Alliance Oil Released Interim Report for Quarter and H1

OREANDA-NEWS. August 24, 2012. The volatility in oil markets in the second quarter of 2012 affected the Company's financial performance in both segments. The average price of Urals decreased by 9.0% quarter-on-quarter, with significant price movements for crude and oil products within the second quarter. The Russian Rouble weakened against the US Dollar by 2.5%. Overall, the operational performance of the Company's downstream segment improved further and upstream crude production stabilized in the second quarter of 2012.

The Company's average daily oil production amounted to 53,546 barrels and the refinery's daily throughput was 78,404 barrels in the second quarter. EBITDA continued to increase year-on-year but decreased quarter-on-quarter, primarily due to lower export netbacks for crude and oil products, and lower refining margins caused by higher prices for domestic crude oil and lagging sales prices. Net income was negatively affected by foreign currency swap revaluation and currency exchange losses.

In the upstream segment, lower oil prices and higher export duties resulted in crude oil revenue and EBITDA declining despite stable sales volumes. The Company drilled a total of 32 new wells in the quarter, including 5 wells at the Kolvinskoye oil field. The production volumes from the Kolvinskoye field have been stable for the last 4 months, as well workover activity and recent addition of new wells have compensated natural decline. We continue to increase the resource base in Timano-Pechora and extend the reach of the Kolvinskoye field operations. In July 2012, the Company acquired the West-Osoveyskoe license block east of the Kolvinskoye oil field with significant prospective resources.

In the downstream segment, oil product revenues increased quarter-on-quarter due to record high sales volumes. Meanwhile segment EBITDA decreased as a result of declining net export prices and increasing cost of domestic crude supplies. The rate of progression towards the launch of the modernized Khabarovsk refinery next year has increased in recent months, with 60% of construction works completed to date.

In the first half of this year, cash flow from operations increased by 122% compared to the first half last year. The balance sheet position of the Company remained solid. The total debt to EBITDA ratio remained at the same level as last quarter - 2.3.

Outlook

The macro environment remains volatile. The recent recovery in crude prices is supportive for the upstream segment, while downstream market conditions continue to present challenges.

In the upstream segment, production is stable while the new license block in Timano-Pechora provides opportunities for further reserve and production growth and for realizing synergies with existing operations. Our current objective is to explore the relevant areas of the block to determine recoverable reserves to be incorporated into the development plan for the Kolvinskoye field.

The first phase of the joint venture with Repsol has been completed. The contribution of Tatnefteotdacha by Alliance Oil and the contribution of Eurotek and cash by Repsol to the joint venture are expected to be completed in the fourth quarter of 2012.

In the downstream segment, we are looking forward towards the launch of the modernised Khabarovsk refinery next year followed by the connection of the refinery to the ESPO pipeline. The completion of these projects in the coming year will provide for increased deliveries of high quality oil products in Far East markets with improvements in efficiency and economics. Oil product demand remains firm with the refinery continuing to process record volumes of oil.

Planned 2012 upstream capital expenditures for existing assets will be further reduced as we continue the revision of drilling plans and implementation of CAPEX efficiency improvements. Downstream capital expenditures remain subject to the actual refinery modernisation progress and are projected at the lower end of the planned range for 2012. We are increasingly evaluating acquisition opportunities to further expand the Company's oil and gas resource base.

The upstream guidance for 2012 remains an average daily production of 55,000-60,000 barrels. The downstream volume guidance is to refine an average of 72,000-77,000 barrels per day in 2012.