OGZD.L Regulatory News (OGZD)

MANAGEMENT REPORTOAO GAZPROM

2014

CONTENT

THE GROUP'S POSITION IN THE GLOBAL ENERGY INDUSTRY

OPERATING RESULTS

Reserves and development of hydrocarbons.

Transportation of gas

Underground gas storage

Gas distribution

Refining

Electric power

Innovation-driven development

Environmental protection

Employees

Analysis of financial results of operations

Results of operations

Liquidity and capital resources

Capital expenditures

Debt obligations

Shareholder structure and stock market of OAO Gazprom

Corporate governance

Strategic and country-specific risks

Customs, currency and tax regulatory risks

Financial risks

Market risks

Operating risks of OAO Gazprom

Branches and representative offices of OAO Gazprom

Conversion Table

Glossary of major terms and abbreviations

Addresses and contacts

Note:

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's entities included in the IFRS consolidated financial statements of OAO Gazprom for the year ended December 31, 2014, 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 consolidated financial statements of OAO Gazprom for the year ended December, 31, 2014 prepared in accordance with IFRS. 

Among other things, the Management Report discloses information on the future production and economic activities of the Gazprom Group, based on the management's forecasts and estimates considering the current situation. Actual performance results may differ from the forecasts and estimates due to the impact of various objective factors.

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

THE GROUP'S POSITION IN THE GLOBAL ENERGY INDUSTRY

Gazprom is the global leader in terms of reserves (approximately 17%) and natural gas production volumes (approximately 12%). In Russia, Gazprom accounts for 69% of gas production and approximately for 11% of oil and gas condensate production (including the share in the production of entities where Gazprom has investments classified as joint operations).

The Group owns the world's largest gas transportation network, which is located in Russia and extends for 170,700 kilometres. This network ensures distribution of natural gas to customers within Russia as well as access to European markets for natural gas.

In Russia, Gazprom accounts for a half of all natural and associated petroleum gas processing and 19 % of oil and stable gas condensate refining.

Gazprom is the dominant supplier of gas to consumers in Russia and countries of the former Soviet Union (FSU). In addition, the Group is Europe's major supplier of natural gas (accounting for 30.2% of European gas consumption, including Turkey).

The Group also owns electricity generating assets, which provide approximately 15% of all the electrical power generated in Russia. Gazprom became the largest heat producer in Russia when it acquired OAO MIPC in 2013.

The Gazprom Group's key operational and financial indicators for 2014 and 2013 are presented in the tables below.

Note:

(1) Including the Group's share in the reserves and production of entities where Gazprom has investments classified as joint operations.

OPERATING RESULTS

Reserves and development of hydrocarbons

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

Reserves

According to the audit of the Gazprom Group's hydrocarbon reserves under PRMS Standards performed by DeGolyer and MacNaughton, as of December 31, 2014 proved and probable reserves of the Group's hydrocarbons (including the share in the reserves of entities where Gazprom has investments classified as joint operations) are 155.6 bboe. Present value of the hydrocarbon reserves is assessed at USD 316.3 billion (as of December 31, 2013 - USD 305.0 billion). The valuation covered 94% of natural gas, 92% of gas condensate and 91% of crude oil reserves of the Gazprom Group under the АВС1 classification.

The following table shows proved and probable reserves of the Gazprom Group (including the share in the reserves of entities where Gazprom has investments classified as joint operations) under PRMS Standards:

Note:

(1) The ABC1 classification accepted in Russia is based on the geological data analysis and evaluates the actual hydrocarbon reserves in geological formations. PRMS Standards take into account not only the probability of hydrocarbon presence in geological formations but also the economic feasibility of reserves extraction, which is determined based on exploration and drilling costs, operating expenses for production and transportation, taxes, current selling prices of hydrocarbon and other factors.

As compared to the assessment made as of December 31, 2013, proved and probable reserves of Gazprom grew by 1.4 bboe. The increase in PRMS reserves is attributable to the inclusion of assessed reserves at the Khandinsky block of the Kovyktinskoye field and the results of exploration at the Chayandinskoye and Semakovskoye fields, as well as the results of the Gazprom Neft Group's exploration operations in Eastern Siberia (i.e. at the Ignyalinsky, Tympuchikansky and Vakunaysky license blocks).

As of December 31, 2014, the Group (including the share in the reserves of entities where Gazprom has investments classified as joint operations) had licenses for ABС1 hydrocarbon reserves development in the following volumes: 36,101.4 bcm of natural gas, 1,447.0 million tons of gas condensate and 2,053.1 million tons of crude oil, for a total of 239.5 bboe. The Group's share in the ABС1 hydrocarbon reserves of associated companies was 971.7 bcm of gas, 97.0 million tons of gas condensate and 575.4 million tons of crude oil, or 10.7 bboe.

The following table presents changes to ABC1 reserves of natural gas, gas condensate and oil (including the share in the reserves of entities where Gazprom has investments classified as joint operations) at licensed areas of the Gazprom Group in Russia in 2014:

Notes:

(1) Under the Russian Federation laws, 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) Except for dissolved gas.

(3) Any changes in gas condensate reserves due to production are recognized as converted into stable gas condensate (C5+). In 2014, the Gazprom Group produced 14.5 million tons of unstable gas condensate.

Exploration

The following table presents summary information on exploration work at licensed areas of the Gazprom Group in Russia and those under the foreign projects with the Group's participation:

Notes:

(1) Including VAT.

(2) The consolidated data about exploration work carried out by the Gazprom Group in foreign countries include the data on projects where the Group's subsidiaries perform operational functions.

In addition, in entities where Gazprom has investments classified as joint operations wells development drilling totalled 13.1 thousand m, 4 exploration wells have been completed, including 3 wells which yielded an influx.

In 2014, exploration work in Russia resulted in an increase in reserves by 822.5 bcm of natural gas and 138.9 million tons of gas condensate and crude oil. The increase in gas reserves was mainly attributable to the Astrakhanskoye field (600.6 bcm), the Yuzhno-Kirinskoye field in the Sea of Okhotsk offshore zone (115.2 bcm), and the Semakovskoye field in the Taz River Estuary offshore zone (47.9 bcm). The increase in gas condensate reserves was mainly attributable to the Astrakhanskoye and Yuzhno-Kirinskoye fields.

In the reporting year, the East-Imbinskoye gas field and 30 gas deposits were opened in the Krasnoyarsk Territory. The largest gas deposit was opened in the Jurassic sediments of the Pestsovoye field.

The recovery ratio for natural gas reserves amounted to 1.9, while for gas condensate it was 10.9 and for oil it was 0.6.

The Group's subsidiaries are involved in exploration projects internationally, in which they perform operational functions. The exploratory drilling was carried out in Algeria and Serbia, while some 3D seismic exploration work was conducted in Serbia.

The drilling of the RSHN-1 exploratory well, at a depth of 4,120 m, resulted in the opening of the Rhourde Sayah Nord oil field (RSHN) in Algeria.

Licensing

As of December 31, 2014, the Gazprom Group held 354 subsoil licenses for conducting geological surveys, prospecting, exploration and production of hydrocarbons in the Russian Federation. The licensed subsoil area covered 546.3 thousand sq. km, including 331.7 thousand sq. km of offshore sites. In addition, entities where Gazprom has investments classified as joint operations held 35 licenses with the licensed subsoil area of 2.7 thousand sq. km.

The Gazprom Group obtained 13 subsoil licenses in 2014, including three licenses issued by decrees of the Russian Federation Government for hydrocarbon surveys, exploration and production at the federal-level Khandinsky plot, which includes part of the Kovyktinsky field (Khandinsky block) in the Irkutsk Region; and for geological surveying and hydrocarbon exploration and production at the federal-level Kheisovsky and North-West subsoil plots in the Barents Sea offshore zone.

In 2014, the licensing activities resulted in a growth of ABC1 natural gas reserves amounting to 182.3 bcm.

The overall one-time payment for all licenses obtained in 2014 was RUB 18.4 billion.

The user of mineral resources decided to surrender its license for the Urumako-1 block (Venezuela) due to the inadvisability of conducting further work.

Transactions with assets that changed reserves and production capacities of subsidiaries and associated companies

In March 2014, OOO Yamal Razvitie, an associate of the Group (in which Gazprom holds a share of 50%), finalized the acquisition from OAO Novatek of a 20% interest in Arctic Russia B.V., which in turn owns a 49% interest in OOO SeverEnergia. As a result of this transaction, the Gazprom Neft Group's share in OOO SeverEnergia (subsidiaries of which are involved in hydrocarbon exploration and production in YaNAO) has increased from 40.2% to 45.1%.

Production

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

In 2014, the Gazprom Group produced 444.9 bcm of natural and associated petroleum gas in Russia which is 43.5 bcm, or 8.9%, less than in 2013. This volume includes the share in the production of entities where Gazprom has investments classified as joint operations. The decrease in gas production was attributable primarily to Ukraine's cessation of gas offtake in the second quarter of 2014 as well as to shortfalls in gas offtake by both Russian and foreign customers.

Despite decreased annual volumes of gas production, the Gazprom Group's production potential given peak demand during the fall-winter 2014/2015 heating season was able to ensure an average gas production volume of 1,690 mmcm per day.

The Bovanenkovskoye field, which has been in development since 2012, accounts for a major part of the gas production growth. In the reporting year, the field produced 42.8 bcm of gas (in 2013 - 22.8 bcm).

Oil production, including the share in the production of entities where Gazprom has investments classified as joint operations, was 43.5 million tons, which is 1.2 million tons more than in 2013. The higher level of production was attributable to the increased oil production potential of the Gazprom Neft Group in the Priobskoye field and fields in the Orenburg Region.

In 2014, gas condensate production was 14.5 million tons, which is 0.2 million tons less than in 2013.

Production of gas by associated companies also increased. The Gazprom Group's share in gas production within Russia was 18.2 bcm of natural and associated gas (an increase of 5.2 bcm as compared to 2013). The Group's share in the liquid hydrocarbon production of the associated companies was 2.3 million tons of gas condensate (an increase of 1.0 million tons as compared to 2013), 10.0 million tons of oil (a decrease of 0.2 million as compared to 2013). The change was attributable to increased production of gas and gas condensate at the Samburgsky licensed area of OAO Arctic Gas controlled by OOO SeverEnergia, as well as to decreased production of oil by other associates of the Gazprom Neft Group.

The Gazprom Group also participated in a number of oil and gas projects abroad under which production has been commenced:

· blocks 05-2 and 05-3 in the South China Sea, on the shelf of Vietnam: total production amounted to 1,786.2 mmcm of gas and 366.4 thousand tons of condensate (which is 5.8 and 6.2 times more than in 2013 respectively);

· the Wingate field in the North Sea shelf (United Kingdom): total production amounted to 622.4 bcm of gas and 4.4 thousand tons of condensate (158% and 210% of the 2013 level, respectively);

· the Shakhpakhty field in Uzbekistan: total production amounted to 334 mmcm of gas (105% to the level of 2013).

In Libya, under oil concessions С96 and С97, Wintershall AG produced 0.4 million tons of oil (in 2013 - 2.4 million tons of oil and 254.0 mmcm of gas). The decline in production is explained by the force majeure event that was announced by Wintershall AG in August 2013.

The Serbian subsidiary, Naftna Industria Srbie A.D., produced 1.2 million tons of oil and gas condensate, and 0.6 bcm of gas.

Oil production has started at the Badra field in Iraq. In 2014, 309.5 thousand tons of crude oil was produced, and commercial shipments of oil have begun.

In 2014, total oil production in block Hunin-6 (Venezuela) amounted to 262 thousand tons. Work is continuing on a project to upgrade basic engineering infrastructure (facilities to improve the quality of oil produced). In the Russian part of the project, which is operated by OOO National Oil Consortium, the ownership interest of OAO NK Rosneft increased to 80% with OAO Gazprom Neft holding the same interest - 20%).

The following table presents information on the number of Gazprom Group's developing fields and production wells stock:

In addition, as of December 31, 2014, entities where Gazprom has investments classified as joint operations developed 33 fields in Russia; their production well stock included 8 gas production wells and 3,635 oil production wells (including 3,086 active wells).

Main areas of investments

In 2014, capital investments in the Gas Production segment amounted to RUB 254,881 million. Capital investments in the Crude Oil and Gas Condensate Production segment in 2014 amounted to RUB 227,421 million .

Main capital investments in gas production in 2014 were allocated to developing the infrastructure of Cenomanian-Aptian deposits at the Bovanenkovskoye oil and gas condensate field as well as the implementation of the Comprehensive Program for Upgrading and Technical Re-equipment of Gas Production Facilities.

The Gazprom Group's capital investments in exploration and production of oil and gas condensate were mainly used for developing the Novoportovskoye, Prirazlomnoye and Priobskoye fields, as well as the Gazprom Neft Group's fields in Orenburg region and fields in Iraq. Long-term investments in exploration and production of oil and gas condensate were related to increasing the interest in OOO SeverEnergia and developing fields of the Messoyakhsky group.

In 2014, the following facilities were put into operation:

· UKGP-1 with the annual capacity of 30.0 bcm at the Bovanenkovskoye oil and gas condensate field;

· three boosting compressor stations with the total capacity of 219 MW at the Bovanenkovskoye oil and gas condensate field (125 MW), the Vyngaykhinskoye gas field (64 MW) and Urengoyskoye oil and gas condensate field (30 MW);

· 127 new production gas wells (including 95 wells at the Bovanenkovskoye field) and 828 new oil production wells. Production drilling for gas totalled 125.6 thousand m and for oil - 2.9 million m.

In addition, entities where Gazprom has investments classified as joint operations carried out production drilling for oil of 0.7 million metres.

Sale of oil and gas condensate

In 2014, the Gazprom Group sold 15.7 million tons of oil and stable gas condensate in total.

Volumes of oil and stable gas condensate sold by the Gazprom Group in domestic and foreign markets were as follows:

Note:

(1) The volumes of sold oil and gas condensate do not include intra-group sales.

The decrease in sales of liquid hydrocarbon to the FSU was attributable to the cessation of oil sales by the Gazprom Neft Group to Kazakhstan. The volumes thus made available were sold in the domestic market and also were supplied for refining to the Group's refineries in Russia and exported to Europe and other countries. The increase in sales of liquid hydrocarbon in the domestic market, to Europe and other countries was also due to the growth of oil production in Russia.

In 2014, about 95% of OAO Gazprom's stable gas condensate was sold in the domestic market to the Group's entities (primarily to OAO Gazprom Neftekhim Salavat).

Oil prices

Operations of the Group are affected by the prevailing price of crude oil, both in domestic and international oil markets. In 2014, according to the PIRA agency the prices for Urals crude oil (average quotes of URALS Mediterranean and URALS Rotterdam) fluctuated in the range of 53.4 - 112.4 USD/barrel and decreased by 51 % to 53.4 USD/barrel at the year end.

Notes:

(1) Based on daily average of Brent quotes, calculated as an average between daily maximum and minimum quotes.

(2) Based on daily average quotes of Urals Mediterranean and Urals Rotterdam, calculated as an average between daily maximum and minimum quotes.

In 2014, the rouble spot prices of oil in the Russian market exceeded the 2013 average level by about 9% (according to the Argus data). In 2014, the prices changed in the range RUB 12,200 to RUB 14,900 per ton (VAT inclusive) (FOB-Nizhnevartovsk pipeline) and attained a minimum in November, having decreased by 18% of the annual maximum values. Even as they are clearly impacted by fluctuations in global energy prices, domestic Russian prices for oil and stable gas condensate are largely determined by internal, country-specific factors, such as the supply-and-demand balance at a given period of time, repairs at refineries, price trends in markets for refined products, and the exchange rate of the Russian rouble, which depreciated significantly against the US dollar in 2014.

Reporting year events

In April 2014, the Group made its first shipment of oil produced at the Prirazlomnoye field, which is currently Russia's only project for developing hydrocarbon resources in the Arctic shelf. A new grade of oil named ARCO (Arctic Oil) has come onto the market. 

In May 2014, the first oil was produced at the Chayandiskoye field in Yakutia: the oil rim of the Botuobinsky deposit was put into operation.

In the latter half of 2014, commercial production and shipment of oil began at the Badra field in Iraq. This represents the Group's first major foreign greenfield project in the Production segment. The Group obtained unique experience that it will use in future to develop other new fields both in Russia and abroad.

In October 2014, commercial production began at the Kirinskoye gas condensate field, with the first gas shipped via the Sakhalin-Khabarovsk-Vladivostok trunk pipeline to supply gas to Russian consumers as well as ensure stable availability of gas condensate in the oil and gas condensate pipeline owned by Sakhalin Energy Investment Company Ltd.

In December 2014, one more gas-producing unit was put into operation at the Bovanenkovo field, which serves as the source base for a major gas production centre on the Yamal Peninsula. The pilot unit includes a comprehensive gas treatment plant with a designed capacity of 30 bcm per year, as well as a boosting compressor station with a capacity of 125 MW, and 95 wells. Thus, the gas production potential at this field has increased by 1.5 times, up to 90.0 bcm per year.

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

The Gazprom Group's goals in the area of gas production include not only maintenance of production at existing fields but active development of new gas production centres on the Yamal Peninsula, as well as in offshore zones in the northern seas, Eastern Siberia and the Russian Far East.

Gazprom's critical business objectives include maintenance of the designed capacity at existing fields, commencement of new fields in the Nadym-Pur-Tazovsky region, and development of large and unique fields on the Yamal Peninsula and in offshore zones in the northern seas so as to have the ability to maintain and increase hydrocarbon production levels.

In the long-term perspective, strategic gas production regions include the Yamal Peninsula (Cenomanian-Aptian deposits at the Kharasaveyskoye field, and Neocomian-Jurassic deposits at the Bovanenkovskoye, Kharasaveyskoye and Kruzenshternskoye fields), and the offshore zones in Russian northern seas (fields at the Ob Bay and Taz River Estuary, primarily the North Kamennomysskoye and Kamennomysskoye seas, and the Shtockman field in the Barents Sea offshore zone).

Eastern Russia is rich in resources that can serve as the basis for building up major new oil and gas production centres that can meet the energy needs of Russia's eastern regions as well as provide export supplies to Asia-Pacific countries, primarily China, in the long-term perspective.

In 2014, OAO Gazprom drafted and approved a set of comprehensive action plans for the creation of gas production, gas transportation and gas processing capacities that will use gas produced at fields in the Yakutsk and Irkutsk gas production centres. The source field for the Yakutsk gas production centre, the Chayandinskoye field (with commercial gas reserves of 1.44 tcm), will be put into service in stages, presumably between the second and fourth quarters of 2018. The source field for the Irkutsk gas production centre is the Kovyktinskoye gas condensate field (with commercial gas reserves of 2.54 tcm).

The development priority for the Sakhalin gas production centre is the Sakhalin-3 project. In the reporting year, commercial development began at the Kirinskoye gas condensate field; the South Kirinskoye oil and gas condensate field is among Gazprom's long-term priority projects in the area of gas production. Gas from the Sakhalin-3 project is the main resource for the Sakhalin-Khabarovsk-Vladivostok gas transportation network, which can ensure gas supply to customers in the Russian Far East as well as implementation of the Vladivostok LNG project.

Oil business development strategy provides for increasing the annual hydrocarbon production up to 100 million tons of oil equivalent by 2020 and retaining that level until 2025. To reach this goal the Group plans to enhance efficiency of extracting the remaining reserves at its active production sites by applying new production technologies and optimizing development processes while reducing the cost of currently employed production technologies and implementing new technologies on a mass scale basis. Plans also call for establishing a new production centre in the northern part of the Yamal-Nenets Autonomous Territory (YaNAO) and expanding presence in the Arctic shelf.

The Gazprom Neft Group has been looking at unconventional methods of hydrocarbon production as another potential source for production growth and will work to develop such assets as an important element of its portfolio. Given the overall impairment in the quality of conventional sources for oil production and the need to utilize oil deposits with low filtration characteristics, the Gazprom Neft Group has begun assessing the commercial potential for developing shale oil resources in the Bazhenov formation in Western Siberia.

The development of the Gazprom Group's resource base internationally is aimed at expanding the Group's global presence and enhancing its role as a global energy leader, as well as diversifying its supply sources and transport options, sales markets, and products and services; and reducing the dependence of supply volumes on available demand in the Group's traditional markets by entering new markets, including in adjacent business segments such as natural gas motor fuel and electrical power. Another important goal in the area of hydrocarbon exploration outside of Russia is to acquire the relevant experience necessary to enhance the Group's technological and managerial competencies so as to promote greater efficiency in projects being implemented in Russia, including on the continental shelf.

Transportation of gas

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

Gas transportation system

Gazprom owns the largest gas transportation system (GTS) in the world. It provides a high level of reliability and ensures continuous, uninterrupted gas supplies.

As of year-end 2014, OAO Gazprom and its gas transportation subsidiaries in Russia owned trunk pipelines and branch pipes with a total length of 170,700 km. The GTS includes 250 compressor stations with a total capacity of 46.1 thousand MW. In addition, gas is transferred to gas compressor units via the gas pipelines of gas producers, refinery subsidiaries and underground storage entities, with a total length of 4,500 km.

The table below shows data on the Gazprom Group's gas trunk pipelines in Russia by age:

To ensure greater reliability of gas supplies, technical and environmental safety, and efficient gas transportation, every year Gazprom carries out capital repairs and scheduled preventive maintenance of the GTS. Reconstruction and capital repairs are performed on these assets by ranking them in order of priority in accordance with forecast workflows; this helps to promote cost savings and flexibility in planning.

The volume of gas pumped into Gazprom's GTS within Russia in 2014 totalled 627.5 bcm (in 2013 - 659.4 bcm). The GTS and UGSF used 33.2 bcm of natural gas for their own technical needs in 2014 (in 2013 - 40.6 bcm). The Group assesses the level of gas losses as low and the level of gas consumed as fuel to be satisfactory.

Gazprom provides independent companies with access to its gas transportation system. In 2014, Gazprom provided 24 companies that are not part of the Group with gas transportation services via the GTS within Russia. Gas transportation volumes amounted to 121.1 bcm (an increase of 8.7% as compared to 2013).

The Group's key foreign gas transportation asset is OAO Gazprom Transgaz Belarus, which supplies gas to customers in Belarus and transits gas to Europe and Russia's Kaliningrad Region. In 2014, 65 bcm of natural gas was pumped into the 7,900 km-long GTS operated by OAO Gazprom Transgaz Belarus, including 45 bcm of gas transiting through Belarus.

ZAO Gazprom Armenia, a subsidiary of the Group, owns the gas transportation system in Armenia, which comprises 1,700 km of trunk gas pipelines. In 2014, 2 bcm of natural gas was pumped into the GTS in Armenia.

In 2014, about 35.7% of the total gas transit to Europe was handled by the marine cross-border pipeline systems created in partnership with the Group: Blue Stream and Nord Stream. In 2014, 36.5 bcm of gas (in 2013 - 23.8 bcm) was transported through the Nord Stream pipeline. Gas sold from the Blue Stream pipeline in 2014 amounted to 14.4 bcm (in 2013 - 13.7 bcm).

Main areas of investments

In 2014, capital investments in the Gas Transportation segment amounted to RUB 434,433 million.

Capital investments were allocated primarily toward building the Bovanenkovo-Ukhta trunk gas pipeline system and implementing the project "Expansion of the Unified Gas Supply System to Ensure Gas Supplies for the South Stream Gas Pipeline".

In 2014, the following assets were put into operation in Russia:

· 1,276.9 km of gas trunk pipelines and branch pipes;

· four compressor stations with a total capacity of 416 MW (including two compressor stations with a total capacity of 256 MW at the Bovanenkovo-Ukhta trunk pipeline).

Reporting year events

In January 2014, OAO Gazprom increased its interest in ZAO ArmRosgazprom (ZAO Gazprom Armenia since February 2014) up to 100%.

In July 2014, OAO Gazprom acquired a 100% interest in OsOO KyrgyzgazProm, Kyrgyzstan's exclusive importer of natural gas and owner of the Central Asian country's gas transport and distribution networks.

In September 2014, the first joint was welded in the Power of Siberia trunk gas pipeline. The pipeline will be the key component of the gas transportation system currently being created in eastern Russia. This system will carry gas from the Irkutsk and Yakutia gas production centres to customers in the Russian Far East and China.

In December 2014, work on the South Stream project essentially ceased in the Republic of Bulgaria when BEH EAD, a Bulgarian company authorized by the Bulgarian Government to work with OAO Gazprom on the project implementation, took a number of actions aimed at halting the project and, moreover, failed to perform a number of corporate procedures required for formalizing decisions on further implementation of the project. Thus, Gazprom was effectively compelled to terminate the South Stream project given the negative impact of a number of external factors, such as:

· pressure exerted by the European Commission on the Bulgarian Government and the governments of other countries participating in the project aimed at preventing South Stream-related construction activity;

· contradictions between the provisions of the EU's Third Energy Package and previously concluded bilateral agreements between the Russian Federation Government and the governments of those countries participating in the project;

· the Bulgarian Government's decision to terminate all activity in both offshore and onshore project sections within Bulgaria, which disrupted and caused delays in mandated work completion deadlines not only in the Bulgarian section of the pipeline but throughout the entire project.

In December 2014, OAO Gazprom and the Turkish company Botas signed a Memorandum of Understanding in Ankara regarding a project to build a new trans-Black Sea gas pipeline from Russia to Turkey. This project is an alternative to the now cancelled South Stream project. The new offshore pipeline's four branches will have an annual carrying capacity of 63 bcm, out of which no less than 47 bcm will be routed to the Turkish-Greek border and the remaining volume will be sold to Turkish customers.

In December 2014 Gazprom bought out all non-controlling interest to become the 100% owner of South Stream Transport B.V., the entity that had been implementing the offshore part of the project.

Development plans for the Gas Transportation segment

In the gas transport segment, the Unified Gas Supply System of Russia (UGSS) will be further developed and modernised simultaneously with efforts to increase production. Plans call for making maximum use of existing infrastructure to ensure the efficiency of deliveries. Initiatives will continue in eastern Russia to further develop the gas transport system.

Gazprom is building new, and reconstructing and upgrading existing, gas transportation facilities to ensure domestic supplies of gas and meet its contractual export obligations.

Gazprom continues to build the Bovanenkovo-Ukhta and Ukhta-Torzhok trunk pipelines to transport gas from the Yamal Peninsula.

Recently, Gazprom has been working to diversify its routes for exporting Russian gas to Europe. In 2014, previously agreed plans were adjusted under the impact of external factors: in December 2014, Gazprom had to terminate the South Stream project.

The construction of a new offshore pipeline in the Black Sea - the Turkish Stream - will ensure the supply of Russian gas in a volume corresponding to the design capacity of the South Stream pipeline, while ensuring full load utilization for gas transport facilities that are being built in Russia as part of the South Stream project. The following projects aimed at ensuring an appropriate volume of gas supplies for the Turkish Stream pipeline are currently carrying out: Expansion of the Unified Gas Supply System to Ensure Gas Supplies for the South Stream Gas Pipeline; and Reconstruction of the Petrovsk-Pisarevka Section of the Urengoy-Novopskov Pipeline.

Currently, Gazprom is considering the possibility of increasing the capacity of the Blue Stream gas pipeline.

Current plans call for the staged construction of the Power of Siberia trunk pipeline to ensure gas supplies via the Eastern route to PRC under the bilateral contract signed in May 2014, as well as to Russian customers.

Altogether, 30 bcm of gas from the West Siberian fields are to be delivered to the PRC under the framework agreement signed between OAO Gazprom and China National Petroleum Corporation (CNPC) in November 2014, via the Western route, i.e. the new 2,600-km Altai gas pipeline.

Adjustments have been approved in the design documentation for the Sakhalin-Khabarovsk-Vladivostok gas trunk pipeline construction project with the goal of potentially expanding the gas pipeline's capacity to deliver gas supplies from the Sakhalin gas production centre to Russian and foreign customers.

Underground gas storage

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

For the Gazprom Group the underground gas storage system is the key instrument that helps to reduce maximum load, control seasonal differences in gas consumption, and ensure flexible and secure gas supplies.

In cold season the Gazprom's underground gas storage system accounts for 20% of gas supplies to Russian customers and abroad.

Underground gas storages in Russia and abroad

The Gazprom Group operates 22 UGSFs in 26 storage facilities in Russia. As of December 31, 2014, the total volume of active gas in UGSFs reached 71.1 bcm. In 2014, 32.7 bcm of gas were withdrawn from UGSF in Russia, and 35.1 bcm of gas were pumped into UGSF. The potential daily capacity increased by 42.6 mmcm as compared to 2013. By the start of the 2014-2015 withdrawal season, the volume of the operating gas reserve in Russian UGSFs increased by 3.0 bcm as compared to the previous season and amounted to 72.0 bcm.

To enhance security of export gas supplies, Gazprom uses UGSF capacities in foreign countries.

In Europe, the Gazprom Group enjoys access, as a co-investor, to active UGSF capacities in Austria (Haidach), Germany (Reden, Katarina), Serbia (Banatski Dvor), and the Netherlands (Bergermeer). In addition, the Group rents storage facilities from third parties: Vitol (UGSF in Germany and Great Britain), OMV and RAG ES (Austria), and MFGK (Hungary). In 2014, the Gazprom's gas storage capacities in Europe amounted to 5.4 bcm, daily capacity -74.6 mmcm.

In 2014, 4.6 bcm of gas were pumped into European UGSFs, and total gas withdrawal was 2.4 bcm. The increase in the volume of gas pumped into UGSFs versus 2013 was attributable to the need to fill in the Group's own UGSFs and expand storage capacities due to higher risks associated with the transit of Russian gas through Ukraine. Meanwhile, low gas withdrawal volumes were due to mild weather conditions, repair of gas transport infrastructure, and customer demand.

In FSU Gazprom's companies own three UGSF in Belarus (Pribugskoye, Osipovichskoye and Mozyrskoye) and to one in Armenia (Abovyanskaya underground gas storage station), they also use storage capacities in Latvia (Inchukalnskoye). As of December 31, 2014, gas storage facilities in FSU, owned or used by the Group, amounted to 3.1 bcm, daily capacity- 56 mmcm. In 2014, 2.9 bcm of gas were pumped into UGSFs in FSU, total withdrawal volume was 2.5 bcm.

Main areas of investments

In 2014, capital investments in the Underground Gas Storage segment amounted to RUB 15,530 million.

The main volume of capital investment in underground gas storage in Russia was channelled into the reconstruction of a gas field at the Peschano-Umetskaya underground gas storage station, as well as a gas field and compressor facilities at the Elshanskaya underground gas storage station; the reconstruction of the Sovkhoznoye UGSF; technical upgrades at the Moscow Gas Underground Storage Division; and the expansion of active capacities and increase in daily production at the Kasimovskoye UGSF. 

In 2014, the following assets were put into operation in Russia:

· a new compressor station with a capacity of 9.6 MW at the Nevskoye UGSF;

· active capacity of 0.7 bcm at the Severo-Stavropolskoye and Nevskoye UGSFs;

· connection of six production wells at the Severo-Stavropolskoye UGSF.

The main volume of capital investment in underground gas storage in the FSU was channelled into developing the Mozyrskoye and Pribugskoye UGSFs (Belarus), and building underground reservoir No. 25G at the Abovyanskaya underground gas storage station (Armenia).

In 2014, in the FSU the active capacity of 0.1 bcm and connection of three production wells at the Mozyrskoye UGSF were put into operation.

Work aimed at expanding storage capacities has continued in European countries. Gazprom continued to build the Katarina UGSF in Germany and the Damborice UGSF in the Czech Republic. In 2014, a third cavity of 50 mmcm was put into operation at the Katarina UGSF.

Reporting year events

By the start of the 2014/2015 heating season, the potential maximum daily capacity of Russian UGSFs reached a record level of 770.4 mmcm as a result of the active development of the UGSF system. The volume of the operating gas reserve in Russian UGSFs reached 72 bcm.

Development plans for the Gas Storage segment

One of Gazprom's strategy goals is technical re-equipment, reconstruction and expansion of existing storage facilities as well as development of new UGSFs. The tasks of long-term development of the underground gas storage system in Russia are set in the General Gas Industry Development Scheme up to 2030 and are aimed at increasing the daily withdrawal capacity UGSFs and operating gas reserve.

Gazprom's long-term plans provide for further developing underground gas storage in Russia and reaching the maximum daily capacity up to 1.0 bcm by 2025 that will allow decreasing expenses for commodity/transport activity by 10-15 % and cost of gas supplies to consumers by 5-10 %.

To reach this goal, plans call for:

· maintaining the current performance level of active UGSFs by reconstructing and upgrading active storage facilities;

· expanding the capacity of active UGSFs (Kanchurinskoye, Kasimovskoye, Nevskoye, Punginskoye, Stepnovskoye, Karashurskoye);

· establishing and developing gas storage facilities for peak customer demand (Volgogradskoye, Kaliningradskoye, Novomoskovskoye);

· building new UGSFs in regions with high consumption volumes: Arbuzovskoye in the Volga Federal District, Bednodemjanovskoye in the Central Federal District, and Shatrovskoye in the Urals Federal District, and exploring the options for building UGSFs in the North-Western, Siberian and Far Eastern Federal Districts.

The full-fledged development of eastern Russia's hydrocarbon resources will not be possible without finding a viable solution to the problem of long-term storage of helium. There are three main ways for creating basic storage facilities for helium concentrate: in salt caverns, in small depleted gas fields, and by putting helium concentrate back in one of the blocks (sections, layers) of a developed field. For storage of helium concentrate from the Chayandiskoye field, Gazprom has been considering the possibility of putting helium back into gas deposits at a field in the Khamakinsky horizon of the Yuzhny II and Samanchakitsky blocks.

The development of underground gas storage facilities abroad is aimed at expanding Gazprom's UGSF capacities in foreign countries and reaching the minimum active storage capacity of 5% of the annual export amount by 2030. And, priority has been given to the Group's own UGSF, i.e. foreign infrastructure units where Gazprom has an ownership interest.

Gas distribution

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

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

Note:

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

In 2014, gas consumption in Russia totalled 458.4 bcm which is a 1.0% decrease as compared to 2013. Gazprom is the largest supplier in domestic market. In Russia, the electric-power industry, cement industry, metallurgy and agricultural chemistry sector remain its key customers.

Gas consumption in Europe decreased by 55 bcm (or by 10.2 %) to 485.3 bcm in 2014.

In 2014, Gazprom's supplies of gas to European countries under long-term contracts totalled 146.6 bcm of gas, which was 14.9 bcm (or 9.2%) lower than in 2013.

In 2014, the volume of LNG sold by the Gazprom Group significantly increased as compared to 2013. During the year, the Gazprom Group sold 52 cargoes of LNG totalling 159.6 tn BTU , versus 24 cargoes of LNG totalling 72.1 tn BTU sold in the previous year. The increase in the Group's LNG portfolio is primarily explained by the increase in the volume of purchases from third parties. In 2014, LNG sold under the Sakhalin-2 project amounted to 53.1 tn BTU .

Domestic natural gas prices

The following table shows the average domestic natural gas prices:

Note:

(1) Calculated based on the annual average currency exchange rate between RUB and USD.

The increase in domestic regulated prices for gas is limited by the Forecast of Social and Economic Development in the Russian Federation prepared by the Russian Ministry of Economic Development and approved by the Government of the Russian Federation in September 2014.

The table below presents weighted average changes in domestic prices in 2015-2017, annual average increase versus prior year.

To mitigate the risks associated with directive gas pricing, OAO Gazprom continues to work with Russian federal government agencies to improve gas pricing, including determining the justified pricing principles that allow OAO Gazprom to maintain sustainable economic terms for domestic gas supplies.

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

The following table shows the average prices of natural gas sold by the Gazprom Group to FSU, Europe and other countries:

Notes:

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

(2) Calculated based on annual average currency exchange rate between RUB and USD.

Under circumstances where the pricing policy on European gas markets is subject to significant change and liquid gas trading floors (hubs) are still being developed, the Gazprom Group believes that contracts with oil price indexation continue to be vital at present moment. Under current conditions, oil products in gas formula are the general deflator. Their presence prevents the gas price from significantly de-coupling from prices for other raw commodities. At the same time, the OAO Gazprom continues to enhance the efficiency of Russian gas export sales, while demonstrating flexibility in its relationships with partners.

Main areas of investments

In 2014, the volume of capital investments in the Gas Distribution segment amounted to RUB 23,709 million.

A significant portion of capital investments in the Gas Distribution segment includes the Group's investments in gasification of the Russian Federation regions. In 2014, construction was completed on 105 gasification facilities for a total length of 1,400 km in 33 regions of the Russian Federation. These facilities provide gas supplies to 236 cities and towns and 29,600 homes and apartments, as well as conversion to gas fuel in 200 boiler-houses.

Reporting year events

In May 2014, OAO Gazprom and China National Petroleum Corporation (CNPC) signed a contract for the purchase of Russian gas to be supplied via the Eastern route to PRC in a volume amounting to 38 bcm per year over a 30-year period. The contract may be renewed. The parties simultaneously signed a Technical Agreement that regulates the technical aspects of future gas supplies. The Company has begun drafting and agreeing technical appendices to the contract, which will regulate different aspects of the construction and operation of the cross-border section of the Eastern route gas pipeline from Russia to PRC.

Based on the contract for gas supplies via the Eastern route, OAO Gazprom and CNPC have also agreed to resume negotiations on the Western route. A number of negotiations have been held, resulting in the signing of a framework agreement in November 2014 spelling out the terms for natural gas supplies from Russia to PRC by the Western route amounting to 30 bcm per year. 

In 2014, the Gazprom Group signed the Main Terms for Liquified Gas Supplies under the Yamal LNG Project, providing for purchases of up to 2.9 million tons (4 bcm) of LNG per year for the Group's portfolio at the transfer point in Europe over a 20-year period (the plateau period). The binding agreement was signed in January 2015.

In 2014, an agreement with Pacific Rubiales was signed under which 0.5 million tons of LNG (0.7 bcm) per year will be purchased for the Group's portfolio from the world's first floating FLNG plant in Columbia in 2016-2020. In addition, the Group was declared the winner of a tender held by Iberdrola S.A, and as a result Gazprom's portfolio will be replenished by 0.4 million tons (0.5 bcm) per year in 2015-2016.

Development plans for the Gas Distribution segment

Gazprom's goal is to retain its leading position in the global gas industry in the long-term perspective.

In the Russian market, Gazprom will work to maintain its current position in terms of gas delivery volumes, provided that the security of supplies is ensured, particularly in the autumn-winter heating season. The Group plans to retain its share in traditional European gas markets, while increasing its market share in North-East Asia to 10-15% over the long term.

The Gazprom Group's marketing strategy provides for expanding presence in prospective gas market including Asia-Pacific Region, and increasing LNG volumes in Gazprom's export portfolio.

One of Gazprom's key projects for developing its position in the Asia-Pacific region's LNG market is the Vladivostok-LNG project, which calls for building an LNG plant in Vladivostok, Primorsky Territory, with a capacity of 10 million tons per year and the possibility of expanding capacity up to 15 million tons per year. The resource base for two phases of the plant will consist of gas from the Sakhalin production centre. The Gazprom Group intends to sell the LNG produced within the framework of this project under long-term contracts to the key markets of the Asia-Pacific region: Japan, South Korea, China, Taiwan and others.

In addition, Sakhalin Energy Investment Company Ltd., an associated company, is conducting a technical and economic feasibility study for expanding LNG production on Sakhalin Island and considering the opportunity of building a new technological line similar to the two existing lines, as well as additional LNG storage and dock facilities.

As part of its policy for developing the LNG market and diversifying export supplies of natural gas, the Group is implementing the Baltic LNG project to build an LNG plant in the Leningrad Region. Its target markets include the Atlantic region countries, including European countries that are not covered by the Russian gas pipeline network (e.g. Spain and Portugal), Latin America and India, as well as the bunker fuel market.

Refining

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

Processing of hydrocarbons and production of refined products

The Gazprom Group's processing capacities include gas and gas condensate processing plants of gas production and gas processing companies of OAO Gazprom, oil refining capacities of the Gazprom Neft Group, refining and petrochemical assets of Gazprom Neftekhim Salavat Group and Vostokgazprom Group.

The following table presents the established capacity of the Gazprom Group's hydrocarbon processing and refining plants in the Group's refining complex:

Note:

(1) Oil refining volume at Mozyr Refinery is based on the schedule of the Gazprom Neft Group oil deliveries approved by the Russian Ministry of Energy, and distribution of the supplied oil between the Gazprom Neft Group's own refineries and sales to Mozyr Refinery in accordance with the intergovernmental agreement between Russia and Belarus.

The following table presents the volumes of the Gazprom Group's hydrocarbon processing and refining:

Note:

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

As compared to 2013, the decrease in gas processing is explained by the continuing decline in gas production at the Orenburgskoe and Vuktylskoye oil-gas condensate fields, which serve as the raw material suppliers for the Orenburgsky and Sosnogorsky refineries.

The increase in oil and unstable gas condensate processing volumes was driven by the increased production of liquid hydrocarbon feedstock from the Achimov formation, as well as finalisation of construction of the Urengoy-Surgut condensate pipeline, and increased refining volumes at the Gazprom Neftekhim Salavat Group's refineries and the Omsk Refinery, which resulted from the completion of planned repairs at the primary oil refining unit in the third quarter of 2013 and the lifting of logistical restrictions on shipments of dark oil products.

The following table presents production volumes of major refined products of the Gazprom Group:

Note:

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

In the reporting year, initiatives for expanding the range of goods and upgrading the quality of products were realised.

Production of winter diesel fuel was begun at the Astrakhansky Refinery as a result of the implementation of a number of in-house technological solutions. The ramp-up of a new naphtha hydrotreater unit will allow the plant to begin production of ecological class 4 diesel fuel and the commissioning of a naphtha isomerisation unit will allow production of ecological class 5 Premium Euro-95 motor gasoline.

The Orenburgsky Refinery started production liquid helium while the Surgut Stable Condensate Plant started the production of technical propane-butane.

The Moscow Refinery began pilot operation of Russia's first new-generation polymer-modified bitumen unit under the G-Way Styrelf brand name. The unit, which was developed by a joint venture between the Gazprom Neft Group and French oil company Total, can produce 60,000 tons of polymer-modified bitumen and 7,000 tons of emulsified bitumen per year.

Sales of refined products

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

Notes:

(1) The volumes do not include intercompany sales. Sales of own products and products purchased from third parties.

(2) The volumes do not include helium.

In 2014, total volume of refined products sales increased by 10.4% and amounted to 75.4 million tons as compared to the previous year.

In 2014, volume of motor gasoline, jet fuel, liquefied natural gas and mazut sales increased as compared to 2013. Sales of mineral fertilisers and polymers also increased. These increases were mainly driven by the increase in the production of refined products and/or increased purchases from companies outside of the Group.

In 2014, about 13% of the total volume of the Gazprom Group's refined products sales were sold via the Gazprom Neft Group's network of fuel stations. Sales via this network reached 9.9 million tons (versus 9.2 million tons in 2013). The increase in sales was driven by the upgrade and optimisation of the Company's own network of fuel stations, enhancement of their operational efficiency, development of the Company's own highly recognizable national brand and a strong degree of confidence in product quality. As of December 31, 2014, the Gazprom Neft Group owned an extensive network of 1,810 fuel stations in Russia, the FSU countries and Eastern Europe.

In 2014, the Group's sales of gaseous helium amounted to 2.7 mmcm, sales of liquid helium amounted to 1.1 million litres (in 2013 - 3.0 mmcm and 0.8 million litres, respectively).

Main areas of investments

In 2014, the volume of capital investments in the Refining segment amounted to RUB 135,158 million.

The major portion of capital investment in refining was channelled toward the construction of the Novy Urengoy gas chemical plant, modernization of production capacities at the Gazprom Neft Group's refineries, and reconstruction of the Astrakhan gas storage unit, construction of gas condensate pipeline Urengoy-Surgut (II line) as well as construction and modernization of the oil refining and petrochemical capacity of the Gazprom Neftekhim Salavat Group.

In 2014, new capacities in hydrocarbon refinery, manufacturing of petrochemical products were commissioned. An OG-500 helium liquefaction plant with a capacity of 4.2 million litres per year was commissioned at Orenburg Helium Plant; a condensate stabilization unit (technological lines 8-9) with a capacity of 4.0 million tons per year was commissioned at Surgut Stable Condensate Plant; an isomerization unit with a capacity of 300,000 tons per year was commissioned at Аstrakhan Refinery. 

At the Gazprom Neft Group's refineries major modernization projects have been implemented. A terminal for running, storage and pumping gas condensate for processing to increase output of light oil products was commissioned at the Omsky Refinery. Reconstruction of a primary oil refining unit was completed and a sulphur granulation block was commissioned at the Moscow Refinery. OAO Slavneft-Yaroslavnefteorgsintez, a refinery, completed reconstruction of a number of units involved in producing motor gasoline: catalytic cracking, sulphuric acid alkylation and production methyl tert-butylether units.

Reporting year events

The purchase of a 50% ownership interest in OOO Poliom, which is a joint venture based at the Omsk Propathene Plant, has been completed on a parity basis with OAO SIBUR Holding. The Gazprom Neft Group will supply raw materials (propane-propylene fraction from Omsky Refinery) to OOO Poliom, and OAO SIBUR Holding will then sell the finished products via its own distribution network.

Development plans for the Refining segment

The main objectives of the Gazprom Group's development in gas processing and gas chemistry include increasing the rate of extraction of valuable components of natural gas and associated petroleum gas (APG) and their effective use for further processing to marketable products with high added value. Plans also call for upgrading existing gas processing and gas chemical plants and building new ones, including in Eastern Siberia and the Russian Far East.

To ensure the development of promising liquid hydrocarbons derived from gas produced in Western Siberian gas condensate fields, plans have been developed for expanding and rebuilding the Urengoy Condensate Treatment Plant to bring its capacity up to projected levels, as well as creating treatment and transportation facilities for gas condensate and oil from the Achimov formation, finalising construction of the Urengoy-Surgut condensate pipeline, and expanding and reconstructing the Surgut Stable Condensate Plant.

Under a project financing framework, OAO Gazprom continues to carry out a project for establishing a gas chemical complex in New Urengoy, the feedstock for which will come from gases derived from condensate de-ethanization at the Urengoy Condensate Treatment Plant.

Natural gas from key fields of Eastern Siberia is characterized by high content of ethane, propane, methane hydrocarbon and helium, therefore their development requires simultaneous establishing gas processing and gas chemical centres.

In the Amur Region, Gazprom is building gas processing and helium plants that will use gas from the Yakutsk and Irkutsk gas production centres as a resource base. They will be located in the Svobodnensky District of the Amur Region. Plans call for commissioning the first line simultaneously with the commencement of gas supplies to China via the Power of Siberia gas pipeline.

Strategic goals in oil refining in Russia include implementation of programs on modernization of refining capacities and increase of their operating efficiency.

Within the selected framework, the Gazprom Neft Group plans to commission hydrocracking facilities at the Omsky Refinery (in 2018) and the Moscow Refinery (in 2019) with a capacity of 2 million tons per year at each plant. Plans also call for building the following major facilities: a flexi-coker unit at the Moscow Refinery by 2020 (2 million tons capacity) and a coking unit at the Omsky Refinery by 2019 (2 million tons capacity). An upgrade programme for OAO Slavneft-Yaroslavnefteorgsintez, which will also include an advanced oil processing centre, continues to be elaborated in detail. It is expected that the upgrade will allow the Gazprom Neft Group to reach a refining volume of 40 million tons per year within Russia, as well as increase the depth of the refinery to 95% and yield of light fractions up to 80% by 2025.

By 2025, the Gazprom Neft Group plans to increase total sales of motor fuels in Russia and FSU to 24.7 million tons. For implementing the established objectives it is planned to expand the retail network in Russia and FSU up to 1,880 fuel stations by 2025; the cost of staffing the fuel stations is expected to be fully covered by gross revenue from the related business.

Electric power

The following table presents assets and capital investments related to the Electricity and Heat Generation and Sale segment:

The Gazprom Group is the largest owner of power generating assets whose installed capacity was 39.0 GW as of December 31, 2014. The Group is the largest producer of electricity in Russia. In 2014, Gazprom's share in electricity generation in Russia was 15%, its share in heat generation was 24%.

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

In 2014, electricity generated by the Gazprom Group totalled 154.6 billion kWh that is 4.3 % lower than in 2013; heat generation totalled 125.2 million Gcal, which is 11.3% more than in 2013. Decrease in electricity generation is mainly explained by the decline in generation due to minimization of ineffective power generation units loading and decline in demand for electricity. Increase in heat generation is driven by consolidation of OAO MIPC from the moment of obtaining control by the Group in September 2013.

The 5th power generating unit of Razdansky TPP owned by the Group's subsidiary and located in Armenia generated about 0.86 billion kWh of electricity in 2014.

In 2014, electricity generated by the Gazprom Group totalled 155.4 billion kWh.

All electricity generated by the Russian generating companies of the Group is sold in the 100% liberalized wholesale electricity and capacity market. In 2014, the increase in the ultimate price of electricity (capacity) represented 7-8% of the 2013 price on average. Also, small volumes of the produced electricity are exported to Norway and Finland.

The Group's generating companies purchase additional electricity and heat for resale to meet their obligations during shutdowns, including periods when emergency repairs are being made.

The Group's entity, OAO Mezhregionenergosbyt is one of the leaders in the Russian power trading market. The company provides for over 95% of electricity consumption of the Gazprom Group's subsidiaries. It also sells electricity to consumers outside the Group (in 2014 - 6.2 billion kWh).

The Gazprom Group also supplied electricity of 2.9 billion kWh (in 2013 - 2.3 billion kWh) to final consumers in United Kingdom, Germany and the Netherlands. 

The Gazprom Group carries out trading operations with electricity in European trading floors. Total electricity trading volume amounted to 339 billion kWh.

Main areas of investment

In 2014, the Group's capital investments related to electricity and heat generation and sales amounted to RUB 82,019 million.

The Gazprom Group's investment programme is the largest in the Russian electrical power industry. The Group's generating companies are carrying out an investment programme that factors in current obligations under capacity supply agreements. As a result of the implementation of such agreements by Group's entities in Russia, the growth in new capacity should amount to 9 GW from 2007 to 2016.

In 2014, the Group launched 905 MW of new generating capacity in Russia:

· the CCGT-420 MW power generating unit at TPP-16 of OAO Mosenergo with a capacity of 420 MW;

· the CCGT-420 MW power generating unit at the Cherepovetskaya GRES (OAO WGC-2) with a capacity of 420 MW;

· a gas turbine unit at TPP-9 of OAO Mosenergo with a capacity of 64.8 MW.

In 2007-2014 the Group launched 6.1 GW of new generating capacity under capacity supply agreements.

Gazprom is also decommissioning ineffective generating capacities. In 2014, 428 MW were decommissioned, including three turbo generators with a capacity of 150 MW and two boilers at the Serovskaya GRES of OAO WGC-2, as well as a power generating unit at the Troitskaya GRES of OAO WGC-2 with a capacity of 278 MW.

Investments in electrical power were primarily channelled to the construction of power-generating units at the Troitskaya GRES (660 MW) and Novocherkasskaya GRES (330 MW) of OAO WGC-2, a steam-gas unit at TPP-12 (220 MW) and TPP-20 (420 MW) of OAO Mosenergo, and a gas-turbine power unit (100 MW) at the Central TPP of OAO TGC-1.

Reporting year events

In October 2014, OAO TGC-1 sold the Ondonskaya GES with the established capacity of 80 MW. The deal value amounted to RUB 2.1 billion (less VAT).

Development plans for the Electricity and Heat Generation and Sale segment

The strategy for developing Gazprom's energy business in Russia was adopted in 2007. By expanding its presence in the electrical power industry, the Group will boost the long-term sustainability of all of its business operations while earning additional revenues. The strategic goals in the electrical power sector include the following:

· diversification of risks associated with tariff regulation;

· diversification of the fuel balance;

· construction of new capacity;

· improving operational efficiency.

In working toward reaching its strategic goals in Russia, the Group's primary focus will be on the construction of new combined heat and power capacity, which will allow for improving efficiency while expanding electricity and heat generation.

Among OOO Gazprom Energoholding's foreign projects, the most critical initiative is the construction of a TPP in Pancevo, Serbia, which is being implemented jointly with Naftna Industrija Srbije A.D. In 2015, a joint venture is planned to be created and active implementation of the project will begin.

Innovation-driven development

The OAO Gazprom Innovation Development Programme for the period up to 2020, which was approved in June 2011, is a document outlining the Company's policy in the area of long-term innovation-driven development.

The Innovation Development Programme is intended to cover a ten-year period. It encompasses the Group's oil, gas and electric power businesses, and outlines a set of interconnected measures aimed at developing and implementing new, world-class technologies, and innovative products and services, as well as creating the conditions for promoting innovation-driven activities in OAO Gazprom and allied industries across Russia.

Innovation-driven development priorities include:

· technologies for field exploration and development, including in the harsh climatic conditions of permafrost and offshore zones in northern seas;

· technologies for production at existing fields, including at the final stage of their development;

· technologies for improving the efficiency of gas transportation and storage;

· technologies for the sale and use of gas;

· technologies for gas processing and petrochemicals.

Gazprom maintains its own well-developed scientific and technical complex, which includes research institutes and specialised design centres. The primary objective of these institutes is to carry out the integrated development of effective technologies for the production, transportation and use of gas, and to implement new technical solutions in practice with the aim of achieving a high level of overall reliability for the gas industry.

In monetary terms, the volume of R&D performed under the Gazprom Group's orders in 2014 amounted to RUB 10.8 billion (net of VAT) (in 2013 - RUB 6.8 billion).

As of December 31, 2014, the Gazprom Group held 2,131 patents for patent rights subjects (including 218 patents received in the reporting year). In 2014, 351 patent rights subjects were used for production purposes. Rights to use 33 patented items were granted to third parties under license agreements. The resulting economic benefit is estimated at RUB 3.1 billion.

In 2014, OAO Gazprom continued its R&D cooperation with major foreign energy companies, including E.ON SE, BASF/Wintershall Holding GmbH, VNG-Verbundnetz Gas AG (Germany); N.V. Nederlandse Gasunie (the Netherlands); GDF SUEZ (France); Statoil ASA (Norway); Kogaz (South Korea); CNPC (PRC); Petrovietnam (Vietnam); and the Agency for Natural Resources and Energy of Japan's Ministry of Economy, Trade and Industry (METI).

Programmes for cooperation in science and technology have been developed and signed with Statoil ASA and E.ON SE. Additionally, a number of programmes for cooperation with GDF Suez, KOGAZ, CNPC and the Agency for Natural Resources and Energy of Japan's METI have been finalized and are now at the approval stage. 

Environmental protection

Gazprom makes every effort to ensure strict compliance with international and Russian environmental law, and voluntarily undertakes a number of environmental obligations.

OAO Gazprom's Ecological Policy was approved by the Board of Directors in 2011 and recommended for application by all Gazprom Group entities. Responsibility for application of the Ecological Policy lies with OAO Gazprom's Coordinating Committee for Environmental Protection and Energy Efficiency. The Committee monitors the Company's environmental protection activities and provides an overall assessment of these activities.

The Environmental Management System of OAO Gazprom (EMS of OAO Gazprom) is the key element of the Ecological Policy. The system integrates management bodies of the parent company and 36 wholly owned subsidiaries involved in gas and gas condensate exploration, production, transportation, storage and processing, as well as in investment operations aimed at developing the Unified Gas Supply System (UGSS).

In 2011, Gazprom's EMS was certified for compliance with the ISO 14001:2004 International Standard. A recertification audit carried out by Det Norske Veritas, an independent international certification authority, in October 2014 confirmed that the system was in compliance with all relevant requirements.

In the EMS framework OAO Gazprom adopted the new Corporate Ecological Standards for 2014-2016 which define targets for planning and implementing environmental protection measures related to reduction in the emissions of metan and nitrogen oxides, waste water disposals in surface-water bodies, prevention of the waste landfilling, as well as energy-saving measures.

The main indicators for the Gazprom Group's environmental impact from its operating activities in Russia are presented below:

Gross emissions of pollutants by the Gazprom Group decreased by 278,800 tons as compared to 2013. The main factors here were: the decrease of pollutant emissions of methane in trunk pipelines, underground storage and natural gas processing facilities as a result of the implementation of a special action plan; the decrease of pollutant emissions made by OOO Gazprom Energoholding subsidiaries due to decreased power generation; and technological measures taken by the Gazprom Neft Group to increase the level of APG utilization at fields and the implementation of a programme to reduce pollutant emissions at oil refineries.

The decrease in waste water disposal in surface-water bodies by the Gazprom Group is attributable primarily to the reduced consumption of water for technical use by OOO Gazprom Energoholding subsidiaries. The Gazprom Group has undertaken a number of environmental protection efforts aimed at promoting rational use of water resources and decreasing pollutants in bodies of water. In 2014, 102 waste treatment facilities with a total capacity of 1.4 mmcm per day were commissioned. Seven recirculated water systems with a capacity of 547.5 mmcm per day were built.

Waste generation increased by 137,700 tons due to the growth of drill mud volumes in the Gazprom Neft Group and of bottom ash waste volumes in OAO WGC-2. The increase in bottom ash is explained by the increased share of coal in the company's fuel mix.

In 2014, greenhouse gas emissions at the sites of OAO Gazprom and its wholly owned exploration, production, transportation, storage and refining subsidiaries totalled 110.7 million tons of CO2-equivalent. The reduction of greenhouse gas emissions is explained by decreased consumption of gas for compression, improved efficiency in utilization of energy and resources, and other energy-saving measures.

The Gazprom Group's environmental costs incurred in operating activities in Russia are disclosed below:

The decrease in environmental investments as compared to 2013 is explained by the completion of environmental activities under the Programme for the Construction of Olympic Facilities and Development of Sochi as a Mountain Resort.

In 2014, the Gazprom Group made payments totalling RUB 1.75 billion to Russian Federation budgets at various levels of government for its negative impact on the environment. The 40.7% decrease as compared to 2013 was primarily due to the increased level of APG utilization by Gazprom Neft. Payments for emissions of air pollutants and waste generation, which are significant ecological by-products of the Gazprom Group's activities, represented major components in the structure of the Group's payments in 2014.

In 2014, Gazprom Group entities underwent 451 governmental inspections. While 416 violations were identified, 329 (79%) of them did not represent any threat to the environment and, thus, no penalties were imposed. The identified violations were eliminated by the specified dates. In the reporting period, 323 violations were eliminated.

In 2014, the Gazprom Group paid fines of RUB 17.7 million, out of which RUB 10.9 related to violations identified in the reporting period and RUB 6.8 million to violations in prior years.

Employees

Having guided by the conventions developed by the International Labour Organization the Gazprom Group complies with principles which relate to underlying rights being the subject of these conventions, namely:

· freedom of association and the effective recognition of the right to collective bargaining;

· elimination of all forms of forced or compulsory labour;

· effective abolition of child labour;

· elimination of discrimination in respect of employment and occupation.

The Gazprom Group also complies with international standards related to salaries, duration of the working day and labour conditions, employees' compensation for their work, social security, grating paid vacation, labour safety and others.

As of December 31, 2014, the number of employees in the Gazprom Group's subsidiaries was 459,600 people, which is consistent with the prior year. The table below shows the structure of the Gazprom Group's employees:

The age composition of the Group's personnel is well balanced. The table below shows the age structure of the Gazprom Group's personnel:

Gazprom has a system of continuing in-house professional education, which is based on corporate training institutions. It is aimed at training employees in accordance with increasing operating and quality requirements, new technologies and the expansion of Gazprom's presence in the regions. In 2014, 265,100 employees of the Gazprom Group attended advanced and professional training courses.

Social and labour relations in the Gazprom Group were regulated by labour legislation, General Agreement between Russian Associations of Trade Unions, all-Russian Employers' Associations and Russian Government, Industry Agreement for Entities of Oil and Gas Sectors and Construction of Oil and Gas Facilities, collective labour agreements and local regulations of the Gazprom Group's entities.

The social policy pursued by Gazprom allows meeting the challenges of motivating employees and enhancing their efficiency. The key principle of the social policy is social partnership which is implemented by providing employees with various social benefits, personal insurance, and medical insurance, housing and supplementary pension coverage.

Analysis of financial results of operations

Results of operations

Sales

The following table summarises volumes and prices:

(1) VAT is not charged on sales to Europe and Other countries, as well as FSU countries.

 (2) Calculated on the basis of average exchange rate between Rouble and US dollar.

Total sales (net of VAT, excise tax and customs duties) increased by RUB 339,846 million, or 6%, to RUB 5,589,811 million in 2014 as compared with 2013.

Net sales of gas accounted for 53% and 57% of total net sales in 2014 and 2013, respectively.

Net sales of gas increased by RUB 13,562 million, or 0%, from RUB 2,971,823 million in 2013 to RUB 2,985,385 million in 2014.

Net sales of gas to Europe and Other countries increased in 2014 as compared with 2013, by RUB 69,386 million, or 4%, to RUB 1,752,147 million. Overall increase in net sales of gas to Europe and Other countries was caused by an increase in the gross average Rouble price (including customs duties) by 11% in 2014, as compared with 2013, although the average price denominated in US dollar decreased by 8%. The volume of gas sold decreased by 9% in 2014 as compared with 2013.

Net sales of gas to FSU countries decreased by RUB 8,598 million, or 2%, to RUB 411,722 million in 2014 as compared with 2013. The change was due to a 19% decrease in volumes of gas sold and a 19% increase in gross average Rouble price (including customs duties) in 2014 as compared with 2013. The average price denominated in US dollar decreased by 2%.

Net sales of gas in the Russian Federation increased in 2014 as compared with 2013 by RUB 26,218 million, or 3%, to RUB 820,567 million due to 8% increase in the gross average domestic gas prices. Volume of gas sold decreased by 4% in 2014 as compared with 2013.

Net sales of refined products (net of excise tax, VAT and customs duties) increased by RUB 267,501 million, or 20%, to RUB 1,619,214 million in 2014 in comparison with the prior year primarily due to an increase in prices and volumes of Gazprom neft Group's sales to customers in Russian Federation, Europe and Other countries. In 2014 and 2013 the Gazprom neft Group's sales comprised 72% and 76% of the total amount of net sales of refined products, respectively.

Net sales of electric and heat energy (net of VAT) increased by RUB 51,362 million, or 14%, to RUB 426,951 million in 2014 as compared with 2013. Increase is primarily due to inclusion of OAO MIPC in the consolidated financial statements from September 2013.

Gas transportation net sales (net of VAT) increased by RUB 9,577 million, or 6%, to RUB 172,842 million in 2014 as compared with RUB 163,265 million in 2013. This increase is primarily due to an increase in transportation volumes and gas transportation tariffs for independent suppliers.

Operating expenses

Operating expenses increased by 16% in 2014 to RUB 4,256,877 million as compared with RUB 3,668,606 million in 2013. Operating expenses as a percentage of sales increased from 70% in 2013 to 76% in 2014. The table below presents a breakdown of operating expenses in each period:

Purchased gas and oil

The cost of purchased gas and oil increased by RUB 38,894 million to RUB 792,723 million in 2014 as compared with RUB 753,829 million in 2013. The cost of purchased gas increased by RUB 36,103 million, or 7%. This increase mainly relates to the increase of costs for gas purchased from third parties abroad. The cost of purchased oil included in the cost of purchased gas and oil increased slightly to RUB 218,069 million in 2014 as compared with RUB 215,278 million in 2013.

Taxes other than on income

Taxes other than on income include:

The mineral extraction tax increased by 10% to RUB 563,404 million in 2014 as compared with RUB 512,885 million in 2013. The increase is mainly due to dynamics of mineral extraction tax rate for natural gas and oil.

Staff costs

Staff costs increased by 4% to RUB 516,778 million in 2014 as compared with RUB 497,852 million in 2013. The increase was mainly due to the average salary indexation and increase in average number of personnel.

Depreciation

Depreciation increased by 13%, or RUB 53,132 million, to RUB 472,151 million in 2014 as compared with RUB 419,019 million in 2013. The increase is primarily due to the growth in the fixed assets base.

Transit of gas, oil and refined products

Transit of gas, oil and refined products increased by 11% to RUB 399,561 million in 2014 as compared with RUB 358,829 million in 2013. This increase was mainly driven by increase in transportation volumes through the Nord Stream pipeline and through pipelines on the territory of Germany.

Cost of goods for resale, including refined products

Cost of goods for resale, including refined products increased by RUB 155,374 million to RUB 292,150 million in 2014 as compared with RUB 136,776 million in 2013. The increase was mainly due to the growth in volumes of external refined products purchased.

Materials

The cost of materials increased by 13% to RUB 267,552 million in 2014 as compared with RUB 236,354 million in 2013. The increase mainly relates to inclusion of OAO MIPC in the consolidated financial statements from September 2013, as well as to an increase in purchases of materials from third parties and increase in prices.

Foreign exchange differences on operating items

Foreign exchange differences on operating items, primarily onaccounts receivable, amounted to a net gain of RUB 243,438 million for 2014 as compared with a net gain of RUB 45,050 million for 2013. The change was primarily driven by a 72% appreciation of the US dollar against Rouble and a 52% appreciation of Euro against Rouble in 2014, as compared with an 8% appreciation of US dollar against Rouble and a 12% appreciation of Euro against Rouble in 2013.

Other operating expenses

Other operating expenses increased by 28% to RUB 300,099 million in 2014 as compared with RUB 233,795 million in 2013. Other expenses include gas and gas condensate production expense, services from gas distribution companies, bank charges, security services, legal and consulting services, charity, financial aid, and advertising.

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

Changes in inventories of finished goods, work in progress and other effects decreased by RUB 53,149 million to RUB 76,699 million in 2014 as compared with RUB 129,848 million in 2013. The negative amount of the line item is mainly due to an increase in the balances of finished goods as of December 31, 2014 as compared with the balances as of December 31, 2013.

Charge for impairment and other provisions, net

Charge for impairment and other provisions amounted to RUB 313,208 million in 2014 as compared with RUB 67,698 million in 2013. Such an increase includes accrual of provision for doubtful trade accounts receivable of NAK Naftogaz Ukraine in the amount of RUB 34,068 million and of AO Moldovagaz in the amount of RUB 5,948 million, and for loans issued in the amount of RUB 14,124 million.

Based on the results of the impairment test the Group recognized an impairment loss in the amount of RUB 42,630 million for power generating assets and RUB 33,752 million for oil production assets as of December 31, 2014. The impairment was primarily triggered by an increase in discount rates due to the economic environment in the Russian Federation.

Based on the results of the impairment test conducted as of December 31, 2014 the Group recognized an impairment loss in relation to goodwill in refining and electric and heat energy generation and sale segments in the amount of RUB 47,620 million.

In December 2014 the Group provided a guarantee to Gazprombank (Joint Stock Company) related to debts from Ostchem Holding Limited under the credit facility for financing of operating activities. As of 31 December 2014 the above guarantee amounted to RUB 47,407 million and was fully provided for.

Operating profit

As a result of the factors discussed above, our operating profit decreased by RUB 276,785 million, or 17%, to RUB 1,310,424 million in 2014 as compared with RUB 1,587,209 million in 2013. The operating profit margin decreased from 30% in 2013 to 23% in 2014.

Net finance expense

The net exchange loss of RUB 1,070,971 million in 2014 in comparison with net exchange loss of RUB 145,214 million in 2013 is mainly explained by appreciation of US dollar against Rouble by 72% and 52% appreciation of Euro against Rouble in 2014, as compared with an 8% appreciation of US dollar against Rouble and appreciation of Euro against Rouble by 12% in 2013. These forex changes increased the Group's liabilities denominated in foreign currencies.

Interest income increased by 101% to RUB 66,983 in 2014 as compared with RUB 33,398 million in 2013, mainly due to an increase in interest accrued on Group's cash held with banks.

Interest expense increased by 5% to RUB 44,749 million in 2014 as compared with RUB 42,768 million in 2013.

Share of net income of associated undertakings and joint ventures

Share of net income of associated undertakings and joint ventures decreased by RUB 10,619 million, or 19%, to RUB 46,051 million in 2014 as compared to RUB 56,670 million in 2013.

The decrease in the Group's share of net income of associated undertakings and joint ventures in 2014 is mainly due to accrual of impairment provision for investment in Shtokman Development A.G. in the amount of RUB 27,378 million. This change was partially offset by an increase in net income of Sakhalin Energy Investment Company Ltd. due to increase in revenue of liquefied natural gas and crude oil.

Profit tax

Total profit tax expense decreased by RUB 170,747 million, or 53%, to RUB 149,631 million in 2014 as compared with RUB 320,378 million in 2013. The effective profit tax rate was 48.8% and 21.6% in 2014 and 2013, respectively.

The change in effective tax rate was mainly driven by an increase in non-deductible expenses, which were primarily related to accrual of provision for impairment of assets and other reserves.

Profit for the period attributable to owners of OAO Gazprom

As a result of the factors discussed above, our profit for the period attributable to owners of OAO Gazprom decreased by RUB 980,257 million, or 86%, and amounted to RUB 159,004 million in 2014 as compared with RUB 1,139,261 million in 2013.

Loss for the period attributable to non-controlling interest

Loss for the period attributable to non-controlling interest amounted to RUB 1,812 million in 2014 as compared to profit attributable to non-controlling interest in the amount of RUB 26,444 million in 2013. The change is due to recognition of loss from impairment of assets, attributable to non-controlling interest in the amount of RUB 18,312 million.

Liquidity and capital resources

The following table summarizes our statement of cash flows for 2014 and 2013:

Net cash from operating activities

Net cash from operating activities increased by RUB 173,965 million, or 10%, and amounted to RUB 1,915,769 million in 2014 as compared with RUB 1,741,804 million in 2013. The increase was primarily due to positive dynamics in working capital changes.

Net cash used in investing activities

Net cash used in investing activities decreased by RUB 25,207 million, or 2%, to RUB 1,441,305 million in 2014 as compared with RUB 1,466,512 million in 2013. The change was primarily due to a decrease in cash used for capital expenditures in 2014 as compared with 2013. The decrease was offset by an increase of investments in associated undertakings and increase in long-term loans issued in 2014 as compared with 2013.

Net cash used in financing activities

Net cash used in financing activities amounted to RUB 262,587 million in 2014 as compared with RUB 33,262 million in 2013. The change was primarily due to a decrease in proceeds from long-term borrowings and increase in dividends paid in 2014 as compared with 2013.

Working capital

The working capital surplus (current assets less current liabilities) was RUB 1,605,208 million as of December 31, 2014 and RUB 1,471,205 million as of December 31, 2013. The increase in our working capital by RUB 134,003 million in 2014 was primarily due to increase in cash and cash equivalents, increase in other current assets and inventories. These effects were offset by increase in accounts payable and current portion of long-term borrowings.

The increase in other current assets by RUB 197,433 million was mainly caused by increase in short-term deposits and increase in prepaid profit tax due to decrease in taxable profit in 2014.

The increase in inventories by RUB 102,192 million was driven by growth in cost of gas in pipelines and storages.

The increase in accounts payable by RUB 321,447 million was mainly caused by increase in accrued liabilities related to possible gas price adjustments on gas supplied to customers in 2014, accrual of provision under financial guarantees provided to Gazprombank (Joint Stock Company) related to debts from Ostchem Holding Limited, and the inclusion of South Stream Transport B.V. and its subsidiaries in the consolidated financial statements in 2014.

Management of OAO Gazprom 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.

Capital expenditures

Total capital expenditures (excluding the effect of acquisitions of subsidiaries) by segment for 2014 and 2013 in nominal Rouble terms, amounted to the following:

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

Total capital expenditures (excluding the effect of acquisitions of subsidiaries) decreased by RUB 51,961 million, or 4%, from RUB 1,475,169 million in 2013 to RUB 1,423,208 million in 2014.

The increase of capital expenditures in Transport segment was due to construction of Bovanenkovo-Ukhta gas pipeline system and extension of the unified gas supply system to ensure gas supply to South Stream pipeline.

The decrease in capital expenditures in the segment of Production of crude oil and gas condensate was mainly due to the decrease of capital expenditures of Gazprom neft Group.

The decrease in capital expenditures in other segments is mainly explained by completion of construction of facilities provided by the Program of Construction of Olympic Venues and the Development of Sochi as a Mountain Climate Resort.

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, net of cash and cash equivalents as well as restricted cash and cash equivalents under the terms of certain borrowings and other contractual obligations) increased by RUB 537,835 million, or 48%, from RUB 1,112,798 million as of December 31, 2013 to RUB 1,650,633 million as of December 31, 2014. This increase resulted from depreciation of Rouble against US dollar and Euro which was offset by an increase in cash and cash equivalents.

The following table presents our actual foreign currency denominated long-term borrowings (expressed in millions of USD) as of December 31, 2014 and 2013 as well as the same balances denominated in RUB:

Notes.

(1) Converted at EUR/USD exchange rates of 1.21 and 1.37 as of December 31, 2014 and 2013, respectively.

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

As of December 31, 2014 and 2013 according to the project facility agreement, signed within the framework of the development project of Yuzhno-Russkoe oil and gas field with a group of international financial institutions with UniCredit Bank AG acting as a facility agent, ordinary shares of OAO Severneftegazprom with a pledge value of RUB 16,968 million and fixed assets with a pledge value of RUB 26,210 million were pledged to ING Bank N.V. (London branch) up to the date of full redemption of the liabilities under the above agreement. As of December 31, 2014 and 2013 the carrying amounts of these fixed assets were RUB 24,044 million and RUB 24,614 million, respectively. Management of the Group does not expect any substantial consequences to occur which relate to the respective pledge agreement.

The following table presents the schedule of repayments for long-term borrowings (excluding long-term promissory notes) as of December 31, 2014 and 2013:

Shareholder structure and stock market of OAO Gazprom

OAO Gazprom's charter capital amounts to RUB 118,367,564,500, consisting of 23,673,512,900 ordinary registered shares with a nominal value of RUB 5 each. There are no preference shares.

The following table presents the shareholder structure of OAO Gazprom:

Notes:

(1) As of December 31, 2013 and December 31, 2014, the share of the Russian Federation represented by the Federal Agency for State Property Management in OAO Rosneftegas was 100 %.

(2) As of December 31, 2013 and December 31, 2014, OAO Rosneftegas owned 74.55 % shares of OAO Rosgazifikatsiya.

(3) Bank emitting ADR issued against OAO Gazprom's ordinary shares - the Bank of New York Mellon.

OAO Gazprom's are shares included on the Tier 1 Quotation List on the Russian stock market: the MICEX Stock Exchange and OAO St Petersburg Stock Exchange.

OAO Gazprom's American Depositary Receipts (ADRs) are freely tradable on the London, Berlin and Frankfurt Stock Exchanges. However, the majority of transactions with these ADRs are registered on the London Stock Exchange.

The following table summarises quotations for OAO Gazprom's shares and ADRs:

As of December 31, 2014, market capitalization of OAO Gazprom totalled RUB 3.08 trillion, or USD 54.8 billion, having decreased by 6.1% in the rouble equivalent during the year. In 2014, the average market capitalization of OAO Gazprom decreased by 2.5% and totalled RUB 3.27 trillion or USD 86.7 billion as compared to 2013.

As of December 31, 2014, dividends paid in 2014 based on OAO Gazprom performance results for 2013 are as follows:

Notes:

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

(2) Dividends paid by OAO Gazprom to nominal holders on July 31, 2014 within the actions performed to implement the decisions made by the General Shareholders' Meeting on payment of dividends for 2013 performance results amounted to RUB 80,706,128,000. As of December 31, 2014, dividends for which nominal holders failed to perform their obligation to transfer dividends provided for by Russian securities legislation for reasons beyond their control (para 8, Article 42 of Federal Law No. 208-FZ of December 26, 1995) amounted to RUB 233,094,000.

Corporate governance

Key corporate governance principles are set out in the Corporate Governance (Conduct) Code of OAO Gazprom approved by the General Shareholders' Meeting of OAO Gazprom on 28 June 2002.

The rights of OAO Gazprom shareholders and regulation of OAO Gazprom management activity are determined by and carried out in accordance with the Russian Federation laws and may differ from the regulating practice in the companies registered in Great Britain.

Corporate governance is focused on mandatory observance of rights of all shareholders of OAO Gazprom. OAO Gazprom's key documents related to corporate governance are based on fair treatment of shareholders, protection of their rights and interests regardless of a number of owned shares.

Key documents of OAO Gazprom which provide for the shareholders' rights include:

· Articles of Association (amended in 2014);

· Code of Corporate Governance (Behaviour );

· Code of Corporate Ethics (amended in 2014);

· Regulation on General Shareholders Meeting ;

· Regulation on Board of Directors (amended in 2014);

· Regulation on Audit Committee of Board of Directors (amended in 2014);

· Regulation on Management Committee;

· Regulation on Chairman of Management Committee;

· Regulation on Audit Commission;

· Regulation on Internal Control System (amended in 2014);

· Procedures for Documenting of Proposals and Requests of Shareholders Related to the Convocation of the General Shareholders' Meeting;

· Dividend policy;

· Regulation on Information Disclosure;

· Procedure for Shareholders' Familiarization with Information ;

· Regulation of JSC "Gazprom" on control of compliance with the laws on countering the unlawful use of insider information and market manipulation.

All the above documents and OAO Gazprom's Charter can be found on OAO Gazprom's official web-site www.gazprom.com or in the shareholders' affairs division, whose details can be found on OAO Gazprom's official web-site.

Development of OAO Gazprom's corporate governance in 2014

OAO Gazprom has been continuously improving its corporate governance systems in line with global best practice in this area. The following changes took place during the reporting year:

· OAO Gazprom's shares were included in the Tier 1 (top) Quotation List on the Russian stock market: the MICEX Stock Exchange and OAO St Petersburg Stock Exchange. Tier 1 (top) lists are formed by the stock exchanges in accordance with new listing rules.

· The Company obtained a listing on the Singapore Stock Exchange.

· A corporate regulation on OAO Gazprom's key performance indicators was adopted (decision of the Board of Directors of October 21, 2014). The regulation defines the concept and system of key performance indicators (KPIs), their main groups, and goals and tasks, as well as relevant requirements for the KPIs. The document also sets the KPIs by which members of OAO Gazprom management are assessed, members of the Board of Directors are incentivized, and HR decisions are made. This group includes, but is not limited to, such indicators as total shareholder return (TSR) and return on equity (ROE).

· In the framework of OAO Gazprom's transparency improvement project, the timeframe for submitting information on the annual General Shareholders' Meeting to shareholders was extended in 2014 (in 2013 the timeframe was increased from 20 to 30 days before the date of the meeting and in 2014 up to 37 days before the date of the meeting).

· OAO Gazprom's Corporate Ethics Committee began to function.

· A whistle-blower hotline was established to counter any potential cases of fraud, corruption or embezzlement in the Gazprom Group.

· At OAO Gazprom's initiative, independent corporate governance audits were performed at Gazprom-controlled entities, shares in which are publicly traded in organized securities markets and/or which have made or are in the process of making a public offering of their bonds or other securities. In connection with such audits, the Group considered the issue of developing a step-by-step action plan aimed at creating the optimal corporate governance model adapted to the specifics of the Gazprom Group's operations. Audit results were discussed at a meeting of the OAO Gazprom Board of Directors.

· Regulatory documents governing the operation of OAO Gazprom's internal control system were updated to specify the principles of the system's operation and define key control procedures.

Assessment of whether OAO Gazprom's corporate governance complies with the Russian Code of Corporate Governance

In November 2014, a benchmarking analysis was conducted of the corporate governance standards currently applied at OAO Gazprom and the Code of Corporate Governance approved by the Board of Directors of the Bank of Russia on March 21, 2014 (hereinafter referred to as the "Russian Code of Corporate Governance"). The benchmarking results confirmed that OAO Gazprom's corporate governance practice is for the most part in compliance with the recommendations of the Russian Code of Corporate Governance.

However, there are a number of key principles and recommendations of the Russian Code of Corporate Governance with which OAO Gazprom is not in compliance or not fully in compliance. The key principles of the Russian Code of Corporate Governance include those that correspond to the mandatory requirements of Russia's main stock exchanges (ZAO MICEX Stock Exchange and OAO St Petersburg Stock Exchange) for the corporate governance of securities issuers when shares are included in the Tier 1 Quotation List (Gazprom must comply with these requirements to maintain the level of its listing on these stock exchanges).

A draft action plan of measures aimed at introducing key provisions of the Code of Corporate Governance in OAO Gazprom's operations has been prepared, in accordance with OAO Gazprom Board of Directors Decision No. 2452 of November 27, 2014, which takes into account the results of the benchmarking analysis as well as management's objective ability to ensure the implementation of the planned measures. The draft action plan has been submitted to the Federal Agency for State Property Management and the Russian Ministry of Energy for the purpose of drafting relevant guidelines.

Management structure of OAO Gazprom

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, the Board of Directors, the Management Committee and the Chairman of the Management Committee. The General Meeting of Shareholders is Gazprom's highest governing body and, among other things, elects its Board of Directors. The Board of Directors is responsible for the general management of OAO Gazprom activities except for the matters that are assigned to the competence of the General Meeting of Shareholders under the Federal Law "On Joint Stock Companies". The Chairman of the Management Committee is the sole executive body of OAO Gazprom and the Management Committee is its collective executive body. The Management Committee and the Chairman of the Management Committee are responsible for managing OAO Gazprom on a day-to-day basis.

The Board of Directors and the Management Committee

The below table presents the information on members of the Board of Directors as of December 31, 2014:

The below table presents the changes in the Board of Directors in 2014: