Interim Results for Six Months Ended 30 June 2012

Urals Energy Public Company Limited

("Urals Energy" or the "Company")

2012 Half Year Results

Urals Energy (LSE: UEN), the independent exploration and production company with operations in Russia, is pleased to announce its half-year results for the six months ended 30 June 2012.

Highlights

Operational

·; Total production at Arcticneft increased to 128,249 barrels (H1 2011: 126,780 barrels)

·; Total production at Petrosakh reached 233,484 barrels (H1 2011: 249,728)

·; Current daily production at Arcticneft is 700 BOPD slightly down from an average of 705 BOPD for the six months ended 30 June 2012

·; Current daily levels of production at Petrosakh increased to 1,395 BOPD from an average of 1,283 BOPD for the six months ended 30 June 2012

·; Measures to halt natural decline at Petrosakh have stabilised production including the completion of successful workovers

·; New well drilling and existing well optimisation programs in place and being implemented

Financial

·; Operating results were improved by 79% reducing the operating loss to US$0.6 million from US$2.9 million loss in H1 2011

·; Net working capital position improved by 69% by a net reduction of $6 million in current liabilities to US$25.9 million (H1 2011: US$35.8 million)

·; Net loss of US$2.0 million (net profit of US$3.6 million for H1 2011) was caused by exchange rate movements during both H1 2011 and H1 2012 as Ural's Russian subsidiaries recognised forex gains in 2011 and forex losses in 2012 on various intracompany loans nominated in US Dollars

·; Successful finalisation of cost reduction program, which resulted in 21% and 12% decrease in selling, general and administrative expenses and cost of sales respectively.

·; Company's headcount decreased by 11% during the period to 507 employees.

Post-period end

·; Initial production testing on Well #41 on the Petrosakh Field completed and now put into production at approximately 180 BOPD

·; Renewal of the license for the Okruzhnoye field until 2037

·; Release of charge over the Company's Petrosakh assets by Petraco Oil Company Limited ("Petraco")

·; Restructure of Petraco repayment agreement to coincide with the shipment of the tanker from Arcticneft

Outlook

·; Tanker shipment of 28,000 metric tonnes of crude oil for export from Arcticneft expected in Q4 2012

·; Finish the year with repayment of the majority of the outstanding debts and further strengthening of the Company's balance sheet

·; Implement new well drilling and existing well optimisation programs for 2013

·; Identify upside potential in downstream and marketing opportunities on the existing acreage

·; Actively seek possible M&A and joint venture targets with a view to expanding and optimising the Company's asset portfolio

·; Anticipated tax break from 2013 for companies located in the far northern territories of Russia to benefit the Company's operations in Arcticneft

Commenting on today's announcement, Alexei Maximov, CEO, said:

"I am pleased to report on what has been a positive period for Urals, both operationally but also in the further strengthening of our balance sheet. I reported this time last year that operationally we have been laying the foundations for maximising production from both Arcticneft and Petrosakh, and, with the various measures we have taken to stabilise production at Petrosakh, the completion and entry into production of Well #41 at Petrosakh and the implementation of new well drilling and existing well optimisation programs we have certainly started to build upon those foundations.

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

Shareholders can now view the future with renewed confidence as the board anticipates the completion of the final year of recovery for Urals and the start of what it expects to be a key period of development for Urals."

Enquiries:

CEO STATEMENT

General overview

2012 is expected to be the final year of recovery for Urals Energy which will bring to a close the numerous legacy issues which had to be resolved before we were able to put into place any growth strategy.

With the majority of the Petraco loan rescheduled to be repaid before the end of November 2012, the positive outcome of the arbitration in London and the settlement of other minor outstanding debts, Urals will start 2013 well-positioned to seek new ways of growth and expansion while shifting its focus from the past to the future and, in doing so, management's attention will change to focus predominantly on operational improvement, growth of production and seeking new ways to increase the Company's asset portfolio.

In order to strengthen its shift in priorities, the Company has successfully concluded its cost-cutting program, made several key management decisions in the production companies, hired a new chief operations officer and is currently considering the strengthening of its board. Further announcements will be made at the appropriate time in connection with the strengthening of the Company's board but new appointments will only be made where the individuals are able to add value, seek out new ways of corporate growth and increase of shareholder value.

The Company is also looking forward to 2013 as the year when companies located in the far northern territories of Russia will receive a tax break which is anticipated to have an immediate effect on the Company's operations in Arcticneft, as well as potentially adding additional value to the possible participation in the Tarkskoye field development, as well as deep-well drilling on Kolguyev island.

Financial Results

Operating Environment

The six months ended 30 June 2012 were characterised by stable crude oil market price at an average level of US$110 per barrel. Domestic prices for light oil products ranged from US$85 to US$129 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.

There were no deliveries of crude oil exported from Arcticneft during the reporting period, resulting in 22,257 metric tonnes of crude oil that remained in stock at 30 June 2012 (H1 2011: 22,000). The tanker from Arcticneft is scheduled to be shipped as planned in Q4 2012.

Operating Results

During the first half of 2012 and following the assignment of the Taas-YuriakhNeftegazodobycha ("Taas") loan, the Finfund Limited debt resolution and subsequent payment of the large portion of the Petraco loan, the overall financial health of the Company has been significantly strengthened eliminating the impending threat of insolvency as well as the going concern issue which was reported in the Company's year end accounts for 2009, 2010 and 2011 but which we do not anticipate will be continued in the Company's accounts for the current financial year.

Gross Revenues ($'000) 

For the six months ended 30 June 2012, total gross revenues decreased by US$0.3 million as a result of decline of sales volumes totaling 219,010 barrels for the six months ended 30 June 2012 (compared with 264,092 barrels for the six months ended 30 June 2011). The decline, which is part of the anticipated natural decline at Petrosakh, was partially off-set by raise of average net back prices for petroleum (refined) products of US$57.73 per barrel for the six months ended 30 June 2012 (US$47.43 for the six months ended 30 June 2011) and a higher crude oil net back price of US$49.88 per barrel for the six months ended 30 June 2012 (US$35.87 per barrel for the six months ended 30 June 2011). Netback, in the case of domestic crude oil sales, is the gross sales net of VAT. Netback for domestic product sales is defined as gross product sales minus VAT, transportation, excise tax and refining costs.

For the six months ended 30 June 2012 all domestic sales of crude oil and almost all petroleum (refined) products related to Petrosakh. During the six months ended 30 June 2012 Arcticneft sold petroleum (refined) products to AMNGR for US$356,000 (US$302,000 for the six months ended 30 June 2011).

 Summary table: Net backs ($/bbl) 

Gross profit (net revenues less cost of sales) for the first half of 2012 doubled to US$3.1 million from US$1.5 million for the six months ended 30 June 2011. The main driver of the increase was the higher netbacks.

Operating Loss for the first half of 2012 was US$0.6 million was significantly reduced as compared with an Operating Loss of US$2.9 million for the six months ended 30 June 2011.

The net finance costs during the first half of 2012 were US$1.5 million and net interest cost was US$0.2 million (for the six months ended 30 June 2011: net finance benefits of US$5.9 million and net interest benefit of US$1.3 million).

Decrease of Finance benefits for the six months ended 30 June 2012 resulted in a Net Loss of US$2.0 million compared with a Net Profit of US$3.6 million for the six months ended 30 June 2011.

Consolidated Management EBITDA in the six months ended 30 June 2012 was US$1.4 million as compared with US$0.1 million during the six months ended 30 June 2011.

Management EBITDA ($'000) - Unaudited

Net debt Position

As at 30 June 2012 the Company had net debt of US$6.6 million (calculated as Long-term and Short-term debt plus finance lease obligations less cash in bank and less Loans issued to related parties). As at 30 June 2011 the Company had net cash of US$9.1 million (calculated as Long-term and Short-term debt plus payables to Finfund less cash in bank, less loan receivable from Taas and less Loans issued to related parties). As at 31 December 2011 net debt was US$1.4 million.

As at 30 June 2012 and 31 December 2011 the Group impaired a loan to a formerly related party by US$6.2 million and US$5.9 million, respectively. This amount relates to a loan to a shareholder and former member of management of the Group, Vyatcheslav Rovneiko. Taking into account that according to the loan agreement all disputes are subject to final resolution by arbitration under the Rules of Arbitration of the London Court of International Arbitration (the LCIA), the Company filed a claim with the LCIA in June 2011. Following hearings in the arbitration, the arbitrator has issued two Partial Final Awards pursuant to which the arbitrator has ruled against the respondent on his principal defense. The respondent has subsequently challenged the latter of the two awards on procedural grounds which the Company intends to oppose. Independent of the outcome of the arbitration, for accounting purposes the management has reassessed the carrying value of the loan and has impaired it fully. However, this does not reduce the validity of the legal claim against this related party and the Company's intent to bring the arbitration to a positive conclusion.

Accounts payable and accrued expenses of US$5.8 million at the period end was significantly reduced from the US$10.7 million at the end of June 2011, mainly as a result of the reduction in accounts payable following the settlement with Finfund Limited.

Outlook and operational update

Petrosakh

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

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

·; prior to installation of a gas injection compressor in March, Petrosakh was producing 165 tonnes of crude per day. In June 2012 Well #41 came onstream with an initial oil rate of 24 t/d and, for the month of June, the average production in the field was 181 t/d with Well #41 producing intermittently

·; in July, encouraged by this result, management at Petrosakh began discussing a schedule of additional workovers and other cost-effective activities to be performed each month, with the following actions having been completed to-date:

o the Company has lowered the line pressure in all in-field pipelines to offset declines in reservoir pressure. Correspondingly the Company reduced choke sizes in the flowingwells to increase wellhead pressure and the differential across the choke

o optimization of the surface rod-pumping units including the choice of unit and stroke length.

o conducted 9 bottom-hole hot-oil circulations

o planned injection well treatments in October to optimize rates and injectivity profiles

o replacement of old sucker rods and acquisition/installation of 3 new surface rod-pumping units

o continuing introduction of cyclic 2-phase injection

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

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

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

In addition, one of the largest shareholders of Urals Energy, Alpcot Capital Management Ltd visited Petrosakh. The representatives visited all existing wells, the refinery, and had a chance to meet with the drilling team, workers, and management on site and in Yuzhno-Sakhalinsk.

Presently the company is reevaluating its drilling plans to include further drilling of 8 new wells in the Southern part of the Okruzhnoye field; the drilling plan will be submitted and hopefully approved by the General Directorate of State Expertise of the Russian Federation by the end of the year and whereupon the drilling of well #53 is to be started

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

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

Downstream

Petrosakh continues to refine and sell 100% of its crude oil production. In 2012 the Company finds itself operating in a highly competitive refined products market in which the state conglomerate Rosneft holds a close to monopolistic position on Sakhalin island, which they are able to exploit by keeping their wholesale and retail prices for oil products unchanged during the year to date. Nevertheless, as a result of the balanced and individual work with our customer base in 2012, the Company managed to increase netbacks on the sales of oil and oil products by 39.0% and 21.7% respectively to US$49.88 per barrel and US$57.73 per barrel. These steps, combined with further continuing work on cost optimization, allowed the Company to almost double its profit margin. In anticipation of the winter period, the Company is actively working with budgeted (state owned) companies and is participating in tenders regarding fuel oil shipment, These are new types of customers for us but we are confident that our bids are competitive and, if successful, will allow us to generate additional margins.

The Company has completed the evaluation of the feasibility of revitalizing export shipments from Petrosakh, particularly of refined products. Additional capital expenditure for terminal upgrade will be needed and the Company is expecting to receive an estimation of these expenses shortly. At the current date, our expectation is that given the geographical vicinity of Petrosakh to the growing Asian markets, the demand for exported refined products will grow continuously and we anticipate that this will represent an additional source of revenue for the Company.

Arcticneft

Current production at Arcticneft is stable and stands at 700 BOPD. As at 23 September 2012 crude oil in stock was 27,100 (214,090 bbls). The tanker is scheduled to be loaded in Q4 2012.

During the reporting period, there have been no major operational changes in the Company in respect of Arcticneft

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

1. reducing decline in production by adding new (up to 3) wells and optimizing the existing well stock;

2. improving geological data and minimizing drilling risk. For these purposes the Company has entered into a partnership with a western company which specializes in geological data reading and interpretation. This work will include the existing, as well as deeper horizons; and

3. a possible participation in Tarkskoye field auction.

Petraco loan

Under the terms of the debt repayment agreement with Petraco Urals Energy pledged 97.2% of the shares it held in CJSC Petrosakh to Petraco as security against the restructured prepayment financing arrangements with Petraco.

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

In addition, the payment to Petraco, scheduled for 31 July 2012 according to the Restructuring Agreement, has been extended to coincide with the shipment of the tanker from Arcticneft. The remaining debt to Petraco is currently US$10.2 million, with US$7.3 million due by the end of November this year and the balance to be paid by the end of November 2013. The Company anticipates that the revenue from the tanker shipment will be sufficient to discharge the US$7.3 million due to Petraco in November 2013 in full.

Outlook

Looking ahead, as part of the recovery strategy, we aim to finish the year with repayment of the majority of our outstanding debts and further strengthening of the Company's balance sheet.

We are shortly going to be loading up to 28,000 metric tonnes of crude oil for export from Arcticneft, which is scheduled for Q4 2012. At the same time, we await the results of the deep exploration drilling results by AMNGR which may provide a strong indication for the potential for Urals to increase its reserves. Furthermore, we expect that the anticipated tax break from 2013 for companies located in the far northern territories of Russia will benefit the Company's operations in Arcticneft.

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

Shareholders can now view the future with renewed confidence as the board anticipates the completion of the final year of recovery for Urals and the start of what it expects to be a key period of development for Urals.

Alexei Maximov

Chief Executive Officer

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Consolidated Statement of Financial Position (presented in US$ thousands)

Consolidated Statement of Comprehensive Income (presented in US$ thousands)

Consolidated Statements of Cash Flows (presented in US$ thousands)

1 Activities

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

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

The Group comprises UEPCL and the following main subsidiaries:

2 Summary of Significant Accounting Policies

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

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 4. Actual results could differ from the estimates.

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

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

Translation to functional currency. Monetary assets and liabilities denominated in foreign currencies are retranslated into the functional currency at the rate of exchange ruling at the reporting date. Any resulting exchange differences are included in the profit or loss component of the consolidated statement of comprehensive income. Non-monetary assets and liabilities that are measured at historical cost and denominated in a foreign currency are translated into the functional currency using the rates of exchange as at the dates of the initial transactions. The US dollar to Russian Rouble exchange rates were 32.82 and 32.20 as of 30 June 2012 and 31 December 2011, respectively.

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

(i) Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position. 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 the Company 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 to the functional currency of the Company at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions).

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

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

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

Accounting standards adopted during the period. In the current period, the Group has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board (the IASB) and the International Financial Reporting Interpretations Committee (the IFRIC) of the IASB that are relevant to its operations and effective for reporting periods beginning on 1 January 2012.

3 Going Concern

A significant portion of the Group's consolidated net assets of $ 97.0 million (31 December 2011: $100.1 million) comprises undeveloped mineral deposits requiring significant additional investment. The Group is dependent upon external debt to fully develop the deposits and realise the value attributed to such assets.

The Group had net current liabilities of $ 2.6 million as of 30 June 2011 (31 December 2011: $3.7 million). The most significant creditor as of 30 June 2012 was $ 10.2 million loan from Petraco (31 December 2011: $10.0 million) (Note 9).

Management have prepared monthly cash flow projections for periods throughout 2012 and 2013. Judgments which are significant to management's conclusion that no material uncertainty exists for going concern this year include future oil prices and planned production which were required for the preparation of the cash flow projections and model. Positive overall cash flows are dependant on future oil prices (a price of $90 per barrel has been used for 2012 and for 2013). Despite the above matters, the Group still has funding and liquidity constraints, though these are less severe than in the prior year. 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 Critical Accounting Estimates and Judgments in Applying Accounting Policies

The Group makes estimates and assumptions that affect the amounts recognised in the consolidated financial statements and the carrying amounts of assets and liabilities within the next financial year. Estimates and judgments 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 judgments, apart from those involving estimations, in the process of applying the accounting policies. Judgments that have the most significant effect on the amounts recognised in the consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include:

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

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

Estimation of oil and gas reserves. Engineering estimates of hydrocarbon reserves are inherently uncertain and are subject to future revisions. Accounting measures such as depreciation, depletion and 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.

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

In general, estimates of reserves for undeveloped or partially developed fields are subject to greater uncertainty over their future life than estimates of reserves for fields that are substantially developed and depleted. As those fields are further developed, new information may lead to further revisions in reserve estimates. Reserves have a direct impact on certain amounts reported in the consolidated financial statements, most notably depreciation, depletion and 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.

Deferred income tax asset recognition. The recognised deferred tax asset represents income taxes recoverable through future deductions from taxable profits and is recorded in the statement of financial position. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. The future taxable profits and the amount of tax benefits that are probable in the future are based on the medium term business plan prepared by management and extrapolated results thereafter. The business plan is based on management expectations that are believed to be reasonable under the circumstances. Key assumptions in the business plan are an average oil price of $90 for 2012 and $90 in real terms for future sales.

Impairment provision for receivables. The impairment provision for receivables (including loans issued) is based on management's assessment of the probability of collection of individual receivables. Significant financial difficulties of the debtor/lender, probability that the debtor/lender will enter bankruptcy or financial 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 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. 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.

5 Inventories

Inventory provision

6 Property, Plant and Equipment

Average capitalisation rate of capitalised interest expense for the period ended 30 June 2011 is 5.75%.

Average capitalisation rate of capitalised interest expense for the period ended 30 June 2012 is 5.5%.

Included within oil and gas properties at 30 June 2012 and 31 December 2011 were exploration and evaluation assets:

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

Estimated costs of dismantling oil and gas production facilities, including abandonment and site restoration costs, amount to $1.5 million and $1.4 million at 30 June 2012 and 31 December 2011, respectively, are included in the cost of oil and gas properties. The Group has estimated its liability based on current environmental legislation using estimated costs when the expenses are expected to be incurred.

7 Other Non-Current Assets

8 Accounts Payable and Accrued Expenses

9 Borrowings

Long-term and short-term borrowings. Long-term and short-term borrowings were as follows at 31 December 2011 and 2010:

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

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

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

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

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

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

In June 2010 Company pledged 100% of the shares it currently holds in Arcticneft and 97.2% of shares it currently holds in Petrosakh to Petraco as security against the restructured Petraco facility.

In December 2011 following the disposal of the Taas loans the Group partly discharged the debt to Petraco in the amount of $10 million.

As of 30 June 2012 the repayment schedule of the balance for the Capital Outstanding and the Accrued Interest was as follow:

Weighted average interest rate. The Group's weighted average interest rates on borrowings were 5.5% and 5.75% at 30 June 2012 and 31 December 2011, respectively.

Interest income and expense. Interest income and expense for the six months ended 30 June 2012 and 30 June 2011, respectively, comprised the following:

10 Equity

At 31 December 2011 authorised share capital was $1,890 thousand divided into 300 million shares of $0.0063 each.

Restricted Stock Plan. During the six months ended 30 June 2012 and 30 June 2011, nil and $290 thousand, respectively, of expense related to share-based payments were recognized in the interim condensed consolidated statement of comprehensive income.

At 30 June 2012 and 30 June 2011, restricted stock grants for 3,194,914 shares and 4,059,112 shares were fully issued.

As of 30 June 2012, the number of unvested restricted stock grants and their respective vesting dates are presented in the table below.

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

11 Revenues

12 Cost of Sales

13 Selling, General and Administrative Expenses

14 Balances and transactions with Related Parties

Parties are generally considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial or operational decisions as defined by IAS 24 Related Party Disclosures. Key management personnel are considered to be related parties. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. 

Balances and transactions with related parties

As of 30 June 2012 and 31 December 2011 the Group has an impairment provision against a loan to a related party of $6.2 million and $5.9 million, respectively. This amount relates to a loan to shareholder and former member of management of the Group. This loan is overdue. For accounting purposes management reassessed the carrying value of the loan and impaired this fully. However, this does not reduce the validity of the legal claim against this related party. Management formally informed this related party and demanded repayment of the full amount by 20 May 2011. By 20 May 2011 management did not receive any response from the related party. Considering that according to the loan agreement all disputes shall finally resolved by arbitration under the Rules of Arbitration of the London Court of International Arbitration (the LCIA) the Company filed a claim to the LCIA in June 2011. Following hearings in the arbitration, the arbitrator issued a Partial Final Award on Preliminary Issues on 21 June 2012 pursuant to which the respondent is liable to repay to the Company the entire principal sum due under the Loan Agreement, plus interest.

Loans receivable include amounts due by OOO Komineftegeophysica in the amount of $1.2 million (31 December 2011: $1.2 million), where shareholders of the Group hold the majority of shares. The loans bear interest 10%. Loans in the amount of $0.4 million is short term in nature. Loans in the amount of $0.8 million mature on 31 December 2015. These loans are not secured.

15 Events after the reporting period

Release of the Charge

Under the terms of the debt repayment agreement with Petraco Urals Energy pledged 97.2% of the shares it held in CJSC Petrosakh to Petraco as security against the restructured prepayment financing arrangements with Petraco (Note 9). After the payment to Petraco of $10 million following the Taas loan assignment, and in accordance with the terms of the Agreement, Petraco has released its charge over the shares of CJSC Petrosakh in full.

Petraco Payment Extension

In addition, the payment to Petraco scheduled for 31 July 2012 according to the Restructuring Agreement dated 1 August, 2011 has been extended to 30 November 2012 (after the shipment of the tanker from Arcticneft).