OGZD.L Regulatory News (OGZD)

 MANAGEMENT REPORTOAO GAZPROM 

2011

Contents

The Gazprom Group

Prospects for the development

Operating results

Reserves, exploration and production of hydrocarbons

Transportation of gas

Underground gas storage

Gas distribution

Refining

Electric Power

Innovative development

Environment protection

Employees

Analysis of financial results of operations

Results of operations

Liquidity and capital recourses

Capital expenditures

Debt obligations

Shareholder structure and stock market of OAO Gazprom

Management structure of OAO Gazprom

Key Risk Factors

Branches and representative offices of OAO Gazprom

Conversion Table

Glossary of major terms and abbreviations

Addresses and contacts

Notes:

In the present Management Report some of operating and economic parameters have been determined in accordance with International Financial Reporting Standards (IFRS) principles and for the Group entities consolidated in the IFRS consolidated financial statements of OAO Gazprom for the year ended 31 December 2011, therefore they can differ from similar parameters in reports of OAO Gazprom prepared under Russian statutory requirements.

Moreover, some operating parameters of OAO Gazprom and its subsidiaries are determined in accordance with principles underlying management reporting.

Analysis of financial results should be read in conjunction with the audited annual consolidated financial statements of OAO Gazprom for the year ended 31 December 2011, prepared in accordance with IFRS.

Among other things the report discloses information on the future production and economic activities of the Gazprom Group, based on the forecasts and estimations of the management, on the basis reasoning from the current situation. Actual performance may differ from forecasts and estimations under the influence of various objective factors.

The Gazprom Group

The Gazprom Group (OAO Gazprom and its subsidiaries, hereafter - Gazprom, the Group) is one of the world's largest vertically-integrated energy companies.

Gazprom is a global leader in terms of reserves (approximately 18%) and natural gas production volumes (approximately 15%). In Russia Gazprom provides for above 70% of gas production and approximately 9% of oil and gas condensate production.

The Group owns the world's largest gas transportation network with length of more than 160 thousand kilometers, which ensures distribution of natural gas to customers within Russia and to the European markets.

A half of gas processing and 15% of oil refining in Russia is attributable to Gazprom.

Gazprom is the dominant gas supplier to Russian consumers (Gazprom's share in the Russian gas market is above 70%) and to former Soviet Union (FSU) countries. Besides the Group is the major supplier of natural gas to Europe (Gazprom's share on the European market is 27%). The Group has branched network more than 1,600 of fuel stations in Russia, FSU and on Balkans.

The Group also owns electricity generating assets, which provide for approximately 17% of the electricity generation in Russia. 

Major operational and financial parameters of Gazprom Group for 2011 and 2010 are presented in the table below:

Prospects for the development

Global energy market: current situation and development trends

Despite the global economic crisis the population will continue to grow and the living standard will continue to improve, especially in the developing countries. This trend will promote the demand for energy in the long-term perspective. According to international energy agencies and organizations, by 2030 the global energy consumption will grow by 40% as compared with the current level. And fossil fuels will account for 80% of the total energy consumption. Oil will continue to dominate among fossil fuels accounting for 30% of the energy consumption mix. The share of renewables may raise up to 15%. Gas consumption will grow rapidly: its share in the global energy balance may exceed 25%.

By 2030 the global demand for gas is expected to grow by 50% as compared with the 2010 level. And the gas consumption is expected to grow in all target markets of Gazprom.

Gas consumption in Gazprom's top-priority Russian market was 473.0 bcm in 2011 and in accordance with the Russian Energy Strategy for the period up to 2030 it may grow up to 539-564 bcm in 2020 and up to 605-641 bcm in 2030.

Gas consumption in Europe, Gazprom's main export market, will grow gradually. In the long-term perspective uncertainty will remain about the level of demand for natural gas in the region due to continued economic crisis in the Eurozone, increased regulatory pressure on the energy sector in EC countries, increased competition between the gas industry and renewables as well as adjustments to nuclear power development plans. Nevertheless, international organizations expect that after the crisis the annual demand for natural gas will be 1.0% on the average. And in the long-term perspective the main demand for natural gas in Europe will come from the power sector. The demand for natural gas in Europe in 2030 is predicted in the range of 670 - 730 bcm.

CIS markets start to use energy efficiency arrangements. But, given the growth of economy in the region the demand for gas is expected to raise. According to expert estimates, in 2020 gas consumption in CIS countries (excluding Russia) may reach 240 bcm and in 2030 - 260 bcm.

Gazprom has already started to supply liquefied natural gas (LNG) to the Asian-Pacific Region (APR) and views it as a perspective export market for expanded LNG supplies and pipeline gas exports. In the last decade gas consumption in the region increased almost two times and reached half a trillion cubic meters in 2010. Main ATR consumers include: the People's Republic of China, Japan, Thailand, the Republic of Korea, Indonesia. Major gas consumers in the Asian market also include India and Pakistan. According to international organizations, the future growth rate of gas consumption in this region is expected to be the highest in the world. By 2030 gas consumption in ATR may increase by more than two times.

Development of LNG will allow Gazprom to deliver gas to other perspective regions of the world.

Major development areas of the Gazprom Group

In gas business

The Gazprom Group's goal is to retain its leading position in the global gas industry in the long-term perspective. Therefore it is necessary to retain the Group's share in the domestic market, ensure meeting one third of the European demand for gas and obtain 10-15% of the ATR market. The Gazprom Group plans to produce up to 15% of the global LNG volume.

In order to achieve these goals Gazprom plans to complete a number of strategic tasks.

The goals in the area of gas production include not only maintenance of production at existing fields but an active development of new gas production centres in the Yamal peninsula, offshore areas of northern seas, in Eastern Siberia and Far East.

In the gas transportation area further development and modernization of the Unified Gas Supply System (the UGSS) will be executed in line with the gas production growth. The existing infrastructure is expected to be used to the maximum extent possible in order to ensure efficiency of supplies. The UGSS will continue to expand to the east of the country, it is planned to increase gas storage and LNG production capacities.

In the area of gas marketing the Group plans to expand its presence in the perspective gas markets including ATR markets and to increase the share of LNG in Gazprom's export portfolio.

The main objective of the Group's development in gas processing and gas chemistry is to increase the rate of extraction of valuable components of natural and associated oil gas and their effective use for further refining to marketable products with high added value; upgrade the existing and build new gas processing and gas chemistry facilities, in particular in Eastern Siberia and Far East.

In oil business

The Gazprom Group intends to increase oil production, including results of its subsidiaries and its share in associated companies. The production and reserves balance is to be maintained at the current level. The number of fields is expected to grow through acquisition of plots from the non-licensed stock of areas and by buying assets in the Russian market. It is planned to expand the Gazprom Group's activities in the development of hydrocarbon reserves abroad.

In the area of oil refinery the Group plans to increase volumes and improve efficiency of oil refinery. To meet these goals Gazprom plans to expand its own refinery capacities both in Russia and abroad.

Improvement of oil refinery efficiency abroad is expected to be achieved through equity participation in refinery assets and long-term processing contracts. The growth of refinery abroad will depend on how quick oil production will increase. At the same time it is planned to implement the program of improving the quality of motor fuels, the depth of refining and equipment level of the Group's oil refinery plants in Russia.

In the area of oil product marketing the Group's strategic goal is to increase premium sales through small-scale wholesale and retail networks including by expanding the network of filling stations in Russia and abroad.

In electric power business

Gazprom targets to increase operating efficiency of the Gazprom Group's generating entities by modernizing existing capacities and building new effective combined steamgas capacities that will increase production of electric power and heat. The Group is considering participation in potential electric power projects in a number of European and North-East Asia countries.

Operating results

Reserves, exploration and production of hydrocarbons

The table below presents assets and volumes of capital expenditures in the Production of Gas and Production of Oil and Gas Condensate segments:

Reserves

According to the audit of the Gazprom Group's hydrocarbon reserves under PRMS Standards performed by DeGolyer and McNoton, as of 31 December 2011 proved and probable reserves of the Gazprom Group were as follows: 22.8 tcm of gas, 757.8 million tons of condensate, 1,216.1 million tons of oil, which in the aggregate makes 149.7 bboe. Net present value (at 10% discount rate)of the Gazprom Group's hydrocarbon reserves is assessed at USD 299.2 billion, which is USD 29.6 billion or 11% higher than as of 31 December 2010. The assessment covered 90% of natural gas, 83% of gas condensate and 89% crude oil reserves of the Group under the ABС1classification accepted in Russia.

The following table shows proved and probable reserves of the Gazprom Group under PRMS Standards:

Note.

(1) The ABC1 classification accepted in Russia is based on analysis of geological parameters of reserves and evaluates the actual hydrocarbon reserves in geological formations. PRMS Standards take into account not only the probability of hydrocarbon deposition in geological formations but also the economic feasibility of reserves extraction, determined based on exploration and drilling costs, operating expenses for production and transportation, taxes, hydrocarbon selling prices and other factors. Thus, PRMS information about proved and probable reserves of the Group can not be used for evaluation of reserves that were not subject to PRMS evaluation.

Comparing to the assessment made as at 31 December 2010, the Group's proved and probable reserves increased by 2.5 bboe, this is mainly explained by the inclusion into the estimate under PRMS Standards of new fields (Malyginskoye, West-Tambeiskoe and Tasijskoe) and the update of geological models of the Chayandinskoye, Mal'dzhinskoye, Yuzhno-Russkoye, Gubkinskoye, Kamennomysskoye-more fields as well as the update of development parameters of the Orenburgskoye field.

As of 31 December 2011 the Group had licenses for ABC1 hydrocarbon reserves development in the following volumes: 35,046.9 bcm of natural gas, 1,395.5 million tons of gas condensate and 1,767.3 million tons of crude oil, for a total of 230.8 bboe.

As of 31 December 2011 the Group's share in the ABC1 reserves of associated companies was 717.4 bcm of natural gas, 60.1 million tons of gas condensate and 728.6 million tons of crude oil, for a total of 10.1 bboe.

The following table sets forth changes to the Group's ABC1 reserves of natural gas, gas condensate and oil in the licensed areas in the Russian Federation in 2011:

Notes:

(1) Under the law of the Russian Federation, the subsoil user does not have any vested right to develop reserves discovered in areas covered by exploration licenses or beyond the licensed areas. Such reserves shall be transferred to the Undistributed Subsoil Fund of the Russian Federation. Subsequently the subsoil user has a preference right to receive a license for their development.

(2) Excluding dissolved gas

(3) Any changes in gas condensate reserves due to production are recognized as converted into stable gas condensate (C5+). The production volume of unstable gas condensate of the Gazprom Group in 2011 was 12.1 million tons.

As compared to 2010 the ABC1 hydrocarbon reserves of Gazprom Group increased by 1,994.6 bcm of natural gas, 110.7 million tons of gas condensate and 34.4 million tons of oil which is the equivalent of 12,905.8 million boe in 2011, primarily as a result of licensing work and re-registration to OAO Gazprom of the license for the right to use subsurface mineral resources of the Kovykta gas condensate field. In addition the year 2011 demonstrated the record increase of reserves as a result of exploration.

As of 31 December 2011 and 2010, ABC1 hydrocarbon reserves of the Group abroad were considered insignificant and accounted for less than 1% of the Group's ABC1 reserves in Russia as of the dates above.

Exploration

In 2011, exploration was carried out in all oil and gas provinces of Russia: West and Eastern Siberia, Far East, the Orenburg Region, the Krasnodar Territory, the Republic of Komi, offshore areas of the Kara Sea and the Sea of Okhotsk.

In compliance with corresponding contractual obligations the Gazprom Group continued to carry out exploration projects in various countries of the world, including Algeria, Bolivia, United Kingdom, Venezuela, Vietnam, Iraq, Cuba, Serbia, Equatorial Guinea and countries of Central Asia. Major exploration works in FSU countries were concentrated in Uzbekistan and Tadzhikistan and in the far abroad countries - in Vietnam, Algeria and Equatorial Guinea.

The following table shows summary information on exploration work at licensed areas of Gazprom Group:

The exploration work in Russia resulted in the increase of reserves by 719.8 bcm of natural gas and 96.5 million tons of crude oil and gas condensate. Recovery of natural gas reserves was 140%, of crude oil and gas condensate - 234%.

In 2011 exploration activities led to the discovery of five new fields, including: the Mynginskoe field in the Sea of Okhotsk offshore area, the Novotatischevskoe field in the Orenburg region, the Severo-Trassovoe and the Myginskoe in the Tomsk region as well as the Ignyalinskoe in the Irkutsk region.

The main increase of hydrocarbon reserves relates to the earlier discovered fields, including: the Yuzhno-Kirinskoye and the Kirinskoye fields of the Sakhalin shelf, the Chayandinskoye field in the Republic of Sakha (Yakutia) and the Yuzhno-Russkoye field in YaNAO.

In the framework of exploration projects carried out abroad, in 2011 a well was drilled in the Akio block in Bolivia that proved the discovery of a commercial reserve.

In February 2011 due to the marked aggravation of the situation in Lybia and the announcement of force majeure, the pre-drilling studies were suspended in licensed areas No.19 and No.64.

Innovations in field exploration

The Gazprom Group has implemented the below methods for improving the accuracy of reservoir development forecasting:

·; methods of identifying and optimizing exploration scope at first priority gas bearing areas of deep drilling in the regions of Eastern Siberia and Far East;

·; method for differential calculatingexploration efficiency by regions of OAO Gazprom's production operations, including foreign projects, aimed at ensuring compliance with corporate requirements to return on project investments;

·; methods of forecasting high output plots in tight and deep-lying collectors;

·; methods for analyzing geological-field description of of coal beds for the purpose of methane production.

Licensing

In 2011, by order of the Russian Government, the Gazprom Group received four licenses for the use of subsoil plots in the Republic of Sakha (Yakutia) with total С1+С2 gas reserves of 550.6 bcm. Costs of licensed plots acquisition totalled RUB 7.3 billion.

In addition, in connection with OAO Gazprom's acquisition of the assets owned by OAO RUSIA Petroleum Company that was recognized as insolvent in accordance with the procedureprescribed by the federal law "On Insolvency (Bankruptcy)", OAO Gazprom re-registered in its own name the license for the right to use subsoil mineral resources of the Kovykta gas condensate field that was earlier held by the insolvent company. As of 31 December 2011, the Kovykta field reserves are estimated at 1.5 tcm of gas and 77 million tons of С1+С2 gas condensate.

In 2011, sixteen licenses for subsoil use were returned: seven licenses were expired, nine licenses were terminated due to inexpediency of any work continuation. Licenses for eighteen areas (fields) have been extended.

Transactions with assets that changed the controlled reserves and production capacities

The Gazprom Neft Group started to consolidate business in Orenburg region - a new region for the company. The Company acquired ZAO Tsentr Naukoemkih Tehnologiy (High Technology Centre) which holds the license for exploration and production of hydrocarbon reserves in Tsarichanskoye field with C1+C2 oil reserves of 12.7 million tons, and the 86.38% interest in ZAO Yuzhuralneftegas, which holds the license for the Kapitonovskoye field located 30 km from Tsarichanskoye field. The С1+С2 oil reserves of the field are estimated at 5.2 million tons.

Revaluation

In 2011 gas reserves were revalued due to changes in the volumetric parameters in the calculation of reserves in Taldinskoye coal methane field and Gubkinskoye gas field. The 2011 revaluation resulted in the increase of gas reserves by 0.5 bcm and oil reserves by 0.1 million tons in the territory of Russia. Gas condensate reserves decreased by 0.05 million tons as a result of the revaluation.

Production

The following table contains information on the volumes of natural gas and liquid hydrocarbons produced by the Gazprom Group and associated companies in Russia:

The natural decline of production at Cenomanian deposits of the Gazprom Group's gas fields (Urengoyskoe, Yamburgskoe, Medvezhiye) was compensated by introduction of new capacities. Gazprom has been introducing new production capacities in YaNAO in accordance with the plan. At the same time the potential of gas producing fields in Nadym-Pur-Tazovsky region has been utilized more efficiently by developing deeper deposits than the traditional Cenomanian deposits.

In 2011, in the Nydinsky section of Medvezhiye field, the Group commenced the production of gas and gas condensate from Aptian - Albian deposits, test production of gas from the Turonian deposits in Yuzhno-Russkoye oil-gas condensate field, production of gas and gas condensate from Valanginian deposits in Zapoliarnoye oil-gas condensate field. In addition, two Cenomanian gas deposits were put into operation in Muravlenkovskoye and Novogodneye fields of Gazprom Neft.

In order to enhance the resource base of the gas transportation system Sakhalin - Khabarovsk - Vladivostok, in 2011 Gazprom commenced the development of Kirinskoye gas condensate field on the shelf of Sakhalin.

The Gazprom Group continued to develop fields on the west coast of Kamchatka: Nizhne-Kvakchinskoye field was put into operation and Kshukskoye field was brought to the designed production levels.

In 2011 the Gazprom Group's production of gas condensate was 12.1 million tons (or 7% higher than in 2010); crude oil production totalled 32.3 million tons (or 1% higher than in 2010).

In 2011, the offshore ice-resistant fixed platform was installed in Prirazlomnoye oil filed in Pechora Sea. This is the first time such a platform has been designed and built in Russia. The С1+С2 oil reserves of the field are estimated at 72 million tons, maximum level of oil production will exceed 6 million tons per year.

In 2011, the Group's Serbian concern NIS produced 1.1 million tons of oil and 0.6 bcm of gas.

In October 2011, Gazprom commenced the production of gas at the Wingate field in the offshore area of the North Sea (blocks 44/24b and 44/19f), in which Gazprom owns a 20% interest. From the start of gas production to 2011 the share attributable to the Group amounted to 23.8 million cm of gas and 38.6 tons of gas condensate.

In February 2011 Wintershall AG, an associated entity of the Group, (the operator) stopped hydrocarbon production in the C96 and C97 concessions in Lybia due to unrest in the country. In October 2011 after completion of the military operations the production was renewed. In 2011 the Group's share in hydrocarbon production in Lybia was 0.7 million tons of oil and 67 million cm of gas.

The following table sets forth information on the number of developed producing fields and production wells of the Gazprom Group:

Main areas of capital investments

Main investments in the Group's gas production segment in 2011 were allocated to the development of Bovanenkovskoye field on the Yamal peninsula and construction of the railway Obskaya - Bovanenkovo, development of Kirinskoye and Zapolyarnoye fields, maintenance of current production levels at Medvezhiye, Urengoyskoye and Yamburgskoye fields, development of Nadinsky section of Medvezhiye field, and Kshukskoye and Nizhne-Kvakchinskoye fields in the Far East of Russia.

In 2011, the Gazprom Group put into operation 187 new gas production wells in Russia.

The Gazprom Group's capital expenditures for oil and gas condensate exploration and production primarily included Priobskoye and Prirazlomnoye fields as well as implementation of Messoyakhinsky project and the development of the Badra field in Iraq. In total in 2011 the Group put into operation 755 new oil production wells in Russia.

Sale of oil and gas condensate

In 2011 the Group sold 20.6 million tons of oil and stable gas condensate (decrease by 8.8% as compared to prior year).

Volumes of oil and gas condensate sold in domestic and external markets were as follows:

Note.

(1) The volumes of oil and gas condensate sold to indicated markets do not include intra-group sales. The total volume of hydrocarbon sold by the Gazprom Group is included, both own production and purchased from third parties.

Decrease of oil and gas condensate export sales in 2011 as compared to 2010 is explained by the increase of oil refining at Gazprom refineries.

Prices for crude oil both in international and domestic markets have a significant influence on the Group'soperations. Crude oil prices have historically been highly volatile, dependent upon the balance between supply and demand, economic and political development in oil producing regions, global economic conditions and are sensitive to the production levels of OPEC as well as the trends of global financial markets.

In 2011 the price for BRENT crude oil was stable enough especially if compared with the movement of prices for other commodities. The average annual price was about US$ 111 per barrel (compared to USD 79.5 per barrel in 2010). The following table shows average monthly prices for BRENT and URALS crude oil in 2011 as per Platt's agency:

Notes.

(1) Based on BRENT (Dated) closing quotes.

(2) Based on average closing quotes of URALS Mediterranean and URALS Rotterdam.

Innovations in field development and production

For the purposes of improving the efficiency of fields development including new gas production regions and offshore areas of northern seas the Group has developed the following unparalleled technical solutions:

·; engineering solutions for ice production of gas worked out in the course of development of Rusanovskoye and Leningradskoye fields in the offshore areas of the Kara sea;

·; a technology for a joint treatment of Cenomanian, Valanginian and oil gas at the final stage of field development;

·; a technology for developing helium-rich gas fields under which helium concentrate is pumped back into developed deposits;

·; automated systems of remote control and management of wells in electrified and non-electrified clusters, systems managing vital infrastructure of gas fields on the principles of minimal manned technology.

Completed research and development projects allowed to start in 2011 the project of managing waterflooding and maintaining formation pressure in a test section of Sugmutskoye field for the purposes of extracting difficult oil from depleted reservoir sections.

The Gazprom Group implemented projects aimed at a complex protection of downhole equipment from corrosion and introduced the regulatory system that would optimize the inhibitory protection of wells. The works performed in 2011 resulted in the decrease of the corrosion related breakdowns multiple of the active assets from 0.37 to 0.16.

The research performed to develop the software for generating a list of idle wells ranked by economic and technical features for bringing them back into operation resulted in a 15-fold increase in the speed of analyzing idle wells.

Reporting year and subsequent events

In 2011 OAO Gazprom's Management Committee approved the Comprehensive program of technical re-equipment and reconstruction of gas transportation facilities for 2011-2015. In the 10-year perspective the Program will allow to prevent a 414.5 bcm reduction of gas production at selected fields. In addition, operating costs can reduce by RUB 29.9 billion. The total amount of investments under the Program is RUB 265.2 billion.

In July 2011 OAO Gazprom Neft joined the project of developing four hydrocarbon blocks in the exclusive economic zone of the Republic of Cuba in the Gulf of Mexico after signing with Petronas the deed on acceptance of the share in the project (30%) and the agreement on cooperation.

In October 2011, OAO Gazprom and Petroleos de Venezuela S.A. (PdVSA) signed a Memorandum of Understanding with regard to a potential establishment of a joint venture for the development of the Robalo gas field in the Gulf of Venezuela. In addition, a framework agreement between OAO Gazprom and Wintershall was signed in Germany with regard to a swap of assets. This agreement provides for a potential joint development of two Achim deposits in the Urengoyskoye field as well as Gazprom's participation in Wintershall's oil and gas exploration and production projects in the North Sea.

In November 2011, OAO Gazprom's Management Committee made a decision to start gas delivery from the Bovanenkovskoye field to the Unified Gas Supply System ahead of schedule, in the second quarter 2012. Earlier gas production in the Yamal peninsular was expected to start in the third quarter of 2012.

In April 2012 Gazprom signed the agreement on entering the project of a joint development of licensed blocks 05.2 and 05.3 in the offshore areas of Vietnam in the South China Sea water zone. Under this agreement Gazprom shall receive the 49% interest in the Product Sharing Agreement on the terms and conditions on which the project is implemented.

Development plans for the Production of Gas and Production of Crude Oil and Gas Condensate segments

The Gazprom Group's target is to ensure efficient and extended reproduction of commercial reserves. The basic document that defines the strategy of raw materials base development in the Russian Federation is the Program on developing the raw-materials base for gas industry for the period up to 2035, under which the production will be compensated with additions to reserves in the contemporary gas producing regions or regions adjacent to the territory of the Unified Gas Supply System, new centres will be organized in Eastern Siberia and Far East, the raw materials base of offshore areas will be formed and extended. In the period from 2011 through 2035 as a result of the above Program implementation the expected increase in hydrocarbon reserves will be 20.3 billion tons of fuel equivalent.

The required levels of gas production are planned to be maintained in the mid-term perspective by intensively developing acting fields and putting into operation new fields in Nadym-Pur-Tazovsky region, the Yamal peninsula and Sakhalin-3 project.

In the long-term perspective strategic gas production regions include the Yamal peninsula, water zones of northern seas and Far East seas of Russia, the fields of Eastern Siberia and Far East.

Gazprom Neft is the base for the development of the Group's oil business. The company intends to increase hydrocarbon production by developing the following priority areas: establishing a new production centre in the north of YaNAO by developing fields of its subsidiary OOO SeverEnergia, Novoportovskoye field and fields of Messoyakha group; improving business processes and procedures for managing major projects; increasing the reserve base, including through new acquisitions.

It is planned to continue implementing exploration projects abroad for increasing the Group's raw material base outside Russia and expending the Group's operations into new markets for ensuring the long-term presence and stable position of the Group in global oil and gas markets.

Transportation of gas

The following table contains information on assets and volumes of capital investments in the Transportation segment:

Gas transportation system

OAO Gazprom owns the largest gas transportation system (the GTS) in the world, over 160 thousand km long, which is located in Russia and forms part of the Unified Gas Supply System (the UGSS) and can provide an uninterrupted long distances gas supply to customers in the Russian Federation and abroad. 211 compressor stations on the GTS and UGSS pipelines, with a total capacity of about 42 thousand MW, provided for transportation of gas through the system.

In Russia apart from gas transportation assets that form the UGSS the Group also owns gas transportation assets in the Russian Far East. The largest of these assets is the trunk pipeline Sakhalin - Khabarovsk - Vladivostok of 1,354 km long.

As of 31 December 2011, the total length of trunk pipelines and branch connections in Russia was 164.7 thousand km.

The age of the gas trunk pipelines in Russia is shown in the table below:

The Group is continually working to improve the GTS reliability and efficiency. There were no major interruptions of gas supplies over the last ten years. As a result of the regular pipeline repairs, advanced maintenance and diagnostic technology, the incidence of technical faults that involve interruptions or restrictions of gas supply are maintained at a low level. In 2011 twelve technical faults of the GTS were registered (0.07 faults per 1,000 km) as compared with seven faults in 2010 (0.04 faults per 1,000 km).

In 2011, the gas transportation system in Russia transported 683.2 bcm of natural gas (661.2 bcm in 2010). Gas volumes transported for gas suppliers outside the Gazprom Group totaled 81.5 bcm and major gas suppliers were OAO NOVATEK (36%) and OOO NGK Itera (27%).

Volumes of natural gas used for own technical needs of the GTS and UGSF were 45.8 bcm of natural gas in 2011 (43.6 bcm of natural gas - in 2010). The Group assesses the level of gas losses as low and consumption of fuel gas as satisfactory.

The main foreign gas transportation asset of the Group is OAO Beltransgaz, control over which was obtained in December 2011. As of 31 December 2011 the Group's gas transportation assets outside Russia included 10 thousand km of trunk gas pipelines and ten compressor stations with a total capacity of about 734 MW.

Main areas of capital investments

In 2011, the main capital investments in the Group's gas transportation segment are allocated to the construction of the trunk pipelines: Bovanenkovo-Ukhta, Sakhalin - Khabarovsk - Vladivostok, Gryazovets-Vyborg, Ukhta-Torzhok, Pochinki-Gryazovets, SRTO-Torzhok, and, Dzhubga-Lazarevskoye - Sochi as well as reconstruction and re-equipment of active gas transportation assets.

In 2011, 2,469.5 km of gas pipelines and nine compressor stations with a total capacity of 1 thousand MW were put into operation in Russia.

In September 2011, the first stage of the first start-up complex of the pipeline Sakhalin - Khabarovsk - Vladivostok was put into operation. The first stage is 1,354 km long, including a CS of 32 MW and its annual flow rate is 5.5 bcm.

The final 344.5 km section of the pipeline Pochinki-Gryazovets was put into operation in 2011. As of the end of 2011 645 km of the pipeline and three compressor stations with the total capacity of 272 MW were put into operation. In 2012, it is planned to commission a compressor station with the capacity of 64 MW.

In June 2011, the pipeline Dzhubga-Lazarevskoye-Sochi was put into operation. The pipeline length is 171.6 km, 90% of which is an offshore part. The volume of transported gas will reach 3.8 bcm per year.

Along with the construction of new gas transportation capacities in Russia Gazprom is also involved in the reconstruction and re-equipment of gas transportation facilities. 432 km of trunk pipelines were reconstructed in 2011.

Main areas of long-term investments in the gas transportation segment related to OAO Gazprom's involvement in the construction of Nord Stream and South Stream pipelines. The first line of the Nord Stream gas pipeline was put into operation in November 2011. Commissioning of the second line is planned for the fourth quarter of 2012.

Innovations in gas transportation

For the purposes of ensuring the reliability and safety of gas transportation, OAO Gazprom has been developing and consistently implementing a system that will manage technical condition and integrity of the linear part of the trunk pipelines and compressor stations of the UGSS.

In the process of gas compressor stations reconstruction engineering solutions have been worked out that enhance the efficiency of compressor equipment and reduce pollutant emissions from its operation. The solutions provide for the use of gas-turbine units with the capacity of 32-35 MW. At the same time modernization of combusters by using low emission burners has been continued.

The development of a modern device for internal survey of trunk pipelines is in its final stage. The survey will be based on a non-contact electro-magnetic acoustic system of defect control. This device has no parallel in terms of the ability to maintain the target speed of movement in the gas pipeline, including pipelines of "composite topography" or in terms of having no effect on technological parameters of gas transportation.

Reporting year and subsequent events

In March 2011, the Group finalized the transaction on raising to finance the second stage of the Nord Stream project.

In September 2011, shareholders of South Stream Transport AG signed the Shareholders Agreement with regard to construction of the offshore section of the South Stream project. In accordance with the Agreement the share of OAO Gazprom in the offshore gas pipeline project is 50%, the Italian company ENI S.p.a owns 20%, the German company Wintershall Holding and the French company EFD own 15% each. Besides, as part of South Stream project a consolidated technical and economic feasibility study was completed in October 2011 and in December 2011, the construction of gas pipeline through exclusive economic zone in Turkey was authorized. In addition, a detailed implementation plan thatenabled to start the construction works in the end of 2012 was approved.

In September 2011, OAO Gazprom and the Ministry of Oil Industry of the Democratic People's Republic of Korea (DPRK) signed the Memorandum of Understanding with regard to the project of gas pipeline construction to the Republic of Korea via DPRK. Also in September 2011 OAO Gazprom and South Korean Kogas signed the "road map" to the project of pipeline gas supply from Russia to the Republic of Korea via DPRK.

In November 2011, OAO Gazprom signed the agreement to buy a 50% interest in OAO Beltransgaz owned by the Republic of Belarus. As a result of this transaction OAO Gazprom's share in the OAO Beltransgaz equity reached 100%.

Development plans for the Transportation of Gas segment

To ensure reliable gas supply to the domestic market and fulfil its contractual export obligations the Group is involved in the construction of new transportation capacities.

The priority is given to the construction of the following gas pipelines in Russia: the pipeline SRTO - Torzhok, Bovanenkovo - Ukhta and Ukhta - Torzhok for transportation of gas from the Yamal peninsula fields; the pipeline Gryazovets - Vyborg for transportation of gas to the Nord Stream pipeline and to supply gas to customers of the north-west region of Russia; and the pipeline Pochinki - Gryazovets. In addition perspective projects are being considered such as the UGSS expansion to ensure supply of gas to the South Stream pipeline.

Gazprom's long-term objectives include the development of gas infrastructure in Eastern Siberia and Far East.

Apart from construction of new gas transportation facilities in Russia, OAO Gazprom reconstructs and modernizes gas transportation system.

In 2011, OAO Gazprom Management Committee approved the Comprehensive program of technical re-equipment and reconstruction of gas transportation facilities for 2011-2015. The program shall help to improve efficiency by using modern gas compressor equipment, reduce emissions of oxides of nitrogen and carbon, and reduce transportation process losses of gas.

Key foreign projects include construction of the Nord Stream pipeline from Russia to Germany under the Baltic Sea and the South Stream pipeline from Russia to South European countries under the Black Sea.

Underground gas storage

The following table contains information on assets and volumes of capital investments in the Gas Storage segment:

The Group maintains underground storage of gas to help smooth seasonal fluctuations in the demand for gas and to ensure additional supply of gas in case of cold weather or technical failures in the UGSS, also to ensure reliable export supplies and long-term reservation.

Underground gas storages in Russia and abroad

As of 31 December 2011, the Group owns and operates twenty five underground gas storage facilities (the UGSF) in Russia with total volume of active gas amounting to 66.7 bcm. By the season of gas withdrawal from the UGS in 2010/2011 operating reserves of gas in the volume of 64 bcm were accumulated, a potential daily capacity - in the volume of 620 mcm - was provided, the average daily capacity in December -February was 500 mcm. The above actions enabled to provide the withdrawal capacity of 553.9 mcm in the UGS in Russia on 20 January 2011 with total withdrawal of gas from the UGS amounting to 21.0 bcm as of this date. During the period of peak load, Underground Gas Storage facilities (UGSF) in the territory of Russia ensure about 20% of gas supply to Russian consumers and for export, and in the days of quick freeze this figure reaches 30%.

After acquisition of OAO Beltransgaz OAO Gazprom became the owner of three UGSF in the Republic of Belarus - Pribugsky, Osipovichsky and Mozyrsky - with total active capacity amounting to 960 million cm. The Group also controls one UGSF in the Republic of Armenia, active capacity of which amounts to 0.1 bcm as of 31 December 2011.

For increasing export sales reliability, the Group uses gas underground storage facilities in Austria - UGSF Haidach, in UK - UGSF of the company Vitol, in Germany - UGSF Reden and capacity of Vеrbundnetz Gas AG, in Serbia - UGSF Banatsky Dvor, in Latvia Inchukalnskoye UGSF, it also participates in the construction of new gas underground storage facilities in Europe.

In 2011, 48.2 bcm of gas were pumped into the UGSFs in Russia and 47.1 bcm were withdrawn. Outside Russia 4.9 bcm of gas was pumped into UGSFs, the total withdrawal was 3.7 bcm of gas.

Main areas of capital investments

The main area of capital investments in underground gas storage system in 2011 was channeled to reconstruction of Sovkhoznoye, Peschano-Umetskoye and Bednodem'yanovskoye UGS's.

In 2011 the Group was working on expanding the capacity of the following UGSFs in Russia: Stepnovsky UGSF (active capacity increase is 0.5 bcm), Sovkhozny UGSF (active capacity increase is 0.8 bcm), Nevsky (twelve operating wells were connected) and other UGSFs. Pre-investment studies were performed with respect to expansion of a number of existing UGSFs and construction of new facilities. The Group commenced the construction of the Bednodemyanovsky UGSF.

In 2011 the following UGSFs abroad were put into operation (the Group participated in their construction): the second stage of UGSF Haidach (Austria), UGSF Catarina (Germany), UGSF Banatsky Dvor (Serbia).

In addition, the Group made injections of buffer gas into UGSF Bergermeer (Netherlands) in exchange for the access to 1.9 bcm of active capacity and 26.4 million cm of the UGSF's daily capacity; UGSF Bergermeer is expected to start its commercial operations in 2014.

Development plans for the Gas Storage segment

Gazprom's strategy tasks include technical re-equipment, reconstruction and expansion of existing storage facilities as well as development of new UGSFs. Seventeen compressor stations and 17.9 bcm of active storage capacity are to be put into operation in Russia by 2015.

The Program of the UGSF development in Russia for 2011 - 2020, including expansion of daily capacity up to 1.0 bcm, was approved in 2011.

The Gazprom Group is performing technical and economic assessment of its potential participation in joint projects in Great Britain (Saltfleetby), Czech Republic, France, Romania, Turkey. In Czech Republic consideration is given to the project of a new UGSF with the total capacity of about 450 million cm near Damborjice. Gazprom plans to increase gas storage capacity in Europe and bring it to the level of 4.8 bcm of active gas by 2015.

Gas distribution

The following table contains information on assets and volumes of capital investments in the Gas Distribution segment:

The Group is the largest exporter of gas in the world. The following table sets out natural gas sales volumes by geographical segments:

Note:

(1) The sales to FSU countries and Europe and other countries include both export from Russian Federation, and sales of gas purchased by the Group outside Russian Federation. According to the law "On Gas Export" dated 18 July 2006 No.117-FZ, OAO Gazprom as the owner of the UGSS or its 100% owned subsidiaries have the exclusive right to export gas or liquefied natural gas (LNG) produced in any hydrocarbon field in Russia.

In 2011, gas consumption in Russia totaled 473.0 bcm which is a 2.8% increase as compared to 2010. Main customers, as before, are electric-power industry, metallurgy, agricultural chemistry. Joint consumption of these companies is 50% of total gas volumes. The Gazprom Group accounts for 70% of total gas supplies and is the largest supplier in the domestic market.

According to preliminary estimates, in 2011 the overall sale of gas on Gazprom's key export market - in Europe - decreased to 551 bcm (or by more than 9%). Own production of gas in Europe an countries also decreased and according to preliminary estimates amounted to approximately 288 bcm, which is 23 bcm (or 7.4%) less than in 2010.

Under long-term contracts with OAO Gazprom, in 2011 European customers bought 150 bcm of natural gas which is 8.2% higher than in the prior year. The increase is explained by the implementation in 2010-2011 of actions aimed at improving competitiveness of the Russian gas.

In 2011 the overall sale of gas to final customers in Europe by the Group's subsidiaries totalled 3.7 bcm.

In 2011 the Gazprom Group sold 2.3 million tons or 3.06 bcm of LNG (as compared to LNG sales of 1.85 million tons or 2.47 bcm in 2010). Out of 34 LNG lots supplied by the Group in 2011 thirty lots were delivered to the Asian-Pacific Region, including 6 lots to Japan. The geography of supplies also expanded: in 2011 for the first time LNG was dispatched to the terminals in Kuwait and Thailand.

The price of natural gas in FSU, Europe and other countries

The Group's performance is heavily dependent on natural gas sales prices in Europe and other countries.

In 2011, just like in prior years, prices for gas in the Group's export contracts primarily depended on changes in global prices for liquid fuel. Generally in 2011 the prices grew as compared to 2010. In 2011 European prices for oil products, that compete with gas, increased by 37-39%%; the annual average price for BRENT crude oil increased by 40% as compared to 2010.

Given the trends in the global oil market and European gas spot market, export prices for Russian natural gas in 2011 had the tendency towards growing. Particular characteristics of gas pricing such as availability of reference periods in the indexation formula of contracts linked to oil prices (generally 9 months) or introduction of gas indexation for a part of volumes supplied under long-term contracts, made it possible to significantly smooth out the growth of export prices for Russian gas as compared with prices for liquid fuels.

In the reporting year agreements on adaptation of price conditions were reached with Edison, Sinergie Italiane, GDF-SUEZ, WIEH, Wingas and SPP. Pricing formulas in contracts with indexation to oil product prices were updated in accordance with these agreements. These adjustments significantly contributed to ensuring competitiveness of Russian gas in European markets.

Nevertheless contracts with indexation to oil product prices remain operative. Oil price indexation is an essential tool of the long-term business-planning that meets interests of the buyer and the seller of gas. It ensures top-down continuity and stability of the industry investment cycle - from a well to the final customer. The use of oil price indexation has been verified by more than 40 years of the global gas market development. Today oil products in the gas formula play the role of a universal deflator. Their presence does not allow the price of gas to break away from prices of other commodities.

The following table shows the average prices of natural gas sales to FSU, Europe and other countries in 2011 and 2010:

Note.

(1) Calculated based on annual average currency exchange rate between RUB and U.S.$

Increase in the average price of natural gas sales to FSU as compared to the prior period mainly related to the fact that Gazprom started providing FSU customers with contractual prices the earning capacity of which is similar to the European prices.

Domestic natural gas prices

In 2011 the average price of gas sold by the Group in the domestic market remained lower than export prices (less export duties and transportation costs) that is explained by regulation of gas wholesale prices in Russia by the Russian Government.

From 1 January 2011 the regulated wholesale gas prices for industrial consumers increased by 15%. For residential consumers gas prices increased by 5% from 1 January 2011 and by 9.5% from 1 April 2011. Average regulated wholesale gas prices for all Russian consumers increased by 15.8% as compared to 2010.

The following table shows the average prices for natural gas sold in domestic market:

Note:

(1) Calculated based on annual average currency exchange rate between RUB and U.S.$

Main areas of capital investments

A significant portion of capital expenditures in Gas Distribution segment includes the Group's investments in gasification of the Russian Federation regions. The construction of 244 gasification facilities with total length of 2.5 thousand km was completed. It provided gas supply to 390 centres of population in 49 territorial subjects of the Russian Federation. In 2011 investments in gasification of the Russian Federation regions totalled RUB 29.07 billion.

Reporting year and subsequent events

In 2011 OAO Gazprom and Chinese company CNPC continued intensively to negotiate the conditions of the Russian gas supplies to China. In May 2011 the Deputy Chairman of the Russian Government, Igor Sechin and Vice Prime Minister of State Council of the People's Republic of China, Wang Qishan signed a protocol to Memorandum of Understanding on cooperation in the Russian gas supplies of 24 June 2009.

In 2011 Gazprom continued activities to arrange pipeline supplies up to 10 billion cm per year to Republic of Korea. To synchronize actions on implementing the above project OAO Gazprom cooperates with North Korean party involved in accordance with the Memorandum of Understanding signed in September 2011 by OAO Gazprom and Ministry of Oil Industry of Democratic People's Republic of Korea and decisions taken at the first meeting of the joint working group of OAO Gazprom and Ministry of Oil Industry of Democratic People's Republic of Korea.

In addition, Gazprom worked over the possibility of increasing gas supplies to Japan. In January 2011 OAO Gazprom and Agency of Natural Resources and Energy of the Japanese Ministry of Economy, Trade and Industry signed the agreement on cooperation to perform feasibility studies with regard to options of using natural gas in Vladivostok region, transportation and sale of natural gas and gas chemical products from Vladivostok region to the potential buyers in Asian-Pacific Region.

In May - June 2011 OAO Gazprom signed Memorandum of Understanding with four Indian companies for supplies of up to 10 million tons of LNG per year from Gazprom Group portfolio during 25 years.

In November 2011 the documents regulating the relationship between the parties regarding the acquisition of the remaining state-owned 50% of OAO Beltransgas shares and further operating of the entity, principles of pricing, volumes of gas supplies and its transit starting from 2012 were signed. OAO Gazprom and OAO Beltransgas signed contracts for gas supplies to Belarus Republic and gas transportation via Belarus Republic in 2012-2014.

In December 2011 OAO Gazprom and NAK Naftogas of Ukraine signed supplements to the contracts for gas supply and transit that provided for possibility of making payments for the gas supplied and gas transit via Ukraine in Russian roubles and US dollars.

In January 2012 OAO Gazporm and State Oil Company of Azerbaijan signed supplement to the current contract for gas sales. According to the mentioned document the volume of gas purchases in Azerbaijan will increase from 1.5 to 3 bcm per year and from 2013 it will exceed 3 bcm.

In March 2012 OAO Gazprom and AO Moldovagas extended the current contracts for gas supplies and transit until the end of the second quarter of 2012. Earlier, in December 2011 the contracts for gas supplies and transit were extended until the end of the first quarter of 2012.

Development plans for Gas Distribution segment

The Group's strategy in the Russian domestic market includes ensuring a continuous gas supply to our domestic customers while improving the profitability of sales. One of the main landmarks of domestic gas market development is moving from the regulation of wholesale gas prices to the regulation of tariffs related to gas transportation through trunk pipelines that is viewed as natural monopoly operations for all suppliers.

In 2010 the Russian Federation Government adopted Resolution No.1205 "On improvement of gas prices state regulation" under which in 2011-2014 the regulation of wholesale gas prices for industrial customers is based on gas price formula considering the principle of equal profitability of export and domestic supplies of gas during transition period and considering the balance of prices for alternative fuels prices.

The Scenario of Economic Performance of the Russian Federation and the Key Parameters of Forecasting Social and Economic Development of the Russian Federation for 2012 and planned period of 2013-2014 developed by the Russian Ministry of Economic Development and Trade provide for the following maximum changes in the regulated gas prices in 2012-2014:

Note:

(1) Maximum annual average rise in wholesale gas prices with annual price indexation starting from the second quarter.

The Group's key objectives in the European market are to maintain the market-leading position, provide for reliable gas supply, and increase the efficiency of our marketing activities. The Group plans to achieve these objectives by developing relationships with traditional customers on a long-term contractual basis and using new forms of trade based on short-term and medium-term sales, as well as gas exchange and one-time transactions. The Group intends to increase its ownership in companies engaged in the sale of gas and electricity to end-users.

The key objectives of Gazprom's marketing strategy in the FSU countries are to ensure that Russian gas will continue to maintain its leading position in the energy sector of the region and to expand access to the end-consumers.

To ensure the flexibility in determining the development stages for fields in the new gas producing regions in Russia, the Group cooperates with Central Asian and other countries.

Marketing strategy provides for diversification of the export sales geography by expanding presence in prospective gas markets. In particular, the Group's priorities include increasing LNG volumes in the Group's export portfolio and, within geographical diversification - access to the markets in North-East Asia and other Asia-Pacific Region countries.

Refining

Assets and volumes of capital investments in Refining segment are presented in the table below:

Processing of hydrocarbons and production of refined products

In 2011 natural gas and gas condensate were processed by gas processing and gas production subsidiaries of OAO Gazprom (OOO Gazprom Pererabotka, OOO Gazprom Dobycha Astrakhan, OOO Gazprom Dobycha Orenburg, Vostokgazprom Group), crude oil was refined at capacities of the Gazprom neft Group - at Omsky refinery, Moscow refinery, OAO NGK Slavneft entities and NIS oil refineries.

The following table sets forth the volumes of the Group's hydrocarbon processing for the periods indicated:

Notes: 

(1) The data in tables do not include raw materials supplied by customers.

As of 31 December 2011 the Group's total processing and refining capacity was 52.5 bcm of natural gas and 75.4 million tons of unstable gas condensate and crude oil.

The following table sets out production volumes of major refined products for the periods indicated:

Notes: 

(1) The data in tables do not include raw materials supplied by customers.

Insignificant decrease (by 1.2%) in gas processing is explained by decrease in gas production in the fields being the raw material bases for Orenburgsky and Sosnogorsky refineries.

The increase in oil and unstable gas condensate refining volumes is explained by commencement of gas and gas condensate production in Valanginian deposit of Zapolyarnoye NGKM and use of all refining capacities at Moscow refinery.

Sales of refined products

The following table sets out the sales of refined and petrochemical products by Gazprom Group:

Notes: 

(1) The volumes of refined products and petrochemicals sold to the consumers of the corresponding sales markets are presented net of intercompany sales. The data include sales volumes of refined products produced by the Gazprom Group and purchased from third parties.

(2) The volumes do not include helium.

High refinery margin maintained in 2011 outlined main trends of marketing policy: oil products sales in a more profitable domestic market as compared to export increased by 3.4 million tons or 14.5% and totaled 26.8 million tons.

Gazprom continued to develop business units engaged in retail product segments - plane-fuelling, coaling, lubricants production and sale.

In 2011 the number of operating fuel stations increased to 1,670 (including 627 fuel stations located abroad) due to expansion of the retail network in Russia and FSU. In 2011 oil products of Gazprom Group that are sold via the network of fuel stations achieved 6.2 million tons.

In 2011 sales of helium decreased to 3.5 million cm (in 2010 4.9 million cm) that is explained by unscheduled repairs of infrastructure facilities used to storage helium concentrate.

Main areas of capital investments

The major portion of capital expenditure in refining in 2011 was channeled to ongoing on the basis of project financing construction of Novourengoisky gas chemical facility, reconstruction of Astrakhansky gas processing complex, modernization and reconstruction of Omsky and Moskovsky refinaries.

In 2011 the Comprehensive program of reconstruction and re-equipment of gas and liquid hydrocarbons processing assets for 2011-2015 was approved. Under the program Gazprom implemented the investment projects for reconstruction and expansion of production capacities of gas processing and gas producing subsidiaries (Astrakhansky and Orenburgsky refineries and Surgut Stable Condensate Plant). Implementation of the program will enable to reach the compliance of products' quality with the European standards and current industrial and environmental safety requirements. In refinery segment Gazprom is implementing the program on upgrading and reconstructing capacities and construction of new facilities that is aimed at improvement of environmental characteristics of fuels produced by the plants, increase in the depth of processing, increase in volumes and expansion of products range. In 2011 Gasprom upgraded and reconstructed the refining capacities in Omsky refinery, Moscow refinery and Yaroslavsky refinery, an associated company of OAO NGK Slavneft.

As a result of upgrading refining capacities since 2011 Moscow refinery commenced production of gasoline and diesel fuel of ecological class 4.

In July 2011 Omsky refinery commenced production of Super Euro-98 gasoline that corresponds to ecological class 5.

Innovations in processing of hydrocarbons and production of oil and gas products

For gas processing purposes the Group is implementing the projects on:

·; developing the testing and production facility to produce the synthetic liquid fuels with the capacity of 100 thousand tons per year;

·; low-tonnage installation to produce super-gasoline to be used at depleted and low pressure wells.

For the purposes of rational utilization of the helium-rich fields the technology of complex raw processing to produce LNG and separate helium and technical decisions related to transportation and storage of helium are being developed.

In order to increase the depth of liquid hydrocarbon raw processing and improving the quality of the produced petrol in accordance with Euro-4 and Euro-5, the secondary processing of the stable gas condensate and oil are being implemented at Astrakhansky gas processing complex and Surgut Stable Condensate Plant.

In addition, other projects are being carried out:

·; developing the technology of HSFO processing at Astrakhansky gas processing plant;

·; implementation of sulphur bituminous for the purposes of construction and repairing the highways.

In 2011 OAO Gazprom implemented large-scale innovation project on development and commissioning a bizeolite catalytic cracking catalyzer in OAO Gazpromneft-ONPZ. Implementation of the new catalyzer enabled Omsky refinery to increase light oil products yield, depth of processing and decrease sulphur content in the products while decreasing operating costs. Currently, Gazprom neft is the only producer of catalytic cracking catalyzers in Russia.

Development plans for the Refining segment

The main objective of the Group's development in gas processing and gas chemistry is to increase the rate of extraction of valuable components of natural and associated oil gas and their effective use for further refining to marketable products with high added value; upgrading of current gas processing and gas chemistry facilities and building new ones, including in Eastern Siberia and Far East.

To improve the quality of the produced motor fuels it is planned to commission a gasoline hydrotreating unit and an isomerisation unit at Astrakhansky refinery in 2012. In 2015 it is planned to commission an isomerisation unit at Surgutsky refinery.

To ensure transportation of increased volumes of gas and gas condensate from new gas production and processing sites put into operation in Western Siberia Gazprom is performing works to expand and reconstruct Urengoysky gas condensate treatment plant so as to increase its capacity, to create treatment and transportation facilities for gas condensate and oil from the Achimov formation and to finalize construction of the condensate pipeline Urengoy - Surgut and to expand and reconstruct Surgutsky Stable Condensate Plant.

Based on project financing principles Gazprom continues to implement the project on Novourengoisky gas chemical complex construction.

Program on Gazprom neft's oil refining development in Russia covers periods through 2020 and a major part of projects on increasing efficiency of oil refinery operations are planned to be implemented by 2015. Gazprom is reviewing projects on developing petrochemistry and studying the perspective of increasing the aromatic hydrocarbons production at Omsky refinery.

In 2012 hydrocracking and hydrotreating units based on Chevron Lummus Global technology are planned to be commissioned at refinery in Pancevo.

Implementation of the investment project on financing Serbian NIS upgrading will provide technical capability of producing all motor fuels of NIS in accordance with EU requirements, increase the efficiency of oil refining and decrease the environmental hazard inflicted by refinery.

Strategic goals set by Gazprom in refinery include production of goods that comply with the Technical regulations, i.e. class 5, increase the yield of light fractions and upgrade the production to existing and projected standards of safety. Strategic goals in the area of oil products marketing include: increased sales of oil products through small-scale wholesalers and retailers in Russia and abroad, expanding the network of filling stations.

Electric Power

The following table shows assets and capital investments related Electricity and Heat Generation and Sale segment:

The Gazprom Group is the largest owner of power generating assets in the Russian Federation. The total installed capacity of the Group's main generating companies in Russia (OAO Mosenergo, OAO TGC-1, OAO WGC-2) is about 37 GW, or 17% of the total installed capacity of the Russian energy system. In November 2011 OAO WGC-2 and OAO WGC-6 merged into OAO WGC-2. The merger resulted in creation of the largest heat generation company in Russia with the established capacity of 17.9 GW.

Information on the Group's key generating assets in Russia and abroad is presented in the table below:

Note: 

(1) Totals may not add up due to rounding.

The Group includes ZAO Kaunasskaya TES that owns Kaunassky thermal power plant in Lithuania. As of 31 December 2011 electric capacity of Kaunassky thermal power plant was 170 MW and heating capacity - 894 Gcal per hour. In September 2011 Board of Directors of OAO Gazprom made the decision to sell the company's shares and started negotiations with the potential buyer.

In 2011 the Group's power generation decreased by 1.1% to 172.8 billion kWh as compared with 2010.

All power generated by the Group is sold in the wholesale electricity and power capacity market.

In 2011 heat production totalled 98.8 million Gcal that is 6.3% lower than in 2010.

Over the last three years average rate of increase in electricity generation was 3.8%, heat generation - 0.3%. Insignificant decrease in these figures is explained by anomalously low temperatures in prior heating season.

In 2011 Kaunassky thermal power plant produced 0.4 bln kW of electric and 1.4 mln Gcal of heating power. In 2011 the Gazprom Group produced the total of 173.2 bln kW of electric and 100.2 mln Gcal of heating power.

Main areas of capital investments

Major capital investments in the power industry in 2011 were allocated to the construction of the Adler TPS, power unit No.2 of Pravoberezhny TPP-5, modernization of Kirishsky SDPP, construction of two power units of Pervomaysky TPP-14 as well as power unit of the Troitsky SDPP.

In 2011 as part of the investment program of the Gazprom Group new power generating capacities in the volume of 1.9 GW were constructed in Russia, which is 40% of the total new generating capacities put into operation in Russia for the stated period.

In 2011, the following items were put into operation: power generating unit of Combined Cycle Plant-800 MW at Kirishskaya GRES (OAO WGC-2), first power generating unit of Combined Cycle Plant-180 MW at Pervomaysky TPP (OAO TGC-1), power generating unit of Combined Cycle Plant-450 MW at Yuzhny TPP (OAO TGC-1), power generating unit of Combined Cycle Plant-420 MW at TPP-26 (OAO Mosenergo) and hydro turbine unit No. 2 at Lesogorsky HPP with the capacity of 29.5 MW (OAO TGC-1). In 2012, it is planned to commission Adlersky TPP with the capacity of 360 MW.

Outside Russia, the Group continued its activity related to the construction and modernisation of the fifth power generating unit of Razdansky TPP (Armenia). In December 2011, complex testing of the power generating unit was performed. After the unit is put into operation Gazprom will have a significant share in the power generating market of Armenia and will be able to supply electric power to its neighbouring countries.

Innovations in electric power

The Gazprom Group is implementing a number of large-scale projects which are unique for the Russian electric power:

·; the construction of a carbon block with CFB-330 at Novocherkassaya TPP continued in 2011 which will enable to use several different coal types including those of low quality for boiler equipment operation;

·; large-scale modernisation of the existing power generating unit at Kirishi GRES is being completed as part of the Combined Cycle Plant-800 construction project. During the modernisation, two single-turbine units with two boilers and capacity of 279 MW each are built up on the currently operating K-300 steam turbine. This conceptually new scheme helps increase the performance of the power generating unit from 38% to 55%, reduce the specific fuel consumption at normal capacity from 324 g/kWh to 221.5 g/kWh, and significantly enhance environmental characteristics.

Development plans for electric and heat energy generation and sales segment

In 2010, the Group and regulators agreed upon energy companies' obligations related to the scope and terms of construction of new power generating capacities under capacity supply contracts which provide for a special capacity tariff that guarantees the return of investments. Implementation of the investment program under capacity supply contracts is also a priority in the development of the Group's energy companies. Group companies are to put into operation approximately 9GW of new capacities in Russia by 2016.

Launch of the long-term capacity market and market liberalisation will guarantee that new power generation units commissioned under capacity supply contracts will pay off. The Gazprom Group continues to enhance the efficiency and reliability of electricity generation. Investment projects for reconstruction and renovation of the existing capacities will help increase the efficiency of power plants and reliability of equipment operation.

In addition, Gazprom is analysing opportunities to invest in construction and acquire power assets in Europe and North-East Asia to increase efficiency and strengthen its position in energy markets of these regions. The Group also expands its collaboration with European energy suppliers who have a client base and technology complex which will help expand Gazprom's presence in the global energy market.

Innovative development

The Gazprom Group views innovative activity and technological upgrade among its priority areas of work. Gazprom significantly invests in research and development. In 2011 research and development costs financed by Gazprom Group totaled RUB 7.9 billion (RUB 7.0 billion in 2010). In this area the Group is the leader among Russian energy companies and is among the top ten global energy companies.

The Group has innovative projects in all core areas of its operations. These projects are primarily aimed at enhanced efficiency, stability and safety of production facilities, efficient field development, increased refinery depth of hydrocarbons, higher quality and competitiveness of produced goods.

Innovative activities of the Gazprom Group are characterized by an effective intellectual property management system. The system is controlled at every stage of the life cycle of intellectual property.

As of 31 December 2011 entities of the Gazprom Group held 1,608 patents.

Long-term Planning of Innovative Activities

The Program of OAO Gazprom's Innovative Development for the period up to 2020 was developed and approved in 2011 to define and systematize main directions and tasks of OAO Gazprom's activity in the area of resources innovation and optimization as well as to set up innovative development indicators.

The Program will cover a set of interdependent actions aimed at the development and implementation of new technologies, innovative products and services of the global level, as well as creation of favorable conditions for the development of innovative activity in OAO Gazprom and adjacent industries of the Russian Federation.

The distinctive feature of OAO Gazprom's Program of Innovative Development for the period until 2020 is the system of priorities in gas, oil and electric power businesses. The system has been formed on the basis of forecasts of OAO Gazprom's science and technology development until 2020 prepared with account for OAO Gazprom's 10-year Development Program and the General Gas Industry Development Scheme until 2030.

Each business process has been analyzed in the terms of potential improvement of its economic indicators for the plan period provided that existing technologies are replaced by the most advanced ones. Basic directions of technology improvement or technology priorities have been identified following the analysis results. Investments into these areas will allow Gazprom to obtain the maximum economic benefit.

Integral performance indices as well as key innovation technologies have been determined for each technology priority.

Annually approved OAO Gazprom's R&D Program as wells R&D plans developed for each key technology are aimed at implementing technology priorities established in the Program.

Substantial funds are to be allocated for the Innovative Development Program. R&D costs are the key element. By 2020 the planned amount may increase 4.2 times and reach RUB 34 billion and their share in revenue can grow three times and exceed the average global level. The economic benefit expected from technological projects is RUB 450 billion for the period until 2020.

Environment protection

In its operations, Gazprom is guided by the principle of strict compliance with rules of international and Russian environmental legislation.

In October 2011, the Board of Directors approved the effective version of OAO Gazprom's Ecological Policy and recommended that Gazprom Group's companies should use this document. In the reporting year OAO Gazprom's Complex Ecological Programme was approved for the period from 2011 to 2015 aimed at the sustainable environment-oriented gas industry.

Gazprom places high emphasis on environmental security upon implementation of its key projects. Project solutions are designed to reduce the impact of business and other activities on the environment, both at the construction and operation stages.

In 2011, as a result of governmental inspections, no significant violations of Russian environmental legislation by Gazprom Group entities were identified. Penalties paid for the violation of the environmental legislation by Gazprom Group in 2011 were RUB 4.6 million. Penalties which are insignificant in proportion to the Group's size demonstrate the high level of compliance with the environmental legislation.

The main indicators of Gazprom Group impact on environment are presented below:

The Group's power assets account for the main contribution in the formation and movement of waste generation and discharge of water waste in surface water bodies. The Group's power assets account for 97% of taken and 99% of discharge water. At the same time 96.5% of waste water volume that go to surface waters are clean as per regulatory requirements or have been cleaned at treatment facilities.

Gazprom Group's environmental costs are disclosed below:

In 2011, CO2 emissions of the main Gazprom's subsidiaries in production, transportation and underground gas storage operations decreased by 3% as compared to the prior year and amounted to 133 million tons of CO2 - equivalent.

In line with the Energy Strategy of Russia up to 2030, the Climate and Ecology Doctrines of the Russian Federation, OAO Gazprom strictly adheres to the corporate policy of Earth climate protection. The main components of Gazprom's policy for climate protection are: participation in international organisations' activities, working out environmental standards in accordance with the international agreements, conducting research related to greenhouse gas emissions, and implementation of target projects to reduce greenhouse gas emissions, and the efficient usage of associated gases.

Employees

In its operations, the Group complies with all requirements of the conventions of International Labour Organization ratified by the Russian Federation. Guided thereby, the Group complies with international standards related to freedom of associations, salary, duration of the working day and labour conditions, employees' compensation for their work, social security, provision of paid vacation, labour safety, etc.

As of 31 December 2011 the number of employees in Gazprom Group's subsidiaries was 404.4 thousand people, including 25.9 thousand employees of Gazprom Group's entities registered abroad.

The structure of Gazprom Group's employees as of 31 December 2011 is provided in the following table:

The table below shows the level of education of Gazprom Group staff as of 31 December 2011.

Professional training of workers is carried out in training divisions of subsidiaries, training of graduates - in corporate and governmental educational institutions. In total 207.7 thousand employees were covered by professional training in 2011.

The established social partnership system allows regulating social and labour relations in accordance with the changing economic and social environment, on-going balancing of personnel's and employer's interests without decrease of the achieved level of material protection of employees and their families, maintaining social stability and attractiveness of Gazprom Group entities in the labour market.

Social welfare of employees is carried out by providing incentives, guarantees and compensations, medical and health resort services, various types of personal insurance, creating a comfortable and safe working conditions, assisting in solution of housing questions through the basic mechanism of bank mortgage, as well as supplementary pension coverage.

In 2011 social and labour relations between employees and employers in the Group entities were regulated by labour legislation, Industry Agreement for Entities of Oil and Gas Sectors and Construction of Oil and Gas Facilities of the Russian Federation for 2011-2013, Industry Tariff Agreement in the Russian Utilities Sector for 2009-2011, General Collective Agreement of OAO Gazprom, its subsidiaries and entities for 2010-2012 and by subsidiaries' and entities' collective agreements.

The Inter-Regional Trade-Union Organization of OAO Gazprom represents interests of more than 270 thousand employees.

Analysis of financial results of operations

Results of operations

(RUB million)

Sales

The following table sets out our volumes and realized prices

Notes:

(1) VAT is not charged on sales to Europe and other countries.

(2) Calculated on the basis of annual average exchange rate between RUB and U.S.$.

Total sales (net of VAT and customs duties) increased by RUB 1,040,036 million, or 29%, to RUB 4,637,090 million in the year ended 31 December 2011 compared to the year ended 31 December 2010.

Net sales of gas accounted for 61% of total net sales in the years ended 31 December 2011 and 2010.

Net sales of gas increased from RUB 2,186,205 million in the year ended 31 December 2010 to RUB 2,814,848 million in the year ended 31 December 2011, or by 29%.

Net sales of gas to Europe and other countries increased by RUB 339,844 million, or 31%, to RUB 1,439,069 million in the year ended 31 December 2011 as compared to the year ended 31 December 2010. This mainly results from the increase in gross average RUB price (including customs duties) by 23%. Besides the volume of gas sold increased by 6% in the year ended 31 December 2011 as compared to the year ended 31 December 2010.

Net sales of gas to FSU countries increased by RUB 187,041 million, or 42%, to RUB 637,178 million in the year ended 31 December 2011 as compared to the year ended 31 December 2010. This increase was mainly due to increase in gross average RUB price (including customs duties, net of VAT) by 21% in the year ended 31 December 2011 compared to the year ended 31 December 2010 and increase in volumes of gas sold to FSU countries by 16% in the year ended 31 December 2011 compared to the year ended 31 December 2010.

Net sales of gas in the Russian Federation increased in the year ended 31 December 2011 compared to the year ended 31 December 2010, by RUB 101,758 million, or 16%, to RUB 738,601 million. This increase was mainly due to 15% increase in the gross average price for domestic gas sales price regulated by the Federal Tariffs Service (FTS), and 1% increase in the volumes of gas sold in the year ended 31 December 2011 compared to the year ended 31 December 2010.

Net sales of refined products (net of VAT and customs duties) increased by RUB 263,964 million, or 37%, to RUB 973,026 million in the year ended 31 December 2011 in comparison with RUB 709,062 million in the year ended 31 December 2010. The increase mainly resulted from increase of world prices for refined products and increase in volumes sold in the year ended 31 December 2011 compared to the year ended 31 December 2010. In the years ended 31 December 2011 and 2010 the Gazprom neft Group's sales comprised 84% of the total amount of our net sales of refined products, respectively.

Net sales of electric and heat energy (net of VAT) increased by RUB 55,896 million, or 19%, to RUB 344,551 million in the year ended 31 December 2011 as compared to the year ended 31 December 2010. The increase in net sales of electric and heat energy was mainly due to the increase in tariffs and volumes of electric and heat energy sold to customers.

Net sales of crude oil and gas condensate (net of VAT and customs duties) increased by RUB 39,358 million, or 20%, to RUB 235,432 million in the year ended 31 December 2011 as compared to RUB 196,074 million in the year ended 31 December 2010. The increase was mainly caused by the increase in oil and gas condensate prices as well as by increase in volumes of gas condensate sold in the year ended 31 December 2011 as compared to the year ended 31 December 2010. Sales of crude oil included in net sales of crude oil and gas condensate (net of VAT and customs duties), amounted to RUB 189,945 million and RUB 169,193 million in the years ended 31 December 2011 and 2010, respectively.

Gas transportation net sales (net of VAT) increased by RUB 20,364 million, or 22%, to RUB 112,995 million in the year ended 31 December 2011 from RUB 92,631 million in the year ended 31 December 2010. The increase was mainly caused by the increase in gas transportation tariffs and volumes of gas transported for independent gas suppliers in the year ended 31 December 2011 as compared to the year ended 31 December 2010.

Other revenues increased by RUB 31,811 million, or 26%, to RUB 156,238 million in the year ended 31 December 2011 compared to RUB 124,427 million in the year ended 31 December 2010.

Net gain from trading activity decreased by RUB 3,465 million, or 55%, to RUB 2,791 million in the year ended 31 December 2011 in comparison with the year ended 31 December 2010.

Operating expenses

Operating expenses increased by 21% in the year ended 31 December 2011 to RUB 2,942,181 million from RUB 2,440,777 million in the year ended 31 December 2010. Operating expenses as a percentage of sales decreased from 68% in the year ended 31 December 2010 to 63% in the year ended 31 December 2011. The table below presents a breakdown of operating expenses in each year:

Purchased gas and oil

Cost of purchased gas and oil increased by 37% to RUB 828,551 million in the year ended 31 December 2011 from RUB 605,836 million in the year ended 31 December 2010. Cost of purchased gas increased by RUB 176,281 million, or 44%, and amounted to RUB 578,006 million in the year ended 31 December 2011. This increase relates mainly to the increase in volumes and prices of gas purchased from third parties within Russian Federation and abroad. The cost of purchased oil included in the cost of purchased gas and oil increased by RUB 46,434 million, or 23%, and amounted to RUB 250,545 million in the year ended 31 December 2011 in comparison with RUB 204,111 million in the year ended 31 December 2010 due to the increase in world oil prices.

Taxes other than on income

Taxes other than on income consist of:

The natural resources production tax increased by 51% to RUB 265,742 million in the year ended 31 December 2011 from RUB 175,789 million in the year ended 31 December 2010. The increase mainly resulted from the general increase of natural resources production tax rate for gas from RUB 147 to RUB 237 per thousand cubic meters since 1 January 2011 as well as from the increase of natural resources production tax rate for oil due to the increase in world oil prices.

Staff costs

Staff costs increased by 6% to RUB 374,731 million in the year ended 31 December 2011 from RUB 354,501 million in the year ended 31 December 2010. Staff costs include expenses associated with pension obligations, which amounted to RUB 35,471 million in the year ended 31 December 2011 and RUB 64,990 million in the year ended 31 December 2010. The increase in staff costs (excluding expenses associated with pension obligations) mainly resulted from the salary indexation.

Transit of gas, oil and refined products

Transit of gas, oil and refined products increased by 3% to RUB 280,770 million in the year ended 31 December 2011 from RUB 273,469 million in the year ended 31 December 2010. This increase mainly relates to the increase in costs of transportation through Eastern Europe.

Depreciation

Depreciation increased by 10%, or RUB 25,491 million, to RUB 275,184 million in the year ended 31 December 2011 from RUB 249,693 million in the year ended 31 December 2010. The increase primarily relates to the growth in fixed asset base.

Repairs and maintenance

Cost of repairs and maintenance increased by 6% to RUB 189,865 million in the year ended 31 December 2011 from RUB 178,296 million in the year ended 31 December 2010. This increase was caused by the increase in volume of repair services rendered by third parties to the Group in the year ended 31 December 2011.

Cost of goods for resale, including refined products

Cost of goods for resale, including refined products increased by 132% to RUB 125,520 million in the year ended 31 December 2011 from RUB 54,145 million in the year ended 31 December 2010. The increase in cost of goods for resale, including refined products, mainly results from the increase in volumes of refined products purchased by the Gazprom neft Group and the increase in prices for refined products.

Materials

Cost of materials increased by 8% to RUB 104,349 million in the year ended 31 December 2011 from RUB 96,287 million in the year ended 31 December 2010. The increase mainly resulted from the increase in prices for purchased materials.

Electricity and heating expenses

Electricity and heating expenses increased by 15% to RUB 70,356 million in the year ended 31 December 2011 from RUB 60,961 million in the year ended 31 December 2010. The increase mainly resulted from the increase in consumption of electricity and increase in electricity tariffs.

Exchange rate differences on operating items

Exchange rate differences on operating items in the year ended 31 December 2011 amounted to a net gain of RUB 6,386 million compared to a net loss of RUB 12,876 million in the year ended 31 December 2010. The change was primarily driven by depreciation of RUB against U.S.$ by 6% and EUR by 3% in the year ended 31 December 2011, compared to depreciation of RUB against U.S.$ by 1% and appreciation of RUB against EUR by 7% in the year ended 31 December 2010.

Other operating expenses

Other operating expenses increased by 7% to RUB 178,896 million in the year ended 31 December 2011 from RUB 166,765 million in the year ended 31 December 2010. Other expenses include bank charges, security services, legal and consulting services, gas storage, charity and finance aid, advertising services.

Changes in inventories of finished goods, work in progress and other effects

Changes in inventories of finished goods, work in progress and other effects increased by 26% to RUB 64,413 million in the year ended 31 December 2011. The negative amount of changes in inventories of finished goods, work in progress and other effects in the year ended 31 December 2011 relates mainly to the increase in the balances of finished goods as of 31 December 2011 in comparison with those as of 31 December 2010.

Impairment provision and other provisions

In the years ended 31 December 2011 and 2010 the Group has assessed whether there were any indicators that non-current assets of the Group might be impaired. No such indicators were identified.

Included in the impairment and other provisions are provisions for short-term and long-term accounts receivable in the amount of RUB 42,351 million and RUB 48,448 million for the years ended 31 December 2011 and 2010, respectively.

Operating profit

As a result of the factors discussed above, our operating profit increased by RUB 543,021 million, or 49%, to RUB 1,656,843 million in the year ended 31 December 2011 from RUB 1,113,822 million in the year ended 31 December 2010. Operating profit margin increased from 31% in the year ended 31 December 2010 to 36% in the year ended 31 December 2011.

Finance (expense) income

Exchange gains increased by RUB 21,186 million to RUB 171,570 million in the year ended 31 December 2011, compared to RUB 150,384 million in the year ended 31 December 2010. Exchange losses increased by RUB 105,392 million to RUB 235,825 million in the year ended 31 December 2011 from RUB 130,433 million in the year ended 31 December 2010. The net exchange loss of RUB 64,255 million in the year ended 31 December 2011 in comparison with net exchange gain of RUB 19,951 million in the year ended 31 December 2010 is explained by depreciation of RUB against U.S.$ and Euro in the year ended 31 December 2011 in comparison with the prior year.

Interest income decreased by 10% to RUB 18,685 million in the year ended 31 December 2011 from RUB 20,692 million in the year ended 31 December 2010, mainly due to deconsolidation of ZAO Gazenergoprombank in the second quarter 2010.

Interest expense decreased by 17% to RUB 31,998 million in the year ended 31 December 2011 from RUB 38,714 million in the year ended 31 December 2010, mainly due to decrease in average borrowings balance during the year ended 31 December 2011 in comparison with the prior year.

Share of net income of associated undertakings and jointly controlled entities

Share of net income of associated undertakings and jointly controlled entities increased by RUB 22,529 million, or 29%, to RUB 99,049 million in the year ended 31 December 2011 compared to RUB 76,520 million in the year ended 31 December 2010. The increase of the Group's share of net income of associated undertakings and jointly controlled entities in the year ended 31 December 2011 relates mainly to the increase of net income of Sakhalin Energy Investment Company Ltd. by RUB 27,878 million due to increase of sales of hydrocarbons, partly offset by change in presentation of OAO NOVATEK and decrease of net income of Gazprombank Group in the year ended 31 December 2011 compared to the year ended 31 December 2010.

Disposal of interest in OAO NOVATEK

In December 2010 the Group sold a portion of the associated undertaking (total carrying value of RUB 84,978 million as of the date sold) representing a 9.4% interest in OAO NOVATEK to a party unrelated to the Group for RUB 57,462 million paid in cash. As a result of this transaction the Group has ceased to exercise significant influence over the business activities of OAO NOVATEK. Therefore the remaining 9.99% interest was classified as long-term available-for-sale financial asset and was recognized at fair value in the amount of RUB 104,484 million at the date of disposal.

In the consolidated statement of comprehensive income for the year ended 31 December 2010 the Group recognized a gain of RUB 77,375 million representing the difference between the sum of fair value of the remaining 9.99% interest at the date of transaction, cash proceeds from disposal of 9.4% interest and accumulated net gain previously recognized in other comprehensive income in relation to this associated undertaking, and the carrying amount of total 19.39% interest as at transaction date.

Profit tax

Total profit tax expense increased by RUB 61,784 million, or 22%, to RUB 337,494 million in the year ended 31 December 2011 compared to RUB 275,710 million in the year ended 31 December 2010. The effective profit tax rate was 20.1% and 21.6% in the years ended 31 December 2011 and 2010, respectively. The change in the effective tax rate results mainly from the effect of decrease of non-deductible expenses associated with pension obligations and impairment provision in the year ended 31 December 2011 and the effect of one-time non-taxable income related to the disposal of interest in OAO NOVATEK in the year ended 31 December 2010.

Profit for the year attributable to owners of OAO Gazprom

As a result of the factors discussed above, our profit for the year attributable to owners of OAO Gazprom increased by RUB 338,461 million, or 35%, from RUB 968,557 million in the year ended 31 December 2010 to RUB 1,307,018 million in the year ended 31 December 2011.

Profit for the year attributable to non-controlling interest

Profit for the year attributable to non-controlling interest increased by RUB 5,988 million, or 20%, to RUB 35,424 million in the year ended 31 December 2011 compared to RUB 29,436 million in the year ended 31 December 2010. The increase is mainly related to the increase in profit of the Gazprom neft Group in the year ended 31 December 2011 compared to the year ended 31 December 2010.

Liquidity and capital recourses

The following table summarizes our statement of cash flows:

Net cash provided by operating activities

Net cash provided by operating activities increased by RUB 177,334 million, or 12%, and amounted to RUB 1,637,450 million in the year ended 31 December 2011 compared to RUB 1,460,116 million in the year ended 31 December 2010. The increase was primarily due to the growth of our operating profit in the year ended 31 December 2011 in comparison with the year ended 31 December 2010, which was partially offset by negative dynamics of changes in working capital.

Net cash used for investing activities

Net cash used for investing activities increased by RUB 554,938 million, or 53%, to RUB 1,605,245 million in the year ended 31 December 2011 compared to RUB 1,050,307 million in the year ended 31 December 2010. This increase relates mainly to the increase in cash used for capital expenditures in development of fields and transport infrastructure, as well as, acquisition of 50% shares of OAO Betransgaz in the year ended 31 December 2011 and proceeds from disposal of interest in OAO NOVATEK in the year ended 31 December 2010.

Net cash provided by (used for) financing activities

Net cash provided by financing activities amounted to RUB 31,814 million in the year ended 31 December 2011 compared to net cash used for financing activities in the amount of RUB 212,384 million in the year ended 31 December 2010. This change was due to the fact that in the year ended 31 December 2011 cash proceeds from loans obtained were higher than redemption of loans and in the year ended 31 December 2010 cash transferred for repayment of loans was higher than proceeds from loans.

Working capital

The working capital surplus (current assets less current liabilities) was RUB 931,038 million as of 31 December 2011 and RUB 854,634 million as of 31 December 2010. The RUB 76,404 million increase in our working capital in the year ended 31 December 2011 was primarily due to the increase in VAT recoverable, increase in inventories and increase in cash and cash equivalents. The increase was partially offset by the increase in short-term borrowings, current portion of long-term borrowings and increase in accounts payable.

The increase in VAT recoverable by RUB 145,064 million was caused by the completion of constructions under the investment agreement in December 2011.

The increase in inventories by RUB 81,791 million was caused by the growth of prices for gas in pipelines and storages and for refined products.

The increase in cash and cash equivalents by RUB 60,558 million was caused by the increase in cash on Group accounts.

The increase in short-term borrowings and current portion of long-term borrowings by RUB 175,816 million was caused mainly by recognition of long-term borrowings with maturity in the year ended 31 December2012 in current portion.

The increase in accounts payable by RUB 102,004 million was caused mainly by the increase in trade payables related to investment construction.

Management believes that the Group has sufficient working capital to meet the Group's obligations for at least the next twelve months. However, the Group is dependent on the short-term credit markets to finance its working capital. The Group is also dependent on a regular access to the domestic debt capital markets to meet a significant portion of its financing requirements in Russian rubles.

Capital expenditures

Total capital expenditures (excluding the effect of acquisitions of subsidiaries) by segment for the years ended 31 December 2011 and 2010 in nominal RUB terms, amounted to the following:

Note:

(1) The capital expenditures in the present analysis differs from the capital additions disclosed within the Group's business segments in IFRS consolidated financial statements of OAO Gazprom primarily due to VAT.

Total capital expenditures (excluding the effect of acquisitions of subsidiaries) increased by RUB 517,275 million, or 47%, from RUB 1,110,834 million in the year ended 31 December 2010 to RUB 1,628,109 million in the year ended 31 December 2011.

The increase of our capital expenditures in the Transport segment was primarily due to increased capital expenditures on the construction of major transportation projects, including Pipeline Bovanenkovo-Ukhta, Pochinki-Gryazovets, Pipeline Ukhta-Torzhok, and also Sakhalin-Khabarovsk-Vladivostok and Nord Stream. The increase of our capital expenditures in the Refining segment was primarily due to increased capital expenditures of Gazprom neft Group and OOO Novourengoysky GCC. The increase of our capital expenditures in the Electric and heat energy generation and sales segment was primarily due to increased capital expenditures on the ООО Gazprom investproekt construction of Adlerskaya TPS and increased capital expenditures of OAO Mosenergo.

Debt obligations

Net debt balance (defined as the sum of short-term borrowings, current portion of long-term borrowings, short-term promissory notes payable, long-term borrowings, long-term promissory notes payable and restructured tax liabilities, net of cash and cash equivalents and balances of cash and cash equivalents restricted as to withdrawal under the terms of certain borrowings and other contractual obligations) increased by RUB 163,948 million, or 19%, from RUB 870,993 million as of 31 December 2010 to RUB 1,034,941 million as of 31 December 2011. This growth resulted from raising of new long-term and short-term loans and borrowings and depreciation of RUB against USD and Euro.

The following table shows our actual foreign currency denominated long-term borrowings (expressed in millions of U.S.$) as of 31 December 2011 and 2010 as well as the same balances expressed in RUB:

Notes:

(1) Converted at Euro to U.S.$ exchange rate of 1.29 and 1.32 as of 31 December 2011 and 2010, respectively.

(2) Converted at the exchange rate as of period-end.

A portion of our long-term borrowings denominated in convertible currencies is collateralized by revenue under certain of the Group's export contracts. As of 31 December 2011 and 2010, borrowings of RUB 18,838 million and RUB 22,747 million, respectively, inclusive of current portion of long-term borrowings, were secured by revenues from export supplies of gas to Western Europe.

As of 31 December 2011 according to the project facility agreement, signed within the framework of the development project of Yuzhno-Russkoe oil and gas field with the group of international financial institutions with UniCredit Bank AG acting as a bank agent, ordinary shares of OAO Severneftegazprom with the pledge value of RUB 16,968 million and fixed assets with the pledge value of RUB 26,666 million were pledged to ING Bank N.V. (London branch) up to the date of full redemption of the liabilities on this agreement. Management of the Group does not expect any substantial consequences to occur which relate to respective pledge agreement.

The following table shows the schedule of repayments for long-term borrowings (excluding long-term promissory notes) as of 31 December 2011 and 2010:

Shareholder structure and stock market of OAO Gazprom

OAO Gazprom's charter capital amounts to RR 118,367,564,500, consisting of 23,673,512,900 ordinary registered shares with a nominal value of RR 5 each. As of 31 December 2011 there were 45,741 registered shareholders of OAO Gazprom, including 10 nominee holders.

Together with its ordinary shares, OAO Gazprom issued American Depositary Receipts (ADRs) for OAO Gazprom ordinary shares in accordance with the program of issuance of level I American Depositary Receipts. The program provides for a free conversion of OAO Gazprom shares into ADRs and vice versa. The Bank of New York Mellon acts as the depositary bank for the program. At present, Gazprom's level I ADRs are freely tradable on the over-the-counter stock market in the United States and on European exchanges such as the London Stock Exchange (LSE), the Berlin-Bremen Stock Exchange and the Frankfurt Stock Exchange.

According to the Russian legislation the maximum volume of ordinary shares underlying ADR may not exceed 35% of Gazprom's charter capital.

The following table summarises shareholder structure of OAO Gazprom as of the last working days of 2011 and 2010:

In 2011 there were no significant changes to the shareholder structure. The Russian Federation remains the major shareholder of OAO Gazprom. Taking into account OAO Gazprom voting shares owned by OAO Rosneftegaz and OAO Rosgazifikatsiya (10.740% and 0.889%, respectively), the state controls 50.002%.

The share of ADR holders in OAO Gazprom equity increased to 28.35% as of 31 December 2011 (as of 31 December 2010 - 27.57%).

Based on the 2011 results, the quotation of OAO Gazprom shares decreased by 11% on the Russian Stock Exchange MICEX and ADR for OAO Gazprom ordinary shares decreased by 16% on LSE.

Changes in the price of OAO Gazprom shares and ADRs and trading volumes on major trading floors in 2011 and 2010 are presented in the table below.

Note:

(1) Before April 2011 onwards 1 ADR provided a right for 4 ordinary shares of OAO Gazprom. Since April 2011 onwards 1 ADR provides a right for 2 ordinary shares of OAO Gazprom. The 2010 comparatives have been restated accordingly.

The average daily trading volume on MICEX in 2011 was RR 14.35 billion or approximately 26% of total average daily volume of the MICEX's secondary trades.

At the end of 2011 the market capitalization of OAO Gazprom was U.S.$122.6 billion. In 2011 the average market capitalization of OAO Gazprom increased by 18 % and totaled U.S.$155.2 billion as compared with 2010.

Dividends paid in 2011 based on OAO Gazprom performance results for 2010 are as follows:

Note:

(1) Dividends are not paid to shareholders (legal entities and individuals) that did not provide data required for dividend payments as per para 5, Art. 44 of Federal Law No. 208-FZ "On Joint Stock Companies" dated 26 December, 1995. Dividends accrued on shares of undefined holders shall be paid upon establishment of the shareholders' rights for securities.

Management structure of OAO Gazprom

The rights of OAO Gazprom shareholders and regulation of OAO Gazprom management activity are determined by and carried out in accordance with the legislation of the Russian Federation and may differ from the regulating practice in companies registered in Great Britain. In accordance with the Federal Law "On Joint Stock Companies" and OAO Gazprom's Charter, OAO Gazprom's operations are governed by OAO Gazprom's General Meeting of Shareholders, Board of Directors, Management Committee and the Chairman of Management Committee. The General Meeting of Shareholders is OAO Gazprom's highest governing body and, among other things, elects OAO Gazprom's Board of Directors. OAO Gazprom's Board of Directors is responsible for formulating the strategy and the executive bodies (Management Committee and the Chairman of Management Committee) are responsible for implementing the strategy and managing OAO Gazprom on a day-to-day basis. All the governing bodies act in compliance with the effective laws of the Russian Federation, OAO Gazprom Charter and the regulations of these governing bodies which were approved by the General Meeting of Shareholders of OAO Gazprom.

Board of Directors and Management Committee

Information on members of the Board of Directors as of 30 December 2011: