39. Segment Information

Presented below is information about the Group’s operating segments for the period ended December 31, 2014 and 2013. Operating segments are components that engage in business activities that may earn revenues or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker (CODM), and for which discrete financial information is available.

The Group manages its operations in 2 operating segments: Upstream and Downstream.

Upstream segment (exploration and production) includes the following Group operations: exploration, development and production of crude oil and natural gas (including joint ventures results), oil field services. Downstream segment (refining and marketing) processes crude into refined products and purchases, sells and transports crude and refined petroleum products (refining and marketing). Corporate centre expenses are presented within the Downstream segment.

Eliminations and other adjustments section encompasses elimination of inter-segment sales and related unrealised profits, mainly from the sale of crude oil and products, and other adjustments.

Intersegment revenues are based upon prices effective for local markets and linked to market prices.

Adjusted EBITDA represents the Group’s EBITDA and its share in associates and joint ventures’ EBITDA. Management believes that adjusted EBITDA represents useful means of assessing the performance of the Group’s ongoing operating activities, as it reflects the Group’s earnings trends without showing the impact of certain charges. EBITDA is defined as earnings before interest, income tax expense, depreciation, depletion and amortisation, foreign exchange gain (loss), other non-operating expenses and includes the Group’s share of profit of associates and joint ventures. EBITDA is a supplemental non-IFRS financial measure used by Management to evaluate operations.

Year ended December 31, 2014 Upstream Downstream Eliminations Total
Segment revenues
Refined products, oil and gas sales and other revenues :
External customers 24,226 1,384,012 1,408,238
Inter-segment 454,755 10,114 (464,869)
Total revenues 478,981 1,394,126 (464,869) 1,408,238
Segment results
Adjusted EBITDA 160,320 182,294 342,614
Depreciation, depletion and amortisation 64,223 21,728 85,951
Capital expenditure 208,796 62,534 271,330
Year ended December 31, 2013 Upstream Downstream Eliminations Total
Segment revenues
Refined products, oil and gas sales and other revenues :
External customers 24,284 1,243,319 1,267,603
Inter-segment 445,356 7,287 (452,643)
Total revenues 469,640 1,250,606 (452,643) 1,267,603
Segment results
Adjusted EBITDA 175,474 161,278 336,752
Depreciation, depletion and amortisation 59,095 17,690 76,785
Capital expenditure 154,489 54,122 208,611

The geographical segmentation of the Group’s revenue and capital expenditures for the period ended December 31, 2014 and 2013 is presented below:

Year ended December 31, 2014 Russian Federation CIS Export and international operations Total
Sales of crude oil 42,624 15,889 233,101 291,614
Sales of petroleum products 715,854 64,582 546,498 1,326,934
Sales of gas 24,406 1,604 26,010
Other sales 40,695 1,430 3,874 45,999
Less custom duties and sales related excises (593) (281,726) (282,319)
Revenues from external customers, net 823,579 81,308 503,351 1,408,238
Year ended December 31, 2013
Sales of crude oil 19,257 48,620 209,449 277,326
Sales of petroleum products 630,359 58,309 477,365 1,166,033
Sales of gas 23,926 1,461 25,387
Other sales 31,266 1,065 2,960 35,291
Less custom duties and sales related excises (3,355) (233,079) (236,434)
Revenues from external customers, net 704,808 104,639 458,156 1,267,603
Russian Federation CIS Export and international operations Total
Non-current assets as of December 31, 2014 1,288,625 15,332 253,751 1,557,708
Capital expenditures for period ended December 31, 2014 235,337 1,737 34,256 271,330
Non-current assets as of December 31, 2013 935,843 10,233 143,572 1,089,648
Capital expenditures for period ended December 31, 2013 168,085 2,783 37,743 208,611

Adjusted EBITDA for the period ended December 31, 2014 and 2013 is reconciled below:

Year ended December 31, 2014 Year ended December 31, 2013
Profit for the period 126,656 186,720
Total income tax expense 19,214 39,260
Finance expense 15,279 11,233
Finance income (7,075) (6,011)
Depreciation, depletion and amortisation 85,951 76,785
Net foreign exchange loss 52,265 2,166
Other loss, net 8,471 6,310
EBITDA 300,761 316,463
add share of loss / (profit) of associates and joint ventures 6,306 (11,251)
add share of EBITDA of associates and joint ventures 35,547 31,540
Total adjusted EBITDA 342,614 336,752

The accompanying consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). In the absence of specific IFRS guidance, the Group has reverted to other relevant disclosure standards, mainly US GAAP, that are consistent with practices established for the oil and gas industry. While not required under IFRS, this section provides unaudited supplemental information on oil and gas exploration and production activities.

The Group makes certain supplemental disclosures about its oil and gas exploration and production that are consistent with practices. While this information was developed with reasonable care and disclosed in good faith, it is emphasised that some of the data is necessarily imprecise and represents only approximate amounts because of the subjective judgments involved in developing such information. Accordingly, this information may not necessarily represent the current financial condition of the Group or its expected future results.

The Group voluntarily uses the SEC definition of proved reserves to report proved oil and gas reserves and disclose certain unaudited supplementary information associated with the Group’s consolidated subsidiaries, share in joint operations, associates and joint ventures.

The proved oil and gas reserve quantities and related information regarding standardised measure of discounted future net cash flows do not include reserve quantities or standardised measure information related to the Group’s Serbian subsidiary, NIS, as disclosure of such information is prohibited by the Government of the Republic of Serbia. The disclosures regarding capitalised costs relating to and results of operations from oil and gas activities do not include the relevant information related to NIS.

Presented below are capitalised costs relating to oil and gas producing activities:

December 31, 2014 December 31, 2013
Consolidated subsidiaries and share in joint operations
Unproved oil and gas properties 70,295 48,191
Proved oil and gas properties 1,163,584 778,836
Less: Accumulated depreciation, depletion and amortisation (373,218) (275,369)
Net capitalised costs of oil and gas properties 860,661 551,658
Group's share of associates and joint ventures
Proved oil and gas properties 366,771 242,134
Less: Accumulated depreciation, depletion and amortisation (80,870) (62,613)
Net capitalised costs of oil and gas properties 285,901 179,521
Total capitalised costs consolidated and equity interests 1,146,562 731,179

Presented below are costs incurred in acquisition, exploration and development of oil and gas reserves for the period ended December 31:

December 31, 2014 December 31, 2013
Consolidated subsidiaries and share in joint operations
Exploration costs 936 3 159
Development costs 179 461 132 907
Costs incurred 180 397 136 066
Group's share of associates and joint ventures
Exploration costs 583 1 034
Development costs 51 676 43 143
Total costs incurred consolidated and equity interests 232 656 180 243

Results of operations from oil and gas producing activities for the period ended:

December 31, 2014 December 31, 2013
Consolidated subsidiaries and share in joint operations
Revenues:
Sales 100,567 115,460
Transfers 396,928 325,942
Total revenues 497,495 441,402
Production costs (84,089) (71,847)
Exploration expenses (936) (3,159)
Depreciation, depletion and amortisation (63,405) (60,069)
Taxes other than income tax (245,484) (220,032)
Pretax income from producing activities 103,581 86,295
Income tax expenses (12,058) (16,561)
Results of oil and gas producing activities 91,523 69,734
Group's share of associates and joint ventures
Total revenues 98,849 87,976
Production costs (20,311) (13,368)
Exploration expenses (583) (1,034)
Depreciation, depletion and amortisation (16,293) (12,601)
Taxes other than income tax (50,604) (46,456)
Pretax income from producing activities 11,058 14,517
Income tax expenses 1,979 (2,803)
Results of oil and gas producing activities 13,037 11,714
Total consolidated and equity interests in results of oil and gas producing activities 104,560 81,448

Proved Oil and Gas Reserve Quantities

Proved reserves are defined as the estimated quantities of oil and gas, which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. 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.

Proved developed reserves are those reserves, which are expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are those reserves which are expected to be recovered as a result of future investments to drill new wells, to recomplete existing wells and/or install facilities to collect and deliver the production from existing and future wells.

As determined by the Group’s independent reservoir engineers, DeGolyer and MacNaughton, the following information presents the balances of proved oil and gas reserve quantities (in millions of barrels and billions of cubic feet respectively):

Proved Oil Reserves Quantities — in MMBbl December 31, 2014 December 31, 2013
Consolidated subsidiaries and share in joint operations
Beginning of year 4,981 4,870
Production (307) (300)
Purchases of minerals in place 105
Revision of previous estimates 272 411
End of year 5,051 4,981
Minority’s share included in the above proved reserves (16) (17)
Proved reserves, adjusted for minority interest 5,035 4,964
Proved developed reserves 2,747 2,614
Proved undeveloped reserves 2,304 2,367
Group's share of associates and joint ventures
Beginning of year 1,189 982
Production (77) (67)
Purchases of minerals in place 58 87
Revision of previous estimates 192 187
End of year 1,362 1,189
Proved developed reserves 614 472
Proved undeveloped reserves 748 717
Total consolidated and equity interests in reserves — end of year 6,413 6,170
Proved Gas Reserves Quantities — in Bcf December 31, 2014 December 31, 2013
Consolidated subsidiaries and share in joint operations
Beginning of year 6,323 6,092
Production (455) (436)
Purchases of minerals in place 23
Revision of previous estimates 430 667
End of year 6,321 6,323
Minority’s share included in the above proved reserves (29) (38)
Proved reserves, adjusted for minority interest 6,292 6,285
Proved developed reserves 3,821 3,781
Proved undeveloped reserves 2,500 2,542
Group's share of associates and joint ventures
Beginning of year 7,069 3,951
Production (150) (58)
Purchases of minerals in place 1,677 1,014
Revision of previous estimates 1,592 2,162
End of year 10,188 7,069
Proved developed reserves 4,357 493
Proved undeveloped reserves 5,831 6,576
Total consolidated and equity interests in reserves — end of year 16,509 13,392

Standardised Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves

Estimated future cash inflows from production are computed by applying average first-day-of-the-month price for oil and gas for each month within the 12 month period before the balance sheet date to year-end quantities of estimated proved reserves. Adjustment in this calculation for future price changes is limited to those required by contractual arrangements in existence at the end of each reporting period. Future development and production costs are those estimated future expenditures necessary to develop and produce year-end proved reserves based on year-end cost indices, assuming continuation of year end economic conditions. Estimated future income taxes are calculated by applying appropriate year-end statutory tax rates. These rates reflect allowable deductions and tax credits and are applied to estimated future pre-tax cash flows, less the tax bases of related assets. Discounted future net cash flows have been calculated using a 10% discount factor. Discounting requires a year-by-year estimate of when future expenditures will be incurred and when reserves will be produced.

The information provided in tables set out below does not represent Management’s estimate of the Group’s expected future cash flows or of the value Group’s proved oil and gas reserves. Estimates of proved reserves quantities are imprecise and change over time, as new information becomes available. Moreover, probable and possible reserves, which may become proved in the future, are excluded from the calculations. The calculations should not be relied upon as an indication of the Group’s future cash flows or of the value of its oil and gas reserves.

December 31, 2014 December 31, 2013
Consolidated subsidiaries and share in joint operations
Future cash inflows 12,756,212 7,690,400
Future production costs (7,734,833) (4,723,691)
Future development costs (938,935) (612,498)
Future income tax expenses (665,167) (354,004)
Future net cash flow 3,417,277 2,000,207
10% annual discount for estimated timing of cash flow (1,936,851) (1,197,686)
Standardised measure of discounted future net cash flow 1,480,426 802,521
Group's share of associates and joint ventures
Future cash inflows 3,593,104 2,084,265
Future production costs (2,003,356) (1,085,733)
Future development costs (254,790) (151,527)
Future income tax expenses (228,982) (153,455)
Future net cash flow 1,105,976 693,550
10% annual discount for estimated timing of cash flow (668,192) (407,796)
Standardised measure of discounted future net cash flow 437,784 285,754
Total consolidated and equity interests in the standardised measure of discounted future net cash flow 1,918,210 1,088,275

For the period ended December 31, 2014

Currency — RUB millions