Annual Report and Accounts

28 June 2011

Urals Energy Public Company Limited

("Urals Energy", or the "Company")

Annual Report and Accounts

Urals Energy (LSE: UEN), an independent exploration and production company with operations in Russia, is pleased to announce its audited financial results for the year ended 31 December 2010 and to provide an update on strategic and operational progress.

Overview

·; stabilising the legacy issues

·; establishing plans to return the Company to growth

·; active discussions regarding the restructuring of the Taas loan

·; increasing confidence in quality of acreage

·; closely monitoring activity in neighbouring blocks which the Board anticipate may further de-risk the Company's acreage

Operational

·; current production at Petrosakh is 1,527 BOPD

·; current production at Arcticneft is 711 BOPD

·; on 20 June 2011 crude oil in stock at Arcticneft was 138,500 bbls

·; well #51 spudded in March 2011, with production expected by the Board in early July 2011

·; following completion of drilling well #51 the Company will start drilling well #41

·; 12 well workover program at Petrosakh started, expected by the Board to increase production by early July 2011

·; commencement of marketing high octane gasoline led to increase in profitability

Financial

·; in 2010 the Company continued to resolve the legacy financial issues and strengthen its balance sheet in order to enable the Company to implement the Company's ongoing strategy

·; net profit (including one-offs) in 2010 increased to $52.9 million from a loss of $304.0 million in 2009

·; restructuring of Petraco loan and successful private placement in December 2010 raising US$9.24million

Corporate

·; appointment of Ingeborg Srenger as a Non-Executive Director of the Company

Outlook

·; ongoing focus to ensure that the Company's remaining debts are repaid, the balance sheet continues to be strengthened, and that the cost reduction program is completed

·; the Company intends to optimise the existing assets, identify ways of utilising the upside potential in downstream and marketing and achieve a positive operating cash flow

·; focus on further increasing production from Petrosakh and Arcticneft with plans to achieve target production of 3,400 BOPD by the end of 2011 and 5,150 BOPD by the end of 2013 respectively

·; Urals will continue to consider and evaluate possible acquisition targets with a view to expanding and optimising the Company's asset portfolio

Alexei Maximov, Chief Executive, commented:

"We would like to thank our shareholders for their on going support, and to reassure them that the Board is focused on restoring the fortunes of this Company. 2010 has been a year of stabilisation but the legacy issues are now largely behind us, leaving Urals well positioned to create a leading Russian focused E&P company. We look forward to updating the market with innovations in due course.

The restructuring of the Petraco loan has been a major milestone for Urals and, combined with the successful private placement, led to a strengthening of our balance sheet. As we look to continue the trend of increased profitability, we are committed to working towards additional increases in production from our existing portfolio, and potentially identifying new opportunities to expand the reserve base."

Enquiries:

The annual report and accounts for the year ending 31 December 2010 will today be posted to shareholders and will be available from the Company's website www.uralsenergy.com in accordance with AIM Rule 20

CEO STATEMENT AND ANNUAL REPORT TO SHAREHOLDERS

2010 for Urals Energy, was a year of stabilising legacy issues and keeping costs low, which has been a challenging task to perform. The Company is now on the other side of this transition period and the outlook looks positive in terms of growth for Urals. There has been a strategic focus by the Board on the ways in which to best develop the production on the two licenses while looking for other opportunities in the region.

In April 2010 the Company and Petraco reached an agreement to restructure the debt owed to Petraco. The agreed repayment schedule allows for a more gradual repayment of the outstanding liability and provides additional security to Petraco. Petraco also converted $2.0 million of the liability to 8,693,006 new ordinary shares in the capital of the Company and received an option to acquire 12,576,688 new ordinary shares in the capital of the Company for $5.0 million.

In December 2010 the Company completed a successful share placing raising US$9.24million. The placing provided the Company with sufficient funds to increase production across its asset portfolio and the revenues from the production increase in turn, will facilitate the ongoing Petraco loan repayment agreement. Urals is also in active discussions regarding the restructuring of the Taas loan and the Board looks forward to updating the market on this matter at the appropriate time.

Significant workovers of the onshore Petrosakh and Arcticneft licenses commenced in 2011 focusing on exploring the potential of the surrounding resources. For the past week production in Petrosakh has increased by 114 BOPD as a result of additional perforation in two wells and a moderate increase as a result of back pressure reduction and draw down increase. We will continue to perform these operations and planned two more acid stimulations within the next week and the Board expects that this will result in a further increase in production. All works are performed by existing staff and using materials and equipment that is kept on the field site, therefore without additional costs to the Company.

Progress continues to be made in development drilling at Petrosakh with the work over program beginning, and the spudding of the first vertical well since 2008. Well #51 was spudded in March 2011 and results are expected in July 2011. The Company continues to review some of the wells which have previously been suspended with a view to reactivating the other promising wells over the coming months. In addition the Company began the marketing of a new product in the form of high octane gasoline, which made a positive contribution to profitability in 2010.

Further potential may be identified in Arcticneft, as a result of the planned drilling of a deep exploration well by ArcticMorNefteGazRazvedka ("AMNGR") in the lower Paleozoic horizon of Peschanoozerskoye field. Since both Arcticneft and AMNGR operate the same field (however different blocks of it), the Board anticipates that that the results will not only further de-risk the field but will also provide a strong indication for the potential for Urals to increase its reserves in the same area and formation.

High oil prices in 2011 substantially increased the profitability of the Company's operations, however at the same time it also effected the Company's working capital position, especially at Arcticneft, where oil is produced and production taxes are paid at a higher tax rate, while delivery of crude oil is expected only in October 2011.

The Board will continue to work hard in identifying further opportunities to add value and to complement the current portfolio. I would like to take this opportunity to thank our shareholders, employees and partners for their on-going support of the Company and its re-focussed strategy in this new period for Urals going forward.

2010 Financial

Operating Environment

2010 was characterised by a stable crude oil market price at an average level of $75 per barrel for the first ninth months of the year and by a sharp increase in the last quarter which reached a level of $90 per barrel in December 2010. Domestic prices for light oil products ranged from $70 to $90 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 tankers from Arcticneft were shipped in the second half of August 2010 and at the end of October 2010.

Operating Results

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

In 2010, total gross revenues declined by $9.7 million as a result of decreased sales volumes totalling 905,000 barrels in 2010 (compared with 1,387,000 barrels in 2009) following the divestment of Dulisma. The decline was partially off-set by a higher crude oil net back price of $36.88 per barrel in 2010 ($26.89 per barrel in 2009) and higher average net back prices for petroleum (refined) products of $43.51 per barrel in 2010 ($38.72 in 2009). Netback for domestic product sales is defined as gross product sales minus VAT, transportation costs, excise tax and refining costs.

The sharp decrease in domestic sales of crude oil was due to the divestiture of Dulisma in 2009 and acceleration of refining of crude oil and sales of refined products at Petrosakh.

In 2010 all domestic sales of crude oil and almost all petroleum (refined) products related to Petrosakh. In 2010 Arcticneft sold petroleum (refined) products for $875,000 ($762,000 in 2009).

 Summary table: Net backs ($/bbl) 

Gross profit (net revenues less cost of sales) in 2010 increased to $79.2 million from a loss of $113.5 million in 2009. The main driver of the increased profit in 2010 was an impairment release of $70.5 million associated with Arcticneft and Petrosakh in comparison with impairment charges recognised by the Company in 2009. According to IFRS, these expenses were included in the cost of sales. Without these releases and write-offs, the Gross Profit in 2010 and 2009 would have been $8.7 million and $8.7 million respectively.

Cost of sales (before impairment) in 2010 totaled $34.8 million as compared with $42.2 million in 2009 of which $3.7 million and $4.1 million respectively represented non-cash items, principally Depreciation, Amortization and Depletion. Also included in these costs are $5.4 million and $1.6 million in 2010 and 2009, respectively of crude oil purchased from Arcticneft's neighboring operator on Kolguyev Island, FGUP AMNGR. Urals Energy purchased this oil from AMNGR and resold it together with its own produced oil for a modest profit margin, but a lesser profit margin than would be the case if Arcticneft had produced the oil itself. Other increase in operating costs is due to the increase in unified production tax by $2 million to $10.4 million from $8.4 million as a result of increased world oil prices.

Selling, General and Administrative expenses decreased during the year 2010 by $3.7 million to $17.6 million from $21.3 million in 2009. Without the charge for the provision for doubtful accounts receivable $5.3 million in 2010 and the recovery of doubtful accounts receivable $1.3 million in 2009 Selling, General and Administrative expenses would have decreased during the year 2010 by $10.2 million. This was primarily caused by the initiation of cost reduction programme in the holding company and management company. Headcount in the management company in Moscow was reduced by more than 70%.

The net finance costs during the 2010 were $1.7 million and net interest benefit was $3.1 million (for the 2009: net finance cost of $163.9 million and net interest expense of $87.8 million). These costs decreased substantially as result of the settlement of all liabilities to Sberbank during 2009 through a sale of Dulisma and Taas.

Net profit for the year attributable to shareholders in 2010 was $52.9 million as compared with net loss of $304 million in 2009. That was primarily driven by non-cash transactions associated with the impairment release of property, plant and equipment in Arcticneft and Petrosakh and divestiture of Dulisma and Taas discussed above.

Decrease of Production expenses, Selling, General and Administrative expenses in 2010 resulted in Consolidated normalized management EBITDA increase by $5.1 million to $2.4 million in 2010 compared with negative $2.7 million in 2009, with EBITDA margins of 5.5 % and (5.2) % respectively.

Management EBITDA ($'000) - Unaudited

Net debt Position

At 31 December 2010 the Net debt position had substantially improved following a restructuring with Petraco, positive cash flows from operations and private placement at the end of December 2010.

As at 31 December 2010 the Company had net cash of $13.3 million (calculated as Long-term and Short-term debt plus payables to Finfund less cash in bank, receivables from private placement $8.8 million received in January 2011, loan receivable from Taas and less Loans issued to related parties). As at 31 December 2009 net cash was $1.9 million.

In April 2010 the Company and Petraco reached an agreement to restructure the debt owed to Petraco with the repayment schedule allowing for a more gradual repayment of the outstanding liability and providing additional security to Petraco. Additionally, Petraco converted $2.0 million of the liability to 8,693,006 new ordinary shares in the capital of the Company and received an option to acquire 12,576,688 new ordinary shares in the capital of the Company for $5.0 million. The Company classified $12.0 million of the $30.7 million as current portion of a long-term debt in its financial statements and the remaining part as long-term debt. As at 31 December 2010 the long-term part amounted to $18.7 million. As part of this restructuring agreement, Petraco have the right to appoint one non-executive to the board of the Company. As of the date of this report liability to Petraco is $27.3 million.

The Company repaid the tranche of the loan $3.0 million to Petraco in November 2010 and the tranche of the loan which was due at the end of December 2010 in amount of $4.0 million in early January 2011.

Accounts payable and accrued expenses of $10.7 million at the end of 2010 mainly represented outstanding accounts payable to Finfund with the maximum liability of $4.4 million at 31 December 2010 for the pledge fee and a liability to AMNGR in the amount of $1 million for the crude oil.

On 4 June 2010 the Company announced that Finfund Limited had exercised its rights to acquire 13,000,000 existing Urals Energy shares with a nominal value of $0.0063 per share 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 "Pledge Shareholders") pursuant to a share pledge agreement dated 26 November 2007 (the "Share Pledge Agreement").

Under accounting rules the Company is required to record a provision for the potential reimbursement to the Pledge Shareholders. The Company has recorded this provision based on the market value of 13,000,000 shares. The provision is equal to $2,559,000 as of 31 December 2010.

The Share Pledge Agreement was entered into by entities beneficially owned by the Pledge Shareholders and secured various obligations of the Company under the terms of a sale and purchase agreement dated 26 November 2007 (the "SPA") relating to the acquisition by Urals of Taas-YuriakhNeftegazodobycha (the "Acquisition"). Such obligations included certain pledge fees which Finfund Limited are now claiming are owed by the Company. Based on Company's alleged defaults in respect of the payment of such fees, Finfund Limited has chosen to exercise its rights under the Share Pledge Agreement to acquire 13,000,000 shares in the Company from entities beneficially owned by the Pledge Shareholders (the "Pledged Shares").

In consequence of the exercise of Finfund Limited's rights as described above, any liability owed by the Company to Finfund Limited has been reduced by $2.2 million (a market share price at the date of the transaction). The Company disputes that it owes any pledge fees to Finfund Limited and is in the process of formulating a response to Finfund Limited.

During 2010 the Group impaired loan to related party by $5.2 million (interest income of $0.5 million for 2010). This amount relates to a loan to shareholder and former member of management of the Group. This loan is overdue and is secured by a pledge on an entity whose primary asset is real estate properties located in Moscow. In October 2010 management became aware of the fact that the same real estate has been additionally pledged to secure funding from external banks. This fact was divulged to management and this was considered to be misconduct on behalf of the related party resulting in a devaluation of the Group's collateral. The Board has formally informed this related party that it is aware of this fact and has demanded repayment of the full amount by 20 May 2011. By 20 May 2011 the Board had not received any response from the related party and the Company therefore filed the claim to the London Court of International Arbitration. 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 this related party.

Operational update

Petrosakh

Current production at Petrosakh is 1,470 BOPD (well #47 is under maintenance currently, together with this well production would be 1,527 BOPD). Recent flow rate tests on the sidetrack well 35b have confirmed that the reservoir has the potential for a production increase. In response to this new data, and with a strengthened balance sheet following the successful private placement conducted in December 2010, the decision has been made by the Board to drill more vertical wells into the same area, in addition to sidetracks from already proven wells on the field.

In order to capture the full potential of the Petrosakh field, the vertical well will consist of a larger diameter and is expected by the Board to achieve better flow rates than the previously envisaged drilling programme would have achieved. In particular, the updated strategy entails drilling two new vertical wells and four sidetracks.

The first vertical well #51 on the Petrosakh field was successfully spudded in the end of March 2011. The current depth of this new well is approximately 1,330 metres and a further 200 meters are to be drilled. The delay in drilling and commissioning of the well (originally planned to be completed in the end of May 2011) was caused by the complicated geological structure. However, this does not impact anticipated flow rates and is planned to be put into operations in July 2011.

Following completion of drilling and review of performance of well #51, the Company will start drilling well #41.

Additionally, following a detailed review of the wells' performance, on 23 June 2011 the Company has started workovers on 12 wells. Since 23 June 2011 production has been increased by 114 BOPD as a result of additional perforation of two wells (by 107 BOPD) and a moderate increase (7 BOPD) was due to back pressure reduction and draw down increase on one well. Further 2 wells are planned for acid stimulation, which the Board anticipate may increase production and 8 further wells are targeted for back pressure reduction and draw down increase may also add further BOPD. All works are performed by in-house workover crew and with no additional cost to the Company.

Downstream

Petrosakh continues to refine and sell 100% of its crude oil production. Following an increase in world oil prices and subsequent excise tax in Russia, prices for oil products in Sakhalin have also increased.

Offshore License

The offshore exploration license at Petrosakh expired in February 2011. As previously discussed above, after confirming a lack of interest from potential farm-out partners, the Board took the decision not to apply for an extension on account of the substantial capital expenditure requirements and the high risk of the exploration programme.

Arcticneft

Current production at Arcticneft stands at 711 BOPD. At 26 June 2011 crude oil in stock was 138,500 bbls.

Last year the Company engaged a respected oil industry institute to review the current well performance and recommence water injection, in order to increase production from the existing wells. These recommendations will be tested during 2011 and, if results prove to be economic, the Board anticipates that these recommendations will be implemented on all wells.

In 2011 the Company not only plans to increase production from the existing wells but also to drill new wells following the approval of the field development plan by State Central Development Committee. This approval process is in progress. Drilling is scheduled for the second half of the year, since delivery of the required materials to Arcticneft can be made only during the open navigation period, which starts in June-July.

The first tanker is planned to be loaded in October 2011.

Auditors' Report

Emphasis of matter - Going Concern

The Auditors issued a qualified opinion for the year ending 31 December 2010 and the Board wish to draw attention to Note 3 to the consolidated financial statements which indicate that the Group's current liabilities exceed its current assets by US$11.2 million. This condition, along with other matters as set forth in Note 3, indicate the existence of a material uncertainty which may cast significant doubt about the Group's ability to continue as a going concern.

Urals Energy Public Company LimitedConsolidated Financial StatementsAs of and for the Year Ended 31 December 2010

Urals Energy Public Company Limited

Consolidated Statement of Financial Position

Approved on behalf of the Board of Directors on 21 June 2011

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 Company's shares were temporarily suspended from trading between 30 June 2009 and 18 December 2009 due to non-compliance with AIM rules 18 and 19, primarily due to the non-filing of audited financial statements for the year ended31 December 2008 and the non-filing of unaudited interim financial information for the six-months ended30 June 2009. The matters giving rise to the suspension were resolved in full on 18 December 2009 and the suspension was accordingly lifted.

The Group comprises UEPCL and the following main subsidiaries:

1 LTK and Urals-Nord were merged with OOO Urals Energy in November 2010.

2 As at 5 January 2011 Urals Energy (UK) Limited is considered a liquidated entity. From 6 January 2012 Urals Energy UK will be struck off of Companies House and will be dissolved.

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) under the historical cost convention as modified by the change in fair value of financial instruments.

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

2 Summary of Significant Accounting Policies (Continued)

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 30.48 and 30.24 as of 31 December 2010 and 2009, 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. Monetary assets and liabilities denominated in foreign currencies are translated 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. 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 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.

Comparatives. Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year.

Group accounting. Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights, or otherwise has power to exercise control over the operations, are consolidated. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. 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 on a transaction by transaction basis at the non-controlling interest's proportionate share of net assets of the acquiree.

Goodwill is measured by deducting the net assets of the acquiree from the aggregate of the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree and fair value of an interest in the acquiree held immediately before the acquisition date. Any negative amount ("negative goodwill") is recognised in profit or loss, after management reassesses whether it identified all the assets acquired and all liabilities and contingent liabilities assumed and reviews appropriateness of their measurement.

The consideration transferred for the acquiree is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed, including fair value of assets or liabilities from contingent consideration arrangements but excludes acquisition related costs such as advisory, legal, valuation and similar professional services. Transaction costs related to the acquisition and incurred for issuing equity instruments are deducted from equity; transaction costs incurred for issuing debt as part of the business combination are deducted from the carrying amount of the debt and all other transaction costs associated with the acquisition are expensed.

All intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered.

2 Summary of Significant Accounting Policies (Continued)

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.

Non-controlling interest at the reporting date represents the non-controlling shareholders' portion of the fair values of the identifiable assets, liabilities and contingent liabilities of the subsidiary at the acquisition date, and the non-controlling interest's portion of movements in equity since the date of the combination. Non-controlling interest is presented as a separate component of equity. Where the losses applicable to the non-controlling in a consolidated subsidiary exceed the non-controlling interest in the equity of the subsidiary, the excess and any further losses applicable to the non-controlling interest are charged against the majority interest except to the extent that the non-controlling interest has a binding obligation to, and is able to, make good the losses. If the subsidiary subsequently reports profits, the majority interest is allocated all such profits until the non-controlling interest's share of losses previously absorbed by the majority has been recovered.

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.

The Group has changed its accounting policy for transactions with non-controlling interests and the accounting for loss of control or significant influence from 1 January 2010. Previously transactions with non-controlling interests were treated as transactions with parties external to the Group. Disposals therefore resulted in gains or losses in profit or loss and purchases resulted in the recognition of goodwill. On disposal or partial disposal, a proportionate interest in reserves attributable to the subsidiary was reclassified to profit or loss or directly to retained earnings.

The Group accounts for the interest in a joint venture using the equity method of accounting. Investments in joint ventures are initially recognised at fair value. The group's investment in joint venture includes negative goodwill identified on acquisition, and immediately recognised as income in the profit and loss section of consolidated statement of comprehensive income.

The Group's share of its joint venture's post-acquisition profits or losses is recognised in the profit and loss section of consolidated statement of comprehensive income, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group's share of losses in a joint venture equals or exceeds its interest in the joint venture, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint venture.

Unrealised gains on transactions between the Group and its joint venture are eliminated to the extent of the Group's interest in the joint venture. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of joint venture have been changed where necessary to ensure consistency with the policies adopted by the Group.

Dilution gains and losses arising in investments in joint venture are recognised in the consolidated statement of comprehensive income.

2 Summary of Significant Accounting Policies (Continued)

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 capitalized 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.

Development costs that are directly associated with identifiable and unique software controlled by the Group are recorded as intangible assets if probable future economic benefits will be generated. Capitalised costs include staff costs of the software development team and an appropriate portion of relevant overheads. All other costs associated with computer software, e.g. its maintenance, are expensed when incurred.

2 Summary of Significant Accounting Policies (Continued)

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 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, materials and supplies and construction materials are valued at the lower of the weighted-average cost and net realisable value. 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 reorganization, 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 consolidated statement of comprehensive income.

2 Summary of Significant Accounting Policies (Continued)

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 yield 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. Interest costs on borrowings to finance the construction of property, plant and equipment are capitalised during the period of time that is required to complete and prepare the asset for its intended use.

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 calculated at rates enacted or substantively enacted by the reporting date, using the balance sheet liability method, for all temporary differences between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. The principal temporary differences arise from depreciation on property, plant and equipment, provisions and other fair value adjustments to long-term items, and expenses which are charged to the consolidated statement of comprehensive income before they become deductible for tax purposes.

Deferred income tax assets attributable to deducible temporary differences, unused tax losses and credits are recognised only to the extent that it is probable that future taxable profit or taxable temporary differences will be available against which they can be utilised.

Deferred income tax assets and liabilities are offset when the Group has a legally enforceable right to set off current tax assets against current tax liabilities, when deferred tax balances relate to the same regulatory body, and when they relate to the same taxable entity.

The Group's uncertain tax positions are reassessed by management at every reporting date. 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 reporting date and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognized based on management's best estimate of the expenditure required to settle the obligations at the reporting date.

2 Summary of Significant Accounting Policies (Continued)

Employee benefits. Wages, salaries, 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 makes required contributions to the Russian Federation state pension scheme on behalf of its employees. Mandatory contributions to the governmental pension scheme are expensed or capitalized to inventories on a basis consistent with the associated salaries and wages.

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. Gross revenues include export duties and excise taxes but exclude value added taxes.

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 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.

2 Summary of Significant Accounting Policies (Continued)

Non-current assets classified as held for sale. Non-current assets and disposal groups (which may include both non-current and current assets) are classified in the consolidated statement of financial position as 'Non-current assets held for sale' if their carrying amount will be recovered principally through a sale transaction within twelve months after the reporting date. Assets are reclassified when all of the following conditions are met:(a) the assets are available for immediate sale in their present condition; (b) the Group's management approved and initiated an active programme to locate a buyer; (c) the assets are actively marketed for a sale at a reasonable price; (d) the sale is expected to occur within one year and (d) it is unlikely that significant changes to the plan to sell will be made or that the plan will be withdrawn. Non-current assets or disposal groups classified as held for sale in the current period's consolidated statement of financial position are not reclassified or re-presented in the comparative consolidated statement of financial position to reflect the classification at the end of the current period.

A disposal group is assets (current or non-current) to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. Goodwill is included if the disposal group includes an operation within a cash-generating unit to which goodwill has been allocated on acquisition. Non-current assets are assets that include amounts expected to be recovered or collected more than twelve months after the reporting date. If reclassification is required, both the current and non-current portions of an asset are reclassified.

Held for sale property, plant and equipment, intangible assets or disposal groups as a whole are measured at the lower of their carrying amount and fair value less costs to sell. Held for sale property, plant and equipment and intangible assets are not depreciated or amortised. Reclassified non-current financial instruments and deferred taxes are not subject to the write down to the lower of their carrying amount and fair value less costs to sell.

Liabilities directly associated with the disposal group that will be transferred in the disposal transaction are reclassified and presented separately in the consolidated statement of financial position.

3 Going Concern

A significant portion of the Group's consolidated net assets of $127,498 thousand 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 $11.2 million as of 31 December 2010. The most significant creditor as of 31 December 2010 was an loan from Petraco - with $30.7 million of principal and interest owed as of 31 December 2010 (Note 15).

As discussed further in Note 15, on 29 April 2010 an Extraordinary General Meeting was held, whereby it was agreed to authorise the restructuring of the Petraco advance. As a consequence of the restructuring the debt was restructured so that $7.0 million was repayable in 2010, $8.0 million is repayable in 2011, $11.7 million is repayable in 2012, the remaining balance is payable in 2013 (see Note 15).

In December 2010 the Company had placed 54,198,071 shares with a nominal value of US$0.0063 each (the "Placing Shares") with institutional and other investors at 11.0 pence per share (the "Placing"). The Placing is conditional upon admission of the 54,198,071 Placing Shares being admitted to trading on AIM. The Company raised approximately £6.0 million (being approximately US$9.2 million) before expenses. The other details of the Placing are discussed further in Note 17.

Management have prepared monthly cash flow projections for periods throughout 2011 and 2012. Judgements with regard to future oil prices and planned production were required for the preparation of the cash flow projections and model. Positive overall cash flows are crucially dependant on future oil prices (a price of$90 per barrel has been used for 2011 and for 2012) and on continued cooperation with Petraco.

Despite the above matters, the Group still has funding and liquidity constraints. Management considers that there is a material uncertainty which may cast doubt about the Group's ability to continue as going concern.

Despite the uncertainties and based on 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 Settlement with Sberbank

During 2007, the Group attracted $630 million in short term financing in the form of two separate loans($500 million and $130 million) from Sberbank to finance acquisitions and mineral development. Despite detailed discussions with Sberbank, these loans were not re-financed during 2008. As of 31 December 2008 the Group was in default of its financing arrangement with Sberbank and the Group's current liabilities exceeded its current assets by $758.2 million.

During 2009 the Group entered into a series of negotiations with Sberbank, OOO Sberbank Capital ('Sberbank Capital') (a 100% subsidiary of OAO Sberbank), and other entities. As a result of these negotiations the Group agreed to dispose of its 100% ownership interest in Dulisma and its 35.3% ownership in Taas in exchange for a release of its debt obligations of $190 million (plus interest of $2.3 million) and $439.6 million (plus interest of $77.8 million), respectively. Furthermore, as a result of these negotiations the Group was released from a Put Option for nil consideration.

No cash was paid or received as a result of the settlement transactions. As a consequence of these non-cash settlement transactions the Group incurred a net loss of $225.5 million in 2009. This net loss is comprised of:

The Company had no access to financial information of Taas for the period and accordingly did not account for the income from Taas under the equity method of accounting. Similarly the Company did not reassess the fair value of the put option prior to the release of the Company's obligations under the agreement. As Taas was disposed and the Put Option terminated in 2009 there is no impact on the recognised loss for the year ended 31 December 2009 from the non-recording of these items.

5 New accounting pronouncements and interpretations

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 2011 or later and which the Group has not early adopted:

IFRS 9, Financial Instruments Part 1: Classification and Measurement. IFRS 9 was issued in November 2009 and replaces those parts of IAS 39 relating to the classification and measurement of financial assets. IFRS 9 has further audited in October 2010 to address the classification and measurement of financial instruments. Key features 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 only payments of principal and interest (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 as at fair value through profit or loss in other comprehensive income.

While adoption of IFRS 9 is mandatory from 1 January 2013, earlier adoption is permitted. The Group does not expect to early apply the standard in its annual 2010 consolidated financial statements.

IFRS 10, Consolidated Financial Statements. IFRS 10 was issued in May 2011 and supersedes IAS 27 Consolidated and Separate Financial Statements and SIC 12 Consolidation - Special Purpose Entities.

- The objective of IFRS 10 is to have a single basis for consolidation for all entities, regardless the nature of investee, and that basis is control.

- The definition of control includes three elements: (i) power over an investee, (ii) exposure or rights to variable returns of the investee and (iii) ability to use power over investee to affect the investor's returns.

- IFRS 10 replaces those parts of IAS 27 that address when or how an investor should prepare the consolidated financial statements and replaces SIC-12 in its entirety.

The effective date of IFRS 10 is 1 January 2013, with earlier application permitted under certain circumstances. The Group is currently assessing the impact of the amended standard on disclosures in its financial statements.

IFRS 11, Joint Arrangements. IFRS 11 was issued in May 2011 and supersedes IAS 31 Interests in Joint Ventures, and SIC-13 Jointly Controlled Entities - Non-Monetary Contributions by Venturers.

- IFRS 11 classifies joint arrangements as either joint operations (combining the existing concept of jointly controlled operations) or joint ventures (equivalent of existing concept of a jointly controlled entity).

- IFRS 11 requires the use of equity method of accounting for interests in joint ventures thereby eliminating the proportionate consolidation method.

The effective date of IFRS 11 is 1 January 2013, with earlier application permitted under certain circumstances. The Group is currently assessing the impact of the amended standard on disclosures in its consolidated financial statements.

IFRS 12, Disclosure of Interests in Other Entities. IFRS 12 was issued in May 2011. The standard requires extensive disclosures relating to an entity's interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. An entity is required to disclose information that helps users of its financial

5 New accounting pronouncements and interpretations (Continued)

statements evaluate the nature of and risks associated with its interests in other entities and effects of those interests on its consolidated financial statements.

The effective date of IFRS 11 is 1 January 2013, entities are permitted to incorporate any of the new disclosures into their financial statements before that date. The Group is currently assessing the impact of the amended standard on disclosures in its consolidated financial statements.

IFRS 13, Fair Value Measurement. IFRS 13 was issued in May 2011. The standards establishes s single source guidance for fair value measurement under IFRS, it applies to both financial and non-financial items measured at fair value.

IFRS 13 is effective for annual periods beginning or after 1 January 2013, with early application permitted, and applies prospectively from the beginning of the annual period in which the standard is adopted. The Group is currently assessing the impact of the amended standard on disclosures in its financial statements.

Consolidated and Separate Financial Statements - Amendment to IAS 27 (issued on 12 May 2011, applicable to annual reporting periods, beginning on or after 1 January 2013). IAS 27 applies when an entity prepares separate financial statements that comply with IFRS.The amendment is not expected to have any material impact on the Group's financial statements. The amendment is not expected to have any material impact on the Group's financial statements.

Investments in Associates - Amendment to IAS 28 (issued on 12 May 2011, applicable to annual reporting periods, beginning on or after 1 January 2013). The standard prescribes accounting for investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.

Classification of Rights Issues - Amendment to IAS 32 (issued 8 October 2009; effective for annual periods beginning on or after 1 February 2010). The amendment exempts certain rights issues of shares with proceeds denominated in foreign currencies from classification as financial derivatives. The amendment is not expected to have any material impact on the Group's consolidated financial statements.

Amendment to IAS 24, Related Party Disclosures (issued in November 2009 and effective for annual periods beginning on or after 1 January 2011). IAS 24 was revised in 2009 by: (a) simplifying the definition of a related party, clarifying its intended meaning and eliminating inconsistencies; and by (b) providing a partial exemption from the disclosure requirements for government-related entities. The Group is currently assessing the impact of the amended standard on disclosures in its consolidated financial statements.

IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments (effective for annual periods beginning on or after 1 July 2010). This IFRIC clarifies the accounting when an entity renegotiates the terms of its debt with the result that the liability is extinguished through the debtor issuing its own equity instruments to the creditor. A gain or loss is recognised in the profit and loss account based on the fair value of the equity instruments compared to the carrying amount of the debt. The Group is currently assessing the impact of the interpretation on its consolidated financial statements.

Prepayments of a Minimum Funding Requirement - Amendment to IFRIC 14 (effective for annual periods beginning on or after 1 January 2011). This amendment will have a limited impact as it applies only to companies that are required to make minimum funding contributions to a defined benefit pension plan. It removes an unintended consequence of IFRIC 14 related to voluntary pension prepayments when there is a minimum funding requirement. The amendment is not expected to have any impact on the Group's consolidated financial statements.

Improvements to International Financial Reporting Standards (issued in May 2010; effective dates from vary standard by standard, most improvements are effective for annual periods beginning on or after 1 January 2011). The improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: IFRS 1 was amended (i) to allow previous GAAP carrying value to be used as deemed cost of an item of property, plant and equipment or an intangible asset if that item was used in operations subject to rate regulation, (ii) to allow an event driven revaluation to be used as deemed cost of property, plant and equipment even if the revaluation occurs during a period covered by the first IFRS financial statements and (iii) to require a first-time adopter to explain changes in accounting policies or in the IFRS 1 exemptions between its first IFRS interim report and its first IFRS financial statements; IFRS 3 was amended (i) to require measurement at fair value (unless another measurement basis is required by other IFRS standards) of non-controlling interests that are not present ownership interest or do not entitle the holder to a proportionate share of net assets in the event of liquidation, (ii) to provide guidance on acquiree's share-based payment arrangements that were not replaced or were voluntarily replaced as a result of a business combination and (iii) to clarify that the contingent

5 New accounting pronouncements and interpretations (Continued)

considerations from business combinations that occurred before the effective date of revised IFRS 3 (issued in January 2008) will be accounted for in accordance with the guidance in the previous version of IFRS 3; IFRS 7 was amended to clarify certain disclosure requirements, in particular (i) by adding an explicit emphasis on the interaction between qualitative and quantitative disclosures about the nature and extent of financial risks, (ii) by removing the requirement to disclose carrying amount of renegotiated financial assets that would otherwise be past due or impaired, (iii) by replacing the requirement to disclose fair value of collateral by a more general requirement to disclose its financial effect, and (iv) by clarifying that an entity should disclose the amount of foreclosed collateral held at the reporting date and not the amount obtained during the reporting period; IAS 1 was amended to clarify that the components of the statement of changes in equity include profit or loss, other comprehensive income, total comprehensive income and transactions with owners and that an analysis of other comprehensive income by item may be presented in the notes; IAS 27 was amended by clarifying the transition rules for amendments to IAS 21, 28 and 31 made by the revised IAS 27 (as amended in January 2008); IAS 34 was amended to add additional examples of significant events and transactions requiring disclosure in a condensed interim financial report, including transfers between the levels of fair value hierarchy, changes in classification of financial assets or changes in business or economic environment that affect the fair values of the entity's financial instruments; and IFRIC 13 was amended to clarify measurement of fair value of award credits. The Group does not expect the amendments to have any material effect on its consolidated financial statements.

Limited exemption from comparative IFRS 7 disclosures for first-time adopters - Amendment to IFRS 1 (effective for annual periods beginning on or after 1 July 2010). Existing IFRS preparers were granted relief from presenting comparative information for the new disclosures required by the March 2009 amendments to IFRS 7 'Financial Instruments: Disclosures'. This amendment to IFRS 1 provides first-time adopters with the same transition provisions as included in the amendment to IFRS 7. The amendment is not relevant for the Group's consolidated financial statements.

Disclosures - Transfers of Financial Assets - Amendments to IFRS 7 (issued in October 2010 and effective for annual periods beginning on or after 1 July 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 amended standard on disclosures in its consolidated financial statements.

Recovery of Underlying Assets - Amendments to IAS 12 (issued in December 2010 and effective for annual periods beginning on or after 1 January 2012). 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 consolidated financial statements.

Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters - Amendments to IFRS 1 (issued in December 2010 and effective for annual periods beginning on or after 1 July 2011). 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 effect on its consolidated financial statements.

6 Critical Accounting Estimates and Judgements in Applying Accounting Policies

The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities. 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 are outlined below.

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 21 for more details.

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 amortization 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.

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 amortization 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 amortization expenses. Conversely, a decrease in the estimated proved developed reserves increases depreciation, depletion and amortization 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 amortization charges and, therefore, reported net profit/(loss) for the year.

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 reorganization, 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

6 Critical Accounting Estimates and Judgements in Applying Accounting Policies (Continued)

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.

Impairment. As discussed further in Note 7, management have estimated the recoverable amount of cash generating units. Changes in the assumptions used can have a significant impact on the amount of any impairment charge/release.

Going Concern.These consolidated financial statements have been prepared on the basis that the Group will continue as a going concern (Note 3). Preparation of the consolidated financial statements on a basis other than going concern can have a significant impact on the balances recorded in respect of assets and liabilities.

7 Impairment

Year ended 31 December 2010

At the end of 2010 the Group's management reassessed the impairment of production assets and cash generating units due to an increase in the forecast crude oil prices. As at 31 December 2010 the Group has released the impairment provision of $32.8 million and $37.7 million for Arcticneft and Petrosakh cash generating units, respectively.

In assessing whether a write-down is required in the carrying value of a potentially impaired item of property, plant and equipment or an equity-accounted investment, its carrying value is compared with its recoverable amount. The recoverable amount is the higher of the asset's fair value less costs to sell and value in use. Given the nature of the Group's activities, information on the fair value of an assets is usually difficult to obtain unless negations with potential purchasers are taking place. Consequently, unless indicated otherwise, the recoverable amount used in assessing the impairment charges described below is value-in-use. The Group estimated value-in-use using a discounted cash flow model.

An average oil price of $90 for 2010 and $90 in real terms for future sales was estimated for the impairment calculation and a discount rate of 12% in real terms was used to discount the estimated future cash flows. The discount rate of 12% in real terms was derived from the Group's approximate pre-tax weighted average cost of capital.

Estimated production volumes are based on detailed data for the fields and take into account development plans for the fields agreed by management as part of the long-term planning process. It is estimated that, if all production were to be reduced by 15% for the whole of the next 20 years, this would not be sufficient to reduce the excess of recoverable amount over the carrying amounts of the individual cash generating units to zero. Consequently, management believes no reasonably possible change in the production assumption would cause the carrying amount of non-current assets to exceed their recoverable amount.

The Group estimates value-in-use using a discounted cash flow model. The future cash flows are adjusted for risks specific to the asset and discounted using a pret-tax discount rate of 12% (2009:12%). This discount rate is derived from the group's pre-tax weighted average cost of capital. Management also believes that currently there is no reasonably possible change in discount rate which would reduce the Group's impairment provision release.

It is estimated that the long-term price of Brent crude oil that would cause the total recoverable amount to be equal to the total carrying amount of non-current assets for individual cash-generating units, would be in the range from US$62 to US$65 per barrel.

7 Impairment (Continued)

Year ended 31 December 2009

During the first half 2009 the Group continued negotiations with Sberbank with regard to the transfer of its share in Dulisma to Sberbank as part of loan assignment agreement. In July 2009 the Group transferred Dulisma to Sberbank. At 30 June 2009 management assessed Dulisma for impairment using the information regarding the proposed transaction which was available at that date as an indicator of the fair value of the asset. As a result of this analysis, an impairment charge of $122.1 million was recognized in the consolidated statement of comprehensive income in the six months ended 30 June 2009. The full amount of the impairment loss was allocated to the carrying value of oil and gas properties of Dulisma. The loss on disposal of Dulisma to Sberbank on 4 August 2009 (Note 4) was calculated based on the net assets of Dulisma after the impairment at the date of disposal.

In assessing whether a write-down is required in the carrying value of a potentially impaired item of property, plant and equipment or an equity-accounted investment, its carrying value is compared with its recoverable amount. The recoverable amount is the higher of the asset's fair value less costs to sell and value in use. Consequently, unless indicated otherwise, the recoverable amount used in assessing the impairment charges described below is fair value less cost to sell. Additionally, management estimated the recoverable amount of other cash generating units. The Group estimated fair value less cost to sell using discounted cash flow models. An average oil price of $75 for 2010 and $75 in real terms for future sales was estimated for the impairment calculation and a real discount rate of 12% was used to discount the estimated future cash flows. The discount rate of 12% in real terms was derived from the Group's approximate pre-tax weighted average cost of capital.

If the oil price used in the calculation was reduced to $65 per barrel in real terms from 2010 onwards an additional impairment charge of $11.3 million and $3.1 million would be required for Arcticneft and Petrosakh, respectively. If the discount rate used in the calculation was increased to 14% in real terms an additional impairment charge of $7.8 million and $8.2 million would be required for Arcticneft and Petrosakh, respectively.

A summary of the impairment reverse for the year ended 31 December 2010 and impairment charges incurred by the Group for the year ended 31 December 2009 is presented below:

8 Accounts Receivable and Prepayments

Included in total accounts receivable and prepayments are $0.5 million and $7.3 million at 31 December 2010 and 2009, respectively, denominated in US dollars and substantially all remaining amounts are denominated in Russian Roubles, except accounts receivable due from shareholders $8.75 million which denominated in Great Britain Pounds (GBP).

8 Accounts Receivable and Prepayments  (Continued)

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 22 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 $0.4 million and $0.1 million at 31 December 2010 and 2009, 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.

No financial assets are considered to be impaired at 31 December 2009.

9 Inventories

Inventory provision

9 Inventories  (Continued)

Release of inventory provision was triggered by the fact that the company has made an updated analysis of market value of inventories, impaired in 2009. In 2011 the company managed to realize these at a price, higher than book value.

10 Property, Plant and Equipment

(*)Total amount of interest capitalized relates to Dulisma assets under construction which were disposed with transfer of Dulisma to Sberbank.

Additions to assets under construction included capitalised depreciation in the amount of $82 thousand (for the year ended 31 December 2009: nil). Average capitalisation rate for the year ended 31 December 2010 is 6.0%.

10 Property, Plant and Equipment (continued)

10 Property, Plant and Equipment (continued)

Included within oil and gas properties at 31 December 2010 and 2009 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 mining licenses and pays production taxes to extract oil and gas from the fields. The licenses expire between 2012 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 $1.2 million and $1.2 million at 31 December 2010 and 2009, 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.

At 31 December 2010 and 2009, no property, plant and equipment were pledged as collateral for the Group's borrowings.

11 Other Non-Current Assets

Loans receivable represent US dollar denominated long-term loans (interest inclusive) of $37.8 million and $34.4 million at 31 December 2010 and 2009, respectively, 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 bear interest of 12% and

11 Other Non Current assets (continued)

mature in February 2015. The fair value of the loans approximates the carrying value at the reporting date. These loans are considered to be fully performing as of 31 December 2010. The loans are unsecured.

12 Accounts Payable and Accrued Expenses

Total accounts payable and accrued expenses in the amount of $6.2 million and $9.1 million at 31 December 2010 and 2009, respectively, are denominated in US dollars and substantially all remaining amounts are denominated in Russian Roubles.

Provisions

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 a sale and purchase agreement dated 26 November 2007 (the "SPA") relating to the acquisition by Urals of Taas-Yuriakh Neftegazodobycha (the "Acquisition"). Such obligations included certain pledge fees which Finfund Limited are now claiming are owed by the Company. Based on Finfund Limited's alleged defaults by the Company in respect of such pledge fees, Finfund Limited has chosen 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 to these shareholders. The company has recorded this provision based on the market value of 13,000,000 shares. The provision is equal to $2,559 thousand as of 31 December 2010 with a charge of $360 thousand reflected in the profit for the year in the Consolidated Statement of Comprehensive Income.

13 Advances from customers