OGZD.L Regulatory News (OGZD)

MANAGEMENT REPORTOAO GAZPROM 

2013

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

Innovative development

Environment 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

Management structure of OAO Gazprom

Key risk factors

Strategic and country-specific risks

Customs, currency and tax regulatory risks

Financial risks

Market risks

Operating risks

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 Gazprom Group's entities included in the IFRS consolidated financial statements of OAO Gazprom for the year ended December 31, 2013, 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, 2013, prepared in accordance with IFRS.

Among other things, 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 13%). In Russia, Gazprom accounts for more than 73% of gas production and approximately 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 more than 168,900 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 (with a share of over 70% of the Russian market) and countries of the former Soviet Union (FSU). In addition, the Group is Europe's major supplier of natural gas (Gazprom has a 30.0% share of the European market, including Turkey). The Group has an extensive network of 1,747 fuel stations in Russia, the FSU and the Balkans.

Gazprom also owns electricity generating assets, which provide approximately 15% of all the electrical power generated in Russia.

The Gazprom Group's key operational and financial indicators for 2013 and 2012 are presented in the table 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 investments 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 McNoton, as of December 31, 2013 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) were 154.2 bboe. Present value of the hydrocarbon reserves is assessed at USD 305.0 billion (as of December 31, 2012 - USD 287.0 billion). The valuation covered 93% of natural gas, 89% of gas condensate and 89% of crude oil reserves of the Gazprom Group under the АВС1classification.

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 geologic 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, 2012, proved and probable reserves of Gazprom decreased by 0.5 bboe. In 2013, an adverse impact on total proved and probable hydrocarbon reserves was primarily due to production and recognition of actual development data in accounts. Positive factors included inclusion of new areas in the audit scope (Nadinsky block of the Medvezhiye field, the Yuzhno-Kirinskoye and Toto-Yakhinskoye fields) and recognition of exploration results. The present value of proved and probable reserves increased primarily due to introduction of the new tax treatment of the mineral extraction tax.

As of December 31, 2013 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: 35,696.6 bcm of natural gas, 1,384.4 million tons of gas condensate and 2,019.0 million tons of crude oil, for a total of 236.4 bboe. The Group's share in the ABС1hydrocarbon reserves of associated companies was 851.5 bcm of gas, 80.1 million tons of gas condensate and 542.0 million tons of crude oil, or 9.6 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 2013:

Notes:

(1) Under the Russian Federation laws, the subsoil user does not have any vested right to develop reserves discovered in the 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 2013, the Gazprom Group produced 14.7 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:

Note:

(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 and control functions.

In addition, in entities where Gazprom has investments classified as joint operations wells development drilling totalled 11.7 thousand m, five exploration wells have been completed, including two wells which yielded an influx.

Exploration work in Russia resulted in an increase in reserves by 647.8 bcm of natural gas and 53.7 million tons of crude oil and gas condensate. The increase in gas reserves amounting to 541.1 bcm was mainly attributable to the Kovyktinskoye field in the Irkutsk Region (156.5 bcm) and the Kruzenshternskoye field on the Priyamalsky shelf (384.6 bcm).

The recovery ratio for natural gas reserves amounted to 1.33, while for gas condensate it was 0.52, and for oil it was 1.14.

The Group's subsidiaries are involved in exploration projects internationally, in which they perform operational and control functions. Most of the exploration work was carried out in the Sarikamysh area (Tajikistan) and within the Pannonsky basin (Serbia, Romania, Hungary), as well as in the El-Assel block (Algeria). The Gazprom Group's subsidiaries were also involved in exploration drilling as part of other foreign exploration projects, including 2,700 m in Bolivia and 1,300 m as part of the Hunin-6 project (Venezuela). 

The user of mineral resources decided to surrender its license for the Urumako-2 block in Venezuela due to the inadvisability of conducting further work. The Group also has withdrawn from exploration projects in Equatorial Guinea and Cuba. Gazprom continues to maintain a force majeure regime in Libya in case it should require grounds for withdrawing from projects being implemented there (blocks 19 and 64).

Licensing

As of December 31, 2013 the Gazprom Group held 258 subsoil licenses for conducting geological surveys, prospecting, exploration and production of hydrocarbon in the Russian Federation. The licensed subsoil area covered 614,200 sq. km, including 376,900 sq. km of offshore sites. In addition, entities where Gazprom has investments classified as joint operations held 36 licenses with the licensed subsoil area of 21,700 sq. km.

In 2013, by resolutions of the Russian Federation Government, the Gazprom Group obtained 17 licenses for surveys, exploration and production of subsurface areas located on the shelves of the Kara, Barents, Chuckchee and East Siberian seas, including four sites (Leningradskoye, Rusanovskoye, Ledovoye, Ludlovskoye) that have С1С2 gas reserves of about 2.5 tcm, and condensate reserves of 15 million tons.

Following the discovery of the Novo-Yudukonskoye field in the Krasnoyarsk Territory, the Group obtained a license for exploration and production at this field. A license for the Yuzhno-Padinsky block in the Tomsk Region was obtained based on tender results.

Subsurface areas, for which subsoil licenses were obtained under resolutions of the Russian Federation Government in 2013 were not covered by the audit of reserves under PRMS Standards as of December 31, 2013.

The overall one-time payment for all licenses obtained in 2013 was RUB 70.6 billion.

In 2013, the licensing activities resulted in a growth of A+B+C1 natural gas reserves amounting to 484.1 bcm, gas condensate - 3.5 million tons.

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

In 2013, OAO Gazprom acquired a 92.25% stake in OAO Kamchatgazprom from OAO Rosneft. The acquired entity holds subsoil licenses for the Kshukskoye field and Kolpakovsky block on the Kamchatka peninsula.

InDecember 2013, the Group's associated company, OOO Yamal Razvitie, (the Gazprom's interest is 50%) signed an agreement for acquisition from ENI S.p.A of a 60% interest in Arctic Russia B.V, which holds a 49% interest in OOO SeverEnergia. As a result, the Gazprom Group's effective interest in OOO SeverEnergia, whose subsidiaries carry out exploration and production in YANAO increased from 25.5% to 40.2% starting from December 20, 2013. 

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 2013, the Gaprom Group produced 488.4 bcm of natural and associated petroleum gas which is 0.4 bcm more than in 2012. This volume includes the share in the production of entities where Gazprom has investments classified as joint operations. Meanwhile, as of December 31, 2013 the Gazprom Group's capacities were able to produce 560-570 bcm of natural gas per year.

Bovanenkovskoye field, that has been developed since 2012, accounts for a major part of the production growth. In the reporting year, the field produced 22.8 bcm of gas (in 2012 - 4.9 bcm). That development, along with increasing production at Zapolyarnoye field up to its projected capacity, compensated for diminishing output at depleting fields.

Oil production, including the share in the production of entities where Gazprom has investments classified as joint operations, was 42.3 million tons (that corresponds to the 2012 level). After the unit of the complex gas treatment facility for gas from the Valanginian deposits (UKPG-1V) at the Zapolyarnoye field reached the projected production capacity, production of gas condensate there increased significantly and reached 14.7 million tons (in 2012 - 12.8 million tons).

Production of gas by associated companies also increased. The Gazprom Group's share in gas production within Russia was 13.0 bcm of natural and associated petroleum gas (an increase of 1.2 bcm as compared to 2012). The Group's share in the liquid hydrocarbon production of the associated companies was 1.3 million tons of gas condensate (an increase of 0.2 tons as compared to 2012), 10.2 million tons of oil (a decrease of 0.6 million as compared to 2012).

The Group's Serbian subsidiary, Naftna Industria Srbie, produced 1.3 million tons of oil and 0.6 bcm of gas. In Libya, under oil concessions С96 and С97 the associated company Wintershall AG (the Group's ownership interest is 49 %) produced 2.4 million tons of oil and 0.3 bcm of gas (in 2012 - 4.1 million tons of oil and 0.6 bcm of gas). The sharp decline in production is explained by the force majeure event that was announced in August 2013.

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

· the Wingate field in the North Sea: total production amounted to 0.4 bcm of gas and 2.1 thousand tons of condensate (in 2012 - 0.7 bcm of gas and 4.5 thousand tons of gas condensate); the Group's share in the project at the development stage was 20%;

· block Hunin-6, Venezuela: total production amounted to 0.1 million tons of oil, the Group's share in the project at the development stage was 8%;

· the Shakhpakhty field in Uzbekistan: total production amounted to 0.3 bcm of gas (in 2012 - 0.3 bcm), the Group's share in the project was 5%;

· blocks 05-2 and 05-3 in the South China Sea, on the shelf of Vietnam, being developed on the basis of a production sharing agreement - total production amounted to 305.9 million cm of gas and 59.4 tons of condensate. The Group's share in PSA is 49%.

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

In addition, as of December 31, 2013 entities where Gazprom has investments classified as joint operations developed 35 fields; their production well stock included nine gas production wells and 4,199 oil production wells (including 3,019 active wells).

Main areas of investments

Main capital investments in gas production in 2013 were allocated to developing the infrastructure of Cenomanian-Aptian deposits at the Bovanenkovskoye field, the Kirinskoye 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 Prirazlomnoye field's infrastructure, developing the eastern area of the Orenburgskoye and Novoportovskoye fields, drilling new production wells at the Priobskoye field, developing gas condensate deposits at the Zapolyarnoye field in Russia and developing fields in Iraq. Long-term investments in exploration and production of oil and gas condensate were used for developing the Messoyakha group fields.

In 2013, the following facilities were put into operation:

· two complex gas treatment plants with the annual capacity of 4.25 bcm at the Kirinskoye field and 1.75 bcm at the Yubileynoye field;

· the second commissioning and start-up complex of the gas treatment plant at the Nizhne-Kvakchinskoye field with the annual capacity of 0.575 bcm;

· two gas compressor units of the boosting compressor station at the Yamburgskoye field with the capacity of 20.0 MW.

· 80 new production gas wells (including 50 wells at the Bovanenkovskoye field) and 778 new oil production wells. Development drilling for gas totalled 239.7 thousand meters and for oil - 3.0 million meters.

In addition, in entities where Gazprom has investments classified as joint operations development drilling of subsurface rock totalled 0.7 million meters.

Sale of oil and gas condensate

In 2013, the Gazprom Group sold 16.0 million tons of oil and stable gas condensate.

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 oil and gas condensate do not include intra-group sales.

Decrease in sales of oil and gas condensate as compared with the previous year is mainly explained by more efficient refining of available oil versus sales of crude in Europe and other foreign markets. In addition, total domestic sales do not include the supplies of the Group's stable gas condensate to Gazprom Neftekhim Salavat refinery due to its consolidation starting from 1 June 2012.

Production capacities need to be utilized in accordance with the approved oil refinery and export programs; therefore free oil sales (without replacement deliveries) in Russia were not significant. Practically all gas condensate of the Gazprom Group was sold in the domestic market.

The Group's operations are affected by the prevailing prices of crude oil, both in domestic and international oil markets. In 2013, according to the PIRA agency the prices for Urals crude oil (CIF Med) fluctuated in the range of 96.8 - 117.4 USD/barrel and decreased by 0.9 % to 109.1 USD/barrel at the year end. According to PIRA's forecast for 2014, the price for Urals crude oil is expected to decrease by another 7% to 102.8 USD/barrel.

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 2013, the price of oil in the Russian market exceeded the 2012 average level by about 5% (according to the Argus data).

The sale prices for the Gazprom Group's stable condensate were in the same trend as oil prices and also increased by 5%. Gas condensate was sold either with a linkage to Russian oil prices or on the basis of global quotes.

Reporting year and subsequent events

In October 2013, initial production of gas was launched at the Kirinskoye gas condensate field in the Sea of Okhotsk (the Sakhalin-3 project). The subsea production unit was implemented here for the first time in the Russian practice. Commercial gas production at the field will start in 2014.

In October 2013, commercial production of hydrocarbons was commenced in the Vietnamese section of the South China Sea in the framework of the 05-2 and 05-3 blocks development project. The Group joined this PSA in 2012 and had a 49% interest. The planned output of 1.98 bcm for gas and 614.9 thousand tons per year for condensate is expected to be reached in 2015.

In December 2013, OAO Gazprom entered into an asset swap master agreement with Wintershall Holding GmbH. In accordance with the agreement, Wintershall Holding GmbH is expected to receive a 25.01% interest in the project for the development of blocks 4A and 5A of the achimovsk deposits of the Uregoyskoye field. Under the asset swap master agreement the Group expects to receive a 50% interest in Wintershall Noordzee B.V. which is carrying oil and gas exploration and production in the south area of the North Sea. The deal is to be finalized in 2014.

The oil production at the Prirazlomnoye field, located on the Pechora Sea shelf in the Russian Arctic region, began at the end of December 2013. The planned production level of 5.5 million tons per year will be reached after 2020.

Development plans for the Production of Gas and Production of 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 in the Yamal peninsular, offshore areas of northern seas, East Siberia and Far East.

The development of Yamal reserves will help to make up for a declining production at key Gazprom's fields, primarily the Urengoyskoye and Yamburgskoye fields.

Major С1С2 gas reserves of 4.9 tcm are located in the Bovanenkovskoye field. According to the estimate, the planned annual production level of 115 bcm of natural gas a year at the Cenomanian-Aptian layers of the field is expected to be achieved between 2019 and 2021. In the long-term perspective, it is expected that the field will be able to produce up to 140 bcm of natural gas taking into account Neocomian-Jurassic gas condensate layers.

In the East of Russia new gas production centers have been established in the Sakhalin Region and the Kamchatka Region; the establishment of a new gas production center in Yakutsk has been started; new gas production centers will be established in the Krasnoyarsk Region and the Irkutsk Region. The resources located in the East of Russia allow establishing new large gas and oil production centers to meet the demand of Russian eastern territories and to provide export supplies to the Asian-Pacific countries, primarily China, in the long-term perspective.  

The Chayandinskoye field with 1.44 tcm of C1C2 gas reserves is the primary source field for the Yakutsk gas production center. In 2014, oil production will be commenced at the field. In 2017, Gazprom plans to start producing gas at the planned level of 25 bcm per year. 

The Kovyktinskoye field with 1.56 tcm of C1C2 gas reserves is the primary source field for the Irkutsk gas production center. Currently, the field is at the pilot development stage. The planned production capacity is about 35 bcm of gas per year.

The development of the Kirinskoye field, the Yuzhno-Kirinskoye field and the Mynginskoye field (Sakhalin-3) has primary importance for developing the production capacities of the Sakhalin gas production centre.

Oil business development strategy provides for increasing the annual oil production up to 100 million tons of oil equivalent by 2020 and maintaining that level until 2025, meanwhile foreign projects should account for at least 10% of total production. 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.

The Group believes that in Russia significant potential for oil production lies in the development and exploitation of fields located in the Yamal-Nenetsky Autonomous District (projects Novy Port, OOO SeverEnergia together with OAO NOVATEK, Messoyakha together with OAO NK Rosneft, water zone of the Pechora Sea (the Prilazlomnoye and Dolginskoye oil fields) and Orenburg Region (eastern part of the Orenburgskoye oil and gas condensate field and new areas). In addition, significant contribution in reaching the planned production levels is expected from East Siberia fields: the Kuyumbinskiy project (together with OAO NK Rosneft) and the Chonsky project (the Tympuchikanskiy, Vakunaiskiy and Ignyalinskiy areas). Production of natural gas from unconventional sources, including shale oil, is viewed as another potential for production growth.

Participation in foreign projects is aimed at expanding Gazprom's resource base outside of Russia in order to strengthen its position in foreign oil and gas markets.

Transportation of gas

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

Gas transportation system

The Gazprom Group's gas pipeline system within Russia is unique. It provides a high level of reliability and ensures continuous, uninterrupted gas supplies.

As of year-end 2013, OAO Gazprom and its gas transportation subsidiaries in Russia owned trunk pipelines and branch pipes with a total length of 168,900 km. The Gas Transportation System includes 247 compressor stations with a total capacity of 45,900 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 4,200 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 Gas Transportation System (GTS).

In 2013, eight technical failures were reported on trunk pipelines, representing 0.05 per 1,000 km, or two times less than in the previous year.

The volume of gas pumped into Gazprom's GTS within Russia in 2013 totalled 659.4 bcm (in 2012 - 666.2 bcm). The GTS and UGSF used 40.6 bcm of natural gas for their own technical needs in 2013 (in 2012 - 40.9 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 2013, 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 111.3 bcm (an increase of 16.3% as compared to 2012).

The Group's key foreign gas transportation assets are the gas transportation system in the Republic of Belarus, including the Belarussian section of the Yamal-Europe gas pipeline, and the gas transportation system in Armenia. As of December 31, 2013 the total length of these gas pipelines was 9,700 km. In 2013, 69.1 bcm of natural gas was pumped into the GTS within Belarus, including 48.8 bcm of gas transiting through Belarus, representing an increase of 4.6 bcm (or 10.3%) as compared with 2012, which was driven by increased gas supplies to Europe in 2013.

In 2013, about 23% of the total gas supplies to Europe under long-term contracts were handled by the marine cross-border pipeline systems created in partnership with the Group: Blue Stream and Nord Stream. In 2013, 23.8 bcm of gas (in 2012 - 11.8 bcm) was transported through the Nord Stream pipeline. Gas sold from the Blue Stream pipeline in 2013 amounted to 13.7 bcm (in 2012 - 14.7 bcm).

Main areas of investments

In 2013, capital investments were primarily used for implementing various construction projects (the Bovanenkovo-Ukhta trunk gas pipeline system, the first section of the Ukhta-Torzhok trunk gas pipeline system, and expansion of the Unified Gas Supply System (UGSS) to ensure gas supplies to the South Stream pipeline. In 2013, 700 km of trunk gas pipelines and branch pipes as well as 15 gas-compressor stations at gas pipelines with a total capacity of 1,409 MW were commissioned within the framework of carrying out gas transportation projects.

Along with the construction of new gas transportation capacities, Gazprom is engaged in rebuilding and re-equipping gas transportation facilities. In 2013, within the framework of the Integrated Programme for Technical Re-equipping and Reconstruction of Gas Transportation Facilities 208 km of trunk pipelines (in 2012 - 132 km) and six compressor stations (in 2012 - two compressor stations) were rebuilt in Russia, while eight compressor stations (in 2012 - two compressor stations) were rebuilt in foreign countries.

The main areas of long-term investments in 2013 were related to Gazprom's involvement in the construction of the South Stream gas transportation system.

Reporting year and subsequent events

In June 2013, a road map was signed for implementing energy projects in Serbia within the framework of the South Stream project.

In October 2013, construction began on the Bulgarian section of the South Stream pipeline and in November 2013, construction began on the South Stream pipeline in Serbia.

In December 2013, a contract was signed for design and survey work, as well as regional planning and an environmental impact assessment of the Hungarian section of the South Stream project.

Development plans for the Gas Transportation segment

In the area of gas transportation, further development and modernisation of the UGSS will be carried out in line with growth in gas production. It is expected that existing infrastructure will be used at the fullest capacity possible to ensure the efficiency of supplies.

 A unique, next-generation gas transportation system which connects the Yamal peninsula and central Russia is being created, thus ensuring the transportation of Yamal gas. In 2012, 2,600 km of pipeline, including the first stage of the Bovanenkovo-Ukhta pipeline and the first section of the Ukhta-Torzhok trunk pipeline, were put into operation.

The South Stream project represents an important step in implementing Gazprom's strategy of diversifying its routes for exporting Russian gas to Europe.The offshore section of the pipeline will go under the Black Sea, while the onshore section will traverse the territories of Bulgaria, Hungary, Serbia, Slovenia and Italy. The pipeline is slated to be commissioned in December 2015 and is expected to reach its full annual planned capacity of 63.0 bcm by 2018. Russia's gas transportation system will be expanded to ensure an appropriate volume of gas supplies for the South Stream pipeline.

OAO Gazprom's long-term objectives include the development of gas infrastructure in eastern Siberia and the Far East as part of its Eastern gas project. The Sakhalin-Khabarovsk-Vladivostok gas transportation system is being developed.

Survey and exploration work is now under way for the Power of Siberia pipeline project. This pipeline will be about 4,000 km long, including a 3,200 km section of the Yakutia-Khabarovsk-Vladivostok pipeline and an 800 km section of the gas pipeline that will link the Yakutsk and Irkutsk gas production centres.

One of the Gazprom Group's key business development areas is activities under the projects on supplying the Russian natural gas to China by the Western and Eastern routes with the annual volume of 68 bcm.

Underground gas storage

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

The development of the underground gas storage system is one of Gazprom's strategic goals. Underground gas storage facilities help control seasonal differences in gas consumption, reduce maximum load, ensure flexible and secure gas supplies.

Underground gas storages in Russia and abroad

The Gazprom Group operates 22 UGSFs in 26 storage facilities in Russia. As of December 31, 2013 the total volume of active gas in UGSFs reached 70.4 bcm. In 2013, 32.7 bcm of gas were withdrawn from UGSF in Russia, and 38.4 bcm of gas were pumped into UGSF. The potential daily capacity increased by 56.7 million cm. By the start of the 2013-2014 withdrawal season, the volume of the operating gas reserve in Russian UGSFs increased by 2.7 bcm as compared to the previous season and amounted to 69.0 bcm.

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

In Europe the Group has access to active UGSF capacities in Austria, UK, Germany, Serbia. By the beginning of 2013 winter, the Gazprom's gas storage capacities in Europe amounted to 4.1 bcm, daily capacity -51.0 bcm.

In 2013, 3.9 bcm of gas (including protective stock) were pumped into European UGSFs, and total gas withdrawal was 4.1 bcm due to subnormal cold and long-lasting winter.

In FSU Gazprom has access to UGSF in Latvia, Belarus, Armenia. As of December 31, 2013 the Group's gas storage facilities in FSU amounted to 2.8 bcm, daily capacity- 42.8 bcm. Increase in active capacities of UGSF is explained by the increase in the capacity of Mozyrskoye UGSF in Belarus.  

In 2013, 2.5 bcm of gas were pumped into UGSFs in FSU, total withdrawal volume was 2.1 bcm.  

Main areas of investments

In 2013, the main volume of capital investments was channeled to increasing the capacity of compressor stations and active capacities of UGSF: reconstruction of Sovkhoznoye UGSF, gasfield facilities of Stepnovskaya underground gas storage station, gasfield and compressor facilities of Elshanskaya underground gas storage station, expansion of active capacities and increase in daily production of Kasimovskoye UGSF.  Increase in active capacities amounted to 2.2 bcm and 42 wells were connected.

Within Russia, construction continues on the Kaliningradskoye and Volgogradskoye underground gas storage facilities (UGSF) in rock salt deposits and the Bednodemyanovskoye UGSF in water-carrying deposits; as well, the search continues for promising new fields.

The expansion of UGSFs capacities in foreign countries continued. A major part of capital investments was used for construction of Katharina UGSF in Germany. In 2013, the construction of Damborice UGSF (Czech Republic) based on the depleted oil filed was commenced. 

Reporting year and subsequent events

In September 2013, the first line of the Kaliningradskoye UGSF, which is Russia's only UGSF in a saline deposit, was commissioned. 

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 2020 that will allow decreasing expenses for commodity/transport activity by 10-15 % and cost of gas supplies to consumers by 5-10 %.

To ensure reliable gas supply under the export contracted obligations Gazprom is using UGSF capacities located in European countries. The Group also participates in construction of new UGSF facilities in Europe, in particular in Germany and Czech Republic.

Gas distribution

The following table presents information on assets and volumes of capital investments 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 law "On Gas Export" of 18 July 2006 No.117-FZ, OAO Gazprom, as the owner of the Unified Gas Transportation System, 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 2013, gas consumption in Russia totaled 461.3 bcm which is a 1.0% decrease as compared to 2012. Gazprom is the largest supplier in domestic market and accounts for 70% of total gas supplies. In Russia, electric-power industry, metallurgy and agricultural chemistry remain its main customers.

Gas consumption in Europe decreased by 8.5 bcm (or by 1.6%) to 538.2 bcm in 2013.

In 2013, Gazprom's supplies to far abroad under long-term contracts totalled 161.5 bcm of natural gas that is 16.3% higher than in 2012. Drivers for export growth include the forced gas pumping in UGSF in summer of 2013 and reduction of supplies made by alternative suppliers, both export supplies of natural gas and LNG and internal production in Europe. The growth in supply volumes is attributable, among other things, to the fact that obligations were revised under contracts with "take or pay" terms. In addition, prices under long-term contracts with some European partners were revised, and the contract system was being adjusted to current market conditions so as to enhance the competitiveness of Russian natural gas. However, the fundamental provisions of long-term contracts, including oil products price indexation, remained unchanged.

In 2013, the Gazprom Group sold 72.1tn BTU (2.0 bcm) of LNG including LNG sold under Sakhalin-2 project amounting to 29.7 tn BTU (1.2 bcm).

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 2013.

The table below presents weighted average changes in domestic prices in 2014-2016, annual average increase versus prior year.

For enhancing the efficiency of domestic sales OAO Gazprom is working with federal government agencies on an on-going basis.

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 in 2013 and 2012:

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.

In 2013, OAO Gazprom continued supporting oil price indexation as a key principle of pricing under long-term contracts for export supplies of gas. Such an indexation is an essential tool of the long-term business-planning that meets interests of the buyer and the seller of gas. It ensures top-down continuity and stability of the industry investment cycle - from a well to the final customer. However, other Europe's large gas suppliers have refused to adopt oil price indexation, preferring instead to link contractual prices to spot gas prices. At the same time, they have managed to enlarge the share of seller's variable obligations in contracts with European buyers, thus reducing the supplies in case of low market prices environment and opening the door for gas deliveries to more attractive markets, primarily the lucrative Asia-Pacific markets.

Main areas of investments

A significant portion of capital investments in the Gas Distribution segment includes the Group's investments in gasification of the Russian Federation regions. In 2013, the construction of 170 gasification facilities with total length of 2,500 km was completed. It provided gas supply to 321 centers of population in 41 territorial subjects of the Russian Federation.

Reporting year and subsequent events

In February 2013, OAO Gazprom's Management Committee approved the justification of investments in construction of LNG production plant in Vladivostok. The plant's capacity will be 10 million tons per year with expansion capacity up to 15 million tons per year. The first line is scheduled to be commissioned in 2018.

In March 2013, OAO Gazprom and China National Petroleum Corporation signed a memorandum of understanding (MoU) for a project to supply natural gas via pipeline to China through the Eastern route in a volume amounting to 38 bcm per year. The MoU establishes the supply volumes as well as when the supply period begins and the location of the gas transfer point on the Russia-China border. To further develop the agreements outlined in the MoU, in September 2013 OOO Gazprom Export and PetroChina International Ltd. signed an agreement on key gas supply terms, which sets the basic non-price characteristics of the future sales contract.

On 21 June 2013, OAO Gazprom and the Leningrad Region Government signed a memorandum of understanding and cooperation during implementation of a project for the construction of an LNG production plant. The plant, which will have a capacity of 10 million tons per year, is scheduled to be commissioned in 2018.

According to the asset swap master agreement between OAO Gazprom and Wintershall Holding GmbH which was signed in December 2013, the Gazprom Group will increase its interest in WINGAS GmBH (WINGAS), Wintershall Erdgas Handelshaus GmbH & Co. (WIEH), Wintershall Handelshaus Zug AG (WIEE) up to 100%. WINGAS, WIEH and WIEE are engaged in gas trading and supply in Europe, WIENGAS also holds ownership interest in large UGSFs in Europe: Reden, Haidach and Jemgum.

Development plans for the Gas Distribution segment

In the Russian market Gazprom will try to keep its current positions as to the volumes of gas delivery, provided the security of supplies, including in autumn and winter is ensured.

The Group plans to expand its presence in foreign gas markets. 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. While maintaining its share in European market at the 2013 level, Gazprom intends to occupy a market share in NEA and world trade of LNG at the level of 10-15%.

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 Gazprom Neft, refining and petrochemical assets of Gazprom Neftekhim Salavat Group and Vostokgazprom Group.

The Gazprom Group's total processing and refining capacity was 53.5 bcm of natural gas and 89.4 million tons of unstable gas condensate and crude oil per year.

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.

(2) The data is presented starting from 1 June 2012.

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.

(2) The data is presented starting from 1 June 2012.

The decrease in gas processing and production of dry stripped gas and sulphur in 2013 as compared to 2012 is explained by the repairs at Astakhansky refinery, the decreased gas production at Orenburgskoe and Vuktylskoye fields being the raw material bases for Orenburgsky and Sosnogorsky refineries. 

The increase in oil refining and unstable gas condensate processing volumes is driven by the increased production of gas condensate at Zapolyarnoye and Urengoiskoye fields and consolidation of OAO Gazprom Neftekhim Salavat starting from June 2012. Insignificant decrease (by 1.7 %) in oil refining volumes in Gazprom Neft is explained by the planned repairs at the refinery.

Motor gasoline and diesel fuel contributed to the increase in production of oil products. The production of fuel oil decreased due to increased production of bituminous materials because of increased demand and productivity of bitumen facility at Moscow refinery after reconstruction.

Due to large-scale modernisation initiatives, starting from 2013 all Gazprom Neft refineries have begun transitioning ahead of schedule to producing fuels in ecological class five (which corresponds to Euro-5). Under the relevant technical regulations, Russian refineries must fully switch over to producing this class of fuels starting from 2015.

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 2013, total volume of refined products sales increased by 6.9% and amounted to 68.3 million tons as compared to the previous year.

In 2013, about 13% of the total volume of refined products sales of the Gazprom Group were sold via the network of fuel stations of the Gazprom Neft Group. Sales via the network of fuel stations of the Gazprom Neft Group reached 9.2 million tons (in 2012 - 8.1 million tons). Based on the 2013 performance, the Group maintained the leading position with regard to supplies of motor gasoline in Russia. The increase in sales is driven by modernisation and optmisation of own network of fuel stations and their increased operational efficiency. In 2013 in Russia and FSU countries, 50 fuel stations were either built or acquired, while 110 fuel stations underwent full reconstruction and six fuel stations were rebranded.

In 2013, the Group's sales of gaseous helium amounted to 3.0 million cm, sales of liquid helium amounted to 0.8 million litres (in 2012 - 2.7 million cm and 3.0 million litres, respectively).

Main areas of investments

The major portion of capital investment in refining was channeled to construction of a gas chemical facility in Novy Urengoy, modernization of production capacity at the Gazprom Neft Group refineries, reconstruction of Astrakhansky refinery, and construction and modernization of oil refining and petrochemical capacity of OAO Gazprom Neftekhim Salavat.

In 2013, diesel fuel hydrotreating unit (after reconstruction), FCC unit and isomerization unit were commissioned at Moscow refinery; diesel fuel hydrotreating unit was commissioned at Yaroslavsky refinery.

Reporting year and subsequent events

In November 2013, OAO Gazprom and OAO SIBUR Holding signed a Memorandum on Cooperation for the Construction of Gas Processing and Gas Chemical Facilities in Belogorsk. In accordance with this document, Gazprom plans to build a gas processing plant in Belogorsk with an annual capacity of 60 bcm. SIBUR plans to build an integrated gas-derived chemicals plant that will be linked to the gas processing plant's production cycle.

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.

For refining crude from promising western Siberian fields, plans have been developed for expanding and rebuilding the capacities of the Urengoy and Surgut refineries.

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.

Strategic goals in oil refining in Russia include implementation of programs on modernization of refining capacities and increase of their operating efficiency. It is expected that the modernization will allow reaching the refining volumes of 40 million tons per year within Russia, increased depth of refinery to 95% and yield of light fractions up to 77% by 2025.

The Gazprom Group's development in oil refining abroad is focused on searching for assets in two key regional markets - Europe and South-East Asia.

By 2025, it is planned 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. It is also planned to develop premium marketing channels- sales of aviation kerosine, lubricants, bituminous materials, petrochemical products and bunkering.

Electric power

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

The Group is the largest owner of power generating assets whose installed capacity was 38.2 GW as of December 31, 2013. When the Group acquired OAO MIPC it became the largest heat producer in Russia. In 2013, Gazprom's share in electricity generation in Russia was 15%, its share in heat generation was 22%.

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

Note:

(1) Data on electricity and heat generation are presented for the period from 1 October 2013 through December 31, 2013.

(2) Total data may differ due to rounding.

In 2013, electricity generated by the Gazprom Group totalled 161.4 billion kWh that is 3.3 % lower than in 2012; heat generation totalled 112.5 million Gcal, that is 11.3% more than in 2012. 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 1.1 billion kWh of electricity.

In 2013, electricity generated by the Gazprom Group totalled 162.5 billion kWh, heat totalled 112.5 million Gcal.

All electricity generated by the Russian generating companies of the Group is sold in the wholesale electricity and capacity market and also exported abroad.

The Group's entity, OAO Mezhregionenergosbyt is one of the leaders in the Russian power trading market. The company provides for over 96% of electricity consumption of the Gazprom Group's subsidiaries. It also sells electricity to consumers outside the Group (in 2013 - 5.6 billion kWh).

The Gazprom Group also supplies electricity to final consumers in Europe and carries out trading operations with electricity in European trading floors. In 2013, the Gazprom Group supplied electricity of 2.3 billion kWh (in 2012 - 2.1 billion kWh) to final consumers in United Kingdom, Germany and the Netherlands. Total electricity trading volume amounted to 240 billion kWh.

Main areas of investments

The investments in electric power in 2013 were primarily channelled to construction of 660 MW power-generating unit of Troitskaya GRES, the second phase of the Cherepovetskaya GRES, a carbon block with CFB at Novocherkasskaya GRES (OAO WGC-2), modernization of TPP-20 and TPP-12 and replacement of the second boiler-turbine shop at power generation unit of TPP-16 (OAO Mosenergo).

In 2013, the Group launched 420 MW of new generating capacity in Russia, including two power generation units CCGT-180 at Adlerskaya TPP (OAO WGC-2) with total capacity of 360 MW and hydro turbine units at Lesogorskaya GES and Svetogorskaya GES with total capacity of 60 MW. In addition, the construction of the main heating pipeline from Apatitskaya TPP to Kirovsk of Murmansk region was completed in the reporting year.

Reporting year and subsequent events

In September 2013, OOO Gazprom Energoholding completed the acquisition of 89.9% shares of OAO MIPC and its movable and immovable assets which are linked to the production cycle of the Moscow heat complex rented by OAO MIPCfrom the Moscow Government. The deal's value based on tender results was RUB 98.6 billion.

OAO MIPC provides services to 227 generation units with total capacity of 17,529.2 Gcal, including eight electricity generation units with total electric capacity of 193.24 MW and heat capacity of 130.8 Gcal. OAO MIPC supplies heat and hot water to more than 70,000 buildings, out of which 33,100 buildings are residential housing stock. The company operates more than 16,000 km of heat network.

In 2013, OAO TGC-1 completed the large-scale reconstruction of cascade of Vyoksinsk GES in the Leningrad Region, which is the largest source of electric power on Karelian Isthmus.

In September 2013, OOO Gazprom Energoholding and the Group's company, Naftna Industria Srbie (NIS) signed a memorandum for constructing the combined cycle power plant (CCPP) with capacity of 208 MW in Panchevo, Serbia. Electricity generated by CCPP will be used for the needs of NIS refinery and petrochemical facilities of HIP Petrohemija, a strategic partner of NIS. The planned construction cost of CCPP amounts to Euro 180 million. The commissioning of the plant is scheduled for 2017.

Development plans for the Electricity and Heat Generation and Sale segment

The development of Gazprom's energy business is primarily connected with the implementation of investment programs in the electricity and heat generation segment.

According to the investment program under capacity supply contracts the Gazprom Group is planning to commission new capacities of 3.4 GW in 2014-2016. The Company also participates in other projects on constructing power plants in Russia.

One of the Gazprom Group's priorities in developing the electric power sector is increase in operating efficiency of generation assets. The Group's generation companies in Russia are implementing the cost optimization programs and measures to improve their financial results. In 2013, the implementation of these programs and measures allowed Russian generation companies to reduce expenses by RUB 4.8 billion.

The Group is considering the potential electric power projects abroad. It is also monitoring electric power markets in Europe and Asia. The Gazprom Group is also considering the opportunities to acquire modern CCPP in Europe, whose market values are currently significantly lower than costs for building new CCPP.

Innovative development

The Program of OAO Gazprom's Innovative Development for the period up to 2020 was developed and approved by Board of Directors of OAO Gazprom on 1 June 2011 (No1825) to define and systematize the key directions and tasks of OAO Gazprom in the area of innovative development. The document highlights basic directions of technology improvement or technology priorities in gas, oil and electric power businesses. Investments into these areas will allow obtaining the maximum economic benefit.

Innovative development priorities include technologies of field exploration and development, processing and transportation of gas, gas condensate and oil in harsh climate conditions of the Far North and permafrost, in the shelf of northern seas with difficult ice conditions. Gazprom is a technology leader in this area. The Group also expects to receive significant economic effect in such areas as extraction of hydrocarbons from difficult-to-access deposits, liquefaction of gas, hydrocarbons treatment under new fuel generation technology (GTL).

Gazprom has its own well-developed scientific and technical complex that includes eight research institutes and three design centers. Total number of employees is over 11,000 people. Gazprom engages over 100 external institutes and research centers in its R&D activities. In 2013, R&D orders were placed with 118 contractors.

In monetary terms, the volume of R&D performed under the Gazprom Group's orders in 2013 amounted to RUB 6.8 billion (net of VAT) (in 2012 - RUB 7.7 billion).

As of December 31, 2013, the Gazprom Group held 2,035 patents for patent rights subjects (including 219 patents received in the reporting year). In 2013, 350 patent rights subjects were used for production purposes and the resulting economic benefit is estimated at RUB 1.8 billion.

Gazprom has been implementing over 30 agreements and programs in science and technology together with Russian and foreign partners. In Europe Gazprom's partners in research and development projects include well-known German companies E.ON CE (former Ruhrgas AG), BASF / Wintershall Holding, Verbundnetz Gas AG, Siemens AG, EUROPIPE GmbH ; N. V. Nederlandse Gasunie, a Dutch company; GDF SUEZ, a French company; ENI S.p.A., an Italian company, and Statoil ASA, a Norwegian company.

Environment protection

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

The Environmental Management System (EMS) is the key element of OAO Gazprom's Ecological Policy. The system integrates management bodies of the parent company and 29 wholly-owned subsidiaries involved in hydrocarbons exploration, production, transportation, storage and processing. In 2011, Gazprom's EMS was certified by Det Norske Veritas, an independent international certification authority, and in 2013, it was successfully audited for compliance with International Standard ISO 14001:2004. In 2013, practically all Gazprom Group's entities, which prepare environmental reports had certified environmental management systems and stated their compliance with ISO 14001:2004 requirements.

In 2010, OAO Gazprom adopted the Corporate Ecological Standards for the EMS purposes. In 2013, the Corporate Ecological Standards for 2014-2016 were adopted based on their implementation results and analysis of environmental aspects.

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

Gross pollutant emissions made by the Gazprom Group decreased by 334,500 tons as compared to 2012. The key factor here was the decrease of pollutant emissions made by oil and gas companies by 282,100 tons, primarily as a result of technological actions undertaken by Gazprom Neft, including the upgraded flare systems, launched vacuum compressor stations, APG flows reallocated to adjoining sites. Pollutant emissions made by Gazprom Energoholding entities reduced by 52,300 tons mainly due to lower volumes of production.

In 2013, the Gazprom Group reduced the volume of waste water disposal into surface-water bodies by 503.1 million cm (10.3%) as compared to 2012. In total, the Gazprom Group waste decreased by 10.2% (532,800 tons) as compared with the prior year. Decrease in waste water disposal and total waste is also explained by the decrease in production volumes of the Group's utility companies.

In 2013, greenhouse gas emissions at the sites of OAO Gazprom and its wholly-owned exploration, production, transportation, storage and refining subsidiaries totalled 122.2 million tons of СО2-equivalent, i.e. 1.6 million tons (1%) less than in 2012. The reduction of greenhouse gas emissions resulted from implemented energy and resource saving measurements used in repairs of trunk pipelines which prevent methane blowing, decreased consumption of natural gas for own technological needs, and other activities performed as part of OAO Gazprom's Energy Efficiency Program for 2011-2013.

The Gazprom Group's environmental costs are disclosed below:

In 2013, current operating costs and costs of environment-related services increased by 27.7% as compared to 2012.

Increase in current operating costs was primarily driven by the Gazprom Neft Group's activities related to intensification of works to implement a program on mitigating the effects of accumulated environmental damage - sludge pits and restoration of disturbed and contaminated lands including due to the activities of former land users.

Costs of capital repairs of fixed assets used for environmental protection increased by 27.1%. It was driven by increase in capital repairs volumes in the Gazprom Neft Group.

In 2013, the Gazprom Group's payments to the budgets of different levels for the negative impact on the environment were 88.9% more than in 2012 as a result of applying multiplying ratios to standard payments for pollutant emissions from APG flaring. Capital environmental costs of the Gazprom Group increased by 93.6% as compared to 2012 primarily as a result of RUB 13.8 billion financing of environmental protection efforts undertaken in connection with the construction of Olympic infrastructure and the development of Sochi as an alpine resort.

In 2013, as a result of 198 governmental inspections in the Gazprom Group's entities 279 violations of the Russian environmental legislation were identified. Penalties paid amounted to RUB 7.8 million (in 2012 - RUB 6.0 million). Identified violations were eliminated within the specified dates.

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, 2013, the number of employees in the Gazprom Group's subsidiaries was 459,500 people, including 27,400 employees of the Gazprom Group's entities registered abroad. Increased number of employees is mainly explained by consolidation of OAO MIPC and increased number of the Gazprom Neft Group's employees.

The table below shows the age structure of the Gazprom Group's employees as of December 31, 2013.

The age composition of the Group's personnel is well balanced. The table below shows the age structure of the Gazprom Group's personnel as of December 31, 2013:

For maintaining high professional level of the Group's employees the Group has the system of continuing in-house professional education of OAO Gazprom's employees which is based on the corporate training institutions. In 2013, 261,800 employees of the Gazprom Group took advanced and professional training courses.

In 2013, social and labour relations between employees and employers 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 of the Russian Federation and other local regulations and standards of the Gazprom Group's subsidiaries and entities.

The social policy of OAO Gazprom is targeted at ensuring social security of employees and motivating employees to work in Gazprom efficiently and for a long-time. The key principle of the social policy is social partnership which is implemented by providing employees with various social benefits, personal insurance, 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 annual RUB/USD exchange rate.

Total sales (net of VAT, excise tax and customs duties) increased by RUB 483,470 million, or 10%, to RUB 5,249,965 million in 2013 as compared with 2012.

Net sales of gas accounted for 57% and 56% of total net sales in 2013 and 2012, respectively.

Net sales of gas increased by RUB 314,716 million, or 12%, from RUB 2,657,107 million in 2012 to RUB 2,971,823 million in 2013.

Net sales of gas to Europe and other countries increased by RUB 213,306 million, or 15%, to RUB 1,682,761 million in 2013 as compared with 2012. The overall increase in net sales of gas to Europe and other countries was mainly driven by an increase of 15% in the volume of gas sold as compared with the prior year. The gross average rouble price (including customs duties) increased by 1% in 2013 as compared with 2012.

Retroactive gas price adjustments were recognized in the financial statements as a RUB 74,393 million increase in sales in 2013 that reflects a decrease in a previously recognized accrual.

Net sales of gas to FSU countries decreased by RUB 109,196 million, or 21%, and amounted to RUB 420,320 million in 2013 as compared with 2012. The change was due to a 10% decrease in the gross average rouble price (including customs duties) and a 10% decrease in the volumes of gas sold in 2013 as compared with 2012.

Net sales of gas in the Russian Federation increased by RUB 33,464 million, or 4%, and reached RUB 794,349 million in 2013 as compared with 2012 due to a 14% increase in the gross average domestic gas prices. In 2013 the volume of gas sold decreased by 8% as compared with 2012.

Net sales of refined products (net of excise tax, VAT and customs duties) increased by RUB 142,498 million, or 12%, to RUB 1,351,713 million in 2013 as compared with 2012 primarily due to an increase in volumes sold by Gazprom neft Group to customers in Europe and other countries and in the Russian Federation and also due to an increase in prices. In 2013 and 2012 Gazprom neft Group's sales comprised 76% and 77% of total net sales of refined products, respectively. Increase in net sales of refined products was also due to inclusion of Gazprom neftekhim Salavat Group in the consolidated financial statements from June 2012.

Net sales of electric and heat energy (net of VAT) increased by RUB 32,080 million, or 9%, to RUB 375,589 million in 2013 as compared with 2012 mainly due to inclusion of OAO MIPC in the consolidated financial statements from September 2013.

Net sales of crude oil and gas condensate (net of VAT and customs duties) decreased by RUB 65,344 million, or 24%, to RUB 210,216 million in 2013 as compared with RUB 275,560 million in 2012. Sales of crude oil included in net sales of crude oil and gas condensate (net of VAT and customs duties) amounted to RUB 179,265 million and RUB 234,470 million in 2013 and 2012, respectively. The change was mainly due to a decrease in crude oil volumes sold to customers in Europe and other countries. Sales of gas condensate decreased due to inclusion of Gazprom neftekhim Salavat Group in the consolidated financial statements from June 2012.

Net sales of gas transportation services (net of VAT) increased by RUB 37,879 million, or 30%, to RUB 163,265 million in 2013 as compared with RUB 125,386 million in 2012 primarily due to an increase in transportation volumes and gas transportation tariffs for independent suppliers.

Other revenues increased by RUB 21,641 million, or 14%, and amounted to RUB 177,359 million in 2013 as compared with RUB 155,718 million in 2012.

Operating expenses

Operating expenses increased by 7% in 2013 to RUB 3,668,606 million from RUB 3,418,639 million in 2012. Operating expenses as a percentage of sales decreased from 72% in 2012 to 70% in 2013. The table below presents a breakdown of operating expenses in each period:

Purchased gas and oil

The cost of purchased gas and oil decreased by RUB 66,863 million to RUB 753,829 million in 2013 as compared with RUB 820,692 million in 2012. The cost of purchased gas decreased by RUB 17,795 million, or 3%. This decrease mainly relates to the decline in volumes purchased from third parties both in Russia and abroad. The cost of purchased oil included in the cost of purchased gas and oil decreased by RUB 49,068 million, or 19%, and amounted to RUB 215,278 million in 2013 as compared with RUB 264,346 million in 2012 due to the decrease in volumes of purchased oil.

Taxes other than income tax

Taxes other than income tax include:

The natural resources production tax increased by 12% to RUB 512,885 million in 2013 as compared with RUB 458,322 million in 2012. The increase is mainly due to an increase in the tax rate for gas from RUB 509 to RUB 582 per thousand cubic meters starting from January 1, 2013 and to RUB 622 per thousand cubic meters starting from July 1, 2013. The increase in natural resources production tax on oil extraction resulted mainly from growth in the base tax rate for oil from RUB 446 to RUB 470 per ton.

Staff costs

Staff costs increased by 21% to RUB 497,852 million in 2013 from RUB 409,807 million in 2012. The increase was mainly due to the average salary indexation and increase of average number of personnel.

Depreciation

Depreciation increased by 21%, or RUB 73,329 million, to RUB 419,019 million in 2013 from RUB 345,690 million in 2012. The increase is primarily due to the growth in the fixed asset base.

Transit of gas, oil and refined products

Transit of gas, oil and refined products increased by 13% to RUB 358,829 million in 2013 from RUB 317,754 million in 2012. This increase was mainly driven by growth in oil and refined products transit due to the inclusion of Gazprom neftekhim Salavat Group in the consolidated financial statements starting from June 2012, as well as increasing in transportation volumes through the Nord Stream pipeline.

Materials

The cost of materials increased by 26% to RUB 236,354 million in 2013 from RUB 186,920 million in 2012. The increase mainly relates to the inclusion of Gazprom neftekhim Salavat Group in the consolidated financial statements starting from June 2012, as well as to increased purchases of materials from third parties.

Repairs and maintenance

Cost of repairs and maintenance decreased by 9% to RUB 200,621 million in 2013 from RUB 219,999 million in 2012. The decrease was mainly caused by a decline in the volume of repair services rendered by third parties to the Group during 2013.

Cost of goods for resale, including refined products

Cost of goods for resale, including refined products increased by 5% to RUB 136,776 million in 2013 from RUB 129,812 million in 2012. The increase was mainly due to the growth in volumes of refined products purchased externally by the Gazprom neft Group.

Electricity and heating expenses

Electricity and heating expenses increased by 13% to RUB 87,242 million in 2013 from RUB 76,949 million in 2012. The increase mainly resulted from the inclusion of OAO MIPC in the consolidated financial statements starting from September 2013, as well as an increase in volumes of electricity consumed and growth in tariffs.

Exchange rate differences on operating items

Exchange rate differences on operating items amounted to a net gain of RUB 45,050 million for 2013 as compared with a net loss of RUB 14,147 million for 2012. The change was primarily driven by an 8% appreciation of the US dollar against rouble and a 12% appreciation of euro against rouble in 2013, as compared with a 6% depreciation of US dollar against rouble and 3% depreciation of euro against rouble in 2012.

Other operating expenses

Other operating expenses increased by 28% to RUB 233,795 million in 2013 from RUB 182,347 million in 2012. Other expenses include bank charges, security services, legal and consulting services, charity and financial aid, and advertising.

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

Change in inventories of finished goods, work in progress and other effects increased by RUB 42,583 to RUB 129,848 million in 2013 as compared with RUB 87,265 million in 2012. The negative amount of the line item is mainly due to an increase in the balances of finished goods as of December 31, 2013 as compared with the balances as of December 31, 2012.

(Charge for) reversal of impairment and other provisions, net

The net release in 2012 was primarily due to the reversal of impairment for construction in progress more than the charge for new bad debt provisions. In October 2012, upon completion of the first phase of infrastructure development and commencement of operations of the Bovanenkovo field, the Group reversed the previously created impairment provision for assets under construction related to Bovanenkovo and Kharasaveyskoye fields and the Obskaya-Bovanenkovo railroad. Total amount of the impairment provision reversal was RUB 47,574 million.

Charges for provisions for short-term and long-term accounts receivable were RUB 64,451 million and RUB 47,238 million in 2013 and 2012, respectively.

Operating profit

As a result of the factors discussed above, our operating profit increased by RUB 236,532 million, or 18%, to RUB 1,587,209 million in 2013 from RUB 1,350,677 million in 2012. The operating profit margin increased from 28% in 2012 to 30% in 2013.

Net finance (expense) income

The net exchange loss of RUB 145,214 million in 2013 as compared with net exchange gain of RUB 71,717 million in 2012 is mainly explained by an 8% appreciation of the US dollar against rouble and a 12% appreciation of euro against rouble in 2013, as compared with a 6% depreciation of US dollar against rouble and 3% depreciation of euro against rouble in 2012. These forex changes increased the Group's liabilities denominated in foreign currencies.

Interest income increased by 25% to RUB 33,398 million in 2013 from RUB 26,626 million in 2012, mainly due to an increase in interest accrued on Group's cash held with banks.

Interest expense increased by 16% to RUB 42,768 million in 2013 from RUB 37,022 million in 2012, mainly due to an increase in average borrowings balance during 2013 as compared with 2012.

Share of net income of associated undertakings and joint ventures

Share of net income of associated undertakings and joint ventures decreased by RUB 88,522 million, or 61%, to RUB 56,670 million in 2013 as compared with RUB 145,192 million in 2012.

The decrease in the Group's share of net income of associated undertakings and joint ventures in 2013 relates mainly to the decline in net income of Sakhalin Energy Investment Company Ltd. by RUB 30,675 million due to a decrease in revenue from crude oil and liquefied natural gas sales as a result of production output decline, market prices decrease for crude oil and liquefied natural gas and the initial recognition of variable obligation on irredeemable preferred share (class R) attributable to the Russian Federation. The Group's share of net income of associated undertakings and joint ventures for 2013 includes an additional expense of RUB 25,961 million recognized for OAO NGK Slavneft and its subsidiaries as a result of a one-time adjustment to correct the prior understatement of depreciation resulting from the differences between the fair values of fixed assets and their carrying amounts as of the Group's acquisition of an interest in OAO NGK Slavneft. The Group's share of net income of associated undertakings and joint ventures for 2012 includes the share of net income of RosUkrEnergo AG related to the results of its operations in 2011 in the form of dividends received by the Group in the amount of RUB 17,017 million.

Profit tax

Total profit tax expense increased by RUB 15,057 million, or 5%, to RUB 320,378 million in 2013 as compared with RUB 305,321 million in 2012. The effective profit tax rate was 21.6% and 19.6% in 2013 and 2012, respectively.

The change in effective tax rate was mainly driven by an increase in non-deductible expenses and decrease in non-taxable income related to Share of other comprehensive income of associated undertakings and joint ventures for 2013 as compared with 2012.

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 85,213 million, or 7%, and amounted to RUB 1,139,261 million in 2013 as compared with RUB 1,224,474 million in 2012.

Profit for the period attributable to non-controlling interest

Profit for the period attributable to non-controlling interest decreased by RUB 1,497 million, or 5%, and amounted to RUB 26,444 million in 2013 as compared with RUB 27,941 million in 2012.

Liquidity and capital resources

The following table summarizes our statement of cash flows for 2013 and 2012:

Net cash from operating activities

Net cash from operating activities increased by RUB 275,084 million, or 19%, and amounted to RUB 1,747,863 million in 2013 as compared with RUB 1,472,779 million in 2012. The increase was primarily due to an increase in operating profit in 2013 as compared with 2012, which was partially offset by a negative dynamics of changes in working capital.

Net cash used in investing activities

Net cash used in investing activities increased by RUB 188,259 million, or 15%, to RUB 1,475,475 million in 2013 as compared with RUB 1,287,216 million in 2012. The increase was primarily due to an increase in cash used for capital expenditure, acquisition of subsidiaries and a decrease in proceeds from associated undertakings and joint ventures in 2013 as compared with 2012.

Net cash used in financing activities

Net cash used in financing activities amounted to RUB 30,358 million in 2013 as compared with RUB 253,870 million in 2012. This change was primarily due to a decrease in dividends paid in 2013 as compared with 2012 and due to the change from net repayment of long-term borrowings in 2012 to net proceeds in 2013.

Working capital

The working capital surplus (current assets less current liabilities) was RUB 1,471,205 million as of December 31, 2013 and RUB 928,737 million as of December 31, 2012. The increase in our working capital by RUB 542,468 million in 2013 was primarily due to increase in cash and cash equivalents, decrease in accounts payable, increase in inventories and accounts receivable.

The increase in inventories amounting to RUB 106,978 million was driven by growth in the average cost of gas in pipelines and storages.

The increase in short-term accounts receivable amounting to RUB 91,294 million was driven by an increase in a debt for gas, crude oil and refined products in all geographical segments.

The decrease in accounts payable amounting to RUB 143,229 million was mainly caused by a decrease in liabilities related to retroactive gas price adjustment on gas supplied in 2010 - 2013 based on the claims made by foreign customers according to the contract terms and a decrease in trade payables related to investment construction.

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. The Group is also dependent on a regular access to the domestic debt capital market in order to meet a significant portion of its financing requirements in Russian roubles.

Capital expenditures

Total capital expenditures (excluding the effect of acquisitions of subsidiaries) by segment for 2013 and 2012 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 69,993 million, or 5%, from RUB 1,545,162 million in 2012 to RUB 1,475,169 million in 2013.

The decrease in our capital expenditures in the Transportation segment was primarily due to putting into operation of Bovanenkovo-Ukhta and Ukhta-Torzhok pipelines following the launch of the Bovanenkovskoye field. The increase in capital expenditures in the segment of Production of crude oil and gas condensate was due to capital expenditures of OOO Gazprom neft shelf and Gazprom neft Group. The increase in capital expenditures in the Electric and heat energy generation and sales segment was primarily due to an increase in the capital expenditures of OAO Mosenergo related to the construction of modern steamgas power-generating units at TPP-12, TPP-16 and TPP-20. The increase in capital investments in other segments is mainly due to the construction of facilities under the Program for Construction of Olympic Venues and 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 41,584 million, or 4%, from RUB 1,071,214 million as of December 31, 2012 to RUB 1,112,798 million as of December 31, 2013. This increase resulted from raising new long-term borrowings, and depreciation of rouble against US dollar and euro which was offset by an increase in cash and cash equivalents.