Operating profit, RUB million

Source: Company data

• The 13.6% increase in crude export sales year-on-year was driven by a 5.2% increase in realized oil prices and an 8.0% increase in sales volumes resulting from market expansion.
• The year-on-year decrease in crude export and sales in the CIS was the result of the reallocation of crude oil from export to refining at Mozyr.

• Domestic crude oil sales increased following the acquisition of a subsidiary in Orenburg in 4Q 2011.

• Gasoline export volumes increased more than three times year-on-year driven by growing refining throughput at the Mozyr refinery.
• Fuel oil export volumes increased 8.3% driven by growing refining throughput combined with decreased domestic sales.
• Jet fuel export volumes increased 46.7% driven by the growing jet fueling network: 35 new airports in 11 countries – Croatia, Ethiopia, Latvia, the Maldives, Nicaragua, Portugal, the Seychelles, Uganda, the United Kingdom, the United States and Vietnam.

• Diesel export volumes decreased 15.7% due to growing domestic demand.

Petroleum Products Sales on International Markets

Sales of petroleum products on international markets increased 1.4% year-on-year driven by a 2.7% increase in prices.

• Fuel oil volumes sold in the CIS increased nearly threefold driven by increased sales in Kazakhstan.

• Jet fuel volumes sold in the CIS more than doubled because of an expanded sales network.

• Domestic sales volumes increased 3.3% driven by increased refining throughput.

• The 50.0% and 48.7% decrease in volume of sales of low octane gasoline and fuel oil, respectively, were caused by the reallocation of volumes to export due to decreasing domestic demand for these products.

Other Revenue

Other revenue includes, primarily, revenue from transport, construction and other services.

The increase in other revenue of 16.6% was primarily driven by changes in volumes sold.

Purchases of Oil, Gas and Petroleum Products

Purchases of oil, gas and petroleum products increased 37.0% primarily due to an increase in volume of crude oil purchased on international and domestic markets.

• Upstream expenses include expenditure on raw materials and supplies, maintenance and repairs of extraction equipment, labor costs, fuel and electricity costs, activities to enhance oil recovery, and other similar costs at the Group's Upstream subsidiaries.
• Upstream expenses increased 6.5% year-on-year due to increased hydrocarbon production and the acquisition of the Orenburg assets.
• Refining expenses at our own refineries include expenditure on raw materials and supplies, maintenance and repairs of production equipment, labor and electricity costs, and other similar costs.
• Refining expenses at our own refineries increased 11.3% year-on-year primarily due to natural monopolies charging higher tariffs, the launch of new processing units at Omsk, and scheduled maintenance at the primary refining unit in Moscow (performed every two years).
• Refining expenses at equity associates' refineries increased 33.3% year-on-year due to higher throughput at the Yaroslavl and Mozyr refineries.
• Lubricants manufacturing expenses increased 39.6% year-on-year due to differences in maintenance schedules at the Omsk lubricants plant, and increased production of packaged lubricants.
• Transportation expenses to refineries increased 23.4% year-on-year due to 7.0% higher refining throughput and increases in tariffs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include general business expenses, wages, salaries (except wages and salaries at our production and refining subsidiaries), insurance, banking commissions, legal fees, consulting and audit services, allowances for doubtful accounts and other expenses.

• Selling, general and administrative expenses increased by 28.6% year-on-year due to business expansion, including higher premium sales, and inflation.

Transportation Expenses

Transportation expenses include costs to transport crude oil and petroleum products to end customers. These costs consist of pipeline transportation, sea freight, railroad, shipping, handling, and other transportation costs.

• The increase in transportation expenses year-on-year was driven by higher tariffs and increased sales volumes.

Depreciation, Depletion and Amortization

Depreciation, depletion and amortization expenses include depreciation of oil and gas properties, refining and other assets.

• Depreciation, depletion and amortization expenses increased 4.8% year-on-year in line with the increase in depreciable assets driven by capital expenditure.

• Mineral extraction tax (MET) expenses increased 17.1% year-on-year due to higher tax rates for both gas and crude oil:
  • The MET rate for gas doubled from January 1, 2012; and
  • The MET rate for crude oil increased in proportion to oil prices, and the base rate also increased from 419 RUB/tonne to 446 RUB/tonne.

• Excise tax expenses increased 31.0% year-on-year due to the introduction of higher rates on January 1, 2012. Excise rates on gasoline increased 31%, naphtha 28%, diesel 55% and lubricants 30%.

• The Group’s share of profit of equity investments increased more than fourfold due to the adoption of the 60/66 tax regime in 4Q 2011 (the regime reduced export duty rates for crude oil from 65% to 60%), which resulted in higher domestic crude oil prices and consequently an increase in the profit of associated entities selling crude oil domestically.

Other Financial Items

• Foreign exchange gains/losses were mainly driven by a revaluation of the portion of the Group’s debt portfolio that is denominated in foreign currencies.
• Finance income increased year-on-year due to more efficient cash management.
• Finance expenses declined 2.5% year-on-year as a result of the Group’s success in reducing its effective interest rate.

• Capital expenditures for Exploration and Production increased 28.6% year-on-year mostly due to the development of the Orenburg assets. The focus on drilling more expensive horizontal wells also led to increased capital expenditures.

• Capital expenditure for refining increased 34.0% year-on-year mostly due to the construction of the isomerization unit and catalytic cracking gasoline hydrotreating unit and the reconstruction of the diesel hydrotreating unit at the Moscow refinery.

• The Group has a diversified debt structure that includes pre-export financing, syndicated and bilateral loans, bonds, and other instruments.

• The average maturity of the Group’s debt increased from 2.68 years in 4Q 2011 to 3.81 years in 4Q 2012 as a result of the USD 1.5 billion 10-year Eurobonds issued in September 2012. However, this also resulted in a slight increase in the average interest rate to 3.48% as at December 31, 2012.