Urals Energy Plc Regulatory News (UEN)

Urals Energy Public Company Limited

("Urals Energy" or the "Company")

Final Results

Urals Energy PCL (AIM:UEN), the independent exploration and production company with operations in Russia, is pleased to announce its audited financial results for the year ended 31 December 2012.

Highlights

Operational

Financial

Post-period end and outlook

Alexei Maximov, Chief Executive, commented:

 "I am pleased to report on what has been a positive period for Urals Energy, not only operationally but also in terms of further strengthening the Company's balance sheet. I reported this time last year that operationally we have been laying the foundations for maximising production from both Arcticneft and Petrosakh, and, with the various measures we have taken to stabilise production at Petrosakh, the completion and entry into production of Well #41 at Petrosakh and the implementation of new well drilling and existing well optimisation programmes, the Company has certainly started to build upon those foundations.

"The release of Petraco's charge over Petrosakh was a pivotal point in Urals Energy's recovery and for the first time in many years we are now close to a time where the Company will be free of all major debtors and able to fully leverage its existing asset base. This will enable us to proceed with our plans to increase production at both of our assets as well as dedicate time to our M&A strategy.

"We are also pleased to have strengthened the Board with three new non-executive directors who are actively assisting management and have taken on active roles in the Audit and Remuneration committees, as well as pursuing new ways to grow the Company.

"We believe that shareholders can now view the future with renewed confidence as the board anticipates the completion of the final year of recovery for the Company and the start of what it expects to be a key period of development and expansion for Urals Energy."

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The annual report and accounts for the year ended 31 December 2012 will today be posted to shareholders and will shortly be available from the Company's website www.uralsenergy.com in accordance with AIM Rule 20.

Chief Executive Officer's Statement

2012 Financial

Operating Environment

2012 was characterised by a stable crude oil market price at an average level of US$110 per barrel. Domestic prices for light oil products ranged from US$100 to US$135 per barrel thus securing the Company's operating cash flows at a level sufficient to maintain its operations and comply with license requirements at both fields.

The tanker from Arcticneft was shipped at the beginning of November 2012.

Operating Results

Summary table: Gross Revenues before excise and export duties (US$'000)

In 2012, total gross revenues increased by US$0.8 million as a result of a higher crude oil net back price of US$54.39 per barrel (US$52.68 per barrel in 2011) and higher average net back prices for petroleum (refined) products of US$63.11 per barrel (US$52.38 in 2011). Net back for domestic product sales is defined as gross product sales minus VAT, transportation costs, excise tax and refining costs.

In 2012 all domestic sales of crude oil and almost all petroleum (refined) products related to Petrosakh. In 2012 Arcticneft sold petroleum (refined) products with a value of US$1.5 million (US$0.4 million in 2011).

Summary table: Net backs (US$/bbl)

Gross profit (net revenues less cost of sales) in 2012 almost doubled to US$8.8 million from a profit of US$4.5 million in 2011. The main driver of the increased profit in 2012 was higher net backs and a reduction in cost of sales.

Cost of sales in 2012 totaled US$41.0 million as compared with US$43.8 million in 2011 of which US$5.8 million and US$8.3 million respectively represented non-cash items, principally Depreciation, Amortisation and Depletion and change in a provision for unused vacation. The main driver for the fall in operating costs was the decrease in wages and salaries by US$3.0 million to US$9.4 million from US$12.4 million as a result of change in an unused vacation provision and a cost reduction programme.

Selling, general and administrative expenses decreased during 2012 by US$1.7 million from US$10.4 million in 2011 to US$8.7 million. Without the charge for the provision for doubtful accounts receivable, US$1.6 million in 2012 and US$0.7 million in 2011, selling, general and administrative expenses would have decreased during the year 2012 by US$2.6 million. This was primarily caused by the decrease in wages and salaries by US$1.2 million in the management company, optimisation of all other general and administrative expenses and by the decrease in sales volume in Petrosakh in 2012 as compared with 2011.

The net finance benefits during 2012 were US$2.6 million and net interest expense was US$0.1 million (2011: net finance benefits of US$0.1 million and net interest income of US$2.2 million).

Net profit for the year attributable to shareholders in 2012 was US$2.6 million as compared with net loss attributable to shareholders of US$24.7 million in 2011 which was primarily driven by non-cash transactions associated with the loss from disposal of the Taas-YuriakhNeftegazodobycha ("Taas") loans in 2011.

The decrease of cost of sales and of selling, general and administrative expenses in 2012 resulted in a consolidated normalised management EBITDA increase by US$3.0 million to US$7.7 million in 2012 compared with US$4.7 million in 2011, with EBITDA margins of 15.5% and 9.7% respectively.

Management EBITDA (US$'000) - Unaudited

Net debt Position

At 31 December 2012 the cash liquidity had improved following the positive cash flows from operating activity in 2012.

As at 31 December 2012 the Company had net cash of US$3.4 million (calculated as long-term and short-term borrowings less cash in bank and loans issued to related parties). As at 31 December 2011 net debt was US$1.0 million.

The Company repaid US$7.3 million in respect of the final tranche of the principal of the loan to Petraco in November 2012. As at 31 December 2012 the long-term and short-term part amounted to US$3.0 million (31 December 2011: US$10.0 million).

During 2012, the Group further impaired a loan to related party and other receivables from related party by US$1.6 million (during 2011 the Group impaired loan to related party by US$0.7 million). This amount relates to an overdue loan to a shareholder and former member of the Group's management team, Mr Rovneiko. On 9 January 2013, the Company received a final decision regarding its legal dispute with Mr Rovneiko from the London Court of International Arbitration. This decision ruled that the Company had won on all accounts. The Company has formally demanded payment from Mr Rovneiko and is committed to using all appropriate means to collect the outstanding amount, however to date Mr Rovneiko has shown no intent to comply with the decision. For accounting purposes management has reassessed the carrying value of the loan and has impaired this fully. However, this does not reduce the validity of the legal claim against Mr Rovneiko.

Operational update

Petrosakh

After several years of limited funding, Petrosakh has emerged in 2012 having made considerable strides in optimisation of its production from the Okruzhnoye field. This can be attributed primarily to the change of the management team and other necessary austerity measures aimed at increasing efficiency and production.

The following is a chronology of the main activities undertaken at Petrosakh during 2012, both before and after the period end.

As a result of these activities for July and August 2012, management at Petrosakh was able to halt the increasing decline in production and return to a stable level. In July and August 2012 oil production averaged 1,358 BOPD and on 10 September 2012 the Company reinstated gas injection to the reservoir. Consequently at the present time oil production is 1,395 BOPD relative to the approved plan of 1,380 BOPD.

The management at Petrosakh continues to demonstrate that further opportunities exist in the Okruzhnoye field to build on these production gains.

During the year to date Petrosakh has been subject to a number of rigorous state inspections that targeted all the operations, facilities and technical aspects of the technological, production, safety, environmental and labour related issues. The Company has successfully passed all of these inspections and has been shown to be in full compliance with the state regulations.

The Company plans to drill 8 new wells in the southern part of the Okruzhnoye field and the drilling plan has been submitted to the approval procedures now at their final stage. The Company expects to receive the approval shortly, whereupon the drilling of well #53 will commence.

The Company will continue optimising the existing well stock through a comprehensive programme of workovers. Management believes that additional production gains can realistically be achieved by the end of 2013. Furthermore, management also believes that opportunities exist downstream to increase margins of refined products through changes to the downstream operator's client base, thus leveraging the Company's unique position as sole provider of refined products on Sakhalin Island.

The license for the Okruzhnoye field was successfully extended and now expires at the end of 2037.

Downstream

Petrosakh continues to refine and sell 100% of its crude oil production. As was stated in the Company's interim report in 2012, Urals Energy finds itself operating in a highly competitive refined products market in which the State-owned conglomerate Rosneft holds a close to monopolistic position on Sakhalin island. Rosneft has been able to exploit this position by keeping their wholesale and retail prices for oil products unchanged since October 2012.

In the fourth quarter of 2012 Petrosakh successfully participated in tenders with State-owned companies and managed to win the contacts with the major local customers for fuel shipment during the winter period. The contracts were signed with JSC "Sakhalinenergo" (the main electricity and heating supplier on the island) and several municipal heating companies.

As a result of the active marketing work with existed and new customers, the Company managed to increase net backs on the sales of oil and oil products by 38.5% and 20.5% respectively to US$52.38 per barrel and US$63.11 per barrel.

In 2013 the passing of new Federal Excise Law provided for further indexation of excise rates for gasoline. For Euro 4 gasoline produced by Petrosakh the first increase was at the start of 2013. The increase was 25% and now represents 8,560 Rubles per ton, the next increase will be on 1 July 2013 when the excise rate will be equal to 8,960 Rubles per ton. Due to the favourable market conditions on the internal market at the end of 2012 the Company made a decision to stay on the local market with the sales of oil products for now. At the same time, Petrosakh continues preparatory works for potential export shipments of the refined products. The product pipeline testing was completed in order to seek a license for shipment and the project for the sea terminal upgrade was also finalised.

Arcticneft

Current production at Arcticneft is stable and stands at 705 BOPD. As in recent years, the tanker is planned to be loaded in late 2013.

As a result of certain liquidity limitations in 2012, the main efforts in Arcticneft during the last year were mainly focused on minimising the decline in production through extensive workovers (18 workovers were done during 2012), performing hydrodynamic studies and enhancing oil recovery using gasoline bottom hole treatment and one well was transferred to artificial lifting. These activities allowed the Company to keep the level of production at Arcticneft stable throughout 2012.

The main efforts of the Company in the current year will be focused on the following:

Petraco loan

After the payment to Petraco Oil Company Limited ("Petraco") of US$10 million following the Taas loan assignment, and in accordance with the terms of the Agreement, as announced on 9 August 2012, Petraco released its charge over the shares of CJSC Petrosakh in full.

In 2012 the Company met its obligations under the restructuring agreement and paid the final loan principal amount of US$7.3 million to Petraco. The remaining accrued interest is to be paid by the Company to Petraco by the end of November 2013, following which time Petraco is obliged to have released its remaining charge.

Outlook

Looking ahead, as part of the recovery strategy, Urals Energy aims to finish the current financial year with the repayment of its outstanding long-term debts and further strengthening of the Company's balance sheet.

The Company is planning to load up around 28,000 metric tons of crude oil for export from Arcticneft, which is scheduled for Q4 2013. Unfortunately, the expected deep exploration drilling, which was planned by our close neighbor, Arcticmorneftegaz razvedka ("AMNGR") was canceled; and so any potential increase in the Company's reserve base will be subject to additional research in the future.

 The Company anticipates a tax break in 2013 for companies located in the far northern territories of Russia, which should benefit the Company's operations in Arcticneft.

The Company continues to focus on increasing production and cash generation at both Arcticneft and Petrosakh. In addition to its existing operations, the Board is actively looking at new opportunities, be it in identifying ways of utilising the upside potential in downstream and marketing opportunities on the existing acreage, or evaluating possible acquisition and joint venture targets with a view to expanding and optimising the portfolio.

The Board believes that the Company is now well positioned to complete its recovery in the current financial year and as a result, we believe that shareholders should now view the future with renewed confidence and optimism as Urals Energy now enters what the Board anticipates to be a key period of development and expansion for the Company.

Alexei Maximov

Chief Executive Officer

Consolidated Statement of Financial Position

(presented in US$ thousands)

Approved on behalf of the Board of Directors on 5 June 2013.

Consolidated Statement of Comprehensive Income

(presented in US$ thousands)

Consolidated Statements of Cash Flows

(presented in US$ thousands)

Consolidated Statements of Changes in Shareholders's Equity

(presented in US$ thousands)

Notes to the Consolidated Financial Statements (presented in US$ thousands)

1 Activities

Urals Energy Public Company Limited ("Urals Energy" or the "Company" or "UEPCL") was incorporated as a limited liability company in Cyprus on 10 November 2003. Urals Energy and its subsidiaries (the "Group") are primarily engaged in oil and gas exploration and production in the Russian Federation and processing of crude oil for distribution on both the Russian and international markets.

The registered office of Urals Energy is at 31 Evagorou Avenue, Suite 34, CY-1066, Nicosia, Cyprus. UEPCL's shares are traded on the AIM Market operated by the London Stock Exchange.

The Group comprises UEPCL and the following main subsidiaries:

2 Summary of Significant Accounting Policies

Basis of preparation. The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) under the historical cost convention as modified by the change in fair value of financial instruments.

These policies have been consistently applied to all the periods presented, unless otherwise stated.

The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the reporting date and the reported amounts of revenues and expenses during the reporting period. Critical accounting estimates and judgements are disclosed in Note 6. Actual results could differ from the estimates.

Functional and presentation currency. The United States dollar ("US dollar or US$ or $") is the presentation currency for the Group's operations as management have used the US dollar accounts to manage the Group's financial risks and exposures, and to measure its performance. Financial statements of the Russian subsidiaries are measured in Russian Roubles, their functional currency.

The functional currency of the Company is the US Dollar as substantially all the cash flows affecting the Company are in US Dollars.

Translation to functional currency. Monetary assets and liabilities denominated in foreign currencies are retranslated into the functional currency at the rate of exchange ruling at the reporting date. Any resulting exchange differences are included in the profit or loss component of the consolidated statement of comprehensive income. Non-monetary assets and liabilities that are measured at historical cost and denominated in a foreign currency are translated into the functional currency using the rates of exchange as at the dates of the initial transactions. The US dollar to Russian Rouble exchange rates were 30.37 and 32.20 as of 31 December 2012 and 2011, respectively.

Translation to presentation currency. The Group's consolidated financial statements are presented in US dollars in accordance with IAS 21, The Effects of Changes in Foreign Exchange Rates. The results and financial position of each group entity having a functional currency different from the presentation currency are translated into the presentation currency as follows:

(i) Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position. Goodwill and fair value adjustments arising on the acquisitions are treated as assets and liabilities of the acquired entity.

(ii) Income and expenses for each statement of comprehensive income are translated to the functional currency of the Company at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions).

(iii) All resulting exchange differences are recognised as a separate component of equity.

When a subsidiary is disposed of through sale, liquidation, repayment of share capital or abandonment of all, or part of, that entity, the exchange differences deferred in other comprehensive income are reclassified to the profit and loss.

Consolidated financial statements. Subsidiaries are those companies and other entities (including special purpose entities) in which the Group, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies so as to obtain benefits. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group (acquisition date) and are deconsolidated from the date on which control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest.

The Group measures non-controlling interest that represents present ownership interest and entitles the holder to a proportionate share of net assets in the event of liquidation on a transaction by transaction basis, either at: (a) fair value, or (b) the non-controlling interest's proportionate share of net assets of the acquiree. Non-controlling interests that are not present ownership interests are measured at fair value.

Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered. The Company and all of its subsidiaries use uniform accounting policies consistent with the Group's policies.

Non-controlling interest is that part of the net results and of the equity of a subsidiary attributable to interests which are not owned, directly or indirectly, by the Company. Non-controlling interest forms a separate component of the Group's equity.

Purchases and sales of non-controlling interests. The Group applies the economic entity model to account for transactions with owners of non-controlling interest. Any difference between the purchase consideration and the carrying amount of non-controlling interest acquired is recorded as a capital transaction directly in equity. The Group recognises the difference between sales consideration and carrying amount of non-controlling interest sold as a capital transaction in the consolidated statement of changes in equity.

Property, plant and equipment. Property, plant and equipment acquired as part of a business combination is recorded at fair value at the acquisition date and adjusted for accumulated depreciation, depletion and impairment. All subsequent additions are recorded at historical cost of acquisition or construction and adjusted for accumulated depreciation, depletion and impairment. Oil and gas exploration and production activities are accounted for in a manner similar to the successful efforts method. Costs of successful development and exploratory wells are capitalised. The cost of property, plant and equipment includes provisions for dismantlement, abandonment and site restoration (see Provisions below).

The Group accounts for exploration and evaluation activities in accordance with IFRS 6, Exploration for and Evaluation of Mineral Resources. Geological and geophysical exploration costs are charged against income as incurred. Costs directly associated with an exploration well are initially capitalised as an intangible asset within oil and gas properties until the drilling of the well is complete and the results have been evaluated. These costs include employee remuneration, materials and fuel used, rig costs, delay rentals and payments made to contractors. If hydrocarbons are not found, the exploration expenditure is written off as a dry hole. If hydrocarbons are found and, subject to further appraisal activity, which may include the drilling of further wells (exploration or exploratory-type stratigraphic test wells), are likely to be capable of commercial development, the costs continue to be carried as an asset. All such carried costs are subject to technical, commercial and management review at least once a year to confirm the continued intent to develop or otherwise extract value from the discovery. When this is no longer the case, the costs are written off. When proved reserves of oil and natural gas are determined and development is sanctioned, the relevant expenditure is transferred to the tangible part of oil and gas properties and an impairment review of the property is undertaken at that time.

Development and production assets are accumulated generally on a field-by-field basis and represent the cost of developing the commercial reserves discovered and bringing them to production together with Exploration and Evaluation (E&E) expenditures incurred in finding commercial reserves and transferred from the intangible E&E assets described above. The cost of development and production assets also include the costs of acquisitions and purchases of such assets, directly attributable overheads, finance costs capitalised and the costs of recognising provisions for future restoration and decommissioning.

Depletion of capitalised costs of proved oil and gas properties is calculated using the unit-of-production method for each field based upon proved reserves for property acquisitions and proved developed reserves for exploration and development costs. Oil and gas reserves for this purpose are determined in accordance with Society of Petroleum Engineers definitions and were last estimated by DeGolyer and MacNaughton, the Group's independent reservoir engineers in 2007. The DeGolyer and MacNaughton information from the 2007 reserves review is updated annually by management by reference to production information and the equivalent Russian ABC reserves classification. Gains or losses from retirements or sales of oil and gas properties are included in the determination of profit for the year.

Depreciation of non oil and gas property, plant and equipment is calculated using the straight-line method over their estimated remaining useful lives, as follows:

The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within 'Other operating loss' in the profit and loss section of consolidated statement of comprehensive income.

Intangible assets. The Group measures intangible assets at cost less accumulated amortisation and impairment losses. All of the Group's other intangible assets have finite useful lives and primarily include capitalised computer software and licences.

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring them to use.

Intangible assets are amortised using the straight-line method over their useful lives:

Provisions. Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events and when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.

Provisions, including those related to dismantlement, abandonment and site restoration, are evaluated and re-estimated annually, and are included in the consolidated financial statements at each reporting date at the present value of the expenditures expected to be required to settle the obligation using pre - tax discount rates which reflect the current market assessment of the time value of money and the risks specific to the liability.

Changes in provisions resulting from the passage of time are reflected in the profit and loss section of consolidated statement of comprehensive income each year under financial items. Other changes in provisions, relating to a change in the expected pattern of settlement of the obligation, changes in the discount rate or in the estimated amount of the obligation, are treated as a change in accounting estimate in the period of the change. Changes in provisions relating to dismantlement, abandonment and site restoration are added to, or deducted from, the cost of the related asset in the current period. The amount deducted from the cost of the asset should not exceed its carrying amount. If a decrease in the liability exceeds the carrying amount of the asset, the excess is recognised immediately in profit or loss.

The provision for dismantlement liability is recorded on the consolidated statement of financial position, with a corresponding amount being recorded as part of property, plant and equipment in accordance with IAS 16.

Leases. Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the commencement of the lease at the lower of the fair value of the leased property or the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are presented as finance lease obligations on the consolidated statement of financial position. The interest element of the finance cost is charged to the consolidated statement of comprehensive income over the lease period. Property, plant and equipment acquired under finance leases are depreciated over the shorter of the useful life of the asset or the lease term.

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the consolidated statement of comprehensive income on a straight-line basis over the period of the lease.

Impairment of assets. Assets that are subject to depreciation and depletion are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell or value in use. For the purposes of assessing impairment, assets are grouped by license areas, which are the lowest levels for which there are separately identifiable cash flows (cash-generating units).

Reversal of impairment. Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of impairment at each reporting date.

Inventories. Inventories of extracted crude oil, oil products, materials and supplies and construction materials are valued at the lower of the weighted-average cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and selling expenses. General and administrative expenditure is excluded from inventory costs and expensed in the period incurred.

Trade receivables. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, net of provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Such objective evidence may include significant financial difficulties of the debtor, an increase in the probability that the debtor will enter bankruptcy or financial reorganisation, and actual default or delinquency in payments. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The change in the amount of the provision is recognised in the profit and loss section of consolidated statement of comprehensive income.

Cash and cash equivalents. Cash and cash equivalents includes cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less. Cash and cash equivalents are carried at amortised cost using the effective interest method. Restricted balances are excluded from cash and cash equivalents for the purposes of the consolidated statement of cash flow. Balances restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date are included in other non-current assets. Restricted cash balances are segregated from cash available for the business to use until such time as restrictions are removed.

Value added tax. Output value added tax related to sales is payable to tax authorities on the earlier of (a) collection of receivables from customers or (b) delivery of goods or services to customers. Input VAT is generally recoverable against output VAT upon receipt of the VAT invoice.  The tax authorities permit the settlement of VAT on a net basis. VAT related to sales and purchases is recognised in the consolidated statement of financial position on a gross basis and disclosed separately as an asset and liability. Where provision has been made for impairment of receivables, impairment loss is recorded for the gross amount of the debtor, including VAT.

Borrowings. Borrowings are recognised initially at the fair value of the liability, net of transaction costs incurred. In subsequent periods, borrowings are stated at amortised cost using the effective interest method; any difference between amount at initial recognition and the redemption amount is recognised as interest expense over the period of the borrowings. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date.

Capitalisation of borrowing costs. Borrowing costs directly attributable to the acquisition, construction or production of assets that necessarily take a substantial time to get ready for intended use or sale (qualifying assets) are capitalised as part of the costs of those assets. The commencement date for capitalisation is when (a) the Group incurs expenditures for the qualifying asset; (b) it incurs borrowing costs; and (c) it undertakes activities that are necessary to prepare the asset for its intended use or sale.

Capitalisation of borrowing costs continues up to the date when the assets are substantially ready for their use or sale.

The Group capitalises borrowing costs that could have been avoided if it had not made capital expenditure on qualifying assets. Borrowing costs capitalised are calculated at the group's average funding cost (the weighted average interest cost is applied to the expenditures on the qualifying assets), except to the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset. Where this occurs, actual borrowing costs incurred less any investment income on the temporary investment of those borrowings are capitalised.

Loans receivable. The loans advanced by the Group are classified as "loans and receivables" in accordance with IAS 39 and stated at amortised cost using the effective interest method. These loans are individually tested for impairment at each reporting date.

Income taxes. Income taxes have been provided for in the consolidated financial statements in accordance with legislation enacted or substantively enacted by the end of the reporting period. The income tax charge or benefit comprises current tax and deferred tax and is recognised in profit or loss for the year except if it is recognised in other comprehensive income or directly in equity because it relates to transactions that are also recognised, in the same or a different period, in other comprehensive income or directly in equity.

Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxes other than on income are recorded within operating expenses.

Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of the reporting period, which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets and liabilities are netted only within the individual companies of the Group. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised.

Uncertain tax positions. The Group's uncertain tax positions are reassessed by management at the end of each reporting period. Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the end of the reporting period, and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on management's best estimate of the expenditure required to settle the obligations at the end of the reporting period.

Employee benefits. Wages, salaries, contributions to the Russian Federation state pension and social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits (such as health services and kindergarten services) are accrued in the year in which the associated services are rendered by the employees of the Group. The Group has no legal or constructive obligation to make pension or similar benefit payments beyond the payments to the statutory defined contribution scheme.

Social costs. The Group incurs employee costs related to the provision of benefits such as health insurance. These amounts principally represent an implicit cost of employing production workers and, accordingly, are included in the cost of inventory.

Prepayments. Prepayments are carried at cost less provision for impairment. A prepayment is classified as non-current when the goods or services relating to the prepayment are expected to be obtained after one year, or when the prepayment relates to an asset which will itself be classified as non-current upon initial recognition. Prepayments to acquire assets are transferred to the carrying amount of the asset once the Group has obtained control of the asset and it is probable that future economic benefits associated with the asset will flow to the Group. Other prepayments are written off to profit or loss when the goods or services relating to the prepayments are received. If there is an indication that the assets, goods or services relating to a prepayment will not be received, the carrying value of the prepayment is written down accordingly and a corresponding impairment loss is recognised in profit or loss.

Revenue recognition. The Group recognises revenue when the amount of revenue can be reliably measured and it is probable that economic benefits will flow to the entity, typically when crude oil or refined products are dispatched to customers and title has transferred.

Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate.

Segments. The Group operates in one business segment which is crude oil exploration and production. The Group assesses its results of operations and makes its strategic and investment decisions based on the analysis of its profitability as a whole. The Group operates within geographic segments as disclosed in note 19.

Warrants. Warrants issued that allow the holder to purchase shares of the Group's stock are recorded at fair value at issuance and recorded as liabilities unless the number of equity instruments to be issued to settle the warrants and the exercise price are fixed in the issuing entities' functional currency at the time of grant, in which case they are recorded within shareholders' equity. Changes in the fair value of warrants recorded as liabilities are recorded in the consolidated statement of comprehensive income.

Financial derivatives. The fair value of options is evaluated using market prices at the grant date if available, taking into account the terms and conditions of the options, upon which those derivative instruments were issued. If market prices are not available, the fair value of the derivative equity instruments granted is estimated using a valuation technique to estimate what the price of those equity instruments would have been on the measurement date in an arm's length transaction between knowledgeable, willing parties.

Share capital. Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Any excess of the fair value of consideration received over the par value of shares issued is presented in the notes as a share premium.

Share-based payments. The fair value of the employee services received in exchange for the grant of options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, using market prices, taking into account the terms and vesting conditions upon which those equity instruments were granted.

Earnings per share. Earnings per share are determined by dividing the profit or loss attributable to equity holders of the Group by the weighted average number of participating shares outstanding during the reporting year.

Initial recognition of related party transactions. In the normal course of business the Group enters into transactions with its related parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgment is applied in determining if transactions are priced at market or non-market interest rates, where there is no active market for such transactions. The basis for judgment is pricing for similar types of transactions with unrelated parties and effective interest rate analyses.

3 Going Concern

A significant portion of the Group's consolidated net assets of $106.3 million (31 December 2011: $100.1 million) comprises undeveloped mineral deposits requiring significant additional investment. The Group is dependent upon external debt to fully develop the deposits and realise the value attributed to such assets.

The Group had net current liabilities of $1.1 million as of 31 December 2012 (31 December 2011: $3.7 million). The most significant creditor as of 31 December 2012 was $3.0 million loan from Petraco (31 December 2011: $10.0 million) (Note 15). Following the settlement of the Taas loans (Note 4) the Group liquidity has improved significantly.

Management have prepared monthly cash flow projections for 2013 and 2014. Judgements which are significant to management's conclusion that no material uncertainty exists about the Group's ability to continue as a going concern include future oil prices and planned production, which were required for the preparation of the cash flow projections and model. Positive overall cash flows are dependent on future oil prices (a price of $110 per barrel has been used for 2013 and for 2014). Despite the above matters, the Group still has funding and liquidity constraints, though these are less severe than in the prior years. Despite the uncertainties, based on the cash flow projections performed, management considers that the application of the going concern assumption for the preparation of these consolidated financial statements is appropriate.

4 Disposal of Taas loans

The Taas-Yuryakh Neftegazodobycha loans (the "Taas loans") represented US dollar denominated long-term loans (interest inclusive) of $37.8 million at 31 December 2010 issued by UEPCL to Taas, as part of the Taas acquisition agreement. The loans were used to pay organisation fees for a $600.0 million project finance loan facility provided by Savings Bank of Russian Federation ("Sberbank") for the development of the SRB field, financing of interest payments and repayment of third party loans at Taas. The loans bore interest of 12% and were to mature in February 2015. The loans were unsecured.

At 8 December 2011, under the terms of an assignment agreement, the Company assigned the full benefit of the Taas loans (together with all accrued interest) to Nagelfar for the total sum of $26 million. The book value of the Taas loans as at 8 December 2011 was $41 million (including the accrual of relevant interest) and transaction costs amounted $1.5 million. A loss of $16.5 million was recorded as a result of this transaction in the profit and loss section of the consolidated statement of comprehensive income in 2011. In December 2011 a payment of $21.6 million, net of the non-cash settlement of the payable to Finfund Limited of $4.4 million, was received.

5 Adoption of New or Revised standards and interpretations and New accounting pronouncements

The following new standards and interpretations became effective for the Group from 1 January 2012:

"Disclosures-Transfers of Financial Assets" - Amendments to IFRS 7 (issued in October 2010 and effective in EU from the commencement date of companies' first financial year starting after 30 June 2011). The amendment requires additional disclosures in respect of risk exposures arising from transferred financial assets. The amendment includes a requirement to disclose by class of asset the nature, carrying amount and a description of the risks and rewards of financial assets that have been transferred to another party, yet remain on the entity's balance sheet. Disclosures are also required to enable a user to understand the amount of any associated liabilities, and the relationship between the financial assets and associated liabilities. Where financial assets have been derecognised, but the entity is still exposed to certain risks and rewards associated with the transferred asset, additional disclosure is required to enable the effects of those risks to be understood.  The Group is currently assessing the impact of the new standard on its financial statements.

Since the Group has published its last annual consolidated financial statements, certain new standards and interpretations have been issued that are mandatory for the Group's annual accounting periods beginning on or after 1 January 2013 or later and which the Group has not early adopted:

Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters - Amendments to IFRS 1 (issued in December 2010 and effective in EU for annual periods beginning on or after 1 January 2013). The amendment regarding severe hyperinflation creates an additional exemption when an entity that has been subject to severe hyperinflation resumes presenting or presents for the first time, financial statements in accordance with IFRS. The exemption allows an entity to elect to measure certain assets and liabilities at fair value; and to use that fair value as the deemed cost in the opening IFRS statement of financial position.

The IASB has also amended IFRS 1 to eliminate references to fixed dates for one exception and one exemption, both dealing with financial assets and liabilities. The first change requires first-time adopters to apply the derecognition requirements of IFRS prospectively from the date of transition, rather than from 1 January 2004. The second amendment relates to financial assets or liabilities where the fair value is established through valuation techniques at initial recognition and allows the guidance to be applied prospectively from the date of transition to IFRS rather than from 25 October 2002 or 1 January 2004. This means that a first-time adopter may not need to determine the fair value of certain financial assets and liabilities at initial recognition for periods prior to the date of transition. IFRS 9 has also been amended to reflect these changes. The Group does not expect the amendments to have any material effect on its financial statements.

Recovery of Underlying Assets - Amendments to IAS 12 (issued in December 2010 and effective in EU for annual periods beginning on or after 1 January 2013). The amendment introduced a rebuttable presumption that an investment property carried at fair value is recovered entirely through sale. This presumption is rebutted if the investment property is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale. SIC-21, Income Taxes - Recovery of Revalued Non-Depreciable Assets, which addresses similar issues involving non-depreciable assets measured using the revaluation model in IAS 16, Property, Plant and Equipment, was incorporated into IAS 12 after excluding from its scope investment properties measured at fair value. The Group does not expect the amendments to have any material effect on its financial statements.

IFRS 9, Financial Instruments: Classification and Measurement. IFRS 9, issued in November 2009, replaces those parts of IAS 39 relating to the classification and measurement of financial assets. IFRS 9 was further amended in October 2010 to address the classification and measurement of financial liabilities and in December 2011 to (i) change its effective date to annual periods beginning on or after 1 January 2015 and (ii) add transition disclosures. Key features of the standard are as follows:

·; Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entity's business model for managing its financial instruments and the contractual cash flow characteristics of the instrument.

·; An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity's business model is to hold the asset to collect the contractual cash flows, and (ii) the asset's contractual cash flows represent payments of principal and interest only (that is, it has only "basic loan features"). All other debt instruments are to be measured at fair value through profit or loss.

·; All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment.

·; Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income.

The Standard has not yet been endorsed by the EU.

IFRS 10, Consolidated Financial Statements (issued in May 2011 and effective in EU for annual periods beginning on or after 1 January 2014), replaces all of the guidance on control and consolidation in IAS 27 "Consolidated and separate financial statements" and SIC-12 "Consolidation - special purpose entities". IFRS 10 changes the definition of control so that the same criteria are applied to all entities to determine control. This definition is supported by extensive application guidance. The Group is currently assessing the impact of the new standard on its financial statements.

IFRS 11, Joint Arrangements, (issued in May 2011 and effective in EU for annual periods beginning on or after 1 January 2014), replaces IAS 31 "Interests in Joint Ventures" and SIC-13 "Jointly Controlled Entities-Non-Monetary Contributions by Ventures". Changes in the definitions have reduced the number of types of joint arrangements to two: joint operations and joint ventures. The existing policy choice of proportionate consolidation for jointly controlled entities has been eliminated. Equity accounting is mandatory for participants in joint ventures. The Group is currently assessing the impact of the new standard on its financial statements.

IFRS 12, Disclosure of Interest in Other Entities, (issued in May 2011 and effective in EU for annual periods beginning on or after 1 January 2014), applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. It replaces the disclosure requirements currently found in IAS 28 "Investments in associates". IFRS 12 requires entities to disclose information that helps financial statement readers to evaluate the nature, risks and financial effects associated with the entity's interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities. To meet these objectives, the new standard requires disclosures in a number of areas, including significant judgments and assumptions made in determining whether an entity controls, jointly controls, or significantly influences its interests in other entities, extended disclosures on share of non-controlling interests in group activities and cash flows, summarised financial information of subsidiaries with material non-controlling interests, and detailed disclosures of interests in unconsolidated structured entities. The Group is currently assessing the impact of the new standard on its financial statements.

IFRS 13, Fair value measurement, (issued in May 2011 and effective in EU for annual periods beginning on or after 1 January 2013), aims to improve consistency and reduce complexity by providing a revised definition of fair value, and a single source of fair value measurement and disclosure requirements for use across IFRSs. The Group is currently assessing the impact of the standard on its financial statements.

IAS 27, Separate Financial Statements, (revised in May 2011 and effective in EU for annual periods beginning on or after 1 January 2014), was changed and its objective is now to prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. The guidance on control and consolidated financial statements was replaced by IFRS 10, Consolidated Financial Statements. The Group is currently assessing the impact of the amended standard on its financial statements.

IAS 28, Investments in Associates and Joint Ventures, (revised in May 2011 and effective in EU for annual periods beginning on or after 1 January 2014). The amendment of IAS 28 resulted from the Board's project on joint ventures. When discussing that project, the Board decided to incorporate the accounting for joint ventures using the equity method into IAS 28 because this method is applicable to both joint ventures and associates. With this exception, other guidance remained unchanged. The Group is currently assessing the impact of the amended standard on its financial statements.

Amendments to IAS 1, Presentation of Financial Statements (issued June 2011, effective in EU for annual periods beginning on or after 1 July 2012), changes the disclosure of items presented in other comprehensive income. The amendments require entities to separate items presented in other comprehensive income into two groups, based on whether or not they may be reclassified to profit or loss in the future. The suggested title used by IAS 1 has changed to 'statement of profit or loss and other comprehensive income'. The Group expects the amended standard to change presentation of its financial statements, but have no impact on measurement of transactions and balances.

Amended IAS 19, Employee Benefits (issued in June 2011, effective in EU for periods beginning on or after 1 January 2013), makes significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, and to the disclosures for all employee benefits. The standard requires recognition of all changes in the net defined benefit liability (asset) when they occur, as follows: (i) service cost and net interest in profit or loss; and (ii) remeasurements in other comprehensive income. The Group is currently assessing the impact of the amended standard on its financial statements.

Disclosures-Offsetting Financial Assets and Financial Liabilities - Amendments to IFRS 7 (issued in December 2011 and effective in EU for annual periods beginning on or after 1 January 2013). The amendment requires disclosures that will enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off. The amendment will have an impact on disclosures but will have no effect on measurement and recognition of financial instruments.

Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32 (issued in December 2011 and effective in EU for annual periods beginning on or after 1 January 2014). The amendment added application guidance to IAS 32 to address inconsistencies identified in applying some of the offsetting criteria. This includes clarifying the meaning of 'currently has a legally enforceable right of set-off' and that some gross settlement systems may be considered equivalent to net settlement. The Group is considering the implications of the amendment, the impact on the Group and the timing of its adoption by the Group.

Improvements to International Financial Reporting Standards (issued in May 2012 and effective in EU for annual periods beginning 1 January 2013). The improvements consist of changes to five standards. IFRS 1 was amended to (i) clarify that an entity that resumes preparing its IFRS financial statements may either repeatedly apply IFRS 1 or apply all IFRSs retrospectively as if it had never stopped applying them, and (ii) to add an exemption from applying IAS 23 "Borrowing costs", retrospectively by first-time adopters. IAS 1 was amended to clarify that explanatory notes are not required to support the third balance sheet presented at the beginning of the preceding period when it is provided because it was materially impacted by a retrospective restatement, changes in accounting policies or reclassifications for presentation purposes, while explanatory notes will be required when an entity voluntarily decides to provide additional comparative statements. IAS 16 was amended to clarify that servicing equipment that is used for more than one period is classified as property, plant and equipment rather than inventory. IAS 32 was amended to clarify that certain tax consequences of distributions to owners should be accounted for in the income statement as was always required by IAS 12. IAS 34 was amended to bring its requirements in line with IFRS 8. IAS 34 will require disclosure of a measure of total assets and liabilities for an operating segment only if such information is regularly provided to chief operating decision maker and there has been a material change in those measures since the last annual consolidated financial statements. The Group is currently assessing the impact of the amendments on its consolidated financial statements.

Transition Guidance Amendments to IFRS 10, IFRS 11 and IFRS 12 (issued in June 2012 and effective in EU for annual periods beginning 1 January 2014). The amendments clarify the transition guidance in IFRS 1 "Consolidated Financial Statements". Entities adopting IFRS 10 should assess control at the first day of the annual period in which IFRS 10 is adopted, and if the consolidation conclusion under IFRS 10 differs from IAS 27 and SIC 12, the immediately preceding comparative period (that is, year 2012 for a calendar year-end entity that adopts IFRS 10 in 2013) is restated, unless impracticable. The amendments also provide additional transition relief in IFRS 10, IFRS 11 "Joint Arrangements" and IFRS 12 "Disclosure of Interests in Other Entities", by limiting the requirement to provide adjusted comparative information only for the immediately preceding comparative period. Further, the amendments will remove the requirement to present comparative information for disclosures related to unconsolidated structured entities for periods before IFRS 12 is first applied. The Group is currently assessing the impact of the amendments on its consolidated financial statements.

Amendments to IFRS 1 "First-time adoption of International Financial Reporting Standards - Government Loans"(issued in March 2012 and effective in EU for annual periods beginning 1 January 2013). The amendments, dealing with loans received from governments at a below market rate of interest, give first-time adopters of IFRSs relief from full retrospective application of IFRSs when accounting for these loans on transition. This will give first-time adopters the same relief as existing preparers. The Group is currently assessing the impact of the amended standard on its consolidated financial statements.

Amendments to IFRS 10, IFRS 12 and IAS 27 - Investment entities (issued on 31 October 2012, the amendments have not yet been endorsed by the EU). The amendment introduced a definition of an investment entity as an entity that (i) obtains funds from investors for the purpose of providing them with investment management services, (ii) commits to its investors that its business purpose is to invest funds solely for capital appreciation or investment income and (iii) measures and evaluates its investments on a fair value basis. An investment entity will be required to account for its subsidiaries at fair value through profit or loss, and to consolidate only those subsidiaries that provide services that are related to the entity's investment activities.

IFRS 12 was amended to introduce new disclosures, including any significant judgements made in determining whether an entity is an investment entity and information about financial or other support to an unconsolidated subsidiary, whether intended or already provided to the subsidiary.

Other revised standards and interpretations: IFRIC 20 "Stripping Costs in the Production Phase of a Surface Mine", considers when and how to account for the benefits arising from the stripping activity in mining industry. The interpretation will not have an impact on the Group's consolidated financial statements.

IFRIC 21: "Levies", it is an interpretation of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. IAS 37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present obligation as a result of a past event (known as an obligating event). The Interpretation clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy.

Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Group's financial statements.

6 Critical Accounting Estimates and Judgements in Applying Accounting Policies

The Group makes estimates and assumptions that affect the amounts recognised in the consolidated financial statements and the carrying amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on management's experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognised in the consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include:

Tax legislation. Russian tax and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management's interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant authorities. Please see Note 22 for more details.

Initial recognition of related party transactions. In the normal course of business the Company enters into transactions involving various financial instruments with its related parties. IAS 39, Financial Instruments: recognition and measurement, requires initial recognition of financial instruments based on their fair values. Judgement was applied in determining if transactions are priced at market or nonmarket interest rates, where there is no active market for such transactions. This judgment was based on the pricing for similar types of transactions with unrelated parties and effective interest rate analyses.

Estimation of oil and gas reserves. Engineering estimates of hydrocarbon reserves are inherently uncertain and are subject to future revisions. Accounting measures such as depreciation, depletion and amortisation charges, impairment assessments and asset retirement obligations that are based on the estimates of proved reserves are subject to change based on future changes to estimates of oil and gas reserves.

Proved reserves are defined as the estimated quantities of hydrocarbons which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic conditions. Proved reserves are estimated by reference to available reservoir and well information, including production and pressure trends for producing reservoirs. Furthermore, estimates of proved reserves only include volumes for which access to market is assured with reasonable certainty. All proved reserves estimates are subject to revision, either upward or downward, based on new information, such as from development drilling and production activities or from changes in economic factors, including product prices, contract terms or development plans. In some cases, substantial new investment in additional wells and related support facilities and equipment will be required to recover such proved reserves. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of underground reserves are subject to change over time as additional information becomes available.

The Group last obtained an independent reserve engineers report as at 31 December 2007. Management believes that these reserves have not changed, other than through production, as the amount of subsequent additional drilling has been minimal.

In general, estimates of reserves for undeveloped or partially developed fields are subject to greater uncertainty over their future life than estimates of reserves for fields that are substantially developed and depleted. As those fields are further developed, new information may lead to further revisions in reserve estimates. Reserves have a direct impact on certain amounts reported in the consolidated financial statements, most notably depreciation, depletion and amortisation as well as impairment expenses. Depreciation rates on production assets using the units-of-production method for each field are based on proved developed reserves for development costs, and total proved reserves for costs associated with the acquisition of proved properties. Assuming all variables are held constant, an increase in proved developed reserves for each field decreases depreciation, depletion and amortisation expenses. Conversely, a decrease in the estimated proved developed reserves increases depreciation, depletion and amortisation expenses. Moreover, estimated proved reserves are used to calculate future cash flows from oil and gas properties, which serve as an indicator in determining whether or not property impairment is present. The possibility exists for changes or revisions in estimated reserves to have a significant effect on depreciation, depletion and amortisation charges and, therefore, reported net profit/(loss) for the year.

Deferred income tax asset recognition. The recognised deferred tax asset represents income taxes recoverable through future deductions from taxable profits and is recorded in the statement of financial position. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. The future taxable profits and the amount of tax benefits that are probable in the future are based on the medium term business plan prepared by management and extrapolated results thereafter. The business plan is based on management expectations that are believed to be reasonable under the circumstances. Key assumptions in the business plan are an average oil price of $110 for 2013 and $90 in real terms for future sales.

Impairment provision for receivables. The impairment provision for receivables (including loans issued) is based on management's assessment of the probability of collection of individual receivables. Significant financial difficulties of the debtor/lender, probability that the debtor/lender will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the receivable is potentially impaired. Actual results could differ from these estimates if there is deterioration in a debtor's/lender's creditworthiness or actual defaults are higher than the estimates.

When there is no expectation of recovering additional cash for an amount receivable, the expected amount receivable is written off against the associated provision.

Future cash flows of receivables that are evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and the experience of management in respect of the extent to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods and to remove the effects of past conditions that do not exist currently.

Asset retirement obligations. Management makes provision for the future costs of decommissioning hydrocarbon production facilities, pipelines and related support equipment based on the best estimates of future cost and economic lives of those assets. Estimating future asset retirement obligations is complex and requires management to make estimates and judgments with respect to removal obligations that will occur many years in the future. Changes in the measurement of existing obligations can result from changes in estimated timing, future costs or discount rates used in valuation.

Useful lives of non-oil and gas properties. Items of non-oil and gas properties are stated at cost less accumulated depreciation. The estimation of the useful life of an asset is a matter of management judgement based upon experience with similar assets. In determining the useful life of an asset, management considers the expected usage, estimated technical obsolescence, physical wear and tear and the physical environment in which the asset is operated. Changes in any of these conditions or estimates may result in adjustments to future depreciation rates. Useful lives applied to oil and gas properties may exceed the licence term where management considers that licences will be renewed. Assumptions related to renewal of licences can involve significant judgment of management.

7 Cash and cash equivalents

Based on Fitch's rating, the credit quality of BNP Paribas in which the Group mostly held its cash and cash equivalents as at 31 December 2012 and 2011 is A+.

8 Accounts Receivable and Prepayments

Included in total accounts receivable and prepayments are $1.1 million and $1.0 million at 31 December 2012 and 2011, respectively, denominated in US dollars. Substantially all remaining amounts are denominated in Russian Roubles.

Trade accounts receivable arise primarily from sales to ongoing customers with standard payment terms. The category 'Other' primarily relates to prepaid amounts to customs and tax authorities, which will be returned to the Group either in cash or through an off-set against future payments.

Changes in the provision for impairment of trade and other receivables related to the recognition of a provision against receivables from related parties are as follows:

The carrying values of trade and other receivables approximate their fair value. The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivables mentioned above. The Group does not hold any collateral as security for trade and other receivables (see Note 23 for credit risk disclosures).

Trade and other receivables that are less than three months past due are generally not considered for impairment unless other indicators of impairment exist, such as indication of significant financial difficulty or bankruptcy. Trade and other receivables of $0.1 million and $0.1 million at 31 December 2012 and 2011, respectively were past due but not impaired. The ageing analysis of these past due but not impaired trade and other receivables are as follows:

The main part of past due receivables related to the members of independent customers for whom there are no recent history of defaults and was subsequently repaid.

9 Inventories

Inventory provision

The release of inventory provision in 2011 was triggered by the fact that the Company has made an updated analysis of market value of inventories, previously impaired in 2009.

10 Property, Plant and Equipment

Additions to assets under construction included capitalised depreciation in the amount of $147 thousand (for the year ended 31 December 2011: $155 thousand).

The average capitalisation rate for the year ended 31 December 2012 is 5.5% (for the year ended 31 December 2011: 5.5%).

Included within oil and gas properties at 31 December 2012 and 2011 were exploration and evaluation assets:

The Group's oil fields are situated in the Russian Federation on land owned by the Russian government. The Group holds production mining licenses and pays production taxes to extract oil and gas from the fields. The licenses expire between 2037 and 2067, but may be extended. Management intends to renew the licences as the properties are expected to remain productive subsequent to the license expiration date.

Estimated costs of dismantling oil and gas production facilities, including abandonment and site restoration costs, amount to $0.1 million and $0.1 million at 31 December 2012 and 2011, respectively, are included in the cost of oil and gas properties. The Group has estimated its liability based on current environmental legislation using estimated costs when the expenses are expected to be incurred.

The Group leases property, plant and equipment (included within oil and gas properties) under a number of finance lease agreements. The Group classified these leases as finance lease based on contract terms that include transfer of ownership rights at the end of contract.

As at 31 December 2012 cost of the leased assets amounted to $2,369 thousand (2011: $574 thousand). Accumulated depreciation for the leased assets as at 31 December 2012 amounted to $361 thousand (2011: $325 thousand).

Future minimum lease payments were as follows:

11 Other Non-Current Assets

At 31 December 2012 and 2011 loans receivable represent US dollar denominated long-term loans (interest inclusive) issued by UEPCL to OOO Komineftegeophysica (Note 24).

12 Accounts Payable and Accrued Expenses

Total accounts payable and accrued expenses in the amount of $1.3 million and $1.0 million at 31 December 2012 and 2011, respectively, are denominated in US dollars. Substantially all remaining amounts are denominated in Russian Roubles.

Other payable and accrued expenses include accounts payable relate to supply of goods under agency agreement made in prior years in the amount of $1.2 million and $1.1 million at 31 December 2012 and 2011 respectively.

13 Provisions

Provision on claims (Note 24)

On 2 June 2010 the Company was notified that Finfund Limited has exercised its rights to acquire 13,000,000 existing Urals shares with a nominal value of US$0.0063 from entities beneficially owned by two directors (being Leonid Y. Dyachenko and Aleksey V. Ogarev) and another significant shareholder (being Vyacheslav V. Rovneiko) (together the "Shareholders") pursuant to a share pledge agreement dated 26 November 2007 (the "Share Pledge Agreement").

The Share Pledge Agreement was entered into by entities beneficially owned by the Shareholders and secured various obligations of the Company under the terms of the Share Pledge Agreement relating to the acquisition by Urals of Taas-Yuriakh Neftegazodobycha (the "Acquisition"). Such obligations included certain pledge fees which Finfund Limited claimed were owed by the Company. Based on Finfund Limited's alleged defaults by the Company in respect of such pledge fees, Finfund Limited chose in 2010 to exercise its rights under the Share Pledge Agreement to acquire 13,000,000 shares in the Company from entities beneficially owned by the Shareholders (the "Pledged Shares"). The Shares beneficially owned and transferred to Finfund Limited as a result of such exercise of its rights against each Shareholder are as follows:

As a consequence of the exercise of Finfund Limited's rights, as described above, any liability owed by Urals to Finfund Limited was reduced by the value of the shares transferred, estimated to equal $2.2 million. The Company has recorded a provision for the potential reimbursement of this sum

to the shareholders. The Company has recorded this provision based on the historical value of 13,000,000 shares. The provision is equal to $2.2 million as of 31 December 2012 (as of 31 December 2011: $2.2 million).

14 Taxes

Income taxes for the years ended 31 December 2012 and 2011 comprised the following:

Below is a reconciliation of profit before taxation to income tax charge:

The movements in deferred tax assets and liabilities during the years ended 31 December 2012 were as follows:

The amount of deferred tax assets and liabilities that will be settled in 2013 is not significant.

The Company is subject to corporation tax on taxable profits at the rate of 10%. Under certain conditions interest expense or interest income may be subject to defence contribution at the rate of 10%. In such cases 50% of the same interest will be exempt from corporation tax thus having an effective tax rate burden of approximately 15%. In certain cases dividends received from abroad may be subject to defence contribution at the rate of 15%.

Most of the individual operating entities are taxed in the Russian Federation at the rate of 20%.

In the context of the Group's current structure, tax losses and current tax assets of different group companies may not be offset against current tax liabilities and taxable profits of other group companies and, accordingly, taxes may accrue even where there is a consolidated tax loss. Therefore, deferred tax assets and liabilities are offset only when they relate to the same taxable entity. At 31 December 2012 and 2011, deferred tax assets of $25.0 million and $23.6 million, respectively, have not been recognised for deductible temporary differences for which it is not probable that sufficient taxable profit will be available to allow the benefit of that deferred tax assets to be utilised. Accumulated tax losses were $144.5 million and $139.0 million at 31 December 2012 and 2011, respectively. The $144.5 million of the accumulated tax losses at 31 December 2012 expire in 2014-2022 years and of the remaining $139.0 million of the accumulated tax losses at 31 December 2011 expire in 2014-2021 years.

Other taxes payable at 31 December 2012 and 2011 were as follows:

15 Borrowings

Long-term and short-term borrowings. Long-term and short-term borrowings were as follows at 31 December 2012 and 2011:

Petraco. In April 2010 the Company reached an agreement (subsequently amended on 18 November 2010) with Petraco relating to the restructuring of the Petraco facility (the "Restructuring Agreement"). The principal terms of the Restructuring Agreement are as follows:

Total indebtedness owed by the Company to Petraco, as at 31 March 2010, was $34.3 million, made up as follows:

- capital amount outstanding (the "Capital Outstanding") of $30.7 million; and

- accrued interest outstanding (the "Accrued Interest") of $3.6 million.

As at 1 April 2010, the Capital Outstanding and Accrued Interest were added together and carried forward as principal ("Principal"). After 1 April 2010 interest was accrued on the Principal and was not compounded. All accrued interest from 1 April 2010 was paid once the Principal has been repaid and all payments made by the Company according to the payment schedule set out below was applied against the Principal outstanding. Interest will be charged on the Principal at a rate of 6 month LIBOR plus 5% per annum, non-compounding.

As part of the restructuring agreement the Company converted $2 million of the Capital Outstanding into 8,693,006 ordinary shares of the Company (recorded in the consolidated statement of changes in shareholders' equity) and gave an option to Petraco to acquire additional new ordinary shares in the amount of 12,576,688 for GBP 0.26 per share. The fair value of the option is not material. This option is considered as non dilutive instrument.

In June 2010 Company pledged 100% of the shares it currently holds in Arcticneft and 97.2% of shares it currently holds in Petrosakh to Petraco as security against the restructured Petraco facility. In August 2012 Petraco released its charge over the shares of Petrosakh in full.

In the year ended 31 December 2011 the debt in the amount of $8 million was paid as a result of the non-cash settlement transactions with trade receivables due to crude oil sales to Petraco.

As of 31 December 2012 the repayment schedule was as follows:

Weighted average interest rate. The Group's weighted average interest rates on borrowings were 5.5% and 5.5% at 31 December 2012 and 2011, respectively.

Interest income and expense. Interest income and expense for the years ended 31 December 2012 and 2011, respectively, comprised the following:

16 Dismantlement Provision

The dismantlement provision represents the net present value of the estimated future obligation for dismantlement, abandonment and site restoration costs which are expected to be incurred at the end of the production lives of the oil and gas fields, which vary from 10 to 40 years depending on the field and type of assets. The discount rate used to calculate the net present value of the dismantling liability was 13.0%.

As further discussed in Note 22, environmental regulations and their enforcement are being developed by governmental authorities. Consequently, the ultimate dismantlement, abandonment and site restoration obligation may differ from the estimated amounts, and this difference could be significant.

17 Equity

At 31 December 2012 authorised share capital was $1,890 thousand divided into 300 million shares of $0.0063 each.

The Share premium is not available for distribution by way of dividend.

Restricted Stock Plan. In February 2006, the Group's Board of Directors approved a Restricted Stock Plan (the "Plan") authorising the Compensation Committee of the Board of Directors to issue restricted stock of up to five percent of the outstanding shares of the Group. Restricted stock grants entitle the holder to shares of stock for no consideration upon vesting. There are no performance conditions beyond continued employment with the Group. The Plan which was authorised in 2006 expired in 2008. Additionally, of the restricted stock of 3,075,393 shares initially granted in 2007, 93,901 and 75,275 granted shares were cancelled as a result of retirement of certain employees of the Company during years 2008 and 2007.

In March 2008, the Group granted an additional 2,281,677 shares of restricted stock of which nil and 16,966 granted shares were cancelled as a result of retirement of certain employees of the Company during 2010 and 2009 correspondingly.

In September 2010 the Group substantially granted an additional 9,584,742 shares of restricted stock of which nil and 864,198 granted shares were cancelled as a result of retirement of certain employees of the Company during 2011.

During the years ended 31 December 2012 and 2011, nil and $0.5 million, respectively, of expense related to share-based payments were recognised in the consolidated statements of comprehensive income.

At 31 December 2012 and 31 December 2011, restricted stock grants for 14,037,685 shares and 10,842,771 shares were fully issued.

During the reporting period, the Group issued 3,194,914 shares as a result of normal vesting of previously issued restricted stock grants.

The fair value of stock granted is evaluated using market prices at the grant date if available. If market prices are not available, the fair value is estimated using a valuation technique to estimate what the price would have been on the measurement date in an arm's length transaction between knowledgeable, willing parties.

Profit/(loss) per share. Basic profit/(loss) per share is calculated by dividing the profit/(loss) attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year.

The weighted average number of ordinary shares issued was calculated as following: