infrastructure Ukrtransgaz, Ukrtransnafta and UGV have been affected.

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    In the extremely difficult circumstances resulting from the Russian military aggression in eastern Ukraine and the occupation of Crimea, Naftogaz ensures the stable operation of the gas transmission system and reliable gas supplies to millions of consumers in Ukraine and other European countries.

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    In 2015, the sum of net losses related to the Russian aggression and disclosed in the consolidated financial statements of the group amounted to UAH 1.6 billion. The amount of losses includes the loss of inventories, impairment of receivables as well as VAT write-offs.
    Because of the occupation of Crimea in March 2014, the company lost significant domestic gas resources of its subsidiary Chornomornaftogaz. Crimea was previously a source of approximately 2.0 bcm of gas extracted per year.

    STABLE GAS SUPPLIES TO UKRAINIAN CONSUMERS

    Naftogaz is applying all possible efforts to preserve the integrity of the gas transmission system of Ukraine in the affected areas. Control has been lost over a portion of the company's infrastructure and assets in the uncontrolled territories of Ukraine in Donetsk and Luhansk regions, as well as in the occupied Crimea. Despite these challenges, Naftogaz has been able to provide stable gas supplies to consumers in almost every settlement located on the territory currently under control of the Ukrainian authorities. The company also performs its obligations to European consumers in full, providing uninterrupted transit of Russian gas to EU countries.

    Russian gas supply routes
    On a daily basis, Naftogaz employees working at gas facilities in the Donetsk and Luhansk regions at the front line put their lives at risk to ensure stable gas supplies to Ukrainian consumers and repairing gas infrastructure damaged by the fighting.

     

    LOSSES IN THE EAST OF UKRAINE1

    The fighting in the Donetsk and Luhansk regions have resulted in considerable damages for Naftogaz group.

    Since June 2015, Naftogaz is not receiving any data from its facilities in the ATO. The value of Ukrtransgaz property used for the transmission and distribution of natural gas in the occupied areas is estimated at UAH 296 million.

    Kondrashivska gas processing facility in Severodonetsk owned by a UGV gas production unit Shebelinkagasvydobuvannya and located in the ATO area is cut off the electricity supply. Daily losses of gas as a result of the hostilities are estimated at 600 tcm.

    Oil transmission assets of Ukrtransnafta's unit in the area are significantly damaged. The assets include technological and auxiliary equipment, buildings and vehicles from the line operations of the Lysychansk control station (Vovchoyarivka village of the Luhansk region).

    Nine out of 15 compressed natural gas filling stations located in the ATO area remain occupied by illegal armed groups.

    Due to the inability to engage in economic activities in the temporarily uncontrolled territory, five out of eight Ukrnafta stations in the Luhansk region have been suspended.

    1 Data as at 31 December 2015.

    LOSSES IN CRIMEA

    PJSC "NJSC Chornomornaftogaz" (below and elsewhere in this report — Chornomornaftogaz) is a 100% subsidiary of Naftogaz active in the production, storage and transportation of oil and gas. Prior to the occupation of Crimea by the Russian Federation, Chornomornaftogaz carried out a wide range of activities, including research and exploration of new deposits, extraction of oil and gas as well as supplying gas and petroleum products to consumers.
    In the beginning of 2014, Chornomornaftogaz employed nearly 4 600 people.

    Occupation of Crimea and loss of control

    Because of the occupation of Crimea by the Russian Federation, Chornomornaftogaz has lost control over all of its production facilities and gas fields at the peninsula and offshore.

    In March 2014, the self-proclaimed government of occupied Crimea have ruled to nationalize all Chornomornaftogaz property, which was subsequently included into the authorized capital of the illegitimately established Crimean Republican Enterprise (CRE) "Chernomorneftegaz".

    The nationalization of the Chornomornaftogaz assets constitutes a violation of international law. In 2014, the newly established Chernomorneftegaz was included in the sanctions list of the European Union, the United States, Canada, Norway, Switzerland, Australia, Japan and Liechtenstein. As at 1 January 2014, the assets of Chornomornaftogaz were valued at approximately UAH 15 billion.

    Prospective resources of the ukrainian sector


    In August 2014, the duly established Chornomornaftogaz was re-registered in Kyiv. The company is now engaged in restoring title documents, re-registration of special permits for subsoil use on the peninsula and offshore, re-registration of the floating rigs of Chornomornaftogaz in the Odessa commercial sea port. The company is also involved in the preparation of legal claims.

    Chornomornaftogaz assets include
    Chornomornaftogaz currently controls Strilkove gas field, which is located in Arabat Spit, near the village Strilkove of Kherson region, and performs gas production under a joint activity agreement with the JSC Plast.

    Actions to restore control and recover damages

    The joint efforts of Naftogaz, Chornomornaftogaz, and Ukraine's Embassy in Mexico, helped to restore the company's control of the derrick-barge Titan-2 which is currently in Mexico.

    Pursuant to the Resolution of the Cabinet of Ministries as of 19 August 2015 No. 605) on the protection of property rights and interests of Ukraine in connection with the temporary occupation of the territory of Ukraine, at the end of 2015 Naftogaz signed an agreement with the U.S. law firm Covington & Burling LLP to protect its rights and interests in disputes related to the loss of or inability to use the company's assets and forgone income in Crimea and in Sevastopol.

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    In line with the IFRS requirements, Naftogaz recognized loss amounting to UAH 13.8 billion in its consolidated financial statements for 2014 associated with the loss of control over assets in Crimea

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    Under the agreement, Covington & Burling LLP will represent the interests of Naftogaz at international judicial institutions to restore control over the assets lost as a result of the Russian occupation of Crimea and reimburse all damages incurred.

    In February 2016 Naftogaz provided the Russian Federation with formal written notification of an investment dispute under the bilateral investment treaty between Russia and Ukraine. The dispute arises from the Russian Federation"s unlawful seizure of Naftogaz's investments in Crimea.

    1For further details see the text of the resolution: "Some Issues of National Joint Stock Company "Naftogaz of Ukraine": http://zakon3.rada.gov.ua/laws/show/605-2015-%D0%BF

     

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